Cheetah Mobile Inc (CMCM) 2019 Q3 法說會逐字稿

Good day, and welcome to the Cheetah Mobile Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Helen Zhu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Thank you, operator. Welcome to Cheetah Mobile's Third Quarter 2019 Earnings Conference Call. With us today are our Chairman and CEO, Mr. Sheng Fu; and our CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A section.

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 Chairman and CEO, Mr. Sheng Fu. Please go ahead, Fu Sheng.

Thank you, Helen. Hello, everyone.

In the quarter, our utility products business continued to face headwinds due to an unfavorable macro environment in both overseas and domestic markets. In overseas markets, the recent global business environment had brought some difficulty to Chinese enterprise in the process of going abroad. Still, we've continued to face challenges that resulted from the misleading statements made by a third party last in November. We have not yet resumed business relations with Facebook despite an independent review of these misleading statements our -- by outside counsel from Skadden, Arps and the use of Facebook's preapproved independent data auditing firm, AlixPartners. This audit did not identify any information inconsistent with our previous disclosure.

In the domestic market, we continue to see softer-than-expected ad demand due to macro headwinds. Additionally, handset markets -- handset makers have increasingly integrated mission-critical features from -- for cleaning, security and battery management into their operating system. The impact from our extension -- external operating environment on our business is more significant than we expected. We expect those headwinds to continue affecting our business in the short term. In spite of these short-term challenges, Cheetah Mobile remains fundamentally strong.

In the third quarter of 2019, revenues from our mobile entertainment business grew by 7% year-over-year to RMB 532 million, and the revenues from our AI-related business grew by 88% year-over-year to RMB 35 million. Despite the challenge of suspending revenue growth for our utility products business, we still earned almost RMB 353 million in revenue and more than RMB 24 million in operating profit from this business in the quarter.

In the quarter, we continued to implement cost-control measures for both our utility products business and our mobile entertainment business. During the quarter, costs and expense from -- for our utility products business and our mobile entertainment business was reduced by almost 12% year-over-year.

In the third quarter, we began to experiment with several new channels to acquire users and monetize our traffic in the overseas market, but this will still take some time. We have already seen some encouraging results. In addition, we began to introduce several new premium features within our existing utility products and game for users to subscribe to. The initial results have been very encouraging. Our user subscription model diversified our revenue source, particularly in the overseas markets where we do not have the direct sales team for our ads business.

The decline in operating profit in this quarter was largely attributed to our increased environment (sic) [investment] for AI, which amounts to roughly RMB 140 million in the quarter; and the onetime noncash asset impairment of about 16 -- RMB 60 million. In the third quarter of 2019, we amended LiveMe's share incentive plan to give LiveMe's current management team more flexibility and the incentive to run the business independently in an increasingly competitive market environment. As a result, Cheetah Mobile will no longer hold the majority voting power in LiveMe and will not consolidate LiveMe's financials from 4Q 2019. We are confident in LiveMe's management team and believe they will lead the team to execute its long-term growth strategy.

Cheetah Mobile will, in turn, benefit from LiveMe's growth as a major shareholder. Besides, as LiveMe generated the majority of the loss for our mobile entertainment segment in the past, our margin for the segment and the corporate level will have structural lift starting in the fourth quarter of 2019. Importantly, Cheetah Mobile has a very strong balance sheet. As of September 13 -- 30, 2019, we had net cash of USD 337 million and long-term equity investments of USD 348 million, which includes Bytedance, Wifi Master, Codemao and other well-known assets, in which we made early-round investments. In the future, we will continue to use our cash to grow our business, and I think we will look at -- we will look at capitalizing our private investments and using these funds for business development and shareholder return.

Overall, we remain confident that our utility products business and mobile game business will resume their growth. As a result, we will continue to invest in our AI-related business to build long-term growth for Cheetah Mobile.

Our AI-related business made a substantial progress in terms of consumer adoption and user engagement in the quarter. Our AI business is a joint effort with Beijing OrionStar. Our service robots, which are powered by our proprietary voice and video interactive technology, are now being used in many places such as shopping malls, museums, schools and subways. Our service robots cover more than 2 -- 20 industries, service more than 800 enterprise customers and have attracted users to use more than 130 million times.

In addition, text-free voice queries from our robots has recently surpassed 2 million.

As more enterprise customers adopt service robots, we believe service robots will become the next traffic gateway in the post-smartphone year. As of today, we are already one of the largest service robot providers in China, and we are confident in both growing our market share and the ability to become a market leader in the coming quarters.

In the third quarter, Beijing OrionStar signed Series B funding agreement with an outside investor. At the same time, cheetah Mobile will also fully exercise its warrants in Beijing OrionStar. We expect the deal to close by the end of November. Post transaction, Cheetah Mobile will remain a major shareholder of Beijing OrionStar. Importantly, this transaction will give us more flexibility in the execution of our AI strategy, and it will take time for us to educate customers to our business models and generate material revenues from our AI business.

However, we do believe we are on the right track and that the development of 5G technology will speed up this progress. And at the same time, our experience in developing cloud-based consumer products, our knowledge of how the Internet works and our sophisticated voice and video interactive technologies will enable us to capture the opportunities going forward.

With that, we are now turning the call to our CFO, Vincent Jiang, to go through the detail of our third quarter financial results.

Thanks, Mr. Fu Sheng, and hello, everyone. I will now walk you through our financial results. Unless stated otherwise, all money amounts are in RMB and all growth comparisons are made on a year-over-year basis.

For the third quarter, total revenues decreased by 32% to RMB 920 million. Revenues from our mobile entertainment business increased by 7% to RMB 532 million. Mobile game revenues increased by 4% to RMB 297 million, driven by the boost in popularity of Bricks n Balls, which we launched in early 2018. LiveMe revenues increased by 11% to RMB 235 million, primarily driven by higher average revenue per paying user.

Revenues from utility products and related services decreased by 58% to RMB 353 million in the third quarter of 2019, primarily due to the slowdown in our mobile utility business in the overseas markets. Headwinds in the domestic online advertising market also affected our mobile utility product business in China.

Moving to our cost and expenses. To help facilitate the discussion of the company's operating performance without the effects of noncash share-based compensation expenses, the following discussion will be on a non-GAAP basis, which excludes stock-based compensation expenses. For financial information presented in accordance with U.S. GAAP, please refer to our press release, which is available on Cheetah Mobile's website at www.cmcm.com.

Cost of revenues decreased by 4% to RMB 366 million in the third quarter of 2019 due to reduced costs associated with our utility product business, which were partially offset by the increases in channel costs related to our mobile games business and other costs associated with our AI business. Gross margin in the third quarter of 2019 decreased by 43% to 400 -- excuse me, to RMB 554 million, and gross margin was 60% compared to 72% in the same period last year.

R&D expenses increased by 27% to 219 -- excuse me, RMB 212 million in the third quarter of 2019 primarily due to increased R&D personnel for our mobile games and AI-related business, offset by a decrease in the number of personnel for our utility products and related services. Selling and marketing expenses decreased by 30% to RMB 397 million in the third quarter of 2019. This decrease was mainly due to reduced promotional activities for our utility products and related services business, which was partially offset by the increased marketing expenses for our mobile games business.

G&A expenses increased by 78% to RMB 167 million in the quarter, which was primarily due to the onetime asset impairment charge, increases in employee benefits and other administrative expenses. Non-GAAP operating loss was RMB 222 million for the third quarter of 2019 compared to a non-GAAP operating profit of RMB 154 million in the same period last year.

Moving to each reporting segment. Operating profit for utility products and related services was RMB 24 million in the quarter, a decrease from RMB 264 million in the third quarter of last year, mainly due to decreased revenues and the onetime increase in allowances for doubtful accounts as the company periodically review its accounts receivable and other receivables. Operating loss for the mobile entertainment business was RMB 142 million in the quarter, an increase from RMB 74 million in the third quarter of last year, mainly due to increased amounts of investments made into our mobile games business as we continue to launch new titles.

Operating loss for AI and other business was RMB 103 million in the quarter, an increase from an operating loss of RMB 36 million in the third quarter of last year, mainly due to additional amount of investments made into our AI-related business. LiveMe amended its share incentive plan on September 30, 2019. As a result, we no longer hold the majority voting power in LiveMe, and we will deconsolidate LiveMe's financial results starting fourth quarter of 2019.

Now let me provide you with our fourth quarter revenue guidance. We currently expect total revenues for the fourth quarter to be between RMB 610 million and RMB 650 million. This amount has reflected the fact that LiveMe's revenue will no longer be included in the company's revenues. Please note this forecast reflects the company's 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 Hillman Chan of Citigroup.

(foreign language) So my first question is on the fourth quarter guidance. Could management provide more granular color on the guidance for fourth quarter for the mobile entertainment, mobile games and utility products?

And my second question is on the product road map for the AI products. Could management share more color related to that and how we should think about monetization and profitability for the AI products going forward?

Hillman, this is Vincent. I will take the first question. Regarding the guidance for the fourth quarter, first of all, we want to point out that LiveMe's revenue is no longer included in the guidance so you can see a substantial decrease in amount compared to last quarter and previous quarters.

And secondly, in terms of the utility products and mobile entertainment, which is now -- just games now, currently, we expect that both the utility products and games will have a slight decrease in the fourth quarter, which is mainly because, for the utility products, we still see soft reaction by advertisers and the softness in general for our utility products. And for the game business, we do have a large pipeline, and we are promoting new games in various channels. Since those new games haven't really picked up the momentum yet, so the fourth quarter will be relatively soft. But we do hope that by next year we will see significant increase in the mobile games business.

(foreign language)

[Interpreted] Okay. Let me interpret now. So our Q4 guidance is quite conservative from our point of view. For example, as I just mentioned, the -- we do have new games in the pipeline. We are promoting those games, but we haven't accounted a considerable amount of revenue contribution from those new games. That has been reflected in our guidance. And also, we're taking a conservative stance because, in our early call, we mentioned that the overseas revenues and the overseas business partners still haven't resumed their business relationship with us. And the impact that has caused is actually much more significant than we originally expected. That's why we are -- again, we are trying to be more conservative in our guidance.

(foreign language)

[Interpreted] Okay. There are 2 aspects of the AI business. First of all, in terms of the Cheetah Mobile GreetBot, which is a product we have been selling to business and enterprise, and this is a relatively -- it's a relatively longer-term process because we're not selling to the consumers but selling to enterprise where the decision process is longer than selling to the consumers. We do have seen some transactions in which the enterprise has been coming back to us. We have seen recurring orders from those enterprise, and we hope that by next year we will see a more meaningful increase in this part of sales for the -- for our robotic products.

For the second part, we have been experimenting and exploring a new business model, which we have been placing thousands of robots in larger shopping malls, and those robots will provide some kind of inquiry to the customers in those shopping malls. And those shopping malls all have a large foot traffic, and we are trying to experiment new advertising model through which to monetize the ad inventory through the large traffic -- excuse me, through the large user traffic.

(foreign language)

[Interpreted] Okay. So the AI technology actually involves many different aspects of technologies. And upstream and downstream, it's a long value chain. In terms of making AI products and providing related Internet services and providing the type of experience that an enterprise customer would want is actually a very challenging job. And for us, we have been able to -- we do have -- along the value chain, we do have our full suite of technologies. So in terms of the customer experience for our enterprise customers, we do believe that we are in a leading position in the industry.

The next question comes from Thomas Chong of Jefferies.

(foreign language) This is [Mavis] asking on behalf of Thomas. I have 2 questions. Could management provide some color on utilities and entertainment 2020 outlook? And any colors on revenue contribution of AI initiatives in 2020? That would be helpful.

(foreign language)

[Interpreted] Okay. In some of the utility products, honestly, the challenges we are facing in this quarter is beyond our expectation. And as we said earlier, the user acquisition channels in overseas market and in the domestic market were all facing some issues in those channels. And -- but we still think that next year we do have growth potential here because we are rolling out new products and we're exploring new channels. And for example, in our PC business, which is our kind of traditional business, many people think that there will be continual decline in PC-related business, but what we have seen today is that, that part of business has been stabilized.

And I also want to add a point that, for example, for our PC business with the new -- one of the new products we've provided is actually the previous premium model, which is the user will subscribe for membership fees, and in return, they will have all the services provided by our products and without having to bother with ads. And this is kind of a reverse of the recent years' trends in Internet, especially in mobile Internet companies because, previously, all the utility products and also the safety-related products was a paid model. And then, of course, when the industry evolves, that model has been overthrown and replaced by the total free model supported by advertising industry and advertising budgets. But now we tried back to the previous model using the user subscription model and we found that, that actually -- with the current generation of users, that model is very receptive to our users. So that's just one example.

And now let me go back to the interpretation about the second part of Mr. Fu Sheng's -- excuse me, the second part of our answer, which is about the AI business. And for that, we are very confident about -- because, as we mentioned earlier, our product is very competitive when we're compared to the other player in this industry. And if you think about the macro environment, we can see a lot of customers and our business partners coming to us to order customer -- custom-made products to sell to their users.

The next question comes from Robert Cowell of 86Research.

(foreign language) My question is about the warrants. After exercising the warrants, what is our shareholding percentage going to be in Beijing OrionStar? And then also in our cooperation with Beijing OrionStar, how do we split up the work? What areas are Cheetah investing in and what areas does Beijing OrionStar invest in?

Robert, I'll take the first question. After the exercise of the warrants, also with the new round of Series B financing, Cheetah Mobile will still have -- will still be the largest shareholder of OrionStar, but it will no longer be the -- well, it will not be the controlling shareholder of OrionStar just mainly because of the dilution by the new investments, but it will remain the largest one.

(foreign language)

[Interpreted] Okay. The relationship between Cheetah Mobile and OrionStar is as follows. First of all, for some of the products such as Cheetah GreetBot, Cheetah Mobile is the exclusive distributor for OrionStar. So they sell the product to its customers, mainly to the business customers, and there will be some profit sharing arrangement between the 2 companies. And for the other part, OrionStar will provide the hardware and the basic or the lower-level AI capabilities, and Cheetah Mobile will develop the high-level applications and also will be responsible for the implementation and deployment in the actual usage scenario. So it is kind of like Cheetah Mobile is developing mobile apps for Android-operated phones.

(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 so much. Bye.

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