Cheetah Mobile Inc (CMCM) 2015 Q2 法說會逐字稿

Welcome to the Cheetah Mobile second quarter 2015 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

At this time, I would like to turn the conference over to Helen Zhu, please go ahead.

Thank you, operator. Welcome to Cheetah Mobile second quarter earnings conference call. With us today are Mr. Fu Sheng, our CEO and Mr. Andy Yeung, our CFO. Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the Safe Harbor Statements 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 Sheng. Please go ahead, Fu Sheng.

Hi, everyone. Thank you for joining our call today. We are very happy to report another quarter of strong results. Q2 revenues came in at RMB871 million, much higher than our previous guidance of RMB785 million to RMB795 million, due to stronger than expected demand for our mobile advertising service from both overseas and domestic advertisers. More importantly, we continue to make very solid progress in our mobile and global strategies, which should lay a strong foundation for our future growth.

Only a year ago we launched our overseas monetization efforts. In the second quarter this year, we celebrated another key milestone with our overseas mobile revenues now. Accounting for 15% of the total revenues for the first half, in Q2 mobile accounted for 64% of our revenues. We are happy with our transformation into a truly global and a mobile company.

About three years ago, we decided to launch Clean Master in overseas markets. As of June this year, five of our apps are now listed among the top 40 most downloaded apps on Google Play worldwide. Today we have over 494 million Mobile MAUs globally, and 71% of our mobile user base came from overseas. Additionally, about two years ago, we began our mobile monetization efforts. Today mobile now accounts for 64% of our total revenues.

As I mentioned earlier, we launched our overseas monetization efforts a year ago and in a very short amount of time, overseas revenue has grown extremely faster and now accounts for 50% of our total revenues and 77% of our mobile revenues.

Our solid progress in mobile and global was due to our continued improvements in (inaudible)the big data analytics expansion of direct sales and of regional compatibilities worldwide, as well as our strong partnership with key global Internet players, first with our continued success of Clean Master and CM Security as a base. We were able to effectively grow sales of other app with high frequency of use, such as CM Launcher, CM Browser and CM Locker. This layering of products is creating a powerful matrix of utility apps that not only helps us expand our user base but also increase our user time spend and user engagement.

Second by integrating the demographic and the [usage] data of our 494 million media mobile MAUs with ad combined data of mobile partners 200 million amongst the advertising audience. We are prudently expanding our global reach and are developing a richer user date loop. While just having a lot of data is not enough, we need to be able to analyze the data and the (inaudible) inside from the data. So far, we have contracted more than 100 users (inaudible) that can help us better understand our user base and improve our ad tracking and retracking of [user base].

big data analytics plays an important role in creating values for mobile advertising platforms and they remain a key focus for our investment in coming quarters. We continue to expand our direct sales and operational mobility worldwide, with the integration of mobile partner and our own organic offers, we now have sales in 10 countries and more than 200 overseas employees. We plan to continue to build our overseas compatibility to deliver better and more localized service to our advertisers. Of course, our mobile monetization compatibility particularly in overseas market have also benefitted from strong partnership we have built with key global Internet players by allowing advertisers to place their ads on our mobile apps through Facebook audience network, we are able to quickly expand our global reach without actually building a large scale network. As of today, advertisers' own [FAN] contributes a large portion of our mobile revenues and we're already one of the biggest public share partners for Facebook audience network if not the biggest. Recently, we've further expanded our partnership with Facebook beyond native ads. In addition to Facebook, we continue to build stronger partnerships with other key industry player including Google and Tencent. In addition, we launched our global ad platform Cheetah Ad Platform in June, an important step for us in building one of the most robust mobile advertising platforms in the world to help publishers, including ourselves to deliver more relevant ad to mobile users that impact our results and to generate higher ROI for advertisers. We are continued to enhance our global and platform, the global ad platform was a new service such as video ads and a new capability such as RTB.

In short, we are happy with the progress we have made so far, but it is just beginning for us. We know there is still a lot of work ahead of us but we're very excited about the opportunities. We will continue to focus on the opportunities and invest our resources and efforts into achieving our goals. We're looking forward to providing you more update on our progress next time. Now I'll turn the microphone to our CFO Andy.

Thank you, Fu Sheng. Good evening, everyone. We had very strong performance in the second quarter both operationally and financially. The key highlight of this quarter continues to be the strong performance in our mobile and global strategy especially the sustained momentum in our overseas operations. Above expected topline results flows through our business model resulting in 180% year-over-year increase in growth in our GAAP operating income and 43% year-over-year increase in non-GAAP operating income, but as Sheng mentioned this is just the beginning for us. The global mobile Internet industry as a whole is still at its infancy, we continue to see significant opportunities in the global mobile space. Looking ahead, we will continue to invest effectively in building up our overseas capability, big data analytics and mobile ad technology in order to better support our business growth in the future.

Now I will walk you through the details of our financial performance. All financial numbers are in RMB unless otherwise noted. Total revenue grew 129% year-over-year and 30% quarter-over-quarter to a record high of RMB871 million in the quarter. Mobile remains the key driver of our growth, driven by ongoing strong demand for our mobile advertising services, both domestically and overseas.

Mobile revenues surged 634% year-over-year and 52% quarter-over-quarter to RMB560 million in the quarter, contributed 64% of our total revenue, up from 20% last year. Most notably, having begun only one year ago, overseas revenues now accounts for 50% of our total revenues and 77% of our mobile revenues.

By segment, revenues from online marketing services for the second quarter were RMB752 million, an increase of 166% year-to-year and 34% quarter-over-quarter. The increases were primarily driven by strong demand for our mobile advertising solutions, especially in the overseas market. Mobile advertising business already accounts for 58% of our total revenues and 90% of our mobile revenues in the quarter. The recent acquisition of MobPartner also contributed modestly to our revenue growth, accounted for a little more than 5% of our total revenues in the quarter.

Revenues from IVAS for the second quarter were RMB109 million, an increase of 29% year-to-year and 13% quarter-over-quarter. The increases primarily reflect the growth of revenue from mobile and PC games published by the company.

Revenues from Internet security services and others for the second quarter were RMB9 million, a decrease of 29% year-over-year and 43% quarter-over-quarter. The decreases were mainly due to the Company ceasing to promote subscriptions services in a strategic reorientation which started in 2011.

Now moving to cost and expenses. Share-based compensation expenses for the second quarter were approximately RMB56 million compared to RMB52 million in the same period last year and RMB46 million in the previous quarter. As we've seen in the past, we'll incur higher SBC expenses this year, mainly due to shares and options granted to our management and employees for attracting and retaining top talents. To help facilitate a discussion of the 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 revenues for the second quarter were RMB222 million, up 171% year-over-year and 54% quarter-over-quarter. The increase was primarily due to higher traffic acquisition costs associated with the MobPartner business, higher bandwidth and IDC costs associated with increased user traffic and big data analytics, as well as high amortization costs from intangible assets resulting from acquisitions.

Non-GAAP gross profit for the quarter was RMB649 million, up 117% year-over-year and 23% quarter-over-quarter. Non-GAAP gross margin for the second quarter was 74.5% compared to 78.5% in the second quarter of 2014 and the first quarter 2015 respectively. We expect gross margin to remain flattish in the coming quarters. Non-GAAP R&D expenses for the second quarter were RMB130 million, up 46% year-over-year and 10% quarter-over-quarter. The increases were primarily due to personnel related costs associated with the expansion of our mobile business.

At the end of the second quarter, we have more than 1,300 R&D personnel. We will continue to invest in mobile product development, big data analytics, mobile app technologies in order to build a robust global mobile advertising platform. Non-GAAP sales and marketing expenses for the second quarter were RMB338 million, up 193% year-over-year and 37% quarter-over-quarter. Increases were mainly due to promotional expenses for our mobile business. Our strong mobile traffic growth underpins our continued robust financial performance. Going forward, we will continue to invest in our user acquisition.

Non-GAAP G&A expenses for the second quarter were RMB87 million, up 203% year-over-year and 33% quarter-over-quarter. The year-over-year increase was due to increased professional service fees and headcounts associated with being a public company. The sequential increase was primarily due to increased professional service fee.

Non-GAAP operating profit for the second quarter was RMB94 million, an increase of 43% year-over-year. Non-GAAP net income for the second quarter was RMB116 million, an increase of 77% year-over-year and 51% quarter-over-quarter. Non-GAAP diluted earnings per ADS for the second quarter 65% year-over-year and 49% quarter-over-quarter to RMB0.81 or US$0.15.

To help to get a better understanding of the impact of amortization of intangible assets resulting from acquisitions on our operating expenses, we have started reporting adjusted EBITDA since first quarter 2015. Adjusted EBITDA is a non-GAAP measure that is defined as earnings before interest, tax, depreciation & amortization, other non-operating income and share-based compensation expenses. Adjusted EBITDA for the second quarter was RMB132 million, an increase of 59% year-over-year and 2% quarter-over-quarter.

Now let me provide you with our guidance. We currently expect total revenues for the third quarter to be between RMB990 million and RMB1.01 billion representing 107% to 111% year-over-year increase.

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 take questions.

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions) Alwyn Cheong, Morgan Stanley

Thank you for taking my question. Congratulations on the strong quarter. I have two questions, the first question is on your investment plans in the second half of 2015 and also the investment plan in 2016 because in the last two quarters I think we are doing better on margins than what we expected or were guided, (inaudible) our guidance for full year zero profit. And my second question is on the revenue growth, can you give us some color on how big is the organic revenue growth and how big is the impact from those acquisitions? (interpreted)

(interpreted) So Mr. Fu Sheng would like to answer the first part of your question and I will answer the second part of your question. Regarding our margins, yes, margins for our quarters were better than expected. And as we have mentioned, we have a pretty aggressive plan to invest in capital markets mainly through this year to acquire user. Even though the overall expenses or the cost of these acquisitions normally have been increasing, we are very cautious and very careful in terms of how we spend our marketing dollar. And so I think, if you think about what we have forecasted or have guided to investor probably was the worst case scenario and but again, as we have mentioned before zero profit was never our strategy, but again, I guess user acquisition will continue to be a focus, but may not be as low as we had previously forecasted [into our project].

Second part of your question regarding organic growth, as I mentioned on our prepared remarks, MobPartner accounted for slightly more than 5% of revenues in the second quarter, so in total, like more than 95% of revenue is coming from organic, and organic growth is definitely the primary driver for our revenue growth.

If you look at our second quarter, right, so if you look at our quarter, right, total revenue grew 129% year-over-year. And as Fu mentioned, MobPartner accounted for about 5% of that contribution for the second quarter.

Evan Zhou, Credit Suisse.

Two questions. (interpreted) So the question is regarding the product update, if you could provide some colors on the revenue breakdown by products and what is the monetization contribution by different products and your growth rate by products, especially the flagship Cheetah Mobile Clean Master? And also if you have some immediate long-term plan for the product update in the next coming quarters will be helpful. Thank you.

(interpreted) So if you look at today, Clean Master is still our flagship product and still growing at a very robust pace. Of course if you look at other products in security, it's also growing at a very fast pace right now, but in term of absolute size, we still have some distance from the size of Clean Master.

(interpreted) So if you think about like - again, we have to remind people that to remind people how MAU, our monthly active user is defined on per device basis. So one device would have multiple applications, so it's not so easy to say like which one product have how many MAUs but still if you look at the overall picture, Clean Master still has the largest penetration, probably close to -- more than 60% of our users would have Clean Master.

(Interpreted)

So if you look at monetization on the other hand, we already had to go from a single product monetization strategy which we never were to a very diversifying, monetization working stream coming from different products. In fact, if you look at Clean Master is longer the largest contributor to have a mobile monetization.

(Interpreted)

Right, so in term of product developments, certainly we have a very good plan for new product developments and we do expect potential a nice surprise in term of our product development side. But if you look at our product layer today, you will see that besides our two applications like Clean Master and CM Security, Battery Doctor, we already have A layer of products like CM Launcher, CM Lock and Lockers products that are very good going, also nice [growth].

(Interpreted) Right, so if you look at on the game publishing side, last week we launched a game called Piano Tiles 2, right, and that product right now is probably one of the top games in a lot of countries; and that I think (inaudible) in term of the direction that we want to go with our products.

(Interpreted) Another example is, we have a major investor for a small development team (inaudible) and that team they had a product launch recently and at one point was number one apps in the US and today still is one of the top 10 apps in the US. (interpreted)So if you look at those two, they represent an example of the progress that we towards product diversification and also building up an ecosystem for our product.

(interpreted)So if you look at our overall organic developed games and products as well as the teams that we have invested in in terms of mobile apps and other software, I think next year we will probably see some nice surprises coming from those efforts and hope we will have some good news report to you guys next year.

Thank you

Thanks.

Henry Guo, Summit Research

Real quick one on the Cheetah Mobile Ad Platform. So I think you guys announced the platform in June, so almost two months already so can you guys provide some color in terms of traction over there and also for example by the end of this year, what portion of the mobile advertising revenue and mobile traffic has really come from this Cheetah Mobile Ad Platform. Thank you.

So let me translate the question into Chinese first. (interpreted) Right, so yes, we have launched our mobile advertising network for almost two months now. It's still pretty early for the development cycle. If you look at page 12 on our ad network, they have been probably in place for two years now. So we know where we want to go and what we need to do for our mobile advertising network and we'll continue to invest and focus on that, but I think it is now too early to talk about the progress at this moment.

(interpreted) So as a latecomer to the mobile advertising industry, we definitely take a very cooperative strategy. We like to cooperate with all the large mobile advertising network and then develop a differentiated strategy to supplement that, so that's how we look at the mobile advertising platform development.

Jeff Hao, [China Merchants Security].

(interpreted) So I have two questions. The first question is about the overseas competition. So I've noticed that the competition on the two apps in the overseas market is still very heavy. For example, from other Chinese companies such as Qihoo, so just wondering, was the management soft on the outlook of the competitive landscape especially if you at 2016, do think the competition was very heavy like this year. And my second question is about the other income items in the income statement, just wondering where does that come from? Thank you.

(Interpreted) Yes, just one clarification from us, I think when you look at Qihoo 360, Qihoo is a product actually not owned by Qihoo 360, it's sort of they have a product licensing from another company. So they will be not for Qihoo 360. (Interpreted) So in term of other competitors from the data that we have (inaudible) actually have not increased at all. (Interpreted) So again as we have mentioned it is one thing to look at the number of downloads and it is another to look at the monthly active user. And so I think they give a very early stage of this development and they are spending a lot of money in term of channels and to acquire download installation, but I think from our point of view that is not something that's that useful at this time. (Interpreted). So if you look at the overall scheme of things even though sometimes you will see the download numbers may go up, may go down at certain quarter but the overall size of those competitors are very disciplined competitors in term of the total use of apps our advantage is that we also have a lot of organic download. (Interpreted) And more importantly, you would notice that our company has moved from a single product company to a company with a diversified portfolio of products. And also we are in the process of moving to, what we call, a ecosystem kind of environment. So I think we are two steps ahead of our competitors and what we are doing right now, as you can see, have an effect on our overall, I guess, download number and our overall mobile active user base.

(interpreted) Right, so actually the competitive measures are not one that keep us from slipping but we are thinking very fast on terms of moving ourselves from a mobile based application developer to monetization and now how can we move that to a platform and to a ecosystem that can sustain our long-term growth.

I will answer the second question, which is about our other income. So if you look at our other income slide, I think that's mostly coming from some of the investment gains that we have. As you can see, from time-to-time we may have impairments or gains on our investments and this quarter we have about RMB30 million or so investment gains. You also noticed that we also have impairments for our investments, which is mostly related to our lottery business that we acquired last year. So that share is gaining little bit (inaudible) at the same time there are some impairments for this investment, that's nothing new.

Wendy Huang, Macquarie.

(interpreted) So my first question is mainly related to our different marketing channels, so can you elaborate on what kind of channels that you're using to acquire the new users and how effective are those channels to actually convert the user traffic to a sticky traffic on your own platform. And also can you provide more details about your cooperation with Google and Tencent that you mentioned in the prepared remark. The second question is about, it's related to the RMB depreciation. So what is Cheetah's exposure to that? As far as what we're seeing, you currently have 50% of revenue coming overseas. So if the management can provide some color on your business sensitivity to the currency changes, that will be helpful as well. Thank you.

(Interpreted) So even though we spend quite some money on customizing, from a Company's perspective the more important measure for us is actually our retention rate and monthly active user as well as total download number. So if you look at our monthly active user and the trend that we notice that we not only are doing much better than our advertisers and you also noticed that most other competitors (inaudible) number but for us MAUs work for us (inaudible) (Interpreted) And then if you look at when we place our advertising or when our user will utilize our user channel, we also pay very close attention to the quality of the channel in term of retention rate and in terms of conversion rate and in fact, we also have quickly expended our distribution channels beyond Google Play. In fact, we have signed up more than 70 Global smartphone manufacturer OEMs to have help us distribute our application. So those are experienced channel strategy (inaudible). (Interpreted) Obviously, the other advertising platform are a very keen partner for us in term of mobile market strategy and so we pay a lot of attention to it, especially Facebook, Google and Tencent. And if you look at in China so for example in Tencent's most recent quarter one of the highlights for the company was their mobile advertising performance and (inaudible) and so we have very good cooperation with Tencent (inaudible) as well. (Interpreted) And then if you look at the overseas market our cooperation with Facebook all have custom press thanks to their mention of us on their first quarter earnings call this year. (Interpreted) We also have a corporation with Google. We also one of the early participants for their [ad work] on mobile search area. (Interpreted) So in regard to your second question regarding RMB and its impact on our financial performance. As we mentioned 50% of revenue now come from overseas market. Obviously, because of our revenue we also have substantial cost, that's also in US dollar, and so the net impact for RMB is not that significant for our financial performance. And I think we actually have little bit positive on the top line and A little bit negative on the cost side, but net net I think is pretty mutual for us.

In the future I think our revenue from overseas market will increase continually, maybe the percentage of our revenue, total revenue, all this revenue will increase. So if you look at our business revenues I think, the expectation is that will continue to increase as the percentage of our overall revenues. And in the same time again as we've mentioned that will be increasing the impact of our overall Company operation.

(Interpreted) Right, so as we mentioned before our ultimate goal is to match our revenue shares with our user base, I am saying professionally we will able to exceed that in terms of our overseas revenue as a percentage of our total revenues.

Thank you.

Thank you.

Thomas Chong, Citi Group.

I have three questions The first question is about balance sheet, the cash and cash equivalents is about RMB113 million. So I'm just wondering whether Cheetah Mobile is thinking of about raising new capital to support the fast growth of your business. And my second question is about MobPartners. I understand that it contributes about 5% of your total revenue, but any color about the [non-GAAP] earnings contribution from MobPartners. And my third question is about Facebook, any color about revenue contribution from there (interpreted)

Thomas, thanks for your question. But first, I think we need to clarify that. For the second quarter, our cash and short-term investments and cash equivalents was actually higher than the number that you have mentioned. In fact, if you look at our press release and also our financial statements, you will notice that in the second quarter, our total cash and short-term investments and cash equivalents were RMB1.3 billion, which is about $210 million, so we have a lot of liquidity that is more than sufficient to support other investments. And also our Company also have been generating positive cash flows for the past two years. And in fact, in the most recent quarter, our operating cash flow was very positive with more than RMB150 million. So both in term of cash flow from operation and also the liquidity on our balance sheet, we have a pretty sufficient liquidity to support (inaudible).

And then the second question that you have is about our MobPartner contribution to our net income. As we mentioned, MobPartner was about RMB50 million in revenues in the quarter. And it's obviously as we mentioned, (inaudible) the company's view is [upscale] right now, so it may feel a money-losing operation, but it is not too negative. So the net impact in term of our overall income is markedly small.

The third question that you have is about, yeah, Facebook contribution. As we mentioned previously, we do not have the policy to discuss our individual customer or the acquired contribution and unless required by [social rule] and the reason for that is because we have some special agreement with our customer, we respect that and also for commercial reason as well. So, however as mentioned before, Facebook is a very important partner for us. We are currently probably one of their top partners on the Facebook Audience Network, if not the largest. So they also contributed a fair amount, a large portion of our revenues, but we don't disclose more details than that.

Thanks, Andy.

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 today, if you have further questions please don't hesitate to contact us. Thank you. Bye.

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

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.