CooTek (Cayman) inc (NYSE:CTK) (CTK) Q3 2021 Earnings Call Transcript

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CooTek (Cayman) inc (CTK) (CTK)
Q3 2021 Earnings Call
Dec 8, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the CooTek's Third Quarter 2021 Unaudited Financial Results Conference Call. Please note this event is being recorded.

I would now like to turn the conference over to ICA Investor Relations. Please go ahead.

Unidentified Speaker

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 Technology Officer; and Mr. Robert Cui, Chief Financial Officer. Mr. Zhang will review business operations and company highlights followed by Mr. Cui, 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 would 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, 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 SEC and its Annual Report to shareholders, in 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 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 the mobile advertising industry, the expected growth of the 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 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 pass the call to Mr. Karl Zhang, Chairman and Chief Technology Officer of CooTek. Karl, please go ahead.

Karl Kan Zhang -- Chairman and Chief Technology Officer

Thank you, everyone, for joining our third quarter 2021 earnings call. We have reported our third quarter 2021 results with net revenue of $51.1 million and non-GAAP net income of $0.4 million. As consistently mentioned, we have been implementing a two-wheel development strategy focused on online literature and mobile games segment. The balanced approach between growth and profitability have been partially impacted by the persistent uncertainties in the Chinese domestic advertising market, but we remain focused on the achievement of the group level profitability. In addition, we have rapidly increased our exposure in the overseas mobile games and online literature segments, and the revenue contribution from overseas business was 17% in the third quarter of 2021 compared to 12% in the second quarter of 2021. We expect that the revenue contribution from our overseas business will continue to increase.

As a special note, for our mobile games business, the continuous optimization of product portfolio and pipeline resulted in a stable contribution to the overall profitability of the group. In the third quarter of 2021, Taptek, our invested game studio, launched Truth Runner, another parkour game following the lead of Catwalk Beauty. A weak into its debut, Truth Runner topped the US iOS game charts. The other expected hit match-3 game, Love Fantasy, has also started to gain momentum in the app ranking. The enrichment of the match-3 game will also further increase life cycle of the product, which can help increase the scale of the revenue and net income of the mobile games business.

We're also encouraged by efficiency achieved in the development of the new mobile game products. We developed and published 14 new mobile games in the third quarter of 2021, and has a pipeline of 15 games to 20 games in the fourth quarter of 2021. And we have secured the relationship with more than 20 third-parties, 3Ps, to provide game publishing and operation service. We are continuously dedicated to increase the scale of the third-party game publishing business.

Coming back to our online literature business. For Fengdu Novel, our free online literature product in a Chinese market, it constituted a stable contributor to the revenue and the gross margin of the group. With the continuously improving -- increasing signed orders and original contract books, we have -- we can keep an engaging and active platform for our users. In the third quarter of 2021, Fengdu Novel has launched a new online community for book lovers, where readers can comment on novels and authors can get instant feedback on their works. This new community will boost authors' creativity and the readers' engagement, and further create momentum to the development of Fengdu Novel's content ecology. Building a high-quality content ecology has been the primary goal of Fengdu Novel. Since the beginning of the year, Fengdu has further improved its novel quality and the reader engagement by hosting a series of creative events, including contents, new writer support programs and new media content distribution. At the same time, we have been moving forward the IP operation business with licensing of e-books, audible book production and short drama production. The revenues from the IP business of Fengdu online literature platform recorded another 165% high quarter-over-quarter growth in the third quarter of 2021.

For our overseas online literature product, the business fundamental has been consistently improving. In addition to the expansion in the Southeast Asia and the North African market, the ROI and the user engagement level in the US market has demonstrated very positive improvements. We are confident that the product will become the next growth driver of the group. Most recently, we have announced our initial metaverse and NFT plan, and formed an internal work group to study and implement such a tech. Our metaverse plan takes full advantage of our two dominant business, online literature and gaming, to create new world of entertainment. On the one hand, our online literature apps have produced quality original content, with numerous exceptional novels emerging from different categories such as fantasy, war, and the science fiction. The immersive experience provided by these works is essential to the creation of the metaverse. We can also tokenize the original digital books and the visualized virtual items of the books, such as weapons and dresses to be NFT, allowing those NFTs to be collected and traded, both within and outside of our apps.

On the other hand, our full-stack global operation and distribution capability has enabled us to launch dozens of chart-topping games, including Catwalk Beauty and Truth Runner. With the emergence of metaverse, we are well-positioned to leverage the strengths from this two businesses to create synergy. As we integrate the two business to construct our own metaverse ecosystem, the boundaries between novels and games will gradually merge to create a unique user experience of reading up a novel and playing games. Readers can interact with the characters and other readers in the form of games, with the possibility of adjusting their rules, appearance, skills, and props. All these virtual items can be turned into NFTs, allowing users to take them to other story worlds for continuous usage. We are confident in creating such a highly immersive metaverse. Going forward, we will use our best endeavors to execute our strategic road map in building our content rich and user-oriented ecosystem.

With that, I will hand the call to Robert, our CFO, who will walk you through our financial results for the quarter. Thank you.

Robert Yi Cui -- Chief Financial Officer

Thank you, Karl. Hello, everyone. Thanks again for joining us tonight. I'm going to brief our third quarter of 2021. Net revenues were $51.1 million, a decrease of 52% from $105.7 million during the same period last year, and a decrease of 39% from $83.2 million during the last quarter. The decrease compared with the same quarter of 2020 was primarily due to a decrease in mobile advertising revenues. The net revenues are mainly generated from three categories of our content rich apps. Mobile games accounted for approximately 56%, online literature accounted for approximately 39%, and scenario-based content apps accounted for approximately 4% of total revenues.

DAUs of the company's portfolio products were 18.7 million, a decrease of 32% from 27.7 million in September 2020. MAUs of the company's portfolio products were 57.2 million, a decrease from 94.8 million in September 2020. DAUs of the company's online literature products were 5.0 million, a decrease from 10.0 million in September 2020. MAUs of the company's online literature products were 13.5 million, a decrease from 29.5 million in September 2020. The average daily reading time of the key product, Fengdu Novel's users was approximately 153 minutes in September 2021, which remained stable compared with 153 minutes in June 2021.

Our gross profit margin was 82.2%, compared with 93.6% in the same period last year and 89.4% last quarter. Costs and expenses were about $50.1 million, a decrease of 39% sequentially and a decrease of 61% from the same period last year. Sales and marketing expenses were $28.7 million, a decrease of 73% from the same period last year, and a decrease of 52% from last quarter. As a percentage of total revenues, sales and the marketing expenses accounted for 56%, compared with 102% during the same period last year, and 72% last quarter. The sequential and year-over-year decrease in the sales and marketing expenses as a percentage of total revenues was primarily due to the continuous transition of the strategy in relation to the acquisition of new users and the retention of the existing users which resulted in the reduction of the user acquisition costs.

R&D expenses increased by 12% year-over-year and decreased by 5% sequentially. The sequential decrease was primarily due to a decrease in salary and payroll expenses associated with technology R&D staff and share-based compensation expenses, and was partially offset by increase in third-party outsourcing fee. The year-over-year increase was primarily due to an increase in salary and payroll expenses associated with technology R&D staff, and was partially offset by decline in share-based compensation expenses. As a percentage of total revenues, R&D expenses accounted for 18%, compared with 8% during the same period last year and 12% last quarter. G&A expenses increased by 8% year-over-year and a decrease of 18% sequentially. The sequential decrease was mainly due to a decrease in listing expenses and bad debt provision, and was partially offset by a rise in share-based compensation. The year-over-year increase was mainly due to an increase in salary and payroll expenses associated with G&A staff and bad debt provision, and was partially offset by decline in listing expenses and professional service fee. As a percentage of total net revenues, G&A expenses accounted for 8%, compared with 4% during the same period last year and 6% during last quarter.

Net loss was $0.4 million, compared with net loss of $22.0 million during the same period last year and a net income of $0.3 million last quarter. Adjusted net income was $0.4 million, compared with adjusted net loss of $20.5 million in the same period last year and adjusted net income of $1.1 million last quarter. The sequential decrease of profitability compared with the adjusted income in last quarter was mainly due to the decrease in revenues. The achievement of profitability compared with the adjusted net loss the same quarter last year was mainly due to the decrease in sales and marketing expenses as a percentage of total revenues, driven by the continuous transition of the strategy in relation to the acquisition of new users and the retention of existing users.

As of September, the 30, 2021, we had cash, cash equivalents and restricted cash of about $36.2 million, compared with $39.0 million as of June 30, 2021.

Operator, we are now ready to take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Steve Silver from Argus Research. Please go ahead, your line is now open.

Steve Silver -- Argus Equity Research -- Analyst

Thank you and thanks for taking the question and congratulations on the recent metaverse announcement. I had a quick question about -- or at least your thoughts on the impact of the metaverse initiative in terms of the R&D behind it or the operating costs behind that. And how the launch of this new strategy will work in conjunction with the previously announced plans to balance growth with profitability and just whether the metaverse changes you're thinking along those lines? Thank you.

Karl Kan Zhang -- Chairman and Chief Technology Officer

Okay. Thank you. I will take these two questions. So the recently announced metaverse and NFT plan does not constitute a change in the existing business, and also in relation to the financial strategies. We will keep our balanced approach between growth and profitability despite recent uncertainties in the Chinese mobile advertising market, which impacted the revenue growth of the group. So, we started to concentrate on products with long product cycles and high ROI performance in the Chinese market and we expanded our exposure in the mobile games and online literature segments in the overseas market, which supported the continuous achievement of the group-level profitability. So, this new metaverse and NFT plan is a natural strategic move to fully utilize our resources in the IP, original contract books and mobile games, aiming at the execution of the fully synergistic business combination involving long-term metaverse and NFT vision. So, we started to form, as mentioned, an internal workgroup to evaluate the reasonable action plan, and we believe that our current core business segments offer significant potential to extract the value in relation to metaverse and NFT. However, in the short-term, we don't expect significant R&D expenses to implement such plan. It is a long-term and strategic path, with further development of the existing business model. Thank you.

Steve Silver -- Argus Equity Research -- Analyst

Thanks for that color.

Operator

We will now take the next question from Vivian Zhang from Diamond Equity Research.

Vivian Zhang -- Diamond Equity Research -- Analyst

Good evening. This is Vivian from Diamond Equity Research. So, my question is also regarding your newly announced metaverse plan. Can you give us some more color on this new business model and your monetization strategy for it? Thank you.

Karl Kan Zhang -- Chairman and Chief Technology Officer

Thank you. I'm going to take this one. Yes, we have been implementing our two-wheel development strategy focused on online literature and mobile game segment to build up our pan-entertainment content ecosystem. So the strategy has achieved significant results in both the domestic and overseas market. So, we will stick with this strategy, continue to invest and grow in the global online literature and the mobile game segment. And our new revealed metaverse plan is actually a part of this strategy. There is a natural connection between online literature gaming and the metaverse. The novels creates virtual worlds and stories and are sometimes even the worldview, which can be further visualized through games and users would be able to interact, explore, trade and live in such virtual settings. So the high level of immersion and the all-round and open social structure created by the novel-based games are consistent with the core concept of metaverse. So, as good as integrate the two business to construct its own metaverse ecosystem, contrary between novels and the games will gradually merge to combine user experience of reading a novel and playing games. So readers can interact with the characters and other readers in the form of games, with the possibility of adjusting their roles, appearance, skills, and prop. So, all of these virtual items will be in that piece, and allowing users to trade and take them to other story worlds.

So, let me give you an example of how we visualize and extend online novels to online games. So our new hit, match-3 game, Love Fantasy, is obtaining very strong growth momentum recently. It hit top three ranking position on both Google Play and App Store in US. So, actually, this innovative and interactive game, it's storyline is created from an online novel. So it is a testament to link novels with games and the possibility to construct an unique metaverse. And on the other hand, we are also looking into the potential disruption that NTF -- NFT could bring to the entire content industry. So, we believe that NFT brings new opportunities for us to benefit our content ecosystem and expand the monetization. So, our internal metaverse working group is integrating a product, which tokenize digital books and the visualized virtual items of the books, such as the dresses, props, weapons, castles and so on and so forth. So readers who are fascinated by the book get a chance to collect and trade those in NFTs. So, this NFTs will be tradable within or outside of our app. So as long as the book gets more and more popular, the NFT holders enjoys the appreciation. One day a new game is produced on top of the story, the book's storyline, they can bring NFTs to the game to play and trade. So with the emergence of metaverse, we believe that we are well positioned to leverage our two dominated business to create synergy and expand our success. Thank you.

Vivian Zhang -- Diamond Equity Research -- Analyst

Thank you for additional detail. That's all my question.

Operator

There are no further questions on the phone at this time.

Unidentified Speaker

Thank you, operator. In closing, on behalf of the entire management team of CooTek, we would like to thank you again for joining us today. If you have further inquiries in the future, please feel free to contact us at [email protected] or [email protected]. Thank you. Bye-bye.

Duration: 27 minutes

Call participants:

Unidentified Speaker

Karl Kan Zhang -- Chairman and Chief Technology Officer

Robert Yi Cui -- Chief Financial Officer

Steve Silver -- Argus Equity Research -- Analyst

Vivian Zhang -- Diamond Equity Research -- Analyst

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