Cheetah Mobile Inc (CMCM) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to Cheetah Mobile's second-quarter 2014 earnings conference call. (Operator Instructions). At that point I would like to turn the call back to Helen Zhu, Cheetah Mobile's Investor Relations Director. Thank you.

Thank you, operator. Welcome to Cheetah Mobile's second-quarter 2014 earnings conference call. With us today are Mr. Fu Sheng, the Company's CEO, and Mr. Andy Yeung, the Company's CFO. Following management's prepared remarks we will conduct a Q&A session.

Before we begin I will refer you to the Safe Harbor provision -- Safe Harbor statement in our earnings release which also applies to our earnings conference call today as you will make -- as we will make forward-looking statements.

At this time I would now like to turn the call over to our CEO, Mr. Fu Sheng.

(Interpreted). Hello, everyone, and thank you for joining us. Today we would like to highlight the progress we have made this past quarter in terms of mobile users, mobile monetization, our [O&C] business and mobile offering in Q2.

First, Cheetah Mobile's user engagement and numbers of users from overseas markets grew at an impressive rate in the quarter. As of the end of the second quarter, our applications have been installed on 662m mobile devices globally, up 32% quarter over quarter.

Mobile MAUs increased 28% quarter over quarter, reaching 284m in the quarter. Most notably, about 67% of our mobile MAUs were from overseas market, presenting a significant year-over-year increase. This strong growth and levels of engagement of our users has propelled Cheetah Mobile into a market-leading position in both the overseas and domestic mobile Internet industry and validates the strong market demand for our product portfolio.

Second, revenue generated from our mobile business jumped tenfold year over year and 42% quarter over quarter to RMB76.2m in the second quarter. During the quarter we experiment with innovative apps format, such as contractual native ads, which significantly draws up mobile revenue, exceeding management expectations. Especially we embedded our distribution-related app into our products and launched the most non-intrusive mobile app in the market. We also utilized big data to analyze user preferences and recommended targeted apps, especially games, to our users.

Furthermore, our successful innovation has allowed us to combined mobile with our utility products, further boosting the distribution of our mobile apps and games. For example, Don't Step on the White Tile, one of our popular games, reached 120m global downloads and has been featured 50 times on the Google Play homepage.

In addition, we acquired HongKong Zoom Interactive during the quarter. HongKong Zoom Interactive operates a mobile advertising business. Its customers include Google, Facebook and global mobile advertising networks, such as iMovies, Millennial Media, among others. HongKong Zoom has enriched advertiser resources and proprietary technology and know-how. With HongKong Zoom Interactive, Cheetah Mobile is expected to further strengthen its global mobile monetization capability.

Third, we further deepened our penetration in overseas market. In June, 67% of mobile MAUs were from overseas market, mostly from the US and Europe. This equals to more than 190m mobile MAUs outside of China. According to App Annie, Cheetah Mobile was the number-two brand in the Google Play non-game app categories worldwide in June, right behind Facebook.

In addition, Clean Master and CM Security were once again awarded the top spot in AV-TEST latest assessment of Android security for the fourth consecutive time in 2014. The AV-TEST is conducted by an independent service supplier for global IT security and anti-ware research based in Germany. Based on AV-TEST results, Clean Master and CM Security achieved a 100% detection rate, had no false positives and maintained its high performance in areas such as power, CPU and data usage.

Moreover, our growing global brand attracted more well-known handset suppliers. As of today, more than 20 handset makers preloaded Clean Master on their devices. Some of our new handset partners include THC -- HTC; [Protingius], a European-based handset maker; and Micromax, an Indian-based handset maker, among others. We believe those partnerships will further increase our user growth and enhance our brand awareness in the overseas market.

First, moving on to our mobile products, we are focusing on differentiating features and services, while developing a product portfolio matrix. According to App Annie, in June the top three most downloaded mobile apps in the Google Play tools categories worldwide were all developed by us. They were Clean Master, Battery Doctor and CM Security. Also Photo Grid ran number one in the photography categories in Google Play by monthly download in the United States.

According to iResearch, in June, Clean Master and Battery Doctor were the top two mobile utility applications in China in terms of monthly active users. This achievement enables us to cross-promote our others apps. For example, during the quarter we launched an extremely light and fast mobile browser, CM Browser, which was cross-promoted by our other four apps. As a result, CM Browser was one of the top 40 most downloaded apps in Google Play in July.

Our strong performance reflects not only the speed of our tactical teams but also our ability to recognize opportunities for product enhancement and/or responsiveness to user feedback. During the quarter we launched multiple updates for our mobile apps, with a number of differentiating features.

Looking ahead, we will continue investing in expanding our mobile platform, especially in utility and mobile apps; further penetrate the global market, especially in the US and Europe market; and strengthen our strategic partnerships with leading Internet and mobile Internet companies globally. We believe that this initiative will allow us to further enhance our brand awareness, user growth and engagement, as well as strengthen our global mobile monetization capabilities.

Andy Yeung for financial highlights.

Thank you, Mr. Fu, and good evening, everyone. We're excited to announce second-quarter financial results that exceeded our previous guidance. In addition to stronger-than-expected user growth, the success of our new product rollout helped our quarterly revenues grow, continuing on a strong trajectory, setting another new record this quarter.

As Mr. Fu mentioned, we made significant progress in mobile monetization. Not only is mobile a material revenue contributor, it is also an increasingly improving driver of our top-line growth. Mobile revenues dramatically increased by over 1,000% year over year to reach RMB76m, now accounts for 20% of our total revenue, up from only 4% a year ago.

Looking forward, we expect our strong business momentum to continue into the third quarter as we continue to make investments, as we drive user growth and expand our product and service offering.

Now moving to our financial results, before we get started, I would like to clarify that all financial numbers we're presenting today are in RMB amount unless otherwise noted.

For the second quarter, total revenues were RMB380m, representing an increase of 139% year-over-year increase and 21% quarter over quarter, exceeding the high end of our guidance by 10%. Revenues from online marketing services were approximately RMB283m, a 112% increase from the prior-year period and a 22% increase from the prior quarter. The increase was largely due to higher revenues from key online marketing customers, which was driven by significant growth in our user traffic.

While we continue to see robust demand from our top three customers, we saw even stronger demand growth from our other key advertising customers that will help us further diversify our revenue base. In addition, we also saw significant growth in our mobile advertising business as we began to ramp up our mobile advertising business overseas.

Revenues from IVAS segment were RMB85m, up 571% year over year and 18% quarter over quarter. This increase was primarily driven by the increase in both the number of games published and the number of paying users. In addition, the Company also expanded into online lottery services.

Revenue from internet security services and others were RMB12m, down 3% year over year but up 6% quarter over quarter. The year-over-year decrease was primarily due to the Company ceasing to promote subscription services in a strategic reorientation which started in 2011.

Moving on to our cost and expenses. First, I would like to discuss our stock-based compensation expenses as these expenses were RMB52m in the quarter. As we previously stated, we would incur higher SBC expenses this year, largely due to shares and options granted to our management team and employees before the Company's IPO in May. Share-based compensation is an important tool for a company to attract and retain top talent and help us to stay competitive. It's an important strategic investment that we will continue to make furthermore.

Now to help facilitate the discussion of the Company's operating performance, the following discussion will be on a non-GAAP basis, which excludes stock-based compensation expenses. Our financial information is presented in accordance with US GAAP. Please refer to our press release, which is available on our website.

Cost of revenues was RMB82m, an increase of 178% year over year, mainly due to higher bandwidth and IDC cost, as well as costs associated with our mobile game business.

Gross profit for the quarter was RMB299m, a 131% year-over-year increase. Gross margin for the quarter was 78.5%, slightly down from the same period last year but slightly up from the previous quarter. The sequential improvement was mainly due to higher contribution from our online marketing services.

R&D expenses were RMB89m, an increase of 79% over the corresponding prior-year period. This was primarily due to an increase in the number of R&D personnel as the number of R&D employees grew approximately 66% year over year.

Selling and marketing expenses were RMB116m, an increase of 308% year over year, mainly due to promotional expenses for our mobile business. On a quarter-over-quarter basis, selling and marketing expenses increased only 4%. As stated previously, 2014 will remain an investment year for acquiring mobile users and developing our mobile game business.

G&A expenses increased by 14% year over year to RMB29m due to increased professional service fees associated with being a public company.

Non-GAAP operating profit was RMB65.5m, an increase of 150% year over year and 97% quarter over quarter. Non-GAAP operating margin was 17.2% compared to 16% in the prior-year period and 10.6% in the prior quarter.

Non-GAAP net income increased by 302% year over year and 100% quarter over quarter to RMB65m.

Non-GAAP diluted earnings per ADS increased by 224% year over year and 75% quarter over quarter to RMB0.49.

Now let me provide you with our third-quarter revenue guidance. We currently expect total revenues to be between RMB430m and RMB440m, representing a 132% to 137% year-over-year increase. Please note that this forecast reflects the Company's current and preliminary view on market and is subject to change.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

(Operator Instructions). Philip Wan, Morgan Stanley.

Good morning. Sorry, good evening. Congratulations on a very good quarter. My question is about your mobile advertising business. Could you share with us how much of your mobile advertising revenue in Q2 is from outside of China? And then also what's your plan to monetize your overseas traffic in the coming quarters and maybe your internal target by the end of this year? Thank you.

(Interpreted). So the second quarter, our mobile revenues and overseas mobile revenues are growing both very fast. So the mobile revenue growth are coming from both overseas and domestic sales. So at this point we don't want to disclose precise percentage of revenue coming from overseas. But what we can say is that the growth is very strong.

And I think if I may add, if you look at mobile revenue this year, it's very significant for us because we are about 20% of revenue coming from mobile now. And we -- while the overseas is not -- is a strong [pickup], it's also not a significant amount for our revenue base. It's becoming more mature. As we mentioned earlier, it's mature contributor to our overall revenues and will be a big driver for our growth going forward.

So my next question is would you comment on the competitive landscape, especially in the utility mobile app market? Given the success of Cheetah Mobile, would that attract more competition and may impact your progress of monetization? Thank you.

(Interpreted). You're right. Our success overseas has attracted other competitors from China, and they have made a concerted effort to expand their overseas market presence. But over the past few months, as we have said, we continue to have a very large leadership gap between us and our competitors. And we're still going very strong in the overseas market.

There are three competitive advantages that we can see. Number one is that Clean Master, this mobile application alone has been drawing very strong leadership overseas. Its download number is only behind three applications downloaded from Facebook. And it's ranked number four on Google site worldwide. So for Clean Master, not only is it ranked very high, but we also enjoy very good user feedback and rating. And this is one of the areas that is very difficult for our competitors to overcome.

So if you look at our ability to cross-sell our applications, we have demonstrated that we're able to cross-sell our mobile applications very successfully. If you look at our key applications that we have, Clean Master, Battery Doctor, CM Security, all very -- ranked very high on the tool categories. And that visibility is very difficult for our competitors to duplicate.

If you look at our ability to promote our products, and we have seen quite good similarities to overseas promotional channel. For example, we're [working] with Facebook [at mark] on the upstream. And then on the downstream we're also developing for a strong relationship with some of the handset manufacturers to preinstall our applications.

So in terms of overseas mobile monetization, the limitation is not so much coming from the competitors, but it's more to -- in terms of our own [special] point of view, how we want to tap out and how we want to promote and monetize our mobile applications. Thank you.

Alex Yao, JPMorgan.

Hi. Good evening, Fu Sheng and Andy. Thank you for taking my questions. So my first question starts from the recent matrix -- product matrix strategy as well as the M&A activities. So after all these strategies, clearly Cheetah Mobile has gained a very significant increase in terms of touch points with the consumers. And then do you guys have some kind of backend system to consolidate and unify the interaction between Cheetah's apps with the consumers? And what kind of features or characteristics are you -- do you have in mind to place into such a mechanism?

And then lastly, does such a capability will be able to open to third party apps? Thank you.

(Interpreted). So internally we continue to strengthen our infrastructure platform. One of the features that we're developing is called [Facemap]. So our Facemap system is -- actually analyzes user behavior so that we can develop big data analysis on user behavior. As such, without invading on user privacy, we're able to analyze user behavior first to such that we can provide a better service to our users.

Yes, so another thing that we do -- cross-platform system that helps us provide native contractual advertising. For example -- when we (inaudible) what advertising on what application, the user would not see duplicated advertising on another application and especially we're able to provide users more-targeted and more-precise targeting marketing, but without annoying the user too much.

The core competitiveness of our Company is not only the large user base that we have, but also our ability to employ big data analysis, so that we can better understand our user and user behavior (technical difficulty) to provide that kind of (inaudible).

Another one, we would open up our platform to not only our own application, or the application that we acquire, also to other third parties' active offers. However -- that would probably take a bit longer to (background noise).

Do you have another follow-up question?

Yes, sure. So the second question is about ROI of user acquisition. We note that the quarterly MAU net adds has increased compared to previous quarters, but the quarterly sales-and-marketing cost didn't grow too much. So can you help us to understand the -- what is driving the improving user acquisition ROI, and how to think about second-half sales marketing strategy and trend? Thank you.

(Interpreted). There are several factors. One is that both Cheetah Mobile and also Clean Master, the brand awareness for those have been increasing, and as we sell [GC] -- we have very strong organic traffic download for our application and unlike our competitors, taking -- spending a lot of money on marketing to acquire user. And I think we'll continue to see this strong organic download for our user growth.

And if you look at our tool applications matrix strategy, we have been quite successful in cross-selling our applications, as we sell, you can see that on the tool categories, top three applications are all coming from Cheetah Mobile. And that -- some of (inaudible) to [replicate]. And if you look at Clean Master, of the top two applications, only Clean Master is promoted -- also promoted through because organic. All the other ones, Battery Doctor, CM Security, are all through (technical difficulty) downloads. So I think that's also a significant factor in terms of our (inaudible) user acquisition.

As we mentioned in our earlier question, we have gained a bit of experience in terms of developing our promotional channels overseas. So if you -- and as a result we were able to refine our overseas promotional strategy. That helps us to lower the [CPA] for our application promotions.

This year and next year I think we continue to see it as a very important year for these acquisitions. For example, ourselves we will continue to invest in user acquisition and especially, given the fact that once we acquire a new user, we cross-sell other applications and we that is very [respective]. So, if you look at the remainder of the year and next year, we will continue to invest heavily on user acquisition.

Thank you, Alex.

Thank you very much. Congrats on a solid quarter.

Thank you.

Evan Zhou, Credit Suisse.

Hello, good evening, Fu Sheng, Andy, Helen. So my first question is regarding the product [evolution] plan. Basically do you still have the plan to maybe promote actively -- some more commercial-oriented product in the next coming quarters, or we'll probably still focus on the current strategy of monetizing our existing, more utility-based apps matrix? Thanks.

Okay. (Interpreted). First of all, we have generally as-expected revenue growth from our overseas [impacting] markets. And that -- we only begin to expect (inaudible - background noise) second quarter. So, we are very encouraged by the results and so we are looking forward to certain growth in our overseas mobile business.

If you look at Clean Master, we continue to see robust growth in MAU. And so (background noise) ourselves we are pretty confident that in the long run we can successfully monetize Clean Master [take off three] application products.

But as we mentioned here before, the importance of Clean Master is not necessarily only amortization but, more importantly, is our ability to actually cross-sell the other applications.

If you look at -- in the second quarter, we rolled a new product called CM Browser, it's a very light browser that's only 1.6 megabytes in size. And that is rated very high on Google Play by users, 4.6 out of 5.0. And within a couple of months off its launch, it already entered into the top-40 most-downloaded applications in July.

Recently, we also acquired a company called Moxiu, and it's a company that operates mobile (inaudible) application, and we acquired an additional 20% stake in the Company.

So, as you mentioned, we will continue to look forward to developing and acquiring applications that have strong user engagement, and are more natural to monetization.

So my second question. My second question is on mobile games. So we see pretty strong traction on the other [ads] segment, but probably due to some seasonality issue, or some execution pace, the IVAS, especially the online games revenue growth is relatively slower. So my question is about, what do you expect for the game segment to go further down the road, and also could you share some colors on the progress to -- about the extension of overseas publishing sources. That would be really helpful, thank you.

(Interpreted). If you look at our mobile game growth, it's probably slightly less than what you had expected, but that's probably because we still take a bit more time to develop our mobile game team to [build up] that business.

Also if you look at the Chinese mobile games industry, you also experience (inaudible) that can change in the second quarter. If you look at Tencent, for example, has become a very dominant competitor, or dominant market leader. So it would also give some pressure for domestic mobile game operators.

You probably are aware that our strategy is mobile and global. And so we have for a long time have set that strategy to focusing on mobile business. And so for our mobile game operation, we also are very optimistic that we are able to develop a very good business model by introducing Chinese games to overseas markets. And if you look at our applications overseas, our market leadership overseas, we are quite confident that we will be able to develop a very unique and strong business model for our overseas gaming population.

So we have actually started our mobile game operation overseas recently. And we are also seeing some very encouraging results. We have a pretty strong pipeline for our overseas game operation, so we expect or we think we'll see pretty strong growth in our overseas mobile game operation. Thank you.

Great, thanks. Thanks for the call.

Jiong Shao, Macquarie.

My first question is about the potential impact from acquisitions made -- the Company has made in the last couple of months on the result, any guidance? Thank you.

(Interpreted). So let me first here explain just how our M&A strategy. For our M&A (inaudible) we are more focusing on a specific value for our acquisition not necessarily in its immediate financial return. So, for example, our [minimum] priority for acquisitions, we initially look for technology or application that can strengthen our own technology or product portfolio that our user will enjoy. So for us that is more important than immediate financial revenue.

The second area of M&A focus is in area that we're relatively new to it. For example, for mobile monetization we recently acquired a company called HongKong Zoom, which has very good experience and a very good team in mobile monetization. And so for that talent and that technology that we want to make acquisition.

Regarding the financial impact for some of our recent acquisitions, what we can say is that as we look at all these acquisitions, we are mostly looking at applying technology application, sometime -- so users that they have. The immediate -- the short-term immediate-term financial return or revenue impact is relatively small. So some (inaudible) growth, coming from organic growth.

Okay. And my second question is really about the mix in the mobile revenue, the advertising versus the gaming.

Okay, so in terms of the mobile -- revenue mix between mobile games and mobile advertising, I think, as we have mentioned before, we will continue focusing on both mobile advertising and mobile games. As of -- as today, on a quarter-to-quarter basis you will see some fluctuation between the revenue mix between mobile advertising and mobile games. But overall I think -- both our focus in the long term we are looking at more even growth on both.

As we mentioned earlier, in the second quarter, mobile game operation is a little bit slower, because -- some of the significant change in China and, as we also just beginning to ramp up our overseas game operation.

In terms of mobile advertising, we are rapidly systematic and steady in terms of how we expand our mobile advertising business, both domestic and overseas.

So that's something that we want to share with you. Thanks, Jiong, do you have any --

Okay (multiple speakers).

Thank you.

(Spoken in Chinese).

(Spoken in Chinese).

Ella Ji, Oppenheimer.

So my first question is relating to mobile monetization as well. I just wonder if you can share some color relating to the advertisers, what's the mix between overseas and the domestic, as well as if there's any colors relating to the user-behavior differences between international and the domestic users. And how is that going to affect your monetization going forward?

And also, relating to your new -- newly-launched products, such as Cheetah Browser, how long do you think it will take you to monetize meaningfully, from when you launched the product?

(Interpreted). Okay, so I would firstly answer your question then. So of course if you look at mobile user, there are some universal interest and behavior. But if you look at in terms of effectiveness to mobile advertising, we see that overall overseas users are more receptive to mobile advertising. And, on the other hand, in China domestic users are more receptive to mobile games business.

So in terms of mobile monetization, I think in the near term we don't see too much pressure to do that. I think our focus in near term is still mobile-user acquisition. However, if you look at our ability to generate revenues on mobile advertising and mobile games, we have demonstrated -- that there's a lot of potential there, once we have the user base.

So if you look at our long-term monetization strategy, really it's not to try to squeeze as much revenue from our user as possible. But we wanted to develop the best product possible and to acquire user base, and have very strong user loyalty. And once we have that, then I think more monetization would be very natural and markedly easier.

So for example, for CM Browser we have quite interesting results in terms of user acquisitions and we also have very good user feedback for our product. So in terms of our strategy there, we really try to continue to refine our products such that we continue to gain users. And then once we have a strong competitive advantage over our competitors, and a very large user base, I think the mobile monetization on CM Browser will be relatively natural and easy.

So, we continue to see very strong momentum in terms of mobile revenue growth. However, again I guess mobile monetization is not the highest priority for us. User acquisition, investing in products remain our top priority in the near term. But in terms of large-scale monetization, big increase, significant revenue transmission from mobile would probably be next year's (inaudible).

Right. So if you look at us, even though monetization is not our main focus at this point, we have seen very strong momentum in our mobile revenue growth. If you look at our year-to-year growth in mobile, it's over (technical difficulty) percentage, for example. But we will continue to really focus in on mobile application development, developing our backbone infrastructure.

As you can see -- we also acquired a company called HongKong Zoom, that will help us to further our capability in mobile monetization. So I think we have really a balance between user growth, user acquisitions, product development, our own internal structure development, as well as monetization. So, in short -- you should expect a more gradual and steady growth in mobile not a big jump forward.

(Spoken in Chinese).

(Spoken in Chinese).

Okay.

Okay, thanks.

Thank you.

Thank you, Ella.

So my second question is relating to your revenue growth on the PC end. What's your total PC MAU for this quarter? And can you also talk about the most recent trend relating to your PC-user conversion?

Okay, Ella. So, as we mentioned in our press release, our key monetization product on PC platform is Duba.com, and we have seen significant user growth. Our long-term active users for Duba.com increased by 20% year over year, and 25% quarter over quarter, to 68m in June 2014. And that's our main product for monetization.

So if you look at our PC revenue growth are mainly coming from increased user shopping. Of course -- our [flexi] product on mobile is actually our Duba antivirus software. And -- but, however, we have decided to -- that it's better for us to focusing on some of the key metrics rather than overall mobile (inaudible) PC user base. Thank you, Ella.

(Spoken in Chinese).

Thank you. And this concludes the question-and-answer session. I would now like to turn the call back to the Management for any closing comments.

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

Thank you.

Thank you. The conference is now concluded. Thank you for attending this presentation. You may now disconnect. Have a nice day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.