Cheetah Mobile Inc. Q4 FY2020 Earnings Call

Good day and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2020 Earnings 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.

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and full year 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 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 CEO and Chairman, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Thank you, Helen. Hello everyone. Whilst the macro environment remains challenging, with focus and determination, Cheetah Mobile improved operational efficiency, diversified our revenue streams beyond advertising and stayed focused on domestic markets. In 2020, we earned RMB1.6 billion in revenue and RMB417 million in net income attributable to our shareholders and our business began to take hold. Meanwhile, we remained committed to our AI-related robotics business to build sustainability for Cheetah Mobile in the long run. Here are the operating highlights. First, we cut our costs and expenses. As a result, our non-GAAP operating loss continues to narrow since Q4 2019. In the fourth quarter of 2020, our non-GAAP operating loss was RMB57 million, reduced from RMB204 million in the same period last year and RMB119 million in the previous quarter. Specifically, our internet business earned about RMB76 million in non-GAAP operating profit in the fourth quarter of 2020 compared to an operating loss of RMB92 million in the same period last year and operating profits of RMB71 million in the previous quarter, thanks to our continued operational optimization. Cheetah Mobile still holds $225 million at hand, despite paying $200 million in cash dividends to our shareholders in 2020. Looking ahead, we will continue to cut our costs and expenses and improve operating efficiency. Second, by offering membership services within our utility products, we diversified our revenue streams beyond advertising in 2020. We will include user experience, user satisfaction, and user privacy protection as our top priority in our home market. Our goal is to improve the user retention rate and attract more users through word of mouth. In the domestic market, we continue to encourage users to subscribe for an ad-free experience. Such initiatives helped us reduce reliance on advertising and allowed our utility products to deliver a superior experience. As a result, both paying user counts and subscription revenue continued to grow in 2020. We expect these metrics to continue to grow in the future, supported by the membership service and our efforts on enhancing user experience. We expect revenue from our key internet business to gradually stabilize and resume quarter-over-quarter growth in the coming quarters. Third, we optimized our operation for our AI business by focusing on a selected number of use cases, while deploying our AI robots in shopping malls. COVID-19 in China has been well-controlled, and this Chinese economy hasn't fully recovered. Our AI-related robots can help shopping mall operators better serve their customers and help brands and shops promote their products and services. While our AI business is still in its early stages, we believe we are on the right path. Before I turn the call to Thomas for financial highlights, I would like to emphasize our strong cash reserves and our confidence in shareholder returns. In 2021, we will continue to cut our costs and expenses and experiment with more monetization models for our AI business to rebuild as a temporal growth model for the long-term. With that, I will now turn the call to our CFO, Thomas Ren to go through the details of our fourth quarter financial results.

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 monetary amounts are in RMB terms. In the fourth quarter of 2020, our total revenues were RMB271 million within our revenue guidance. It represented a year-over-year decrease of 56%. The year-over-year decline was primarily due to the suspension of our collaborations with Google since February 2020, as well as the disposal of certain gaming-related businesses and assets. On February 21st, 2020, Cheetah Mobile announced that the company's Google Play Store, Google AdMob, and Google AdManager accounts had been disabled, which negatively affected its ability to attract new users and generate revenue from Google. Given the unfavorable environment in the overseas markets, we have chosen to shift our focus from overseas markets to the domestic market. In the second half of 2020, the company disposed of certain gaming-related businesses and assets in the overseas markets. As a result, we expect that revenue contribution from the mobile game business to decrease in the foreseeable future. Post such disposals, Cheetah Mobile's business primarily comprises two segments. One is the internet business, which includes our utility products on both PC and mobile platforms in the domestic market, and a remaining and diminishing portion of its mobile game business. The other is AI and other business. Therefore, we started reporting our revenues and operating profits by the above two business lines from this quarter. We have retrospectively revised segment information from the previous period to be comparable with the current period. Revenues from the company's internet business decreased by 56% year-over-year to RMB257 million in the fourth quarter of 2020 due to the above-mentioned factors. In the fourth quarter of 2020, nearly 74% of the company's revenues from its internet business were generated by the utility products, while the remaining came from the diminishing mobile game business. In the future, we expect revenues from our utility products to account for a vast majority of this reporting segment. Revenues from AI and others were RMB14 million in the quarter, representing a year-over-year decrease of 50%, mainly due to a decline in consumer-facing AI-related products. Turning to our fourth 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 present the results of our operating performance without the effect of non-cash items. For financial information presented in accordance with U.S. GAAP, please refer to our earnings release. In the past several quarters, we have continued to streamline our operations and cut our costs and expenses. In the fourth quarter of 2020, total costs and expenses decreased by 61% year-over-year and 33% quarter-over-quarter. As a result, our operating loss significantly narrowed to RMB57 million in the quarter from RMB203 million in the same period last year and RMB119 million in the previous quarter. Notably, the operating profit for the internet business was RMB76 million in the fourth quarter of 2020, increased from an operating loss of RMB92 million in the same period last year and an operating profit of RMB71 million in the previous quarter due to our costs and expenses cutting. As of December 31st, 2020, Cheetah had about 150 full-time employees, decreasing by about 50% from the end of 2019. In 2020, our total operating expenses decreased by 44%. In 2021, we will continue to cut our costs and expenses, particularly sales and marketing and personnel-related expenses. Turning to non-operating items, during the quarter the fair value of some of our investees increased. As a result, we reported a net income attributable to Cheetah Mobile's shareholders of RMB85 million in the fourth quarter. Importantly, our balance sheet remains strong. As of December 31st, 2020, we had cash and cash equivalents, restricted cash, and the short-term investments of $255 million and long-term equity investments of $369 million. Our strong balance sheet gives us the confidence to continue to invest in the AI-related business to rejuvenate long-term growth for the company. For our first quarter revenue guidance, we currently expect total revenues to be between RMB165 million and RMB215 million. 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. Thank you.

Thank you. We will now begin the question-and-answer session. Our first question today comes from Vicky Wei with Citi. Please go ahead.

Good evening management. Thank you for taking my question. I would like to ask about the advertising market and AI robots. What is management's perspective on the current sentiment in the advertising market as we enter the first quarter of 2021? Additionally, what were the top three advertising verticals for the fourth quarter? My second question is about potential behavioral changes in adopting AI robots post-pandemic. Any insights on Cheetah Mobile's progress in AI robot adoption would be appreciated.

Thank you, Vicky. So, I will answer your first question about the general advertising market and Fu Sheng will answer your second question. So, for the advertising market, it seems that the COVID-19 pandemic is now already under control in China. We can see a strong recovery trend in the macro economy in China, which in turn has led to a recovery in the advertising market as well. Specifically for a few sectors like FMCG, auto, gaming, and education, I think those sectors will maintain a strong growth momentum and we can also see recovery from the travel and entertainment sectors from last year. But I also want to draw your attention that for us, as we mentioned in the prepared remarks, we are now focusing less on advertising as we are developing the user subscription model. So, we expect to see more contribution from user-contributed revenue for our domestic utility products. Hope this answers your question. So, I will turn to Fu Sheng to answer your question about the AI.

After the COVID-19 pandemic, we have observed a significant acceleration in business customers' acceptance of AI robotics, which has been beneficial for us due to our ongoing investments in AI technologies, including our investee, OrionStar, aimed at reducing robotics costs. The domestic market's acceptance of AI robotics is now considerably higher. For instance, in shopping malls where traffic is recovering, interaction with our robotics is increasing, with customers regularly asking for directions to specific shops, restaurants, or restrooms. Additionally, OrionStar has promoted restaurant service robotics since late 2020, where the monthly rental fee from a restaurant is under RMB2,000, making it more affordable than employing a typical waiter, while also providing sufficient efficiency to replace one. Within just a few months, OrionStar has deployed robotics in several hundred restaurants. In light of the pandemic and our continued investment in AI technology, we have managed to reduce costs to a competitive level. Furthermore, there is a greater acceptance of services that involve less face-to-face interaction, positioning us well to capitalize on this market acceptance.

So, that's Fu Sheng's response. Hope it answers your question, Vicky?

Thank you so much.

Thank you.

And our next question today comes from Melody Chan with Jefferies. Please go ahead.

Good evening. Thanks for taking my question. I have two questions. The first is can you share some deals on the 2021 outlook across different sectors? And then my second question is, Apple recently increased its privacy control, and all app developers are required to have the users' approval to use their data. So, will this impact the advertising business?

Okay, I will translate this part. Fu Sheng was discussing our business outlook, mentioning that we encountered significant challenges in the overseas market last year. Our strategy for the previous year was to focus on our domestic market, and it appears that our domestic mobile internet business not only stabilized our revenue but also achieved some growth this year. This growth is coming from both advertising and our user subscription model, and we believe the internet segment is showing signs of recovery this year. Fu Sheng also addressed the AI and robotics industry, which is at a critical juncture. While some AI companies are facing difficulties with new rounds of financing or IPOs, this situation is generally positive for the industry as a whole. In AI and robotics, success now hinges on product features; if your product aligns with customer needs, reduces costs, and enhances user experience, that will be your key competitive edge. Previously, robotic products were heavily reliant on governance parameters or were predominantly showcased at exhibitions, but they are now being utilized more effectively in settings like restaurants and hotels. I am quite confident that this industry will experience rapid growth. Regarding your second question about the new Apple policy, I believe it will have a minimal effect on our utility products, as these primarily operate on Android or PC platforms. Additionally, our overseas gaming products have already been divested, so the Apple policy itself is unlikely to impact us. I also want to stress that user privacy concerns are becoming increasingly important for app developers. On March 15th, there was a gala event hosted by CCTV that highlighted issues related to fraud and disruptive advertisements. I anticipate that in the future, low-quality advertisements or those infringing on user privacy will face stricter regulations from both the government and mobile manufacturers. Given the challenges posed by companies like Facebook and Google over the past two years, we recognized the importance of user experience and the issues surrounding low-quality ads. Thus, in 2020, we began to scale back our advertising reliance and move toward a user subscription model that enhances the user experience. I believe this recent shift in our business model for utility products has been significant. I also want to add a bit about our 2021 outlook: since we were terminated by Google last year and disposed of certain gaming-related products in the latter half of 2020, a decline in revenue for the full year is likely. However, we are optimistic that starting in Q2, which is usually a slow advertising season, we can anticipate some recovery in our revenue.

Thank you.

Thank you. And there are no further questions. So, at this time, I'd like to turn it back over to our management team for final remarks.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.