Cheetah Mobile Inc (CMCM) 2020 Q3 法說會逐字稿

Good day, and welcome to the Cheetah Mobile Third Quarter 2020 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 2020 Earnings Conference Call. With us today are our company's Chairman and CEO, Mr. Fu Sheng; and our company's CFO, Mr. Thomas Ren.

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 call -- 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. Fu Sheng. Please go ahead, Mr. Fu.

Thank you, Helen. Hello, everyone. While total revenue exceeded our revenue guidance, we still face challenges in growing our revenues. Total revenues decreased by 60% year-over-year and 7% quarter-to-quarter to RMB 335 million (sic) [RMB 365 million] in the third quarter of 2020, mainly due to the decline in overseas business, where we suffered some setbacks in overseas markets. Facebook and Google, our ex large business partners, stopped working with us. As a result, we lost 2 significant channels to acquire users and monetize traffic overseas.

Although we consistently communicated with Facebook and Google, offered several solutions to them to resume our work, we are still not able to rework with them. Given today's international environment, we don't expect to resume our cooperations in the near future. To cope with these headwinds, we have taken several measures and have seen some initial results as following. First, we have streamlined our operations and cut our costs and expense. As a result, non-GAAP operating loss narrowed to RMB 119 million from RMB 220 million -- RMB 222 million in the same period last year and RMB 133 million in the previous quarter.

Our operating loss in the quarter also included certain one-off staff restructuring expense, though we expect to continue reducing our operating loss in the fourth quarter. Second, our revenues from PC business and the mobile utility products in our home market as a whole stabilized. Our PC business has transformed from advertising model to a membership subscription model. During the quarter, we continued to diversify our premium content and service, which drive -- which show an increase in paying user accounts and subscription revenues. As a result, daily PC revenues from membership subscription fees increased 14x year-over-year and 42% quarter-over-quarter in the quarter.

Daily member subscription fees already accounted for about 50% of our daily PC revenues, which demonstrated that our PC business has transferred from an advertising model to a membership subscription model. Besides our mobile utility products business in our home market resumed the quarter-over-quarter growth in Q3, driven by improved eCPM. Revenues from mobile utility products business in our home market grew by 7% quarter-over-quarter in Q3.

Third, we disposed certain business and assets in the quarter resulted -- results a net cash gain of USD 21 million in the second half of 2020. Thomas will provide more details about the deal in his part. But I would like to emphasize that we will continue to create and deliver shareholder value in the future. As of today, we have already returned about USD 300 million to our shareholders. After the shareholder returns, we still have a strong balance sheet to support our ambitions and investments. Recently, Codemao, a Chinese online education platform, which focuses on teaching programming to children, raised a new round of financing. Cheetah Mobile is an angel investor of Codemao. Before this round of financing, Cheetah Mobile held about 10% of active in Codemao.

Fourth, we continue to focus our results on AI-related robotics business to build our ecosystem and eventually build our long-term growth. Together with our investor company, Beijing OrionStar, we have developed our AI-related robotics. We have increased number of user case. The recent outbreak of COVID-19 has also helped us expand usage of our robotics products and solutions. One highlight is our robot developed in shopping malls today. Our robots have been developed in about 1,000 shopping malls across 35 cities in China. As more users use our robots in shopping malls, we have begun to build tentative business models.

Meanwhile, we've found that hotel in China have increased welcome, delivery and reception robots. So we quickly responded and developed customized robots for hotel customers in the fourth quarter. Our cooperation with Beijing OrionStar in AI business built our respective gen. Beijing OrionStar develop and produce AI robots and Cheetah Mobile build user case for the customer. Notably, Beijing OrionStar's robots has been nominated thrice in a row in the service robot contest held by Beijing. With Municipal Scientists (sic) [Science] & Technology Commission for Beijing 2022 Olympic Games, we won 4 first prize and 1 second prize in this contest.

Looking to the fourth quarter of 2020, we currently expect total revenues to be between RMB 230 million and RMB 280 million. The quarter-over-quarter decrease were due to disposed assets and business, which Thomas will provide more details at his portion. Going forward, utility products and service, in particular, in PC business, were primarily driver of our revenues. Driven by subscription business, our PC revenue will resume sequential growth in Q4. On the other hand, we will continue to cut our cost and expense and narrow our operating loss in both year-over-year and quarter-over-quarter basis.

Before I hand over to the call -- the call to our CFO, I would like to emphasize that why we don't want downplay the challenges we face. It is not the first time that Cheetah Mobile encounters unfavorable outside environment. We believe that our AI strategy will enable us to build a new future for Cheetah Mobile.

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

Thank you, Fu, and good day, everyone. Thank you all for joining us today. Now I will walk you through our financial results. Please note that, unless stated otherwise, all money amounts are in RMB terms. As we stated in previous quarters, LiveMe amended its share incentive plan on September 30, 2019. As a result, we no longer hold the majority voting power in LiveMe and have started to deconsolidate LiveMe's financial results since the fourth quarter of 2019. To better present our financial results, we will also provide year-over-year comparisons, excluding the impact of the deconsolidation of LiveMe.

Total revenues were CNY 365 million in the quarter, exceeding the high end of our guidance, representing a year-over-year decrease of 60% and a sequential decline of 7%. Excluding the impact of the deconsolidation of LiveMe, total revenues decreased by 47% year-over-year in the quarter. This decrease was primarily due to the suspension of our collaborations with Google since February 2020.

By business segment, revenues from utility products and related services decreased by 47% year-over-year and 5% quarter-over-quarter to CNY 186 million in the quarter, representing 51% of our total revenues in the quarter. PC revenues and mobile utility product revenues in our home market are stabilizing, already contributing to 33% of our total revenues in the quarter.

Revenues from our mobile games business were CNY 158 million in the quarter, representing 43% of our total revenues in the quarter. As of September 30, 2020, the company has disposed certain business and assets related to the gaming business in the overseas market. In the third quarter of 2020, the disposed business and assets as a whole contributed approximately 27% of our total revenues and generated operating losses. As a result, for the fourth quarter of 2020, we expect revenues from the mobile games business to shrink significantly.

However, we expect revenues from PC and mobile utility products in our home market to remain stable and account for the vast majority of our total revenues. And for our fourth quarter revenue guidance, we currently expect total revenues to be between RMB 230 million and RMB 280 million. Please note, this forecast reflects our current and preliminary views and is subject to change.

Turning to our third quarter of 2020 costs and expenses. The following discussion of results will be on a non-GAAP basis, which excludes stock-based compensation expenses and goodwill impairment. 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. In the past several quarters, we continue to streamline our operations and cut our costs and expenses. In the third quarter of 2020, total costs and expenses decreased by 58% year-over-year and 9% quarter-over-quarter to CNY 481 million. Excluding the impact of LiveMe, our total costs and expenses decreased by 38% year-over-year. As a result, the gross margin expanded to 69% in the third quarter of 2020 from 60% in the same period last year.

Operating loss reduced to CNY 119 million in the quarter from CNY 222 million in the same period last year and CNY 133 million in the previous quarter. During the quarter, we disposed some of our business and assets related to the gaming business in overseas markets. This disposal boosted our earnings and helped us to create shareholder value. In the third quarter of 2020, our net income attributable to Cheetah Mobile shareholders grew to CNY 266 million from CNY 244 million in the previous quarter.

Importantly, our balance sheet remains strong. As of September 30, 2020, we had cash and cash equivalents, restricted cash and short-term investments of USD 235 million and long-term equity investments of USD 332 million. Our strong balance sheet gives us the confidence to continue to invest in the AI-related business for our future.

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

(Operator Instructions) Our first question today comes from Thomas Chong with Jefferies.

(foreign language) My question is about the 2021 outlook. Can management share about your view about the business trend across different segments as well as the competitive landscape?

(foreign language)

[Interpreted] Okay. Let me translate the first part of Fu Sheng's answer. So indeed, this year, year 2020, for us, Cheetah Mobile is a difficult year, especially after our product was removed from Google. And as you know, before our -- most of our utility revenues coming from overseas market. But after we performed the -- such adjustments, as we mentioned just now, after we were removed from Google, Google Play Store, now we are focusing our efforts to domestic market.

And in domestic market, PC side, we already completed the pivoting from advertising model to the subscription model, as we rely on utility products, we rely on advertisement a lot previously. But on the advertising industry, we were influenced by our partners significantly. So we think now we have improved significantly, as we just talked. And now PC as a vertical market, it will not disappear along with the validly use of mobile phone, and now we can see the user base is stabilizing on our PC front and with a slight increase. So we think, next year, for our utility business, we can regain some increases.

(foreign language)

[Interpreted] Okay. For the AI business, especially our shopping mall robotics, it depends on the offline. So due to the COVID-19, it was affected a little bit. But now I think we are recovering from the COVID-19 situation and also the whole offline traffic in the shopping mall. So I think there is still a great chance in our shopping mall business model.

(foreign language)

[Interpreted] Yes. For the greater economic view, I'm not a professional. But from my point of view, we think, for sure, in China, last year, the growth should be in the leading part globally. And now our strategy is focusing on the China market to focusing on our utility and AI business to do a great job in the -- in our home market.

(foreign language)

[Interpreted] Yes. I hope that answers your question, Thomas.

The next question comes from Vicky Wei with Citi.

(foreign language) My question is about the AI investment -- the AI business investment. So given the company does not anticipate significant revenue from the AI business in the foreseeable future, what does management think of the investment needed for the AI business? And what does it imply for the company cash balances in the midterm?

(foreign language)

[Interpreted] Yes. Let me highlight a few points from AI front. So first, previously, we combined both our 2C and 2B AI business revenue in the AI revenue. So for the 2C product, we used to have a product named Cheetah Translator, which is AI-based interpretation device. But due to the situation of COVID-19, people don't travel abroad. So this product, we almost suspended it for now. And also for the COVID-19 in Q2 for our 2B sales, we cannot meet our customers due to some travel restrictions. So it impacted a little bit in Q2. But now I think we have seen some rebound of our AI business in this quarter.

(foreign language)

[Interpreted] After the recovery of the COVID-19 situation, I think, the market is having a greater acceptance for the low-touch service, like robotic services. So the acceptance for the industry is growing, as we speak.

(foreign language)

[Interpreted] Yes. And our investment in AI is -- mostly consists of R&D expenses. So after some functions were developed, the -- such investment may not be continued investments.

(foreign language)

[Interpreted] Yes. So as we mentioned just now, in Q3 -- there is some onetime staff restructuring expenses in Q3. So in Q4, we expected our operating loss level could be improved a lot, as per our own estimation. So as for such a trend, our balance sheet can support our investment in the midterm. And also as we -- when we explore the monetization model or shopping mall and hotels, as we mentioned, I think we -- you may expect some more growth on AI front next year.

(foreign language)

[Interpreted] Yes. I think we don't need to worry too much about our AI investment. On the investment side, as we mentioned, the market is recovering quickly, including both the hotel and also the shopping mall industry. And also we are exploring our business model. And also, on the other hand, along with our cost and expenses cutting, you may see greater improvement on our bottom line. And also, we have sufficient cash and investments. So I think our vision is to make the business of service robotics great, to be our new growth engine.

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 all for joining us today. If you have any further questions, please do not hesitate to contact us. Thank you so much. Bye.

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

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