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CooTek (Cayman) Inc (CTK)
Q3Â 2019 Earnings Call
Nov 18, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the CooTek to announce Third Quarter 2019 Unaudited Results on November 18, 2019. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Rene Vanguestaine. Please go ahead, ma'am [Phonetic].
Rene Vanguestaine -- Investor Relations
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.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. Jean will review business operations and Company highlights followed by Ms. Zhang, 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 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 terminology such as will, expects, anticipates, future, intends, plans, belief, estimates, confident, and similar statements.
CooTek may also make return or oral forward-looking statements in its reports filed with or furnished to the U.S. Securities and Exchange Commission, in it's an annual report to shareholders, in press releases and other written materials and oral statement made by its officers, directors or employees to third parties.
Any statements that are not historical facts, including statements about CooTek's belief 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 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 U.S. Securities and Exchange Commission. All information provided on this call is current as of the date of the this call, and CooTek does not undertake any obligation to update such information, except as required under law.
It is now my pleasure to introduce Mr. Karl Zhang. Karl, please go ahead.
Karl Kan Zhang -- Chairman and Chief Architect
Thank you everyone for joining our third quarter 2019 earnings call. Our performance this quarter was better than we expected, after Google disabled our access to Google Play Store and Google Admob, negatively impacting our second and third quarters top line and bottom line. Our business started to bounce back during this quarter. We are optimistic about the coming quarter and our long-term growth.
Based on the current state of our business, we have raised our revenue projection by 28% for Q4, from implied $37 million to $48 million. As a sign of our confidence, in our long-term growth and the value of our business, we also announced a new share repurchase plan. And this quarter we've been in continuous communication with Google, to clarify the potential misunderstanding behind their action. However, we cannot guarantee that we will prevail or that any such suspended or removed applications will be made available again. Regardless we're well prepared for either outcome. We have already rollout effective operational measurements to continue to acquire new users.
In the second quarter, approximately 47% of our portfolio apps users were acquired through channels, other than Google Play, such as App Store, OEM pre-loaded store and direct download advertising platforms. This quarter we added resources to expand our acquisition -- user acquisition through those channels. Our super app TouchPal Keyboard acquired users, mainly through pre-loading which was not impacted by Google's action. Additionally, we're also working on alternative plans to make our apps available on Google Play, in case we failed to reinstate the app, in the disabled account.
In addition, thanks to our fast growing in-house ads network and other successful initiatives such as releasing more traffic to other app exchange network. We have mitigated the impact our monetization and user growth. Our business started to bounce back during the quarter as both our daily revenue and the number of daily active users regained growth momentum. This is testament to our strong execution capability, core competency and unique value proposition built on our -- in that user impact. The average DAU of our content rich portfolio apps were 23.9 million in September, down from 37.6 million in June. But the MAU increased to 67.5 million in September, as user acquisition recovered and user growth regain momentum. The engagement rate of our portfolio apps was 35.4%, down 7% sequentially. One reason is that, we could not use Google push notification to enrich and activate user. App that was developed accounts were disabled. To mitigate this impact, we have already developed our own shelf hosted push system, all of our app will bundle our shelf hosted push system in the future.
Nevertheless our engagement ratio remain very high, demonstrating the thickness of our products. Based on current unit economics key products and metrics and the overall ROI. We have the confidence to expand our investments and user acquisition. Our mission is to empower everyone to enjoy relevant content seamlessly. We believe that the global content app market is still in its early stages. And this gives us massive opportunities in both horizontal and vertical area. We are investing to firmly establish and continuously evolve our content ecosystem.
Our sophisticated growth platform is built by leveraging our unique in-depth user insights. As we mentioned on our second quarter earnings call, late last year, we successfully expanded our product offering to China market. This quarter we released a couple of new content apps to China market such as fitness app [Indecipherable], and they're growing pretty fast. We believe our success in China market demonstrate our core competencies and open up a substantial new opportunity for our long-term growth. One of our strategic goal is to strengthen our advertising business by reducing external dependency. And this first quarter of this year we officially launched the CooTek advertising platform, our in-house ad network. This system allows advertisers create and manage ad campaign, manage ad budget and put ads into our app portfolio directly. For the market it provides programmatic interface that allows third-parties, to acquire mobile traffic. In this quarter, we achieved a significant progress at the CooTek, advertising platform started to contribute a significant percentage of our total advertising revenues. It also boosted, our monetization efficiency, because the average [Indecipherable] for the platform surpassed all the third party, as it changes. The daily ARPU of our content rich portfolio apps, that's a new record recently. We will continue to strongly invest in both advertising technology and our ad ecosystem.
With that, I will hand the call to our CFO, Jean to walk you through our financial results for the quarter.
Jean Liqin Zhang -- Chief Financial Officer
Thank you. Karl, and thanks to everyone for joining us on the call today. I'm going to walk you through our third quarter financial results. Now, let start with users, monthly active users for our portfolio products reached 67.5 million in September up 100% from the a year ago. Average daily active user for our portfolio products in September reached about approximately 24 million, up 1.2 times compared to last year. Average daily active user on TouchPal Smart Input in September were approximately 141 million, up 6% from last year, and may use 185 million compared to 180 million last year.
Total net revenue was $31.3 million, down 15% from last year. Mobile advertising revenues were $30.5 million down about 16% for a year ago, with total advertising revenue for the third quarter of 2019. Portfolio products contributed approximately 81%. TouchPal Smart Input contributed approximately 2%, and the TouchPal Phonebook contributed approximately 17%.
Turning now to expenses. Our Q3 GAAP costs and expenses were nearly $48 million, a decrease of 80% sequentially and up 40% -- 40% from same period last year. Non-GAAP cost expenses were $47 million, a decrease of 8% sequentially, and an increase of 40% year-over-year. As a percentage of revenue non-GAAP cost and expenses accounted for 158% [Phonetic]. The operating expenditure increase is mainly driven by sales and marketing expenses.
Sales in the marketing expenses increased by 48% from the same period last year and 2% sequentially. The largest component of these expenses, it's user acquisition costs, and these went down in late July, as a result of Google's actions. As we found new ways to reunite growth, we started to spend more in late August in September with tangible results. R&D expenses decreased by 9% sequentially and increased by 34% year-over-year, primarily due to the increased cost associated with technology R&D stuff. We ended the quarter with 540 [Phonetic] full-time employees, up 14% from last year and a down 13% from last quarter. R&D employees represented about 63% of total employees, the same as last quarter and the same period last year.
G&A expenses decreased by 66% essentially, and increased by 14% year-over-year. The decrease is mainly due to the accrued provision of that debt of $4.7 million in last quarter. The increase over last year is due to the organic growth of the company's operations. Our gross margin was 87.5% down from 90.7% during the same period last year and slightly down from 89.4% last quarter. The lower gross margin for the third is mainly due to the drop in revenue, while the cost of revenue remained stable. With revenue regaining growth momentum, we expect gross margin to recover to previous normal status.
We had a GAAP net loss of about $16 million representing a 42% of net loss margins. Excluding this effect of stock compensation, our adjusted net loss was approximately $15.4 million, representing 49% non-GAAP net loss margin. As of September 30, 2019, cash and cash equivalents and restricted cash was about $56 million compared to $63 million as of June 30, 2019. Under this year repurchase program announced on November 26, 2018, the company used an aggregate of $12 million to purchase 1.4 million ADS as of December 30, 2019. The Company will early terminate the 2018 Program on November 20, 2019, and take effect, a new share repurchase program on the same day. In the new share repurchase program, the Company is authorized to repurchase its class A ordinary share in the form of ADS with an aggregate value of up to $6 million during the six months period starting from November 20, 2019. The Company expects to fund the repurchase under this program with its existing cash balance.
Turning now to the revenue outlook, we expect total revenue in the fourth quarter of 2019 to be about $48 million, representing a 2% increase year-over-year, with the fiscal year of 2019, CooTek expect total revenue to be about $157 million representing a 17% increase year-over-year. These estimates to assess Company's current and the preliminary view, which is subject to change.
Operator, we are now ready to take questions.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Alicia Yap of Citigroup. Please go ahead.
Alicia Yap -- Citigroup -- Analyst
Hi, thank you. Good evening, Karl and Jean. Thanks for taking my question. I have couple of questions, is regarding the reasons behind the fourth-quarter guidance range. So if you could elaborate a little bit, will be better. So which apps that you have seen most of the app coming from in 3Q and how should we think about the apps that contribute with the 4Q guidance rate? And also when we look at your 4Q guidance is also suggest that -- that's a early sign of recovery from the negative impact that you experienced from Google, last few months. So are these negative impact now largely behind us and how should we think about the next year growth outlook? Thank you.
Karl Kan Zhang -- Chairman and Chief Architect
Thank you, Alicia. So I'm going to answer this question. So yes, our performance this quarter was better than we expected. And our business started to bounce back in this quarter, based on the latest operation data. We're very optimistic about the coming quarter and our long-term growth. And that is why we have raised our revenue projections by 28% for Q4 from implied $37 million to $48 million. And actually both of our daily revenue and the number of daily active users regained the growth momentum. And this is testament to our strong execution capability, core competency and unique value proposition. And the major driver behind this strong recovery, is the Google ad platform. Not any individual app actually. So CooTek had platform successfully replaced Google Admob and rate the overall monetization for all of our portfolio apps. And I have to admit that we underestimated our potential to build up in-house ad network in Q1 and Q2. We knew that building up in-house ads network is that strategic choice for us to sustain our core business and reduce external dependency. But we underestimated our traffic value and the possibility in how at network could possibly and both our monetization.
So we concentrate our results to focus on developing our own ad ecosystem, we found great potential and opportunities. So, as you know that most of our portfolio apps are content rich apps, purely the traffic from content app, especially newsfeed apps have higher conversion for advertisers. So when we sell our traffic directly to ad partners such as Admob, they don't optimize their ad networks specifically for our traffic. But when we build up our ad network, we can optimize for our traffic. So we have can find the specific types of advertisers, based on conversion efficiency for our traffic.
For example, we've found that, e-commerce advertisers, especially those small and the medium advertisers have higher conversion on our fitness apps. Then we provide our wholesale sales network to focus on that category and introduce specific advertisers for our fitness apps. This resulted in better ECTM [Phonetic] and even better advertisers kind satisfaction. There are actually a lot of optimizations, we can do to further boost our monetization. And we will continue to strongly invest in both advertising technologies and our ad ecosystem. In terms of next year, since we have regained the growth momentum and what's more -- our monetization is even more stable now. But believe we will be on the fast lane next year, not only on revenue side, but also on product side. And we are confident to invest more and user acquisition could drive our user growth. I think, I will be able to provide more color, when we finish the fourth quarter. Thank you, Alicia.
Alicia Yap -- Citigroup -- Analyst
Okay. Thank you.
Operator
Our next question will come from Tina Long of Credit Suisse. Please go ahead.
Ivy Liu -- Credit Suisse -- Analyst
Hi, good evening management and thank you for taking my question. So this is Ivy Liu on behalf of Tina. I have two questions here. First one is, we understand that CooTek's in-house ad system is growing really fast. And then mitigate some of the impact from the Google incident. So, can management give some color in terms of the key metrics for this ad system such as ROI and the ECPM? And how the revenue growth trend will be like for next year for in-house ads? And second question is, this management have some guidance on the user growth front for 2020 in terms of MAU and DAU? Thank you.
Karl Kan Zhang -- Chairman and Chief Architect
Thank you. One of our strategic go is to strength our advertising business by reducing external dependency. In the first quarter of this year, we officially launched the CooTek Ads Platform. And this year -- this quarter, we achieved a significant progress as the CooTek Ad Platform started to contribute the significant percentage of our total advertising revenues. So, yes, it as offset the impact from Google's action and boost our monetization efficiency, because the average ECPM is higher than other average [Indecipherable].
I think, if I can provide some detailed numbers here. So the average ARPU DAU of our portfolio apps in October is approximately 40% higher than Q1 average of ARPU DAU. At that time, we were not impacted by Google yet. We expect to -- that the revenue generated from our in-house ad network. We'll take more revenue percentage in the future. And we believe it will help to sustain our ARPU growth. And in terms of the DAU and MAU outflow, we don't provide guidance, both DAU and MAU growth, but I can give you some color about it. So our sophisticated growth platform is built by leveraging our unique in-depth user impact. So we are very confident on our growth capability. So the DAU of our content rich portfolio app started to bounce back and MAU continued its growing phase, even in Q3. So we're looking forward to a strong user growth in the next year. Thank you.
Ivy Liu -- Credit Suisse -- Analyst
Thank you.
Operator
And our next question will come from Hans Chung of KeyBanc Capital Markets. Please go ahead.
Hans Chung -- KeyBanc Capital Markets -- Analyst
Hi, good evening, Karl and Jean. Thank you for taking my question. So I guess, I just have one question. So in the third quarter, we have the engagement ratio, was it DAU divide by MAU, came down to 35%-ish and that's compared to the last quarter we have over 40%. So can you expand -- there will be more why we have these -- we have lower engagement ratio and also why should we think about these -- the trend going forward? Thank you.
Karl Kan Zhang -- Chairman and Chief Architect
Thank you, Hans. So the engagement rate of our portfolio apps was 35.4%, in third quarter, down 7% sequentially. There are two major reasons. First, we could not use Google push notification service to reach and activate our users, after our developer accounts would disable. So push notifications email push and the retargeting advertising major channels connected to our personalized recommendation system, to recall and activate our users. To mitigate this impact, we have already developed our on-shelf hosted push system, all of our apps work under our shelf hosted push systems. And another reason for the decline is that some of our apps have higher, long-term retention rates and good ROI, but have naturally lower average engagement rate.
The MAU percentage of such app are increasing. For example, Cherry, which is a female lifestyle community app, it's engagement rate is around 25% to 30%, a little bit below average. But its long-term retention is very good, so it's MAU percentage is increasing. Another case is HiShow [Phonetic], which we released to China market, despite its engagement ratio, is a little bit lower than average. It's ARPU DAU is two times above average. So we don't think it's a problem because the overall ROI of those app are actually above average. We cannot -- just focus on engagement in the future, but product lifetime value ROI long-term retention rate and the value would bring to our users. Thank you, Hans.
Operator
[Operator Instructions] Our next question will come from Alicia Yap of Citigroup. Please go ahead.
Alicia Yap -- Citigroup -- Analyst
Hi, thank you for taking my follow-up questions. So, Karl, I have a follow-up questions on the sales and marketing spend. You mentioned, since I --you're increasing the budget in 3Q, which drove help to drive the DAU and MAU growth. And then the sales and marketing percentage is actually higher than the revenue for the third quarter. So was these also one of the reasons that contribute to the faster fourth quarter revenue growth? So will, sales and marketing need to remain high to support the stronger revenue growth into the 2020?
Karl Kan Zhang -- Chairman and Chief Architect
Yes. So we are investing more to acquire users because we're pretty confident on our user growth and the overall ROI and unit economics is pretty good, even without Google Play. So that's why we are confident to put more money to drive the user growth. And yes, because the ROI, the total assets at the entire ROI of our system is very good. So the budget we spend to acquire users and the part of the budgets we're just sensitivity revenue. So part of the revenue is coming from the -- this quarter's investments to user acquisition. And we expect that the percentage of our sales and marketing costs will -- just decrease. But still we will continue our investments on user acquisition in the fourth quarter and next year.
Alicia Yap -- Citigroup -- Analyst
Okay. Thank you.
Operator
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rene Vanguestaine for any closing remarks. Please go ahead.
Rene Vanguestaine -- Investor Relations
Thank you, operator. This concludes our call for today. Thank you everyone for joining the call tonight. If you have any questions or comments, please don't hesitate to reach out to any of us. Good night.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Rene Vanguestaine -- Investor Relations
Karl Kan Zhang -- Chairman and Chief Architect
Jean Liqin Zhang -- Chief Financial Officer
Alicia Yap -- Citigroup -- Analyst
Ivy Liu -- Credit Suisse -- Analyst
Hans Chung -- KeyBanc Capital Markets -- Analyst
