Earnings Call Transcript - CMCM Q3 2020

Operator, Operator

Good day, and welcome to the Cheetah Mobile Third 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.

Helen Zhu, Investor Relations Director

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 like to turn the conference call over to our Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Fu Sheng, Chairman and CEO

Thank you, Helen. Hello, everyone. While our total revenue exceeded our revenue guidance, we still face challenges in growing our revenues. Total revenues decreased by 60% year-over-year and a 7% quarter-to-quarter to RMB365 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 previous largest business partners, stopped working with us. As a result, we lost two significant channels to acquire users and monetize traffic overseas. Although we consistently communicated with Facebook and Google, offering several solutions to them to resume our work, we were not able to reestablish our partnerships. Given today’s international environment, we don’t expect to resume our cooperation in the near future. To cope with these headwinds, we have taken several measures and have seen some initial results. First, we have streamlined our operations and cut our costs and expenses. As a result, our non-GAAP operating loss narrowed to RMB119 million from RMB222 million in the same period last year and RMB133 million in the previous quarter. Our operating loss in the quarter also included certain one-off staff restructuring expenses, though we expect to continue reducing our operating loss in the fourth quarter. Second, our revenues from the PC business and the mobile utility product in our home market as a whole stabilized. Our PC business has transformed from an advertising model to a membership subscription model. During the quarter, we continued to diversify our premium content and services, which showed an increase in pending user count and subscription revenues. As a result, daily PC revenues from membership subscription fees increased 14 times 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, demonstrating that our PC business has transformed from an advertising model to a membership subscription model. Additionally, our mobile utility product business in our home market resumed quarter-over-quarter growth in Q3, driven by improved eCPM. Third, we disposed of certain businesses and assets during the quarter, resulting in a net cash gain of US$21 million in the second half of 2020. Thomas will provide more details about the deal later, 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 retained about US$300 million through our shareholders. After returning this to our shareholders, we still have a strong balance sheet to support our ambitions and investments. Recently, Codemao, a Chinese online education platform focusing on teaching programming to children, raised a new round of financing. Cheetah Mobile is an angel investor in Codemao. Before this round of financing, Cheetah Mobile held about 10% of the stake in Codemao. Fourth, we continue to focus our efforts on the AI-related robotics business to build our ecosystem and, eventually, long-term growth. Together with our investor company, Beijing OrionStar, we have developed our AI-related robotics. We have increased the number of user cases. The recent outbreak of COVID-19 has also helped us expand the usage of our robotics products and solutions. One highlight is our robots operating 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 a tentative business model. Meanwhile, we’ve found that hotels in China have increased the use of 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 the AI business is mutually beneficial. Beijing OrionStar develops and produces AI robots, while Cheetah Mobile builds user cases for the customers. Notably, Beijing OrionStar’s robots have been nominated thrice in a row in the service robot contest held by Beijing Municipal Science and Technology Commission for the Beijing 2022 Olympic Games, winning four first prizes and one second prize in the contest. Looking to the fourth quarter of 2020, we currently expect total revenues to be between RMB230 million and RMB280 million. The quarter-over-quarter decrease is due to the disposed assets and business, which Thomas will provide more details about. Moving forward, utility products and services, particularly in the PC business, are expected to be the primary drivers of our revenues, driven by the subscription business, while our PC revenue will resume sequential growth in Q4. On the other hand, we will continue to cut our costs and expenses and narrow our operating loss on both a year-over-year and quarter-over-quarter basis. Before I hand over the call to our CFO, I'd like to emphasize that while we don’t want to downplay the challenges we face, it is not the first time that Cheetah Mobile encounters unfavorable external environments. We believe that AI challenges will enable us to build a new future for Cheetah Mobile. With that, we'll now turn the call to our CFO, Thomas Ren, to go through the details of our third quarter financial results.

Thomas Ren, CFO

Thank you, Fu, and good day everyone. Thank you all for joining us today. Now, I'll 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, we amended our 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 revenue was RMB365 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 collaboration 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 RMB186 million in the quarter, representing 51% of our total revenue in the quarter. PC and mobile utility products revenues in our home market are stabilizing, already contributing to 33% of our total revenue in the quarter. Revenues from our mobile games business were RMB158 million in the quarter, representing 43% of our total revenue in the quarter. As of September 30, 2020, the company had disposed of certain businesses and assets related to the gaming business in the overseas market. In the third quarter of 2020, the disposed businesses 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. For our fourth quarter revenue guidance, we currently expect total revenues to be between RMB230 million and RMB280 million. Please note, this forecast reflects our current and preliminary view 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, resulting in the effect of non-cash items. For financial information presented in accordance with US GAAP, please refer to our earnings release. In the past several quarters, we continued 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 RMB481 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 59% in the third quarter of 2020 from 60% in the same period last year. Operating loss reduced to RMB119 million in the quarter from RMB222 million in the same period last year and RMB133 million in the previous quarter. During the quarter, we disposed of some of our businesses and assets related to the gaming business in the overseas market. 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 RMB266 million from RMB244 million in the previous quarter. Importantly, our balance sheet remains strong. As of September 30, 2020, we had cash and cash equivalents, restrictive cash, and short-term investments of USD235 million and long-term equity investments of USD332 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're now ready to take questions. Thank you.

Operator, Operator

Thank you. We'll now begin the question-and-answer session. Our first question today comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks, management, for taking my questions. 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? Thank you.

Fu Sheng, Chairman and CEO

Okay. Let me summarize the first part of Fu Sheng’s answer. This year has been challenging for us at Cheetah Mobile, especially after our product was removed from Google. Most of our utility revenues were generated from overseas markets, but since being taken off the Google Play Store, we've shifted our focus to the domestic market. On the PC side, we have transitioned from an advertising model to a subscription model. We previously relied heavily on advertisements, but our partners significantly influenced our outlook on the advertising industry. We believe we have made notable improvements. Our user base on the PC front is stabilizing with a slight increase, so we think our utility business could see some growth next year. As for the AI business, particularly in shopping mall robotics, it relies on offline traffic, which was affected by COVID-19. However, we are now recovering from the pandemic and seeing an increase in offline traffic in shopping malls. I see great potential in our shopping mall business model. From a broader economic perspective, although I'm not an expert, I believe China will likely lead global growth next year. Our strategy is centered on the Chinese market and enhancing our utility and AI businesses to succeed domestically. I hope that answers your question, Thomas.

Thomas Chong, Analyst

Thank you.

Fu Sheng, Chairman and CEO

Thank you.

Operator, Operator

The next question comes from Vicky Wei with Citi. Please go ahead.

Vicky Wei, Analyst

So, management, thanks for taking my questions. My question is about the AI investment - the AI business investment. Given the company does not anticipate significant revenue from the AI business in the foreseeable future, what does management think about the investment needed for the AI business? And what does it imply for the company cash balances in the mid-term? Thank you.

Fu Sheng, Chairman and CEO

Yes, I want to emphasize a few points regarding our AI business. Previously, we combined the revenues from our consumer and business AI sectors. For our consumer product, we had an AI interpretation device called Cheetah Translator, but travel restrictions due to COVID-19 led us to suspend this product. Additionally, our business sales in the second quarter were affected by these travel limitations. However, I believe we've started to see a recovery in our AI business this quarter. As the market rebounds from COVID-19, there is a growing acceptance of low-touch services, including robotics. Our AI investment primarily consists of research and development costs. Once certain functionalities are developed, this investment may not require ongoing funding. In the third quarter, we incurred some one-time stock restructuring costs, but we expect to see substantial improvements in our operating losses in the fourth quarter. Our balance sheet is robust enough to support our mid-term investment. As we look into monetizing opportunities in shopping malls and hotels, we anticipate further growth in AI next year. I am confident that our AI investments are secure. The market, including hotels and shopping malls, is rebounding quickly, and we are actively refining our business model. With our cost-cutting measures in place, you should observe a notable enhancement in our bottom line, and our cash and investment levels are adequate. We see our service robotics division as a key driver for future growth.

Vicky Wei, Analyst

Thank you.

Operator, Operator

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

Helen Zhu, Investor Relations Director

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.

Operator, Operator

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