Cheetah Mobile Inc (CMCM) 2014 Q4 法說會逐字稿

Hello and welcome to Cheetah Mobile's fourth quarter 2014 earnings conference call. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

Now, I'd like to turn the conference over to Helen Jing Zhu, IR Director. Please go ahead.

Thank you, operator. Welcome to Cheetah Mobile's fourth-quarter and full-year 2014 earnings conference call. With us today are Mr. Fu Sheng, our CEO, and Mr. Andy Yeung, our CFO. Following managements prepared remarks we will come back for Q&A section.

Before we start, I refer you to the Safe Harbor Statement in our earnings release which, also applies to our conference call today as we will make forward-looking statements. At this time, I would like to turn the conference over to our CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Okay, thank you. Good evening, everyone, and thank you for joining our call today. I am excited to report that we made a significant breakthrough in our global business in Q4 and in 2014.

Revenues from mobile increased more than six times year over year and doubled quarter over quarter, and now account for 38% of our total revenue as of Q4.

More importantly, we continue to see very strong reception for our mobile advertising business in the overseas market. Already our overseas market revenue accounts for over 24% of our total revenues and 63% of mobile revenues last quarter. This success clearly demonstrates the potential value and our ability to monetize our mobile apps and users both in China and internationally. Given these strong trends we are confident that mobile will remain the key growth driver for our company and will account for more than 50% of total revenues by the end of first half of 2015.

Additionally, our recent investment in MobPartner will further strengthen our mobile advertising technology and enrich our global talent pool, which further accelerating our monetization capabilities. Going forward, we will remain focused on building one of the leading global mobile advertising platforms.

Now, I would like to highlight the progress in the three strategic areas. First, our [print apps] and user growth, during the Q4 our global mobile user installations has surpassed tremendous milestone by reaching 1b installations. On the MAU front we have now reached over 395m globally. This is an increase of 138% year over year, and now over 69% of our mobile users are outside of China.

Also for the full year of 2014 we added about 230m mobile MAUs. Led by the success of Clean Master we have built a strong product matrix of mobile apps. By using our innovating products to cross-promote new apps, today, five of our apps are among the top 40 non-game apps on Google Play. And four of our apps have more than $100m on Google Play. According to App Annie, Cheetah Mobile was the number two publisher for non-game apps globally on Google Play and is the number one publisher for the tools category.

Furthermore, we continue to launch new apps and services that improve the mobile experience for users worldwide. For example, recently Samsung has integrated Clean Master into its flagship S6 smartphone worldwide. In China, Tencent, Xiaomi, and WiFi Master are all promoting Clean Master. With these strong partnerships we are confident that our mobile user growth will remain strong both in China and overseas.

Second, with the strong progress in our overseas monetization capabilities, during Q4 mobile revenues grew 610% year over year and doubled quarter over quarter to RMB222m, accounting for over 38% of total revenue. For the full year 2014, mobile revenues grew 741% year over year and to RMB465m.

Our overseas monetization has already exceeded our expectations and now account for 24% of our total revenues and 63% of mobile revenue in Q4. The growth in the overseas mobile advertising was driven by our growth in user base, the significant progress we made in big data analysis and the mobile advertising technology as well as we expanding partnerships with key mobile advertising platforms worldwide.

In 2014 we improved the big data analysis which can improve our efficient ads for our advertisers. In addition, we have greatly expanded partnerships with more than 20 leading global mobile advertising platforms, resulting in US being the top partner of Facebook audience network. As a result, not only can we increase the availability of our AD -- ad inventory we are also seeing a significant increase in the value for our ad inventory. We expect that overseas will continue to be the major growth driver for our company.

Third, we will continue investing in mobile and global. Our results and our achievements in 2014 have clearly shown the validity of our previous investments. But this is just the beginning of us -- for us as we navigate that our expanding mobile markets. Recently the daily run rate of our overseas mobile ad revenues surpassed $500,000 per day. The rapid growth in our overseas mobile monetization demonstrates the huge value of our utility apps in the global market.

In 2015, we will continue to invest aggressively in developing our service and build better apps and expanding our successful promotion efforts. Our recent acquisition of MobPartner will also further enhance our monetization capabilities and the global sales footprint, allowing us to improve the inflation [value] of our advertising and expanding our customer base. We also plan to open additional overseas office to localize our service offer.

This initial venture will help us further strengthen the foundation for our future success. In short, through our hard work and solid results in 2014 we have demonstrated that a China-based company such as Cheetah Mobile can successfully monetize utility apps in the overseas market. We clearly demonstrated that the free-to-use model of Chinese tool apps can profit in global markets.

Additionally, it significantly strengthens our resolve and confidence in investing aggressively in the mobile business. We are confident that we can built Cheetah Mobile into a leading global mobile advertising platform over the next two or three years.

We expect 2015 to be another year of high growth in mobile users as well as the overall mobile advertising market. We have an aggressive strategy that we will significantly increase our investment in product development and marketing in order to solidify and expand our leading position in the mobile space.

Through large-scale investment we aim to, one, reach 600m mobile MAUs by the end of 2015; two, increase our revenues by 100% growth year to year in 2015; and three increase mobile revenue, especially overseas mobile revenue making it the main source of revenue and our key growth engine going forward. In fact, we anticipate Q1 mobile revenues could exceed 50% of our total revenues.

This concludes my portion of the presentation. I will now turn the call to our CFO, Andy Yeung.

Thank you, Sheng. Good evening, everyone. We close a landmark year with a solid quarter. For the full-year 2014 our total revenues increased by 135% year over year to RMB1.76b. In the fourth quarter our total revenues grew 119% year over year and 23% quarter over quarter to RMB589m, exceeding the high end of our guidance.

This strong performance was driven by organic business growth, primarily due to our robust mobile platforms performance globally. As Sheng mentioned earlier, mobile revenues grew 610% year over year and double quarter over quarter to RMB228m (sic - see press release "RMB222.1m"), accounting for over 38% of total revenue.

For the full-year 2014 mobile revenues grew 741% year over year to RMB465m. Most notably, our overseas monetization have exceeded our expectations since its launch in the second quarter 2014 and now. This already accounts for 24% of total revenues and 62% of mobile revenues in the fourth quarter. Our success in mobile, particularly in the overseas market, clearly validates our previous investment in the mobile and global arenas.

Now, I will walk you through the details of our balance sheet performance. All financial numbers are in RMB unless otherwise noted. Revenue from online marketing services for the fourth quarters were approximately RMB446m, an increase of 110% year over year and 24% quarter over quarter.

For the full-year 2014, revenues from online marketing services increased by 116% year over year to RMB1.3b. The increase were primarily driven by a strong demand for our mobile advertising business in both the domestic and overseas market. Mobile advertising business already accounts for 28% of our total revenue and 75%, almost 75% of our revenues in the fourth quarter. Looking ahead, we see strong trends that will allow mobile advertising to be the key growth driver of the company.

Our revenues have continued to diversify throughout the year. In 2014, revenue contribution from top three customers in aggregate was 41% of total revenues compared to 58% in 2013. This was mainly due to the significant ramp up in our mobile business.

Revenues from IVAS for the full -- fourth quarter were approximately RMB137m an increase of 226% year over year and 28% quarter over quarter. For the full-year 2014 revenues from IVAS increased by 382% year over year to RMB401m, increase were primarily driven by a large number of games and paying users compared to the same period last year.

Revenues from internet security services and others for the quarter were approximately RMB6m, a decrease of 60% year over year and 44% quarter over quarter. For the full year 2014 revenue from internet security services and others decreased by 26% year over year to RMB40m. The decrease was primarily due to the company ceasing to promote subscription services in a strategic reorientation which was started in 2011.

Now moving to costs and expenses, SBC expenses for the fourth quarter were approximately RMB51m compared to RMB10m in the same period last year and RMB57m in the previous quarter. SBC expenses for the full-year 2014 were approximately RMB173m compared to RMB37m in 2013. As we stated in the past, we have incurred higher SBC expenses in 2014 largely due to share and options granted to management and employees prior to the Company IPO in May 2014.

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

Non-GAAP cost of revenues for the fourth quarter were RMB140m. Non-GAAP cost of revenues for the full-year 2014 were RMB402m. The increases were primarily due to higher costs associated with the mobile game business and higher bandwidth and IDC costs from increased user traffic, as well as higher amortization costs from acquired intangible assets.

Non-GAAP gross profit for the fourth quarter was RMB449m, up 105% year over year and 22% quarter over quarter. Non-GAAP gross profit for the full year 2014 was RMB1.36b, up 123% year over year. Non-GAAP gross margin for the fourth quarter was 76% compared to 81% in the same period last year and 77% in the previous quarter. Non-GAAP gross margin for the full year 2014 was 77%.

Non-GAAP R&D expenses for the fourth quarter were RMB105m, up 96% year over year and down 12% for the quarter. The year-over-year increase was primarily due to increased headcount associated with expansion of our mobile business. Non-GAAP R&D expenditure for the full year was RMB386m, up 90% year over year.

Non-GAAP sales and marketing expenses for the fourth quarter were RMB182m, up 115% year over year and 11% quarter over quarter. Non-GAAP sales and marketing expenditures for the full-year 2014 were RMB573m, up 189% year over year. The increase was mainly due to promotional expenditures to expand our mobile business and deepen our global penetration. As Sheng mentioned, in 2015 will be another investment year for acquiring mobile users and overseas expansion.

Non-GAAP G&A expenditure for the fourth quarter were RMB56m, up 176% year over year and 73% quarter over quarter. Non-GAAP G&A expenses for the full-year 2014 were RMB147m, up 89% year over year. The increase were mainly due to increased professional fees and headcount associated with being a publicly listed company.

Non-GAAP operating profit for the fourth quarter was RMB105m, an increase of 76% year over year and 103% quarter over quarter. Non-GAAP operating profit for the full-year 2014 was RMB256m, an increase of 98% year over year.

Non-GAAP operating margin for the fourth quarter was 18% compared to 22% in the prior-year period and 11% in the prior quarter. Non-GAAP operating margin for the full year 2014 was 15% compared to 17% in 2013.

Non-GAAP net income for the fourth quarter was RMB83m, an increase of 132% year over year and 37% quarter over quarter. Non-GAAP net income for the full year 2014 was RMB241m, an increase of 143% year over year.

Non-GAAP diluted earnings per ADS for the fourth quarter increased by 105% year over year and 37% quarter over quarter to RMB0.59 or $0.10. Non-GAAP diluted earnings per ADS for the full year 2014 increased by 108% year over year to RMB1.80 or $0.29.

Now let me provide you with our first quarter 2015 revenue guidance. We currently expect total revenues for the first quarter to be between RMB640m and RMB650m, representing a 103% to 106% year-over-year increase. Please note this forecast reflects the company's current and preliminary view and is subject to change.

Finally, as mentioned previously, while we experienced non-GAAP operating margin improvement quarter over quarter in the second half of 2014, mobile internet is still in its early stages of development. I would like to emphasis that profitability is still not a priority for us yet. We will continue to see 2015 as an investment year. As a result, we will continue to invest heavily and aggressively in improving our products and acquiring more users to fortify our leading position in this growing market.

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

(Operator Instructions). George Meng, Morgan Stanley.

(Spoken in Chinese). Hi, my questions is about your overseas advertising monetization, especially you are now taking a three-pronged approach so basically you have your own sales force selling your advertising directly. You actually partner with baseball in terms of their baseball audience network. And you also partner with some of the third party ad exchanges.

So just wondering what's the revenue mix and then how do you allocate that? Is it all on RTB real time bidding basis or do you actually allocate those budgets or inventories manually? And is there any one particular source that shows higher [ROI] or any particular trait than the others. Then that's my question. Thanks.

Okay. I'll answer the question in Chinese and Andy will translate it for me. (Interpreted). Thank you for your questions, George. Your question about the distribution between our revenue share with -- or that the percentage of our advertising from overseas coming from Facebook or third parties or their sales force, I think that percentage continues to change and evolve as we develop our mobile advertising position overseas. And I think at this point we would not like to disclose too much detail about that at this moment.

Of course, partnership with overseas mobile platforms is very important for us. And in fact, I will be attending the Facebook audience network partner conference -- [F8] audience conference next week. Then I think that shows you how much we are involved in the overseas partnership there.

Right, so obviously we are continue developing our mobile advertising technology platform. We have a rudimentary RBD system but again, it's still in the early stage. It helps us to automate the optimizations of our billings. But again, as emphasized, we still -- it's a work in progress right now.

Right, so obviously we continue to look at strengthening our direct sales force in the overseas market and that's part of the key reasons for our acquisition of MobPartner which we announced a couple of days ago to basically strengthen our overseas presence and also acquire some technology there.

In addition to that, (technical difficulty). Right, so still in many areas we can continue to improve in our mobile technology platform. So that's part of the reason why we expect as we improve each one of them, we will see significant improvement in our revenue generation capabilities.

Thank you.

Thank you, George.

Jeff Hao, China Merchants Securities.

(Spoken in Chinese). Thank you for taking my question. My question is regarding overseas competition. So we've seen the overseas competition has been quite severe in the first quarter this year, especially among those Chinese tool apps developers, especially Qihoo. So can management comment on what's your view on the competitive landscape? And are you planning to spend more marketing dollars to deal with the current competition? Thank you.

Okay. (Interpreted). Well, thank you for the question, Jeff. Obviously our success in the overseas market has attracted a lot of entrants from China and other places. But those entrants have not really impacted in our user decisions or our business overseas.

Right, so if you look at some of the competitors, their main way of acquiring users are through very aggressive promotional activities there. And then that certainly helps in terms of [some] monthly download numbers. But in terms of their size and the scales, I think they are still very significantly behind us.

Given our success in the overseas market, we believe that we have a lot of opportunity to create even bigger scales and bigger -- better technologies overseas.

Right, so in order for us to solidify our leading positions in the overseas market and expand it and to achieve the scale of economy that we want to see, we will definitely increase our investment in marketing, in product developments to -- in the overseas market.

So, obviously some of your guys probably have seen quite a bit of our competition on the Google Play ranking at this moment. But the part you don't see is the activity that we have or the success that we have achieved in the offline user-acquisition channels.

In fact, if you look at our recent announcement, Samsung have integrated our Clean Master technologies into their recent (inaudible) product. And in addition to that, we are also working with other major OEMs including HTC and (inaudible) either to pre-install our applications or to provide some services for them.

So I think we are quite confident that that offline channel would also help us to [boost] our user acquisition as well.

Yes, so we are confident that we can maintain our leading position despite the competition coming in.

Thank you.

Thank you.

Evan Zhou, Credit Suisse.

(Spoken in Chinese). My question is regarding the overall spending plan to pursue the larger opportunities we foresee in the future. What's the breakdown by different [types] of spending scheme? For example like pre-installation, like partnership or [traffic provision]? Thanks.

(Interpreted). So as you can probably tell from the mobile industry globally, it's still at a very high pace of growth. And if you look at our peers, most of them have announced significant increase in investment in mobile business.

I think previously there's some questions about our business model in terms of monetizing our apps in the overseas market. But if you look at our first-quarter result and in the overall 2014 results, you will see that our -- we have a strong growth in our overseas market revenues. I think that clearly demonstrates the Chinese company like Cheetah Mobile ability to actually monetize the applications in overseas markets.

So today our Board of Directors have approved our plan to be more aggressive in investing in mobile business. So number one, as we mentioned, we want to achieve 600m monthly active users, so for our mobile user base in 2015.

So despite very high growth that we achieved in 2014, we also aim to double our revenues in 2015. But unlike last year -- or unlike 2014, in 2015 we anticipate that the main key driver for our growth will be coming from mobile, not PC.

We believe that we will be able to achieve very important milestones in the first quarter when our revenues which we anticipate for mobile to exceed 50% of total revenue.

So to achieve this very worthy goal of -- those three worthy goals, we believe that it is important to invest to achieve those ambitious goals. And so in 2015, we will invest aggressively.

The number one thing that we want to invest in is the product developments. We have seen the values of those applications, we want to create a powerful product matrix both -- not only in utility applications but also in other areas including in lifestyle and content areas. So that's a key area for our investment.

I think some of our peers have tried to monetize in the overseas market and may face some challenges. I think one of the key challenges for them was the inability to develop monetization technologies, advertising platform. So this is an area that we continue to -- like to focus and invest in. As we mentioned, we want to be one of the leading mobile advertising platforms globally. So this is one key area of investment.

So number three is that given we already have proven a very successful monetization model in the overseas market, it's the right time for us to increase and strengthen our user activation in overseas in order to achieve the scale of economy that we would like to see.

So these are the three key areas of our investment focus. So thank you.

Alex Yao, JPMorgan.

(Spoken in Chinese).

Okay, good question. (Spoken in Chinese).

Before I translate Fu Sheng's answers, maybe I will translate the question in English first. The question was about in 2015, one of our strategic goals is to achieve the 600m monthly active user mark. And the question is, to achieve that, are we going to maintain a (inaudible) of one or two products or are we going to have a more balanced portfolio of products? And also in terms of user engagements, what's the trend for us?

And so the answer that Fu Sheng initially mentioned is that one, obviously our flagship product Clean Master is very important for us, it continues to grow very fast and is a very important tool for us to promote our -- to cross-promote our applications. But if you look at some other applications that we have launched, particularly CM Security, which we launched in the first quarter 2014, we already have accumulated more than 100m users in less than one year.

(Interpreted). From the user base perspective, it's probably one of the largest mobile security software applications today globally.

So in addition to CM Security, in fact I think we have two other products that have more than 100m user downloads already. But in addition to that, we'll have -- also we've been launch several products including our CM Launcher. So in the coming year, we expect that we will form a very strong product matrix and to cross-promote different applications. So we would expect that the penetration amount -- our own applications will be even higher.

Right, so in terms of the ad inventory that we make available for advertising, I do not want to disclose the precise number of impressions. But I think if you look at, on a year-over-year basis, we have more than double the inventory that we have made available for advertising. And I think if you look at the ability for us to increase impressions and inventory and page view, we think we still have significant room to improve on that.

So if you look at, in addition to the volumes of inventory of increase, another very key area for increasing mobile revenue is what we call eCPM. And eCPM has led to a lot of the ad revenue technologies in terms of mobile advertising. So it's how you can optimize pricing, how we can do better tracking, how can you source more advertisers and so you can -- and also we can vary different type of pricing model.

So we continue to improve on that. So overall I think you look at volume, you look at eCPM, we continue to see a lot of room for improvement and a lot of room for growth.

Okay. (Spoken in Chinese). Thank you.

Thank you, Alex.

Thomas Chong, Citigroup.

Hi, thanks for taking my questions. I have two questions. Can management give us some color about the geographical revenue mix for your advertising business?

And my second question is any color about the -- your business strategy in the China market going forward? (Spoken in Chinese).

(Interpreted). Right, so as we mentioned earlier already, mobile accounts for -- overseas revenues account for more than 60% -- I think almost 62% of our total mobile revenues. So obviously the rest of that's in China. For overseas, you can tell that our business mirrors very much the existing international mobile advertising market, which is mainly coming from North America and also Europe.

Right, and we also want to point out that even in China we see, again, re-acceleration of our growth in the mobile advertising business.

Right, reflecting our user base right now, so a lot of users today are coming from North America and Europe. So -- and more advertising business in those countries are also more developed. So the revenue generation abilities in those markets are bigger. So our focus in those markets today in addition to user growth is monetization.

Now we also want to point out that all this trend today in the mobile market is that in emerging market, the user growth is growing faster. So countries like India and those places, we see faster user growth. And I think that represents a very important potential market for monetization in the future. So that's our view on mobile and also our future outlook for that in terms of geographic outlook. Thank you.

Henry Guo, JG Capital.

Thanks for taking my question. So a very quick one. So, Andy, -- this is a question for Andy. So could you break out the mobile advertising and mobile gaming for the mobile revenue for the quarter?

Right, so right now the majority of our revenues are coming from advertising. In fact I think we mentioned that almost 75% of our mobile revenues today are coming from advertising, that's in the fourth quarter.

Okay, thank you.

All right, and as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

Thank you for joining our conference call. And if you have any questions, please let us know. Thank you so much.

Thank you, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

Thank you.

Thank you.