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CooTek (Cayman) Inc (NYSE:CTK)
Q4 2019 Earnings Call
Mar 12, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the CooTek Fourth Quarter and Fiscal Year 2019 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Tip Fleming at Christensen. Please go ahead.

Tip Fleming -- Managing Director, Christensen

Thank you, operator. Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and is available on the 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 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 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, expect, anticipate, future, intends, plans, belief, 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 SEC and its annual report to shareholders in press releases and other written materials and oral statements made by -- made by its officers, Directors or employees to third-party.

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, expected growth of the mobile Internet industry and the mobile advertising industry, expected growth of mobile advertising, expectations regarding demand for and market acceptance of the company's products and services, competition in mobile application in advertising industry and relevant government policies and regulations relating to the industry. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the US SEC.

All information provided on this call is current as of the date of 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. Thank you everyone for joining our fourth Quarter 2019 earnings call. Our performance during the fourth quarter far exceeded our expectations as our business bounced back strongly to regain its growth momentum. Total net revenue for the quarter was $69 million, beating our adjusted guidance, $53 million by 30%. Our ability to derive sophisticated user insights and the drive growth remained one of our key core competencies. We also made promising progress on delivering competitive content apps and building a distinctive content ecosystem. Our in-house ad network, CooTek ad platform grew rapidly during the quarter, which field our monetization efficiency and mitigated the risk of third-party dependency. All of this positive momentum made us optimistic on our long-term growth.

Based on the current state of our business, we project our first quarter 2020 revenue will exceed $85 million, representing 23% growth rate sequentially, despite the industry seasonality and the impact of the global coronavirus outbreak. Our focus remains on developing and growing our portfolio of content-rich apps to meet the evolving needs of users. The average DAU of our content rich portfolio app was 24.7 million in December, up from 23.9 million in September. The MAU increased to 74.6 million in December, up from 67.5 million in December. Our content rich portfolio apps contributed approximately 95% of our total revenue during the quarter. This is the testament to our mission of empowering everyone to enjoy relevant content seamlessly.

During the quarter, we were in communication with Google to clarify the potential misunderstanding behind the removal of our apps from Google Play in July. However, as of today those apps have not be reinstated yet. We cannot guarantee that we will prevail in our efforts or that any such removed applications will be made available again. Regardless, we have already rolled out effective operational measurements to release new content rich apps, diversify our user growth channels such as app store and strengthen our internal compliance efforts. With all these initiative, [Indecipherable] regained strong growth momentum and we believe that the impact of Google's action in July is behind us.

We are moving on and focusing on slowing our new portfolio apps. While the engagement rate of our portfolio apps was down 2% sequentially at 33.1%, we are not overly concerned. One reason for this drop is that we cannot use Google push notification to reach and activate our users after our develop account was disabled. We fully expected DAU to drop for those apps removed by Google's action. Thanks to the strong DAU growth of the new content rich portfolio apps, total DAU regained growth momentum. While some of our new portfolio apps are naturally lower than average engagement rate they have much higher ARPU and overall ROI compared to the removed app. We are satisfied with the growth momentum of this high ARPU, but naturally with lower engagement app. Again, we are moving on and focusing on growing our new portfolio app.

Going forward, we cannot just focus on engagement, but also on product lifetime value, ROI, and the value that would bring to our users. Our mission is to empower everyone to enjoy riding on the 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 areas. At this stage, we have focused our content app strategy on three special categories. Scenario based vertical content app such as fitness, healthcare app. Long reading content apps such as global online novel and casual games, which is typical entertainment content. We believe that these three markets are massive globally and that we -- our sophisticated user insight driven growth platform will help us deliver unique value proposition in this category.

Here I want to emphasize that our first priorities at this stage are to grow the user base of our content rich portfolio app, aggressively and to cultivate our content ecosystem. We will continue to follow this strategy and make decisions with long-term growth in mind. With the current ROI level and the business opportunities, we are confident to invest aggressively to grow our user base and at the same time make great effort to improve our app key metrics such as user retention rate continuously.

This quarter we released some new casual games to the global market on both Android and iPhone such as Idle Land King Tycoon, Crazy Penguin and Farm Hero [Phonetic]. With our casual game business in its very early stage, we still have plenty of room to improve in terms of the game quality, localization, and the user retention, by leveraging our user insights driven growth platform this casual games deliver better than expected ROI and has started to contribute meaningful revenue. This gives us the confidence to invest more in this -- at the payment content segment.

One of our strategy -- strategic goal is to strengthen our advertising business by reducing external dependencies. In the first quarter of '19 we officially launched the CooTek Advertising platform, our in-house ad network. This system allows advertisers to create and manage ad campaigns, manage ad budget, and to place ads in our app portfolio directly. In the past couple of quarters, we have worked hard to improve our ad network by leveraging AI technologies, optimized end to end ad conversions and cultivating our advertisers ecosystem.

CooTek ad platform boosted our monetization efficiency because the average eCPM for the platform surpass all the third-party ad exchanges. And it started to contribute a significant percentage of our total advertising revenue. During March 2020, we are generating approximately 60% of our revenue from the -- from our ad network. 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. Thank you.

Jean 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 fourth quarter financial results and a few key results from full year 2019. All comparisons are on year-over-year basis unless otherwise noted.

Let's start with users. Monthly active user for our portfolio of products reached 74.6 million in December, up 62% from a year ago. Average daily active user for our portfolio of products in December reached about the 24.7 million, up 46% compared with last year. Average daily active user on TouchPal Smart Input in December were about 137.6 million, down 2% from last year. MAUs were 182.8 million, down 4% from last year.

Total net revenue were $69 million, up 47% from last year. Mobile advertising revenue were $68.5 million, up about 47% from a year ago. Related to advertising revenue for the fourth quarter of 2019, portfolio products contributed about 95%, TouchPal Smart Input contributed about 1% and TouchPal Phonebook contributed about 4%.

Turning now to expenses. GAAP cost and expenses were about $75.2 million, an increase of 58% sequentially and up 74% from same period last year. Non-GAAP cost and expenses were 74% -- $74.8 million, an increase of 60% sequentially and an increase of 76% year-over-year. As a percentage of revenue, non-GAAP cost and expenses account for 108%, down from 150% in previous quarter. The increase in operational expenditure were mainly driven by sales and marketing expenses.

Sales and marketing expenses increased by 99% from -- from the same period last year and 90% sequentially. The largest component of this expense is user acquisition costs, which grew in line with overall expansion of our business. As Karl mentioned, at this stage our first priority continues to be -- to be aggressively growing user base of our content rich portfolio applications and to cultivate our content ecosystem. With our current level of ROI and the business opportunity, we are confident that as we continue to invest aggressively to grow our user base, we should be able to maintain our faster revenue growth in the coming period and achieve future profitability.

R&D expenses decreased by 17% sequentially and by 2% year-over-year, primarily due to a decline in average compensation rate with technology R&D staff and share based compensation expenses. We ended the quarter with 553 full-time employees, up 11% from last year and up 8% from last quarter. R&D employees represent about 63% of total employees, the same as last quarter and compare with 62% last year.

G&A expenses decreased by 19% sequentially and by 24% year-over-year. The sequential and year-over-year decrease was mainly due to reversal of bad debt provisions of $0.6 million during fourth quarter of 2019. Our gross margin was 94.4%, up from 92.6% during the same period last year and an increase from 87.5% last quarter. The improvement of gross margin was firmly due to our asset optimize efficiency related to infrastructure utilization.

We had a GAAP net loss of $6.6 million, which reference a net loss margin of 9.6%. Excluding the effects of stock compensation, our adjusted net loss was approximately 6.2 million, representing a non-GAAP net loss margin of 9%.

I will now quickly run through a few key full year 2019 financial results. Further details can be found in the earnings release. Net revenue was $178 million, an increase of 33% from $134 million in 2018. Mobile advertising revenue was $175 million, an increase of 33% from $131 million in 2018. Portfolio products contributed approximately 85%, TouchPal Smart Input contributed about 6% and TouchPal Phonebook contributed about 9%. Cost and operating expenses were $215 million, an increase of 73% from $124 million in 2018. Sales and marketing expenses were $187 million, up 95% year-over-year. As a percentage of total revenue, sales and marketing expenses accounted for 88%, an increase from 60% in 2018, primarily due to increased investment in user acquisition.

R&D expenses were $27 million, an increase of 39% from $19 million in 2018, mainly due to the increased cost associated with technology R&D people. As a percentage of total revenue, R&D expenses accounted for 15%, up from 14% in 2018. G&A expenses were $16 million, an increase of 52% from $10.7 million in 2018, primarily due to an increase of $4.1 million in bad debt provision. As a percentage of total revenue, G&A expenses accounted for 9%, an increase from 8% in 2018. Gross margin was 91.4% compared with 88.9% in 2018. Net loss was $37 million compared with net income of $10 million in 2018. Adjusted net income was $33 million compared with adjusted net income of $12.5 million in 2018.

At the end of the year 2019, we had cash, cash equivalents and restricted cash of about $60 million, compared with $85 million at the end of -- at the end of year 2018.

On November 26, 2018, we announced share repurchase program. This program was terminated during the fourth quarter of 2019. We repurchased an aggregate of 1.7 million ADSs for a total consideration of $13.7 million during this time. During the process, we netted the cancellation of treasury stock with additional paid in capital.

On November 20, 2019, we launched a new share repurchase program, where we are authorized to repurchase up to $6 million of our ADS during the six month period starting on November 20, 2019. As of the end of the year 2019, we had used an aggregate of $1.1 million to repurchase 0.2 million ADS.

Turning now to the revenue outlook. We expect total revenue in the first quarter of 2020 to be above $85 million, representing an increase over 112% year-over-year. These estimates reflect our current and preliminary view, which is subject to change.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Hans Chung of KeyBanc Capital Markets. Please go ahead.

Zoie -- KeyBanc Capital Markets -- Analyst

Hi Karl and Jean. This Zoie [Phonetic] on behalf of Hans. Congratulations on the strong result, and thank you for taking my questions. I have two questions. The first one is, could you talk a little about the potential impact of the coronavirus outbreak, especially in the overseas market? The second one is, what do you think is the upside of the in house ad as a percentage -- as a percentage of the total ad revenue and its contribution to the improvement of our ARPU? Thank you.

Karl Kan Zhang -- Chairman and Chief Architect

Thank you. Let me answer this question. So the pandemic actually has mixed impact on our business. The travel ban increased [Phonetic] our users at home, which resulted in higher than expected usage of our content apps. App inventory increased accordingly with the increased time spend naturally. So on the other side, coronavirus outbreak does impact the advertisement industry. So in China really we expect a strong ad budget recovery after the spring festival holidays, but this year we noticed that some of the major advertisers were cutting budget. So this cost a less bidding competition and increasing ad inventory, which as a result lower both the add fill rates and the eCPM. So this was happening throughout all of the -- February and we estimate it had approximately 10% to 15% negative impact on ARPU. The market started to recover recently, but not strong enough. We anticipate that the recovery will happen in the second quarter actually.

As for the overseas market, especially the US market, we didn't notice any significant impact yet, but we are not quite sure about the future impacts as the virus continue to spread. We will see, but anyway, our guidance has already build in conservative considerations and the current ROI level of our apps is relatively safe even taking the pandemic impact into account. So in terms of the CooTek ad platform, during March 2020 we are generating approximately 60% of our revenue from our ad network. So it boosted approximately 20% to 30% of our ARPU. So we are confident that the ARPU will continue to improve ongoing. Thank you.

Operator

The next question is from Nelson Cheung of Citi. Please go ahead.

Nelson Cheung -- Citi -- Analyst

Hi management and thank you for taking my question and congratulations on a solid quarter. I have two questions here. My first question is could you elaborate more details or drivers for a strong performance in the fourth quarter of 2019? And will the sequential revenue trend as you guided while China and global advertisers efforts have negatively impacted by coronavirus outbreak and will these global trend continue into the rest of 2020?

And my second question is related to the marketing expense, could you comment on the large increase of sales and marketing dollars this quarter? What types of marketing expenses is that and is that mainly for user acquisition? And what are the top advertiser categories? Thank you.

Karl Kan Zhang -- Chairman and Chief Architect

Thank you for your question. So I'm going to answer this question. So let me elaborate the key drivers behind our strong performance first. The advertising business is the foundation of CooTek. The [Indecipherable] insight is the plan to field and to cultivate our sophisticated growth platform backbone and mentioned three content app category, which are long reading app, scenario based vertical content app, and the casual games are the three vertical pillars on top of this foundation. So we are gaining growth momentum for all of this three categories. We are optimistic on both short term and long-term growth despite the impact of pandemic. We noticed that some of the major advertisers were cutting budget, which caused ARPU approximately 10% to 15% lower than our expectation in February for China market. So -- but it is now recovering and we didn't notice any significant impact on global market yet. So we believe that the impact of the coronavirus outbreak on our business is limited because we have big portion of advertisers coming from non-impacted industries such as the mobile gaming industry.

The second question, yes. Our sales marketing cost increased from $33 million to $63 million in the fourth quarter to up 91% sequentially. The sales marketing is mainly spent to acquire new users, but the total revenue was up 123% sequentially and non-GAAP net loss decreased from $15 million to $6 million, down 60% sequentially. So this operating results demonstrated our strong monetization improvements, our great ROI and operational leverage. So here I want to reinforce that our first priorities at this stage are to grow the user base of our content rich portfolio as aggressively and to cultivate our content ecosystem. So based on the current state of our business, we will continue to invest on our user acquisition without compromising our ROI level. Thank you for your question.

Operator

The next question comes from Ivy Liu of Credit Suisse. Please go ahead.

Ivy Liu -- Credit Suisse -- Analyst

Hi Jean, Karl. Thanks for taking my questions. So I understand the company has started to focus on multi -- multi growth drivers since last year. So just want to have a general idea on what is the overall growth strategy or growth target for the new products including the literature app or casual games etc.?

And second question is, on the literature apps do you guys have any differentiated content strategy? That's it.

Karl Kan Zhang -- Chairman and Chief Architect

Thank you. So our mission is to empower everyone to enjoy relevant content seamlessly. So as I mentioned at this stage, we have focused our content app strategy on three special categories and global online novel is actually one of them. So clearly reading novel, which is a app released in China is an initiative for the long reading content app market. So we do not disclose detailed number of any specific app at this moment, but yes, the growth of the Crazy Reading Novel is amazing. Here I want to emphasize that our target for the long reading content app market are global. So actually we have already released online novel apps to target overseas market as well. So we believe that we have an opportunity to disrupt the global online novel market. And we are making effort to cultivate our content ecosystem for our online, mobile apps. So we worked with copyright partners to license book in China and overseas markets. At the same time, we have already established in-house online literature market to directly work with writers, help them submitting novels and making money. So going forward we expect this business continue to grow and we believe that the oversea market is a great opportunity for us.

In terms of the new game business category, we are focusing on casual games at this moment, because they are more suitable for our advertising business model. As of today, we have developed [Indecipherable] games such as Idle Land King Tycoon, simulation games such as Farm Hero and the puzzle game such as Crazy Painting in which we run ad. So with our casual game business in its very early stage, we still have plenty of room to improve in terms of game quality, localization, user retention rate. By leveraging our user insights driven form this casual game delivered better-than-expected ROI and started to contribute meaningful revenue. So the new casual game business contributed approximately 13% of our total revenue in fourth quarter of 2019. So our game business is targeting both China and the overseas market. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tip Fleming for closing remarks.

Tip Fleming -- Managing Director, Christensen

Thank you operator. This concludes our call for today and thank you everyone for joining the call tonight. If you have any questions or comments, please don't hesitate to reach out to us directly. Thank you for joining. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Tip Fleming -- Managing Director, Christensen

Karl Kan Zhang -- Chairman and Chief Architect

Jean Liqin Zhang -- Chief Financial Officer

Zoie -- KeyBanc Capital Markets -- Analyst

Nelson Cheung -- Citi -- Analyst

Ivy Liu -- Credit Suisse -- Analyst

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