This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Hello, ladies and gentlemen. Thank you for standing by for the second quarter 2021 earnings conference call for Kutotiao Inc. At this time, all participants are in the listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Saichi Liu. Please go ahead, Saichi.
spk04: Thank you very much. Welcome everyone to the second quarter of 2021 Earnings Conference Call of Xutou Tiao Inc. The company's financial and operational results were released via Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.xutoutiao.net. Participants on today's call will include our CEO, Mr. Eric Tan, and our CFO, Mr. Xiao Lu Zhu. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation and Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please note that Chido Teo's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Chido Teo's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will start by reading out Eric's commentary on the business first. Thank you, Saishi, and thanks everyone for joining today's conference call. As our recent focus has been on repositioning the business and improving underlying financial health, we have had a relatively quiet and a stable second quarter, during which both our revenue and the size of our user base have maintained stability. Therefore, our monetization efficiency in terms of our pool was also on a stable trajectory, despite us facing some headwind in the overall advertising market. Post-COVID-19 in China, the market backdrop has not been on a whole favorable for digital advertising, although we did observe some recovery from the negative effect on advertisers' spending. It is the uncertainty or the lack of visibility going forward that has dictated much of advertising customers' budgeting decisions. We expect the second half of the year to continue to be under pressure, as there has not yet been a sign of a straight upward momentum. For our business, while we cannot control the wider industry variables, we focus on putting effort into improving operating efficiency and growing MEDU novels, which forms the key part of our growth strategy forward. MEDU has seen a very positive growth trend with DAU average in the second quarter of this year, so we are well on track to achieve our full-year targets. What is driving MeDo is our consistent investment into building a rich content offering and innovative format of interaction to reach users, most notably through our proprietary content creation platform and the mini-drama series, which we believe has more potential to create value than currently obvious. It is a naturally more engaging format and will play an important role in the exploration and the development of IP value of the books we own copyright to. Recently, there has been concern among investors and observers regarding the regulatory actions on the internet industry. We see them as a positive on the long-term health, growth, and stability of the Chinese tech industry, as well as the country's economy as a whole. As always, we will stick to the highest standard of conduct and compliance with rules and regulations of the land. Thank you very much. This concludes Eric's remarks, and I will now turn the call over to CFO Xiaolu.
spk03: Thank you, Eric and Caiqi. Again, thank you everyone for joining today's call. Let me first go through financial highlights with you before providing outlook for the next quarter and the rest of the year. Our net revenues for the second quarter were RMB $1,202,000,000 with our pool of RMB $0.46 and the quarterly average DAU of $29,000,000 and MAU of $132,000,000, fractured sequentially as we focus on underlying financial health while pursuing growth very selectively. Let's look at costs and expenses in a bit more detail. Please note, I will be referring to non-GAAP measures which exclude stock-based compensations. Cost of revenues were RMB 328 million, a decrease of 17% year-on-year due to more efficient budgeting with our IT expenditures despite increasing content procurement costs. As a result, we generated RMB 874 million gross profit and 73% gross margin, which expanded both year-on-year and sequentially. Our sales and marketing expenditures for the second quarter totaled RMB 901 million, broadly flat year on year, and as a percentage of revenue, it came to 75%, which represented a 13 percentage point increase from a year ago, due to a combination of lower revenue base and increased investment in growing the user base of MeToo Novels. Our R&D expenses were R&D 116 million during the quarter, which was 10% of revenue, flat compared to a year ago. G&A expenses were RMB 90 million during quarter, which was over 7% of revenues, in line with historical trend. We made an operating loss of around RMB 200 million, which is within the controlled range. After breakeven in Q4 last year, our year-to-date loss has been the result of our ramped-up investment in middle novels, excluding which we were profitable in Q2 and Q3 consecutive quarters now. We also expect our overall business, including Midoo Novels, to be operationally profitable in the second half of this year, hence profitable for the full year. For the next quarter, i.e. Q3 of 2021, we expect revenue to be broadly stable, ranging between RMB $1.5 billion to RMB $1.1 billion. Thank you very much. That concludes our prepared remarks today. We are now open for questions. Operator, please proceed.
spk02: As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Thomas Chong of Jefferies. Please ask your question.
spk01: Hi, good evening. Thanks, management, for taking my questions. My first question is about the advertising outlook in the second half. Management, I have mentioned in the prepared remarks that the visibility is not so clear at this point. I just want to get some sense with regard to some of the key advertising categories like downloads, e-commerce, and other key categories in terms of the advertising trend in Q3 and Q4. Because our guidance are showing some softness on a sequential basis, traditionally, Q3 should be a better quarter versus Q2. So just want to get some sense about the more stringent regulatory environments in some of the sectors, and how much that affects Q3 and Q4, and when should we expect it to enjoy sequential growth again. And then my second question is about the sales and marketing. Looking at the user engagement is showing quite a very good progress per DAU basis. On the other hand, we are also seeing the acquisition cost is also rising very rapidly. So just want to get a sense about the market environment on user acquisition and how we should think about that going forward. Thank you.
spk03: Regarding our first question, for the overall outlook for the ad market in the second half, I think overall we remain very cautious as the industry and the economy continue to face uncertainties, both in terms of economic growth and recovery, as well as in terms of regulatory environment. So we have witnessed our clients, our advertising partners, have been more conservative in terms of ad spending and budgeting. So I think this will probably continue into the second half. Although overall, I think the recent regulatory campaign by the government is a good thing for the long-term health and stability of the Chinese economy and the society as a whole. And the company, we welcome this development, and I think we will continue to strive to meet the higher standard of compliance. However, I think there will be some near-term uncertainties and impact. on the overall ad market, especially in terms of advertisers' sentiment. So I think that explains the weakness in the second half, especially in Q3. In terms of ad categories, I think for us, because we have been doing some of the upgrade and operating efficiency improvement over the last one or two years, and we have seen KA key accounts taking a larger share of our revenue as part of our standards when boarding new customers, and also because our relationships with the KAs have grown over the years. And also, I think for the second half, especially going into year-end, the e-commerce seasons, I think we probably will see increased revenues from the e-commerce players, especially in Q4. Regarding our second question on the sales and marketing, as you have already pointed out, our user engagement cost has been done a lot over the last few quarters. Now it stands at about 6 cents per user per day, and I think that will stand there for the foreseeable future. We don't have any plan to increase that, and I think that right now the amount of incentives we give to our users, it's about right to make sure that they stay with us without incurring bigger expenses or loss for us. In terms of acquisition costs, that's mainly due to our increased investment into Meidu. As we said at the beginning of the year, we plan to at least double the DAU of Meidu for 2021, and so far we are well on track. MeDo's DAU, average DAU has already been over 10 million in Q2, so I think we are going to see 12, 13, or 14 million DAUs by the year end. So that's where we have been spending our money, and I think that's a good investment because we are getting very good RIs, very good users from this marketing campaign on the MeDo front. So this probably will continue for the second half of the year. In terms of a longer period, for example, what about next year or the year beyond, I think it remains to be seen. It really depends on whether we can still get better ROI and returns from the investment we made on the middle front. Thank you.
spk01: Thank you.
spk02: Your next question comes from the line of Vicky Wei of Citi. Please ask your question.
spk00: Good evening, management. Thanks for taking my question. So would management share some color about the latest regulation on data collection, security, and also algorithm recommendation? How will this impact the company and the advertising business? Thank you.
spk03: Thank you, Wiki. As I said in the previous question, I think overall we welcome the development in the regulatory environment. I think overall it's a good thing for the long-term health of the economy and the society. And for us, we have kept up with high standards of compliance. And so overall, I don't think there will be much incremental impact, especially to Chitotel's business. As, you know, content industry has been on a tightening cycle over the past two years, we have already taken the opportunity to reposition our business to to improving and enhancing our practice with regard to data privacy and security. So we will obviously continue to closely monitor the development on the regulatory front and make sure we meet all requirements. And we will also update the market accordingly. But as I have said, for us, we don't see any much incremental impact on this front, and we welcome this development. Thank you.
spk02: Thank you. Once again, if you wish to ask a question, please press star and the number 1 on your telephone keypad. As there are no further questions, now I'd like to turn the call back to the company for closing remarks.
spk04: Thanks again for your time. If you have any further questions, please do not hesitate to contact us. Have a great day.
spk02: This concludes this conference call. You may now disconnect your line. Thank you.
Disclaimer