Hello, and welcome to the Meitu, Inc 2018 annual results analyst conference call. Throughout the call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Please note this call is being recorded. Today, I am pleased to present Johanna Chen. Please begin your meeting.
Thank you. Good evening, and welcome to Meitu's full year 2018 earnings conference call. I am Johanna Chen from the IR team. Joining me today to discuss our results are Wensheng Cai , Chairman; Xinhong Wu , CEO; Gary Ngan, CFO; and Bryan Cheng, COO. I would like to take this opportunity to remind you that our remarks today may include certain forward-looking statements. A number of risks and factors beyond our control may cause the actual results to differ materially from those contemplated by these forward-looking statements.
During this and non-IFRS financial measures. We may also discuss the normal conditions for our industry, and such information may come from a variety of sources outside Meitu. For a detailed discussion of the risk factors we face and non-IFRS measures, please refer to our public documents on corp.meitu.com/ir. Now I would like to turn the call over to Mr. Cai, he will present in Chinese, followed by a translation.
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Thank you everyone for joining the results conference call for Meitu Inc.
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Meitu has experienced a lot of changes over the past year. We began this year with our new beauty and social media strategy, which required making fundamental adjustments to our staff, business model, product line, and organizational structure. In line with our new strategy, we have sought out new external partnerships to meet current market conditions. First example of this was our cooperation with Xiaomi, which we officially announced last November. As a result of this partnership, Xiaomi will bring their years of experience in marketing and supply chain management to Meitu smartphone in a way that will allow more users to enjoy our superior user experience.
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Continuing on this theme, we announced our strategic cooperation with Leyou Technologies to invest in its Canadian-based game studio, Digital Extremes, through the issue of new shares in February this year. Warframe, the company's award-winning online game, has maintained rapid user growth as a multi-platform strategy game since its launch. This deal is likely to increase our cash flow and overseas earnings. In addition, the team at Leyou has developed extensive resources in the pan-entertainment industry. As such, the introduction of this strategic shareholder represents an important step for Meitu in exploring the pan-entertainment industry. We expect this deal to be completed in April of this year.
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After the evaluation and restructuring of our asset-heavy business, Meitu is now better able to focus on growing the Meitu app social community. The social version of the Meitu app was officially launched in September of 2018, and we have seen our numbers of MAU grow to about 16 million thus far. Among these users, we have observed a core group that has developed a significant attachment to the community.
With this transformation, we strive to nourish an online community to service the growing number of users that love to share their lives with the world. Eventually, we believe the market will no longer perceive Meitu as a pure utility app. We have capitalized on the app's abundant and growing amount of community content by inserting in-feed ads that improve our inventory and enhance our commercialization potential. We've already attracted a number of advertisers to offer ads in our user feed, and we expect ad revenues to continue to grow as Meitu's driving force for commercialization going forward. I would like to turn the call over to our CEO, Wu Xinhong, to share more on our operational for 2018.
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Thank you, Wensheng. Welcome everyone to our results call. First, let me share with you some of the latest development from the Meitu app. The app's total MAU reached a record high of 119 million in February this year. With respect to social users, as Wensheng said before, the number of MAU using the social platform at the end of last year reached nearly 16 million. About 75% of the app's user are female, and females are the core users of social media. The fact that we started as a beauty tool application was what attracted these female users initially, and this allowed for us to offer them the value of an online community, which was a key driver to our rapid development in this area.
During this time, the proportion of community user logging in with Meitu accounts increased from 17% since its launch to about 50% today. The increase in the Meitu account login rate is an important indicator of our success. This is because account login is an important foundation for further increase in engagement, stickiness, and interaction between users. This remarkable growth is the result of our team's work to create a number of exclusive features that are only available to logged-in users, such as the access to high-resolution image, the one tap to replicate a specific filter, and other enhancements to the user experience.
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Before the launch of this community feature, most of our other apps do not require login to use, and that has somewhat limit the understanding of our users' preferences. The increase in Meitu apps community account login rate represents a huge progress in allowing us to learn more about each user and customize content to better fit their preferences. Image and video content on the Meitu social platform reached 8 billion page views just last December. This demonstrate the initial success of our social transformation and lay the foundation for in-feed ad revenues.
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The initial version of the social platform incorporated a premium tool function that introduced new picture features such as the 9-frame collage, which brought exclusive new content to the community. In the future, we plan to enhance user understanding of our community by offering them continuous guidance as they explore its features and change their perception of what the Meitu app has to offer.
In November last year, the community went from simply offering makeup and photo beautification to a more diversified live experience sharing that includes leisure, emotional stories, films, TV, music, and more. The daily amount of user-generated content, or UGC, reached 500,000 posts by late December last year, and this content has become increasingly more attractive and diverse.
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Because Meitu app social platform is still in its infancy, we believe that there remains a lot of opportunity to increase our number of active users. In terms of strategy, we intend to gain user attention by improving the relevancy of our content recommendation algorithm and targeted content push to create mutual following among users. We have seen excellent results from several activities offered on the platform thus far. For example, two activities offered during this year's Spring Festival attracted around 1 million new registered users. During the same period, the number of photos saved reached more than 570 million, an increase of 32.7% sequentially.
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We are very encouraged by these results. Though the Meitu app social platform has yet to reach the mainstream, we will continue to optimize our product line, operations, and algorithms to attract an ever-growing number of people to share their lifestyle on the Meitu app.
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The beauty component in our strategy is represented by our camera business. We have taken effective measures to remedy some of the issues associated with BeautyCam. First, we have directly communicated with and surveyed our users before modifying the effects we offer, and this has achieved positive results. A notable example of this is the HyunA makeup looks we launched earlier this year, which resulted in even more growth than the holiday effect.
Another example is the fact that growth among iOS users is 50% higher than it was during its peak value on Valentine's Day. Secondly, we have reached out to old users by sending them personalized push notifications. This resulted in a 200% growth compared to the first half of the year. BeautyCam's overall decline in MAU slowed down compared to the first half of the year. As of December 2018, MAU was 79 million.
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BeautyPlus, our main overseas product, has also shown excellent growth in the number of MAU, which reached 59.6 million in December 2018, representing 11% year-on-year. The growth is mainly derived from adjustment and optimizations made to the product itself rather than paid marketing. For example, we have learned from analyzing that users from different countries tend to have different preferences with regards to functions like skin smoothing, teeth whitening, and etc. As a result, we have designed a data system based on this research to optimize its function display to conform to the local user preferences.
Our experience has shown us that effect adjusted for local preference help us to prevail in market with fierce competition from similar products. To meet these local preferences, we have chosen to work with leading domestic and overseas IP companies such as Sanrio and Astro Boy to create more attractive AR or augmented reality effects. We believe that this will not only bring about considerable user growth, but also boost the income from BeautyPlus subscription while connecting users with brands.
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The camera business will now focus on expanding its offline business, because we have found that in the current industry, imaging and vision products are becoming increasingly similar. Expanding our offline business will not only enable our excellent image technologies to continue to serve our users, but also generate revenues. This will greatly increase our competitiveness in the industry and give us an edge.
For example, last year we launched MeituGenius, which is an O2O advertising product using Meitu's augmented reality technology to simplify makeup trials for brands such as Sephora, D&G, and MAKE UP FOR EVER. MeituGenius use our technical analysis tools to identify facial features and overall skin health to provide users with personalized product recommendations. We plan to continue to explore, develop, and expand our offline services around the concept of beauty.
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Meipai's number of MAU declined to 38.9 million at the end of last year, compared to 42.7 million in June 2018. As a short video and live streaming platform, the regulatory oversight is far greater than the tool products. Last year, in accordance with local regulations, we took the initiative to suspend i- services twice to make adjustments to the content system. In order to create a safe, stable, and healthy platform, we further went on to block minors from live streaming and uploading videos on Meipai. After these adjustments were made, the downward trend in the number of MAUs slowed down in the second half of 2018.
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We believe that there is so much space for growth in the short video market. In addition to Meipai, the Meitu app community will also pay more attention to videos, and we will continue to explore possibilities for other short video apps to meet the growing user demand.
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Okay. I am Gary, and I will continue to update you on the commercialization efforts and financials for 2018. After making adjustments to our business last year, we have restructured our asset-heavy businesses through a series of strategic cooperations. This has allowed us to shift our focus to our internet business. As a result, revenue contribution from internet business increased from 16.7% in 2017 to 33.9% in 2018, reaching a total of CNY 948 million. Internet business contribution accounted for more than half of the gross profit, reaching 51.9% this past year.
We expect this ratio to continue to increase in 2019. As far as internet business is concerned, advertising has been the most obvious area for growth over last year. Our advertising business grew 101.9% year-on-year, reaching CNY 621 million. Among our ad inventory, domestic key account advertising accounted for the largest proportion, in which cosmetic and skincare, e-commerce, food and beverages, clothing and accessories, and network services represented our largest ad buyers.
In 2018, we saw an increase in both the number of paying advertisers as well as the average revenue per advertiser. We are also encouraged that the rate of repeat advertisers in 2018 has increased by 44% compared to 2017, which indicates the growing value of Meitu's advertising platform. In the second half of 2018, we launched in-feed ads to coincide with the launch of the Meitu app community. In Q4 2018, in-feed ads already accounted for about 20% of Meitu app's total revenue. Xinhong also mentioned before that the Meitu app photo and video content had reached more than 8 billion page views in December last year.
We will continue to explore marketing products for the Meitu app community as it continues to develop. In addition, we have also launched a variety of programmatic advertising products in 2018, which include our PMP, which stands for Private Marketplace Platform, and our DMP, Data Management Platform, both of which enhance our ability to help advertisers to increase the accuracy of their marketing efforts. The internet value-added services revenue last year was CNY 327 million, which showed a year-on-year decline of 26.2%.
The income was mainly derived from virtual gifts on Meipai, and therefore suffered a bit due to the setback Meipai experienced during this time. The number of paying users declined from 313,000- 137,000. Although we saw a decline in the paying users, the average revenue per user has increased. We think this is mostly because the stickiness of the remaining users are stronger, and they have a higher loyalty. As for our smart hardware segment, revenue decreased by 50.7% to just over CNY 1.84 billion in 2018. 721,000 units were shipped in total.
The smartphone market in China in 2018 was very challenging, and there's not only a very sharp drop in shipment overall, but fierce competition among increasingly homogenous products. We believe that licensing the Meitu smartphone brand to Xiaomi will create a mutually beneficial relationship that help us to weather the storm better. As a result, our hardware department will now be able to better focus on developing skin-related smart hardware products. Finally, we have also restructured our MeituBeauty, our first-party e-commerce platform business.
Because of that, we have classified that as a discontinued business in 2018, and it will not be shown in the continuing operation in this annual result. The financial and operational data listed in this annual result is excluding the e-commerce business. We also expect our smartphone business will be defined as discontinued business in our 2019 results. Let me now touch a little bit on the profit-related metrics. The gross profit for 2018 was CNY 429 million, a decline of 59.8%. But it is important to note that the gross profit from internet business has grown quite significantly to CNY 492 million, and the gross profit margin for internet was 51.9%, compared to 27.9% in 2017.
Since the cost of our advertising business is relatively fixed, the operating leverage that are generated has increased the gross profit margin for the internet business quite significantly. Excuse me. In terms of the smart hardware, the gross loss was CNY 62.8 million. The most important factor for this is the strategic restructuring of this business, which caused a one-time inventory impairment of approximately CNY 380 million. The adjusted net loss of continuing operation was CNY 897 million.
We have successfully implemented a cost-saving plan, which we expect to save about CNY 500 million in marketing and promotion and about CNY 350 million in daily operating costs in 2019. However, it is important to note that we are not intending to give up user growth while achieving this cost optimization. On the contrary, we have developed some very great ideas to enhance our product and promote user growth on a limited budget. To give you an example, the MAU of BeautyPlus in the first three quarters of 2018, saw only 1.7% growth compared to the end of 2017.
However, in the fourth quarter, it achieved about 9% sequential growth with a 75% decrease in promotional expenses. Another successful example is the Meitu social platform, which reached a record high MAU for the whole of the Meitu app in February, despite a promotional budget for the first two months that is less than half of what we had in 2018. Although our overall performance in 2018 was not very satisfactory, the team has now become more focused, more innovative, and place greater emphasis on commercialization after all these restructuring and adjustments.
We believe this is the basis for Meitu's long-term development, and we are very confident in the development in the next few years following. I would now like to talk a little bit about the balance sheet and the cash flow statement. Our cash and short-term investment at the end of 2018 was CNY 2.69 billion. In terms of investing cash flow, we had about CNY 160 million of capital expenditure, which is mostly related to servers, to enhance our data analysis capability.
We have invested about CNY 400 million on external investments, mainly in startup companies that complement our internet business. We also had about CNY 600 million of cash inflow from selling some of our investment projects. In terms of financing cash flow, we have repurchased about CNY 640 million worth of company stock in 2018. This is what we have prepared in our remarks, and now I will open up the line for question and answers. Operator, please.
Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, please press zero one to register for a question. Please bear with us while questions are being registered. The first question comes from the line of Thomas Chong from Credit Suisse. Please go ahead.
Hi. Good evening. Thanks, management, for taking my question. I have two questions. My first question is about our strategic transformation. How should we think about the 2019 revenue and margin outlook, and in particular, how we should think about the revenue mix going forward? My second question is about competitive landscape. Can management talk about how we should think about the short video competitive landscape in 2019? Thank you.
Thanks, Thomas. I'm Gary. I'll take the first question, and maybe Bryan, you can talk about the second one. In terms of 2019 revenue outlook, as I said, the smartphone business will also be classified as discontinued business in 2019. If we brush that aside for a moment, then the mix will mostly be coming from advertising and followed by a little bit of internet-related services. I think look at the advertising growth, it's been quite strong, growing about 100.1% in 2018 year-on-year.
Obviously, now the size is a little bit bigger than before, we're not expecting triple-digit growth in 2019. But I think growth will still be very fast for the advertising business. On the smartphone business itself, I think by the end of 2018, we still have about 200,000 units to be sold in 2019. That would give you a little bit of revenues in 2019, and we think it will be spread out across the year as we continue to sell them. But it's not going to be a big number. Bryan?
Hi, this is Bryan. Let me answer the second question. The second question was asking about the short video competition landscape in China. Let me start by saying that now we're just at the very beginning of the short video development, the product wise and also the commercialization wise. We're just at the very beginning. The second voice is from the monetization perspective, we see more and more budgets moving from the OTV budget segment to a short video platform. We see that in our own product as well. The product development is at the very beginning, and also monetization is at the very beginning as well, with a huge potential, with huge budgets moving.
We see that moving from the OTV budget segment to a short video platform. As far as Meitu is concerned, the opportunity we have seen so far is that we have a good lineup for a short video tool space. Not only Meipai, Meitu XiuXiu, and Yi, and also we have BeautyPlus. So in all those products, we have a good short video tool space, and also we have a good resource to develop more and more innovative short video tools. On top of the tools, we also are developing Meitu XiuXiu into a social platform.
So in the Meitu XiuXiu and Meipai and the new product called Yi, we are developing the short video social platform as well. We see that the vlog and also different and newer forms of short video are taking forms. Not only we see the opportunity in terms of short video tools, which is Meitu's traditional stronghold, but also we see that with a good product lineup that Meitu already has, we are well-prepared to facing the— We're developing new form of the short video products.
Thank you. May I ask a quick follow-up? In terms of our user acquisition strategies in 2019, how we should think about the customer acquisition cost in the market, as well as the way on how we acquire our users? Thank you.
Sure. With more and more aggressive competition, we're definitely seeing the user acquisition cost is going higher. But as you can see from the data, Meitu XiuXiu, we have reached the newer peak of newer height of monthly active user in the beginning of 2019. By not spending as much as we did last year to acquire a new user. The way we do it is that by developing short video and picture-based tools, and we're encouraging people to propagate Meitu XiuXiu. Propagating short video or beautifying pictures in their social circles. Then by spreading the pictures or short video that's being modified or beautified by our applications, we're acquiring new user without paying any user acquisition cost.
In other words, we are innovating the product and also we are providing features in a product so that we acquire user by encouraging user to propagate, to get more user into the product without paying to acquire those users. We are continuing doing so, and we are by developing and by providing more and more innovative features, not only the short video tools, but also more and more social platform features. We are expecting to see this trend going better and better, basically by acquiring more user via providing those innovative features.
Thank you.
Sure.
Once again, ladies and gentlemen, if you do have a question, please press zero one on your telephone keypad. There are currently no further questions from the phone lines. I hand the conference back to you.
Okay. Thank you everyone for joining us today.
Ladies and gentlemen, this now concludes our presentation. Thank you all for attending. You may now—