Cheetah Mobile Inc.

Welcome to the Cheetah Mobile fourth quarter and full year 2020 earnings conference call. All 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 Helen Hsu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and four-year 2020 earnings council 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 the 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 CEO and Chairman, Mr. Fusheng. Please go ahead, Fusheng.

Thank you, Helen. Hello, everyone. While the macro environment remains challenging, with focus and determination, Trader Mobile improves operational efficiency, verified our revenue streams beyond advertising, and stayed focused on domestic markets. In 2020, we earned RMB 1.6 billion in revenue and RMB 417 million in net income attributable to our shareholders. and our business began to take hold. Meanwhile, we remained committed to our AI-related robotic business to build sustainable growth for Cheetah Mobile in the long run. Here are the operating highlights. First, we cut our costs and expense. As a result, long gap operating loss continued to narrow since Q4. In the fourth quarter of 2020, non-GAAP operating loss was RMB 57 million, reduced from RMB 204 million in the same period last year and RMB 190 million in the previous quarter. Specifically, our Internet business earned about RMB 76 million. in non-GAAP operating profit in the fourth quarter of 2020. Compared to an operating loss of RMB 92 million in the same period last year, and operating profit of RMB 71 million in the previous quarter, thanks to our continued operating optimization China Mobile still holds US$255 million at hand, despite that we paid US$200 million cash dividends to our shareholders in 2020. Looking ahead, we will continue to cut our costs and expense and improve operating efficiency. Second, through offering membership service within our utility products, we diversified our revenue streams beyond advertising in 2020. We put user experience, user satisfaction, and our user privacy protection as our top priority in our whole market. Our goal is to improve the user retention rate and attract more users through word of mouth. In the domestic market, we continue to encourage users to subscribe for an ad-free experience. Such initiative helped us reduce reliance on advising and allow our utility product to deliver a superior experience. As a result, both paying user count and subscription revenue continue to grow in 2020. And we expect this metric to continue to grow in the future. Supported by the membership service and our efforts on enhancing our user experience, we expect revenue from our key internet business to gradually stabilize and resume quarter-over-quarter growth in the coming quarters. Third, we optimized optimize our operation for our AI business by focusing on a selected number of use case. One of them is deploying our AI robots in shopping malls. COVID-19 in China has been well controlled and this Chinese economic has recovered. Our AI related robots can help shopping mall operators better serve their customers and help brands and shops promote their products and services. While our AI business is still in its early stage, we believe we are on the right direction of our business. Before I turn the call to Thomas for financial highlights, I would like to emphasize our cash reserves and our confident shareholder returns. In 2020, we will continue to cut our cost and expense and experiment more monetization models for our AI business to rebuild a sustainable growth model for the long term. With that, I will now turn the call to our sales Thomas Ren, to go through the details of our fourth quarter financial results.

Thank you, Fu Dong, 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. In the fourth quarter of 2020, our total revenues were $271 million, within our revenue guidance, it represented a year-over-year decrease of 56%. The year-over-year decline was primarily due to the suspension of our collaborations with Google since February 2020, as well as the disposal of certain gaming-related business and assets. On February 21, 2020, Cheetah Mobile announced that the company's Google Play Store Google AdMob and Google Ad Manager accounts had been disabled, which negatively affected its ability to attract new users and generate revenue from Google. Given the unfavorable environment in the overseas markets, we have chosen to shift our focus from overseas markets to the domestic market. In the second half of 2020, the company disposed certain gaming-related business and assets in the overseas market. As a result, we expect that revenue contribution from the mobile game business to decrease in the foreseeable future. Post such disposals, Cheetah Mobile's business primarily comprises of two pieces. One is the internet, which includes our utility products on both the PC and mobile platforms. in the domestic market and a remaining and diminishing portion of the mobile game business. The other is the AI and other business. Therefore, we started reporting our revenues and operating profits by the above two business lines from this quarter. We have retrospectively revised segment information from the previous periods to be comparable with the current period. Revenues from the company's internet business decreased by 56% year over year to RMB 257 million in the fourth quarter of 2020 due to the above mentioned factors. In the fourth quarter of 2020, nearly 74% of the company's revenues from its internet business were generated from utility products, while the remaining came from the diminishing mobile game business. In the future, we expect revenues from our utility products to account for a vast majority of this reporting segment. Revenues from AI and others were 14 million in the quarter, representing a year-over-year decrease of 50%, mainly due to a decline in consumer-facing AI-related products. Turning to our fourth 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 continue to streamline our operations and cut our costs and expenses. In the fourth quarter of 2020, total costs and expenses decreased by 61% year over year and 33% quarter over quarter. As a result, our operating loss significantly narrowed to 57 million in the quarter from 203 million in the same period last year and 119 million in the previous quarter. Notably, the operating profit for the internet business was 76 million in the fourth quarter of 2020. increased from an operating loss of $92 million in the same period last year and an operating profit of $71 million in the previous quarter due to our costs and expenses cutting. As of December 34, 2020, Cheetah had about 150 full-time employees, decreasing by about 50% from the end of In 2020, our total operating expenses decreased by 44%. In 2021, we will continue to cut our costs and expenses, particularly sales and marketing and personnel-related expenses. Turning to non-operating items, during the quarter, the fair value of some of our As a result, we reported a net income attributable to Cheetah Mobile's shareholders of $85 million in the fourth quarter. Importantly, our balance sheet remains strong. As of December 31, 2020, we had cash and cash equivalents, restricted cash, and short-term investments of US$255 million. and long-term equity investments of US$369 million. Our strong balance sheet gives us the confidence to continue to invest in the AI-related business to rejuvenate long-term growth for the company. And for our first quarter revenue guidance, we currently expect total revenues to be between RMB 165 million and RMB 215 million. 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.

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 speakerphone, we ask that you 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. And once again, ladies and gentlemen, that is star than one if you have a question, and we will pause momentarily to assemble our roster. Our first question today comes from Vicky Wei with Citi. Please go ahead.

Good evening, management. Thanks for taking my question. My question is about the advertising market and the AI robots. So what does management think of the COVID advertising market sentiment going into the first quarter 2021? And what was the top three key advertising verticals for fourth quarter? And my second question is, post the pandemic, does management witness any behavioral changes in habits in terms of adoptions of AI robots? Any color about the progress of Cheetah Mobile's AI robot adoptions would be great. 我自己反映一下。 Good evening, Manager Cheng. Thank you for accepting my question. My question is about advertising and our AI robot. Manager Cheng, what is the market like in the first quarter? And what is the main advertising industry in the fourth quarter? My question is about AI robots. After the pandemic, did you see any changes in the habits of users in the use of AI robots?

Thank you, Vicky. So I will answer your first question about the general advertising market, and Fuzong will answer your second question. So for the advertising market, it seems that COVID-19 pandemic is now already under control in China, we can see a strong recovery trend on the macro economy in China, which in turn lead to a recovery to advertising market as well. So specifically for a few sectors like FMCG, auto, gaming and education, I think those few sectors will maintain a strong growth momentum. and also we can see the recovery from the travel and entertainment sectors from last year. But I also want to draw your attention that for us, as we mentioned in the prepared remarks, we are now defocusing our reliance on advertising while we are developing the user subscription model. So we expect, we can see more contribution from user-contributed revenue for our domestic utility products. Hope this answers your question. So I will turn to Fuzong to answer your question about the AI.

After the pandemic, we have noticed that many business owners are rapidly increasing their access to AI. I will translate this part.

After the COVID-19 pandemic, we indeed noticed that there are a lot of business customers. Their acceptance level for the AI robotics is accelerating, and also it benefits us from the past few years. We continue to invest in AI technologies. including our investee, Orange Star, to reduce the cost of the robotics. So we can feel that the whole market acceptance to the AI robotics is becoming much more than before.

For example, our robot in the mall, due to the resumption of supply and demand, OK, so I will translate this part.

For an example, our robotics in the shopping mall, along with the traffic in the shopping mall is recovering. We can see in more and more shopping mall, the interaction with our shopping mall robotics is increasing. So some customers already are used to asking our robotics about the where to find certain brands of coffee or certain brands of restaurants and various toilets, etc. So we are seeing that more and more customers in the shopping mall used to such kind of inquiry to our robotics.

This is a restaurant service robot. We give the restaurant's rent of less than 2,000 yuan per month. In fact, the cost is lower than that of the waiter. And then the efficiency of this delivery is actually already able to replace this one. This is called Sichuan Cuisine, right? Yes, Sichuan Cuisine. So it's only been two months. There are hundreds of restaurants. There are hundreds of restaurants that use this robot.

Another example is robotics in restaurants promoted by our university, Orange Star, again. So towards the end of 2020, Orange Star promoted restaurant service robotics. the monthly rental RM Star is collecting from one restaurant is less than 2,000 yuan RMB and actually this cost is already lower than common waiter's cost and the efficiency on the delivery is already enough to substitute a waiter and just in a couple of months already entered into a few hundred restaurants which they rent the restaurant robotics.

Yeah, so especially after the

COVID-19 pandemic and also our continuing investment into the AI technology, I think we already reduced our cost to a level that could be accepted by the market. Also, we can see the untouched service and also the service with fewer face-to-face communication is also gradually accepted by the market. So we think it's the right timing we can benefit from the market acceptance. So that's all Fuzong's response. Hope it answers your question, Vicky.

Thank you very much.

Thank you.

And ladies and gentlemen, as a reminder, to ask a question, please press stars and one. As there's no further, please stand by while we pull for questions. And our next question today comes from Melody Chan with Jefferies. Please go ahead.

Hi, good evening. Thanks for taking my question. So I have two questions. The first is, can management share some views on 2021 outlook across different sectors? And my second question is, so Apple recently increased its privacy control and all the app developers are required to have the approval from users to use data. So will this impact the pricing business? Let me translate it for myself. The first question is about our vision for 2021. I hope you can share your thoughts about it, including the Internet and some of the AI-related issues you just talked about. I'll answer that.

Thank you. First of all, we are not economists. We will only talk about our own business and related business. First of all, as we said earlier, we have encountered a lot of difficulties overseas. So last year, we proposed a strategy to return to China. Now it seems that our domestic mobile Internet business Okay, so I will translate this part. So Fuzong was talking about the outlook for our own business.

So the first, as we mentioned just now, I think we met a great challenge in the overseas market last year. So the strategy for us in the prior year was to return to our home market, which is a domestic market. And now it seems that our domestic mobile internet business, we are Not only we stabilize our revenue level and also we expect we can regain some growth in this year. The growth is not only coming from the advertising and also coming from our user subscription model. We believe for the Internet segment, we can see a recovery trend in this year.

Of course, I also think that the competition will be more and more intense in the new year for the Internet. Our tool software can't just be a function, it must be with content.

Yeah, so Fuzeng was talking about in the coming year, we can see more severe computation for the whole internet industry. And for us, our utility products can not only to do some functional features, And also we need to be connected with the content and community or the cloud functions. And then we can regain some energy for our utility softwares.

Although you may have seen some so-called artificial intelligence companies recently have some bubbles behind or the listing is very bad. I think this is not a bad thing for the entire industry. In other words, the artificial intelligence and the machine learning industry will use your technical indicators from the past, or you publish a few papers in the international market, or do a competition to get the first place. This is too much as a evaluation standard. This is a stage where the product is the core. No matter how advanced the technology behind you is, your product can meet the needs of the users. It is the core that allows users to reduce costs and improve their experience. This is a sign that artificial intelligence is the core of the industry.

Okay, so as I just said, for the AI and the robotics industry, I think it is now the turning point. Although we can see some AI company, they are not doing great or it's not smooth for them to either to a new round financing or the IPO, but I think generally it's not a bad thing for the whole industry. And for the AI and robotic business, it's not only about some certain technology indicator or you publish some essay or win some prize on a competition as a judge standard. So I think now it has been turning to a stage that the product should be the core component the core feature and as long as your product can meet your customer's need and also to reduce customer's actual cost and to leverage or improve the user's experience, I think that's the core computation for the AI products.

Yes, I think the most obvious sign is that we can see that the service robot products that we promote have been purchased by the government in the past. I don't know if it's a big deal, but it's a big deal. It's a big deal. It's a big deal. Yeah, I think the obvious phenomena we can see is that for the robotic products, previously

It depends highly on some governance purchase or to use the Baltic in some exhibition. But now it has been converted to a wider use at either the restaurants or hotels. as an efficient, a more efficient tool. So I think I'm quite confident that this industry will grow very fast.

And then the second question is about Apple's advertising. Apple's advertising movement has basically no impact on us, because our tool software is currently mainly based on Android and PC as core platforms. Yeah. For your second question about the new policy by Apple, I think basically it has a very minimum effect on our utility products because our

utility apps or products mainly on the either Android or PC platforms. And also for our overseas gaming products, we already, as we mentioned, we already dispose certain overseas gaming products. So for the Apple policy itself, there is a very minimum impact on us.

I also want to emphasize that another outlook is about

no matter the overseas market or domestic market. Now it's becoming more and more important for the users' privacy information. It requires more and more focus for the whole app's developers. We can see on the recent March 15th Gala by CCTV, the user the fraud advertisement or disruptive advertisement is also becoming focused by government.

I think this is the whole industry is that this is getting less and less quality advertising and quality advertising and bad user privacy advertising in the future will be greatly controlled, whether it is in the government or in this

Yeah, for the whole industry, I think in the future, the advertisement with low quality or violating some user privacy information, it will be controlled more and more strict by either the government or mobile phone manufacturers.

Yes, so in fact, since the beginning of last year, when we had some problems with advertising overseas, we were aware of this problem. So last year, we spent the most effort to reduce the disturbance of our advertising, reduce the dependence on the advertising model, and develop a member income model. Yeah, so then the

we were facing some challenges from either Facebook or Google in the last year or the year before. So we already realized that the user experience and also the low quality advertisement issue. So we already in 2020, we already started to reduce our advertisement and also to reduce our reliance to advertising. So we developed the user subscription model. I think it improves our user experience. And so in the, we just mentioned on the CCTV Gala, so there is no Cheetah Mobile products was involved. I think it has a big relation or a great relation with our change on our business model for our utility products.

Thank you. I want to supplement a little bit about our outlook for 2021 because I want to emphasize that

Because first, we were terminated by Google last year. And also, secondly, we already disposed certain gaming-related products of business in the second half of 2020. So I think generally, for our full-year outlook, I think we will still see a decrease trend for the full-year revenue. But we are confident that since 2020, Q2 because Q1 is always a slack season for advertising. So I think we can expect some recovery from our revenue trends since Q2. So that's my supplement information.

Okay. Thank you. Thank you.

Thank you. And there are no further questions. So at this time, I'd like to turn it back over to our management team for final remarks.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.