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CooTek (Cayman) Inc (NYSE:CTK)
Q1 2020 Earnings Call
May 15, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and good evening. Welcome to CooTek's First Quarter 2020 Unaudited Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Christian Arnell at Christensen please go ahead.

Christian Arnell -- Managing Director at Christensen Investor Relations

Thank you. 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 -- and through PR Newswire services. On the call today from CooTek are Mr. Karl Zhang Chairman and Chief Technology Officer, and Mr. Jacky Lin, Chief Financial Officer.

Mr. Zhang will review business operations and company highlights followed by Mr. Lin, 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 remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities and 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 terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, confident, and similar statements. CooTek may also make oral forward-looking statements in its reports filed with and furnished with the U.S. SEC and its annual report to shareholders and press releases and other written materials and 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 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 the mobile advertising industry, the expected growth of mobile advertising, expectations regarding the demand for and market acceptance of the Company's products and services, competition in the mobile application 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. SEC. All information provided on this call is current as of today and CooTek does not undertake any obligation to update any such information, except as required under applicable law.

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

Karl Zhang -- Chairman, Co-founder and Chief Technology Officer

Thank you. Thank you, everyone, for joining our first quarter 2020 earnings call. We are excited to report yet another strong quarter where we outperformed our expectations. Total net revenue for the -- for the quarter grew 55% sequentially to be $107 million, exceeding our guidance of $85 million, 26%.

Total MAU for our content-rich portfolio apps grew nearly 20% sequentially to be 89% [Phonetic]. Thanks to the strong growth of our in-house ads network and other business segments cash flow turned positive during the product. This exciting results demonstrate our ability to provide sophisticated user insights and drive growth in both our user base and top line.

Our mission is to empower everyone to enjoy relevant content seamlessly and we are confident in our ability to sustain healthy and strong growth momentum across all three content categories we are now focused on; online literature, scenario-based content apps, and casual games. Based on our current estimate, we believe growth momentum will remain strong with revenue from the second quarter of 2020 expected to be around the $130 million, representing a year-over-year increase of around 219% despite the impact of the global coronavirus pandemic.

As a demonstration of our confidence in the long-term growth prospects of our business, we also announced a new share repurchase plan. Our focus remains on developing and growing our portfolio of content-rich apps to meet the evolving needs of users. MAU of our content rich portfolio app increased to be 89.2 million in March this year, up nearly 20% sequentially from 74.6 million in the December last year. We are happy to see such strong growth in our active user base.

Average DAU was 25.2 million in March, up from 24.7 million in December. We have been seeing a drop in DAU from certain apps removed the by Google from the Google Play in July last year. Since we are not able to update those app, nor use Google push modification to reach and activate users. The drop of DAU from those apps is expected and accelerating actually. We expect that it will take another two quarters to fully digest the impact this is having on our total DAU and we are working to aggressively grow new apps to offset this impact.

Thanks to the strong growth momentum generated by our new apps and game, we are very optimistic on DAU growth prospects over the long-term. 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 of developments and presents enormous opportunity.

We have focused our content app strategy on three categories; online-literature, scenario-base content apps, and casual games. Our sophisticated user insight driven growth platform together with our in-house ads network form a solid foundation and the three focused content categories are being built as three pillars, on top of this foundation.

Our platform and apps are working together as a whole to ensure our competitiveness on ROI, user retention, and other key growth metrics. For example, online-literatures, our strategic content segment, we'd begin to invest starting during the middle of last year. By leveraging our sophisticated growth platform, the DAU of our online-literatures grew rapidly from scratch over the past three quarters, particularly in China.

We also established an online literature content ecosystem to support long-term growth in this content segments. Online literature is an enormous and global opportunity for us and we are taking advantage of it by incubating our online literature apps in multiple countries and regions.

Another example is our casual games business. Traditionally, part of the entertainment content segment, which we continue to invest meaningfully since the fourth quarter of last year. By leveraging our growth platform, our casual games business delivered better-than-expected ROI. Average DAU of our casual game grow to 2.6 million from the scratch in the past two quarters and had contributed 32% of our total revenue during the quarter.

This leaves us more confidence in its enormous growth potential and we are continuing to invest more in the entertainment content segment. Our focus for now, however, remains on developing and growing our portfolio of content-rich apps to meet the evolving needs of users.

We believe that our deep experience and leading operational capability will help us generate more capacity and penetrate deeper into the three content category going forward.

Here, I want to reemphasize that our priority at this stage is to grow the user base of our content rich portfolio apps aggressively and further cultivate our content ecosystem. We will continue to adopt this strategy and will making decisions with long-term growth in mind.

One of our strategic goals is to strengthen our advertising business by reducing our dependency on external parties. In the first quarter of last year, we officially launched the CooTek advertising platform, on in-house ads network. Throughout April 2020 we were generating over 70% of our revenue from our ad network. We will continue to strongly invest in both advertising technologies and our ads ecosystem.

With that I will hand the call to our acting CFO [Phonetic] Jacky to walk you through our financial results for the quarter. Thank you.

Jacky Lin -- Acting 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. All comparisons are on a year-over-year basis, unless otherwise stated. So let's talk about our users first. MAU, monthly active users, for our portfolio products reached 89.2 million in March, which was up 49% from a year ago, mainly because we continue to successfully develop and enlarge our basket of content-rich apps. For example the MAU of casual games in March were 24.5 million, while it was close to zero from the year ago.

Average DAU, daily active users for our portfolio of products in March reached about 25.2 million, up 9% compared with last year. Within this, the average DAU of the casual game in March were 2.6 million. Average DAU of our TouchPal Smart Input product in March were about 136.5 million, down 6% from last year. MAU were 178.8 million, down 7% from last year.

Total net revenue were $107 million, up 167% from last year. Mobile advertising revenue were $106 million, up about 170% from a year ago. And within total net revenue for the first quarter of 2020, online literature and scenario-based content apps contributed about 66%, casual games contributed about 32% TouchPal Smart Input contributed about 0.2% and TouchPal Phonebook contributed about 1%.

Now, turning to expenses. GAAP cost and expenses were at about $117 million, an increase of 55% sequentially and up 193% from the same period last year. Non-GAAP cost and expenses were $116 million, an increase of 55% sequentially and an increase of 200% year-over-year. As a percentage of revenue, non-GAAP cost and expenses accounted for 108%, it's flat about -- it's flat with previous quarter.

Sales and marketing expenses increased by 274% from the same period last year and 61% sequentially. The largest component of these expenses is user acquisition costs. Currently, we are focusing on the content rich portfolio strategy. As such, we are investing to expand the user base of these portfolio products and cultivate content ecosystem.

And thanks to our user insight-driven growth platform, we now have a strong growth momentum with a decent level of ROI and user retention. We are confident that we will be able to maintain fast revenue growth in the coming period and achieve future profitability. R&D expenses increased by 19% sequentially and by 3% year-over-year, primarily due to an increase in cost associated with technology R&D staff and share-based compensation expenses.

We ended the quarter with 577 full-time employees, up 7% from last year. R&D employees represent about 61% of the total employees compared with 63% last year. G&A expenses increased by 20% sequentially and by 41% year-over-year. The sequential increase was mainly due to a reversal of bad debt provision during the last quarter of $0.5 million -- $0.6 million. The year-over-year increase was mainly due to an increase in costs associated with the G&A staff and share-based compensation expenses.

Well nevertheless, G&A expenses as a percentage to total net revenue was 3%, it's a decrease from 4% last quarter and we are keeping the expenses under control. Our gross margin was 95.7%, up from 91.2% during the same period last year and an increase from 94.4% last quarter. The increase are mainly due to the greater economy of scale as we better utilize our infrastructure.

We had a GAAP net loss of $9.7 million, which represents a net loss margin of 9.1%. Excluding the effects of stock compensation, our adjusted net loss was approximately $8.8 million, representing a non-GAAP net loss margin of $8.2 million -- 8.2%, sorry. As of March 31st, 2020 we had cash, cash equivalents and restricted cash of about $70 million compared with $60 million at the end of the year 2019. We have positive operating cash flow this quarter despite the turbulence of the macro environment. This was primarily because we grew our in-house ads network, which helped us achieve a quicker turnaround of working capital.

Last year, we launched our share repurchase program where we are authorized to purchase up to $6 million of our ADS during the six month period starting on November 20th 2019. Until the end of April, we have used an aggregate of $5.8 million to repurchase 1 million ADS, and we early terminated 2019 program on May18th 2020, and take effect, a new share repurchase program on the same day.

In the new share repurchase program, we are authorized to repurchase up to $20 million during the 12-month period starting from May 18th, 2020 and we expect to fund the repurchases with our existing cash balance.

Turning now to our revenue outlook, we expect total revenue in the second quarter of 2020 to be around $120 million, representing an increase of 219% year-over-year and 12% quarter-over-quarter. This estimate reflects our current and preliminary view, which is subject to change.

So now, operator, we're 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 Ivy Liu of Credit Suisse. Please go ahead.

Ivy Liu -- Credit Suisse -- Analyst

Hi, thanks for taking my question. So my question is, what is your current growth strategy and content strategy on your online literature reading app.

Karl Zhang -- Chairman, Co-founder and Chief Technology Officer

Thank you. Thank you for your question. So we are very optimistic and passionate about online literature market. So reading is one of the very fundamental content's need, no doubt. And a lot of people enjoy reading books in different categories. So we are -- we are actually talking about up to 100 million DAU global market size, potentially.

So online literature is not a new segment in mobile Internet industry, but we believe by taking advantage of new technology and new growth velocity, there are opportunities to disrupt this market. And the point is, once one existing market is disrupted, it's usually huge potential this market will be released, which makes the market that much bigger than ever before. So I'm not -- maybe I'm not in right position to comment or challenge our competitors, but we believe that we have different growth philosophy and point of view on this market.

So our proven sophisticated user insight-driven growth platform together with our in-house ads network forms a solid foundation of our growth capability. Our platform and apps are working together as a whole to ensure our competitiveness on ROI with user retention and other key metrics. So the content ecosystem is also a key success factor for online literature market for sure, but we don't think that it's about the size of the ecosystem. So we are -- we are established in online literature content ecosystem in very cost effective way with our growth philosophy to support long-term growth in this constant segment.

So we have already launched our in-house online literature marketplace to directly work with writers and help them submitting novels and making money. And also, as I mentioned that we see online literature at an enormous global opportunity. So we are incubating our online literature app in multiple countries and regions. We will disclose more detailed information when ready. Thank you.

Operator

Is there a follow-up Ms. Liu?

Ivy Liu -- Credit Suisse -- Analyst

No, thank you. I think it's very detailed and helpful. Thank you.

Operator

Thank you. The next question comes from the location of Nelson Chung and Alicia Yap of Citigroup. Please go ahead.

Nelson Chung -- Citigroup -- Analyst

Hi, management and thank you for taking my question and congratulations on the solid quarter. I have two questions for management. My first question is for online gaming, given 2.6 million DAU and -- or a 32% revenue mix, could you share what the rough breakdown of DAU coming from China and overseas market? Given the global lockdown continues in the second quarter, do you think the DAU and revenue for overseas games will increased more meaningfully or do you think the increase will still come from domestic gaming users?

How much of the strong performance of gaming was driven by stay-at-home versus your ability to come out with more interesting games? So do we anticipate the user and gaming revenue for second quarter in China to remain strong despite resumption?

My second question is regarding the advertising outlook, with the global slowdown coming on from the COVID-19, how do you anticipate the impact to you overall online advertising as related to content platform? Have you seen more cautious project allocation so far from global advertiser and domestic advertises and do you see any shifts of the advertising industry categories within your ads revenue? Thank you very much.

Karl Zhang -- Chairman, Co-founder and Chief Technology Officer

Thank you for your questions. Let me answer it one by one. So the first question is about the online gaming. So in terms of the games business, we are focusing on casual games at this moment because they are more suitable for our advertising business model.

So as of today, we have already released over 10 casual games and our first wave of successful casual games includes merge games such as Idle Land King Tycoon, and simulation games such as Farm Hero, and puzzle games such as Crazy Painting, in which we run ad. And in Q1, we extended our success to elimination game, by hunter series, such as high hunter.

By leveraging our user insights-driven growth platform, these casual games deliver the better than expected ROI and contributed 32% of our total revenue. We do expect that the revenue contribution from casual game will continue to increase in the coming couple of quarters. And although we don't disclose detailed break-down on user distribution, I'm still willing to give some general information about this topic.

So, because all of our game have initially released in China market, the most of the DAU for our casual games at this moment is mainly in China region. Besides, we are -- we have already rolled out a couple of games to overseas market and we anticipate to seeing a strong growth in the second half of this year in overseas market confidently.

Actually I don't think that our game benefits a lot from the quarantine. With our casual games business in its starting stage, from Q2, we started to focus on improving game quality, localization, and improve the retention. So we expect to see improvements in terms of the retention rate and ARPU in Q2, which continue to drive the strong performance of our casual game business. We are very confident on that. Thank you for this question.

And another question was actually about the pandemic. So the pandemic impacted Chinese domestic advertising industry because some of the major advertisers were cutting budget which carved the ARPU, it's approximately 10% to 15% lower than our expectations mainly in February and March. But I think the worst case -- the worst time had passed and the market is recovering, although not that strong, but still recovering.

So we expect that the markets will return to its normal status in June for China market. But frankly, this year is not a good year for ads business even without this pandemic in China. It takes time to digest the increasing ad inventory and the relatively weak demand sentiments, and this is about China market. And the global advertising industry is pretty much replicating the trend happening in China.

So now, the worst panic movements have passed in U.S. ad industry based on our observation. The budget is recovering, not that strong, but recovering. And CTM is recovering as well. And I think with the reopening of U.S. and other countries, the market will return to its normal track, I think going to be early, early Q3.

And in terms of the advertiser industry categories, there was no significant change on our platform. So online game, local services such as the food delivery service and e-commerce growing fast, which compensated the shirk of other services. Thank you.

Nelson Chung -- Citigroup -- Analyst

Thank you.

Operator

The next question comes from Hans Chung of KeyBanc Capital Markets. Please go ahead.

Zheqian (Zoe) Deng -- KeyBanc Capital Markets -- Analyst

Hi management. This Zoe on behalf of Hans and thank you for taking my question. So my question is regarding the second quarter guidance, can you share some color on the -- what's the drivers of the second quarter revenue growth, and how do you see the profitability in the second quarter. Thank you.

Karl Zhang -- Chairman, Co-founder and Chief Technology Officer

Thank you for your questions. So let me answer this question. So by leveraging our sophisticated growth platform, we replicate our success in three content categories already. And we believe that our sophisticated growth platform and our advanced growth philosophy is a key factor to content app categories to-date. So it makes us confident on not only Q2 but our long-term growth. In terms of Q2 specifically, all I can say at this moment is that we are executing pretty well.

And as I mentioned that our priority at this stage is to grow the user base of our content rich portfolio apps aggressively and further cultivate our content ecosystem. Meanwhile, we are also optimizing the profitability. With the strong revenue growth and ROI improvements, we expect percentage of total revenue of sales and marketing expense will decreased about 8% in the second quarter, which drive the profitability much better than Q1, I think. Thank you.

Operator

Was there any follow-up?

Zheqian (Zoe) Deng -- KeyBanc Capital Markets -- Analyst

No, thank you.

Operator

Thank you very much. This concludes our question-and-answer session. I would like to turn the conference back over to Christian Arnell for any closing remarks.

Christian Arnell -- Managing Director at Christensen Investor Relations

Thank you. This concludes our call for today. If you have any further questions or comments, please don't hesitate to reach out to the CooTek IR team. Thank you for joining. Have a good day or evening. Good bye.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Christian Arnell -- Managing Director at Christensen Investor Relations

Karl Zhang -- Chairman, Co-founder and Chief Technology Officer

Jacky Lin -- Acting Chief Financial Officer

Ivy Liu -- Credit Suisse -- Analyst

Nelson Chung -- Citigroup -- Analyst

Zheqian (Zoe) Deng -- KeyBanc Capital Markets -- Analyst

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