Qutoutiao Inc (NASDAQ:QTT) Q3 2019 Earnings Conference Call - Final Transcript
Dec 03, 2019 • 08:00 am ET
Certainly sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question coming from the line of Zhijing Liu from UBS. Please go ahead.
Let me translate myself. Thank you, management for taking my question. I have two questions. The first one is, we see COGS in 3Q had a surge of over 200%. The official explanation is QTT have a newly integrated and customized marketing solution services. Can you introduce this new business and the reason for integration. The second one is, how do you look at a competition of free-reading market or competitors like SINA [Phonetic] and [Indecipherable] had a quite good momentum as Midu, and just to have a new round of financing, will you guys maintain your marketing and user acquisition at a high level? Thank you.
Hi. Thank you Zhijing. This is Xiaolu. Regarding our first question in terms of gross margin, I think it's a combination of several factors, especially if you look at the year-over-year numbers. The number one factor is, obviously the loss of revenue from Midu. This loss of revenue has skewed our margin across line in Q3. The second reason is the content costs on the Midu side, as you know, there are certain upfront payments for working with content providers like iReader, we make our investment decisions based on the normal cost of our business and the suspension of Midu, came as a surprise to us, but we choose to not interrupt the normal operation of our business, given the lack of time for preparation and notice. So we continue the content expenditures in Q3.
The third reason is additional costs associated with content compliance. This is something that we have putting a lot of efforts, so far this year. But I think this part of cost should be stable going forward. The fourth reason is that, as you mentioned there is a small amount of our revenue in Q3 have a lower gross margin, this is -- then this that we start to provide to our third-party partners for general advertising platform services. This is still a small part and we don't think this will be a big part of our revenue going forward. The fifth reason is the change of user preference, especially in the content format side, now more videos are being viewed every day by our users. The majority, over 50% of our advertising are delivered through video, which means that it requires a more infrastructure build up such as servers and bandwidth and also different AI computing resources.
So I think the decrease in gross margin this quarter is a combination of several factors, as I just explained. And the biggest problem here is there is a loss of revenue from Midu in Q3. So we believe that our gross margin will be back to over 70% in Q4 and beyond, as the impact of the Midu suspension is smaller in Q4 compared to Q3.