Cheetah Mobile Inc.

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.

Thank you, Operator. Welcome to Cheetah Mobile's third quarter 2020's earnest conference call. With us today are our company's chairman and CEO, Mr. Fu Sheng, and our company's CFO, Mr. Tang Manjin. Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the Sage Hopper Statement in your 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. Fusheng. Please go ahead, Fusheng.

Thank you, Helen. Hello, everyone. While total revenue exceeded our revenue guidance, we still face challenges in growing our revenues. Total revenues decreased by 60% year-over-year and 7% quarter-to-quarter. To unbeat three hundred thirty-five million in the third quarter of two thousand twenty mainly due to the decline of overseas business we will separate Some setbacks in overseas markets. Facebook and Google, our ex-largest business partners, stopped working with us. As a result, we lost two significant channels to acquire users and monetize traffic overseas. Although we have consistently communicated with Facebook and Google, offered several solutions to them to resume to resume our work. We are still not able to rework with them. 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 as following. First, We have streamlined our operations and cut our costs and expense. As a result, non-GAAP operating loss narrowed to RMB 119 million from 22 million in the same period last year and RMB 133 million in the previous quarter. Our operating loss in the quarter also included a certain one-off staff restructuring expense. So we expect to continue reducing our operating loss in the fourth quarter. Second, our revenues from PC business and the mobile utility products 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 continue to diversify our premium content and service, which shows an increase in paying user accounts 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, which demonstrated that our PC business has transferred from an advertising model to a membership subscription model. Besides, our mobile utility products business in our home market resumed quarter-over-quarter growth in Q3. Driving by improved ECPM, revenues from mobile utility products business in our home market grew by 7% quarter-over-quarter in Q3. We disposed certain business and assets in the quarter, resulting a net cash gain of US$21 million. In the second half of 2020, Thomas will provide more details about the deal in his part. 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 returned about US$300 million to our shareholders. After the shareholder returns, we still have strong balance sheets to support our ambitions and investments. Recently, CodeMao, a Chinese online education platform which focuses on teaching programming to children, raised a new round of financing. Chika Mobile is an angel investor of CodeMao. Before this round of financing, Chika Mobile held about 10% of equity interest in CodeMao. First, we continue to focus our resources on AI-related robotics business to build our ecosystem and eventually build our long-term growth. Together with our investing company, Beige Orange Star, we have developed our AI-related robotics in an increased number of user cases. The recent outbreak of COVID-19 has also helped us expand usage of our robotics products and solutions. One highlight is our robots developed 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 began to build tentative business models. Meanwhile, we found that hotels in China had increasingly welcomed delivery and reception robots, so we quickly responded. and developed customized robots for hotel customers in the fourth quarter. Our cooperation with Beijing Orange Star is in AI business, built our respective gens. Beijing Orange Star developed and produced AI robots, and Cheta Mobile built user case for the customer. Notably, Beijing Orange Stars robot has been nominated twice in a row in the service robot contest held by Beijing Municipal Scientist and Technology Commission for Beijing 2022 Olympic Games. We won four first prize and one second prize in this contest. Looking to the fourth quarter of 2020, we currently expect total revenues to be between RMB 230 million and RMB 280 million. The quarter-of-quarter decrease were due to disposed assets and business, which Thomas will provide provide more details at this portion. Going forward, utility products and services, in particular in PC business, were primarily drivers of our revenues. Driving by subscription business, our PC revenue will resume consequential growth in Q4. On the other hand, we will continue to cut our cost and expense and narrow our operating loss in both year-over-year and quarter-of-quarter basis. Before I hand over the call to our CFO, I would like to emphasize that while we don't want downplay the challenges we face, it is not the first time that Trader Mobile encounters favorable outside environment. We believe that our AI strategy will enable us to build a new future for Cheetah Mobile. With that, we will now turn the call to our CFO, Thomas Ren, to go through the details of our third quarter financial results.

Thank you, Fuzong, 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. As we stated in previous quarters, LACME amended its Share Incentive Plan on September 30th, 2019. As a result, we no longer hold the majority voting power in LACME and have started to deconsolidate LACME'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 LACME. Total revenues were $365 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 LeftMe, total revenues decreased by 47% year-over-year in the quarter. This decrease was primarily due to the suspension of our collaborations 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 186 million in the quarter, representing 51% of our total revenues in the quarter. PC revenues and mobile utility products revenues in our home market are stabilizing. already contributing to 33% of our total revenues in the quarter. Revenues from our mobile games business were 158 million in the quarter, representing 43% of our total revenues in the quarter. As of September 30, 2020, the company had disposed certain business and assets related to the gaming business in the overseas market. In the third quarter of 2020, the disposed business 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. And for our fourth quarter revenue guidance, we currently expect total revenues to be between RMB 230 million and RMB 280 million. Please note, this forecast reflects our current and preliminary views 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 without 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 $481 million. Excluding the impact of LACME, our total costs and expenses decreased by 38% year-over-year. As a result, the gross margin expanded to 69% in the third quarter of 2020 from 60% in the same period last year. Operating loss reduced to $119 million in the quarter, from $222 million in the same period last year and $133 million in the previous quarter. During the quarter, we disposed some of our business and assets related to the gaming business in overseas markets. 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 $266 million from $244 million in the previous quarter. Importantly, our balance sheet remains strong. As of September 30, 2020, we had cash and cash equivalents. restricted cash, and short-term investments of US$235 million, and long-term equity investments of US$332 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. We are now ready to take questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. When asking the question, please state your question in Chinese first, then immediately repeat your question in English for the convenience of everyone on the call. Our first question today comes from Thomas Chang with Jefferies. Please go ahead.

谢谢管理层接受我的提问。 网上好。 我的问题主要是关于2021年的展望。 管理层可以分享一下不同的板块在明年的一个business trend 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.

Let me give a brief answer to Thomas. It is true that it is very difficult for telecoms to move around in 2020, especially after we were downloaded by Google overseas. Most of our tool revenue came from overseas. But we believe that after the adjustments we mentioned earlier, after we were downloaded, we are now doing our best to In China, we have achieved the transformation of the business model on PC. In the past, tools were overly dependent on advertisements, and advertisements were greatly affected by partners. We believe that this has begun to improve very significantly. As I said earlier, PC is now a professional market in terms of verticality. It will not rise because of mobile phones. Let me translate the first part of Fuzhou's answer.

This year, year 2020, for us, Cheat Mobile is a difficult year, especially after our product was removed from Google. And as you know, before, most of our utility revenues coming from overseas markets. But after we performed such adjustments, as we mentioned just now, after we were removed from Google Play Store, now we are focusing our efforts to domestic market. And in domestic market, PCSAT, we already completed the pivoting from advertising model to the subscription model. As we rely on utility products, we rely on advertisement a lot previously, but on the advertising industry, we were influenced by our partners significantly. So we think Now we have improved significantly as I just talked. And now PC as a vertical market, it will not disappear along with the And then,

This year, due to AI, our entire robot business, especially the commercial robot business, is heavily dependent on the offline market, so it is also affected. But now the entire commercial market and the offline market in China are recovering very quickly, so our entire business is rapidly expanding. Next year, we should also have an increase in income from the AI part.

Okay, for the AI disease, especially our shopping mall robotics, it depends on the offline. So due to the COVID-19, it was affected a little bit, but now I think we are recovering from the COVID-19 situation and also the whole offline traffic in the shopping mall. So I think there is still a great chance in our shopping mall business model.

I am not an economist, but from our perspective, we believe that China's growth next year should be For the greater economic view, I'm not a professional,

From my point of view, we think for sure in China next year, the growth should be in the leading part globally. And now our strategy is focusing on the China market to focusing on our utility and AI business to do a great job in our home market. So that's about it. I hope that answers your question, Thomas.

Thank you.

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

Good evening, Director. Thank you for accepting my question. 我的提問是關於AI業務的投資。 想請問公司現在是如何看待AI業務方面所需要的投資? 謝謝。 我自己想一下。 So, the instrument management, thanks for taking my question. My question is about the AI investment, the AI business investment. So given the company does not anticipate significant revenue from the AI business in the foreseeable future, what does management think of the investment needed for the AI business and what does it imply for the company cash balances in the mid-term? Thank you. 关于AI的这个邮件,我还想说明一下。

First of all, in our past business reports, we have put the C and B sections of AI together. So you can see that we have some impact. On the one hand, we used to have a translation bank business. But because of the pandemic, we don't go out to play anymore. The need for translation abroad has become less. So we didn't continue to do this business. So this has affected a part of our AI income. Yeah.

Let me highlight a few points from AI front. So first, previously, we confirmed both our 2C and 2B AI business revenue in the AI revenue. So for the 2C product, we used to have a product named Cheetah Translator, which is an AI-based interpretation device. But due to the situation of COVID-19, people don't travel aboard. So this product, we almost suspended it for now. for the COVID-19 in Q2 for our to-be sales. We cannot meet our customers due to some travel restrictions, so it impacted a little bit in Q2. But now, I think we have seen some rebound of our A&P in this quarter.

Then from the market situation, after the pandemic, the acceptance of this kind of non-contact service, robot service industry is rapidly rising.

After the recovery of the COVID-19 situation, I think the market is having a greater acceptance for the no-touch service, like robotic services. So the acceptance for the industry is growing as we speak.

Yeah, and our investment in AI is mostly consists of R&D expenses. So after some function

functions were developed, such investment may not be a continual investment. 再一个刚才还强调了,本季度有一些看上去的亏损和费用上是一次性的,

which is equivalent to some compensation for the cutting team. So we will see that the loss of Q4 will be greatly improved. According to our own estimate, according to such a trend, our investment in AI will be no problem in the next one or two years. And we expect that the AI income next year Yeah, so as we mentioned just now, in Q3 there is a

some one-time stock restructuring expenses in Q3. So in Q4, we expected our operating loss level could be improved a lot as per our own estimation. So as per such a trend, our balance sheet can support our investment in the mid-term. And also, when we explore the mindset model of shopping more in the hotels, as we mentioned, I think we may expect some more growth on AI front next year.

From this point of view, I don't think we need to The investment in AI is too much to worry about. On the one hand, the market is rising rapidly. We've just talked about it. Whether it's the hotel industry or the commercial industry, the business model is constantly being explored. And through the reduction of costs, the company has greatly improved our loss in Q4. And the company also has enough cash and assets. So we believe that we can definitely

I think we don't need to worry too much about our AI investment. As we mentioned, the market is recovering quickly, including both the hotel and also the shopping mall industry. And also we are exploring our business model. And also, on the other hand, along with our cost and expenses carding, you may see a greater improvement on our bottom line. And also, we have sufficient cash and investments. So I think our region needs to to make the business of service robotics great to be our new growth engine. Thank you.

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.

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.

This conference has now concluded. Thank you for attending today's presentation.