Qutoutiao Inc. (QTT) Q1 2021 Earnings Call Transcript

Qutoutiao Inc. (NASDAQ: QTT) Q1 2021 earnings call dated Jun. 01, 2021

Corporate Participants:

Sai Chi Du — Investor Relations

Xiaolu Zhu — Chief Financial Officer

Analysts:

Thomas Chong — Jefferies — Analyst

Vicky Wei — Citigroup — Analyst

Presentation:

Operator

Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2021 Earnings Conference Call for Qutoutiao Incorporated. [Operator Instructions]

I will now turn the call over to your host, Sai Chi Du. Please go ahead, Sai Chi.

Sai Chi Du — Investor Relations

Thank you very much. Welcome everyone to the first quarter of 2021 earnings conference call of Qutoutiao, Inc. The company’s financial and operational results were released by 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.qutoutiao.net. Participants on today’s call will include our CEO, Mr. Eric Tan and our CFO, Mr. Xiaolu 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 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 Qutoutiao’s earnings press release and this conference call includes discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Qutoutiao’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.

Thank you, Sai Chi, and thanks everyone for joining today’s conference call. After year adjustment, which we initiated last year following meaningful changes in the operational environment triggered by COVID-19 as well as our thinking in terms of how we can better position the business going forward, we started 2021 with a healthy and balanced portfolio of applications at various stages of development. After several quarters of consistent effort and execution, the business overall is today on a much stronger financial footing to march forward. We will continue to operate our business more efficiently, while stepping up our growth initiatives.

A very important pillar of growth for us today is Midu Novels, which has been the pioneer and a leader of free online literature industry. Following the latest round of financing, as we have announced in the last earnings release, we brought on a new phase of significant investment in the growing Midu franchise. We are now strategically collaborating with Kuaishou in mini TV series or otherwise known as short drama series where we leverage our in-house produced IP to create short clips based on rich and engaging story lines. It’s an experiment for the expansion of IP value and a way for more users to come to know Midu as a brand and appreciate the quality of work Midu has to offer.

China Literature has been leading the overall online literature industry for years and is reputed for creating and curating the highest quality literature works. We began to partner with them on the content side since Q4 of last year to expand the diversity and the scope of quality work available to our users. Given the high quality of China Literature’s work and the fact that many have been made available on a free online literature platform for the first time, our users are enjoying more engaging reading experiences. And as a result, we have observed better user retention trend.

We continue to nurture our in-house editor team to drive differentiated content, adding where otherwise lacking, as part of our overall strategy to provide the most comprehensive and register-free online literature offerings. Remember, last year, we adjusted our product positioning by flashing loyalty points and parting ways with users who were essentially not content-oriented. It caused a near-term impact to our business, but we noted that underlying economics turned out to be much improved.

To be cultural and/or content-driven has been the overarching shift for us. Midu traditionally with little loyalty points has been at the forefront of this drive and provided us with a strong engine to accelerate our overall transition. Having a more unified and clearer target user profile is also conducive to our user acquisition strategy which is handled by the shared Midu office. With better brand recognition, better content, more effective use acquisition and better economics, we are seeing good results coming from Midu, which now has peaked the DAU getting over 10 million in the second quarter and revenues doubling on a year-over-year basis. Elsewhere, the business has been characterized by operating efficiency and improving margins and profitability.

Our sequential revenue trend is in fact quite a bit better than what Q1 seasonality would typically dictate. A leaner operation is going to benefit us longer term as we can now turn our focus outward to capture opportunities in the marketplace and leverage our well structured and efficient corporate infrastructure. For the full year of 2021, we remain committed to our balanced approach towards growth and profitability, while we further develop and grow our portfolio of applications, and we remain confident of achieving full year group level profitability.

Thank you very much. This concludes Eric’s remarks, and I will now turn the call over to our CFO, Xiaolu.

Xiaolu Zhu — Chief Financial Officer

Thank you, Eric, and thank you, Sai Chi, and 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 first quarter were RMB1,291 million with ARPU of RMB0.45 and quarterly average DAU of 32 million and MAU of 133 million, rather flattish sequentially. As we came off the peak season of Q4 and Q1 being the traditional low season advertising due to Chinese New Year, this indicates underlying stability and recovery of our overall business.

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 compensation. Cost of revenues were RMB380 million, a decrease of 17% year-on-year due to more efficient budgeting with our IT expenditures despite increasing content procurement cost. As a result, we generated RMB910 million gross profit on 71% gross margin, which is a 3% to 4% margin expansion both year-on-year and sequentially.

Our sales and marketing program has been well managed as we have seen better results with smaller expenditures. For the first quarter, the total amount was RMB798 million, a 24% reduction year-on-year, and as a percentage of revenues, became to 62% which represented a 13 percentage point improvement from a year ago. Our R&D expenses were RMB137 million during the quarter, which was 11% of revenues in line with the previous quarter and a 4 percentage point decrease in comparison to a year ago given our streamlined R&D teams.

G&A expenses were RMB61 million during the quarter, which was just under 5% of revenues in line with the range we observed in recent quarters. Since we broke even during the fourth quarter of 2020, which was the first quarterly operating profit since IPO, we have maintained good cost discipline. And for the first quarter of 2021, we incurred a very small operating loss of RMB54 million with operating loss ratio of just 4.2%. Coming off the Q4 peak season and despite the increased investment in Midu, this is a strong result and gives us confidence to our financial outlook for the whole year.

We continue to see improving unit economics. Excluding Midu, which historically has offered little loyalty points, the rest of the business has achieved both better ARPU and significantly reduced user engagement expenses. It’s not a result of mechanical reduction of loyalty points awarded, but rather our strategic repositioning of the business which we believe is a much stronger and healthier basis to push forward. On Midu, as Eric mentioned, it is a key part of our growth strategy and we have entered a new phase of enhanced investment immediately after the latest round of financing.

The relevant segments represents great long-term runway for us. We are investing more into every aspect of it from content and IP creation to user acquisition. Together with our strategic partners, which are leading players in their respective fields, we are seeing promising trends and results meeting our expectations. Monetization efficiency in terms of ARPU has consistently improved. Better content and algorithms have allowed us to generate improving user retention rates, which are key to the virtuous cycle we are nurturing for Midu.

We will maintain a disciplined approach with the all necessary investments into Midu as we have with the financial management with the rest of the business. And we are confident that we will be able to double Midu’s revenues and DAU by year end. After successfully executing a combination of strategic and financial initiatives over the past few quarters, we feel well positioned with the current profile of the business. We expect the business in terms of DAU and revenue to be stable for the rest of the year, albeit with some movements due to seasonality. And we expect underlying profitability, excluding Midu, to continue the improving trend.

Thank you very much. That concludes our prepared remarks today. We are now open for questions. Operator, please proceed.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Thomas Chong. Please ask your question.

Thomas Chong — Jefferies — Analyst

Hi, good evening. Thanks management for taking my questions. I have a question about the Q2 revenue guidance. Can management comprehend [Phonetic] about how we should think about the advertising momentum in quarters? And in particular, how is the trend across key industry categories? Are we actually seeing any slowdown in any particular vertical? And another tool we got to redo. Can management reiterate again what’s our KPI for this year in terms of the user and revenue? And any color on the KPI that would be grateful? Thank you.

Xiaolu Zhu — Chief Financial Officer

Thank you so much. So regarding your first question, regarding the Q2 revenue guidance, as we have said in the prepared remarks, we took a balanced approach this year towards investment and growth, especially on the marketing side. So we do require a very good ROI for every marketing dollar we spent. So this year we expect to have somewhat stable user base and revenue base.

That being said, I think in Q2 in particular, we do see some weakness in the advertising market, especially in March — from March to May because some of the regulatory actions taken by the government regarding the Internet industry and also in particular for sectors like online education. I think we do see the mood to be dampened a bit in the — in late Q1 and early Q2. However, we do see a strong demand for advertising for the June 18 e-commerce activities. So I think, overall, we see this — the recovery trend in advertising market to continue for 2021, but we do see some certain weakness in Q2. But so far, we think it’s still being limited in certain sectors and that does not change our outlook for the full year.

So regarding your second question for Midu, as we have said before, we want to double Midu’s DAU and its revenue by year end. So last year, Q4, Midu’s DAU was around 7 million to 8 million, so which means this year our year end target will be over 50 million. And as we said, in May — last May, so just a while, two weeks ago, the peak DAU for Midu has already surpassed the 10 million. So I think we are right on track to achieve that year end target goal for Midu. And also, as we said, the ARPU — the monetization rate for Midu is actually also improving at the same time. So I think for the revenue target we are more confident to achieve. Thank you.

Thomas Chong — Jefferies — Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Vicky Wei. Please ask your question.

Vicky Wei — Citigroup — Analyst

Good evening. Thanks management for taking my questions. So following up on your comment about the user growth of Midu, can management provide some color about the user acquisition strategy and implied acquisition cost for Midu? Thank you.

Xiaolu Zhu — Chief Financial Officer

Sure. Thank you, Vicky. So for Midu, I think the goal is to get to over 50 million in terms of DAU by year end. So we do want to make sure that we get to that number. But that being said, we also will take a disciplined approach to make sure that we get ROIs for all the marketing dollars we spend on Midu. And so far, the results are quite promising because as we have said before, the ARPU — the monetization rates is also improving for Midu, and we are getting better user retention rate as well. So I think for us, we do believe that Midu has a good runway and we are making very good investment in this business and we will continue to do that for the rest of the year. Thank you.

Vicky Wei — Citigroup — Analyst

Thank you.

Operator

[Operator Instructions] As there are no further questions now, I’d like to turn the call back over to the company for the closing remarks.

Sai Chi Du — Investor Relations

Thanks again for your time. And if you have any further questions, please do not hesitate to contact us, and have a very good day.

Operator

[Operator Closing Remarks]