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Cheetah Mobile Inc. (CMCM) Q2 2019 Earnings Call Transcript

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Cheetah Mobile Inc. (NYSE: CMCM)
Q2 2019 Earnings Call
Aug 20, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Cheetah Mobile Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Helen Zhu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Helen Jing Zhu -- Investor Relations Director

Thank you, operator. Welcome to Cheetah Mobile's second quarter 2019 earnings conference call. With us today are our company's Chairman and CEO, Mr. Fu Sheng; and the company's CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the safe harbor statement in our earnings release, which will also apply to our conference call today as we will make forward-looking statements.

At this time, I would now like to turn the conference call over to our Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Sheng Fu -- Chairman and Chief Executive Officer

Thank you, Helen. Hello, everyone. In the second quarter of 2019, quarterly revenues exceeded the high end of our guidance, driven by our -- robust growth of our mobile games and AI-related business. However, we must admit that our utility products business is still facing some challenges due to the misleading statements made by our third-party in late November 2018, which led to pause in some of our collaborations with business partners in overseas markets. While we have continued to talk with them to clean up this confusion, we have not yet been able to resume business, business relations with some, including Facebook.

In the first half of 2019, revenues from utility product and related service decreased by 39% to RMB921 million. In the second half of 2019, we will continue to face the challenges of growing and sustaining our utility product business revenues. On a year-over-year basis, the slowdown of our utility product and related service could lead a decrease in our total revenues for the full year of 2019. We were also continue investing in AI, as our AI business is still in its early stage of development.

As a result, we could report our operating loss for the full year of 2019. Even though we have taken several steps to restart the growth of our business, some of these steps have already shown early upbeat results, which our utility product and related service business continues to make healthy profit and cash flow. In the first half of 2019, this business segment earned RMB244 million in operating profit. About RMB400 million MAU continue to still be a strong source of revenues and a rich foundation for developing new products and service.

Second, our mobile games. Mobile games business has continued to grow strongly and has become a growth engine for the company. In the first half of 2019, revenues from our mobile business grew by 88% year-over-year to RMB591 million. We continue to see the growing user adoption of our mobile casual game in overseas markets. According to third-party data, the overall mobile casual game market increased by 100% year-over-year in June 2019, driving by user growth in both developed countries and emerging markets such as India, Russia and Brazil. This rapid progress was also joining by gamer who had never played mobile games before joining our platform. So growing mobile with casual game market has continued to boost growth in our mobile game business.

Cheetah Mobile continues to create two greatest hits games. Our games have been downloaded more than 2 million times in the past -- 2 billion times sorry, 2 billion times in the past years. Since 2019, we have launched seven games, some of these games remain top casual games in overseas markets and have been featured by either Google or Apple Store. For example, in late July, we launched Beach Clean. Beach Clean is a light, casual game that quickly became a top three app and game on Google Play in the United States and a number of other developed countries.

We also continue to explore additional monetization opportunities through our current high titles by launching in-game purchase items and in-game rewards. This has helped us to continue growing own app -- do our app. Importantly, our flagship games, including Piano Tiles 2, Rolling Sky, Dancing Line and Bricks n Balls continue to do quite well and have begun to form a portfolio of we are now in mobile game IP. In the second quarter of 2019, our flagship game operating margin expanded to 28% from 23% in the same period last year due to better operating leverage. So, despite the early stage of development, we have already launched several popular AI-based products together with Beijing OrionStar. We are also a single largest shareholder of Beijing OrionStar. We believe that development of five key technology will create opportunity to grow the number of voice and video interactive products and solutions on the market quickly.

Our voice and video interactive products offering have been used in many places, such as convenience stores, office buildings, KTVs, shopping malls, hotels, after-school class and more. In the first half of 2019, our AI and other revenue increased to RMB80 million from RMB22 million in the same period last year. In the future, we were be able to enhance the monetization giants of our AI-related business and user adoption for our service continues to grow. Please keep in mind, we will continue to invest in and the focus on AI to resume our growth.

Lastly, I would like to finish my speech today by announcing our Board, that our Board has declared a cash dividend in the amount of the USD0.50 per ADF, which amount to a total cash payment of about USD72 million. Our special cash net dividend payment demonstrates our commitment to delivering shareholder value, which we are facing some difficulties. We are confident in our company's long-term potential. We believe that our legacy mobile internet business, which include our utility product business, mobile game business and the lining were resumed to grow in the long run and remain profitable.

In addition, we are excited about some of the new prospects of building a new growth engine around the AI to enterprise service and we are confident in our long-term returns in the AI investment. Despite said our AI business is still in his early age of development, we have sufficient cash to be able to fund this new business. We have also made some good progress in building sustainable business model for the AI business and then we hope to see meaningful returns on the investment soon.

With that, we will now turn the call to our CFO, Vincent Jiang to go through the details of our second quarter financial results.

Vincent Jiang -- Chief Financial Officer

Thanks, Sheng, and hello, everyone. I'll walk you through the financial results. All money announced are in RMB, unless stated otherwise. For the second quarter, total revenues were RMB970 million decreased by 12% year-over-year. Revenues from utility products and related services decreased by 44% year-over-year to RMB424 million in the second quarter of 2019, primarily due to slowdown in our overseas mobile utility business, as a result of the negative publicity caused by a news article published in 2019, and this is softness of the domestic advertising industry.

Revenues from the mobile entertainment business increased by 50% year-over-year to RMB498 million, driven by 109% year-over-year growth in the mobile games business, and an 8% year-over-year growth in LiveMe business. The increase in mobile games revenue was mainly driven by the strong performance of Bricks n Balls, which started to ramp up in the middle of July 2018. The increase in LiveMe was primarily driven by higher average revenue per user, as LiveMe introduced several new features in the quarter to enhance user interaction, competition, and engagement. Please note that the company will begin to deconsolidate LiveMe's revenue starting in the fourth quarter of 2019, while AI and other revenues grew by 236% year-over-year to RMB49 million mainly driven by net sales of the AI-based interpretation device, Cheetah Translator.

Moving to our costs and expenses to help facilitate the discussion of the company's operating performance without the effects of non-cash share-based compensation expenses, the following discussion will be on a non-GAAP basis, which excludes stock-based compensation expenses. Our financial information presented in accordance with US GAAP. Please refer to our press release, which is available on the company's website at www.cmcm.com. Cost of revenues in Q2 was RMB327 million, a decrease over 7% year-over-year, mainly due to reduced traffic acquisition costs associated with our third-party advertising platform business, partially offset by increases in content and channel costs relating to our mobile game business, as well as costs associated with the AI business. Gross profit for the quarter was RMB643 million and gross margin for the quarter was 66%.

R&D expenses in Q2 were RMB211 million, an increase of 36% over the corresponding period in 2018, primarily due to an increase in number of R&D personnel of our mobile games and AI-related businesses. Selling and marketing expenses in Q2 were RMB382 million, an increase of 3% year-over-year, mainly due to increase from promotional efforts for our new mobile games. G&A expenses increased by 18% year-over-year to RMB118 [Phonetic] million in the quarter, primarily due to increased professional service fees. Non-GAAP operating loss were RMB22 million, compared to RMB143 million in Q2 last year.

Moving to each reporting segments. Operating profit for utility products and related services was RMB121 million in the quarter decreased from RMB282 million in Q2 last year, mainly due to the revenue decrease. Operating loss for the mobile entertainment business was RMB58 million in the quarter reduced from an operating loss of RMB99 million in Q2 last year, mainly attributable to the increasing operational leverage and stricter cost and expense management for LiveMe, and the improved operating profits for our flagship games, partially offset by initiatives to launch new titles. Please note that the company will begin to deconsolidate LiveMe's financial from September 30, 2019. Operating loss for AI and other business was RMB74 million in a quarter increased from an operating loss of RMB41 million in Q2 last year, mainly due to our step up investment in AI-related business.

Now, let me provide you with our third quarter revenue guidance. We currently expect total revenues for the third quarter to be between RMB940 million and RMB980 million. Please note that this forecast reflects the company's current and preliminary review and subject to change. Overall, we are confident that our business remains healthy, and I also wanted to emphasize that the company has a very strong balance sheet. Throughout the second quarter of 2019, we had USD488 million in cash and cash equivalents, restricted cash and short term investments. We also have USD287 million in long-term investments, which contain several well-known projects and excludes our all-year-round investments.

In the second quarter of 2019, the company recognized a gain from equity investments of RMB11 million and other income net of RMB34 million, primarily due to an increase in fair value of certain long-term investment in this quarter. For example our investments in Codemao, a Chinese online education platform teaches programming to children Our investment in SuperAtom, an online finance platform focusing on the Southeast Asia markets. Our gains for long-term investments helped the company report a net income of RMB49 million. This concludes our prepared remarks.

Operator, we're now ready to take questions. Thank you.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Hillman Chan of Citigroup. Please go ahead.

Hillman Chan -- Citigroup -- Analyst

[Foreign Speech]

Thank you management for taking my question. So my first question is on the third quarter revenue guidance. Could management share more color for each of the business segments into third quarter, please? And my second question will be on the AI and others, could management breakdown the revenue by Cheetah Translator and other AI products? And how we should think about, in the coming few quarters, the strategy on the product launches as far as the monetization model and more importantly, the investment, the loss that we are thinking about AI Segment? Thank you very much.

Vincent Jiang -- Chief Financial Officer

[Foreign Speech]

Okay. So in terms of the mobile internet, that's our legacy business, we still -- although we have some short-term disruption due to what happened last year, but still we are very confident by the long-term prospects. Just given the example, we recently lunched a mobile game called Beach Clean, which has been ranked top three globally in both App stores and Google Play. The way we launched this new game not following our old model, we actually, we're trying a new approach and it turns out that the revenue and profitability are still very good. That's why we are confident that even though with all those disruptions in the past, we're still confident about our long-term prospect and the same applies to the utility products as well.

Sheng Fu -- Chairman and Chief Executive Officer

[Foreign Speech]

Okay. So in terms of the AI to enterprise service business, we understand that this is different from other type of business, it requires longer term investments. And also to build the distribution channels also takes time. However, we think that the service robots, for example, robots that can deliver goods. We have seen very encouraging results from our clients. They're very eager to try our new products. And in terms of voice-related services or delivery robots, we think there is a lot of room for growth in the near future. In addition, because of the labor cost in the developing countries, and we think that there are still lot of opportunities for us to expand our robot business to the overseas market. So that it is possible that I can reduce the labor cost for the business. So, we think that the AI2B and we have lot of opportunities here.

Vincent Jiang -- Chief Financial Officer

[Foreign Speech]

Yeah. Okay. So, I'll take the first part of the Hillman's questions. In terms of Q3 guidance, we can -- in general, we can say that the revenue from the utility products, there is a slight decrease. But the revenue from the mobile entertainment business, we have growth. And the AI and other business segments grew as well. In terms of -- normally, we don't provide further details in the forecast, so I think that's all we can say at this point of time.

Sheng Fu -- Chairman and Chief Executive Officer

[Foreign Speech]

Okay. So, because we are trying new business models for both the utility products and games and also for the AI business, so in terms of the forecast, we're relatively conservative.

Hillman Chan -- Citigroup -- Analyst

Okay.

Sheng Fu -- Chairman and Chief Executive Officer

All right.

Hillman Chan -- Citigroup -- Analyst

All right. Thank you.

Sheng Fu -- Chairman and Chief Executive Officer

Thank you. [Foreign Speech]

Operator

The next question comes from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

[Foreign Speech]

Thanks management for taking my questions. I have two questions. My first question is about our revenue growth over the next few years. How should we think about the contribution from the new initiatives as well as the margin profile. Should we expect the margin profile in the future to be very different from what we see at the moment? And my second question is about M&A. Given the fact that our new initiatives takes time to take off. Should we expect any M&A opportunities that the company would pursue during that transition process? Thank you.

Sheng Fu -- Chairman and Chief Executive Officer

[Foreign Speech]

Okay. Let me try to translate. Okay. So to -- in terms of AI to business, we have been exploring different models. For example, we have been using a type of traditional distribution channels, and we have third parties to helping us to deploy our service robots in situations such as KTVs, hotels, courthouse, and we haven't made some quite progress in these areas.

So we are also exploring new applications for our robots. For example, we have been deploying our robots in places with larger foot traffic, for example, in shopping malls. And then we have deployed hundreds of them in those shopping malls. And the consumers, customers are very eager to go to these robots to ask questions such as the location of certain restaurants and whether they have some discount information for certain shops. So this is a new application similar to moving the offline traffic to online traffic. Actually, this is the opposite of the mobile application, the so-called O2O, right, online-to-offline applications.

And in terms of merger and acquisition activities, Cheetah Mobile has established a very stable casual games and utility business. And the company right now have been looking for opportunities to invest in AI-related areas. We have minority positions in those companies. And we have some quite successfully mathematically recently and we have potential synergies between Cheetah Mobile and those invested companies.

In terms of larger merger and acquisition activities, we are open to opportunities. We are not going to acquire large mature companies because that may not be able -- we might not be able to consolidate and acquire them as well, so we are looking for new opportunities. I'll give you an example, OrionStar, which right now, Cheetah Mobile is a largest shareholder and a business partner. And Cheetah Mobile has a priority or preference rights to acquire the controlling position in the company, if at one point, that OrionStar is growing relatively well and that fits into the overall strategy of Cheetah Mobile. So that answers, the second part, I think, the questions Thomas just asked.

Thomas Chong -- Jefferies -- Analyst

Thank you.

Sheng Fu -- Chairman and Chief Executive Officer

And let me go back to your first part of the question. In terms of the margins of all those different segments, right. Yeah, so in terms of the utility products, we expect, overall right now, our revenue is lower than previous years. And the operating margin will be lower accordingly, but I think in the longer term, if we are looking past the current couple of quarters, we hope that the margin will go back to what we had in the previous years. And in terms of smart hardware, right now, it's really hard to say, it depends on the mix of our products. Our AI2C [Phonetic] products currently have relatively lower margin because of the competition. But in terms of the AI2B [Phonetic] business, which we mentioned, for example, for the shopping mall applications of our service robots and also the delivery robots, we just mentioned earlier, we see good gross margin over there. Okay.

Thomas Chong -- Jefferies -- Analyst

Got it. Thank you.

Sheng Fu -- Chairman and Chief Executive Officer

Thanks, Thomas.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Sheng Fu -- Chairman and Chief Executive Officer

Thank you all for joining us today. If you have any further questions, please don't hesitate to contact us. Thank you so much. Bye.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Helen Jing Zhu -- Investor Relations Director

Sheng Fu -- Chairman and Chief Executive Officer

Vincent Jiang -- Chief Financial Officer

Hillman Chan -- Citigroup -- Analyst

Thomas Chong -- Jefferies -- Analyst

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