Cheetah Mobile Inc.

Good day, everyone, and welcome to the Cheeto Mobile 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'd like to turn the conference call over to Helen Yu, Investor Relations Director of Cheeto Mobile. Please go ahead, ma'am.

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 Jin. Fully in 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 well as 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, Du Dong.

Thank you, Helen. Hello, everyone. We delivered overall better than expected results in the second quarter of 2020. Today, total revenue came in at RMB 394 million, exceeding the high end of our revenue guidance. Non-GAAP Netcom grew to RMB 244 million. However, We still facing challenges in operating our business. In 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 continues to decline. Given today's environment, We are not confident in resuming our cooperation with Facebook and Google. In the domestic market, the online advertising industry has been negatively impacted by the pandemic since the beginning of this year, leading to the decline of eCPM. The scope of these hard wins, we choose to strategically shift our focus from overseas markets to the domestic market and introduce the user satisfaction model. Financially, we have reduced cost and expense and focus on our AI investment in the shopping mall. In today's call, I would like to highlight the following. First, we significantly reduced our cost and expense during the quarter. As a result, the non-gap operating loss narrowed by RMB 8 million quarter over quarter in Q2, despite that our total revenue decreased 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 continue to impact our online advertising business in China. During the quarter, we cut back our cost and expense for overseas markets, leading to 61% year over year. and 31% quarter-over-quarter decrease in cost and expense for our mobile internet business, namely the utility products and the mobile game operations. In the coming quarter, we will continue to improve operational efficiency, reduce cost and expense, and significantly narrow our operating launch on the corporate leverage. 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 daily subscription revenue from our Duba antivirus software reached new heights. This achievement proved the user subscription model within utility apps. Recently, we have copied the user subscription model from PC to mobile by introducing premium service for Clean Master. The initial user adoption has been very encouraging as we have seen the paying user count and the daily subscription revenue remained growing since inception. Third, given today's environment, we believe Chinese mobile internet company will face increasing challenges aboard. As a result, our utility product business will move from overseas market to the domestic market. This move allow us to reduce cost and expense gradually. 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 offering and boost 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 customers' shopping experience, and create more business opportunities for merchants. The customers' daily inquiries with our robot has been growing. Increased customer usage has attached many shops and brands to come to us to gain coverage. Recently, We tried to work with several brands, including restaurants, auto companies, and accessories to direct traffic to their local shops. The progress of our robot in shopping malls delayed about six months due to the pandemic. However, we will accelerate the monetization monetization along with the recovery from COVID-19 situation. Fifth, our long-term equity investment contains several well-known projects. As of June 30, 2020, we had US dollar 292 million long-term equity, investment, sitting on our balance sheets. During the quarter, some of our major investors made notable developments. For example, Blimey achieved profitability, leading Chinese online education platform that teach programming to children closed a new round of funding raising. Looking ahead, we expect to continue facing potential headwinds so that we are unable to grow or sustain our total revenues in second half of 2020. However, we will continue to reduce cost and expense and narrow our operating loss in the coming quarters. At the same time, we will uphold our commitment to AI, bake it 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.

Thank you, Fudo. A 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 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. To better present our financial results, We will also provide year-over-year comparisons, excluding the impact of the deconsolidation of LEFME. Total revenues were $394 million in the quarter, exceeding the high end of our revenue guidance for the second quarter of 2020, and representing a decrease of 59%, excluding the impact of the deconsolidation of LEFME. 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 the 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 195 million in the quarter, representing 50% of our total revenues in the quarter. Revenues from our mobile games business were 179 million in the quarter, representing 46% of our total revenues in the quarter. By region, revenues from China accounted for 41% of our total revenues in the quarter, while revenues from overseas markets accounted for 59% of our total revenues in the quarter. By platform, PC revenues improved slightly quarter over quarter to $118 million and represented 30% of our total revenues in the quarter, while mobile revenues accounted for 70% of our total revenues in the quarter. 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-GAF 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. GAF, please refer to our earnings release. During the second quarter of 2020, we chose to strategically shift our focus from overseas markets to the domestic market, and thus continue to reduce our expenditures on our mobile internet business in overseas markets in turn. At the same time, we remained focused on 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 $528 million in the quarter. Excluding the impact of black mean, our total costs and expenses decreased by 30% year-over-year and 22% quarter-over-quarter. In particular, cost of revenue decreased by 65% year-over-year and 23% quarter-over-quarter to $113 million in the quarter. R&D expenses decreased by 43% year-over-year and 17% quarter-over-quarter to $113 million in the quarter. Selling and marketing expenses decreased by 46% year-over-year and 33% quarter-over-quarter to $205 million in the quarter. Moving on to our profits and margins. Gross profit was $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 $133 million in the quarter from $141 million in the previous quarter. The decrease in operating loss during the second quarter was the result of our strict cost saving measures and represented the third straight quarter in a row of reducing operating losses since third quarter of 2019. During the quarter, we disposed our remaining stake in bad stance which resulted in an investment gain of about US dollar 66 million. As a result, we reported a non-GAAP net income attributable to Cheetah Mobile shareholders of 244 million in the quarter, compared to 82 million in the same period last year. and a non-GAAP net loss attributable to Cheetah Mobile shareholders of $98 million in the previous quarter. In addition, we reported a non-GAAP diluted earnings per ADS of US$0.25 in the quarter, which grew from US$0.08 in the same period last year and a non-GAAP diluted loss per ADS of US$0.10 in the previous quarter. Moving on to our balance sheet. As of June 30, 2020, we had cash and cash equivalents, restricted cash and short-term investments of US$453 million and long-term equity investments of US$292 million. On July 9, 2020, we used cash from our balance sheet to pay a special cash dividend of US$1.44 per ADS to our shareholders. The aggregate amount of the cash dividend was about US$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 $360 million. Excluding the impact of deconsolidating last year, this guidance implies a year-over-year decline in total revenues between 47% 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.

Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then 1 on a touch-tone phone. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. We do ask that you please ask your question in Chinese first, followed by English. At this time, we will pause momentarily to assemble the roster. And our first question today comes from Vicky Wei from Citi. Please go ahead with your question.

管理层晚上好,谢谢接受我的提问。 我有两个小问题。 第一个就是想请问管理层现在看到比如说二季度、三季度广告市场表现比较好的是哪几个行业? 然后第二个小问题是关于中美之间的关系。 Good evening, management. Thanks for taking my question. I have two small questions. The first is about the advertising market update. So will management provide some color about the category performance of the advertising market in the second quarter and the third quarter? And the second question is about the U.S.-China tension. So lots of Chinese ADRs are coming back to China to do lists or they privatize. So what does management think of this and what is the plan of the company? Thank you. Xiexie.

I will answer your two questions.

The first one is about the industry with good performance for our advertising business. I think our situation is similar with other players in the advertising industry. Most of our advertising revenue is coming from major domestic platforms. We can see a greater contribution from e-commerce and online education than the increased investment for their June 18th promotional contents or for summer holiday courses. And in categories such as automobile and consumer electronics, they marketed more aggressively consumption recovered. Hope this answers your first question. For your second question, it's about what the management view about the delisting from US market or delisting in Hong Kong capital markets. So yeah, we did know that recently many Chinese company They have either chosen to delist from the U.S. stock market or completed delisting in the Hong Kong stock market. Meanwhile, we have also noticed that many Chinese companies have completed their successful U.S. IPOs in the past couple of months. So I believe that the different capital markets provide variety of options for different companies at different growth stage. So for us, as Cheetah Mobile's management, our top priority is definitely the company's business development and growth. At the same time, we will also pay attention to various options available in different capital markets. So yeah, for sure, if we have any plan, we will disclose to the public as soon as possible.

Thank you.

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. And ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.

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.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.