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

Good day and welcome to the KUTEX fourth quarter and fiscal year 2021 unaudited financial results conference call. 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 PIVA NewsWare. On the call today from Cootech are Mr. Carl Jung, Chairman and Chief Technology Officer, and Mr. Robert Tui, Chief Financial Officer. Mr. Jung will review business operations and company highlights. followed by Mr. Tsui, 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 would like to kindly remind you that this conference contains forward-looking statements within the meaning of Section 21-E 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 Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, confidence, and similar statements. COOTEC may also make written or oral forward-looking statements in its reports filed with or furnished to the USSEC 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 Kutex 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. Kutex mission and strategies, future business developments, financial conditions and results of operations, the expected growth of the mobile internet industry and the mobile advertising industry, the expected growth of the 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, uncertainties, and factors is included in the company's filings with the USSEC. All information provided on this call is current as of the date of this call, and KUTEC does not undertake any obligation to update such information except as required under law. It is now my pleasure to introduce Kutex Chairman and Chief Technology Officer, Mr. Carl Zhang. Carl, please go ahead.

Thank you. Thank you everyone for joining our fourth quarter and financial year 2021 earnings call. We have concluded the year of 2021 with our revenue of US$272.1 million and the next a non-gap probability for the three constructive quarters starting from the second quarter of 2021. Under the current circumstance, in relation to the uncertainty in the Chinese advertising market, we are confident that our balanced developed strategy and the second flywheel in the overseas mobile game segment will continue to drive the sustainable growth of the group. To enhance our balanced development strategy, we optimized our resources and concentrated more on overseas mobile game business. We turned our Chinese domestic online literature business, Fengdu Novel, into profitability since the third quarter of 2021. Meanwhile, we are diversifying our IP monetization business based on our Fengdu original book to increase the revenue and profit and benefit the content ecosystem. We have been incubating ReDict, our overseas online literature app, since 2020. Based on the current program, we expect ReDict will start to generate profit in April 2022 for the group. And starting from the fourth quarter of 2021, we performed a series of cost control plans to cut down the overall cost of the group significantly. With all the efforts, we expect the group will generate meaningful net income after four years of 2022, with operating cash flow tend to be positive in the first half of 2022. As a sign of the confidence in our long-term growth, and the value of our business. I announced that I will purchase up to $3 million of our company's ADR during the six-month period starting today after this earnings release. Firstly, it is worthwhile to address our overseas mobile game business. We have made many breakthroughs in the overseas mobile game business in 2021. Catwalk Beauty and Choose Runner, both casual mobile games, have topped both US App Store and Google Play Store game charts. These achievements showcase our data-driven content production model, outstanding R&D and distribution capabilities. We continue to apply this methodology to many other game types. In particular, the success of Love Fantasy our Match 3 game is a big step for us. It is our first game combining interactive storylines, which is composed from a hot online novel and Match 3 game experience. It topped the list of most downloaded iOS Chinese overseas games in December 2021, with 2.5 million total downloads. On Google Play, ranked as the second place on the most downloaded Chinese overseas game list. The success of this game validated the strong synergy between our online literature and the mobile game business. Love Fantasy targets female mobile game players. Based on the explosive Match 3 gameplay, the game added an interactive romance storyline which fits with the pursuit of contemporary women for life romance, and career. Since it was launched, Love Fantasy received many good reviews and has achieved high user ratings of 4.9 out of 5 on App Store and 4.8 out of 5 on Google Play Store. In 2022, we plan to roll out more Match 3 plus interactive story-like games. We will compose more attractive storylines from the hot novels of reading, our novel app for overseas market. In addition, we started to develop vigorously our game publishing business in overseas market. HottestUp has achieved exceptional success after it's ranked as top three on the US iOS game chart. It is a casual game developed by RepDrive and published by Smileage, our invested studio. We have signed a cooperation agreement with 24 third-party studios for publishing the product in the overseas market. We developed our game publishing SaaS platform, which is based on our unique data-driven content production model. Our content provider will provide will produce their content on this platform. And we provide a comprehensive data metric to help them evaluate their ideas, upgrade content in their games, and optimize monetization and user acquisition. Driven by our internal development and external cooperation, we believe that the mobile game development and the publishing business will grow rapidly in the overseas market. and the revenue contribution from the overseas market will continue to grow. During the fourth quarter of 2021, the total revenue from overseas mobile game business exceeded US dollars, 11 million US dollars, and Love Fantasy contributed to more than 60% of the revenue. Secondly, for our online literature business, We have been steadily consolidating the productive exposure of Fengdu novel in Chinese market and the reading in overseas market. In our current balanced approach, we have been continuously improving the efficiency of user and the content acquisition and the management for Fengdu novel. The user retention rate and the user reading time have been consistently improving in 2021. Also, the signed orders and original country books also increased by 100% and 113% compared to the same period in 2020. As a part of our IP commercialization plan, we reached a cooperation with Tencent Video's MAS project, which aims to support micro-drama TV adoption. A bunch of high-quality online literature works from Fengdu Novel have entered into the bidding stage and will be ready for shooting upon the completion of the bidding and the coordination with the producers. We also initiated a dynamic novel to drama launching mechanism while seeking external cooperation to maximize the inference and the profitability of IT works. The customized launching campaigns, your social media, and other channels have also achieved substantial results. In addition, we're happy expanding our monetization channels by launching our social media distribution plan. We cooperate with KOLs to distribute our IP content to relevant and targeted audience with a pay-to-read monetization model. which provides a strong complement to our current free-to-read app model. As a result, Fengdu Novel currently constitutes a strong and stable gross profit and net income contributor for the group. In terms of Reddit, the online literature app targeting overseas markets, we have been incubating it in a more tailored approach for the positioning of the products in the overseas market. The current focus is to further strengthen the user retention rate and ROI performance. The current 90-day ROI exceeded 100% already. We are confident that the prospect of the online literature business in the overseas market continues to be strong and will start to contribute profit from April 2022 for the group. we are glad that we have been mitigating effectively the different level of risk during our business development. We expect that our profitability will be further improved in 2022 with a meaningful net income level to be achieved and an improvement in the cash flow status and the cash balance. 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. I'm going to brief our fourth quarter of 2021 first. Net revenue was $53 million, a decrease of 48% from $102.4 million during the same period last year. The decrease compared with the same quarter of 2020 was primarily due to a decrease in mobile advertising revenue. The net revenues are mainly generated from three categories of our content-rich apps. Mobile games accounted for approximately 55%, online literature accounted for approximately 42%, and scenario-based content apps accounted for approximately 2%. The use of the company's portfolio products were 18.5 million, a decrease of 32% from 27.8 million in December 2020. MA use of the company's portfolio products were 62.6 million, a decrease of 27% from 85.8 million in December 2020. Our gross profit margin was 88.7% compared with 93.1% in the same period last year and 83.1% last quarter. Gap costs and expenses were about 52.4 million U.S. dollars, a decrease of 2% sequentially, and a decrease of 57% from the same period last year. Non-GAAP costs and expenses were 51.6 million US dollars, a decrease of 2% sequentially, and a decrease of 57% year-over-year. As a percentage of revenue, GAAP costs and expenses accounted for 98%, down from 119% in the same period last year. The year-over-year decrease in operational expenditures are mainly due to the sales and marketing expenses reduction. Sales and marketing expenses decreased by 63% from the same period last year, an increase of 18% from last quarter. The year-over-year decrease in the sales and marketing expenses was primarily due to the transition of the strategy in relation to the acquisition of new users. and the retention of existing users, which resulted in the reduction of the user acquisition costs. The sequential increase in the sales and the marketing expenses was primarily due to the increased investment in the user acquisition in connection with our efforts to still grow the user base, and was partially offset by a decline in salary and payroll expenses associated with sales and the marketing staff. R&D expenses decreased by 1% year over year, and decreased by 30% sequentially, primarily consists of costs associated with technology R&D staff. G&A expenses decreased by 13% year-over-year and 15% sequentially. The sequential and year-over-year decreases were mainly due to a decrease in the salary and payroll expenses associated with G&A staff and also third-party outsourcing fee. Staff net loss was $0.3 million. Excluding the impact of share-based compensation, adjusted net income was approximately $0.5 million. I will now quickly run through a few key full-year 2021 financial results. Further details can be found in the earnings release. Net revenue was $272.1 million, a decrease of 38% from $441.5 million in 2020. Online literature accounted for approximately 39%, narrow-based content apps accounted for approximately 8%, and mobile games accounted for approximately 52% of the total net revenue. Gross margin was 87.9%, compared with 94.5% in 2020. Total cost and operating expenses were 280.9 million US dollars, a decrease of 43% from $489.4 million in 2020. Sales and marketing expenses were $200.2 million, a decrease of 52% from $418.3 million in 2020. As a percentage of total revenue, sales and marketing expenses accounted for 73%, a decrease from 95% in 2020, primarily due to the continuous transition of our strategy in relation to the acquisition of new users and the retention of existing users, which resulted in the reduction of the user acquisition costs. R&D expenses were $34.4 million, an increase of 15% from $29.7 million in 2020, mainly due to an increase in the salary and payroll expenses associated with technology R&D staff and third-party outsourcing fee. As a percentage of total revenue, R&D expenses accounted for 13%, increasing from 7% in 2020. G&A expenses were $17.8 million, an increase of 19% from $15 million in 2020, primarily due to an increase in salary and payroll expenses associated with the G&A staff, professional service fee, third-party outsourcing fees, and listing expenses, and was partially offset by decrees in the back-debt provision. As a percentage of total revenue, G&A expenses accounted for 7%, increasing from 3% in 2020. Net loss was $13.9 million, compared with net loss of $47.4 million in 2020. Adjusted net loss was 10.2 million US dollars in 2021, compared with adjusted net loss of 42 million US dollars in 2020. At the end of 2021, we had cash, cash equivalents and restricted cash of about 18.4 million US dollars, compared with 49.6 million US dollars as of December 31st, 2020. So operator, we are now ready to take questions.

If you wish to ask a question at this time, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad to ask a question. We'll pause for a moment to allow everyone to signal. We will now take our first question from Steve. Your line is open. Please go ahead.

The questions, I've got a few. So first, you mentioned in the commentary some examples of the integration between the online literature and game segments under the unified content ecosystem. I was hoping you could provide a little bit more color about how those two initiatives are expected to come together further in 2022. Okay. Thank you.

I'll take this question. This is a great question. So mobile games and online literature are two major content businesses for us. So both are typical entertainment content businesses. There are many synergies between them despite their user experience being different. So first, we fully leverage our data-driven philosophy to build up these two business. We believe that the data-driven content production is disruptive to traditional content production model in these two fields. For example, most of the game companies usually incubate new game based on key person's experience and their understanding of the market needs. What we do is to implement a statistic idea evaluation platform with comprehensive data metrics to evaluate each idea about its potential market size, targeted user profile, and even its ROI. When successful projects such as Catwalk Beauty actually come out of 50 idea evaluations. So we do similar things for our online literature. We have already made this data-driven content production SaaS platform available for our science novel authors and our science game content providers. So this is our core competency. By integrating and developing this unique data-driven content production platform, we can evolve this model. and the algorithm behind the effect efficiently and the benefit both business. And second, online literature and mobile game business have strong synergy on content level as well. So when we kick off our game business back to the end of 2019, we planned it to link this to business with content so that we compose storylines based on the hot novels from our novel app and make them available as a game. So Love Fantasy is a big step for us because it is our first game combining interactive storyline and the match three game experience. So the success of this game validated the strong synergy between our online literature and the mobile game business. And we will produce more games with attractive storylines from Reddit and potentially from Fundo Novel as well. And we are merging internal talents related to this business chain from novels to games to make the flow more efficient. Thank you.

Great. And thank you for the outlook for net income generation in 2022. I was hoping you could just discuss briefly the company's flexibility in managing expenses to maintain that outlook if the macro environment remains challenging.

Yeah, okay. I'll take this question. So obviously, as consistently mentioned, you are in our – previous earnings calls and also this earnings call as well we will continue to maintain a reasonable spending for the cost and expenses and in particular for the sales and marketing expenses we are targeting a stable 70% as of revenue level for the next few quarters in particular for 2022 and also we have seen continuous space for improving the efficiency in relation to the R&D and GN expenses as well. So our targets for the R&D expenses as of revenue and GN expenses as of revenue are around 10% and 6% for the current year. Thank you.

Great. And last one for me. if there's any guidance around the pace of new game launches in 2022, whether that might match or stay around the same range that we saw in the second half of 2021. And also just to clarify, this is Steve Silver from Argus Research. Thanks so much.

Okay, I'll take this question. So we have made many breakthroughs in the overseas mobile game business in 2021, so Cash Walk and the Truth Runner, both casual mobile games, have topped the US game chart. These achievements showcase our unique data-driven content production model. We continue to apply this capability to other game types. For example, Love Fantasy, our Match 3 game, topped the list of the most downloaded iOS and Chinese overseas games in December 2031. And Google Play is ranked in the second place as well. So to extend the success, we started to develop vigorously our game publishing business in the overseas market. And we have already released the hottest app, which is exceptional success. It's ranked as top three on the US game chart. It is actually a casual game developed by RAP Driver and published by us. For 2022, we expect to accelerate the pace to launch new games by the following facts. One, we have signed over 20 external game studios with our publishing business. We developed our game publishing SaaS platform already. which is based on our unique data-driven content production model. And our content provider will produce their content on this platform, and we provide comprehensive data metrics to help them evaluate their ideas, evolving content in their games, and optimize monetization across users. So we believe this approach to enable our partners will help us to scale out our new game release and form a more competitive content ecosystem. And we have three games almost ready to go, and we expect more from this cooperation model in the coming quarters. And Love Fantasy is a big step for us because it is our first game combining interactive storyline and a match-three game experience. So the success of this game validated the strong synergy between our online literature and the mobile game business. We will export and compose more attractive storylines from the hot novels of Revit, our novel app from overseas market. And in 2022, we plan to rule out more mastery plus interactive storyline games. I think in the end of the second quarter of this year, You will see another one coming out, which is another Match 3 game as well, and we are expecting more in the second half of this year. Thank you.

As a reminder, to ask a question, please press star 1. We will now take our next question from Vivian Zhang from Diamond Equity Research. Please go ahead.

Hello. My first question is about the game studios you've invested in. We know that Knowledge is one of them and has launched a lot of high-downloaded games for QTAG, including Catwalk Beauty and Love Fantasy. So how do you work with these third-party studios to ensure they deliver successful games and generate significant revenue? My second question is that will the continued tightening of Chinese government policies on the Internet and gaming industries affect the company's views on the industry's prospects? Thank you.

Thank you for your questions. I will take both of them. So the first question is about our game studios, interactive game studios. And as I mentioned, we fully leverage our data-driven philosophy to build up our business. So we believe that the data-driven content production is disruptive to traditional content production model. And we have already implemented our data-driven content production and the publication service as a SaaS platform. and built in all our data metrics, user growth engine, monetization, optimization, and the related algorithm about content production and distribution in this SaaS platform. And all our invested studios and our signed game content providers have access to this SaaS platform. And this way, we enable our partners, ensure their success to establish a healthy content ecosystem. In terms of the second question, it's about the Chinese government's policy. So I don't think I'm in the right position to comment or predict the government's policies, but the macroeconomics, especially internet advertising on demand side, is relatively weak since the third quarter of 2021 in Chinese domestic market. So I think this is correlated correlates to government regulations, which I think some of them have positive long-term benefits to the industry. And there are still uncertainties about the Chinese domestic mobile game regulations. But as I mentioned, to enhance our balanced development strategy, we have optimized our resources and concentrated more on our overseas business, especially overseas mobile games. We made a bunch of critical breakthroughs in the overseas mobile game business, and we targeted all our new game projects to overseas markets. And the pipeline is solid for the coming years. And we have been incubating Revit, our online novel app for the overseas market. It has made phenomenal progress and will start to contribute profit to the group from April 2022, we believe. Thank you.

Thank you.

As a final reminder, to ask a question, please press star 1. We'll pause for a moment to let everyone signal. As there are no further questions at this time, I'd like to turn the conference back to your speaker for any additional remarks.

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