Cheetah Mobile Inc (CMCM) 2016 Q2 法說會逐字稿

Welcome to the Cheetah Mobile second-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this conference is being recorded. I would now like to turn the conference over to Helen Zhu. Please go ahead.

Thank you, operator. Welcome to Cheetah Mobile's second-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 Sheng. Please go ahead.

Thanks, Helen. Hello everyone. As we said on our first-quarter earnings call we had a challenging beginning of in the second quarter and set out to implement a series of initiatives to restart growth and improve our financial performance and at least established a sustainable and profitable growth model for the long term.

The centerpiece of our plan is to transform is a transformation of our Company from a mobile utility app Company to a Company driving mobile Internet Company. Moving speedily [and the ways of data implementation] and much hard work from our staff I'm delighted that these efforts are starting to bear fruit. Our short-term initiatives which included refreshing our existing products and [added payouts] as well as improvements in our sales programs.

Additionally, for direct sales [it's up to us] to spoke start mobile revenue declines that took place in the early part of this year. In fact, we delivered better-than-expected total revenue growth in the second quarter. We now expect revenue to resume quarter-over-quarter growth in the second half this year.

[Driven by strategy to rejuvenate] revenue growth generated by our existing utility app and the continued improvements in our sales programs. But more importantly we also made solid progress on our content strategy. With the recent product rollout our content-driven product portfolio now includes new service, short video, live streaming and, of course, casual games.

Most notable two of our content-driven products, News Republic and Live.me, showed strong performance over the past quarter, particularly in the US market. To accelerate our news app rollout there's culture-wide issues worldwide we recently acquired News Republic for $57 million. The (inaudible) News Republic is a global mobile news service operator with thousands of high-profile media partners around the world.

Also News Republic is now a wholly-owned subsidiary of Cheetah Mobile. The award-winning News Republic app will continue to operate on a standalone basis. In fact, with continued improvement and the support from Cheetah since the acquisition News Republic has been moving up on the app charts and was ranked as well as the top three news and magazine apps in the US on Google Play in July according to App Annie.

Live.me, a live streaming app, which was developed in-house and recently launched was ranked as one of the top three social apps in US on Google Play in July and recently has been ranked as one of the top three social network caps in US on Apple App Store. So far this quarter the successful close of Live.me has continued as we've seen user members growing rapidly.

On the live casual games side Piano Tiles 2 and Rolling Sky continue to perform well and were both among the top five most downloaded mobile games in the US according to App Annie. Which we are encouraged by the progress of our content strategy so far. I would suggest that our (inaudible) technology (inaudible) Company we know that our continued success which in utility app space or the content-driving app space lies in our ability to leverage the big data generated by our 600 million MAUs, actually monthly mobile users and our ability to develop the best application with the best experience from our users.

In the mobile age content consumption has become more fragmented and the content is increasingly being pushed rather than pulled by mobile users. So far our content strategy begins delivering more personalized and relevant content to users when and where they want it, hence we continue to invest heavily in our bigger analytics. On the user side we are deploying big data analytics to help us better understanding and profile the wants and the needs of our users.

On the content side we are using BI and machine learning algorithm to better analyze and profile the millions of videos, graphics and articles generated by our users and content partners on a daily basis. The ongoing success of our news app news venues (inaudible) issues such as our coverage worked well in delivering more content and the relevant content to our users accurately and efficiently despite only having (inaudible) culture and the language in-house.

Finally, while we don't want to downplay the challenge we face in our transformation from a utility app based mobile Company to a content-driving mobile Company our initial success gives us the confidence that we are on the right track improve our growth and profit profile and progress better according to plans. Looking ahead, we remain focused on aggressively executing our content strategy to establish a sustainable and a profitable growth model for the long term.

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

First of all, I am pleased to announce that we did better than expected total revenue growth in second quarter. Thanks to our successful strategy we have driven revenue up in 2016 including refreshing our product app layout as well as improving direct sales program.

But given the importance of the transformation that we are undertaking this year there are a few moving parts in our business model. So to help you better understand the performance of our business operations I will first give you an overview of our financial performance and some additional color on our existing businesses as well as the level of investment and progress that we are making in our new content-driven product.

In the second quarter total revenue grew by 18% year over year to RMB1.05 billion which exceeded the high end of our revenue guidance by almost 5%. New content product including the newly acquired News Republic accounted for roughly 1% of our total revenues in the quarter.

While we incurred a net loss of RMB150 million on a GAAP basis and a net loss of RMB62 million on a non-GAAP basis the decline in net income attributable to a one-time non-cash investment impairment of RMB95 million and step-up investment in new content-driven products which amounted to roughly RMB15 million in the quarter. In fact, we generate roughly RMB130 million operating cash flow and almost RMB90 million in free cash flow in the second quarter.

Excluding SBC expenses and the impact of our new content-driven products our existing product would have generated 17% year-over-year increase in revenues and almost RMB55 million in operating profits. Looking ahead, for the third quarter we currently expect and estimate total revenue for third quarter to be between RMB1.0 billion and RMB1.15 billion, representing a 7% to 12% yearly increase and 5% to 10% growth quarter over quarter.

Please note this forecast reflects the Company's current preliminary view and is subject to change. The implied quarter-over-quarter growth was primarily driven by a resume sequential mobile revenue increases thanks largely to steady and sustained revenue growth generated by our existing utility apps.

The second half of 2016 we will continue to implement strict cost controls. In particular, we will be more focused on optimizing our marketing spending, shifting somewhat our promotional activities on using the app onto content-related spending and focusing more on specific developed markets. Our goal is to sustain revenue growth, albeit more moderate growth, and we expand the capabilities of our existing business while step-up investment in order to build upon the success and accelerate the growth of our new content-driven products.

In the third quarter we expect to invest roughly RMB150 million in content, R&D and marketing for our new content-driven product, mostly through the profit generated from our existing businesses. All in all, we expect this initiative to continue to drive our overall financial recovery starting from the third quarter and lay a solid foundation for another round of strong monetization, revenue growth and ultimately improvement in the coming years.

Now let me walk you through the details of our second-quarter performance. All financial numbers are in RMB unless otherwise noted.

In June, mobile MAUs were RMB623 million, increased 26% year over year and declined 4% quarter over quarter. The sequential decline to our mobile MAUs was mainly attributable to, one, the declines in mobile MAUs for (inaudible) which have entered into the mature stage of its product lifecycle.

Two, the Company's strategic vision to focus on spot market. The MAUs for the Company's core tool application continues have remained flattish quarter over quarter. The Company's mobile MAUs in the developed market including North America and Europe increased modestly quarter over quarter.

In the second quarter total revenue grew by 18% year over year to RMB1.05 billion. By platforms mobile revenues grew by 37% year over year to RMB772 million for the second quarter. Mobile revenue accounted for 74% of our total revenue in the quarter, up from 64% in the prior-year period.

PC revenue declined by 15% year over year in the second 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 RMB561 million for the quarter, up 25% year over year. Overseas revenues account for 54% of total revenues or 33% of mobile revenues in this quarter.

China revenues increased by 11% year over year. The China revenue growth was supported by continued revenue increase from our mobile advertising business in the domestic markets.

By segment revenues from our online marketing services were RMB939 million for the quarter, up 24% year over year. The increases were driven by our mobile user base and increased demand from advertisers as well as monetization of our light casual games through in-game advertising.

Revenues from IVAS for the second quarter were approximately RMB80 million, a decrease of 27% year over year. The decreases were primarily driven by a decline of our mobile games publishing ad revenues in China which offset our growth in overseas markets.

Revenues from Internet security services and others for the quarter were approximately RMB28 million, an increase of 43% year over year. The increase was primarily due to the increases in Internet software licensing revenues (inaudible) Kingsoft Japan.

Moving on to our costs and expenses SBC expenses for the second quarter were approximately RMB89 million compared to RMB56 million in the same period last year. To help facilitate the discussions of our 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 revenue for the second quarter were RMB355 million, up 59% year over year. The increases were primarily due to step-up investments in content for our content-driven products, an increase in traffic acquisition costs associated with our third-party advertising publishing business from the Cheetah Ad Platform and an increase in bandwidth and Internet data center costs associated with increased user traffic and data analytics.

Non-GAAP gross profit for the second quarter was RMB692 million, up 4% year over year. Non-GAAP R&D expenses for the second quarter were RMB178 million, up 38% year over year. The increases were primarily due to increased headcount associated with our step-up investments in big data analytics and new product development.

At the end of the quarter we have approximately 1,800 R&D personnel. Non-GAAP sales and marketing expenses for the second quarter were up RMB406 million, up 70% year over year. The increase was primarily due to the spending on promotional activities for our content-driven products.

This increase was also due to an increase in the number of sales and marketing staff. Non-GAAP G&A expenses for the second quarter were RMB123 million, up 43% year over year. The increases were mainly due to increased headcount associated with being a public Company and higher staff benefits.

Our operating expenses, sorry, other operating income was RMB40 million for the second quarter of 2016. Other operating income primarily consisted of government grants, subsidies and financial incentives. Non-GAAP operating profit for the second quarter was RMB26 million, a decrease of 71% year over year.

The Company recognized impairment losses of long-term investments of RMB95 million for this quarter, primarily driven by one-time non-cash write-downs in certain investment assets. Non-GAAP net loss for the second quarter were RMB62 million as compared to non-GAAP net profit of RMB160 million for the second -- for the same period last year. The losses were partly attributable to step-up investment in current content-driven products and the RMB95 million net impairment loss of investment in this quarter.

Non-GAAP loss per ADF for the second quarter was RMB0.44 or $0.07. That compared to non-GAAP net earnings per ADS of RMB0.81 for the same period last year. Adjusted EBITDA for the second quarter of RMB68 million, a decrease of 46% year over year.

Lastly, before we start Q&A session I would like to remind investors and analysts that in March 2016 the Board Director authorized a one-year share repurchase program allowing the Company to buy back up to $100 million in aggregate value of this ADS. As of August 18, 2016 the Company had repurchased a total of 2.54 million ADS representing 25.4 million Class A ordinary shares at an average price of $10.75 per ADS. The share repurchase program reflects our belief that our shares are presently undervalued and demonstrate our confidence in the long-term outlook for our business.

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

(Operator Instructions) David Sun, Morgan Stanley.

(spoken in Chinese) So my question is can management provide some updates on the overall (technical difficulty) the revenue from Facebook? The new guidance, the sequential improvement does it imply that the revenue from Facebook is recovering and also what's the current eCPM trend of the ad from Facebook? Thanks.

(interpreted) Thank you for the questions. So in response to your questions, I think in addition to Facebook, so far we have made as we mentioned in prepared remarks in the quarter to (inaudible) [working goals]. Those efforts employing our strength and focus in developing market to (inaudible) where the user traffic actually have increased and also actually grow stronger.

In addition to that we also (inaudible) customer relationship or strategic (inaudible) customer we just say that in general who are their caller we also have (inaudible) with (inaudible) partners in addition to Facebook. In addition to that we also have initiative to improve our (inaudible) which (inaudible). So all in all, it is a combination of many factors in the quarter, in the second half of the quarter that help us to restart the revenue growth hopefully we can (inaudible) this year.

(spoken in Chinese)

Evan Zhou, Credit Suisse.

(spoken in Chinese) Please translate my question. The first question regarding the content product newly launched content product, revenue contribution according to the prepared remarks was only at 1%. I was wondering how that trajectory be in the following quarters? And specifically on the Live (inaudible) Live.me how further maybe you can share with us some insights about the competitive landscape in the US and the developed market and also how if you think about how this product can evolve to contribute more to our Company. Thank you.

So to your first question regarding working contribution from our new product, improvement product. So our new products are actually improving more than Live.me. Obviously Live.me makes pretty good strong progress in the quarter but we also have a new service as we mentioned in (inaudible) and news and also globally we recently acquired News Republic and then we also have a couple of other new applications in the marketplace.

Also importantly will contribute roughly 1% of our revenues. And we do not expect content product to really become a significant part of our revenues until 2017 at the earliest.

The reason is because as we roll out new product while we test [more organization] but we generally are not (technical difficulty). Our goal right now as we have shown in the second quarter, roll out new products and then try to improve those products and then acquire more users and then over time (inaudible) user in traffic then we will beginning to think about more (inaudible).

So for third quarter and fourth quarter you can expect some cost increase in revenue contribution from the new content products. But they are not going to be material, at least as far as we can see at this moment. I will not -- Sheng Fu will answer your second question regarding his view on the Live stream videos operations in US and other countries.

(interpreted) Live streaming I think is not as predominantly in China but if you look at globally the future of live streaming is very exciting. If you look at Facebook I think you have found there and feel they are actually matching. Live streaming is one of the most exciting product we have seen in recent years.

So in terms of our own products, we have launched our products two or three months ago and you can see on app store both Google Play and Apple App Store you have (inaudible) received greater well but users and we gain very high ratings for our products. So our (inaudible) very competitive and have a lot of advantage compared to other products from different (inaudible).

But the (inaudible) very well you can see that (inaudible) in the US actually doing quite well. We ranked as you know the top five (inaudible) on Google Play in the US and if you go (inaudible) (technical difficulty) I think we are (inaudible) in the marketplace.

(spoken in Chinese) The question is regarding the related -- let me briefly say this. A question regarding the cost that's involved in upcoming quarters regarding pushing out new product, finally what kind of the nature behind the mix of the cost? Is it more related to the app installed base and wall in that would be acquired from external traffic or is it more related to some content standing that's related to acquiring quality content in our new product such as News Republic and Live.me? Thank you.

So if you look at what we have as our investment in third quarter for the new products including Live.me, News Republic as well as a few other product applications it would be used as you say among all different areas, content, acquire the content, do less in R&D not only in cost but also in data analytics, machine learning, all the technical stuff that we need to develop in order to have a wonderful news experience for our app user. And also for promotions of the applications, and promotion is not necessarily means cancellations, it in fact has no cancellations in the US, so it is not only material like online marketing but also including brand.

Our product promotion piece that we organize to help promote either our application and the brand name of those applications.

Hopefully that has addressed that question.

Thanks, Andy.

Wendy Huang, Macquarie.

Hi, this is Wendy Huang from Macquarie. (spoken in Chinese) So I have three simple questions. The first is actually about the revenue recognition of the News Republic, Rolling Sky, 1002, etc., whether you are actually booking it under the owned subsidies or the value added subsets. In the second is how much is your Q2 revenue guidance actually is coming from those three things that I just mentioned?

The last thing is about the gross margin trend, it seems the gross margin declined a little bit in the quarter. What's the reason behind it and how should we expect the trend going forward? Thank you.

So let me thank you for the questions. Thank you for the questions. In terms of the revenues for the new product actually for News Republic as well as Live.me mainly in the online marketing services.

For Rolling Sky and also for (inaudible). Those are the two casual games that we have. Also (inaudible) in the online marketing services because we monetize it mainly through advertising, although we do have revenue contribution from those two games in (inaudible) app because it's also some small contribution from user purchasing in-game items.

So the second question regarding our guidance as we mentioned for those three quarters, content quarters we don't give guidance for the games themselves. But if you look at Live.me, music company, the news app services as well as through all the apps that we have (inaudible) rolled out recently those products which (inaudible) has said a small portion of our revenues we expect some increase but not (inaudible) increase at this point.

As we mentioned right now our main focus for those new content products are on refining those products and acquiring more users, not monetizing at this time. But we do expect them to contribute growth.

In terms of the valuations for News Republic, we look the total price for the acquisition was about $57 million. We do not disclose the [advisory] matrix that we use but as we mentioned our revenue contribution from (inaudible) making our new product portfolio right now. News topic is really one of them and so the revenue contribution is kind of limited.

Given the scale-up in revenues they had more losses while outside they actually caused a lossmaking than profit making. So that would be the case for at least a couple more quarters until we begin (inaudible) monetization for those products.

And, again, right now the first job here is really to these are good properties with strong brands (inaudible) global user. Our goal is to give them support to improve the product and then also we prefer to help them improve the distribution of the application in the entire (inaudible).

And the last question I think is about the gross margins. The gross margins decline are mainly attributable to increase in content with cost. And I think as these products grow in terms of users and revenues will be just the improvement on the quality and profit, gross profit margin. I did find that scale and competitive revenues, so we do incur a higher content cost as a percentage of revenues for that.

So how should we expect the gross margin trend (multiple speakers)? So do we expect the content cost to continue to trend higher in the future quarter as well?

It should not be that much higher. Obviously, first with a lot of product a lot of cost that we did not incur before will show up or the incremental increase should not be that large.

I think product getting looked at low 60 gross margin is fairly reasonable way to look at it. But I think at the same time probably have of couple more (inaudible) to go just because some of these products (inaudible) in content. But I think 60 is probably a reasonable way to look at it, and then as those products begin to ramp up in revenues we should begin to see gross margin begin to recover hopefully in the early part of next year.

Thank you.

(Operator Instructions) Eric Wen, Blue Lotus.

(spoken in Chinese) Thanks very much for taking my question Andy, Helen and Sheng. I have three questions.

My first question is how much percentage of our total traffic across our product is from content product. And do we expect the revenue potential per traffic for the content product to be similar or different from our tools product?

(spoken in Chinese) My second question is that we notice the competition in overseas market is still very fierce. This quarter our marketing costs still outstrip our revenue growth. How's the marketing spending outlook look like in the second half and what is the effectiveness of our marketing spending in terms of customer acquisition cost, retention rate and average revenue per user?

(spoken in Chinese) The third question is regarding the mobile game revenue has been declining. Can management share some of its thoughts on this business and whether we intend to keep this business? Thank you very much.

(interpreted) so to sum up the new user (technical difficulty) for all new traffic coming from our new content products, they are still pretty low right now because it's new compared to our large user baser right now, 600 million. So they also have set very strong global opportunity for us, for us to convert about our user using those products.

So the MAU or the traffic from those (inaudible) is full. And also monetization is also the opportunity for content product to be a lot stronger and you [feel application, as well].

In fact, when we look at the contribution from the current product it's an also a question we have expand our [outlook] applications market well. So if you looked at it [clean-up example] when we (inaudible) good revenue content producer we will probably have (inaudible) the user of our [clean-up product] for these new applications.

I'll give you another example, we basically have a broadening of inter news in India. It's a news services and there it's called New Republic India.

And that product actually has a really healthy life, time spent by users. And then if you look at the monetization (multiple speakers) actually much stronger new applications in India. It's almost 10 times more acquisition rate of our product over there.

So if you look at Live.me in the US time spent on user the active user now comes to on average 40 minutes per day.

So when you look at our (inaudible) cost for new applications I think if you look at our outstanding actual rate in the quarter this is our first [million-dollar] actual we have and growing at a pace that is slower than in recent quarters. Both on a GAAP and non-GAAP basis it's less than 20% year over year.

In fact, if you look at on a quarter-on-quarter basis you may actually see that declining. And that's changes affect that we're investing aggressively to promote our new content product.

So, in fact, we have shifted the marketing dollars from our own new applications to new content products. So I think that's speaks volumes to our new applications very competitiveness, competitive implementation compared to other products and our competitors.

Our products themselves we will have users not just because we are promoting these new applications. So if you look at them a little bit more closely you actually can see that even though we invested heavily on our new products we actually have gone down in the standing on overall advertising and also particularly for the older products.

Okay, so why don't we all, the question regarding the mobile gaming business, operations it was pretty challenging in the same quarter for us because (inaudible) games but it has entered into a more mature phase of its go-live cycle. We are really slow to roll out our new games to Rolling Sky, that's a game that we know we came in the second half of the second quarter.

Right now it's doing quite well. So we are quite encouraged by that and so we look forward to a more steady growth year in the third quarter. (multiple speakers).

Okay, thanks.

This concludes our question-and-answer session. I would now like to turn the conference back over to Helen Zhu for any closing remarks.

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

Thank you so much. Bye.