Cheetah Mobile Inc. Q1 FY2020 Earnings Call

Good day, and welcome to the Cheetah Mobile First Quarter 2020 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

With us today are our company's Chairman and CEO, Mr. Fu Sheng; and Mr. Thomas Ren, our company's CFO. 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 will now turn the conference call over to our Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Thank you, Helen. Hello, everyone. Honestly, Cheetah Mobile is a mobile internet business that still faced some headwinds in the first quarter of 2020, due to the epidemic as well as suspension of our partnerships with Facebook and Google. While we continue to communicate with Google and Facebook, we have not yet resumed our work with them. As a result, we are having difficulties in acquiring new users and monetizing our traffic in overseas markets. In the first quarter of 2020, revenues from overseas markets decreased by 56% year-over-year and 11% quarter-over-quarter. MAUs in overseas markets declined by 33% year-over-year and 40% quarter-over-quarter. Due to the epidemic, our eCPM in China declined significantly in Q1, resulting in a 75% year-over-year and 42% quarter-over-quarter decrease in our mobile utility products revenue in the domestic market. Overall, we expect our total revenues to decrease by 49% to 55% year-over-year in the second quarter of 2020 by excluding the impact of deconsolidation facing LiveMe. In face of these challenges, we have taken measures to sustain our profits, fulfill our cash, and build a long-term growth engine. These measures include the following: first, we have streamlined our operations focused on the domestic mobile internet market and offloaded some non-strategic businesses such as LiveMe; second, we have continued to optimize our cost and expense structure, especially for our mobile Internet business, including the utility product business and mobile game business; third, in terms of our investment in AI, we will focus our resources on AI-related robotics business in shopping malls; fourth, we have liquidated our equity stakes in other companies, which Thomas will provide some additional color on in his part. Our efforts to implement these four measures have started to pay off. Non-GAAP operating profit for our mobile internet business unit in the first quarter of 2020 improved substantially from the fourth quarter of 2019 despite a decline in revenue. The costs and expenses for our mobile Internet business decreased by 50% year-over-year and 28% quarter-over-quarter in the first quarter of 2020. Excluding the consolidation of LiveMe, the costs and expenses for our mobile internet business decreased by 30% year-over-year and 28% quarter-over-quarter in the first quarter. As a reminder, we began to consolidate LiveMe's financials since Q4 last year. As a result, the non-GAAP operating profit of our mobile internet business improved to RMB 8 million from a non-GAAP operating loss of CNY 92 million in the fourth quarter of 2019. At a corporate level, our gross margin expanded on both a year-over-year and quarter-over-quarter basis in the quarter. Non-GAAP operating profits also improved sequentially from the fourth quarter of last year. Looking ahead, we will continue to implement strict cost-saving and expense control measures while improving operational efficiency. Meanwhile, our PC revenues stabilized on both a year-over-year and a quarter-over-quarter basis at around RMB 120 million in the first quarter of 2020. Importantly, the composition of our PC revenues is changing. In addition to advertising revenues and gaming revenues, we generated an increased amount of PC revenues from paying users who subscribed to the premium service of our Duba Antivirus software. Both the paying user count and daily subscription revenue reached record highs during the pandemic. While this metric declined slightly after Chinese users returned to work and school, it has recently started to grow again. In Q1, the decrease in our mobile utility products revenue in the domestic market was due to the epidemic and our initiatives to proactively reduce some advertisement slots in China to enhance our user experience. Now, we still have close to 100 million MAUs on both PC and mobile in China. We believe our utility products business in China has been stabilizing. Going forward, we expect both our PC revenues and the mobile utility product revenues in the domestic market to remain resilient. At the same time, we will replicate our user subscription model from PC to mobile. To rebuild our long-term growth engine, we continue to focus our resources on selected AI-related robotics business, such as AI new retail. Since last year, we have deployed our robots in more than 800 shopping malls across China's Tier 1 and Tier 2 cities. Our offering helps customers find shops and brands they are looking for, improves the customer shopping experience, and creates more business opportunities for merchants. Before the outbreak, customer daily inquiries with our robots had been growing since inception, while engagement levels decreased during the outbreak. It is back to the recovery model now. On the other hand, the accuracy of our speech interaction service has already surpassed 90%, which is on par with smart home speakers. Increased customer usage has attracted many shops and brands to come to us for coverage. Our team has developed an online system, which has helped users register and adjust and update their information on a real-time basis. Recently, we have tentatively directed more traffic to certain users to monetize our user traffic in shopping malls. Additionally, we have deployed our robots in many hospitals in China during the recent outbreak of COVID-19, further increasing brand awareness for our product and solutions. With that, I will hand the phone over to our CFO, Thomas.

Thank you, Fu Sheng, 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 and all growth comparisons are made on a year-over-year basis. As we stated in previous quarters, LiveMe amended its share incentive plan on September 30th, 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. During the first quarter of 2020, total revenues decreased by 51% to RMB 528 million. Excluding the impact of the deconsolidation of LiveMe's revenues, total revenues decreased by 36% in the quarter. Let's now look into our results for each business line, starting with utility products and related services. Revenues from utility products and related services decreased by 58% to RMB 211 million in the quarter. Moreover, during the quarter, about 71% of our revenues from utility products were generated from advertising. This decrease was primarily due to the following: first, the decline in our mobile utility product business in overseas markets. Mobile utility product revenue in overseas markets decreased by 63% to RMB 54 million in the quarter, which was mainly due to the suspension of our collaborations with Google on the advertising front since February 2020. Second, the decline in our mobile utility product business in the domestic market. Mobile utility product revenue in the domestic market decreased by 75% to RMB 62 million in the quarter, which was the result of headwinds in China's online advertising market. Third, the decline in PC-related revenues. PC-related revenues decreased by 6% to RMB 95 million in the quarter, as internet traffic in China continued to migrate from PC to mobile devices. Revenues from our mobile game business decreased by 5% to RMB 285 million in the quarter, mainly due to the suspension of our collaborations with Google on the advertising front since February 2020. In addition, during the quarter, about 70% of revenues from our mobile games business were generated from advertising, while the remaining portion of revenues were generated from in-game purchases. Turning to our 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 on our operating performance without the effect of non-cash items. For financial information presented in accordance with U.S. GAAP, please refer to our press release, which is available on Cheetah Mobile's website. In the first quarter of 2020, we implemented strict cost savings and expense control measures to our mobile internet business, especially for our utility product business and the mobile game business. Total costs and expenses decreased by 38% year-over-year to RMB 675 million in the first quarter of 2020. This year-over-year decrease was mainly due to the deconsolidation of LiveMe and our efforts to reduce costs and expenses for our mobile internet business. Excluding the impact of LiveMe, our total costs and expenses decreased by 16% year-over-year in the quarter. In addition, on a sequential basis, total costs and expenses decreased by 18% in the first quarter of 2020. Turning to each line item of our costs and expenses, cost of revenues decreased by 60% year-over-year and 19% quarter-over-quarter to RMB 148 million in the quarter. The year-over-year decrease was mainly due to the deconsolidation of LiveMe. The quarter-over-quarter decrease was mainly due to reductions in IDC and CDN costs, relating to the company's utility product business. Gross profit decreased by 47% year-over-year and 12% quarter-over-quarter to RMB 380 million in the quarter. Gross margin grew to 72% in the quarter from 66% in the same period last year and from 70% in the previous quarter. R&D expenses decreased by 25% year-over-year and 1% quarter-over-quarter to RMB 136 million in the quarter, mainly due to a reduction in personnel for the company's utility products and related services business in overseas markets. Selling and marketing expenses decreased by 30% year-over-year and 11% quarter-over-quarter to RMB 304 million in the quarter. The year-over-year decrease was mainly due to the reduction in promotional activities for the company's utility products and related services business in the domestic market as well as the deconsolidation of LiveMe. The quarter-over-quarter decrease was mainly due to the reduction in promotional activities for the company's mobile game business in the overseas market. G&A expenses decreased by 12% year-over-year and 46% quarter-over-quarter to RMB 87 million in the quarter. The year-over-year decrease was mainly due to decreased professional fees. The quarter-over-quarter decrease was mainly due to lower salaries and employment benefits related to our G&A staff. Operating loss was RMB 141 million in the quarter, compared to an operating profit of RMB 9 million in the same period of last year. However, our operating loss reduced by 31% on a sequential basis, thanks to our efforts to implement cost savings and expense control measures. Moving on to each reporting segment, operating profit for our utility products and related services was RMB 44 million in the quarter, decreasing from RMB 123 million in the same period of last year. Expect this year-over-year decrease, which was mainly due to the decline in revenues, operating profit for our utility products and related services increased on a sequential basis from RMB 29 million in the last quarter, thanks to our cost savings and expense control measures. Operating loss for our mobile entertainment business was RMB 36 million in the quarter, decreasing from RMB 44 million in the same period of last year. This year-over-year decrease was mainly due to the deconsolidation of LiveMe. Sequentially, the operating loss for our mobile entertainment business narrowed from RMB 120 million to RMB 36 million this quarter, mainly due to our cost savings and expense control measures for our mobile game business. Operating loss for AI and other business was RMB 149 million in the quarter, compared to RMB 70 million in the same period of last year, mainly due to the increased investments in our AI-related business. Moving on to our balance sheet. As of March 31, 2020, we had cash and cash equivalents, restricted cash, and short-term investments of US$331 million and long-term equity investments of US$361 million. We continue to review our investment portfolio and selectively liquidate some of our investments. Recently, we disposed of our remaining equity ownership in Bytedance Ltd., which will result in a gain on investment of approximately US$66 million and a cash inflow of approximately US$130 million in the second quarter of 2020. We also continue to return cash to our shareholders. Recently, our Board approved a special cash dividend of US$1.44 per ADS. The aggregate amount of the cash dividend was approximately US$200 million. Importantly, Cheetah Mobile's cash position remains strong even after paying off this special cash dividend. Now let me provide you with our second-quarter revenue guidance. We currently expect total revenues for the second quarter to be between RMB 340 million and RMB 390 million. Excluding the impact of deconsolidating LiveMe, this guidance implies a year-over-year decline in total revenues between 49% and 55% in the period. Please note that 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. Thank you.

We will now begin the question-and-answer session. Our first question is from Thomas Chong from Jefferies. Please go ahead.

Thank you to management for taking my questions. My first question is about the Q2 revenue guidance. Can management provide insights on the business trend for each segment on a monthly basis and share expectations for the outlook in the second half? My second question relates to the recovery momentum in both domestic and international markets. Considering the differences in timing and recovery due to the coronavirus, particularly between China and overseas, how should we assess the impact on our business lines going forward? Thank you.

Okay. Thomas, I'll answer your first question, and Fu Sheng will answer your second question. So the first part of your question is about providing more color on Q2 guidance. Normally, we don't provide breakdown for revenue guidance, and we also don't provide monthly revenue guidance. But you can see, our Q2 revenue guidance is between RMB 340 million and RMB 390 million compared to RMB 530 million last quarter. So the decrease will mainly come from the utility business and gaming business being affected by Google's termination of collaboration since late February. For the Q2 AI revenue, we expected it to be stable compared to Q1. Although the impact of COVID-19 on supply chain and sales is recovering step-by-step, we do need some more time to pick up the AI revenue. For the second half outlook, I would say that because of the impact of Google's termination of collaboration for our utility and gaming business, i.e., our mobile internet business for the short term, we may expect some downturns on the revenue side, mainly coming from overseas markets. While the domestic utility revenue has been stabilized, we do think while we are reconstructing our revenue composition, we are experimenting with a monetization model for AI new retail mentioned in our prepared remarks. AI and other revenue will contribute a more sizable part if the experiment is successful during the second half of this year. I hope this answers your question.

Thank you.

We may expect some downturns in revenue, primarily from international markets. Although domestic utility revenue has stabilized, we believe that as we restructure our revenue composition, we are exploring a monetization model for AI in new retail as mentioned earlier. If successful, AI and other revenue streams will represent a bigger portion during the second half of this year. I hope this addresses your question. Thank you.

Yeah. Let me translate the first part about the overseas market. So although we are still trying to communicate with Google and Facebook, we still have no clear answer from both companies on how we can resume our collaborations. So this means that we cannot upgrade our products to further serve our huge user base. Now for the overseas market, we are actively looking for some opportunities for asset sales, and we are also focusing our business on the domestic market. Okay. Let me translate about the domestic market. So on the PC side, we are changing our model from free plus advertisement model to free plus premium subscription model, which we believe is more acceptable to all PC users. Now our revenue on the domestic mobile side is declining. Our PC revenue is stabilizing currently, and we are also, as we mentioned, trying to replicate our user subscription model from PC to mobile.

Got it. Thank you.

Our next question is from Vicky Wei from Citi. Please go ahead.

Evening, management, thanks for taking my questions. I have two small questions. So would management provide some color on the progress of the strategic focus on the mobile internet market in China? And my second question is about margin trends. Would management provide guidance on the gross margin trend after deconsolidation of LiveMe in the future? Will there be any room to improve? Thank you.

So I will answer your question. So for the first part of your question, I believe we have mentioned for our domestic utility business, as we stated in the prepared remarks, although revenue is decreasing due to the epidemic and our sale adjustment to enhance user experience, our revenue has stabilized, and we have also changed the revenue composition by adding a premium member subscription model. The paying user account and daily subscription revenue has reached a record high. Also, as we mentioned just now, we will replicate the same subscription model from PC to mobile. Now for the domestic gaming business, we will be focusing on key titles to ensure our profitability while selectively and carefully choosing new titles if any become available. So I hope this answers your first question. Regarding your second question about the gross profit ratio, actually our gross margin trend really depends on our revenue composition. Normally, we have higher gross margin for mobile internet business, utility, and gaming businesses. We believe that for mobile internet business, the gross profit ratio will stabilize after deconsolidating LiveMe. Now for the AI business, because it includes robotic sales or consumer product sales, the margin will be lower than traditional internet businesses. So if we increase the proportion of AI revenue later, the gross margin might be lower than the current level because of the different revenue composition. Yes, hope that answers your question.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to 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. Bye-bye.

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