Cheetah Mobile Inc.

Good day, and welcome to the Cheetah Mobile First Quarter 2020 Conference Call. Our participants will be in 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 Halanyu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Thank you, Officer. Thank you, operator. Welcome to Cheetah Mobile's first quarter conference call. With us today are our company's chairman and CEO, Mr. Fusheng, and Mr. Thomas Yan, our company's CFO. Following management's prepared remarks, we will conduct the Q&A session. Before we begin, I refer you to the same proper 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. Fushun. Please go ahead, Fushun.

Thank you, Helen. Hello, everyone. Honestly, China Mobile's mobile internet business 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 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 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 this conciliating rating like me. In face of these challenges, we have taken measures to sustain our profits conserve 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 offered some non-strategic business, such as Limey. Second, we have continued to optimize our cost and expense structure, especially to our mobile internet business, including the utility product business and the mobile game business. Third, in terms of our investment in AI, 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 four measures have started payoffs. Non-GAAP operating profits for our mobile internet business unit in the first quarter of 2020 improved The standard 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 the 28th quarter-over-quarter in the first quarter of 2020, excluding the decline Deconcelation of Limey, the cost and 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 deconcelate Limey's financials since Q4 last year. As a result, the non-GAAP operating profits 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 the corporate level, our gross margin expands on both a year-over-year and a quarter-over-quarter basis in the quarter. Non-GAAP operating profits also improved 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 the daily subscription revenue reached record highs during the pandemic. While these metrics declined slightly after the Chinese user had attended returned to work and school. They have recently started to grow again. In Q1, the decrease in our mobile utility product 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 product business in China has been stabilizing. Going forward, we expect both our PC revenues and 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 robot in more than 800 shopping malls throughout China's tier 1 and tier 2 cities. Our offering helps customers to find shops and brands they are looking for. improve the customer's shopping experience and create more business opportunities for merchants. Before the outbreak, the customer's daily inquiries with our robot had been growing since inception. While engagement level decreased during the outbreak, it is back to the in recover model now. On the other hand, the accuracy rate 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 our to us to gain coverage. Our team has developed an online system which has helped users register, 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 increase in brand awareness for our product and solutions. With that, I will hand the phone over to our CFO, Thomas.

Thank you, Fuzhou, 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, LIFE-ME amended its share incentive plan on September 30, 2019. As a result, we no longer hold the majority voting power in LIFE-ME and have started to deconsolidate LIFE-ME's financial results since the fourth quarter of 2019. During the fourth quarter of 2020, total revenues decreased by 51% to $528 million. Excluding the impact of the deconsolidation of liveness 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. Revenue from utility products and related services decreased by 58% to $211 million. 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 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 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 95 million in the quarter, as internet traffic in China continues to migrate from PC to mobile devices. Revenues from our mobile game business decreased by 5% to $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 revenue 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 impairments. 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 press release, which is available on Cheetah Mobile's website at ir.cmcn.com. In the first quarter of 2020, we implemented strict cost saving 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 675 million in the first quarter of 2020. This year-over-year decrease was mainly due to the deconsolidation of LabMe and our efforts to reduce costs and expenses for our mobile internet business. Excluding the impact of LabMe, 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 148 million in the quarter. The year-over-year decrease was mainly due to the deconsolidation of life means. The quarter-over-quarter decrease was mainly due to the reduction 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 $380 million in the quarter. World's 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 $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 $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 LifeMe. 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. DNA expenses decreased by 12% year-over-year and 46% quarter-over-quarter to $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 GNA staff. Operating loss was 141 million in the quarter, compared to an operating profit of 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 saving and expense control measures. Moving on to each reporting segment. Operating profit for our utility products and related services was 44 million in the quarter, decreasing from 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 29 million in the last quarter thanks to our cost-saving and expense control measures. Operating loss for our mobile entertainment business was 36 million in the quarter, decreasing from 44 million in the same period of last year. This year-over-year decrease was mainly due to the deconsolidation of last year. Equally, operating loss for our mobile entertainment business narrowed from 120 million to 36 million this quarter, which was mainly due to our cost saving and expense control measures for our mobile game business. Operating loss for AI and other business was 149 million in the quarter compared to 17 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 31st, 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 our remaining equity ownership in Fastdown Limited, which will result in a gain on investment of approximately US dollar 66 million and a cash inflow of approximately US dollar $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 $1.44 per ADS. The aggregate amount of the cash dividend was approximately $200 million. Importantly, Theta 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 lab mean, 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.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please ask your question in Chinese first and then in English. At this time, we will pause momentarily to assemble our roster. Our first question is from Thomas Cheng from Jefferies. Go ahead.

晚上好,谢谢管理层接受我的提问。 我的问题有两个方面。 第一个问题是想问一下就是我们在Q2的guidance那边可不可以在 The second question is about our development in China and abroad. Because from the situation of the epidemic, 我内跟国外都有一点不太一样的一个趋势。 所以对我们来说,从我们的收入的展望来看, 应该是可不可以多说一下这个未来的一个方向。 Thanks, management, for taking my questions. 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? Thank you.

Okay, Thomas, I will answer your first question and Fudong will answer your second question. So the first part of your question is about 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 $340 million to $390 million compared to... 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 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 and 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 are 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. Hope this answers your question.

Thank you.

Yeah. At that time, we also had a lot of communication, but their response was very official. They didn't give us too many reasons. They didn't give us any feedback on how to restore the cooperation. So this made our foreign products, like tool-based products, we don't have, because of Google's full-line restrictions, we don't have the ability to upgrade to this kind of old users. 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 communicate of what we can do to resume our collaborations. 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 sale, and we are also focusing our business on domestic market.

Right, and in China, as I just mentioned, we have achieved a breakthrough in PZN, which is that we have turned our previous free ad tool model into a free ad tool model. This mode is more suitable for current users because users are more sensitive to some advertisements. So we are also going to copy this strategy at the mobile end. In fact, at the mobile end, I just mentioned that our income has dropped a lot in the first quarter, so we are not only affected by the epidemic, but the epidemic has caused a lot of decline in eCPM of the entire advertisement. But the PC end has not been affected much, . . . . . . . Okay, let me translate about the domestic market.

So on a 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. While 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 map model from PC to mobile.

Got it.

Thank you. Again, to ask a question, please press star, then 1. Our next question is from Vicky Wei from Citi. Go ahead.

Good evening, Manager Cheng. Thank you for accepting my question. I have two small questions. The first one is about the company returning to China. The second question is about the interest rate and future trend. This quarter, our interest rate is 72%. I would like to ask the management, is this level already... Good evening, management. Thanks for taking my questions. I have two 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 change. Will management provide on the growth margin trend after the consolidation of Lightning in the future? Will there be any room to improve? Thank you.

How do you answer your question? 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 ad slots to enhance 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. And also, as we mentioned just now, we will also replicate the same subscription model from PC to mobile. Well, for the domestic gaming business, we will be focusing key titles to ensure our profitability. We also selectively and carefully choose new title if there is any available. So hope this answers your first question. So for your second question about gross profit ratio, actually our gross margin trend, it really depends on our revenue composition. So normally we have higher gross margin for mobile internet business. by utility and gaming business. And we believe for mobile internet business, the growth profit ratio will be stabilized after deconsolidating LAMY. Now for AI business, because it includes robotic sales or consumer product sale, the margin will be lower than the 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 composition. Yeah. 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.