Qutoutiao (QTT) Management on Q4 2018 Results - Earnings Call Transcript

About: Qutoutiao Inc. (QTT)
by: SA Transcripts
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Earning Call Audio

Qutoutiao (NASDAQ:QTT) Q4 2018 Earnings Conference Call January 5, 2019 8:00 PM ET

Company Participants

Fionna Chen - Director of Investor Relations

Eric Tan - Co-Founder & Executive Chairman

Jingbo Wang - CFO & Executive Director

Conference Call Participants

Leo Chiang - Deutsche Bank

Alicia Yap - Citigroup

Wendy Huang - Macquarie

Hans Chung - KeyBanc Capital


Hello, ladies and gentlemen. Thank you for standing by for the Fourth Quarter 2018 Earnings Conference Call for Qutoutiao Inc. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded.

I'll now turn the call over to your host, Fionna Chen. Please go ahead, Fionna.

Fionna Chen

Hello, everyone, and welcome to the fourth quarter 2018 earnings conference call of Qutoutiao Inc. The company's financial and operational results were issued via Newswire services earlier today and are 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 Mr. Eric Tan, our Co-Founder and Executive Chairman; and Mr. Jingbo Wang, our Chief Financial Officer.

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 result may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in 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 also note that Qutoutiao's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Qutoutiao's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to my colleague, Sai Chi [ph] who will read the prepared remarks on behalf of Mr. Tan. Please go ahead.

Unidentified Company Representative

Thanks, everyone, for joining the call. I'm very pleased to have our Executive Chairman, Mr. Eric Tan and our CFO, Jingbo Wang here with us. I will first read Eric's remarks on the business.

During the fourth quarter of 2018, we have seen strong growth in all of our key operating and performance measures exceeding our expectations. Average MAU has reached RMB94 million, which has grown 286% year-on-year or 44% quarter-on-quarter.

Our average DAU has reached RMB31 million, which represents an increase of 225% year-on-year or 45% quarter-on-quarter.

More recently, in the first quarter of 2019, we have seen peak MAU close to RMB120 million and peak DAU close to RMB40 million. We have become one of the most important traffic portals for the lower-tier cities market, and we are one of the fast-growing Internet companies in China today.

The first reason we can deliver such growth is because of the unique value proposition of the Qutoutiao app. The Qutoutiao app has 70% of its users based in cities that are tier three and below. They used to rely predominantly on TV for news. Now with Qutoutiao, they could obtain much more timely, personalized and diverse news and information and, as a result, become frequent readers. This is a great example of content consumption upgrade.

Over the past few months, we have increased efforts to promote - in promoting high-quality and original content, distributing content with positive social messages and have gained the recognitions from both users and regulators.

Secondly, we developed an innovative user account system which allows users to read, interact with each other, and participate in tasks, all of which are integrated with our loyalty program. This creates a brand new experience of consuming content in a fun and gamified way.

Last but not least, the social aspect has always been a core feature of the Qutoutiao app. More than half of our users come from earlier user recommendations that's very socially active on the platform by sharing, commenting and liking.

More recently, we have rolled out a new function called also being read by friends which takes advantage of social network to improve the relevancy of recommended content. The unique design and product value has led to great user loyalty. We keep hearing great feedback from users who really enjoy our apps such as Mr. [indiscernible] Beijing and which is just outside West Beijing. He has recommended a total of 15 family members to become Qutoutiao users.

Now Qutoutiao has become an indispensable part of their family life as a place for them to share interesting readings and interact with each other and also, their usual topic during family gatherings.

The second reason we can achieve such growth is the effective execution of our multi-product strategy. Let me tell you a little bit about one of our new products, Midu novels. Some of you might know that online literature in China has traditionally come with subscription fees. The business model is similar to that of console games, which is paid for.

Such a model is geared towards a relatively small group of hard-core fans who are willing to pay and mainly reside in Tier 1 and Tier 2 cities. With the literature market, our observation is that the population with a more leisurely attitude towards reading is many times bigger than the group of hard-core readers. Their desire to read as a past time is just as keen, except their willingness to pay is relatively low.

Considering the typical profile and need of such readers, Midu came up with an innovative free-to-read model, with content and running costs being covered by adverts. Since launch in May 2018 within the first six months, Midu attracted 40 million installed users with a little traffic support on the Qutoutiao app. By the end of December 2018, Midu's DAU reached 5 million which ranked number three in the online literature space, according to Quick [ph] mobile data. Average daily time spent a DAU was industry-leading at 150 minutes.

The success of Midu is not just the result of differentiated model positioning. It is also the direct beneficiary of our highly effective platform capabilities which are composed of three engines, the user growth engine, content recommendation engine and the monetization engine.

In the process of building Qutoutiao, we have set these three core capabilities, which we can leverage across the entire platform to support the development of four new products. We have seen how well it has worked in the case of Midu.

Finally, I would like to discuss our 2019 growth strategies. We are faced with significant growth opportunities. The Qutoutiao app has total installations of about 300 million so far, which still has considerable further penetration potential given a 1 billion population that live in Tier 3 and below cities.

And Midu has just started the journey of offering free literature for all. According to 2018 year-end statistics, our users spend a total of 40 million hours per day on our platforms, which is 1.3% share of the total user time spent on mobile Internet in China. Our goal towards the end of 2019 is to raise this number to 2.5% to 3%.

Our plan to achieve this objective has four key component; Qutoutiao, Midu, new products and monetization. With Qutoutiao, we will focus on building the content ecosystem, enhancing the social features and optimizing the unit economics. We want our content ecosystem to truly connect with the grassroots population to understand and to meet the need of the people.

For example, within the healthcare vertical for which there is wide interest among our users, we have come up with the trusted source plan which would increase traffic allocation to content creators for subject areas like fitness, healthy lifestyle and parenting.

In the local news section, we have rolled out the city planners - the city partners plan to encourage the production of original and localized content. We also keep improving the algorithms behind our content recommendation and aim for technological leadership in the industry by the end of this year. In the meantime, we will collaborate with the paper on content compliance.

To enhance social features, we will encourage users to express their opinions through liking, tipping, commenting, et cetera, to increase both inter-user interactions and the user-wide interactions, which then incentivizes content production and evolution, ultimately leading to higher user stickiness.

A user can tip writers or gift other users with loyalty points. A writer can also show appreciation towards users through sending them loyalty points. This type of activities can help us build a unique interactive community.

To optimize our unit economics, we will keep controlling user engagement costs and encourage users to spend accumulated loyalty points within apps, such as through games. This will increase our return on user acquisition spend and our margins.

The objective for Midu in 2019 is to become the leading online literature app. We will continue to introduce more high quality books, improve the recommendation of films [ph] and start to build a writer ecosystem by starting strong relationships with high-caliber writers for original content. Additionally, we will encourage inter-user and user writer interactions, building a dynamic and active community.

In terms of new product, I would like to stress that innovation is in our genes and is the core driving force behind our growth. Qutoutiao made a successful entry to the newsfeed space by offering an innovative user loyalty program and a gamified user experience.

Midu entered the online literature market with the innovative free-to-read model. In the future, we'll continue to take innovative approaches to break into new markets such as short videos in order to meet diverse user needs and to truly fulfill our mission of bringing some end value to users through content.

Finally, with monetization, the quality of our advertisers has consistently improved since we went public. Going forward, we'll continue to optimize adverse mix, increase the share of video adverts and interactive adverts, offering our advertising clients a more targeted and differentiated online marketing solution. The sites will keep exploring new monetization models such as e-commerce, games, live streaming, et cetera.

This concludes Eric's remarks, and I will now read the prepared remarks from our CFO, Jingbo.

2018 is a milestone year for us. We completed our IPO in September. Our revenue exceeded RMB3 billion, almost six times our revenue in 2017, which was just north of RMB0.5 billion.

In the fourth quarter, we have seen a healthy and improving trend across all the key operating and financial metrics. Our quarterly revenue reached RMB1.3 billion, which was above the high end of our guided range and more than five times our revenue from the same period a year ago.

Our ARPU, which is defined as net revenues per DAU per day, remained healthy at nearly RMB0.47 in the fourth quarter compared with RMB0.5 in Q3 '18 and RMB0.29 in Q4 '17. The slight decrease from Q3 to Q4 was due to the rapid growth of new products such as Midu, which are still at the early stages of monetization.

Now turning to costs and expenses just to remind you, unless otherwise noted, my comments will focus on non-GAAP financial measures, which excludes stock-based compensation.

For the fourth quarter of 2018, our gross margin was 84.8%, generally in line with the same period last year and previous quarter. With expenses, the largest component is sales and marketing, which consists of three elements; user acquisition, user engagement and others.

User engagement expenses, which are the costs of loyalty points given to users in Q4, accounted for 42.5% of revenue compared to 49.2% of revenue in Q3. Our unit user engagement expenses were RMB0.2 per DAU per day compared to RMB0.25 in Q3.

The significant decrease was due to our effective measures and ongoing initiatives to control such expenses from the Qutoutiao app and the absence of such expenses from Midu. We expect engagement expenses per DAU per day to further decline in the first quarter of 2019.

User acquisition expenses, which are the one-off costs for acquiring users, accounted for 56.3% of revenue in Q4, generally in line with 54.5% in Q3. Our user acquisition cost per new installed user was RMB6.57 compared to RMB6.75 in Q3, thanks to the increased efficiency of our user acquisition platform.

R&D expenses increased from 7% of revenue in Q3 to 8.7% of revenue in Q4, mainly due to our continued efforts to enhance content recommendation and a targeted marketing technology.

G&A expenses remained stable at 2.3% of revenue. Non-GAAP net loss was RMB367 million, representing a non-GAAP loss margin of 27.6%, improved from 30.5% in the last quarter, mainly thanks to the effective control of our user engagement expenses.

Also please note that Midu on a stand-alone basis have revenues of roughly RMB100 million and incurred net loss of roughly RMB100 million in Q4. And it is still at a very early stage as it required a lot of investment in user acquisition. If we exclude Midu, our core margin has improved significantly quarter-on-quarter.

Now I'd like to talk about our unit economics. On a per DAU per day basis, our revenue was RMB0.47, user engagement expenses was RMB0.2. The difference between the two is the net spread of RMB0.27, which means that it takes roughly 25 active days to recover the acquisition cost of RMB6.57 per installed user.

Taking into account the user retention rate and the usage frequency, the payback period is 6 to 8 months in reality, which is clearly a good return on investment. This is why we choose to focus our investment on user acquisition, which is essentially a type of growth CapEx. But instead of capitalizing it, we expense it, and this has some near-term impact on the P&L and unmasks the attractive returns to develop the underlying business.

To understand the underlying profitability of this, which will be more observed for at a later and a more mature stage, we can calculate an adjusted margin by excluding user acquisition expenses. Our non-GAAP operating margin, excluding user acquisition expenses increased to 27.3% in Q4 from 22.9% in Q3 and has remained positive in most quarters in the past.

In the long term, as our user base continues to expand, our user acquisition expenses as a percentage of revenues will decline, coupled with our adverts controlled user engagement expenses, this means that our margins will improve significantly.

Before concluding our guidance, I want to talk a little bit about the nature of our loyalty program. The monetary value of the loyalty points given to users is just RMB .2 per DAU, which would be negligible as an incentive for anyone to use our products if they wouldn't be interested otherwise.

The main reason our users have chosen us is the appeal of the content and the fun experience we offer. Our loyalty program is very much like the frequent fliers programs offered by airlines. Nobody takes the flight just for the miles, but the miles enhance customer loyalty.

Finally, turning to guidance. Based on our preliminary estimates of the market, the operating conditions and customer demand, which are all subject to change, we expect our net revenues to be between RMB7.5 billion to RMB8.5 billion for the full year of 2019 compared with RMB3 billion for the full year 2018.

We expect our net revenues in the first quarter of 2019 to be between RMB1.10 billion to RMB 112 billion. This represents a year-over-year growth rate of 365% to 374%. Sequentially, it's lower than net revenues in the fourth quarter of 2018, mainly due to seasonality. We expect the strong year-on-year growth momentum to continue for the full year of 2019.

Thanks very much for your attention, and we'd like to open up to questions. Operator, please proceed.

Question-and-Answer Session


Thank you [Operator Instructions] Our first question comes from Zesheng Lu [ph] from UBS. Please go ahead.

Unidentified Analyst

Hi, everybody. Thank you very much. [Foreign Language] I'll translate to English. What is the unit economy for the new Midu app, and what is our plan for Midu regarding investments in user acquisition and retention cost? And second question is, does slowdown of advertising market pose any threat to Qutoutiao's revenue growth in first half? Thank you.

Jingbo Wang

Thank you, Zesheng. I'll take your first question and Eric will answer your second question. So on Midu, I want to, first of all, clarify that Midu unlike Qutoutiao has no engagement cost for the users, so the users enjoy free-to-read novels. In addition to that, they don't receive any loyalty points as they do on Qutoutiao. So we think that is pretty simple.

The acquisition cost is similar to that of Qutoutiao. So for the full quarter, it's about RMB6.5 each, and the ARPU is still ramping up given its short history. But we expect it will catch up with the ARPU of Qutoutiao very quickly. And the payback period or the ROI on CAC [ph] on user acquisition is also similar to Qutoutiao. That's between 6 to 9 months payback period.

Regarding 2019, we do plan to grow Midu substantially, and our target as Eric said in his remarks is to become a leader in the market. So we will invest heavily on user acquisition. And our target for the year end is to reach DAU between RMB15 million to RMB20 million. And in the longer term, given that Midu has no user engagement cost, we do believe that the long-term margin profile will be significantly higher than Qutoutiao.

Eric Tan

[Foreign Language] Okay. So just to add a little bit on your first question. So our official target for Midu year-end DAU is RMB20 million. But as we - but that is based on the assumption of the current retention rate, user retention rate. As we add more content to the platform and as we build out our own IT ecosystem, we believe the retention rate should improve. And in that case, our target is certainly to beat that RMB20 million year-end number. That's the internal target.

And on the second question, I will translate Mr. Tan's answer. So yes, we do see some macro headwind in 2019 advertising market, especially on the brand advertisers side. In particular, the consumer brands especially foreign brands are more affected.

However, brand advertisers only account for about 5% of the total advertising revenue. So we are less affected on that front. The vast majority of our advertisers are performance advertisers. When the economy is under challenge, they actually need to sell more, so they have more sales budget to spend so we think their situation is slightly different.

On the macro side, we, as we said, we see some challenges for the full year. But recently, we have also seen some improving signs, for example, subscriber environment and the capital markets, including - and also consumer spending in China.

So for us, we only account for about 1% of total advertising market in China, and we are growing very rapidly. So we believe that we are relatively insulated from the top down factors. Our aim is to maintain at least stable advertising pricing compared to 2018 in this year.

In the meantime, we plan to diversify our revenues into areas such as paid subscription, live streaming, games and e-commerce, creating a more balanced revenue mix and enhancing the overall ARPU.

Unidentified Analyst

Okay. Thank you very much.


Our next question comes from Leo Chiang from Deutsche Bank. Please go ahead.

Leo Chiang

[Foreign Language] Now I'll translate myself. So thank you management for taking my question. And congratulations on the solid 4Q result. I have two questions. My first question is we are seeing the unit cost per new user acquisition decline quarter-over-quarter. What's the reason behind this, and how should we think of the trend of 2019? My second question is as we lower the user rewards, do we see vast user engagement and user retention rate? Thank you.

Eric Tan

[Foreign Language] Okay. I will translate Eric's answer for the first question first. So yes, our user acquisition cost decreased slightly in Q4 compared to Q3, and that's mainly due to improved platform capabilities, what we call the user growth engine. So when we acquire users, it's really a very technical and system-based approach.

We have - it's continually dated and wasn't proven. And we - is a very powerful platform to monitor the entire traffic flow on the market and to generate realtime feedback, realtime pricing adjustment and to analyze the quality matching in realtime, and all the promotion material or the landing pages also adjusted accordingly. So here are the technical improvements has caused - had led to better efficiency in the acquisition and hence, reducing the cost.

Looking forward, we're seeing - we will continue to acquire users, mainly through three channels. The first one is the so-called borrow channel, user referral system we established on Qutoutiao and we'll continue to rely on that. But in addition, we will continue to improve the acquisition platform. And also because our business is based on content, as we continuously improve our content offerings, that will attract organic users that is users we don't need to pay for. So obviously, the borrower channel, subscriber acquisition and content-based user acquisition will continue to drive our user growth in 2019.

Your second question I will answer directly. So far, we have seen pretty positive data on controlling the user engagement expenses. If you compare Q3 - Q4 versus Q3, overall have reduced unit user engagement expense by 20% and on Qutoutiao alone, it's more than 10%. And so far, we haven't seen any significant impact on user retention or user engagement, and that is Q4.

Moving into Q1, we are actually seeing further decline in terms of user engagement expense and also, without any impact on user retention and engagement. The reason why we have - we are able to achieve this is that the loyalty points play a relatively important role when the user first come onto the platform and as they form the daily habit of using our app. Once that habit is formed, actually, they're not too sensitive to changes in monetary value or the loyalty points they receive because, after all, the amount is really minimal. It doesn't make a real financial difference to the users. And we can - we also change user rewards in a very careful way so that users do not feel the rules change every day.

[Foreign Language] And also, as we continue to improve our content, users are more and more attracted by the content and become less reliant on the loyalty points. [Foreign Language]


Our next question comes from Alicia Yap from Citigroup. Please go ahead.

Alicia Yap

Thank you. Good morning, Tan. Jingbo, thanks for taking my questions and also congrats on the strong result. I have a couple of questions. One is that if you could elaborate a little bit in terms of your user acquisition spend, how much of that is using for acquiring new user for Qutoutiao app versus how much you're spending for the Midu app?

And given your comments about investing into potentially, like short videos and all that, so how should we think about the investment spend on both the R&D, as well as the marketing spend for 2019 as related to new initiatives?

And then lastly, I have some question, wanted to clarify on your reported new installed user metric that you disclosed, the RMB130 million. Is that also includes the user from Midu app as well?

And then, currently related to this ARPU per user, I think management prepared remarks mentioned that the ARPU per DAU per day declined sequentially, mainly due to the Midu app is early stage of monetization.

I just wonder if we're excluding Midu, how is the ARPU per day per DAU on the Qutoutiao app given your time spent actually is improving from the 56 minutes to 63 minutes. Also, want to clarify is that 63 minutes also including the Midu app time spend? Thank you.

Jingbo Wang

Thank you, Alicia. So on the first question, the CAC [ph] spending mix between Qutoutiao and Midu, okay, let me put it this way. In Q4, we acquired in total about 110 million users, and that is about 80, 20 mix between Qutoutiao and Midu. And the unit acquisition cost is similar. So that's basically the spending mix between the two apps.

And I'll answer the third question first, and then Eric will answer the second question. So the ARPU decline. Yes, as we explained in the prepared remarks, if we exclude Midu, the ARPU for Qutoutiao in Q4 was also RMB0.50. That's exactly almost the same as the ARPU in Q3.

And on the time spent. Yes, the 63 minutes time spent, that's the overall time spent, so the average between Midu and Qutoutiao. So if we exclude Midu, Qutoutiao time spent was stable at around 55 minutes.

[Foreign Language] Anyway, it depends on [Foreign Language] So on your second question. Yes, we are investing very heavily on the R&D front, including both the total recommendation technology and also for new products such as short video product.

However - so the absolute amount for R&D will increase for sure. But as a percentage of revenue, because our revenue is also growing very rapidly, we are not seeing R&D expenses as a percentage of revenue will increase. And actually, it may slightly decrease in 2019.

On the short video side, it is hard to give an estimate budget on the marketing side because it really depends on how popular or what kind of traction it receives with users. In case it has a very strong traction with users such as - TikTok [ph] we will definitely spending - we'll be definitely spending much more on the marketing side. So that is - it really depends on the product.

And coming back to the third question on ARPU. So although the ARPU for Qutoutiao remained stable at RMB0.50 from Q4 - from Q3 to Q4, actually, there are two competing factors.

On the technical side, number of advertisers, the algorithm, the effect of the algorithm, marketing engine, that's all improving. But on the regulation side and also on the internal quality control side, we are now much more strict in terms of the quality of advertisers and also the quality of the promotional materials. So that kind of balances out the improvements on the technical side and resulted in a stable ARPU.

Alicia Yap

Can I have a very quick follow-up on a couple of things? One is that on your short video app, what is the status right now? Is that like close to done, close to be launching out? Any color on the status? And then also on profitability timing as a group, how - when should we expect we should see the breakevens? Thank you.

Eric Tan

[Foreign Language]

Jingbo Wang

[Foreign Language]

Eric Tan

[Foreign Language]

Jingbo Wang

So on the short video app, it's currently already released, currently being tested with users and also being promoted on smaller - at a smaller scale right now. All the data and the user retention rate, user engagement is very promising, and we expect to promote that app to a wider audience in Q2 this year.

And on profitability, as we discussed on this call, we are now executing a multi-product strategy, so - and also as we discussed, the marketing spending for each product is uncertain. It depends on the product. So it's hard to tell exactly the breakeven point for the entire group.

But for each separate product, for example, Qutoutiao, the main app, we do expect that app on a stand-alone basis will break even in Q4 this year. But for all the new apps, including Midu, before we promote them, before we acquire users on a large scale, we'll make sure the ROI on the CAC makes sense, the unit economics is healthy and we make sure that it will be profitable as it goes up

Eric Tan

[Foreign Language]

Jingbo Wang

Yes. So for the whole group, the profitability is really just a matter of timing.

Eric Tan

[Foreign Language]

Jingbo Wang

[Foreign Language]

Eric Tan

[Foreign Language]

Jingbo Wang

Also to add on the - also, to make some comments on the overall marketing side. So according to CNNIC [ph] data, the entire Chinese mobile Internet has a daily user time spent of about 3.2 billion hours. And right now, we have a 1.3% share out of that total time spent. That's a relatively low number, and we do target to reach 2.5% to 3% by year-end and hopefully, beating that target.

So we do see a lot of room for growth, and that's why at this stage, we do want to maintain this kind of high growth and gain larger market share instead of looking to break even at the whole company level very soon.


Our next question comes from Wendy Huang from Macquarie. Please go ahead.

Wendy Huang

Thanks for taking my question. [Foreign Language] I will translate myself. First question is more about the competitive landscape in the online literature market. So since you actually launched the Midu, we see a lot of copycats in the markets. Some of the traditional online platform sales also launched similar model and also some of the Internet companies with big traffic sales are actually following your steps as well.

So how can you keep your leadership here? Especially given some of the traditional literature platform, they have advantages on the copyright and content side. So how will you actually acquire the content, and what's your budget for the literature content cost?

And secondly, is a minor question on your Q1 revenue guidance. It seems 7% below the consensus. So can you help out - help us understand where do you think - where you think actually the shortfall is? Thank you.

Eric Tan

[Foreign Language]

Jingbo Wang

Okay. On the first question. So I think people do get the impression that the free-to-read model literature is kind of easy to copy or easy to replicate. But I will say if that's really the case, Midu wouldn't be the first one to do it. Everybody else would have already done it a long time ago.

So actually, to make the free model work, you have to make sure this acquisition, user retention and monetization have to be very efficient to make sure unit economics makes sense. This is very challenging thing to do.

As we explained before, we have built these core capabilities, so I experienced with Qutoutiao. And now these three engines allowed us to quickly acquire a large number of users at relatively low cost, and to ensure that our user retention rate, given the precise content recommendation is higher than our competitors. And also monetization is generally better ARPU compared to most competitors. So that's really the difficult part. And therefore, we don't think it is that easy to replicate.

On the content side, first of all, we don't think we are at a huge disadvantage at the moment. I think the only platform that we do not receive content at the moment is China literature. Pretty much every other content platform in China are already supplying novels to us, because for them, the licensing fees they can generate from - they can get - receive from us, thanks to our large user base is significant. So we don't think we're now at a huge disadvantage.

Looking forward, because we have a large user base, we are able to give authors large revenue share in absolute amount. So please be mindful that the authors, they don't really care about the revenue share percentage. What they care about is the amount. Therefore, there's strong economy of scale. When we have large user base, we'll be able to offer them a larger overall revenue share.

And in addition, we'll start building our own writer ecosystem. We are already the largest in the free-to-read model. With a large user base, it is not very hard to attract writers, and we will also build a user community and to promote direction between users and authors, therefore creating an active community. And that is a network that is difficult to replicate.

On the second question on guidance. We do think the sequentially lower revenue in Q1 is purely due to seasonality. If we look at our revenue in 2018, our revenue in Q2 2018 is more than double of revenue in Q1. And for the full year, Q1 2018 only accounts for about 80% of full year revenue.

So in China, Q1 is traditionally a low season for advertising, especially for e-commerce-related advertisers given the China New Year holiday. And we - and e-commerce is actually our largest vertical for advertisers. Now coming out of this Chinese New Year holiday, in March, we already see ARPU picking up very quickly, so we do think ARPU and revenue will normalize in Q2.


Our next question comes from Hans Chung from KeyBanc Capital. Please go ahead.

Hans Chung

Hi. Good morning, Eric and Jingbo and rest of the team. Congratulation on a strong result. So I have a question about the content ecosystem. So it seems like you're continuing to invest here. And then as we see the content cost as a percentage of revenue in fourth quarter is roughly flattish.

But I mean, we have the Midu in the quarter, assuming Midu has higher content cost ratio and then imply the QTT, the news feed app the content cost ratio is probably lower.

So I guess, probably because of the higher revenue scale. But going forward, how should we think about the coming quarters, I mean, in terms of the percentage of revenue going forward? Should we think about higher revenue - higher percentage level from here or should we see the some - the scale benefit given we have higher revenue growth?

Jingbo Wang

[Foreign Language]

Eric Tan

[Foreign Language]

Jingbo Wang

So I think different content types have different cost structures for the content. It really depends on how concentrated the top producers or top content is. For example, in long-form video, the top content is really super concentrated. One, K drama show can generate say, 50% of the entire traffic of the platform. But in literature, that concentration is much lower, and it's even lower in the news feed business.

As we all know, there are millions of freelancers in China writing news articles, short video, short content. So their concentration is super low. And that's why you'll see a very low content cost on the news feed side. And it's slightly higher but still much lower than long video on the novel side.

So that being said, we do think that in the mid-term given our effort to improve the content quality and build our content ecosystem on the literature side, we do think that percentage will increase. It will not be more than 10% of revenue. And in the longer term, we actually think that percentage might slightly decrease from the peak of 10%.

Eric Tan

[Foreign Language]

Jingbo Wang

Also, on a separate note...

Eric Tan

[Foreign Language]

Jingbo Wang

We are doing some risk assurance, AI-assisted content production for literature and also potentially for comics. So there, we are not asking the robot to create the content themselves but rather to help the creator to do their work more efficiently to take over some of the tedious work. And there, if that materialized, that will further reduce the content production cost, and that will have a long-term margin benefit.


Thank you. That is all the time we have left for questions today. I will turn the call back to the company for closing remarks.

Fionna Chen

Thank you, everyone, again for joining us today. If you have any further question, please feel free to contact Qutoutiao's Investor Relations through the contact information provided on our website or the TPG Investor Relations. Thank you.


Thank you. This concludes the conference call. You may now disconnect your lines. Thank you.