Cheetah Mobile Inc (CMCM) 2017 Q4 法說會逐字稿

Good day, and welcome to the Cheetah Mobile Fourth Quarter and Full Year 27 (sic) [2017] Earnings Conference Call. (Operator Instructions) Please note this event is being recorded

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

Thank you, operator. Welcome to Cheetah Mobile's Fourth Quarter 2017 Earnings Conference Call. With us today are Mr. Fu Sheng, CEO and Chairman; and Mr. Vincent Jiang, 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 supplies (sic) [applies] for 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 Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Thanks, Helen, and hi, everyone. We have strong results in Q4. Total revenues grew by 9% year-over-year and 16% quarter-over-quarter to RMB 1.4 billion. Operating profit grew by almost 2.6x year-over-year and 68% quarter-over-quarter to RMB 222 million.

Now let me give you more detail on each of our business lines. Our utility products and the related service continued to earn strong profit and cash flow. The non-GAAP operating margin for our utility products and the related service increased to 34% in Q4 from 32% in Q3 in the last year, thanks to our strategy to continue to optimize the cost and expense structure for the utility product business. For the full year of 2017, our utility products earned a record RMB 980 million in operating profit.

Our utility products such as Clean Master and CM Security experienced some [challenges] in the overseas market. Facebook stopped using certain ad formats, i.e. ads on mobile phone lock screen since May 2017. Google made the same decision in January 2018. This change impacts all app developers that monetize through ads, including Cheetah Mobile. As a result, we saw a year-over-year decrease in revenue from utility product in the overseas market starting in the second half of 2017. The decrease was because lock screen apps were a large part of our ad inventory for Clean Master and CM Security in the overseas market. That effort will continue in 2018.

On the bright side, we believe this change will help remove many small app developers and foster a cleaner and a more user-friendly mobile app industry, which will benefit Cheetah Mobile in the long run. For example, the makeup of revenues from our mobile utility products in the overseas market is now very healthy because they are mainly from result page ads, to which are more liked by our users.

The profit margin for our utility products overseas stayed very healthy, and its outlook remains good in 2018. Our utility products that offer personalized service to our users continued to do well. For example, our AI-powered Cheetah Keyboard has grown into a leading third-party input app on the Android platform. Google Play featured it on its global homepage 4 times in the second half of last year. The DAU of Cheetah Keyboard grew by 33% quarter-over-quarter in Q4, and we expect the figure to continue its growth trend in 2018.

Also the DAU of CM Launcher has continued its fast growth even though the app has been on the market for a while. Most notable -- notably, mobile revenues once again grew in our home market in Q4, showing strong year-over-year and quarter-over-quarter increase in both impressions and eCPM. The eCPM gain was helped by our strong direct sales team in China. Today, almost 70% of our mobile revenue in China comes from direct sales.

Our key customers include short-form video, news, social and fintech firms, although our use of Big Data analytics has improved our targeting power and boosted eCPM in China.

Our mobile game business continued to grow and will be a key focus for Cheetah Mobile in 2018. We are confident of growing both revenue and profit for our mobile game business in 2018. We plan to actually expand our game portfolio by publishing third-party casual games and launching casual games developed in-house. As of end of Q4, we operate 7 major casual games. In 2018, we expect to more than double the number of casual games we operate. In fact, we have 4 games in our pipeline for the coming next quarter of 2018. We have recently gained the rights to publish a dozen of small casual games, which will help to enrich our game portfolio future.

In addition to casual games, we have added more multiple -- multiplayer social game, and we plan to add middle-core games in 2018. For example, in Q4 we launched SkidStorm, a racing game that features multiple racers and a full of portfolio of cast. The initial result has been very promising. The game has recently become one of the top 10 racing games in the U.S. on Google Play. Revenues from SkidStorm has grown a great deal since early 2018.

In 2017, Cheetah Mobile became a top game publisher on Google Play in the United States. 3 mobile games were among Apple's best of 2017 list. These top results were due to our efforts to enhance our games.

In the quarter, new features, shortcuts and levels were added to improve game experience and increase user engagement. For example, we added deceleration in our game purchase features to Piano Tiles 2 to slow down faster tiles and help players complete the game. We also continue to bring our games to our home market in China. For example, the DAU of Piano Tiles 2, Rolling Sky and Dancing Line hit record high in China during the Chinese New Year.

Live.me is Cheetah Mobile's first subsidiary to raise funds from outside investor. Its revenue continues to grow due to our efforts during the quarter to drive platform business and user engagement. On the product side, we launched engaging video-based social games such as QuizBiz, a live trivia game. User can play every day to answer question for cash prize. The cash prize and the fun element have attracted many users. On the operation front, we launched premium service to the top host and the core user. Now they can buy special filter, sticker and other virtual item to build up their social brand in the mobile internet space.

We have also grown our content by working more with local talent agencies. For example, pop star Victoria Monet [added] is the favorite star in Cheez, a social short-form video app that Live.me launched in the quarter. Users can now have a dance-off with Victoria using the Dance Off feature. We show our user a set of dance moves for them to match. Cheez then captures how well the user can match all the -- all of Victoria's moves.

In addition to growing our existing business, Cheetah Mobile is committed to stay at the forefront of largest advance in tech. We believe we are able to do so due to our talent R&D team, massive user base and strong cash position. Over the past year, we have invested a great deal in AI, including in voice and facial recognition. We plan to use this tech in new products to meet user needs.

On March 21, 2018, Cheetah Mobile will launch an AI speaker that use some of Beijing Orion Star's technical -- technology. Beijing Orion Star will also launch some robotics product that day. Cheetah Mobile has about 30% equity invest in Beijing Orion Star and has a 2-year warrant to gain more equity interest at the same valuation to achieve a controlling position.

We also believe blockchain technology may create additional opportunity for us. For example, we will encourage users of our AI speaker to complete a task such as a certain interaction with the device to earn points. Users can use these points to consume value-added service on our platform such as premium content and cloud storage, which enhance user engagement and user stickiness. We can also use our data to better understanding our users and improve our products and service. We welcome you to join us at the media event on March 21 for more detail about our planned products and service.

With that, I will now turn the call to our CFO, Vincent Jiang for Q4 financial updates.

Thank you, Mr. Fu Sheng. Hello, everyone. We are pleased to report that Cheetah Mobile closed out 2017 with a strong quarter.

Total revenues grew by 9% year-over-year and 16% quarter-over-quarter to RMB 1,388 million in Q4 and exceeded the high end of our guidance range by 6%, driven by strength in Live.me, mobile games and domestic utility apps business. We posted stronger-than-expected rev growth in the quarter.

By platform, mobile revenues grew by 18% year-over-year and 16% quarter-over-quarter to RMB 1,218 million, which accounted for 88% of our total revenues in the quarter. By region, although overseas revenue growth decelerated from the previous quarters, revenues generated from the Chinese market accelerated its growth to increase 23% year-over-year and 38% quarter-over-quarter to RMB 544 million.

Profits continued to expand in the quarter. Gross profit increased by 14% year-over-year and 17% quarter-over-quarter to RMB 926 million in Q4 2017. Operating profits increased to RMB 222 million from RMB 62 million in the same period last year and RMB 132 million in Q3 2017. The expanded profits and margins resulted from higher revenues and our strategy to optimize the cost and expense structures for our utility products and our initiative to offload the loss-making business News Republic. In Q4, the total operating expenses decreased by 6% year-over-year to RMB 704 million.

Our core business continued to generate strong cash flow in the quarter. We made RMB 267 million in net cash from operating activities and RMB 259 million in free cash flow in Q4 2017. We also closed 2 significant disposals, including News Republic and our interest in musical.ly, which generated a gain of RMB 1,089 million in Q4 and greatly boosted our earnings and balance sheet.

In Q4, we reported a diluted income per ADS of RMB 7.27, up from RMB 0.41 in the same period last year and RMB 0.95 in Q3 2017. As of December 31, 2017 our cash, cash equivalents, restricted cash and short-term investments were RMB 3.8 billion.

Moving on to each of our reporting segments. Please note that all financial numbers below are in RMB, unless otherwise noted.

For our utility products and related services, revenue decreased by 4% year-over-year but increased by 17% quarter-over-quarter to RMB 967 million in Q4 2017. The year-over-year decrease was due to: first, a decline in revenues from mobile utility products in the overseas market. As Mr. Fu Sheng just mentioned, Facebook and Google discontinued the placement of ads on mobile phone lock screens since May 2017 and January 2018, respectively, which reduced our ad inventory; second, a decline in PC revenue as the internet traffic continued to migrate from PC to mobile. The decrease was largely offset by the solid operation and the robust growth of our mobile utility products in China. Although our eCPM impressions continue to rise, our revenues from mobile utility products in China is getting very close to those from the overseas markets. The quarter-over-quarter growth of this segment was due to a seasonal effect, as the first quarter is typically our strongest quarter of the year.

Non-GAAP operating profit for our utility product and related services increased by 3% year-over-year and 26% quarter-over-quarter to RMB 327 million in the fourth quarter of 2017. The non-GAAP operating margin for our utility products and related services expanded to 34% in the quarter, up from 32% in the first quarter of 2016 and in the third quarter of 2017.

As we've stated in the past, the profit improvement was the result of our strategy to optimize the cost and expense structures for our utility products. In Q4, we continued to improve collaboration across our product teams and focused our marketing dollars on our core products in key markets. These initiatives, coupled with the resilient revenue, have allowed this segment to improve profitability and generate strong cash flow. For the full year of 2017, our utility product and related services segment reported a record non-GAAP operating profit of RMB 979 million.

For our mobile entertainment business, revenue increased by 50% year-over-year and 10% quarter-over-quarter to RMB 399 million in the first quarter of 2017. For the full year of 2017, our mobile entertainment business earned RMB 1,496 million in revenue, up 160% year-over-year. Specifically, revenues from our content-driven products increased by 58% year-over-year and 13% quarter-over-quarter to RMB 228 million in the quarter.

Live.me, the live video streaming app serving overseas users, is the majority contributor to our content revenues. The fast-rising revenue was mainly due to strong growth in average revenue per user, supported by the initiatives mentioned by Mr. Fu Sheng earlier.

Revenues from mobile game business increased by 41% year-over-year and 7% quarter-over-quarter to RMB 171 million in the quarter. The year-over-year increase was due to our efforts to expand the mobile game portfolio by introducing several new mobile games in early 2017 and launching in-game purchase features in some of our well-known titles. The sequential increase resulted from our efforts to bring some of our favorite mobile games in the overseas market to our home market. For example, both Piano Tiles 2 and Dancing Line have been among the top mobile games in China.

Our non-GAAP operating losses for the mobile entertainment business shrank to RMB 62 million in the quarter from RMB 201 million last year and RMB 105 million last quarter. The reduced losses were primarily attributable to increased revenue in the Live.me and mobile game businesses and reduced expenses from the News Republic business, partially offset by our increased investment in Live.me and Cheez, the short term -- excuse me, the short video business operated by Live.me in overseas markets. Also, our mobile game business continued to improve its profitability in the quarter, thanks to its steady revenue improvement.

Moving along, we would now like to provide revenue guidance. For the first quarter of 2018, we expect total revenues to be between RMB 1.1 billion and RMB 1.14 billion. I would like to point out that the depreciation of the U.S. dollar against RMB in 2017 added some pressure on the yearly comparison for our overseas revenues, as the majority of our overseas revenues which amounted to -- amounted (sic) [accounted] for 67% of our total revenues in 2017 are recognized in U.S. dollar but reported in RMB.

Another negative impact on our revenue is our reduced ad inventory for our utility products in the overseas market as Facebook and Google Play discontinued lock screen ads. This will affect all app developers, including Cheetah Mobile. However, we would like to point out that our revenues from mobile utility products in the overseas market now have a very healthy composition as the result page is the major ad format for now. Our result page ads are well received by our users and have a track record of solid performance in the past.

Further, we expect that the profit margin for our utility products in the overseas market to stay very healthy, and the outlook for 2018 remains positive. In addition, we are pleased that revenues from our mobile utility products in China will continue a strong year-over-year growth trajectory in the coming quarters and will become an important revenue contributor, similar to our mobile utility products from the overseas markets.

Overall, we expect that our core utility products and related service business will remain healthy and continue to generate strong profit and cash flow in 2018. We expect the revenues from our mobile entertainment business to continue its growth, driven by our mobile games and Live.me business. Please note that this forecast reflects our current and preliminary view and is subject to change.

This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

(Operator Instructions) The first question comes from Thomas Chong of Crédit Suisse.

(foreign language)

I will now translate my questions in English. I mean, first, can management talk about the robotics and blockchain initiative and how we should think about the monetization potential? And my second question is about our existing business, Live.me and mobile games, how should we think about the revenue trend?

(foreign language)

Okay. Now I'll translate. So Live.me has a healthy revenue growth year-over-year, and right now, its structure of revenue is actually more balanced because the marketing expenses for Live.me is decreasing and the top line has increased. And we are confident that the Live.me revenue will continue to increase. And on the other hand, we understand that just like the live broadcast businesses in China, it also has had a negative impact from the short video part of business from other players. That's why Live.me has launched a short video business called Cheez. We think that this is a strategic movement. And if that strategic move can materialize and generate good recon -- excuse me, generate good return, and then the overall Live.me business can be very prosperous.

(foreign language)

Okay. Well, we think that robots that has certain perceptions that can do certain jobs, they do exist today. And of course, all the robots are facing challenges about the cost of production and sales price. We have been trying very hard to reduce the cost of robots. We think that a general-purpose robot doesn't exist yet because of the technology limitation, but we believe that robots for a certain vertical area and for a certain scenario do exist, for example, for a robot in household to -- for accompanying purpose do exist and the technology including visual and language that can help [lead] achieve this goal. And the day after tomorrow, we will have a product launch event that will showcase our family of robot products. We think that if the product can reach our expectation, including the hardware production and manufacturing part, then we think the future of robot market can be a huge and high-growth market.

(foreign language)

Okay. As the human costs are getting higher and higher and with the high expectations people are expecting, we think that this is a global issues. I think -- we think that the general direction is very good, and we are confident about this.

(foreign language)

Okay. I think -- we think that blockchain technology is a real innovation. And we highly -- we're going on this trend, and we are following this trend as well. And blockchain will cause a change in many different applications. Right now, with the computer and cellphone getting very popular and everybody's online now, so that makes decentralization become a possibilities. Also, blockchain technology -- well, actually, Cheetah Mobile has its own advantage in developing blockchain technologies because blockchain technology requires security, and also, it's a utility product as well. And people will prefer a good user experience and the safety of using blockchain products. Because Cheetah Mobile has a global user base and this provides a basis for massive users of blockchain technology-related products. Also, security and utility, those are the extension of Cheetah Mobile's capabilities. So that's natural for Cheetah Mobile to develop blockchain technologies.

Okay. Good. I also -- actually, in terms of blockchain, I also wanted to add a few things. Recently, Cheetah Mobile has already released a couple of products. One is the SafeWallet . And it also has released a decentralized app browser, and there are still other products in the pipeline now, so just keep tuned.

(Operator Instructions) The next question comes from Wendy Huang of Macquarie.

(foreign language)

I will translate the question myself. So my first question is about your domestic revenue. When should we expect your domestic revenue contribution to surpass 50%? There is, however, the margin of your domestic business reducing from overseas business. Second question is trying to get some clarification on the Live.me strategy. I think previously you mentioned that Live.me generated some money, and priority is not really monetization. But in your prepared remarks just now, you actually mentioned that Live.me is constantly trying to control the cost and to grow the top line. So can you give us some clarification on this?

Well, Wendy, first of all, let me answer the question about the domestic mobile utility products. Right now, the revenue from mobile utility products in China is getting close to the revenue from the utility products on the overseas market in Q4 2017. And I think we expect that in Q1, the 2 portions will be very similar, so it will be kind of equal. But in terms of the overall overseas revenue because in the overseas revenue, we still have Live.me and mobile games, which mobile games primarily is from the U.S. right now -- comes from outside China now, so the overall overseas revenue will still be larger than the revenue from the domestic markets. In terms of margin, both margin in the domestic market and overseas market for the utility products are all very healthy.

(foreign language)

(foreign language)

Okay. Let me translate. Live.me is an independent company. Although, in general, its approaching will be in conformity -- will follow the general direction of Cheetah Mobile, it still has its own independent decision-making process. For the Live.me itself, the user acquisition cost and the revenue, it is -- (inaudible) it has been achieve a certain healthy balance, so we think that there's no need to reduce these acquisition costs or marketing expenses for the revenue to continue to grow. The only thing is that -- we are talking about Cheez, that's a short video business operated by Live.me. Because we think that the short video business has the potential to bring more users to the Live.me platform, so they are considering to put more user acquisition and more marketing dollars to Cheez. Of course, there's a balance, how much do you put in Cheez, and that will directly impact the bottom line of Live.me and also will impact the bottom line of Cheetah Mobile. And that's why they are kind of trying to reach a balance of the user acquisition cost and the user growth.

(Operator Instructions) The next question comes from Andrew Orchard of Nomura.

(foreign language)

Just a question on the revenue growth guidance. I'm guessing that the weaker guidance for revenue this quarter is due to -- due partly to the disposals of News Republic and musical.ly. So I'm just trying to get a sense of what the revenue growth would be if we had taken out these 2 businesses that you've sold off now.

(foreign language)

Okay. So the overall impact resulting from the disposal of the News Republic business actually is not that significant. And the main reason for the guideline in the lower range is because, first of all, the dollar -- U.S. dollar depreciation against the RMB, which has a quite significant impact; and secondly, as we mentioned earlier, Facebook and Google changed their approach. They do not allow ads on cellphone lock screens, which reduced our ad inventory, and that reduced our revenue in turn. On the other hand, our 2 utility product itself has been going well. For example, one of our product is CM Launcher, the other one is Keyboard. Those 2 products has a very good user growth trajectory. But these 2 products are still relatively new, so commercialization from those products still need some time. That's why, in the short term, we do have some pressure in terms of revenue growth from the overseas utility products. But in the long run, we are very confident because one of the new driver is our mobile game business. We have started the casual game business for -- in the last couple of years, and we found that the casual game can be a virtually -- have a longer life cycle -- have a long lifespan, and it has relatively good revenue and profit. For example, Piano Tiles 2, which is a casual game, it has been around for more than 3 years, and we have added more than 200 songs to the product. And it still has a very good user base and good revenues. So we think that in the long term, our -- the game -- mobile game business can be a very significant part of our overseas revenue generation -- excuse me, overseas revenue source.

(Operator Instructions) The next question comes from Liping Zhao of CICC.

(foreign language)

I have a small question about the operating margin. So we saw, in the fourth quarter last year, the operating margin improved a lot. And what will be the margin trend in first quarter '18 and in full year '18?

Okay. Let me answer that question. The improved margins are mainly from our higher revenues in the fourth quarter. Also, we have been continuing to optimize the cost and expense structure for our utility products, so that's another reason. The third one is we disposed News Republic in the fourth quarter, which was a loss-making business. So disposal of it helped our margin in the fourth quarter. Thank you.

(Operator Instructions) This concludes our question-and-answer session. I would 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 further questions, please do not hesitate to contact us. Thank you. Bye.

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