CooTek (Cayman) Inc. American Depositary Shares, each representing 650 Class A Ordinary Shares

and welcome to KUTEC's fourth quarter and fiscal year 2020 unaudited financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone. Please note this event is being recorded. I would now like to turn the conference over to Institutional Capital Advisory. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website at ir.cootech.com and on PR Newswire. On the call today from QuTech are Mr. Carl Zhang, Chairman and Chief Technology Officer, and Mr. Robert Cui, Chief Financial Officer. Mr. Zhang will review business operations and company highlights, followed by Mr. Cui, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we begin, I'd like to kindly remind you that this conference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements are made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intent, plan, leave, estimate, confident and similar statements. COOTEC may also make written or oral forward-looking statements in its reports filed with or furnished to the U.S. SEC in its annual report to shareholders in press releases and other written materials and oral statements made by its officers, directors, or employees to third parties. Any statements that are not historical facts including statements about WhoTech beliefs and expectations, are forward-looking statements that involve factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors and risks include, but are not limited to the following, WhoTech missions and strategies, future business development, financial conditions and results of operations, the expected growth of the mobile industry, internet industry, and the mobile advertising industry, the expected growth of mobile advertising, expectations regarding demand for and market acceptance of the company's products and services, competition in the mobile application and advertising industry, and relevant government policies and regulations relating to the industry. Further information regarding these and other risks and certainties and factors is included in the company's fighting with the USFDC. All information provided on this call is current as of the date of this call, and QPAC does not undertake any obligation to update such information except as required in the law. It is now my pleasure to introduce Mr. Carl Zhang. Carl, please go ahead.

Thank you. Thank you, everyone, for joining our fourth quarter and the four-year 2020 earnings call. We are pleased to conclude the year of 2020 with our revenue reaching $442 million, representing the growth of 148% compared to 2019. Since our IPO in 2018, our annual revenue grew approximately 80% from $134 million. We executed our strategic roadmap to expand our content app portfolio and cultivate the global Penn Entertainment content ecosystem firmly. While keeping the scale of our scenario-based content app since our IPO, we successfully developed our online literature and the casual game business from scratch, which respectively contributed 38% and 37% to the total revenue in 2020. We are delighted to announce this result and feel very confident on our future growth. Based on our current estimate, we expect 2021 four-year revenue will continue to grow steadily. I would like to say that It has been a solid year for the company in 2020. Our mission is to empower everyone to enjoy relevant content seamlessly. We have focused our content app strategy in three pillars, online literature, scenario-based content apps, and casual games. In terms of user base, the DAUs and MAUs of our portfolio products reached 37.8 million users and 85.8 million in December 2020, with the continuous improvement of user engagement ratio. Firstly, let me address specifically on the recap of our online literature business. In particular, for Fengdu Novel, our core online literature product, which constantly ranked the number three in terms of MAUs in the free online literature market in China in 2020, we have enriched our content resource by increasing efficiently the number of the signed authors and the third-party content partners targeting at further improving the user sickness. We are encouraged to see the positive indicators of the intensified Fengzhu novel community. The average daily reading time per daily active user exceeded 130 minutes in December 2020. We actually saw further increase of the average daily reading time in January and February 2021. The monthly new user retention rate from the first month to the 12th month also increased steadily in 2020. Our philosophy is to build a customized content production model that establishes the data feedback, and the metrics between our signed authors and the readers so that the content ecosystem is adapted to users' ever-evolving content preferences. We launched the Fengdu Literature Platform to develop our original content ecosystem at the end of 2019. Since December 2019, Fengdu Literature Platform has accumulated around 3,000 signed authors and 3,600 original conscious books. Compared to licensed books, the books produced by our signed authors obtained more than 50% of total reading time of Fondue readers and total revenue. Fondue literature platform is deemed as diverse in category, covering 13 major categories of male and female preferred content. More than 70% of content focused on gender-specialized stories in urban context and Asian romance. In addition, we are actively diversifying our IT business based on the original book from Fengdu Literature Platform. We developed Fengdu Audible Books, a new feature incorporated in Fengdu's novel app to meet evolving needs of readers. More than 2,000 audible books are available on the platform. We also created short video series based on Fengdu literature platform, content, and IP resources. The first short video drama series, named The Proud Wenwen Su, produced from content on Fengdu literature platform, is based on a piece of literature with a substantial and exciting storyline. The video series is divided into 20 episodes with a running time of two or three minutes for each. The short drama has been redistributed on major short video sites such as Douyin, the Chinese version of TikTok, and Kuaishou, Bilibili, and Xigua Video, among others, and can be watched by certain Fondue theaters. At the same time, we have also advanced our monetization capability to create additional growth momentum for the group. Although the average revenue per user, RPU in short, incurred volatility with the overall internet advertising market, we still deliver a satisfactory return on investment. As a result, the BAUs and the revenues of Fengdu Novel recorded significant year-over-year growth, of 106% and 360% in 2020. In addition, we achieved significant milestones in the development of our overseas online literature business. The product is constantly ranked as one of the top apps in book category in the U.S. with MAU close to 1 million. We have also seen the stable improvement of the monthly new user retention rate. Guided by our unique content acquisition strategy, we have successfully secured the contract with a series of best-selling authors, and the content inventory reached 1,000 books after just one year's operation. We are even more confident to strengthen our competitive edge in the global online literature or even publishing market. Secondly, for our mobile game business, we also delivered rapid growth in 2020, which contributed to the revenue and the profitability of the group. As a highly synergetic business to online literature, we have successfully self-developed and self-distributed more than 20 casual games. They typically reflected high ROI but shorter product cycles, which illustrated the rationale of optimizing our game product pipeline. We have strived to upgrade our strategy by investing and partner with other experienced studios and teams for delivering a more diversified product portfolio with casual games and mid-core games. We are still convinced that the business can serve as a stable source of revenue and profitability for the group. Thirdly, as a vibrant business segment since our IPO, the scenario-based content apps have been further streamlined and upgraded. We have focused on selected verticals such as sports and fitness, but also developed new products. The key priority of this business is to maintain the ROI and to serve as a strong foundation of the growth of the group. As we move forward in 2021, our strategy remains stable. We will continue to cultivate the global pan-entertainment content ecosystem and focus on the three synergized pillars, online literature, mobile games, and scenario-based content apps. Our key strategy initiatives will be 1. Growing Fondue Novel by providing the interactive and quality user experience and cultivating an engaging and attractive community. Optimizing our casual games products by strengthening internal, developed, and third-party investment and partnership. 3. Intensifying the oversea market expansion with our core strengths built in the online literature segment. Four, upgrading our monetization capabilities by exploring user-paid content, e-commerce, and IP asset adaption. We strongly believe that we can further improve our business model with a more balanced approach by delivering revenue growth and achieving profitability. We are excited to deliver Robert's performance and maximize our long-term shareholder value. With that, I will hand the call to Robert, our CFO, who will walk you through our financial results for the quarter. Thank you.

Thanks, Tao. Hello, everyone. Thanks again for joining us tonight. As mentioned, our firm strategy of the Penn Entertainment content ecosystem has been demonstrated by our robust growth in our user base and revenue in 2020. As our business scale reached a new high on a yearly basis, we are confident that our commitment will further contribute to the continuous enhancement of our product portfolio. I'm going to brief you our fourth quarter and full year of 2020. To start with the fourth quarter, net revenue was 102.4 million U.S. dollars, an increase of 48% from 69 million U.S. dollars during the same period last year. The net revenues are mainly generated from three categories of our content rechecks. Online literature accounted for approximately 47%. Scenario-based content apps accounted for approximately 24%, and casual games accounted for approximately 28% of the total net revenue. For online literature business, we are excited to report that our Fengdu novel delivered solid business growth in the fourth quarter of 2020 with a sequential average revenue per user, output growth of 22%, and revenue growth of 28%, reflecting the upgraded monetization strategy The average DA use of the company's portfolio products were $27.8 million, an increase of 13% from $24.7 million in December 2019. MA use of the company's portfolio products were $85.8 million, an increase of 15% from $74.6 million in December 2019. Our gross profit margin was 93.1% compared with 94.4% in the same period last year and 93.6% last quarter. Gap costs and expenses were about 121.5 million, a decrease of 5% sequentially and up 62% from the same period last year. Non-gap costs and expenses were 120 million, a decrease of 5% sequentially, and an increase of 60% year-over-year. As a percentage of revenue, non-GAAP costs and expenses accounted for 117%, down from 119% in previous quarter. The decrease in operational expenditures were mainly due to the sales and market expenses. Sales and market expenses increased by 61% from the same period last year and a decrease of 5% from last quarter. The largest component of these expenses is the user acquisition costs, which is in line with the overall expansion of our content-related business. R&D expenses increased by 14% year-over-year and decreased by 21% sequentially primarily consist of costs associated with technology R&D staff and share-based compensation expenses. We ended the quarter with 759 full-time employees, up 37% from last year and up 5% from last quarter. R&D employees represented about 60% of the total employees, the same as last quarter, and compared with 63% last year. G&A expenses increased by 41% year-over-year and 4% sequentially. The sequential and year-over-year increases were mainly due to an increase in cost associated with G&A staff and share-based compensation. GAAP net loss was $18.8 million, excluding the effects of stock compensation. Adjusted net loss was approximately $22 million. I will now quickly run through a few key full-year 2020 financial results. Further details can be found in the earnings release. Net revenue was $441.5 million, an increase of 148% from $177.9 million in 2019. As a full-year basis, online literature accounted for approximately 38%, scenario-based content apps accounted for approximately 24%, and casual gains accounted for approximately 37% of the total net revenue. Gross margin was 94.5% compared with 91.4% in 2019. Total cost and operating expenses were $489.4 million, an increase of 128% from $214.6 million in 2019. Sales and marketing expenses were $418.3 million, an increase of 166% from $157 million in 2019. As a percentage of total revenue, sales and marketing expenses accounted for 95%, an increase from 88% in 2019, primarily due to increased investment in the user acquisition. R&D expenses were $29.7 million, an increase of 10% from $26.9 million in 2019, mainly due to an increase in costs associated with technology R&D staff. As a percentage of total net revenue, R&D expenses accounted for 7%, decreasing from 15% in 2019. G&A expenses were $15 million, a decrease of 8%, from $16.3 million in 2019, primarily due to accrued bad debt provision of $0.4 million in 2020, a decrease by $3.7 million from $4.1 million in 2019, and was partially offset by an increase in professional expenses and an increase in costs associated with G&A staff and share-based compensation expenses. As a percentage of total net revenue, GNA expenses accounted for 3%, decreasing from 9% in 2019. Net loss was $47.4 million, compared with net loss of $36.8 million in 2019. Adjusted net loss was $42 million in 2020, compared with adjusted net loss of $33.2 million in 2019. At the end of year 2020, we had cash, cash equivalents, and restricted cash of about 49.6 million U.S. dollars, compared with 60 million U.S. dollars at the end of 2019. On May 18, 2020, we announced a share repurchase program, the 2020 program, where we are authorized to repurchase our Class A ordinary shares in the form of ADSs with an average value of up to $20 million during the 12-month period starting from May 18, 2020. We expect to fund the repurchases under this program with existing cash balance. As of end of year 2020, we had used an aggregate of $4.7 million to repurchase 0.9 million ADSs under the 2020 program and recorded as Treasury stock. For the first quarter of 2021, we expect total revenue to be about 80 million US dollars. This outlook is based on information available as of the date of this press release and conference call and reflect the company's current and preliminary expectations, which are subject to change in light of various uncertainties, including those related to the ongoing COVID-19 pandemic. Looking at the overall 2021, we are committed to further execute our well-structured, dedicated growth plan focused on continuously delivering the revenue growth and steadily achieving profitability. At the same time, we are also committed to deliver a balanced financial approach by improving the overall operating leverage. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Vicky Wei from Citi. Go ahead.

Good evening, Matt. Thanks for taking my question. This is Vicky Wei on behalf of Alicia Yap, and we've got three questions here. So can management comment on latest competition landscape for online reading market? What is the latest market share of Fengdu, and do you have any market share target to achieve? Our second question is, What type of content creators typically on the platform? What are the main differentiation of these content creators versus competitors? And our third question is, what is the company's sales and marketing spend target and overall user acquisition plan? Thank you.

Thank you, Vicky, for your question. Let me answer the first two questions and then I will hand over to Robert to answer the rest of the questions. So, in terms of the competitive landscape of free reading market, I separate this question into two regions, the China domestic market and the overseas market. So, in China's domestic market, Fond du Novel raised from scratch within two years and remained the number three position of free literature market under the market competition. So now our focus is more on cultivating our unique content ecosystem to build up competition barrier and sustain the long-term growth. So we believe that the competition is long run and the content ecosystem is the core to win the game eventually. As for the overseas market, we are a pioneer of a free reading model. So thanks to the strong global content app experience, our long-term goal is to become the number one online literature community in multiple countries. Now let's talk about Fondue Literature Platform. Since December 2019, Fondue Literature Platform has accumulated over 3,000 signed orders and 3,600 original contract books. So compared to licensed books, the books produced by our science authors obtained more than 50% of total reading time and of Fondue readers and total revenue. Fondue literature platform is deemed as diverse in category, so covering 13 major categories of male and female preferred content. So compared to other platforms, More than 70% of content focus on gender-specialized stories in urban context and Asian romance. Besides, we're not only focusing on traditional online book formats, which are usually long to over 1 million words, but also cultivating middle-length format stories. So these specialized stories will bring our community diverse user base and provide our users different content to enjoy. Thank you.

Yeah, okay. So for the third question on the sales and marketing spend targets, so as we have seen, we have invested in the customer or user acquisition. Given we have started to build our online literature and casual games business, since the fourth quarter of 2019, and we are encouraged to see we have achieved important milestones with our user base and revenue reaching new highs. But as a result, our sales and marketing expenses as of revenue indeed increased from about 60% in 2018 to 95% in 2020. As a key component of our growth strategy, we have also been committed to optimize the cost and expense structure, targeting and moving forward towards profitability. So there are several important initiatives in relation to this strategy. So first, we have been launching diversified and innovative marketing campaigns to improve the efficiency of the new user acquisition. Second, with the enrichment of our content resource on our online literature platform, we have seen stable improvements of the user retention rates, which can contribute to the marginal reduction of the sales and marketing expenses in relation to the management of the existing users. And at the same time, we are also diversifying the monetization strategy for our online literature products with paid content, e-commerce, and IT adaptation. which will support the growth of the ARPU and ROI. And third, we have also been striving to increase the ROI for our casual games products and to diversify the pipeline. Given the casual games business represent higher ARPU and shorter investment return period, the contribution from all the performing products can also help increase the operating efficiency. So with all these efforts, we are convinced that we can steadily implement this balanced approach of achieving user base and revenue growth, and at the same time, the group level profitability. So to summarize, we forecast a stable reduction of the sales and the marketing expense as of revenue for the percentage in the coming quarters. And on a yearly basis, the sales and the marketing expenses as of revenue is expected to decrease by 10% to 15% in 2021, while keeping the growth momentum of our user base and revenue. And we are confident in delivering this operating leverage. Thank you.

Thank you. Our next question is from Hunter Diamond from Diamond Equity Research. Go ahead.

Hi. Firstly, congratulations on the strong earnings. So we want to just get an update on your strategy for expanding the overseas market. Whatever additional information you can tell us on that approach.

Okay. So I'm going to take this question. So yes, we will stick with our mission to empower everyone to enjoy relevant content. So in 2031, we will continue to grow our overseas market business with priorities. So we believe global online literature is a tremendous opportunity for us. So by leveraging our AI and big data technology, we get a chance to improve the efficiency and the precision of long-reading content production and distribution process, not only in China domestic market but overseas market as well. We will focus on English-speaking countries as the first step to reach this goal. So we will strive to cultivate local content ecosystem So, cooperating with local content partners and enabling local authors with our AI technology are our priorities. So, at the same time, we are expanding our mobile game business to the overseas market as well. So, we have already launched nearly 10 mobile games to overseas market and have achieved success for most of them. So we are exploring the synergy between online literature and mobile game business in overseas markets. So the strategic goal is to establish a strong synergy to connect online literature and mobile game business, just as we already realized with Fengdu Novel and mobile games in China's domestic market. Thank you.

Great. Thank you for the additional information on the approach. Our next question was, obviously, global mobile content is experiencing very high growth in 2020 or 2021 as well, given COVID-19 stimulated demands for entertainment-based applications. So we wanted to see your expectations on the outlook for the company and the industry in the post-pandemic period. And what measures will Kutek take to maintain the level of growth it's seeing after COVID-19?

Yes, so we are optimistic on the long-term growth of global mobile content industry, especially entertainment-based apps in the post-pandemic period. So if we look at the time spent distribution on mobile devices of global users, most of users' time is spent on mobile entertainment-based apps today. But if we look at the total time spent on mobile devices of global users, we find that the growth rate of total time spent on mobile devices is mixed. So in some developed countries, the growth rate is declining, but in emerging countries, it's still increasing significantly. So that is In developed countries, time spent dividend is disappearing and the apps are competing for users' attention. So that brings the opportunity for companies who focus on cultivating healthy and quality content ecosystem and improving content distribution efficiently and precision. So we strive to innovate on both AI technology and business model to cultivate our content ecosystem, grow and monetize our user base effectively, and develop our user community. So we believe the measures will drive our continuous growth.

Thank you. Great. Appreciate the additional information on the strategy. So again, congratulations on the earnings. Thank you.

Our next question is from Aaron Chu from Tigris Financial Planners. Go ahead.

Thank you for taking my question. So I have two questions. The first question is regarding the Q1 revenue guidance. So what are the reasons for this? I say it would be the Q1 revenue guidance. And the second question is regarding the online literature business. China so how do you see the current trend of literature business in China and what is the total addressable market for this business in China and yeah thank you okay yeah thank you so I will answer the first question and Carl will

answer the second question. For the first quarter of 2021, guidance is based on our current estimates. Obviously, it's in line with the seasonality in relation to the domestic online advertising market, in particular in the Chinese market, and the relevant monetization strategy upgrade of our portfolio products in particular for the online literature and mobile games business but as a general reminder we we steal or we are committed to further or continuously deliver growth for the full year revenue user base and for the steadily achievement of the profitability for the coming year so this is based on the current estimates and our internal management plan for giving this quality title.

In terms of the online literature market in China and the global market, to us, we think that the online literature business, especially the free online literature a market is a new area which has tremendous opportunity for us. So we released the Fengdu novel in 2019, and in a very short period, we grow the user base to be over 10 million BAUs, which means that we actually benefit from the great potential of the market. And we also believe that the global online literature is a tremendous opportunity for us as well. Because long reading content is a fundamental content need for global users. But the traditional online publishing industry cannot meet users' ever-evolving needs. So by leveraging our AI and big data technology, we get the chance to improve the efficiency and precision of long reading content production and the distribution process. So for example, we introduced the AI Assistant and the big data technology of Fengdu Literature Platform to establish a data feedback loop which enabled our science authors deep understand the performance of their books and help them to consistently improve their art. The same thing happened on our global online literature apps for English-speaking countries, especially U.S. So we tried to innovate on both AI technology and the business model to cultivate our content ecosystem, grow and monetize our user base effectively, and develop our user community. So we believe that such innovations on both AI technology and the business model will drive continuous growth. So in addition, as I mentioned, we believe online literature is a tremendous opportunity globally. So we will actively expand our user base, not only in China, but also overseas markets to drive growth. Thank you.

Our next question is from Steve Silver from August. Go ahead.

Hello, everybody, and congratulations as well on the strong revenue growth and user metrics. Very impressive year. Most of my questions have been answered, but I did have one remaining. You guys mentioned the share buyback status as of December 31st. I was just curious if you had any color that you could provide. As to your current thinking on accessing the program, given the downturn in technology stocks towards the end of the first quarter.

Yeah, okay. Thank you. I'll take this question. So as mentioned, as of December 31st, 2020, so we have repurchased the U.S. dollar's 4.7 million worth of shares. And as a general rule, we will monitor the markets and the stock price for evaluating further the plan and the potential next step. But as always, we have higher priority for the business growth and will be founded for delivering the long-term value for our shareholders. So it is really subject to our... you know, imminent monitoring of the market and the stock price. And we don't have additional details to be disclosed at current stage.

Okay, great. Thank you and congratulations again.

Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Institutional Capital Advisory for closing remarks.

Thank you, operator. In closing, on behalf of the entire management team of Kutak, we would like to thank you again for joining this conference call tonight. If you have any further inquiries in the future, please feel free to contact us at irs.kutak.com or kutak.icaasia.com. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.