Earnings Call Transcript - CMCM Q2 2020

Operator, Operator

Good day, everyone and welcome to the Cheetah Mobile's Second Quarter 2020 Conference Call. After today’s presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I would like to turn the conference call 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 second 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 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. Please go ahead, Fu Sheng.

Fu Sheng, Chairman and CEO

Thank you, Helen, and hello, everyone. We delivered overall better than expected results in the second quarter of 2020. Today our total revenue came in at RMB 394 million, exceeding the high end of our revenue guidance. Non-cash net income grew to RMB 244 million. However, facing challenges in operating our business in the overseas markets we are unable to resume our cooperation with Facebook and Google. As a result, we have difficulty in acquiring new users and monetizing our traffic, and our overseas revenue continued to decline. Given today's environment, we are not confident in resuming our cooperation with Facebook and Google. In the domestic markets, the only advertising impact share has been actively affected by the pandemic since the beginning of this year, leading to the decline of eCPM. In light of this headwind, we chose to strategically shift our focus from the overseas market to the domestic market and introduced the user subscription model. Financially, we have reduced costs and expenses and focused on our AI investments in the shopping mall. In today's call, I would like to highlight the following. First, we've significantly reduced our costs and expenses during the quarter. As a result, the non-cash operating loss narrowed by RMB 8 million quarter-over-quarter in Q2, despite our total revenue decreasing by RMB 130 million from the previous quarter. The revenue decrease was primarily due to the suspension of our collaboration with Google since February 2020, as well as the outbreak of COVID-19, which continued to impact our online advertising business in China. During the quarter, we cut back our costs and expenses for the overseas market, leading to a 61% year-over-year and 31% quarter-over-quarter decrease in costs for our mobile internet business, namely the utility products and mobile game operations. In the coming quarter, we will continue to improve operational efficiency, reduce costs and expenses, and significantly narrow our operational loss at the corporate level. Second, PC revenue increased by 2% quarter-over-quarter to RMB 120 million, driving the growth of user subscription revenue. During the quarter, both paying user accounts and the daily subscription revenue from our DuBa Antivirus software reached new heights. This achievement proved the user subscription model with utility apps; recently we have applied the user subscription model from PC to mobile by introducing premium service for Clean Master, and initial user adoption has been encouraging as we have seen the paying user count and daily subscription revenue remain growing since inception. Third, even in today's environment we believe Chinese mobile internet companies will face increasing challenges abroad. As a result, our utility products business will move from overseas markets to the domestic market. This move allows us to gradually reduce costs and expenses. During the quarter, we introduced some new utility products in our home market. In the future, we will add more utility products in the domestic market to further enrich our product offerings and bolster our revenue. Fourth, the number of AI-related robots in shopping malls grew to about 7,000 by the end of the second quarter. Our robots help customers find the shops and brands they are looking for, improve the customer shopping experience, and encourage more business opportunities for merchants. Customer interactions with our robots have been increasing. Increased customer usage has attracted many shops and brands to partner with us to gain coverage. Recently, we tried to work with several brands including restaurants, outdoor companies, and accessories to direct traffic to their local shops. The progress of our robots in shopping malls was delayed by about six months due to the pandemic; however, we will accelerate the monetization alongside the recovery from the COVID-19 situation. Fifth, our long-term equity investments contain several well-known projects. As of June 13, 2020, we had U.S. $292 million in long-term equity investments sitting on our balance sheet. During the quarter, some of our major investees announced developments. For example, LiveMe achieved profitability, and a leading Chinese online education platform that teaches programming to children closed a new round of financing. Looking ahead, we expect to continue facing potential headwinds, and we are unable to grow or sustain our total revenues in the second half of 2020. However, we will continue to reduce costs and expenses and narrow our operating loss in the coming quarters. At the same time, we will uphold our commitment to AI projects with our strong cash reserves. We believe AI will allow us to build a new growth engine for the company in the long term. With that, I will hand the phone over to our CFO, Thomas.

Thomas Ren, CFO

Thank you, Fu Sheng. 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 and all 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. 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 RMB 394 million in the quarter, exceeding the high end of our revenue guidance for the second quarter of 2020, and represented a decrease of 59%. Excluding the impact of the deconsolidation of LiveMe, total revenues decreased by 48% in the quarter. This decrease was primarily due to the suspension of our collaboration with Google since February 2020, as well as the outbreak of COVID-19, which continued to impact our online advertising business in China during the quarter. By business segment, revenues from utility products and related services were RMB 195 million in the quarter, representing 50% of our total revenue. Revenues from our mobile games business were RMB 179 million, representing 46% of our total revenue. By region, revenue from China accounted for 41% of our total revenue, while revenues from overseas markets accounted for 59%. By platform, PC revenues improved slightly quarter-over-quarter to RMB 118 million and represented 30% of our total revenue, while mobile revenue accounted for 70% of our total revenues. 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 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. During the second quarter of 2020, we sought to strategically shift our focus from overseas markets to the domestic market and as a result continued to reduce our expenditures on our mobile internet business in overseas markets. At the same time, we remain open to our AI-related investments for shopping malls. As a result, total costs and expenses decreased by 47% year-over-year and 22% quarter-over-quarter to RMB 528 million in the quarter. Excluding the impact of LiveMe, our total costs and expenses decreased by 30% year-over-year and 22% quarter-over-quarter. In particular, the cost of revenue decreased by 65% year-over-year and 23% quarter-over-quarter to RMB 113 million. R&D expenses decreased by 43% year-over-year and 17% quarter-over-quarter to RMB 113 million. Selling and marketing expenses decreased by 46% year-over-year and 33% quarter-over-quarter to RMB 205 million. Moving on to our profits and margins, gross profit was RMB 281 million in the quarter. Gross margin was 71% in the quarter compared to 66% in the same period last year and 72% in the previous quarter. Operating loss narrowed to RMB 133 million in the quarter from RMB 141 million in the previous quarter. The decrease in operating loss during the second quarter was a result of our strict cost-saving measures and represented the third straight quarter in a row of reducing operating losses since the third quarter of 2019. During the quarter, we disposed of our remaining stake in ByteDance, which resulted in an investment gain of U.S. $66 million. As a result, we reported a non-GAAP net income attributable to Cheetah Mobile shareholders of RMB 244 million in the quarter compared to RMB 82 million in the same period last year and a non-GAAP net loss attributable to Cheetah Mobile shareholders of RMB 98 million in the previous quarter. In addition, we reported a non-GAAP diluted earnings per ADS of U.S. $0.25 in the quarter, which grew from U.S. $0.08 in the same period last year and a non-GAAP diluted loss per ADS of U.S. $0.10 in the previous quarter. Moving now to our balance sheet, as of June 30, 2020, we had cash and cash equivalents, restricted cash, and short-term investments of U.S. $453 million and long-term LiveMe investments of U.S. $292 million. On July 09, 2020, we used cash from our balance sheet to pay a special cash dividend of U.S. $1.44 per ADS to our shareholders. The aggregate amount of the cash dividend was about U.S. $200 million. Now, let me provide you with our third quarter revenue guidance. We currently expect total revenues for the third quarter to be between RMB 310 million and RMB 350 million. Excluding the impact of deconsolidating LiveMe, this guidance implies a year-over-year decline in total revenue between 47% and 55% in the period. Please note, these forecasts reflect our current and preliminary views and are subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

Operator, Operator

Our first question today comes from Vicky Wei from Citi. Please go ahead with your question.

Vicky Wei, Analyst

Thank you for taking my questions. I have two brief inquiries. First, could management share insights on the performance of the advertising market in the second and third quarters? Secondly, regarding the U.S.-China tensions, many Chinese companies are returning to China for listings or choosing to privatize. What is management's perspective on this, and what is the company's strategy moving forward? Thank you.

Thomas Ren, CFO

Okay, I will respond to your two questions. The first question pertains to the advertising business and its performance. Our situation is similar to other companies in the advertising space, as a significant portion of our advertising revenue is derived from major domestic platforms. We are seeing a larger contribution from e-commerce and online education, along with increased investment for their promotional content related to June 18 or summer holiday courses. In sectors like automobiles and consumer electronics, there has been a more aggressive marketing approach as consumption picks up. I hope this addresses your first question. Regarding your second question about the delisting from U.S. markets or the possibility of relisting in Hong Kong, we have observed that many Chinese companies have either opted to delist from U.S. stock markets or have achieved new listings in Hong Kong recently. At the same time, we have seen several Chinese companies successfully complete their U.S. IPOs in recent months. Different capital markets offer various options for companies at different growth stages. For Cheetah Mobile, our primary focus is on business development and growth. We remain attentive to the various options available in different capital markets, and if we have any plans, we will share them publicly as soon as possible.

Vicky Wei, Analyst

Thank you.

Operator, Operator

And ladies and gentlemen, with no further questions, I would like to hand the call back to management for their 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

Ladies and gentlemen, with that, we will conclude today's conference call. Thank you for attending. You may now disconnect your lines.