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A $100 Million Chinese Artificial Intelligence IPO

They say that if the entire population of China were to walk past you, the line would never end. The implication is that it would take so long for the people to pass by you that the rate of reproduction would make sure there was always someone walking past you, even though they may not have been born when the exercise first started. The point is, there are a whole lot of Chinese out there – enough so that they make up 18.53% of all the people on this planet.

It’s difficult to operate in China as a foreign firm, and that’s why we’re seeing incredibly large numbers from firms like Ant Financial – the biggest fintech company in the world. Since they haven’t had an IPO yet, retail investors can only hope to get exposure to Ant Financial by purchasing shares in Alibaba (BABA) which owns an equity stake of 33% in Ant Financial. Soon though, there may be another interesting Chinese success story for retail investors to get a piece of. This time, it’s an artificial intelligence company called CooTek.

CooTek and TouchPal

Chinese Artificial Intelligence IPO - CooTek and TouchPal logo. click to company websiteFounded in 2008 by three former Microsoft employees, Shanghai-based CooTek had raised $13.5 million to develop a smartphone app called TouchPal which autocorrects typos and predicts your next word with higher accuracy than that drivel that Android’s type predictor spits out. Just to make sure we’re all on the same page here, what we’re talking about is “predictive text” – the functionality that suggests the next word (or phrase) that you’re going to type so you can type faster. In other words, CooTek is getting right in front of your face which is glued to your smartphone anywhere from 2.5 to 5 hours a day. Using the upper end of that estimate, this means you spend almost one-third of your waking time staring at a small screen. A lot of that time you’re actually typing on that small screen, and that’s where CooTek comes in to play with their TouchPal app.

If you use a smartphone then you know about “auto correct” and the “predictive text” function that tries to guess what words you’re going to use next. As you all already know, it doesn’t work that way leading to some embarrassing slip-ups. That’s where TouchPal comes into play, autocorrecting your typos and predicting your next word with a much higher accuracy than you’re accustomed to.

The “TouchPal Keyboard” is actively used by over 132 million users every day and supports over 110 languages in more than 240 countries and regions worldwide. Just this year, TouchPal launched the first NLM based predictive engine, combined with an AI Assistant, Talia. (NLM stands for Neural Language Model and is about understanding the semantic relationship between words in order to provide powerful text correction and prediction capabilities.)

Now we could go on about all the apps they’re developing and neat features like the “emoji predictor” which pulls from over 1,500 emojis so that you can communicate like a 14-year old girl:

Chinese Artificial Intelligence IPO - TouchPal emojis

You’d have to be a complete tool to use something like this to communicate – unless you’re an Asian from a developed market – in which case it’s pretty much required.

But instead, we’re going to focus on what type of business they’ve built around this app. While it may be “just an app”, over 132 million people use it as of June 2018, a number that’s 75% percent higher than June of 2017. Emojis aside, just think about all that valuable big data exhaust that’s being thrown off from all those people typing away for 5 hours a day on their keyboards.

CooTek and Mobile Advertising

All of this big data is worth a lot to advertisers who always want to make sure the perfect ad appears at the perfect time. CooTek can do that, and that’s why 90% of their revenues come from mobile advertising. The company states that their AI algorithms can “predict upcoming content users need based on the previous context and user’s location.” That means they’re able to advertise based on what store your standing in and what you’re texting people about. They also have over 170 patents as a result of heavy R&D spending in order to defend themselves against any giant smartphone maker that may try to make their text predictive function do similar things.

You might think your keyboard’s predictive text is ‘good enough,’ but once you get used to TouchPal’s contextually astute AI engine you’ll notice how much slower you type going back to a regular keyboard. – Source: Android Authority

When trying to think about what form this business model might take going forward, it’s easy to see that once they’ve got you hooked into using their app then they start peddling you other apps as seen below:

Daily Active Users of Touchpal and Other Global Portfolio products from March 2017 to June 2018

(By the way, DAU stands for Daily Active Users and it refers to people who use an app at least once a day, every day.) When it comes to online advertising of any kind, advertisers like to see people from developed markets because they have bigger wallets. That’s our observation anyways, so location does matter in some cases. Here’s where all the users of CooTek products are coming from:

Location based Monthly Active Users of CooTek Products

(By the way, MAU stands for Monthly Active Users and it refers to people who use an app at least once a month, every month.) The key will be for the company to continue growing their DAUs and MAUs as fast as they can in hopes that they get acquired by Samsung who has to be pissed off that these cheeky Chinese are sneaking into every conversation that’s being had on their phones in order to sell their users things that are actually relevant. Below is an example of advertising in real-time based on what you are typing:

Some more blurry pictures from their SEC filing which show how they can advertise in real-time based on what you are typing.

CooTek Financials

It’s at this point in time where we’re supposed to go through the CooTek financials and dissect them like we learned how to do doing our MBAs, but frankly, that’s probably going to be as boring to read as it will be to perform. Instead, we’ll just present the below numbers and make a few brief observations:

CooTek's finances

Looks like revenues tripled from 2016 to 2017, and along with that came a sharp increase in marketing expenses from $9.4 million to $20.1 million. That makes sense as they need to get this app installed on as many smartphones as possible. We also see heavy R&D spending with around 30% of 2017 revenues being spent on developing their technology. In the early stages of a business like this, the numbers are often less important than answering the question – how fast are we growing DAUs and do we have the funding we need to grow that number as fast as possible?

Conclusions

CooTek has made a considerable effort in their filing to make sure you know that the key to their entire business lies in using artificial intelligence and big data to better address their users’ needs and serve up ads that are incredibly relevant. That’s pretty powerful, as more and more people migrate to using their smartphones for more things – five hours a day worth of things.

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