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CooTek (Cayman) Inc (NYSE:CTK)
Q1 2019 Earnings Call
Jun 3, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the CooTek First Quarter 2019 Earnings Conference. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to (ph) Rene Von Gersen. Please go ahead.

Unidentified Speaker

Thank you, Amy. 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.cootek.com and on PR Newswire.

On the call today from CooTek are Mr. Karl Zhang, Chairman and Chief Architect; and Ms. Jean Liqin Zhang, Chief Financial Officer. Mr. Zhang will review business operations and Company highlights, followed by Ms. Zhang, who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that will follow.

Before we begin, I'd like to kindly remind everyone that this conference call may contain 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 US 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, confident, and similar statements. CooTek may also make written or oral forward-looking statements in its reports filed with or furnished to the US Securities and Exchange Commission, in its Annual Report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.

Any statements that are not historical facts, including statements about CooTek's 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. CooTek's mission and strategies, future business development, financial conditions and results of operations, the expected growth of the mobile Internet industry and mobile advertising industry, the expected growth of mobile advertising, expectations regarding demand for and market acceptance of our products and services, competition in 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 US Securities and Exchange Commission. All information provided on this call is current as of today, and CooTek does not undertake any obligation to update such information, except as required under applicable law.

It is now my pleasure to introduce Mr. Karl Zhang. Karl, please go ahead. Thank you.

Karl Kan Zhang -- Chairman of the Board of Directors & Chief Architect

Thank you everyone for joining our first quarter 2019 earnings call. We delivered strong growth this past quarter in both user growth and user engagement. User growth relying on our sophisticated growth platform went beyond our past expectations. Overall, user acquisition unit cost was kept at low range and stable despite such a large increase in total user numbers.

We achieved significant progress on further improving user engagement by investing in our content ecosystem, optimizing product and enhancing our operations. The engagement rate of our content-rich portfolio apps reached nearly 39%. The user retention rate improved as well. We're excited about the progress on the product side because user engagement and retention are two key metrics to evaluate user stickiness. We believe that we are on the right path to bring more and more value to our end users, and increase the stickiness of our user community.

Our mission is to empower everyone to enjoy relevant content seamlessly. We believe that the global content app market is still in its early stage, and this gives us massive opportunities in both horizontal and vertical areas. As our strategy is to release multiple apps to meet different user needs on different content verticals. We are investing in establishing and evolving our current ecosystem to achieve long-term competitiveness and user stickiness.

For example, we redesigned the news feed format for Cherry, our female healthcare and lifestyle community app in order to evolve our content ecosystem and to increase content consumption. User interaction and time spent improved significantly and we continue to incubate new content app to expand our reach across a wide diversity of user interest.

Besides content app and ecosystem, we are also making good progress on monetization. In Q1, we officially launched the CooTek advertising platform, our in-house ad serving platform. This system allows advertisers to create and manage ad campaign and place ad into our ad portfolio directly. Furthermore, it provides programmatic interfaces to allow third-parties to acquire mobile traffic directly from our portfolio ads.

With the benefits from our in-depth user insights, we offer sophisticated precise user targeting capability to help our advertisers and partners to increase our ads on our ad platform. This system contributed approximately 14% of our total advertising revenue in March, and this percentage is increasing.

We will continue to strongly invest in both advertising technologies and our ecosystem because we believe that we have enhanced our monetization and bringing us substantial long-term value.

With that, I'll hand over the call to our CFO Jean to walk you through our financial results for the quarter.

Liqin Zhang -- Chief Financial Officer

Thank you, Karl, and thanks everyone for joining us on the call today. I'm going to walk you through our first quarter financial results.

Now, let's start with users. We ended March with approximately 242 million people using our global products, up 43% from year ago. Approximately 169 million people accessed our global products each day on average in March, up 40% from the prior year. Monthly active user for our portfolio of products reached 49.8 million in March, up 3.2 times from a year ago. Average daily active user for our portfolio of products in March reached 23.1 million, up 4 times compared to last year.

Average daily active users on TouchPal Smart Input in March were approximately 146 million, up 26% from last year. This number represents about 76% of 192 million monthly active users,. MAUs were up 19% compared to last year.

We delivered a strong revenue growth year-over-year. The total revenue was $40 million, up 83% and the app revenue was $39.4 million, up about 89%. We estimate that of the total advertising revenue for the first quarter of 2019, portfolio products constitute approximately 75%. TouchPal Smart Input contributed approximately 18% and the TouchPal Phonebook contributed approximately 7%.

Turning now to expenses. Our quarter one GAAP cost and expenses were nearly $40 million, an increase of 94% from last year, representing 99% of revenue. Non-GAAP cost and expenses was $38.7 million, an increase of about 91% year-over-year, representing approximately 97% of revenue. We were quite effective in growing our user base with portfolio products DAU growth of more than 4 times -- growth of about 4 times year-over-year and up 36.7% sequentially with S&M expenses up 1.6 times year-over-year and a decrease of 14% sequentially.

We ended the quarter with 519 full time employees, up 44% from last year and 4% from last quarter. R&D employees represent 63.4% of total employees compared to 58.6% last year.

Our gross margin was 91%, up from 81% during the same period last year and slightly down from 93% last quarter. We had GAAP net income of $0.2 million, representing a 0.4% of net profit margin. Excluding the effects of stock compensation, our adjusted net income was approximately $1.3 million million, representing 3.3% non-GAAP net profit margin.

As of March 31st, 2019, cash and cash equivalents and the restricted cash was $77.3 million compared to $84.9 million as of December 31st, 2018. Under the share repurchase program announced on November 26th, 2018, the company used an aggregate of $5.7 million to purchase 645,000 ADS by the end of last quarter.

Turning now to the revenue outlook, we expect total revenue in the second quarter of 2019 to be between $45 million and $60 million, representing 58% to 76% increase year-over-year. This estimate reflects company's current and the preliminary view, which is subject to change.

Operator, we're now ready to take questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Hans Chung at KeyBanc Capital Markets.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Hi, Karl and Jim. Thank you for taking my questions. So, I have one question just regarding the user engagement. We have seen another improvement in the (inaudible) portfolio app. Can you explain like what's driving that, and then how should we think about the trend going forward? Should we continue to see the improvement near to mid-term turn or it's sort of like the new level that we should consider? Thank you.

Karl Kan Zhang -- Chairman of the Board of Directors & Chief Architect

Thank you, Hans. I'm going to answer this question. Yes, we achieved a significant progress on further improving user engagement this quarter, and the user engagement rate of our portfolio app reached nearly 39% compared to approximately 32% in March last year and approximately 37% in December last year. So we have made very good progress on that. User engagement is actually our key metrics we use to evaluate the stickiness of our users. So we are very excited to see such strong improvements on our product capability. I think the improvement in user engagement is actually a result of multiple efforts.

So firstly, we are investing in establishing and evolving our ecosystem to achieve long-term competitiveness and user stickiness because we believe content is the key to attract and retain our users. For example, we redesigned the news feed format for Cherry, our female healthcare and lifestyle community app, and our short video app VeeU, in order to evolve our key KOL-based content ecosystem, which focuses on professional generated content and to increase content consumption at the same time.

And secondly, we enhanced the product operation as well to push more relevant content to users based on user profile. It turns out that the click-through rate of our push content improve a lot in the past quarter, helping to keep more users active. And we also introduced the user recall program for our portfolio apps just like Facebook and other social media and content app company if we decided to send recall email with relevant content to recall users. So, yes, I think the improvement is user engagement is a result of the above multiple efforts. Thank you, Hans.

Operator

The next question is from Alicia Yap at Citi.

Alicia Yap -- Citigroup -- Analyst

Hi. Good evening, Karl and Jean. Thanks for taking my questions. I have couple of questions here. Number one is that, could you share with us where were the growth and the incremental addition of your MAU and DAU of your portfolio content at this quarter, where did you see the new users come from, specifically which apps that you see the most growth in the DAU, and how should we think about the DAU growth in the second quarter? Is there any target for the full year 2019?

My second question is related to the overall global app environment and the sentiment. As we noticed, there were quite a lot of disappointing app outlook for China market. So I'm just wondering if you have any comments regarding the global market as you see the second quarter guidance seems to be also showing some weakness or some cautiousness on your side as well. Thank you.

Karl Kan Zhang -- Chairman of the Board of Directors & Chief Architect

Thank you, Alicia. So I'm going to answer both of your questions. So the first question is about the -- our user growth and the incremental addition of our MAU and DAU. So, we delivered very strong growth in the past quarter in both user growth and user engagement. So, the total DAU of our content-rich portfolio app reached over 33 million from 16 million last quarter, an increase of over 200% year-over-year. So we're very excited about that. The results validated that we are on the right path to give that bigger user community bring more value to our end users and make them happy and more actively interact with our products.

So, in terms of the content-rich portfolio app DAU breakdown, our fitness and lifestyle app series helped us bigger proportion of the total DAU and continued to grow. The user engagement and the retention rate have been improving and the time spend is quite stable. From Q1, we made progress in working with phone manufacturers to distribute our fitness apps with relatively low cost. So we are exploring more opportunity to distribute at different distribution channel for our portfolio apps to expand our user base rapidly.

And we're also establishing and evolving our content ecosystem for long-term competitiveness and user stickiness. So, as I mentioned that we just redesigned the news feed for our Cherry and in order to evolve our KOL-based content ecosystem, so user interaction and time spend improved dramatically. So Cherry reached a superior user stickiness, (inaudible) retention rates exceed 55% already, which is pretty high. And we continue to incubate new content app to expand our reach across wide diversity of user interest. For example, we incubate content-rich app Phone Color Screen in Q4 last year. It is an app to allow users to enjoy entertaining and other relevant short videos and choose any of them to replace phone functional screen background.

And it also provides relevant news and (inaudible) news feed. The backend of this app content ecosystem under the content recommendation system is actually connected with our short video app VeeU. So this app contributed nearly 10% of the total DAU in March, so it is actually one of the key drivers of this quarter's DAU growth.

We don't provide any guidance for our DAU growth target. But here I want to emphasize that our first priority is still to expand our user base, especially for our content-rich portfolio app rapidly. But the management team will keep a very close eye on the market fluctuation and make adjustments based on the ROIs of each app dynamically. So we will invest more in apps which have relatively longer lifetime.

In terms of the user distribution, the user geographical distribution is pretty much the same to Q4 of last year. And we believe that we will -- our user base will continue to grow pretty fast.

And in terms of the second question about the ads -- global ads environments, what we think about the local advertising industry is kind of mixed this year. So we notice that some of our important partners encountered some challenges on mobile ad business as well, and we also noted few trends so far this year. So, on one hand, the ad inventory supply is increasing, because a lot of companies are faced with the challenge of ad revenue growth under pressure of monetization. They have been releasing ad inventory to the market.

For example, YouTube is increasing ad inventory. Facebook is adding more ads to Instagram and WhatsApp, and a lot of more and media-size apps have started to focus on monetization this year. This result is that the supply side of the ad industry this year (ph) has surplus that sometimes become expensive. On the other side, ad demand does not look that strong for different reasons such as uncertain economic growth. We noticed some big advertisers controlling ad budgets this year (inaudible).

The ad industry actually a balancing act between the demand side and supply side. So in supply side, if the ad increase, with expectations that it will increase but demand is inadequate. The price, which is the (inaudible) and the fill rate goes up. This is the fact and the challenges we are faced with this year in terms of monetization. We believe this industry volatility is short term, and the mobile advertising industry has great potential to grow. Thank you, Alicia.

Alicia Yap -- Citigroup -- Analyst

Thank you.

Operator

The next question is from Emerson Chan of Bank of America Merrill Lynch.

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Hi, Karl and Jean. Thanks for taking my question. Regarding our own ad platform launch in Q1, could you please elaborate how we can benefit from it and how does it impact our financial performance in the year and in long run? Thank you.

Karl Kan Zhang -- Chairman of the Board of Directors & Chief Architect

Thank you. So I'm going to answer this question. So, as I mentioned at the very beginning, our user base is growing very fast and user engagement improved dramatically. So this means we are releasing more and more ad inventory. At this moment, we are relying on our ad exchange and other ad business partners to monetize our increasing inventory. So that is, the industry volatility and its impact on our business partners will impact us. We do not have direct control over our business partners at resource allocation strategy. So we realized under current environment that relying on third-party business partners to effectively feel our faster growing ad inventory is a challenge. Both the fill rate and the average (inaudible) price has been flat to (ph) 18 this year.

On the other hand, we have two powerful weapons, fast growing drivers, ad inventory and the impact user insight that we are obtained from our user app TouchPal Keyboard and now our portfolio app, which has a unique and a valuable asset to optimize ad performance and ROI. So it makes us confident that we have great potential in the global mobile advertising industry. Therefore, we have been developing our own in-house advertising platform since the middle of last year. We officially launched the CooTek advertising platform, our in-house ad serving platform early in Q1. This system allows (inaudible) to create and manage ad campaign, manage ad budget and place ads (inaudible) our ad portfolio to ramp.

Furthermore, it provides programmatic interface to allow third-party to acquire mobile traffic from us directly. We believe this is a very strategic investment with benefits from our investor user impact, we offer sophisticated precise users targeting capability to help our advertisers and partners to achieve better our ad platform. This makes us believe that advertisers and the -- this makes us believe that we have great potential to growth in global advertising industry. We're excited to see that as we benefit from -- as we benefit from our (inaudible) user impact, the monetization efficiency of our in-house ad platform has surpassed most of our ad business partners. It is winning revenue share from them actually.

So this system contributed approximately 14% of our total advertising revenue already (inaudible) and this percentage is still increasing. Our goal is to make CooTek advertising platform one of the top tier global ad platform in terms of advertiser through ROI. Although it takes time to ramp up in short-term, we believe our in-house ad platform will boost our revenue and profit in long-term. Thank you.

Operator

(Operator Instructions) The next question is from Tina Long with Credit Suisse.

Tina Long -- Credit Suisse -- Analyst

HI. Hi, management. Just a quick follow-up on the previous in-house ad platform. Can you just explain a little bit of the financial impact of this in-house ad platform on your financials? Thank you.

Karl Kan Zhang -- Chairman of the Board of Directors & Chief Architect

Thank you, Tina. I'm going to answer this question. So, by tracking advertisers to spend their (ph) package directly on our advertising platform and serving them better. We will make our monetization much more independent and reduce the impact of market volatility and eventually realize the peak value of our best user insight to boost our revenue and profit.

At this moment, the cost to build out our own ad ecosystem is mainly on engineering side as we expanded our team and hired experienced engineers. On the sales side, we were established a global direct sale agency network to sell our ad inventory. We were provided the best to our global partners at incentive, which will be excluded when recognizing the net revenue. So, basically this is the impact. So mainly -- at this moment, the impact is mainly on the R&D cost. Thank you.

Tina Long -- Credit Suisse -- Analyst

Okay, thank you.

Operator

(Operator Instructions) I'm seeing no further questions. I'd like to turn the conference back over to Rene Von Gersen.

Unidentified Speaker

Thank you, Amy. Thank you all for joining our call and for your continued interest in CooTek. Please do not hesitate to call us if you have any questions or want to visit. Thank you, and good night.

Operator

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

Duration: 31 minutes

Call participants:

Unidentified Speaker

Karl Kan Zhang -- Chairman of the Board of Directors & Chief Architect

Liqin Zhang -- Chief Financial Officer

Hans Chung -- KeyBanc Capital Markets -- Analyst

Alicia Yap -- Citigroup -- Analyst

Emerson Chan -- Bank of America Merrill Lynch -- Analyst

Tina Long -- Credit Suisse -- Analyst

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