Cheetah Mobile Inc.

Good day and welcome to the Cheetah Mobile first quarter 2021 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 Cheryl Zong, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Thank you, Operator. Welcome to Cheetah Mobile's first quarter 2021 earnings conference call. With us today are Mr. Sheng Fu, our chairman and CEO, and Mr. Thomas Ren, our CFO. Following management's prepared remarks, we will conduct a Q&A session. Cheetah Mobile earnings release was distributed earlier and is available on our IR website at www.ir.cheetahmobile.com. Before we begin, I refer you to the Safe Harbor Statement in our earnings release, which will also apply to this call today, as we will make certain forward-looking statements. Now, I would like to turn the conference call over to our Chairman and CEO, Mr. Sheng Fu. Please go ahead, Fu Zong.

Thank you, Sherry. Hello, everyone. In the first quarter of 2021, with our Our previous guidance, Trader Mobile's revenue was about RMB 200 million The company has efficiently improved operational efficiency Growth margin continuously increased to 70.1% Operating loss narrowed to RMB 57 million and net income attribute to our shareholders was on the 76 million. Our cash position has been increasing to about US dollar 276 million as of March 31st, 2021. The abandoned cash resource enable us to keep investing in our core business to empower the company's long-term sustainable growth For our Internet business, in this quarter, the company has been focused on the domestic market and enhancing membership service Our business has gradually transformed from a single advertising model to a diversified model of advertising plus subscription. Our products and services all center on how to deliver superior user experience and improve our user satisfaction. As a result, we see a continued increase in revenue from our membership service in terms of both absolute numbers and the percentage of total internet revenues Besides, the company has been consistently developing new utility products on mobile platforms to increase the user time and attract more high-value young users Despite the huge challenge from the market Our efforts to optimize our business model and products, our internet business managed to realize net profits for five consecutive quarter. For our AI business, we have seen some initial achievements in the business model of shopping mall robots. By now, we have more than 12,000 robots in about 1,200 shopping malls in more than 40 cities. Pilots in several shopping malls showed that selling coupons by our robots could effectively attract new customers to Manhattan. Merchants, they are very active to participate because it is a win-win situation for both customers and merchants. We have also launched many apps based on this Shopping Mall robot coupon selling model. In May, we started to expand this business and have seen a rapid growth. We believe that we have found the key points to monetize this business and expect a boost in the coming quarters. Lastly, I would like to emphasize that in spite of the extensive hand-wins last year, we have consistently realized net profits and increase our cash reserves. This cannot be achieved without our determination and improved operational efficiency. In the coming quarter, we will keep the profitable growth of our domestic internet business. At the same time, our top priority will still be the monetization of our shopping mall robot business. which will create new growth engine for the company. With that, I will now turn the call to our CFO, Thomas Ren, to go through the detail of our fourth quarter financial results.

Thank you, Fuzong, and hello, 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 2021, our total revenues were 198 million, which was within our previous guidance. It represented a year-over-year decrease of 62% and a quarter-over-quarter decrease of 25%. The year-over-year decrease was from the suspension of the company's collaborations with Google since February 2020, and the company's strategic retrenchment of gaming-related business and assets last year. The quarter-over-quarter decrease was mainly due to the normal seasonal change in the first quarter and the decreased revenues from the company's diminishing mobile gaming business. Now, let me break down our revenues into internet and AI and other sectors. Revenues from the company's internet business decreased by 62% year-over-year and 25% quarter-over-quarter to $188 million in the fourth quarter of 2021. Revenues from our internet products have been accounted for a vast majority of our total revenues, so the changes were mainly due to the same reasons as stated above. Revenues from AI and others were 11 million in the quarter, representing a year over year decrease of 66% and a quarter over quarter decrease of 24%. As our AI business is still in a very early stage, short-term volatility is within our expectation. Turning to costs and expenses, the following discussion of results will be on a non-GAAP basis, which excludes stock-based compensation expense. 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, our ongoing streamlining of business is on the right track. We have successfully improved our operational efficiency and narrowed operating losses. In the fourth quarter of 2021, total costs and expenses decreased by 62% year over year and 20% quarter over quarter. As a result, our operating loss was $58 million in the quarter compared to $141 million in the same period last year and $57 million in the previous quarter. Cost of revenues decreased by 60% year over year and 41% quarter over quarter. to 59 million in the first quarter of 2021. The decrease in costs were mainly from disposal of certain overseas utility and gaming related business and assets, as well as improved operational efficiency. Research and development expenses decreased by 48% year over year and increased by 9% quarter over quarter to 71 million in the first quarter of 2021. Along with our efforts to streamline our business, we have been keeping investing in R&D in our domestic utility and AI business to optimize our products and services. Selling and marketing expenses decreased by 74% year over year and 14% quarter over quarter to 80 million in the first quarter of 2021. This decrease was mainly due to more strategic and disciplined promotional activities. General and administrative expenses decreased by 44% year over year and 14% quarter over quarter to 49 million in the first quarter of 2021. This year-over-year decrease shows well the excellent execution of our cost optimization strategy. Now, let me turn to our balance sheet, which remains robust as of March 31st, 2021. We had cash and cash equivalents, restricted cash, and short-term investments. of US dollar, 276 million, and long-term equity investments of US dollar, 365 million. Our strong balance sheet enables us to continue to invest according to our strategies to rejuvenate long-term growth for the company. And for our second quarter revenue guidance, We currently expect total revenues to be between $175 million and $225 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 one 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 two. When asking the question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone on the call. We will pause momentarily to assemble our roster. And today's first question comes from Vicky Wei at Citi. Please go ahead.

Good evening, management. Thanks for taking my question. So will management share with us the latest industry trend for the AI business and the company strategy as we see AI revenue decline due to the decline in sales of consumer-facing AI-related products? Thank you. Thank you for accepting my question. Can you please share with us the recent progress of the AI business and the company's strategy? Because we see that the income of AI is decreasing year by year because consumer-facing AI products have decreased sales. Thank you.

Yes, the first one is that you see that the company's AI sales, which is 2C, has dropped. In fact, it is because everyone knows that the Chinese smart hardware competition is very fierce. Especially in the field of smart box, it is actually very difficult to have real profits or profits. And last year, the company encountered some overseas things, which made us lose a lot of business and did some Okay, let me translate the first part.

So as to your question regarding the decrease for our AI to see revenues. I think, as we all know, the competition in the Chinese AI hardware industry is very severe. Yeah. To see, to show it. Yeah. Facing to customers. So, especially in the AI speaker. and we think it's difficult to have a true or real gross profit or profit. And also for us, our company, we met some challenge in the overseas market, which will increase some of our operating losses. So we do some strategy shift to cut down this 2C business, but I don't think it will affect our strategy in AI business.

The second is that our entire AI strategy is still focused on the 2B end. We also see that the demand for 2B robot market scenarios is increasing rapidly, especially after the pandemic.

Yeah, our company strategy in AI is still focusing on to be business. And also we are seeing tremendous increase in the market regarding some service robots, especially after the pandemic.

For example, we can see in the industry, for example, like delivery service or promotional service,

For the restaurant, as well as the delivery service in hotels, such demand is increasing significantly. And also, for the whole industry, the sales volume for such kind of service robots is also increasing, verified.

Yes, Lierbao Investment's Lierhu Xingkong launched its restaurant service before this year's January, and has been doing sales and rentals. Orange Star, one of our investees, Orange Star promoted the

service robot for restaurants to deliver dishes. And Orenstar started to sell or lease such kind of service robot since this January. And the rental per month is about 100 RMB. And we can see a tremendous growth for the past five months.

Because Cheetah Mobile is the single largest shareholder

So actually through the cooperation with Orange Star and also our investment in this company, it means we can have such kind of cooperation when we launch in such kind of new use scenario.

Yes, as I said earlier, we are in the commercialization of the restaurant service machine. After many attempts, we feel that the brand advertising model is not good enough. But now we are helping the restaurant to sell vouchers and get new customers. We have seen in some business events that

As I mentioned in our prepared remarks, the pilot for the foundation model for our shopping mall, Robert, we have some initial achievements. So our pilots in the past couple of years told us that for this model, maybe the brand advertising is not the best way. But now we realize that we can sell coupons for the restaurant or the local merchants in the shopping mall. through our service robots, and also to help the merchants to attract new customers. And we can see some very good trend in our pilot shopping malls. Also, the efficiency of our service robots is, we can see the great potential, yeah.

Yes, in this mode, the biggest difference between us and the traditional screen is that the user actually has interaction with the machine. When it comes to inquire about some nearby restaurants, our machine will recommend a very discounted queue for this restaurant. Now, whether it's a restaurant or a customer, they all accept this kind of service.

The biggest difference between our model and the traditional screens in the shopping malls is that the actual customers can have real interaction with our robots in the shopping malls. And the customer may ask if there are any restaurants or service robots could such coupons with very high discount to attract the customers to the restaurant. So both the restaurant or the customers, they are very active for such kind of models and I think, as I mentioned, it's like a win-win situation.

In conclusion we believe that

like a restaurant or shopping mall, we already see a very fast growth potential for service robots. And I think we can launch or copy our initial pilot models to more shopping malls. Yeah, hope that answers your question, Mickey.

Thank you. And ladies and gentlemen, as a reminder, to ask a question, please press star, then one. Our next question comes from Melody Chen with Jefferies. Please go ahead.

Hi, management. Thank you for taking my question. I have a question regarding our internet business. Given that we have transferred from the advertising model to membership subscription model, can you share a bit more on our strategy on the subscription business and how should we think about the potential and the growth driver of it? strategy, and how we should think about its future development space and driver. Thank you.

Yes, actually today, from the point of view of consumers in the Chinese environment, users' software and function payment have already become

Yeah, I thought today, I think for the Chinese internet users, we think it's already a trend that users would like to pay for the software or certain features of the software.

Especially for some key features,

For example, like some security functions on the PC or security protection functions or some functions like light office features like PDF conversion or PDF view features. We can see the growth on user payment is fast.

As for the future, I think... You can see that a lot of these apps are starting to use the subscription mode. Their market share is quite large. For us, the first step is to make the users on PC and mobile devices It also ensures that our income in some scenarios like the PC segment is still growing. As to the future outlook for this industry, we can see nowadays

Most software has adopted a subscription model or membership payment model. And the market size is also growing. And for us, we are just converting our previous users on both PC or mobile apps to payment users. And in our PC revenue is also growing, contributed by the payment users' growth. And for our key products on PC, It's called Jin Shan Du Ba which is a virus detection software on PC. It's already existed for like 20 years and most users I think they don't like the advertising model and so we convert the model and also we see great satisfaction by our users for our payment model.

We are confident that our internet business revenue can resume the growth in the next couple of quarters.

Hope this answers your question, Madeline. Thank you.

Thank you. Thank you for the detailed answer.

Ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the conference back over to management for any final remarks.

Thank you all for joining us today. If you have any 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.