Cheetah Mobile Inc (CMCM) 2016 Q1 法說會逐字稿

Welcome to the Cheetah Mobile First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will an opportunity to ask questions. (Operator Instructions) Please note this conference is being recorded.

I would now like to turn the conference over to Helen Jing Zhu, IR Director. Please go ahead.

Thank you, operator. Welcome to Cheetah Mobile first 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 earnings 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.

Thanks, Helen. We have began 2016 on a solid note with revenues coming in at the high end of our guidance, but we have to admit that we were too optimistic when we made our full-year 2016 plan. At that time, we saw the quarter-to-quarter decline in first quarter would simply be seasonality, and this change would get better in the second quarter. However, revenues have not grown as anticipated in the early part of the second of quarter. As a result, we expect our revenue and profit for the full-year 2016 to be lower than what we have initially planned.

Three key factors contributed to weakness in our expected mobile and advertising revenues growth, which is a key driver for our overall growth. First, declines in eCPMs from some of our third-party advertising platform partners in the international markets; second, slower than expected progress in building an effective direct sales force; and third, longer than expected time for us to execute our [expense] strategy. We have taken a series of measures to grow our revenues in the near term. For example, we've enhanced product promotion in key developed markets. In addition, our newly acquired mobile game, Rolling Sky, further expands our core video games offering. To [attract] longer-term, [global] users, we have began implementing a two pronged approach to boost our long-term growth prospects. This effort includes aggressively investing in new content products to increase user engagement as well as changing our direct sales of reaching globally.

By recognizing the challenge that lay ahead, I'm confident that with focus and determination, we will be able to build a sustainable and a profitable business model. We are very confident in Cheetah Mobile's future, because first of all, look from the overall market, advertisers still has strong demand for global mobile advertising service especially in e-commerce and brands advertisers and video remains a fast growing at ad format. Secondly, some of our recently launched content product already shows some early encouraging progress. We have a number of content products now in the product topline ready to be launched in the coming quarters. Third, during the first quarter, we have adjusted and expanded the direct customers sales team. This already directly contributed to the re-accelerated growth of our mobile and advertising revenue in China in the first quarter. To replicate the successful experience overseas, we recently hired Todd Miller as our global sales vice president. Todd was the Vice President of Yahoo prior to joining Cheetah. He worked for Yahoo for 13 years and managing the [direct] sales team. We have no doubt that Todd will help expand our overall sales effort in North America and Europe. In addition, I would like to emphasize that we will continue to invest in data analytics heavily even if we are facing some short-term hurdles in becoming a leading global advertising platform. With that in mind, we remain confident that our business strategy is on the right track and we will continue to aggressively execute the strategy managing user acquisition, user engagement, revenue growth and profitability for the long-term sustainable growth.

With that, I will hand the phone over to our CFO Andy.

Thank you, Sheng. Hello everyone. We continue to grow our user base, revenues and profitability in the quarter driven by our solid mobile and overseas performance. Before I walk you through the details of our financial performance, I will like to point out that we gained control of Kingsoft Japan on January 29, 2016 as Cheetah Mobile and Kingsoft Japan were under common control by Kingsoft Corporation, both before and after the closing of the combination, in accordance with ASC 805-50. Our unaudited consolidated financial information mentioned below, unless otherwise stated, has been prepared as if Kingsoft Japan has been controlled by Cheetah Mobile through the periods presented. In addition, all financial numbers are in RMB, unless otherwise noted.

Total revenue grew by 57% year-over-year to CNY1.12 billion in the first quarter. Excluding the impact of Kingsoft Japan consolidation, total revenue grew by 63% year-over-year to CNY1.096 billion. This strong performance was again driven by our organic business growth particularly in mobile and global operations. Our platform mobile revenues grew by 111% year-over-year to CNY827 million for the first quarter. Mobile revenue accounted for 74% of our total revenue in the quarter, up from 65% in the prior year period. In March, Cheetah had approximately 651 million mobile monthly active users worldwide, a 47% increase from a year ago. PC revenue declined by 9% year-over-year in the first quarter. The decreases in PC revenues were mainly due to the migration of Internet traffic from PC to mobile in China. By region, overseas revenues were CNY634 million for the quarter, up 116% year-over-year. Overseas revenues accounted for 57% of our total revenues or 77% of our mobile revenues in the quarter, up from 41% of revenues or 35% of mobile revenues in the prior year period.

In March, 80% of our mobile monthly active users were from the overseas market compared to 31% in a year ago. China revenue grew by 60% year-over-year in first quarter supported by accelerated mobile advertising revenue growth, which more than offset PC revenue declines in China. By segment, revenues from online marketing services were CNY992 million for the quarter, up 78% year-over-year. The increase was driven by our growing mobile user base and increased demand from our advertisers, including third party advertising platforms. For our mobile advertising services worldwide as well as more taxation of [high light] casual game through in-game advertising. Revenues from IVAS for the first quarter were approximately CNY102 million, an increase of 5% year-over-year. The increase was primarily driven by growth of our mobile game publishing revenue, including the successful monetization of Piano Tiles 2 in the overseas market. Revenue from Internet security services and others for the quarter were approximately CNY20 million, a decrease of 26% year-over-year. The decrease was primarily due to a decline in the sales of the company's air purifier products.

Moving to our costs and expenses, SBC expenses for the first quarter were approximately CNY91 million compared to CNY46 million in the same period last year. As we said in the past, we will incur higher SBC expenses this year mainly due to the shares and options granted to our management and employees for attracting and retaining top talents, particularly in the R&D area.

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 quarter were CNY221 million, up 97% year-over-year. The increases were primarily due to higher traffic acquisition costs associated with our third party advertising publishing business on the Cheetah Ad platform, higher bandwidth costs and Internet data center costs associated with increased user traffic worldwide and in data analytics.

Non-GAAP R&D expenses for the first quarter were CNY167 million, up 38% year-over-year. The increases were primarily due to increased headcounts associated with our step up investment in Big Data analytics and new product development, especially the development of our new content-driven products. At the end of the quarter, we had approximately 1,700 R&D personnel. Non-GAAP sales and marketing expenses for the first quarter were CNY438 million, up 75% year-over-year. Increases were primarily due to spending on promotional activity for our mobile business, including the continued global promotions of Piano Tiles 2. As Sheng mentioned, we plan to aggressively expand our direct sales operations in North America and that may result in higher personnel-related selling and marketing expenses.

Non-GAAP G&A expenses for the first quarter were CNY88 million, up 33% year-over-year. The increases were mainly due to increased headcount associated with being a publicly listed company and higher staff benefit costs. Non-GAAP operating profit for the first quarter was CNY114 million, an increase of 10% year-over-year. Non-GAAP net income for the first quarter was CNY102 million, an increase of 33% year-over-year. Excluding Kingsoft Japan consolidation impact, non-GAAP net income for the first quarter was CNY102 million, an increase of 32% year-over-year. Non-GAAP diluted earnings per ADS for first quarter increased by 32% year-over-year to CNY0.71 or $0.11. Adjusted EBITDA for the first quarter was CNY151 million, an increase of 11% year-over-year. 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.

Now let me give you our second quarter revenue guidance. We currently expect and estimate total revenues for the second quarter to be between CNY975 million to CNY1 billion, representing a 10% to 13% year-over-year increase. The implied sequential declines was partly due to lower than expected revenue from some of our third-party advertising platform partners in the international market. As Sheng mentioned earlier, Cheetah is facing some short-term headwind and some structural issues and we have began to implement a number of actions and initiatives to accelerate revenue growth. This initiative involved aggressive investment in new product, new content products and expanding our direct sales operation, will result in a short-term financial impact on our P&L and may take some time to pay off. However, we would like to emphasize that Cheetah Mobile's operational direction and history have changed several times in today's fast changing mobile world and we have successfully evolved with it.

With that in mind, we're confident that we are on the right track. So again, please note that this forecast reflects the Company's current and preliminary view and is subject to change. Before we conduct a Q&A session, I would like to remind investors and analysts that on March 16, 2016, the Company's Board of Directors have approved a share repurchase program where the Company may purchase its ADS with an aggregate amount up to $100 million over the next 12-month period. The share repurchasing plan does not require the Company to acquire a specific number of shares. As of May 18, 2016, no ADS were repurchased by the Company. The Board's decision reflect our belief that our share are presently undervalued and demonstrate our confidence in the long-term outlook for our business.

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

(Operator Instructions) Wendy Huang, Macquarie.

(Spoken in Foreign Language) My question is about the now you are resetting the growth expectation for the top line previously you gave bottom line guidance, so with the reset of the revenue growth how will you execute your cost and how should we expect the bottom line for this year?

This is Andy. So as we mentioned like we are obviously looking into the second quarter and see low growth than we had expected before. So overall for full year we do expect both topline and also the bottom line to likely come in below what we have targeted before for the full year 2016. However as we mentioned before, this year we would continue to try to drive synergy and leverage from our sales and marketing expenditure takeaway and if you look at that we are already beginning to show some result in that. So for the full year, we still expect to maintain profitability and we would control cost because if you look at the way we actually invest in R&D or in sales and marketing [in China], we look at what we put in there and how much we can make in return. But we probably both in the growth rate and also profitability would come in for 2016 significantly below what we have previously targeted at the beginning of the year just because that we envisioned in term of how we expect revenue to come in, in the second quarter.

(Spoken in Foreign Language) Just want to clarify, so you just mentioned that you are still trying to be profitable, but I think previously you are targeting not just being profitable but actually CNY1 billion non-GAAP net profit.

Obviously, like if you look at the growth trajectory in the second quarter it's going to quite a significant haircut in term of our overall growth expectation right now. So with that haircut in growth, it's unlikely that we will achieve what we have set out to achieve in 2016 unfortunately and so it will quite a reduction, I think. But we will continue maintaining cost control to make sure that we are profitable and we will try to generate and control costs given the new revenue expectation that we have and we would adjust our plan if we need to going forward.

But how would 2016 end up being compared to 2015. Last year although you were only guiding like breakeven, but you ended up having like CNY0.5 billion net profit. So even if we are using the new second quarter revenue growth guidance, actually you can still have like 10% to 13% revenue growth. So should we expect the profit dollar amount to be better than last year still despite after the reset of growth expectation?

I think if you expect that I think the profit margins given the expectation that we have and also the cost run rate that we have, I think that would probably be a little bit too optimistic, but we will try to maintain cost control and again like last year we outperformed our possible expectation because of a couple factors, one of them being that our topline was actually growing faster than we had forecast in 2015. So today, this year we have the opposite event that is happening right now. And so we probably would not be as aggressive in terms of the possible forecast. So again, like you know right now, we calibrate expectation for our topline. So we would calibrate our expenses as well, but it's unlikely we're going to achieve what we have set out at the beginning of year and it will be quite significantly lower than that. When you want a run rate for the second quarter, which I think is quite a bit lower than we had forecast before. So I would not be aggressive in possible forecast when you have slowing topline growth.

(Spoken in Foreign Language) So my second question is about one of the reasons you provided for the slower topline growth especially related to your partners. So as far as I understand it, you are working with those international partners like Facebook as well as your Chinese partners like Tencent and also last night Tencent just reported kind of a below the Street expected advertising revenue growth. So can you provide more color as to what actual partners actually has kind of (inaudible).

(Spoken in Foreign Language) So I think you know when we look at I think first of all, I think when we looked [last time] some lower-than-expected eCPMs from our partners that's referring to our international partners, especially the US. In term of what happened in the quarter, as we mentioned if you look at in the first quarter when we first initially make out 2016 plan, we expect first quarter sequential decline from the fourth quarter, but we mainly believe that was attributed to seasonality because from our operational history we have seen consistent growth in revenues coming from our third-party platform partner. So we expect a seasonal rebound in the second quarter, but obviously that did not happen as we have anticipated. In fact, we didn't see much rebound in April. So as for sales now, we expect that to be a challenging [frontline]. But this is not completely our expectation, we do expect eventually a mix - and previously we have expected sometime late this year, we may see the third party advertising platform maybe become as a channel for us, may become frustrated and become slowing in terms of growth. Hence, we have earlier announced our expansions in direct sales force effort in the last quarter. But I think the pace of these happenings, call it, a little surprise is a few quarter ahead of our anticipation but nevertheless if you look at the types of our user base, the user traffic that we have and then I think once we saw some of these issues and beef our own direct sales force, we should be able to see revenue growth restarting again.

(Operator Instructions) Evan Zhou, Credit Suisse.

(Spoken in Foreign Language) So my question is regarding some more color regarding what specifically changed regarding - in April that we find the [offerings] didn't actually change that actually kind of impacted the numbers in a meaningful way and so on the read through the leading advertising platforms report in the first quarter actually have been posting pretty good numbers. So is there like a meaningful direction change of the offers and also of the partner strategy that these platform is planning to do, any color will be helpful? Thank you.

(Spoken in Foreign Language) Evan, thanks for your questions. So to be very frank with you in the first quarter, our Company have major reorganization. We have reorganized our business line including our two applications, our content products and our gaming operations. And we during that period of time, we make mistake and we did not communicate with our partner as we should have. So that may, perhaps, be the reason why the [third-party] side will be surprised.

(Spoken in Foreign Language)

Right, so again to be very honest with you. We were a little bit too complacent in the first quarter when we see the sequential declines from the fourth quarter to the first quarter. We largely attributed that to seasonality and did not pay as much attention as we should have to the change in direct new trend. And when we look at it in April, we like that and we are still hoping that in the next two months in May and June (inaudible) but right now it's not coming as the way that we'd like to see it.

(Spoken in Foreign Language) So when we look at other peers and partners, they seem to have experienced similar trend than we need to [only] into the issue and we wait for that. In addition to that, we felt when we actually do analysis, we see that sometimes quite in UC UPM, so that's a [triumph] for that. And also if we look at - what you expected as next two or three quarter to (inaudible) our own sales team revenues.

So if you look at our strategy going forward, I think, sure, we can go back and we have done a lot of analysis on what happened from first quarter and into early part of second quarter and trying to recognize how it happened and we very openly shared that with you guys, the three reasons - the key reason that we find the reason for the slowing (inaudible) but we also want to emphasize that we are taking a few actions immediately and we also have a longer term plan as we mentioned before immediately we are oaky with some of the marketing expenditure, we have strengthened our direct sales force, and the impact from revenue adjustment in China which actually help us, accelerate growth in the China direct sales business and we are also making good progress in building our overseas direct sales team, as we mentioned a little bit earlier in the press release and as well as in the conference call we are very pleased to announce that Todd Miller previously worked at Yahoo as the VP of Regional Sales have joined us as our VP of Global Sales. I think Todd will bring a lot of experience and skill to help us to build out and strengthen our direct sales efforts in North America and European market. And then also if you look at our content strategy, is also beginning to bear fruit. You know we are rolling out new products. We will be more aggressively rolling out new products in the coming quarters. And that should help us to boost our user engagement level. So yes, we do admit that we have dropped the ball in terms of in the first quarter to second quarter noticing the [true-up] in trend in marketplace and we are taking a lot of actions and we are taking it very seriously.

(Spoken in Foreign Language) Second question is regarding content driven products, the progress. Could you share some color on how the progress of the development, what's the kind of launch timeline and in terms of the increased investments in R&D and also promoting the product, what's kind of the ballpark number that we will be looking at for the rest of the year and maybe 2017? Thank you.

(Spoken in Foreign Language) Regarding the timeline for our content driven product rollout. I think what I meant earlier when we say it will take a little bit longer than we have expected is mainly because we didn't feel the urgency I think that's part of our thought, we were too complacent when our revenue was growing with that, we thought we have more time to make this transition into the content product. But obviously now the entire Company have a sense of urgency and a focus on the effort. So we do expect to rollout a number of products this year. We rolled out quite a few, but I think there is a couple of ones that will be our main product in the content product side. We will have to share more with you but given the competitive landscape, we would rather discuss this after we launch this product. So that's our view on the content product side.

Thomas Chong, Citigroup.

(Spoken in Foreign Language) My question is about the use of cash and M&A strategies. Will management consider to issue new shares or use the existing cash for the funding of upcoming M&A if there is any? Thanks.

(Spoken in Foreign Language) So I mentioned a couple things. Basically if you look at our - historically we have been free cash flow positives over the past two years. There's no change in view on that. This year we would likely see a positive free cash flow. And also as we mentioned in our earnings call earlier, we have a share buyback cover that the Board has authorized in the previous Board meeting and we have put that plan into place. So while although we have not repurchased share up until May 18, the plan is in place. So again if you look at our investment and operational cash flow requirement, I think for operational cash flow requirement, as we mentioned before, we continue to be free cash flow positive and we also have a pretty strong balance right now. But if you look at our cash balance right now including short-term investment, which is mainly CD or fixed structure deposits, we have almost CNY1.8 billion in cash. So I think we have ample liquidity to support our investment as well as our operation. Now, obviously, investment in itself - unless we have a very large acquisition, I think we have more than sufficient cash to handle that but at this point I don't think we have any plan and if we do have any plan, we'll make the announcement to the public in term of fundraising or a large investment but as we mentioned, we have not made such announcement.

This concludes our question and answer session. I would like to turn the conference back over to Helen Jing Zhu, IR Director for any closing remarks.

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

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