Edited Transcript of CMCM.N earnings conference call or presentation 10-Jun-20 12:00pm GMT

Beijing Jun 30, 2020 (Thomson StreetEvents) — Edited Transcript of Cheetah Mobile Inc earnings conference

Beijing Jun 30, 2020 (Thomson StreetEvents) — Edited Transcript of Cheetah Mobile Inc earnings conference call or presentation Wednesday, June 10, 2020 at 12:00:00pm GMT

Cheetah Mobile Inc. – IR Director

Cheetah Mobile Inc. – Chairman of the Board & CEO

Cheetah Mobile Inc. – CFO

Good Day, and welcome to the Cheetah Mobile First 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.

Jing Zhu, Cheetah Mobile Inc. – IR Director [2]

Thank you, operator. Welcome to Cheetah Mobile’s First Quarter Conference Call. 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 the 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.

Sheng Fu, Cheetah Mobile Inc. – Chairman of the Board & CEO [3]

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 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 market 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 75% year-over-year and 42% quarter-over-quarter decrease of our mobile utility product 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 deconsolidating 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 offload some nonstrategic business, such as LiveMe; second, we have continued to optimize our cost and expense structure, especially to our mobile Internet business, including the utility product business, and mobile game business; third, in terms of our investment in AI, we will focus on — we will focus our resource 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 in his part.

Our efforts to implement these 4 measures have started to payoff. Non-GAAP operating profit for our mobile internet business unit in the first quarter of 2020 improved substantially from fourth quarter of 2019, despite a decline in revenue. The cost and expense for our mobile Internet business decreased by 50% year-over-year and 28% quarter-over-quarter in the first quarter of 2020. Excluding the deconsolidation of LiveMe, the cost and the expense for our mobile internet business decreased by 30% year-over-year and 28% quarter-over-quarter in the first quarter. As a reminder, we started to deconsolidate 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 RMB 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 operating 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 compensation of our PC revenues is changing. In additional 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 users count and daily subscription revenue reached record high during the pandemic. While this metric declined slightly after the Chinese user had returned to work and school, they have 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 MAU 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 resource 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 throughout China Tier 1 and Tier 2 cities. Our offering helps customers to find shops and brands they are looking for, improve the customer shopping experience and create more business opportunities for merchants. Before the outbreak, the customers’ daily inquiries with our robot had been growing since inception. While engagement level decreased during the outbreak, it is back to the recover model now.

On the other hand, the accuracy reach of our speech interaction service has already surpassed 90%, which is reaching the level of smart home speakers. Increased customer usage has attracted many shops and brands to come to us to gain 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 the coming quarters, we will focus on the monetization of our user traffic in shopping malls. Additionally, we have developed our robot throughout many hospitals in China during the recent outbreak of COVID-19, further increasing brand awareness for our product and solutions.

With that, we will hand — I will hand the phone over to our CFO, Thomas.

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Thomas Jintao Ren, Cheetah Mobile Inc. – CFO [4]

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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 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. During the first quarter of 2020, total revenues decreased by 51% to CNY 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 CNY 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 market decreased by 63% to CNY 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 CNY 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 60% — 6% to CNY 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 CNY 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 of our operating performance without the effect of noncash 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 at ir.cmcm.com.

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 CNY 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 cost and expenses for our mobile Internet business. Excluding the impact of LiveMe, our total cost and expenses decreased by 16% year-over-year in the quarter. In addition, on a sequential basis, total cost 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 CNY 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 the 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 CNY 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 CNY 136 million in the quarter, mainly due to a reduction in the 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 CNY 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 CNY 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 CNY 141 million in the quarter compared to an operating profit of CNY 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 CNY 44 million in the quarter, decreasing from CNY 123 million in the same period of last year. Despite 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 CNY 29 million in the last quarter, thanks to our cost savings and expense control measures. Operating loss for our mobile entertainment business was CNY 36 million in the quarter, decreasing from CNY 44 million in the same period of last year. This year-over-year decrease was mainly due to the deconsolidation of LiveMe. Sequentially, operating loss for our mobile entertainment business narrowed from CNY 120 million to CNY 36 million this quarter, which was mainly due to our cost savings and expense control measures for our mobile game business. Operating loss for AI and other business was CNY 149 million in the quarter compared to CNY 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 USD 331 million and long-term equity investments of USD 361 million. We continue to review our investment portfolio and selectively liquidate some of our investments. Recently, we disposed our remaining equity ownership in Bytedance Ltd., which will result in a gain on investment of approximately USD 66 million and a cash inflow of approximately USD 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 USD 1.44 per ADS. The aggregate amount of the cash dividend was approximately USD 200 million. Importantly, Cheetah Mobile 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, 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Thomas Chong from Jefferies.

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Thomas Chong, Jefferies LLC, Research Division – Equity Analyst [2]

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(foreign language)

My first question is about the Q2 revenue guidance. Can management comment about the business trend for each segment on a monthly basis? And how we should expect the outlook in the second half?

And my second question is about the momentum in terms of the recovery in domestic and overseas market. Given the coronavirus, in terms of the timing and the recovery is different in China and overseas, how we should think about the impact to our business line going forward?

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Thomas Jintao Ren, Cheetah Mobile Inc. – CFO [3]

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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 the — to provide more color on Q2 guidance. So normally, we don’t provide breakdown for revenue guidance. And also, we don’t provide monthly revenue guidance as well. But you can see our Q2 revenue guidance is between CNY 340 million to CNY 390 million compared to CNY 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. And for the Q2 AI revenue, we expected it to be stable compared to Q1. Although the impact by COVID-19 to 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 by Google’s termination of collaboration for our utility and gaming business, i.e., our mobile Internet business, for short term, we may expect some downturns on revenue side mainly coming from overseas markets while the domestic utility revenue has been stabilized. But we do think while we reconstructing our revenue composition, then we are experimenting 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.

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Sheng Fu, Cheetah Mobile Inc. – Chairman of the Board & CEO [4]

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(foreign language)

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Thomas Jintao Ren, Cheetah Mobile Inc. – CFO [5]

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[Interpreted] Yes. 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, how we — what we can do to resume our collaborations. So this caused us that we cannot upgrade our products to further serve our huge user base. So now for the overseas market, we are actively looking for some opportunities for asset sales, and we are also focusing our business on domestic market.

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Sheng Fu, Cheetah Mobile Inc. – Chairman of the Board & CEO [6]

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(foreign language)

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Thomas Jintao Ren, Cheetah Mobile Inc. – CFO [7]

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[Interpreted] 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 by all the 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, we are also trying to replicate our model — user subscription model from PC to mobile.

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Operator [8]

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(Operator Instructions) Our next question is from Vicky from Citi.

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Yi Jing Wei, Citigroup Inc, Research Division – Associate [9]

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(foreign language)

I have 2 small questions. So would management provide some color on the progress on the strategic focus on mobile Internet market in China? And my second question is about margin trends. Would management provide on the gross margin trend after the deconsolidation of LiveMe in the future? Will there be any room to improve?

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Thomas Jintao Ren, Cheetah Mobile Inc. – CFO [10]

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So I will answer your question. So for the first part in your question, I believe we have mentioned for our domestic utility business, as we mentioned in the prepared remarks, although the revenue is decreasing due to the epidemic and our self-adjustment on AppLock, it has user experience, our revenue has been stabilized and we have also changed the revenue composition by adding premium member subscription model. So basically, paying user account and daily subscription revenue has reached a record high. So — and also, as we mentioned just now, we will also replicate the same subscription model from PC to mobile.

Now for the domestic gaming business, we will be focusing key titles to ensure our profitability, while we also selectively and carefully choose new title, if there is any available. So I hope this answers your first question.

So for your second question about gross profit ratio, actually, our gross margin trend really depends on our revenue compensation. So normally, we have higher gross margin for mobile Internet business by utility and gaming business. And we believe, for mobile Internet business, the gross profit ratio will be stabilized after deconsolidating LiveMe.

Now for AI business, because it includes robotic sales or consumer product sales, the margin will be lower than traditional Internet business. So if we are increasing the portion of AI revenue later, the gross margin might be lower than the current level because of the different revenue compensation. Yes. Hope that answers your question.

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Operator [11]

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This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

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Jing Zhu, Cheetah Mobile Inc. – IR Director [12]

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

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Operator [13]

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The 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.]

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