Yesterday's News? Qutoutiao Adds Delisting Threat to Growing Headaches

Key Takeaways:

• Qutoutiao faces potential delisting after being notified last week that the value of its publicly held shares is too small
• The cash-strapped company has adopted a cost-cutting strategy over the last two years, and has yet to report its first and second quarter results for this year

By Trevor Mo

Qutoutiao Inc. QTT shot to fame as the fastest Chinese company to go from zero to IPO when it listed its shares on the Nasdaq in September 2018, just two years after launching its core news aggregating service. But four years after its listing, that distinction could become irrelevant as the company faces potential delisting, it announced last week.

A delisting wouldn’t spell the end of Qutoutiao, which is still one of China’s top news aggregators, even though it ranks well behind industry leader Bytedance-owned Toutiao. But the potential delisting adds to the troubles for the rapidly declining company, which has recently ramped up its cost-cutting to try to head off a deepening cash crunch.

We’ll return shortly to the company’s growing list of problems and what they mean for it in the longer term. But first we’ll review details of the new delisting threat.

Qutoutiao’s 2018 listing was on the Nasdaq Global Select Market, one of the three listing tiers on the Nasdaq that requires a minimum $15 million value for the company’s publicly held shares, according to the exchange’s rules. But Qutoutiao was notified that it no longer meets the requirement because it has traded below that threshold for the past month, it said in a statement last Wednesday.

Qutoutiao will now have 180 days to regain compliance, during which it will need to reach the threshold for more for at least 10 consecutive business days. Alternatively, the company can apply to transfer its shares to the Nasdaq Capital Market, the lower listing tier for early-stage companies. Perhaps that’s where the company always belonged, given its relative youth.

While Qutoutiao said the notification has no immediate consequences, investors didn’t seem to think the same way. The company’s shares fell 5% over the three days after it released the statement, closing at $0.81 on Friday. That gives it a total market value of $25 million, or a fraction of the whopping $4.6 billion market cap it recorded on its first day of trading in September 2018. Since then the stock has moved steadily downward as its losses ballooned.

Founded in 2016, Qutoutiao found early success by mainly targeting its news aggregating app at readers in smaller markets often neglected by internet giants. It’s famous for pioneering a business model that pays users who simply spend time on its app. Readers also receive financial incentives for inviting friends to join the platform.

The model proved successful in the company’s early years, with its daily active users reaching over 10 million within a year of the Qutoutiao app’s launch. But such heavy use of subsidies wasn’t sustainable, leading Qutoutiao’s losses to balloon over the years. It reported a whopping 2.6 billion yuan ($372 million) loss in 2019, up from just 10.9 million yuan in 2016.

Shriveling business

The company’s losses began to improve after it shifted to a more conservative spending strategy in late 2019. Last year that loss narrowed to 1.2 billion yuan, according to its latest annual earnings report released in May. But the strategy also caused its revenue to shrivel to 4.3 billion yuan last year from 5.3 billion yuan and 5.6 billion yuan for 2020 and 2019, respectively.

Qutoutiao’s latest strategy has been driven largely by practical considerations as it faces a looming cash crunch. The company received a lifeline in early 2019 after e-commerce giant Alibaba BABA purchased $171.1 million of its convertible debt. But that infusion has become a dangerous wild card for Qutoutiao ever since due to its maturation earlier this year.

In all of its earnings reports since early last year, the company has repeatedly warned that “uncertainty involving the debt … raises substantial doubt about the company’s ability to continue as a going concern.” Such language is standard industry parlance for saying the company could be forced out of business, in this case if Alibaba asks to be repaid its cash rather than exercising its conversion option when the debt came due.

In its latest earnings report for last year’s fourth quarter issued in May, the company repeated the same wording. It also revealed that it reached an agreement with the creditor to extend the maturity date to May 28 this year from the original April 4. It’s probably safe to bet that Alibaba didn’t want to execute its conversion option under the debt’s original terms, since Qutoutiao’s current stock price of $0.81 is a tiny fraction of the $15 conversion price.

Alibaba could still exercise the conversion option to help Qutoutiao avert a crisis, though it would almost certainly attach big extra demands such as gaining control of the company. But such a move also looks unlikely in the current environment where China is pressuring Alibaba and other big internet companies to divest assets out of their core areas.

Qutoutiao’s cash, cash equivalents and restricted cash totaled 659 million yuan at the end of last year, equal to less than $100 million and thus well short of the $171.1 million it would owe Alibaba. The company has yet to release any financial reports since last year’s fourth quarter, but it’s probably safe to assume its cash has continued to dwindle since the end of last year.

Still, the looming cash crisis and Qutoutiao’s cost-cutting efforts don’t mean the company is retreating across the board. It is still spending heavily on other initiatives, especially its Midu Novels unit, which operates a standalone app launched in May 2018. For the three months through December, the company’s sales and marketing expenses grew 17%, with most of the money going to expand business for Midu Novels, it said in its May report.

At the end of day, Qutoutiao’s ability to turn itself around will depend on its ability to solve its looming cash crunch involving the Alibaba debt. Developing other businesses like Midu Novels is also important. But it’s unclear how long the company can continue burning cash as it faces increasing competition from rivals like ByteDance and China Literature (0772.HK), which have far better finances. For now, its major news aggregator Qutoutiao app is still its major revenue generator, and that business is showing no signs of reversing its recent declines.