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Edited Transcript of CMCM earnings conference call or presentation 20-Aug-19 12:00pm GMT

Q2 2019 Cheetah Mobile Inc Earnings Call

Beijing Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Cheetah Mobile Inc earnings conference call or presentation Tuesday, August 20, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jing Zhu

Cheetah Mobile Inc. - IR Director

* Sheng Fu

Cheetah Mobile Inc. - Chairman of the Board & CEO

* Zhenyu Jiang

Cheetah Mobile Inc. - CFO

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Conference Call Participants

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* Hillman Chan

Citigroup Inc, Research Division - Research Analyst

* Thomas Chong

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Cheetah Mobile Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Helen Zhu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

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Jing Zhu, Cheetah Mobile Inc. - IR Director [2]

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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.

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Sheng Fu, Cheetah Mobile Inc. - Chairman of the Board & CEO [3]

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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 game 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 a 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 relations with some, including Facebook.

In the first half of 2019, revenues from utility products and related service decreased by 39% to RMB 921 million. In the second half of 2019, we will continue to face the challenges of growing and sustaining our utility product business revenue on a year-over-year basis. The slowdown of our utility products and related service could lead to a decrease in our total revenues for the full year of 2019, where we are also continually investing in AI as our AI business is still in its early stage of development. As a result, we could report operating loss for the full year of 2019.

Given those, we have taken several steps to restart the growth of our business. Some of these steps have already shown early upbeat results. First, our utility products and the related service business continued to make healthy profits and cash flow. In the first half of 2019, this business segment earned RMB 244 million in operating profit. About 400 million MAU continued to serve as a strong source of revenues and a rich foundation for developing new products and service.

Second, our mobile games business has continued to grow strongly and has become our growth engine for the company. In the first half of 2019, revenues from our mobile games business grew by 88% year-over-year to RMB 591 million. We continue to see the growing user adoption of our mobile casual games in overseas market.

According to third-party data, the overall mobile casual game market increased by 100% year-over-year in June 2019 driven by user growth in both developed countries and emerging markets such as India, Russia and Brazil. This rapid progress was also driven by gamers who had never played mobile games before joining our platform. The growing mobile casual game market has continued to boost growth in our mobile game business.

Cheetah Mobile continues to create hit 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 7 games. Some of these games remain top casual games in overseas markets and have been featured by either Google or App Store. For example, in late July, we launched Beach Clean. Beach Clean is a light, casual game that quickly became a top 3 app and game on Google Play in United States and a number of other developed countries.

We also continue to explore additional monetization opportunities through our current titles by launching in-game purchase items and in-game rewards. These have helped us to continue growing our apps. 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 well-known 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. But despite the early stage of development, we have already launched several popular AI-based products together with Beijing OrionStar. We are also the single largest shareholder of Beijing OrionStar.

We believe the development of 5G 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 product offering have been used in many places such as convenience stores, office buildings, KTVs, shopping mall, hotels, after-school class and more.

In the first half of 2019, our AI and other revenue increased to RMB 80 million, 8-0, from RMB 22 million in the same period last year. In the future, we will be able to enhance the monetization strength of our AI-related business as user adoption for our service continues to grow. Please keep in mind we will continue to invest in and 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 USD 0.5 per ADS, which will amount to a total cash payment of about USD 72 million. Our special cash dividend payment demonstrates our commitment to delivering shareholder value.

Whilst 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 LiveMe, will resume to growth 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 that our AI business is still in its early age of development, we have sufficient cash to -- reserved to fund this new business. We have also made some good progress in building sustainable business model for the AI business, and we hope to see meaningful returns on the investments 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.

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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [4]

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Thanks, Sheng, and hello, everyone. I'll walk you through the financial results. All money amounts are in RMB unless stated otherwise.

For the second quarter, total revenues were CNY 970 million, decreased by 12% year-over-year. Revenues from utility products and related services decreased by 44% year-over-year to CNY 424 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 (sic) [2018] and this year's softness of the domestic advertising industry.

Revenues from the mobile entertainment business increased by 50% year-over-year to CNY 498 million driven by a 109% year-over-year growth in the mobile game business and an 8% year-over-year growth in the LiveMe business. The increase in mobile game revenue was mainly driven by the strong performance of Bricks n Balls, which started to ramp up from 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. AI and other revenues grew by 236% year-over-year to CNY 49 million mainly driven by the 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 noncash share-based compensation expenses, the following discussed will be on a non-GAAP basis, which excludes stock-based compensation expenses. For financial information presented in accordance with U.S. 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 RMB 327 million, a decrease of 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 related to our mobile game business as well as costs associated with the AI business. Gross profit for the quarter was CNY 643 million, and gross margin for the quarter was 66%.

R&D expenses in Q2 were CNY 211 million, an increase of 36% over the corresponding period in 2018, primarily due to an increase in the number of R&D personnel of our mobile games and AI-related businesses. Selling and marketing expenses in Q2 were CNY 382 million, an increase of 3% year-over-year, mainly due to increased promotional efforts for our new mobile games. G&A expenses increased by 18% year-over-year to RMB 118 million in the quarter, primarily due to increased professional service fees. Non-GAAP operating loss were CNY 22 million compared to CNY 143 million in Q2 of last year.

Moving to each reporting segment. Operating profits for utility products and related services was CNY 121 million in the quarter, decreased from CNY 282 million in Q2 last year mainly due to the revenue decrease. Operating loss for the mobile entertainment business was CNY 68 million in the quarter, reduced from an operating loss of CNY 99 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 from our flagship games, partially offset by initiatives to launch new titles.

Please note that the company will begin to deconsolidate LiveMe's financials from September 30, 2019. Operating loss for AI and other business was CNY 74 million in the quarter, increased from an operating loss of CNY 41 million in Q2 last year, mainly due to our step-up investments in AI-related business.

Now let me provide you with our third quarter revenue guidance. We currently expect total revenues for third quarter to be between RMB 940 million and RMB 980 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. As of the second quarter of 2019, we have USD 488 million in cash and cash equivalents, restricted cash and short-term investments. We also have USD 287 million in long-term investments, which contains 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 CNY 11 million and other income, net, of CNY 34 million, primarily due to an increase in fair value of certain long-term investments in this quarter, for example, our investments in Codemao, a Chinese online education platform that teaches programming to children; our investment in SuperAtom, an online finance platform focusing on the Southeast Asian markets. Our gains from long-term investments helped the company report a net income of CNY 49 million.

This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Hillman Chan of Citigroup.

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Hillman Chan, Citigroup Inc, Research Division - Research Analyst [2]

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(foreign language) So the 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 would be on the AI and others. Could management break down 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 in AI segment?

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Sheng Fu, Cheetah Mobile Inc. - Chairman of the Board & CEO [3]

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(foreign language)

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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [4]

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[Interpreted] 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, still, we are very confident about its long-term prospects.

Just to give you an example, we recently launched a mobile game called Beach Clean, which has been ranked top 3 globally in both App Store and Google Play. The way we launched this new game is not following our old model. We actually were trying a new approach and in terms of 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 are still confident about our long-term prospects. And the same applies to the utility products as well.

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Sheng Fu, Cheetah Mobile Inc. - Chairman of the Board & CEO [5]

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(foreign language)

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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [6]

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[Interpreted] 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 robot, for example, robot 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's a lot of room for growth in the near future. In addition because of the labor cost in the developed countries, and we think that there are still a lot of opportunities for us to expand our robotics business to the overseas market. So that -- it is possible that, that can reduce the labor cost for the business. So we think that the AI2B, we have a lot of opportunities here.

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Sheng Fu, Cheetah Mobile Inc. - Chairman of the Board & CEO [7]

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He had another question.

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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [8]

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Okay. I'll take the first part of Hillman's question. In terms of Q3 guidance, we can -- in general, we can say that the revenue from the utility products, there would be a slight decrease, but the revenue from the mobile entertainment business, we have growth. And the AI and others business segment will also grow 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.

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Sheng Fu, Cheetah Mobile Inc. - Chairman of the Board & CEO [9]

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(foreign language)

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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [10]

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[Interpreted] 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 are relatively conservative.

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Operator [11]

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And the next question comes from Thomas Chong of Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [12]

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(foreign language) I have 2 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 the transition process?

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Sheng Fu, Cheetah Mobile Inc. - Chairman of the Board & CEO [13]

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(foreign language)

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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [14]

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[Interpreted] 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 helping us to deploy our service robots in situations such as KTVs, hotels, courthouse, and we have been making some quite good progress in these areas.

And 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 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 there are 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 had been looking for opportunities to invest in AI-related areas. We have minority positions in those companies, and we have some quite successful investments actually 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 they may not be able -- we might not be able to consolidate and acquire them as well, but we are looking for new opportunities.

I'll give you an example. OrionStar, which, right now, Cheetah Mobile is the largest shareholder and a business partner. And Cheetah Mobile has the priority or the preference rights to acquire the controlling position in the company if, at one point, OrionStar is growing relatively well and that fits into the overall strategy of Cheetah Mobile. So that answers the second part, I think, of the questions Thomas just asked.

And let me go back to your first part of the question in terms of the margins of all those different segments, right, yes. So the -- 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 have in 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 products currently have relatively lower margin because of the competition. But in terms of the AI2B business, which we maintain, 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.

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Operator [15]

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(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.

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Jing Zhu, Cheetah Mobile Inc. - IR Director [16]

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

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Operator [17]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.