Cheetah Mobile Inc (CMCM) 2021 Q3 法說會逐字稿

Good day, and welcome to the Cheetah Mobile Third Quarter 2021 Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Sheryl Zhang, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Thank you, operator. Welcome to Cheetah Mobile's Third Quarter 2021 Earnings Conference Call. With us today are Mr. Sheng Fu, Chairman and CEO; and Mr. Thomas Ren, CFO.

Following management's prepared remarks, we will conduct the Q&A session.

Before we begin, I refer you to the safe harbor statement in our earnings release, which will -- 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. Sheng Fu. Please go ahead, Fu.

Thank you, Sheryl. Hello, everyone. In the third quarter of 2021, consistent with our previous guidance, Cheetah Mobile's revenue was RMB 196 million. For our Internet business, we continued to transform our business from single advertising model to a diversified model of advertising plus subscription. The number of members kept double-digit growth. The revenue from our membership business has increased for more than 5 quarters consecutively.

On PC platform, we further enhanced our service and membership privilege. The overall member satisfaction score stays at high level. Our mobile platform, we improved user experience through product optimization and more value-added service. The percentage of paying users as well as the renewal rate both increased. In general, after the huge external challenges, our Internet business has been back to the right track as we planned.

However, globally, advertising is facing some uncertainty in China. Sectors such as education, real estate, travel have slowed down due to COVID-19. Government supervision and regulation and some other reasons, the impact has been passed on to advertising business. Companies including Baidu and Tencent are not very optimistic about advertising in the coming quarters. Our outlook for the first quarter also reflects these negative factors. Overseas advertising business of big companies such as Facebook also faced headwinds from the change of iOS 14, macroeconomic and COVID-related factors. Our overseas advertising agency business is inevitably adversely affected. As this might be multi-quarter impact, this also has been factored in our fourth quarter guidance.

Good news is revenues from our global cloud service has been growing very well due to expanding service categories and the client base in this quarter and the price which tried to explore overseas market has a real demand for this service. We are very optimistic about its future growth.

For our AI business, GMV and revenue from shopping mall coupon-selling robots has been up for several months in a row. We apply both off-line and online marketing strategies to expand the business. Off-line, we have deployed more than 10,000 robots in more than 40 cities.

Online, we used our own WeChat mini program, Pinduoduo, some other local network community as well as some mainstream third-party platforms. Customers can register in Pinduoduo through our shopping mall robots and choose their favorite coupons from a list of options we displayed in this mini program. Machines can also use Pinduoduo's professional platform to review the data of their coupon sale and to analyze. Currently, our robots sell more than 55,000 kinds of coupons for more than 1,000 merchants in more than 700 shopping malls all over the country. At the end of October, GMV per day at the weekend has achieved another milestone.

For this business, we have gradually created competition better. It has been widely welcomed by more and more merchants and customers. Generally speaking, revenue from our new business, such as membership business, the global cloud service business and the shopping mall coupon-selling robots business were will keep growing, while our revenues from advertising-related business will face some challenges in the coming quarter.

For cost and expense, our operational efficiency has been greatly improved in past quarters. Upon this, we will continue the strict control over cost and expense to maximize our operational efficiency and the interest of our shareholders.

Additional, as of September 30, 2021, our cash position was around USD 288 million and the long-term equity investment was about USD 376 million. The abundant capital reserves ensure us to focus on our strategies and growth steadily.

With that, I will now turn the call to our CFO, Thomas Ren, to go through the detail of our third quarter financial results.

Thank you, Sheng, and hello, everyone. Thank you all for joining us today. Now I will walk you through our key financial highlights. Please note that unless stated otherwise, all money amounts are in RMB terms.

As Sheng just mentioned, in the third quarter of 2021, our total revenues were CNY 196 million, representing a year-over-year decrease of 46% and a quarter-over-quarter decrease of 7%. The revenue was within the range of our previous guidance.

To explain the reasons behind the changes, now let me break down our revenues into Internet and AI and others sectors. As a result of the company's ongoing business streamlining efforts, we realigned our business segments based on the change of the way that the management assesses the company's segment performance. The company's overseas advertising agency services, which assist company to launch advertisement of overseas advertising platforms, are changed from the Internet business into AI and others due to the synergies created between the company's advertising agency services and global cloud services. Consequently, the company has retrospectively revised segment information and the related revenue presentation to conform the change in the company's segments.

Revenues from the company's Internet business decreased by 51% year-over-year and 16% quarter-over-quarter to RMB 161 million in this quarter. The year-over-year decrease was due to the company's strategic efforts to diminish the game-related business in past quarters. The quarterly decrease was mainly because revenue in the second quarter of 2021 was temporarily increased due to June 18 promotional events and no such promotional event occurred in this quarter.

Revenues from AI and others. At the reclassification of segment from this quarter, this segment now includes our shopping mall coupon-selling business, overseas advertising agency business, global cloud businesses and some other business. Revenues from this segment were CNY 36 million in the third quarter of 2021, representing a 9% year-over-year decrease and a 63% quarter-over-quarter increase. The year-over-year decline was primarily attributable to the planned drop in sales of AI-related hardware products. The quarter-over-quarter increase was from our global cloud services as well as shopping mall coupon-selling robots business.

Turning to costs and expenses. The following discussion of results will be on a non-GAAP basis, which excludes stock-based compensation expenses. The use of non-GAAP measures in this context will help us to better present the results of our operating performance without the effect of noncash items. For financial information presented in accordance with U.S. GAAP, please refer to our earnings release.

Our operating loss was CNY 59 million in the third quarter of 2021 compared with CNY 119 million in the same period of last year and CNY 56 million in the previous quarter. Our adjusted EBITDA was negative CNY 38 million in third quarter of 2021 compared with negative CNY 101.6 million in the same period last year and negative CNY 47.7 million in the previous quarter.

Cost of revenues decreased by 34% year-over-year and increased 48% quarter-over-quarter to CNY 74 million in the third quarter of 2021. The year-over-year decrease was primarily due to the decreased revenue. The quarter-on-quarter increase was from increased spending over AI-related business.

Research and development expenses decreased by 54% year-over-year and increased by 11% quarter-over-quarter to CNY 52 million in the third quarter of 2021. This was due to the deconsolidation of certain gaming- related business in past quarters. Our investment in research and development has been keeping flat. The quarter-over-quarter change is mainly due to less government grants in this quarter.

Selling and marketing expenses decreased by 49% year-over-year and 30% quarter-over-quarter to CNY 85 million in the third quarter of 2021. This year-over-year decrease was attributable to the streamlining of our business and the strategic reduction of our costs. While the quarter-over-quarter decrease was mostly because we incurred incremental promotional expenses for the June 18 promotional event in the second quarter.

General and administrative expenses decreased by 46% year-over-year and 7% quarter-over-quarter to CNY 48 million in third quarter of 2021. The decrease was mainly due to the streamlining of our business and our effective expense control.

Now let me turn to our balance sheet. As of September 30, 2021, we had cash and cash equivalents, restricted cash and short-term investments of USD 288 million and long-term equity investment of USD 376 million. This strong balance sheet reassures us to follow our long-term development plans and achieve our strategic growth.

And for our fourth quarter revenue guidance, we currently expect total revenues between CNY 130 million and CNY 180 million. As Sheng just mentioned, our guidance has reflected the uncertainty we face in the fourth quarter due to the headwinds in global advertising business. Please note, this forecast reflects our current and preliminary views and is subject to change.

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

(Operator Instructions) And today's first question is from Melody Chan at Jefferies.

[Interpreted] Let me translate my question. My first question is on the advertising business. So how should we think of about the impact of the COVID uncertainty and the macro weakness and also the regulation impact.

And my second question is on the AI business. How should we think the AI business outlook in 2022?

Okay. Thank you, Melody. I will answer your first question and Mr. Sheng will answer your second question and I will translate for him. So your question, I think, is regarding the advertising business. And firstly, I would quickly answer the impact by COVID uncertainty and some also market weakness. Yes, this thing, COVID uncertainty and the market weakness will affect on our business. And we can see now globally advertising is facing some uncertainty. In China, sectors such as education, real estate, travel has slowed down due to COVID-19 and also the government has supervision and regulation and some other reasons. So the impact has been passed down to advertising business. So some bigger Internet platform companies are not very optimistic about advertising in the coming quarters. And also, our outlook for the fourth quarter also reflects these negative factors.

And overseas -- in the overseas market, advertising business, as we mentioned, for the big platform companies like Facebook, they are also facing headwinds from the change of IAS 14, macroeconomic and COVID-relating factors. So our overseas advertising agency business is also adversely affected and this might be impacted by multi-quarters. This also has been factored in our fourth quarter guidance.

And also for our shopping mall coupon-selling robot business, there were also some negative impact in certain cities. Some shops in these cities were closed or some restaurants stopped eat-in, but it is controllable and the impact was only in limited areas. So we didn't see a significant impact on our shopping mall robot business.

And also I think your question also involved the regulation impact by the Personal Information Protection Law. Yes, we also see the strict government supervision and regulations could also slow down the advertising business. This has already been reflected in some Chinese Internet companies financial results. And as we mentioned earlier, we also expect some negative impact on our advertising-related business.

For us, internally, our related departments have been starting and following the regulations and laws seriously. We also adjusted how we display advertisement on our platforms and how we can collect the user's information. We conduct with some internal restructures to better comply with the updated government regulations.

And also, as we mentioned, now we are focusing on new business such as membership, shopping mall coupon-selling and the global cloud service. We are confident about the growth of this new business. So generally speaking, about this regulation, we will strictly comply, and at the same time, we also have made business strategies to ensure the growth of our overall business. Hope this answers your question.

(foreign language)

[Interpreted] Okay. Let me translate this part. So we have deployed over 10,000 service robots in dozens of cities across China. And we recently realized that all the customers, they are already used to talking to the robot in the shopping malls like inquiring information or merchants in that shopping more or the service provided by those merchants.

(foreign language)

[Interpreted] Because we found the customer already used to us communicating with our service robots, we found that the customer is asking the location or interaction these our service robots. The coupons we recommend for the customers could be acceptable.

(foreign language)

[Interpreted] And all the merchants in the shopping malls, especially the restaurants, they also need to deploy some of their coupons in this shopping mall to attract its traffic.

(foreign language)

[Interpreted] When the customer is shopping in the mall, so for most of the times, they didn't have a clear targeted restaurant. So sometimes it might be -- they might go into the recommended restaurants because of the coupons we recommend.

(foreign language)

[Interpreted] Combining the 3 parties demand, we are promoting the mini program called Pinduoduo.

(foreign language)

[Interpreted] When the customer interacts with our robots, so they -- firstly, they need to register our mini program to become a member of our mini program. And then they pay to buy the coupons through our program. And then they can bring the electronic coupons to the restaurant or to the merchants to enjoy the discounts.

(foreign language)

[Interpreted] So by promoting our service robots around the shopping malls, we can successfully convert the off-line traffic into the online traffic or online user base of our mini program.

(foreign language)

[Interpreted] This business model, we can apply our advantage of the Internet traffic business model to combine the off-line traffic user base.

(foreign language)

[Interpreted] Yes. We have provided over 5,000 coupons in our mini program.

(foreign language)

[Interpreted] We believe this business model could be -- grow fast because, as we just mentioned, it's a combination of 3 parties demand.

(foreign language)

[Interpreted] This could also convert our traditional Internet business from the previous pure advertisement model into the consuming and payment procedures.

(foreign language)

[Interpreted] We can also earn commissions by selling the coupons. This could be another source of our future commercial income.

(foreign language)

[Interpreted] This is basically our shopping mall service robots business model. Thank you, Melody.

(Operator Instructions) As there are no further questions at this time, I'd like to hand the conference back to our management for closing remarks.

Thank you, operator. Thank you all for joining us today. If you have any questions, please don't hesitate to contact us. Thank you. Bye.

And ladies and gentlemen, this concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]