Cheetah Mobile Inc (CMCM) 2015 Q1 法說會逐字稿

Thank you, operator. Welcome to Cheetah Mobile's first-quarter earnings conference call. With us today are Mr. Fu Sheng, CEO, and Mr. Andy Yeung, CFO. 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 also applies 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 CEO, Mr. Fu. Please go ahead, (inaudible).

Good evening, everyone. Thank you for joining our first quarter 2015 earnings conference call. I'm excited to announce that we have made impressive progress since we set our strategic goal at the beginning of 2015 to be among the top three global mobile advertising platforms. We have witnessed both strong growth in our mobile user base and continued success in our mobile monetization during the quarter. Most importantly, Cheetah Mobile has achieved a major landmark milestone in the mobile and global transformation of our Company, with mobile revenues now accounting for a majority of total revenue for the first time in our history.

Now, I would like to talk about the progress we have made in the mobile user growth and monetization during the first quarter from a few perspectives. First of all, our growing mobile user base and mobile MAUs demonstrates the continued jump (inaudible) momentum of our business. Specifically, our total mobile user installations has reached over 1.3b as of March 31, 2015. Additionally, our mobile MAUs reached 444m, an increase of 48m users quarterly over quarterly -- quarter over quarter. To date, 71% of mobile MAUs came from overseas markets. These impressive results were mainly driven by our portfolio popular products, our strong presence (inaudible) as I mentioned of mobile apps and our continued investment in user acquisition.

On the product side, we continued to roll out new apps and service in order to further enhance the mobile experience for our smartphone users worldwide. In December 2014, we launched a personalization app called CM Launcher and, according to App Annie, CM Launcher was among the top 20 non-game apps on Google Play and rated number two in the personalization application category on the Google Play in April 2015. CM Launcher was rated 4.6 out of 5 stars, which was the highest score among the large mobile launcher apps.

In addition, we are creating a powerful [niche] of utility apps. In March of our app were among the top three -- top 30 non-game apps on Google Play. With the continued success of Clean Master and CM Security as a base, we are able to effectively cross-sell other apps with high frequency of use such as CM Launcher, CM Browser and CM Locker.

In addition, we recently launched CM-Backup, a cloud-based backup and restore service. That has been well received by users and has been successful in encouraging] more and more of our app users to register with us. This layering of products is creating a powerful matrix of utility apps that not only help us expand our user base but also increase our user time spent and user engagement.

On the user acquisition side, we continue to strengthen our multi-channel [strategy] to promote our apps. During the quarter we strengthened our partnership with key online marketing platform including Facebook, Google and Twitter. In addition, we have expanded our offline partnership with over 50 smartphone makers and carriers to distribute our mobile apps.

Moreover, our mobile revenues, especially mobile revenue from overseas markets, continue to deliver solid financial results which have become the main driver of our growth. Specifically, our mobile revenues grew 584% year over year to RMB366m -- RMB367m, accounting for 55% of Q1 total revenues. Overseas revenue grew 84% quarter over quarter to RMB256m, accounting for 38% of our total revenue and 70% of our mobile revenue in the quarter. This substantial improvement in mobile and overseas monetization was driven by increasing success of our mobile advertising service. Mobile advertising revenues accounted for 48% of our total revenue and 89% of our mobile revenues.

During the quarter, we have also further expanded our partnerships with leading mobile advertising network, made a strategic investment and acquisition of a key mobile advertising asset. We have also increased investment into R&D to improve our big data analytics capabilities, created better mobile and formats and continue to build our mobile advertising platform. These initiatives enhanced our monetization capabilities and enabled us to drive the mobile revenue and overseas revenue higher during the quarter.

We further expanded our advertiser base through strategic partnerships during the quarter. Internationally, we greatly expanded our partnerships with leading global mobile advertising platform, including Facebook Audience Network and Google (inaudible). We were very pleased that Facebook had highlighted our successful partnership with Facebook Audience Network in their earnings call recently.

In China, the overall mobile advertising industry has experienced the Cheetah evolution and the development as well. People are beginning to realize that mobile advertising is much more than just a mobile app store. Now, people are paying more attention to big data analytics and targeted mobile advertising solutions. In this sense, Cheetah Mobile has become a top partner of Tencent -- for Tencent where we have all our core apps linked into Guangdiantong and already show promising results from this partnership during the quarter.

We also further accelerate our global mobile advertising capability through strategic investment and acquisitions through the quarter. In April, we completed the acquisition of MobPartner and are happy to report that integration is progressing smoothly. Our investment in MobPartner further expanded our global sales footprint. Now, we have set up and are in the progress of setting up more than 10 overseas office to facilitate our localization of service offering.

In March, we made a strategic investment in Nanigans, a social and mobile advertising software provider, which makes -- which marks an important move for us as we improve our big data analytics capability. Moreover, we enhanced our mobile app ad talent pool, introduced additional mobile ad formats and made significant progress in the mobile advertising platform through investment in R&D.

We are excited to have the personalized recommendation team from Yahoo Beijing Research Center join our Cheetah family. In addition to contextual (inaudible) ad and radio ad, we also experimented with an innovative mobile ad network for the (inaudible) ads on the lock screen.

Looking ahead, we are confident that by executing this strategic initiative we will continue to grow our mobile and overseas revenues.

In closing, I would like to reiterate that we will continue investing in our mobile and overseas business in 2015. Cheetah Mobile will continue investing in products and marketing to attract more mobile users and improve our mobile advertising technology and platform in order to capture the vast global mobile advertising opportunity ahead. We are very clear in what we are pursuing and firmly believe this initiative will strengthen our leadership position in the industry and deliver long-term shareholder value.

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

Thank you, Sheng. Good evening, everyone. We're delighted to have, once again, delivered another record quarter of financial performance. Total revenue grew 113% year over year and 14% quarter over quarter to a record high of RMB672.5m in the quarter, well exceeding the high end of our guidance.

Our robust revenue growth was mainly driven by our mobile advertising business, especially in the overseas market. Revenues on mobile increased 584% year over year and 65% quarter over quarter and accounted for 55% of our total revenue in the quarter, a very important milestone for our global and mobile strategy. Particularly, overseas was the biggest contributor to our mobile revenue growth. During the quarter, overseas revenue contributed 38% of our total revenue and 70% of our mobile revenue.

Our results and achievement have clearly shown we -- that we are on the right track for ensuring our success as a top global mobile advertising platform. But it is just the beginning for us as we continue to see significant opportunities in the vast, rapidly growing mobile market. Looking ahead, we will continue to invest in attracting more users, improving big data analytics and build a sophisticated mobile advertising platform.

Now I will walk you through the details of our financial performance. All financial numbers are in RMB unless otherwise noted. Revenue from online marketing services for the first quarter were RMB559.9m, an increase of 141% year over year and 26% quarter over quarter. The increases were primarily driven by a strong demand for our mobile advertising business, especially in the overseas markets. Mobile advertising business already accounts for 48% of our total revenue and 89% of mobile revenues in the quarter. Looking ahead, we are confident in our ability to continue growing our mobile advertising revenue.

Revenues from IVAS for the first quarter were RMB97.2m, an increase of 35% year over year and a decrease of 29% quarter over quarter. The year-over-year increase primarily reflects the growth of our revenue from mobile and PC games published by the Company. The sequential decline was mainly due to the (inaudible) of our online lottery operation in response to regulatory changes in China.

Revenue from Internet security services and others for the quarter were RMB15.5m, an increase of 32% year over year and 167% quarter over quarter. The increases were primarily due to the sales of the Company's air purifier product.

Now moving to costs and expenses, SBC expenses for the first quarter were approximately RMB46m compared to RMB14m in the same period last year and RMB51m in the previous quarter. As we've stated in the past, we will incur high SBC expenses this year, mainly due to share and option granted to our management and employees prior to IPO in May 2014.

To help facilitate the discussion of Company's operating performance, the following discussion will be on a non-GAAP basis which excludes stock-based compensation. 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 revenue for the first quarter were RMB140m, up 105% year over year and 3% quarter over quarter. The increases were primarily due to higher bandwidth and IDC costs from increased user traffic as well as higher amortization costs from intangible assets resulting from acquisitions.

Non-GAAP gross profit for the first quarter was RMB528m, up 115% year over year and 18% quarter over quarter. Non-GAAP gross margin for the first quarter increased to 78.5% (sic - see press release "78.4%") from 77.7% in the prior-year period and 76.2% in the previous quarter, bolstered by a high percentage of revenue generated from mobile advertising.

Non-GAAP R&D expenses for the first quarter were RMB117m, up 64% year over year and 12% quarter over quarter. The year-over-year increases were primarily due to increased headcount associated with the expansion of our mobile business. At the end of the first quarter, we have approximately 1,300 R&D personnel. We're delighted to have the personalized recommendation team from Yahoo Beijing Research Center join us recently. We'll continue to invest in mobile product development to enhance our big data analytics capabilities and our mobile advertising platform technology in order to build a global mobile advertising platform.

Non-GAAP sales and marketing expenses for the first quarter were RMB248m, up 124% year over year and 36% quarter over quarter. The increases were primarily due to promotional expenses for our mobile business. As we have mentioned previously, we will continue to step up investment in user acquisition for the rest of the year.

Non-GAAP G&A expenses for the first quarter were RMB66m, up 123% year over year and 17% quarter over quarter. The increases were due to increased professional services fees and headcount associated with being a public company.

Non-GAAP operating profit for the first quarter was RMB97m, an increase of 192% year over year and a decrease of 8% quarter over quarter. Non-GAAP operating margin for the first quarter increased to 14.4% (sic - see press release "14.5%") from 10.6% in the prior-year period.

Non-GAAP net income for the first quarter was RMB76.9m, an increase of 135% year over year. Non-GAAP diluted earnings per ADS for the first quarter doubled year over year, to RMB0.54 or $0.09.

To help with a better understanding of our -- of the impact of amortization of intangible assets resulting from acquisitions on our operating expenses, we reported adjusted EBITDA beginning this quarter. Adjusted EBITDA is non-GAAP measure that is defined as earnings before interest, tax, depreciation, amortization, other non-operating income and share-based compensation expenses. Our adjusted EBITDA for the first quarter was RMB129m, an increase of 207% year over year.

Now let me provide you with our guidance. We currently expect total revenue for the second quarter to be between RMB785m and RMB795m, representing a 106% to 109% year-over-year (background noise). Please note this forecast reflects the Company's current and preliminary view and is subject to change.

And this concludes our prepared remarks for today.

Operator, we are now ready to do the questions.

Evan Zhou, Citigroup (sic).

Hello, this is Evan from Credit Suisse. Thanks for taking my questions. My first question will be we have already set our goal to be in the top three advertiser -- mobile advertising provider in -- around the world so I was wondering what kind of the scale of business that will be if we reach that goal. And if we reach that levels of scale, what the revenue mix will be in like in terms of the mobile advertising and what kind of a current run rate of over $600,000 per day compared to that goal? Thank you.

Evan, thank you for your questions. Regarding what the potential size for mobile advertising revenue, obviously that's a dynamic involvement. If you look at the mobile advertising industry as a whole, it's continued to grow. We think that in a couple of years will probably take magnitude of billions of dollars in revenues to be a top three mobile advertising platform. And I think, current run rate, if you look at some of the top three players probably running at maybe a couple of million US dollars per day run rate. So, again, it's a dynamic situation so we just can only give you an approximation and --. Evan, do you have any other question, follow-up question for that?

Thomas Chong, Citigroup.

Hi. Thanks for taking my questions. I have three questions. The first question is about the accounts receivable. Any color about the sequential jump by 60% quarter on quarter to about RMB420m in the first quarter?

And my second question is about the cooperation with Samsung. Any color about the lump sum payment, how much a year [advance] we should expect to be booked in your P&L?

And the third question is just I wanted to confirm the mobile advertising revenue represent 48% of your total revenue and 89% of your mobile revenue in the first quarter. Thanks.

Thomas, thanks. I think regarding the receivable increased some but you have to remember our total revenues also increased in the quarter. And also if you also remember that in the first quarter January is a (background noise) season for receivables, mainly due to the Chinese New Year and whatnot so there's seasonality to the receivable collection. And, as you know, our Company have one cash flow operation -- positive cash flow operation for many, many quarters now and during the quarter we continue to run a positive operating cash flow.

The second question that you asked is about Samsung. As we mentioned, we have a partnership with Samsung where they integrate our SDK into their operating system for the Samsung S6 smartphone. And unlike a traditional [preservation] type of project, we - they actually is our customer. They pay us a technical fee so we don't actually pay them for SDK/ But, however, the payment that we receive from Samsung is (inaudible) small and we value their partnership more than what we value the revenues generated from particularly that partnership. So , we're very delighted to have Samsung as our partner and we like to (background noise) grow and expand.

The third question that you have is confirmation of mobile advertising revenues as a percentage of total revenue. It should now account for 48% of our total revenue and about 89% of our mobile revenues. Thank you for your questions.

Jeff Hao, China Merchants Securities.

Hi, good evening. Thank you for taking my question. I have two questions. First is regarding the first-quarter results, because our guidance is the non-GAAP operating margin is around zero, but we have made quite a big profit in our first quarter. So can management give some color on the reason behind that?

And my second question is about our new product strategy. Fu Sheng mentioned a number of new product with launch during the past quarters. Can the management comment on the promotion strategy for the new products for the following quarters? Thank you.

(Interpreted). Jeff, thank you for your questions. Yes, so as for our competitive landscape, our strategy today is not to [can buy] our competitor. It's more for us, because -- if you look at our competitors, they're very far distant from our leadership position. What we're trying to do is that we will try to experiment with our strategy and find marketing and product strategies that will continue to build our success. And so that was coming to face us. It's not going to be all happen at once, and so it's going to be more progressive type of exploitation.

So even though we have set a very broad and ambitious goal and objective for our plan, but when we look at marketing dollars, we always want to spend it effectively. And so we definitely look at how effective a channel is, we look at retention rate, we look at user feedback. And then we decide to adjust our advertising and mobile promotional activities.

So again, and like our competitors, we may have one single objective of making money and pour all the money into mobile promotional activities. We would look at the market and respond it correspondingly.

The second question, the second?

Yes, we'll follow up on the second question, which is about our current new products, yes.

(Interpreted). Right, so if you look at our current product matrix, we already have formed a very powerful product matrix with Clean Master and Security -- CM Security at the base that basically address the user needs for clean and secure smartphone work operating environment. Today we are layering on top of that increasingly with products that have higher frequency of use for users.

Right, so if you look at, for example, one of our recently launched products, CM Launcher, while we're still at a stage where we continue to improve the user experience, but the product itself is already ranked in the top 20 on a non-game app on Google Play. And as we make the product better, we will drive more users to use our product.

Right. Besides introducing high-frequency-of-use applications, we also have recently launched the cloud-based services such as our CM Backup Services. And we already see very -- the product has been well received by our users. And we do expect we'll continue to -- new products in the cloud-based area and see more user growth from that area.

Okay. Thank you.

Thank you.

Alvin Jiang, Morgan Stanley.

I can see Cheetah Mobile has a very strong quarter-on-quarter MAU growth in overseas markets. Can you share us more color on the geography breakdown of this new addition?

And my second question is on the mobile revenue in overseas markets. Can you give us a breakdown of how much percentage is from mobile ads and how much from gaming? Thanks.

(Interpreted). So in terms of our user base, as you can see, our user base expands globally, and obviously developed markets like US and Europe still are our largest markets. But if you look at overall mobile user base in emerging markets, they are growing much faster, for example, today. And that's also happening to our user base as well. We see new emerging markets user base going at a faster pace. I think that's natural and normal.

So if you look at mobile revenue, 89% of that is coming from mobile advertising. Only 11% of that coming from games. And if you look at the overseas market, that proportion is even greater for advertising, because our mobile gaming operations overseas is in a very, very early stage of operation. So hopefully that answers your question?

Thank you.

Thank you.

Alex Yao, JP Morgan.

Good evening, Fu Sheng and Andy. I have two questions. Number one is about the revenue split of first-party mobile advertising, i.e. your monetized inventory so your own monetization capability versus the third-party mobile advertising revenue, i.e. you're selling the traffic to mobile ads networks such as a Facebook Audience and Tencent Guangdiantong. Can you share with us the rough split between these two? And what is the strategy to drive the first-party monetization capabilities here?

And number two, can you share with us the difference between the development of mobile ad networks in China versus the rest of the world? Particularly we are interested to hear the difference in the ecosystem monetization capability and the competitive landscape. Thank you.

(Interpreted). So thank you, Alex, for your question. If you look at our current mobile revenue, the mix between our direct (background noise) and third-party networks, obviously it's a dynamic environment. It's not a static environment. So our system actually looks at what the pricing -- at the pricing schemes they are coming from, both our direct sales and also from the third parties. And then we'd almost in real time [amicably] to determine what advertising to take in our apps.

So that all should change over time, and also at this time we don't intend to disclose it at this moment, because of the changing dynamic nature of this too.

Right, so, if you look at to build a, I guess, leading mobile advertising platform, it's more sophisticated than most people would think. In fact, you have not only to have a look at the platform technology, but also have to do a lot of the data analytics, and you also have to acquire the advertisers and etc., etc.

So it's a complicated process and it may take some time as well. So for us, it's really important for us to continue to expand our cooperation with some of these other global advertising networks such as Facebook Audience Network and those guys.

At the same time, each mobile platform has their own traffic and their own advantage and strength and we would like to continue to experiment with our mobile advertising platform, and strengthen our own platform as well.

If you look at globally, our firm belief that over time, global mobile advertising, successful global mobile advertising networks, would be concentrated in a few companies that have their own large organic traffic flow. So, it is our view that if you look at today, while the independent mobile advertising network that does not have their own organic traffic would have limited growth opportunities. On the other hand, if you look at the properties or networks that have their own organic traffic, I think there's a lot of opportunity for them.

And as a result you can see that the (background noise) that does have a lot of traffic, such as Facebook, also have recently acquired a mobile advertising network like [Netview]. Google has acquired [Admart], and, if you look at Yahoo offer, all these top leaders have certain organic traffic acquired in their own advertising technology platform. I think that's the trend, and that's similar to why we are interested and have acquired a market partner in the first quarter.

If you look at the global mobile advertising market, obviously traffic is a big barrier to entry. And I think we already have [thought] that big barrier to entry, because we ourselves have very strong global mobile traffic. And the next step that we wanted to improve nig data analytics as we can see we have rapidly improving our capability there.

And then the second thing we said, it's important to our global competition is in term of execution, ability to consolidate global advertising sources to form a sort of network. And I think we are confident that we're on the right track in that direction and to become one of the top three mobile advertising platforms.

Thank you.

(Operator Instructions) Ella Ji, Oppenheimer.

So my first question is also a follow-up relating to your M&A strategy. So if you aspire to become one of the top three global mobile ad platforms, I wonder if you could comment on your M&A plan in the coming quarter -- in the coming years? Do you think you will continue to be very active with M&As in the -- regarding the targets, are they most likely going to be independent mobile ad platforms?

And second question is relating to your domestic user end revenue. Could you also share with us recent updates on that perspective?

And the last question is relating to your revenue drivers. So if we break down your revenue model by the click-through rate, conversion rate and cost CPA, which one do you think will be the largest revenue drivers in the next couple of years? Thank you.

Okay, thank you.

(Interpreted). So I think -- Ella, thank you for your questions. I think regarding acquisitions, I think first of all acquisition is not doing it for acquisition's sake. Our M&A strategy has always been focusing on identifying complementary technology, know-how companies that will keep up with our strategy. So we don't just acquire a company for convenience sake.

And I think that important mention we may be applying traffic and selling traffic, what we can tell you that our organic traffic, for example, represents more than 90% of our mobile revenue. So there's no reason to believe that we are acquiring a company just for traffic or for revenue.

If you look at our acquisitions, while we like to view acquisitions to complement our global strategy to expand our global presence, but at the same time we are also very cautious because we are aware that there may be immigration issues and other issues with too large acquisitions. So, in that sense our acquisition strategy focusing on complementary (inaudible) of the potential targets and we also are more, very, very cautious with our approach.

And I think the second part of the question is about our China strategy. I think if you -- as we have created this policy now, we also have special partnership with WiFi Master to promote our applications in China. We also have a partnership with Xiaomi for our applications on their Xiaomi to install our application on their Xiaomi Redmi smartphone. We also have strong partnership with Tencent not only with Guangdiantong but also with their YingYongBao, their app store.

And so we have obviously invested in user acquisitions in China as well. But for us, when we look at Chinese market, we want to look at it as a part of our global strategy and global market. And so obviously China's an important market and we will pay attention to it as well. But it's part of our global strategy but not a single strategy on a standalone basis.

Right, so obviously we have achieved a very good success in overseas market and we've a very strong leadership position in the mobile user applications space globally. So this year we definitely would focus some more resources in the Chinese market to make sure that we also achieve a certain level of success in China, and also put our potential (inaudible) in a more defensive position.

So, I think when we look at our growth opportunities, the growth driver for mobile advertising revenues going forward, obviously the number of -- impressions will be a significant driver. We are still very early in the mobile advertising game today.

In addition to that, also if you look at, we have pricings (inaudible) to monetize per user, I think we still have much room to grow. If you look at Facebook, for example, or other US platforms, they generally can generate close to $1 per month per user. Today we're only a few pennies on a monthly basis. So I think there is significant room for us both to grow our number of impressions for advertising as well as the pricing front as well.

So from a long-term perspective, my inclination is to have our Company focus more on increasing the value of our impressions rather than just trying to push through a lot quantity on our advertising to our users. The main thing is that we want to see -- because when you see an increase in the value of our advertising impression, that means that we have better targeting, and also often means that our user will have better user experience, and as a result not being overly monetized or overly advertised to buyers.

And so from that perspective it means that we need to further improve our big data analytic capabilities. This is an area that we would obviously invest nationally so that we will have more targeted advertising, better advertising. So -- but we like to see ourselves not only become the leading user applications provider globally, but also you walk into a big data analytic house that can have very effective advertising.

Okay, thank you.

Thank you.

Thank you for joining our conference call today. If you have further questions please do not hesitate to contact us. Thank you, bye.

Okay, thank you.

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.