Qutoutiao Inc. (NASDAQ: QTT) Q3 2020 earnings call dated Dec. 16, 2020
Corporate Participants:
Sai Chi Du — Investor Relations
Eric Siliang Tan — Co-founder, Chairman and Chief Executive Officer
Xiaolu Zhu — Chief Financial Officer
Analysts:
Vicky Wei — Citigroup — Analyst
Thomas Chong — Jefferies LLC — Analyst
Presentation:
Operator
Hello, ladies and gentlemen, thank you for standing by for the Third Quarter 2020 Earnings Conference Call for the Qutoutiao Inc. At this time, all participants will be in a 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. Please go ahead, sir.
Sai Chi Du — Investor Relations
Thank you very much. Welcome everyone to the third quarter of 2020 earnings conference call of Qutoutiao 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.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 US 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 US 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 include 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.
Eric Siliang Tan — Co-founder, Chairman and Chief Executive Officer
Thank you, Sai Chi and thanks everyone for joining today’s conference call. We are delighted to see the resilience of our business as reflected in the results of the third quarter. Our focus for the year continues to be on the underlying profitability of the business as we go through a tough market and regulatory backdrop, partly due to the COVID pandemic. We have remained agile as a business while facing some uncertainties and changes in the operational environment this year and we are pleased to see our efforts and perseverance bearing fruit in the form of consistently improving profitability.
This has been achieved as a result of the combination of initiatives. Firstly, our marketing expenditures have followed strict ROI requirements to make sure that they are yielding satisfactory returns. For this, we look at user acquisition and user retention separately and in combination to discern the discrepancies in constant search for room to further optimize. This perspective has been the driver behind the amount and timing of our user acquisition. As this is an important part of our daily operation, we have become structurally more efficient as a business and this will set a solid footing for our long-term growth.
Within our expenses, we have also taken a closer look at other line items, which are relatively smaller and previously had not attracted enough of our attention, such as server bandwidth costs as well as our budgeting for headcount. These are proven to be another meaningful source of efficiency gain. Our disciplined approach towards expenses has been instrumental in protecting our shareholder value during tough times and will continue to serve us as we re-emerged as the tide turns. In the short-term, it does mean some downward pressure on our DAU and MAU metrics.
We have mentioned in our previous call that our applications have been briefly taken off the app stores at the beginning of Q3 as a result of the CCTV program. Despite being brief, the event did make a negative impact on the number of active users on our platform as well as user time spent. Although this is the later factor in comparison to our pricing initiatives behind the weak DAU and MAU trends, we took the opportunity to recalibrate our strategy towards our content and user ecosystem development, providing loyalty point has been an effective marketing strategy in attracting user attention for us to scale up our business in our early days that helps to increase user activeness and stickiness, but it is only icing on the cake on top of content. Ultimately [Indecipherable] to be the main driver for our users, which is why we have consistently invested into generating better at a more original content while reducing loyalty points.
Our R&D effort into a smartening algorithms has also helped us reduce loyalty points rewarded in terms of both absolute dollar amount and on a per DAU per day basis, a measure that has halved [Phonetic] year-on-year. Given the magnitude us witnessed of the loyalty points reduction, our DAU in Q3 had experienced weakness, which we expect to continue into Q4, however we are pleased to observe and our ARPU has held up reasonably well, suggesting we are capturing and retaining high value customers.
Since last year, Midu has emerged as an important strategic pillar for us. It has made a material contribution to our growth and ecosystem building. We have been focused on consistently improving user experience and investing in the quality and diversity of content, which has led to improve the user retention. We successfully explored alternative business models on the monetization for Midu on such as the membership program and brand advertising, all of which have created durable incremental revenues. In addition to our strategic cooperation with Qutoutiao on many drama series, which we talked about last time, we have also entered into several content cooperation arrangements with key content providers and players in the online literature market. This will further strengthen our platform in the online literature space and position us well for future growth. Midu is poised to pursue the next stage of expansion in the New Year. We will continue to explore diversifying monetization avenues to enhance the return profile of the business while employing a disciplined and targeted approach towards user acquisition with the goal of nurturing a robust and a healthy ecosystem.
In terms of the outlook for the fourth quarter and beyond, we will continue to manage our business prudently, balancing sustained growth and profitability. We expect to be operationally breakeven in the fourth quarter on a non-GAAP basis, which will mark the first time we breakeven since IPO. Although we have consistently improved our unit economics in comparison to a year ago, there is always more to be done. We remain squarely focused on driving better returns to our investment with the objective of achieving full year profitability next year while maintaining a stable user base overall. As we continue to improve the operational efficiency, we see a balanced and promising path towards growth and profitability for the coming years.
Thank you very much.
Sai Chi Du — Investor Relations
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 Sai Chi and again thank you everyone for joining today’s call. Let me first review our financial results with you before providing outlook for the fourth quarter and next year.
Our net revenues in the third quarter were RMB1,130 million with an ARPU of RMB0.31. Our MAU was 121 million. As Eric mentioned, the change in our DAU and MAUs has been the result of several factors, but most notably, our active initiatives to drive more operational efficiency and a more robust user and content ecosystem. We have sharpened our focus on profitability this year on our way to achieving breakeven. This has seen optimization through our entire budgeting process. So let’s take a closer look at costs and expenses. Please note, I will refer to non-GAAP measures.
Cost of revenues were RMB367 million in the third quarter of 2020, a decrease of 26% from the third quarter of 2019. Part of this reduction was the direct impact of revenue adjustment on variable content costs, but another part was due to our disciplined approach towards managing the relatively fixed components such as bandwidth server costs. As a result, our gross profit was RMB763 million in the quarter, a decrease of 16% year-on-year, while our gross margin improved year-on-year from 65% a year ago to now 67%.
As Eric mentioned, we made significant savings in sales and marketing expenses, which came in at RMB679 million latter half compared to a year ago. Both user engagement and user acquisition expenses saw the same magnitude of reduction and have come down to RMB265 million and RMB386 million respectively. Overall, our sales and marketing expenses as a percentage of revenues was 60% in the third quarter in comparison to 106% a year ago, which represents a significant improvement.
Our ARPU in the third quarter was RMB0.31, largely stable throughout the year against a difficult backdrop. Maintaining a similar level of monetization despite much less incentives and loyalty points for ad-clicks, it is evident that we have been delivering higher quality returns to our advertising customers while keeping the users who are satisfied with the experience on our apps and are truly interested in our content.
Our R&D expenses were RMB181 million, which represents 16% of net revenues, broadly in line with the past few quarters. Our continued but disciplined investment into R&D will be one of the key drivers for our future growth. General and administrative expenses were RMB36 million, which represented a reduction of 28% year-on-year. This is another area where we managed to extract savings by running a more efficient and a leaner operation.
As a result of our efforts on both the top-line and cost management, our profit margin are at their best since IPO, with operating loss ratio improved to 9.7% in the quarter, consistently positive trend characterizing this year. In the context of a moderate revenue base in the third quarter, this is strong testimony to what we have achieved against [Indecipherable].
Midu continues to be a focus for our investment into growing the franchise and we will push on all fronts in Q4 and next year, including richer content, growth strategic co-operations with our partners, strategies to better acquire and retain users as well as new and innovative business opportunities. Taking into consideration of the continued investment in content and potentially ramping-up [Phonetic] the pace for our user acquisition on the Midu side to drive forward the business, we still expect to be operationally breakeven in the fourth quarter this year.
We expect our total revenues to recover to RMB1.23 billion to RMB1.25 billion in the fourth quarter, while we keep our standards high on quality growth and better unit economics. We will remain committed to further improving our operational efficiency as we have achieved consistently over the past several quarters and we expect this trend to continue in the fourth quarter of 2020 and beyond.
This concludes today’s prepared remarks. Again, thank you very much. We are now open for questions. Operator, please proceed.
Questions and Answers:
Operator
Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Vicky Wei from Citi. Vicky, your line is now open.
Vicky Wei — Citigroup — Analyst
Well, good morning management. Thanks for taking my questions. My questions are about Midu. So what does management think of the CIU [Phonetic] target for the 2020 and 2021 and also what is the management view on the competition landscape for the online reading industry. Thank you.
Xiaolu Zhu — Chief Financial Officer
Thank you, Vicky. So regarding the guidance and outlook for Midu, I think we see a quite stable user base and improved monetization in the second half of this year. And as we took a more balanced approach for the entire company between growth and profitability, I think this more or less apply to Midu as well, although we do have bigger plans for Midu for Q4 and next year. And the year-end target is to get to over 8 million to 9 million DAUs for Midu and stable ARPU in line or slightly better than the rest of the company. This year we made a significant investment in content, especially proprietary content as well as collaborations with other content providers. So as we plan to keep investing, as we believe that only a healthy content ecosystem can return the users over the longer term and proprietary platform enables us to further impact with our users and to use in a real-time user data for quality analysis and to give real time feedback to the authors.
So the quality of the content and the right match of authors, content and readers are the key to our long-term success for any content-based business. So competition-wise, I think we are seeing more players getting into the free literature market this year, but this further proves the value of this sector and we welcome more players to make this a robust and the healthy industry. And as we have said before, we believe the free literature market is much bigger compared to the traditional pay-to-read model. So there will always be competition from the incumbent as well as newcomers. However our head-start and experience in user acquisition, monetization and healthy content ecosystem make us uniquely positioned in this market and we will continue to be one of the leading players in this market. Thank you.
Vicky Wei — Citigroup — Analyst
Thank you.
Operator
Thank you so much. [Operator Instructions] And your next question comes from the line of Thomas Chong [Phonetic] from Jefferies. Thomas, your line is now open.
Thomas Chong — Jefferies LLC — Analyst
Good morning, management and thank you for taking my question. I am asking on behalf of Thomas. Can management share your view on the advertising market sentiment in 2021 and maybe can you also share on the competitive landscape. Thank you.
Xiaolu Zhu — Chief Financial Officer
Okay, thank you. I think for the second half of 2020, we have seen the market start to pick-up compared to the first half and we expect this trend to continue. For us, because of the CCTV incident earlier in Q3 that caused our applications to be taken off the app stores for about two weeks, so we have observed some negative impacts on our business operationally and the financially due to this in Q3, but we do have seen strong demand from our advertising partners across different in these sectors for Q3 and Q4. As we have said in the prepared remarks, we see revenue continue to recover going into Q4. So overall, I think the market is gradually picking up back to the level we have seen last year, back to the levels before the pandemic and I think this trend will continue in Q4 and probably going into next year.
And as we have said before, I think our strength in the performance [Indecipherable] will help us to get through difficult times as our customers are increasingly looking for direct and a more measurable results. So that’s why we are quite confident that we will continue to see our revenue recovery and growth in Q4 and the next year for Qutoutiao. Thank you.
Thomas Chong — Jefferies LLC — Analyst
Thank you.
Operator
Thank you so much. [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 joining today’s call. And if you have any further questions, please don’t hesitate to reach out to any of us. Thank you and goodbye.
Operator
[Operator Closing Remarks]