Qutoutiao Inc. (“Qutoutiao”, the “Company” or “We”) (NASDAQ: QTT),
a leading operator of mobile content platforms in China, today
responded to the false and misleading statements made by a report
(“the Report”) published by Wolfpack Research on December 10, 2019.
The statements in the Report are based on
numerous factual errors and an overall misunderstanding of the
Company’s business. The Report arrived at false conclusions after
misquoting by a wide margin our publically disclosed financial
figures and making a series of unsubstantiated claims some of which
can easily be proven to be fabrications.
The Company is committed to the highest
standards of conduct. Our consolidated financial statements are
prepared in accordance with U.S. GAAP and in compliance with the
rules and regulations of the SEC. To protect the interests of its
shareholders, the Company hereby responds to each of the Report’s
key errors below.
1. Allegation that the
Vast Majority of Qutoutiao’s Revenue and Cash Are
Non-existent.
The Report’s claim that our revenues are
fake is due to a lack of understanding of our business and
accounting standards.
1) Dianguan plays a
vital role in Qutoutiao's business
Dianguan creates value for Qutoutiao through its
cooperations with our other subsidiaries that operate our various
applications. Take Shanghai Jifen, which primarily engages in the
operation of our Qutoutiao mobile application, as an example. In
this cooperative relationship, Dianguan serves both as an agent and
an in-house advertising platform for Jifen.
As an agent, Dianguan serves as the Jifen’s
sales agent in selling Jifen’s advertising solutions to second-tier
advertising agents, the end advertisers are the customers of Jifen
as they specifically select Qutoutiao to display its advertisement
and the performance obligation of Jifen is to provide the
underlying advertising display services. Dianguan collects advances
from end customers, usually through second-tier agents. Advances
are recognized as revenues when advertisement displays and/or
clicks are delivered on Qutoutiao.
As an in-house advertising platform, Dianguan
leverages its technology to provide a bidding system for placing
advertisements on Qutoutiao.
The differences between the SAIC report and the
credit report for Dianguan are mainly attributable to different
presentation methods. In the SAIC report, we presented revenues and
costs on a net basis, while in the credit report we were suggested
to present on a gross basis. The net profit and net asset (total
equity) in the two presentations had no material differences with
each other.
The consolidated financial statements for
Qutoutiao are prepared in accordance with US GAAP. Dianguan and
Jifen are both wholly owned subsidiaries of Qutoutiao and any
internal transactions between the two are fully eliminated upon
consolidation. It is incorrect to simply sum up the accounts of
subsidiaries on a standalone basis and draw comparisons with the
consolidated statements.
2) The Report’s claim
that our cash balance is fake is groundless
As of September 30, 2019, the Company had cash,
cash equivalents and short-term investments of RMB2,120.1 million,
including cash and cash equivalents of RMB525.4 million, and
short-term investments of RMB1,594.7 million, the detailed
breakdown of which is as follows:
Bank |
Details |
Amount in RMB |
% of Total |
Bank A |
Time deposit (over three
months) |
353,645,000.0 |
22.2 |
% |
Bank B |
Time deposit (over three
months) |
855,184,339.0 |
53.6 |
% |
Bank C |
Time deposit (over three
months) |
57,997,780.0 |
3.6 |
% |
Bank D |
Wealth management
products |
326,710,000.0 |
20.5 |
% |
Bank E |
Wealth management
products |
1,122,345.6 |
0.1 |
% |
Total |
|
1,594,659,464.6 |
100.0 |
% |
As of September 30, 2019, 79.4% of the Company’s
short-term investments were time deposits over three months and the
remaining 20.6% were wealth management products (“WMPs”). WMPs are
essentially RMB-denominated savings products with interest rates
ranging from 2.4% to 2.9%1 per annum and maturity period within 1
year or on revolving terms. The WMPs we invested in are offered by
large state-owned and reputable financial institutions in the PRC,
and the underlying investments of these WMPs are predominantly low
risk fixed income products and money market instruments. WMPs are
legitimate liquid investments in China and are widely used by
mainstream companies for cash management. There were instances of
fraud in the past involving WMPs of other companies, but that is no
reason to question the credibility of all WMPs without any real
basis.
2. Allegation that Qutoutiao Removed the
Gatekeeper with Dianguan Acquisition
1) Our
rationale to acquire
Dianguan
When Qutoutiao first commenced on its business,
due to our limited operating history and human resources, we
collaborated with various third-party advertising platforms to
efficiently and rapidly fill advertisement space on our mobile
applications. Thus, we historically generated a significant portion
of our net revenues from a limited number of third-party
advertising platforms, for example, Baidu used to be our largest
customer, it contributed 69.9% and 43.7% of our net revenues in
2016 and 2017, respectively. However, such concentration risk may
cause significant fluctuations of our operational results in that
any adverse change in our relationship with these advertising
platforms, including our arrangements with them, or a decrease in
the amount or quality of the advertisements placed by these
platforms on our mobile applications may materially and adversely
affect our results of operations.
As our business grew rapidly and substantially,
it made perfect sense to start building our own distribution
capabilities, i.e., an in-house advertising platform. The benefit
of owning an in-house advertising platform is not only enhanced
monetization efficiency as we can improve advertising technology
for better matching of supply and demand which results in higher
average revenue per user (“ARPU”), it also allows our business to
become independent and obtain long-term viability.
This was why in February 2018 we made the
decision to acquire Dianguan which then became our in-house
advertising platform. At the time of this acquisition, Dianguan had
built up a good technical base as it owned several intellectual
properties, which were valuable assets for us to further develop
our proprietary advertising platform related technology. The
acquisition decision was made after thorough due diligence, the
purchase consideration of RMB15 million was supported by a
valuation report. This acquisition enabled our in-house advertising
platform to grow from zero to one, and also ensured the rapid
growth of our advertising business. Post-acquisition, Dianguan was
fully integrated with our internal resources including other
subsidiaries, which, after continuous investments, developed into
our proprietary programmatic advertising system. Dianguan has
become more technologically advanced since the completion of the
acquisition, and it has been leveraging its advantages in
technology and algorithm to act as an agent for other media
platforms in China, which has enriched our revenue mix. The fact
that the bulk of our revenues are now generated by Dianguan with
ARPU at reasonable levels is evidence that we have made a
successful acquisition.
Therefore, the reduction of Baidu’s revenue
share and the increase of Dianguan’s revenue share has nothing to
do with ‘removing a gatekeeper’. It is a natural transition and a
very positive and healthy development for a young business as it
successfully grew and secured a position in a highly competitive
industry.
2) The Report claims
that Dianguan has no actual operations
Dianguan’s programmatic advertising system
operates on the basis of automatic bidding whereby advertising
customers can bid for the specific advertisement inventories
created by applications operated by Qutoutiao. The system considers
a wide range of parameters to determine the timing, the location
and the frequency of exposure for each advertisement, including
price bid, predicted click-through rate and content relevance,
etc., with the objective of delivering advertisements to their most
receptive and interested audience and consequently maximize our
revenues.
Below is a snapshot of Dianguan’s company
website:
https://www.globenewswire.com/NewsRoom/AttachmentNg/b4cc958c-ba40-4db0-a6ec-4908ce878d82
Below is a snapshot of Dianguan’s ICP
license:
https://www.globenewswire.com/NewsRoom/AttachmentNg/9095cbab-3196-4077-9f89-4ff25d78ca78
Below is a snapshot of Dianguan’s copyright
certificates for its self-service platform:
https://www.globenewswire.com/NewsRoom/AttachmentNg/222bc7b7-fba8-4bb5-8514-bb469917a4ea
The Report has falsely concluded that Dianguan
has no actual operations just because they “found no Dianguan staff
standing by and ready to take orders”, which is an unfortunate
result of not understanding that Dianguan mainly operates its
business through second-tier advertising agents. Second-tier
advertising agents can often represent customers in bidding on
advertising platforms, it is therefore perfectly normal for
customers to find that their second-tier agents can place
advertisements on their behalf without themselves having to
interact with Dianguan directly. The Report also quotes two
advertising agents who claimed to be “core” advertising agents for
QTT - the truth is, Hunan Jie Jisuan Computer Tech
Company (湖南皆计算网络科技有限公司) is one of QTT’s agents with
year-to-date transactions amounting to only RMB0.4 million; as for
Shanghai Jusou Info Tech Co.(上海聚搜信息技术有限公司), we do not have any
direct business relationships with that particular advertising
agent per our internal check.
3. Allegation that Nearly 50% of
Qutoutiao’s Advertisments Come from Undisclosed Related Parties, or
Qutoutiao Itself
1) The claim is invalid as the Report
relies on inadequate sample size that lacks statistical
significance
The total number of advertisements placed on
Qutoutiao’s platform per day exceeds 2,000,000,000. Therefore,
analyzing 50,0002 advertisements (i.e., only 0.0025% of total)
concentrated in a very confined period (i.e., four hours on
September 12, 2019) on Qutoutiao’s platform would lead to skewed
results, especially considering that behind the very limited sample
size is a very limited number of test phones that are not capable
of replicating the diverse behaviours exhibited by our 42 million
daily active users.
As our programmatic advertising system considers
a wide range of parameters to determine which advertisement to
display, including price bid, predicted click-through rate and
content relevance, any results generated by a miniscule sample
through a tiny group of fake users (i.e., test phones) could
inevitably be skewed. That is to say, as the test phones probably
have some identical or similar characteristics, when these test
phones frequently send requests to our advertising system in a
short period of time, it could respond to these “fake requests” by
recommending similar contents, so that the advertisements received
by these fake users are concentrated in a specific type, which
cannot represent the actual overall situation.
2) The Report
claims that our related party transactions are not fully
disclosed
Qutoutiao follows three important steps to
present and disclose related party transactions:
- “Identify” - Our financial reporting team maintains and
regularly updates a full list of affiliate companies to facilitate
our identification of related party transaction.
- “Report and approve” - The Audit Committee of the board of
Qutoutiao is now composed of independent directors only. Qutoutiao
abides by all relevant U.S. securities laws and regulations and
NASDAQ listing rules in reporting potential related party
transactions to the Audit Committee and obtaining its approvals
before entering into such transactions.
- “Disclose” - Qutoutiao has fully disclosed its material
related party transactions in its previous filings with the SEC.
For related party transactions that occurred between 2016 and 2018,
including those with companies controlled by or affiliated with Mr.
Tan and those with other related parties, we have disclosed such
transactions appropriately on page 111 and page F-45 of our annual
report on Form 20-F for the fiscal year ended December 31, 2018 and
on page 167 and page F-82 of our prospectus dated on September 14,
2018.
For related party transactions that occurred in
the six months ended June 30, 2019, including those with companies
controlled by Mr. Tan, we have disclosed such transaction
appropriately on page F-41 of Exhibit 99.1 on Form 6-K dated on
November 19, 2019.
The Report lists some of our related parties on
page 18 and calls them “undisclosed without any reasonable grounds.
We have summarized all of our material related party transactions
occurred in 2018 and in the six months ended June 30, 2019 in the
table below which is extracted from our SEC filings as mentioned
above:
In RMB |
Twelve
months ended |
Six months
ended |
December 31,
2018 |
June 30,
2019 |
Amount |
% of Total |
Amount |
% of Total |
Service provided by Qutoutiao Inc. |
|
|
|
|
Agent and platform services provided to a
related party |
|
|
|
|
-Related party in which Mr. Tan was a key
management |
29,597,143 |
0.98 |
% |
- |
- |
|
Advertising and marketing services provided to
related parties |
|
|
|
|
-Related parties under common control of Mr. Tan |
- |
- |
|
144,462,450 |
5.77 |
% |
-Related party in which Mr. Tan was a key
management |
4,450,962 |
0.15 |
% |
- |
- |
|
-Other related party |
12,996,513 |
0.43 |
% |
- |
- |
|
Subtotal |
47,044,618 |
1.56 |
% |
144,462,450 |
5.77 |
% |
Net revenues |
3,022,145,785 |
100.00 |
% |
2,504,796,664 |
100.00 |
% |
|
|
|
|
|
Service received by Qutoutiao Inc. |
|
|
|
|
Advertisement costs charged from a related
party |
|
|
|
|
-Related party under common control of Mr. Tan |
- |
- |
|
14,758,169 |
0.39 |
% |
Advertising service fee charged from related
parties |
|
|
|
|
-Related party under common control of Mr. Tan |
- |
- |
|
669,123 |
0.02 |
% |
-Other related party |
15,815,201 |
0.32 |
% |
- |
- |
|
Cloud server and other services fee charged from
a related party |
|
|
|
|
-Other related party |
13,875,839 |
0.28 |
% |
- |
- |
|
Subtotal |
29,691,040 |
0.59 |
% |
15,427,292 |
0.41 |
% |
Total cost and operating expenses
incurred |
5,004,483,861 |
100.00 |
% |
3,783,609,857 |
100.00 |
% |
All of our transactions with related parties
during these periods were executed at a market rate comparable with
those we make with independent third parties. The Report also
mentioned transactions with two of our affiliates, “Shanghai
Tujin3” and “Shanghai Fangce” as “undisclosed” - the fact is that
we have identified them as companies under common control of Mr.
Tan, the transactions with companies under common control of Mr.
Tan that occurred in 2018 and in the six months ended June 30, 2019
had been approved by the Audit Committee and appropriately
disclosed in our filings with the SEC, as we have detailed the
locations of these disclosures above.
3) The Report
claims that Mr. Tan’s other companies share offices, management and
resources with Qutoutiao Inc.
We share the same ‘OFFICE COMPLEX’ (i.e.,
Xingchuang) with some of our related party companies as well as
numerous other technology-focused companies we never cross path
with or know of, but in no case do we share the same ‘OFFICE’ with
any company which is what we have been wrongly accused of doing.
Therefore our related party companies and we are operationally
separate, in the sense that every company has its own set of team
who is solely responsible for the running of its business.
As of December 31, 2018, Qutoutiao had signed
several contracts to lease 6,303 square meters at Xinchuang,
accommodating 887 staff members, on average 7.11 square meters for
each staff member.
As of September 30, 2019, Qutoutiao had signed
several contracts to lease 10,818 square meters at Xingchuang,
accommodating 1,497 staff members, on average 7.23 square meters
for each staff member.
We had 1,865 and 3,036 full-time employees plus
interns as of December 31, 2018 and September 30, 2019,
respectively, below is a breakdown by location. Our Shanghai office
employed 887 and 1,497 staff members as of these two dates.
Location |
As of December 31, 2018 |
As of September 30, 2019 |
Shanghai |
887 |
1,497 |
Beijing |
332 |
571 |
Wuhu |
626 |
733 |
Others |
20 |
235 |
Total |
1,865 |
3,036 |
4. The Report Claims
that Qutoutiao’s Applications is a Malware Nightmare
We have strict and comprehensive user privacy
policies that are fully in compliance with laws and regulations in
China. All users reserve the right to grant or decline our access
to their personal data and information. Any access granted to us
will be subject to the terms of the privacy agreement that users
have agreed to. We have no access and we do not request access to
user information beyond the scope and purpose of delivering our
products and services and optimizing in-application user
experiences. We are neither capable of nor having a reason for
operating users’ mobile phone functions without users’ knowledge as
the author imagined. While denying us access would lead to less
than optimal user experiences, it does not affect or prohibit users
from running our applications within their normal functional
capacities.
5. The Report Claims
that Qutoutiao’s Loyalty Program Creates Fake Ad Traffic and User
Growth
The author’s allegations regarding our loyalty
program are the unfortunate result of not understanding our
business. The author does not at the least take due care to quote
the correct financial figures, as the author claims that “as of Q2
2019, trailing twelve-month loyalty program expenses totaled $701.8
million, or 100.2% of its SEC reported revenue”, while our reported
figures were RMB 2,074 million (or approximately USD 300 million),
or 43% of SEC reported revenue. Our loyalty programme works in
exactly the same way as any other loyalty programmes offered by any
businesses such as airlines, hotels, restaurants, etc., all for the
purpose of showing appreciation towards loyal users. It is a paltry
amount in monetary terms which currently stands at RMB0.14
(consistently reduced from the peak of RMB0.25 in the third quarter
of 2018) per active user per active day which corresponds to 61
minutes’ time spent. Nobody would spend 61 minutes to merely earn
RMB0.14 unless she/he finds the content relevant and engaging, in
the same way as nobody would take a flight solely for the purpose
of earning miles unless she/he does need to travel to a particular
destination. Therefore, there does not exist “fake user growth” or
“fake ad traffic” as the author erroneously presumes.
6. The Report Claims
that Mr. Tan’s Personal Expenditures and Investments Have Been
Enabled by Cashing out at Qutoutiao
Mr. Tan has not sold a single share of Qutoutiao
during the IPO or after the IPO, and has taken on the CEO role to
drive the business forward. All the shares owned by Mr. Tan are
founder’s shares, and Mr. Tan has not earned any share rewards for
his role as the CEO or Chairman of the Company. Mr Tan has not
pledged any of his shares to obtain cash advances either. This
clearly demonstrates Mr. Tan’s long-term commitment to shareholders
to build Qutoutiao into a world-class internet company. Mr. Tan’s
personal property purchases are his private affairs, and not a
matter of concern for the Company.
7. The Report Has Been
Inconsistent and Dishonest in Referencing the Lawsuits Qutoutiao
Has Handled.
The Report claimed that Shanghai Jifen had 67
lawsuits on page 23, while its Appendix A listed 69 lawsuits, which
contained 18 duplicates. Among the 51 unique cases remaining:
- 49 cases were related to content infringement disputes that
occurred during our normal business operations, with liabilities
capped at RMB50,000 for each case, of which 45 cases have been
withdrawn by plaintiffs; for the outstanding four cases, we intend
to argue for the Safe Harbor Principle that is universally
applicable in both China and US in internet Intellectual Property
area for liability exemption with maximum potential liabilities
estimated to be RMB 0.16 million;
- one case relating to advertisement contract dispute was
terminated in 2019 and the court ruled in Qutoutiao’s favor;
- One case was settled in 2018.
At the time of this response, the pending
litigation shall not have material impact on our daily normal
business operations and we do not record any contingent liabilities
relating to these pending
litigation. About
Qutoutiao Inc.
Qutoutiao Inc. operates innovative and
fast-growing mobile content platforms in China with a mission to
bring fun and value to its users. The eponymous flagship mobile
application, Qutoutiao, meaning “fun headlines” in Chinese, applies
artificial intelligence-based algorithms to deliver customized
feeds of articles and short videos to users based on their unique
profiles, interests and behaviors. Qutoutiao has attracted a large
group of loyal users, many of whom are from lower-tier cities in
China. They enjoy Qutoutiao’s fun and entertainment-oriented
content as well as its social-based user loyalty program. Launched
in May 2018, Midu Novels is a pioneer in offering free literature
supported by advertising and has grown rapidly to become a leading
player in the online literature industry. The Company will continue
to bring more exciting products to users through innovation, and
strive towards creating a leading global online content
ecosystem.
For more information, please visit:
https://ir.qutoutiao.net.
Safe Harbor Statement
This announcement contains forward-looking
statements. These statements are made under the "safe harbor"
provisions of the United States Private Securities Litigation
Reform Act of 1995. These forward-looking statements can be
identified by terminology such as "will," "expects," "anticipates,"
"future," "intends," "plans," "believes," "estimates" and similar
statements. Statements that are not historical facts, including
statements about Qutoutiao's beliefs, plans and expectations, are
forward-looking statements. Forward-looking statements involve
inherent risks and uncertainties. Further information regarding
these and other risks is included in Qutoutiao's filings with the
SEC. All information provided in this press release is as of the
date of this press release, and Qutoutiao does not undertake any
obligation to update any forward-looking statement, except as
required under applicable law.
For investor and media inquiries, please
contact:
In China:
Qutoutiao Inc.Investor RelationsTel:
+86-21-6858-3790E-mail: ir@qutoutiao.net
The Piacente Group, Inc.Jenny CaiTel:
+86-10-6508-0677E-mail: qutoutiao@tpg-ir.com
In the United States:
Qutoutiao Inc.Oliver Yucheng ChenE-mail:
oliver@qutoutiao.net
The Piacente Group, Inc. Brandi
PiacenteTel: +1-212-481-2050E-mail: qutoutiao@tpg-ir.com
1 Actual interest rate for the eleven months
ended November 30, 2019.
2 The Report claims it has “12 separate samples
over a recent two-week period”, our data analysis has shown that
even a 12-fold sample size is of no statistical significance in a
period as long as two weeks.
3 The Report has mistakenly used the name
“Shanghai Sujin” for Mengtui’s operating entity, which should be
“Shanghai Tujin”.
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