Qutoutiao Inc.

Thank you very much, and welcome everyone to the second quarter of 2019 earnings conference call of Qutoutiao Inc. The company's financial and operational results were released via NEWSWIRE services earlier today and have been made available online.

You can also view the earnings press release by visiting the IR section of our website at ir.qutoutiao.net. Participants on today's call will include our Co-Founder and CEO, Mr.

Eric Tan; and our Co-CFOs, Mr. Jingbo Wang and Mr.

Xiaolu Zhu. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S.

Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please note that Qutoutiao's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Qutoutiao's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

Now let me start by reading out Eric's commentary on the business first.

I would like to review the business and our strategy with you first and then provide some outlook for the rest of the year. In the second quarter, we have focused on three things: The first is growth.

The overall business continues to enjoy strong momentum with quarterly average combined DAU reaching 38.7 million and combined MAU reaching 119.3 million, both more than tripled from a year ago. In addition to scaling up existing apps, we have leveraged our platform capabilities to develop new products.

In May, we started Midu Lite, which is a mobile application that allows users to read online literature for free while earning loyalty points. The variation in design helps us to attract a user base that is different from that of the Midu app and is, therefore, a valuable addition to our family of apps.

The second is compliance. As we all know, compliance requirements for Internet content have tightened up considerably this year.

We have one of the best track records in compliance among all the sizeable newsfeed players in the space as we have put in significant efforts from the very beginning in building our content compliance teams and capabilities. Last month, we expanded our compliance personnel by adding a team based in Tianjin, which will strengthen our content review and monitoring.

We have recently been granted the Internet news license, which is the first for a nonstate-owned company since 2017 and the first and only one in Shanghai, representing an official recognition of our efforts in content quality and compliance as well as our leading market position. The third is the optimization of internal teams to support future growth.

Our shift to building a service-oriented architecture by modularizing common functionalities and building full function teams is progressing well. It's a significant step towards our long-term positioning as a multiproduct platform.

In this quarter, we started a rotational programme for our team leaders, which offers them opportunities to be fully involved operationally in various parts of the business. This gives our key management staff a more comprehensive operational experience with the business, which will enhance efficiency and internal collaboration.

We believe such organizational changes will pay off over time and strengthen our long-term competitive advantage, especially as our business continues to scale up. Let me also talk about competition in the market.

With the Qutoutiao app, by focusing on regions outside Tier 1 and 2 cities in China and pioneering the loyalty program, it has differentiated itself from competitors and captured a large, underserved market. The relative lack of technology infrastructure and the services have caused lower tier cities to digitally fall behind the Tier 1 and Tier 2 cities.

By contributing to the narrowing of this digital gap, Qutoutiao is playing a positive role in social development, which we believe is both a great cause in itself and a great structural theme to play into. We have built a deep understanding of the people we serve, which has underpinned our leadership position in the market.

Midu started in the competitive online literature market where strong and dominant players already existed. Pioneering the free-to-read model, Midu expanded the addressable market by offering a solution to hundreds of millions of online literature lovers, who have been previously excluded by the traditional paid-only business model.

Midu has maintained a leading position in the free-to-read market since the inception, and already has the richest content ecosystem by a clear margin in comparison to direct peers. We have also built an internal editor team to work with writers directly to introduce original and differentiated content, which has grown exponentially in page view share albeit from a very low base.

The value of our efforts in enhancing content offerings will not be visible in the immediate quarter or quarters but will, over time, lead to better user retention and engagement, which is key to our user base expansion. From mid-July, we have temporarily suspended content update and the commercial activities on Midu as we sort through our existing library to adjust to the regulator's compliance requirements.

This also puts a temporary break on our DAU as we are not able to acquire any new users through regular channels during the period. We expect this phase to pass by early Q4, by which time growth will resume.

Our objective of reaching 10 million plus DAU with Midu and the Midu Lite combined, by year-end and becoming the biggest online literature platform in the whole market in 2020 remains unchanged. We remain confident about achieving the objective given the better than expected start of Midu Lite, the strong growth momentum of Midu we enjoyed in Q2 and the tremendous market opportunities lying ahead.

Turning to the second half of 2019 outlook. We will continue to grow our user base for Qutoutiao and further strengthen Midu's leading position once normal operations resume by mid-October.

Our year-end DAU target remains unchanged at 50 million to 60 million DAU for the group, which is about double the level at the end of last year. The overall digital advertising market is experiencing weakness this year due to the supply/demand imbalance and the weak macro conditions.

Despite a much tougher operational environment, we're delivering one of the fastest growth rates in the industry. We continue to diversify our monetization avenues by growing contributions from casual games and live streaming, which have been increasing their share of group revenues.

Looking longer term, as we are far from realizing our monetization potential, our focus undoubtedly continues to be optimizing the efficiency of our ad platform, which will drive structurally higher ARPU. This concludes Eric's remarks.

I will now read the prepared remarks of Jingbo.

Despite the weakness in the ad market, which directly impacts us through pricing, our unit economics remain healthy. Our average user acquisition cost was RMB6.93; our user engagement expenses for the whole group were apparently RMB0.13 per DAU per day, while our ARPU was RMB0.39.

We continue to invest across the different products based on what we think makes strategic sense. We have invested heavily in Midu on the content front just before the suspension.

As a result, it has a far better coverage of the high-quality books available in the market than any free-reading peer does. We have also built a very capable in-house editor team, which works with writers directly to generate original and differentiated content.

We have seen pleasing performance data, which clearly shows that these original books have been well received by the readers. We have significant potential to further drive our monetization by improving the efficiency of our proprietary advertising platform, which we built last year.

As the business grows, which diversifies our advertising inventories through the investment in technology and the accumulation of data, we will be able to enhance the bidding system and the targeting algorithms to close that gap between us and the established players. In the meantime, we are deepening our existing customer relationships as we build better understanding of our customers and deliver better results as well as expanding into more advertiser industries to better match the ever diversifying ad inventories that are being added onto our platform.

We're also making good progress on growing revenues from casual games and live streaming. This concludes Jingbo's remarks.

Now I will move on to Xiaolu's comments.

Our revenue has recovered from the seasonal low of Q1 to reach RMB1.4 billion in Q2, which is close to 3 times higher versus the same period last year. This rapid growth is being driven predominantly by DAU growth and has been achieved against the backdrop of a weak, overall advertising market especially from a pricing perspective.

The recovery since Q2 has progressed more slowly than what one could expect under normal market conditions but we're not seeing any worsening trend. ARPU, which we define as net revenues per DAU per day, was RMB0.39 in Q2 2019 compared to RMB0.33 in Q1 2019 and RMB0.42 in Q2 2018.

The year-on-year decline has been driven by the faster growth of new products such as Midu, which have lower ARPUs in comparison to Qutoutiao, and also the general weakness of the advertising market in China. Sequentially, we see meaningful ARPU growth across all products, which is a combination of favorable seasonality impact and structural improvement of monetization as products grow.

Turning to costs and expenses. I will focus on non-GAAP measures, which excludes stock-based compensation.

For Q2 2019, our gross margin was 74.0% which declined 1.2% quarter-on-quarter or 9.1% year-on-year, mostly due to our investment in IT infrastructure to better accommodate more bandwidth data intensive content such as videos, live streaming and games. However, sequentially, our operating margin has improved by 18.7% as we have kept our our expenses under control while monetization improved.

Our user engagement expenses as a percentage of revenue have improved both sequentially and year-on-year. As we have continued to bring down the absolute amount we pay to each active user every day, which will be stable and within the range of RMB0.15 to RMB0.20 for the Qutoutiao app.

Our ad load is at a healthy level, and given the potential for ad inventory increase coming from our products scaling up such as Midu and subsequently the higher efficiency of our central ad platform manifested through higher click-through rates and cost per click. We’re confident about the growth opportunities lying ahead.

R&D expenses were 13.3% of revenue compared to 12.4% in Q1 2019 and 7.9% in Q2 2018 as we continued to invest in talent and our core technological capabilities, which underpin our long-term competitiveness. Other sales and marketing expenses amounted to 5.2% of revenue compared to 3.0% of revenue last quarter and 4.4% of revenue in Q2 2018.

The increase was driven by our increased spending on brand advertising, which we believe would be more value creating from here onwards given that we have reached a meaningful scale. G&A expenses were stable at 3.6% of revenue, in line with history.

Overall, our non-GAAP net loss was RMB496 million, representing a loss ratio of 35.8%, which has increased from a year ago, largely due to our increased investment in our IT infrastructure and the higher user acquisition costs on a per new installation basis. Looking ahead, in terms of guidance, given that Midu has been suspended for new content update and commercial activities since July 15 and will remain suspended for the rest of Q3, we will have very little revenue contribution from Midu this quarter.

We do expect the business to resume regular operation by October 15, so the impact on Q4 should be small. And as discussed earlier during the call, our year-end traffic as well as revenue run rate target for Midu remains unchanged given the strong growth momentum for Midu we have witnessed in Q2 and the better than expected start of Midu Lite so far.

For Q3, based on our view of the market and the operating conditions, which are subject to change, we expect net revenues to be at a similar level as we have achieved in the second quarter. This has taken into account the short-term impact of lost revenues from Midu.

Finally, in terms of balance sheet, we are in a strong position with RMB2.3 billion cash. And we are confident this will support us as we take the business to the next level.

That concludes all our prepared remarks today. Now we are open for questions.

Operator, please proceed.

Thank you management for taking my questions. [Foreign Language] We noticed that DAU was stagnant in 2Q.

Can you elaborate more on our user acquisition strategy on both Qutoutiao and Midu and their DAU change? Due to advertising and content upgrade expansion, Midu DAU and monetization will be under pressure in 3Q.

I understand that you already launched the Lite version to offset some pressures. Can you elaborate more on current progress on how you deal with the Midu app issue?

I'll stop here. Thank you.

Thank you, Zhijing. This is Xiaolu.

So regarding your first question on DAU growth trend, I think we did discuss this a little bit in our last earnings call. We have some pressure in late Q1, in early Q2 in terms of user growth due to irrational competitions in the market and also the overall weakness in ad market.

But we have seen some recovery in terms of user growth starting from the second half of the second quarter, especially in June. And I would say that our user growth has since reaccelerated and that trend has been carried over to Q3.

In terms of QTT and Midu on a stand-alone basis, for Qutoutiao side, I think we have seen some very healthy trends. So far this quarter, DAU on a stand-alone basis increased on average about 10% to 15% as compared to Q2 on a quarter-to-quarter basis.

On the Midu side, I think as we said in our prepared remarks, we have a very strong second quarter, and the early results in the beginning of Q3 is also very good that the peak DAU for Midu has reached over 8 million at the beginning of Q3. However, we did have this suspension for Midu starting from July 15.

So this will be changing for us in Q3. The suspension will last from July 15 to - until October 15.

So the impact mainly felt in Q3. So to your second question regarding the Midu situation, we do have some additional efforts.

First of all, that we continue to expand our content library. We continue to be the number one 1 player in the free online literature market and with a comfortable margin based on our third party data.

And also, with the launch of Midu Lite, we were able to keep our combined user traffic stable for Q3 compared to Q2. Although the monetization have been stopped so the impact on revenue side will be much bigger, assuming that we have no growth for Midu in Q3, it still has at least 8 million DAU.

And assuming CNY 0.30 [ph] to CNY 0.35 [ph] incomes from ARPU, that means we are losing RMB2 million in terms of revenue per day for the entirety of Q3. However, we do have better-than-expected start of the Midu Lite.

So far, the traffic growth has been very strong. So we were able to keep the combined user traffic of Midu and Midu Lite at a stable level compared to Q2.

And also, with the additional royalty program on Midu Lite, the new app attracts a somewhat different user base compared to the original Midu app. And with that logical one [ph] we are able to increase ARPUs as long as the early results have showed.

So we are confident that both apps will do well once Midu resumes normal operation. And our year-end target of combining DAU of 10 million to 15 million for Midu has not changed.

On the monetization side, I think Midu's potential has yet to be fully realized given the low ad load in the first half of this year and also the new opportunity from Midu Lite. So we believe combining the two apps will contribute potentially RMB2 million to RMB3 million per day incomes of revenue in Q4.

Thank you.

Thank you.

Hi, good evening, good morning, management. Thanks for taking my questions.

I have a couple of questions. Number one is just to follow up on the Midu question.

I wanted to understand how sure are you regarding the regulatory headwind that we are seeing could really - got relaxed and resumed by mid-October. And then if we look forward in terms of when we can resume the monetization, how big you think the Midu app revenue grow into in terms of, let's say, percentage of total revenue contribution from Midu that you believe that could reach.

And then the same question just regarding the cost expenses. So we did see some kind of like cost control or the benefit, right, user engagement coming down, but user acquisition and content procurement cost seems to be going up a little bit.

So can you help us understand what will be the expense trend for the second half in terms of, let's say, the content user acquisition and user engagement? So any color on the direction, that will be helpful.

Thank you.

Thank you, Alicia. I think regarding your first question, we are quite confident that we do will resume normal operations by October 15.

We also received the Internet News License recently, so this is the first license issued since early 2017 and the first and only issued in Shanghai. So which means that - I think that our efforts from the very beginning, building our content compliance team and capabilities, has been well recognized by the regulators.

And I think based on our understanding and communications with the regulators, we are quite confident that the impact of Midu in Q4 will be limited. Regarding your second question, in terms of revenue contribution, as I said previously that we do see a very healthy traffic growth of Midu in Q2 and early Q3, and also we have a very strong start of Midu Lite so far this quarter.

So I think in Q4, we do have very high expectations from Midu. And with the current trends, we see that Midu can contribute up to 20% of our total revenue in Q4.

In terms of your third question regarding on cost and expenses, I think that's several things. First is for content cost, I mean given the nature of our business, we believe we will be able to control the content costs at 6% to 7% level as a percentage of revenue on the QTT side, and around 20% on the Midu side, respectively.

As the cash contributors command a large share of users mindshare compared to other content formats, while the tail is long and fat for both newsfeed and online literature, we are confident to keep our content costs at the level in the near future. For user acquisitions, it has been RMB6 to RMB7 per installation level for several quarters, and we don't see any big change for the rest of the year.

In terms of engagement cost, I think this quarter, we were able to further reduce our average user engagement cost to RMB0.13 per DAU on a blended basis compared to CNY0.17 [ph] in Q1 and over CNY0.20 [ph] in the second half last year. The reduction is a result of our improved algorithm for which we have focused our engagement budget on users as a more susceptible to cash stimulation and also effects that we intentionally cut back some of the costs during low season and in the face of original competition in Q1 and Q2.

For Q3 and Q4, we expect our average engagement cost per DAU to increase a little bit due to seasonality and better monetization on the ARPU side but still a bit low compared to the same period last year, and to be around CNY0.15 [ph] per DAU on a blended basis. Thank you.

Okay. Thank you.

Thanks for taking my questions. So I have a couple of questions first.

So can you give some color around your view on the 4Q revenue outlook? And then I remember last quarter, we have our annual guidance for CNY6 billion [ph] to CNY7 billion [ph], and I just wondered if that guidance is still maintained.

And then secondly, things like the engagement ratio, which is DAU to MAU, and then also the conversion from installed user to MAU, if you look at the two metrics, they both came down quite a bit in the same quarter. So I just wonder what drove the trend and then how should we think about the trend to get us stabilized going forward?

Thank you.

Thanks, Zhijing - thanks, Hans. So regarding the revenue outlook and the guidance, I think if you look at our Q3 numbers, as we explained that we have almost very little to zero revenue contribution from Midu this quarter.

So our guidance for this quarter is that we believe - we are expecting Q3 revenues to be on a similar level of brackish compared to Q2 quarter-to-quarter basis. That means Qutoutiao app alone will contribute revenues on a similar level as Qutoutiao and Midu combined in Q2.

So for Q4, I think once Midu resumes normal operation and also as I explained in the previous questions that we believe Midu can contribute as much as to - 20% of our total revenue. We do think that Q4 will be a strong quarter for us in terms of revenue growth.

And regarding the overall annual guidance, I think, so far, average trend is growing as we expected, as we have discussed with the market before. But there is a lot of revenue in Q3 from Midu.

So I think the main difference will be that part. Otherwise, we think we have strong confidence in achieving our other annual goals.

Especially on the traffic side, we are still very confident that we can achieve our goal of year-end DAU of 50 million to 60 million. In terms of your third question regarding engagement ratio, I think we have touched upon that a little bit previously as well.

We have some pressures in the first quarter and the first half of the second quarter due to irrational competition and the overall weakness of the market. However, we did make several efforts in terms of optimizing our user engagement costs, also increase the quality of our content.

And we have seen some very promising early results starting from the second half of Q2, especially starting from June. And as I explained, we have seen a 10% to 15% user traffic growth in Q3 so far compared to Q2, and we believe the trend will continue.

And also, in terms of Midu, despite the suspension, we have a very strong start of Midu Lite. So combined traffic of Midu and Midu Lite stays brackish compared to Midu in Q2.

And I think we can start -- restart the growth of Midu once the normal operations resumes. So overall, I think we are still very confident in terms of achieving our year-end goal of 50 million to 60 million DAUs.

And the pressure we have earlier this year, we don't think it's a long-term thing. Thank you.

Yes. [Foreign Language] So two questions.

One is regarding the retention rate. So what is the current retention rates of two apps combined?

And also what is the target retention rate by the end of this year since the newer app, Midu, is going to come back live? So that - that's going to be really helpful to our retention.

So that's the first question. Second question is related to advertising - advertisers.

So in Q3, what are the newer or growing sector of advertisers? What are the decreasing sector of advertisers?

So what trend do you see in the advertising sector front? That's two questions.

Thank you.

Thank you, Tian. Regarding user retention, as I said earlier, we did see some pressure in the first half of this year as we continue to optimize our user engagement program while placing irrational competitions in market at the same time.

And March and April are the low points for us. For Q1, we've seen a downward trend.

But for Q2, we have ended the quarter on a higher mark. Quarter end DAU exceeded 40 million and the strong momentum continued in Q3.

So - and also, as I said earlier, we see average DAU for the QTT app has increased over 10% so far in Q3 compared to the second quarter. Regarding the user position costs, as I explained earlier that we are trying to keep that cost down at that RMB6 to RMB7 range, and we don't have any plans to increase that budget on a large scale.

So overall, I think we are planning still to continue to increase our content quality, continue to optimize our operations and to offer more social features, video games, live streaming and - et cetera, also all kinds of new content features on the QTT side to increase user engagement and activeness. And so far, we have seen some very strong early results.

And as I said, that our year-end target of 50 million to 60 million DAU has not been changed so, so far, we are quite confident in terms of user traffic growth and the user retention. In terms of your second question regarding the advertisers, so far this year, e-commerce has been quite strong and continue to be the largest segment of our advertisers.

Otherwise, I think most of the segments are more or less the same as previous quarter. And we think that this trend will continue for the rest of the year.

Thank you.

Thank you.

Thank you, everyone. That concludes today's conference call.

Thank you.

Thank you.