Kingsoft Corp Ltd Adr

Good day and thank you for standing by. Welcome to the Q1 2023 Kingsoft Cooperation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. to withdraw your questions, star one and one again. Please be advised that today's conference is being recorded. I would now like to have the conference over to your speaker today, Francie Liu. Please go ahead.

Hi, thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2023 first quarter earnings call. I'm Francie Liu, the IR Director of Kingsoft. I would like to start by reminding you that some information provided during the earnings may include forward-looking statements which may not be relied upon in the future for various reasons. These forward-looking statements are based on our own information and information from other sources which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors which may affect our business and operations. Having said that, please allow me to introduce our management team who joined us today. Mr. Zou Tao, our director and CEO, and Ms. Li Yi, our acting CFO. And now I'm turning the call to Mr. Zou. Zou Zou.

Hello, everyone. In the first quarter of 2023, we will have a good start. Jinshan Office Group will do its best to promote new AI technologies in the application field. to actively invest in relevant research and continue the digital transformation of energy-saving institutions and individual users, and further enhance the value of original IP in game business, and firmly carry out the premiumization strategy. This quarter, the total revenue of the Group's overall performance documents is RMB19.7 billion, which is 6% of the total growth. Office software and service business I'll do the translation for Mr. Zhou.

We had a good start in the first quarter of 2023. Kingsoft Office Group actively explores and promotes the practical application of AI technology. invests in related R&D, and continues to empower the digital transformation of institutional and individual users. Online business further enhances the value of original IPs and remains committed to the strategy of developing premium gains. The group's businesses remain steady in this quarter, with total revenue reaching RMB 1,970 million, increasing by 6% over the year. Revenue from office software and services business reached RMB 1,052 million, up 21% year-over-year. Both domestic individual office subscription and info subscription businesses experienced robust growth during this quarter, demonstrating the significant effect of the subscription transformation. Now I'm turning the call to Ms. Li. Thank you, Francine. Ladies and gentlemen, good evening and good morning. In face of the technological transformation brought about by generative AI and large language models, Keysoft Office Group focuses on the AI field, collaborationally engaged in a large language model, and concentrates on core business to excel in the application layer. Since we own the leads of organizational users, we continue to leverage the advantages of the digital office platform. actively promote the digital transformation and upgrading for organizations of all sizes and empower the digital construction. In April 2023, we launched WPS 3.5, a comprehensive package of office software suitable for a wide range of institutional users, which includes powerful office software and collaboration management capabilities aimed to improve their work efficiency. In order to achieve high quality development of individual office subscriptions of business, we constantly enhanced the user experience of our products in cross-platform scenarios like collaboration and reconstructed the membership system in April. Online games business made progress in iterating core IPs. Based on the high quality inspection pack Launched in the fourth quarter of 2022, our flagship GX Online 3 achieved an increase in new users, expanding the user base. At the same time, the number of daily active users and revenue of GX Online 3 increased year-over-year in the first quarter of 2023. At the end of February 2023, a new expansion pack of GX Word 3 mobile game released. together with effective marketing and promotion, stimulated the game's vitality and improved user experience. At the end of March 2023, World of Thought's original mobile game was initially launched in Viamian. Upon its launch, it topped the free and gross interest in local iOS and Android stores. Our animated mobile game snow breaks, contaminant zones, and the other shore are scheduled for launch in the second half of 2023. I will now discuss the first quarter operational and financial results using RMB as currency. Revenue increased 6% year-over-year and decreased 7% quarter-over-quarter, 1,970 million. The revenue speed was 53% for office software and services and 47% for online games and others. Revenue from the office software and services business increased 21% year-over-year and increased 4% quarter-over-quarter to $1,052 million. The year-over-year increase was mainly due to the robust growth of domestic individual subscription business. and rapid growth of domestic institutional business of Teamsoft Office Group, partially offset by the decrease in domestic institutional licensing business. The solid growth of domestic individual office subscription business was primarily attributed the continuous optimization of cloud and collaboration use experience. The fast growth of domestic institutional subscription business mainly driven by the continuous upgrades of digital office solutions and service quality, as well as the ongoing process of promoting cloud integration and collaborative office in government and enterprises. The decrease in domestic institutional licensed business was mainly due to the relatively high base in the first quarter of 2022. and reception in new purchase orders on localization solutions in quarter. The slight quarter-on-quarter decrease was mainly due to declined internet advertising promotion business. Revenue from the online games and other business decreased 6% year-over-year and 10% quarter-on-quarter to $990 million. The year-over-year decrease was primarily due to the natural decline in revenue from the mobile games such as GX World 3 and GX One 3 Live, which had a relatively high revenue base in the first quarter of 2022. The decrease was partially offset by the revenue growth from GX Online 3, which was attributed to our continuous efforts in enhancing user engagement and online and in-game consumption through game content updates and operations optimization. The quarter-on-quarter decrease reflected the natural decline of certain existing games. Cost of revenue decreased 2% year-on-year and 9% quarter-on-quarter to $345 million. The quarter-on-quarter decrease was mainly due to the reduced Purchasing cost of products and subsets of Kingsoft office group. Growth profit increased 8% year-over-year and decreased 7% quarter-over-quarter to $1,625 million. Growth profit margin increased 1% point year-over-year and kept flat quarter-over-quarter to 82%. Research and development costs increased 9% year-over-year and kept the flight quarter-of-quarter to $661 million. The year-over-year increase was mainly attributable to higher personal related expenses of consort office. Selling and distribution expenses. increased 31% year-over-year and 5% quarter-over-quarter to $351 million. The year-over-year increase mainly reflected greater marketing spending of Kinsoft Office Group to expand its presence in the domestic, enterprise, and government market. The quarter-over-quarter increase was mainly due to higher spending on online games. Administrators Administrative expenses increased 2% year-over-year and decreased 8% quarter-of-quarter to $150 million. The quarter-of-quarter decrease was mainly due to the reduction in professional service fees. Share-based compensation costs decreased 2% year-over-year and increased 21% quarter-of-quarter to $73 million. was mainly due to the growth of awarded shares to the selected employees of certain subsidiaries of the company. Operating profits before share-based compensation costs decreased 7% year-over-year and 21% quarter-of-quarter to $533 million. Net other gains from the first quarter of 2023 were 44 million, compared with the gains of 23 million for the first quarter of 22, and losses of 42 million for the first quarter of 2022, respectively. Shared losses of associates of 231 million were recorded for the first quarter of 2023. compared with losses of $275 million and $256 million for the first and fourth quarter of 2022 respectively. Income tax expense decreased 26% year-over-year and 82% quarter-of-quarter to $26 million. As a result of the reasons discussed above, attributable to the owners of the parent was $192 million for the first quarter of 2023, compared with the profit of $98 million and $48 million for the first and fourth quarter of 2022, respectively. Profit attributable to owners of parent excluding ESOT was $236 million for the first quarter of 2023, compared with the profit of $142 million and $83 million for the first and fourth quarter of 2022, respectively. The net profit margin, including the effect of share-based compensation costs, was 12%, 8%, and 4% for this quarter, the first quarter, and the first quarter of 2022, respectively. The group had a strong cash position towards the end of the reporting period. As at 31st of March, 2023, the group had cash resources of $21,710 million. Least cash generated from operating activities was $363 million, $189 million. and $3,232 million for this quarter, the first and the fourth quarter of 2022, respectively. Capital expenditures was $80 million, $85 million, and $206 million for this quarter, the first quarter, and the fourth quarter of 2022, respectively. We adhere to technology-driven business. Looking forward, Keysoft Office Group will continue to cultivate and fully leverage new technologies to drive the reconstruction and patent innovation of office products and services. Online games business will continuously adjust and optimize products and services in response to user needs, improve games reputation, introduce more unique game players and content. and further strength user recognition and confidence in our core assets. We are committed to creating long-term value for our shareholders by enhancing our core competencies. Thank you for your attention. Now, I turn the call to Francie. Thank you. Hi, thank you, Ms. Li. Operator, we're now ready for the Q&A session.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for you to be announced. To withdraw your question, please press star 1 and 1 again. Please stand by while we call IOD Q&A roster. Hi, sorry, operator.

One thing to add is that when you ask the question, please ask your question in both English and Chinese Mandarin if possible. Thank you.

Thank you. We will take our first question. The first question comes from the line of from CICC. Please go ahead. Your line is open.

Hello, Mr. Zhou, Ms. Li, and Ms. Fancy. I'm an analyst in the center. Thank you for accepting my question. I have two questions. The first question is about our game business. We saw that MoYu2 launched a full-network project at the end of March. Can the management help us update the data feedback of MoYu2 project? In addition, is there any change in the revenue guidance of our game business all year round? Thank management for taking my questions and congrats on the strong quarter. My first question is on the gaming business. Could you please update us on the performance of more YouTube's full platform release? And also, what is our latest revenue guidance for the gaming segment for full year 2003? As for our office software business, we noticed that WPS AI has launched its version. So could you please share your views on the public pipeline function update and also the commercialization plans? Thank you.

I know. It's okay. I know. Okay, let me answer. The first question is about Moyu. I will share it with you from several dimensions. In fact, Moyu is actually slightly worse than we expected in terms of user traffic. However, its ARP value is slightly better than we predicted in terms of profitability. We are still tracking the long-term. So in general, it should basically meet our expectations for this product itself. OK, this is one. Then there are some guidelines throughout the year. Let me put it this way. We may not have changed much in this direction. What does that mean? In general, the first one is the This is the performance of the new game. The second is the performance of the new game after the game is released. From the current perspective, there is also the continuity of the old game itself. From the current perspective, I think the new game is much more than expected. Yes, of course, I also saw it just now. Like our Q1, the same and the same. Indeed, there is a certain decline. This is what I asked the finance department to confirm. In fact, it is mainly from the point of view of financial acceptance. In fact, the increase in the number of businesses is very, very, very good. It is much higher than expected. This is one. The second one is the overall new game. We also said in the last Q that the current time table has not changed. The launch period is in July. The pen time is in August. In October, it will be the reset 2.0 of our business. Yes, so from now on, of course, there is also the third part, which is the old game, which is that we mainly see the world 3 last year, the one that was released at the end of last year, especially from the recent one, it looks better than we expected. The effect of this natural decline is better, so in general, this year, We haven't made any changes to the game yet. Although the game has grown well, we still have some uncertainties regarding the release of the new game. So we haven't made any changes to the game yet. I'll just show you a few of them. The old Game 3 series, The second question is about AI.

I'll translate for Mr. Zhou. The game question, Udemy 2 was launched, and we will discuss this game in two aspects. The first one is from the user point of view. From the number of users, this game is slightly less than our expectations. But from the R2 point of view, the performance is actually slightly better than our expectation. And in the long term, we will continue to monitor the performance of Udemy 2. I think overall, the game itself has met our expectations in general. And the second part of the question is on our four-year guidance for the game business. Overall, we did not change the guidance that we have given out in the beginning of the year. our guidance was based on three factors. The first one is the performance of JX Online 3. The second is the performance of the upcoming new games. And lastly, we have the performance of our old mobile games. So for JX Online 3, it has actually exceeded our expectation. Although in the first quarter, the online game business its financial performance has slightly declined quarter over quarter and year over year. But the JX3 online game itself is actually performing very strong. And for the new games pipeline, we have three upcoming new games. For the first one, Chen Bai Jin 2, this one launched in July. And this one will be launched in August. And in October, we're launching the 2.0 version for JX Online 3. And lastly, we have the performance of our old mobile games, which is JX World 3. We recently launched the expansion pack. The natural decline of this game is slightly better than our expectation. So overall, we will keep the guidance that we have given out in the beginning of the year. JX Online 3 has exceeded our expectations, but we still have the uncertainty coming from the upcoming new games. So we're now going to change the guidance that we developed earlier. Thank you.

Okay, the second one is related to the follow-up online and commercialization of A.I. At the current stage, we should say that we are trying our best to change our products from February. In fact, from what we have observed so far, the effect is very, it should be said to exceed expectations. Then the subsequent commercialization progress depends on a few things. One is that I will explain it first. We ourselves did not go to do the big model. There is definitely no big model investment in the current stage. We mainly cooperate with other big model manufacturers. So the subsequent commercialization progress depends on one thing. It depends on our cooperation. It takes the time to get the big model. Yes. Secondly, it depends on our future. Once the license is obtained, we will carry out a different level of user-open. So it depends on the results of the user test and the progress of the continuous optimization. Then we will enter the specific fee section. So from the current time table, it will probably be in June or July. Of course, we still have to look at the scheduled time. We will carry out an external test, and then there will be a round of adjustment after the test, and then we will enter the entire commercialization. In other words, if everything goes smoothly, we are looking forward to a more optimistic Q4. Okay, I'll translate for Mr. Zhou.

Regarding the second question on WPS AI, starting from February, we have fully optimized the product. We're going to continue to optimize the product itself. the performance of this product has actually exceeded our internal expectation. Currently, we are not investing in doing the large language models. So we're cooperating with other partners in the large language models. So the further monetization of this product will down the timing when our partners will get the license for their models and also on the future performance and user experience from the products. So we are going to start, our plan is that we're going to start the testing in June or July, but this also will depend on the timing of the license. And after testing, we're going to first do the optimization based on the performance and also the user experience. And after the optimization, we will start the monetization of the AI products. So my own expectation is that the monetization will not start until the fourth quarter of this year or maybe next year. Thank you. Hi, operator. We're ready for the next question.

Thank you. Please stand by.

Your next question comes from the line of . Please go ahead. Your line is open.

I have two questions that I would like to ask. One is about the game. I also saw that we also have new games on the Vietnamese market overseas. How big of an increase can this bring? Is it still relatively stable? So if you look at it this way, can Q2 see a relatively positive growth? I also want to know how to view the influence of AI on games. From now on, have you seen any more obvious effects, such as the effect of marketing? And in this part, I also see that there may be some products that use AI to make games, and there may be some new games in the future. So what are the company's preparations for this part? This is the game part. The second one is about WPS. After WPS released the new member system, we can see that there is a clear improvement in the up value. This improvement can show an increase in revenue, and the subsequent payout rate will increase. I will simply translate it myself. My first question is about games. We say we launch the new games overseas. So how much growth can this bring? Can we see positive growth in Q2? What do you think about the impact of AI on games? Are you seeing some closer impact? or efficiency in business.

What recommendations do you make? Hi, Lin Lin. Lin Lin, hello. You can't hear me.

We can't hear you. I'm sorry, I've finished my question. It's a bit noisy here.

I'll mute it first. Okay, I'll answer it. I'll just answer it directly. To be honest, it's already the end of May. From the current actual figures, Combined with the question I asked in the first question, I will answer it. I just talked about it. In fact, our Internet 3.0 is actually a serious exceeding period. So, because of the reason for this income drop, many of its income will drop to Q2. So, from the point of view of Internet 3.0, it is very good. Yes, the second one is to talk about the World 3.0. After we uploaded the data recently, we stretched it again to what we think is still relatively a satisfactory height. So overall, it is slower than we originally expected. So these two factors, from the actual data, we can see the performance of our Q2 game, but it is not convenient to talk about it in detail. But in fact, it should be very, very good. So I would like to add that just now, The first thing I would like to add is that, in fact, the game itself, if you look at Q1's financial data, it seems to be not very good. But in fact, I also answered this question at today's meeting. I said that in fact, from the perspective of the actual management of the game itself, it is out of the question for me. Yes, it's just because of the reasons of financial revenue in all aspects. Actually, it was two points just now, a period of overpayment of the Internet 3, and then the decline of the World 3 itself is less than expected. So, of course, the uptrend of Xinniu itself is in the second half of the year, the specific price hasn't come out yet, so from the final price point of view, I think it's still much better than expected. So in terms of the entire QR of this game data, it's actually one quarter to look at Ziyin, it's over that we expected in the beginning of the year. Okay? The second piece is the specific production of the AI-based game itself, especially when it comes to the cost aspect, the cost-effectiveness aspect. I can only say that it has to be viewed from a different perspective. Because the AI part, in fact, whether it's in the engine art, planning, even testing or quality, we all have different levels and different amounts of applications. Therefore, it is not just a reduction in efficiency. In other words, in some aspects, it is indeed a reduction in efficiency. In some aspects, the cost has not changed. but the quality of the user's experience will be greatly improved. So, of course, at present, our conclusion is that, of course, there is another point here, which is to see what type of game you are playing. At present, our conclusion for games like Internet 3.0 is that in the short term, especially this kind of 3D rendering, This piece of current AI does not yet have this ability, but we believe that it will have it in the future. From the current point of view, for this kind of large 3D MMORPG game, the improvement in the effect is more obvious. The cost of this piece is actually not such a significant improvement, okay? The third piece is whether We are already using AI to assist in making game products. It depends on our preparations. To be honest, we are not making preparations. Our studio in Shiyou may actually launch some games using AI technology this year. So,

So regarding your question on the Q2 guidance for the game business, for JX3, it actually exceeded our expectation in the first quarter. But even though in the first quarter our game revenue has declined quarter-on-quarter and year-over-year, but the actual performance of JX3 actually exceeded our expectations. It's due to the financial revenue deferral problems that some of the results will not show until in the second quarter. And also due to the recent launch of the new expansion pack, the performance of World 3 actually also is better than our We expected a nitro decline of this game, but with the new extension tax relief, the decline has not been as severe as what we expected earlier this year. So generally speaking, Q2 will be a very good quarter for the game business, even though we don't have specific numbers yet. In the board meeting, I also answered a question that I said that even though the financial result for the first quarter was not as good as expected, But the actual performance in the first quarter, due to the great performance of GAX Online 3 and also the new expansion path of GAX World 3, the actual performance is actually better than our company's expectation for the first quarter. The new game, Pipeline Lounge, is scheduled in second half of the year. So we don't know the detailed performance yet. But for the second quarter specifically, we think the guidance should be better than our expectations. And the second part of the question is on the cost of AI. We do have applied AI technology in the engine visual image and also the testing aspects of the game. So the AI technology not only improves the efficiency of these aspects and also decrease the cost of these aspects. Some aspects, if the cost is not significantly decreased, but the quality and also the user experience have improved due to the application of AI technology. And also, it depends on the type of games. For example, for the JX Online 3, with this 3D visual effect, the AI is not very helpful at this point, but we think that this will also improve in the future. And lastly, we have the question on the AI application for the games. Not only apply the AI technology in the game, but our subsidiary, Shenzhen Shiyou, will have new games launched maybe this year using the AI technology. Thank you.

Okay, President Zhou, you've answered the question. The second question is about the new members, that is, for the entire app and other aspects. This is the situation. To put it simply, after we launched it, we are still making some adjustments based on the actual feedback of the users. But in fact, we have implemented it ourselves. It should be said that long-term consideration can definitely achieve our expectations. The current stage is still in the adjustment period, because after the new one is launched, according to the actual feedback of the users, we are still making some fine-tuning adjustments. From the current results, we think the long term is very good.

Liu. Hello, Chairman Zhou.

There was no sound just now, right? I finished talking just now.

我讲完了,但我没听到你翻译。 好的,好的。 I'll do the translation for Mr. Zhou. So for the new membership launch for the Kings of Office business, the ARPU actually improved, but now we are in the progress of optimizing the system based on its current user experience. In the long term, we have confidence that the new membership system will meet our expectations and also improve the ARPU for the Kings of Office business. Thank you. Hi, operator. We're ready for the next question.

Thank you.

We will take our next question. Please stand by. Your next question comes from the line of Brian Gong from Citi.

Please go ahead.

Your line is open. There are two questions, two follow-up questions. The first is, President Zhou, you just mentioned WTI's AI transformation. Maybe at the end of this year, at the beginning of next year, this is the current view. I know that maybe earlier, I just want to ask, President Zhou, can you share the potential of this future transformation? How big do you think it is? The second question is, we also know that there are many different big models in the Chinese market, right? So, I don't know if you think that, for example, some other business owners will make some changes to the business structure of this office software market. Thank you. This is my question. I will translate myself. Thanks, Zhou Dong and the next member, for taking my question. Just have two follow-up questions. First, for WPS AI monetization, How do you see the, you know, potentials of the monetization in the future? And also for the application of large language models, will this bring a change to the competitive lens for, you know, the office software industry in China? Thank you.

Okay, let me answer the first one first. How big is the potential for this transformation? To be honest, because we don't have our own data today, we can only refer to which products in this industry are similar to us. The performance of specific commercialization after it passes the GPT or internal large source model. Currently, it seems that only Notion can talk about it. Yes, but from Notion's point of view, Notion itself is not in China. If you look at Notion's data abroad, it must be very optimistic. Yes, but after all, the state situation is not the same. So we can only think about it, that is, our current paid users are already members. They are willing to How much does it cost in a month? If you use the full amount, let's say all of our members now use this basically based on this notion of this way of 10 US dollars a month, 8 US dollars a month, it will be 10 US dollars a month in January, and 8 US dollars a year in January. It's still quite objective. Yes, so I can only say I can't tell you the exact answer right now. I can only tell you that we are similar to this kind of大概去去去去推演一下吧好吧具体的确实是还是要看一下你也可以看看就说哎那假设说有一半的人你手弄成这样那大概是多少呃四分之一的人大概是多少对呃这个这个其实我相信大家自己也会算出来所以呢只能说乐观来讲呢那潜力还是很大的对 But even if it is relatively not so optimistic, in general, it is also a relatively large, uh, it should be said that the whole sky boss is on the mud again. This is definitely good. Second, I understand that your meaning should be that because everyone has seen it, the gpt itself is actually very strong in terms of content generation. I saw that after the launch of Microsoft, there are people who say that after using GPT, why do I still need your office software? Yes, there is indeed this kind of sound in the market. In short, it's actually about this kind of content. I myself refer to it more. In fact, it's about this kind of content. Right? In the future, AI can basically replace people. That is to say, people basically don't have to write this trend on their own. From this perspective, it must be. So how do I say it? I don't think this is a change in the software. More of it is a way of changing the process, from people to creation, to machine creation, and then people to recognition and repair. Such a process. This is my understanding. It is not an office software. So indeed, the future office software, in my own understanding, is the value and meaning of its existence. There must be some changes in the past. So in some of our promotions about AWS AI, you can see that in addition to the content generation, Actually, there is also the beautification of the content and the提取 and so on, especially for the table. In fact, it should be said that it has greatly improved the efficiency of people, especially the table. You don't even need to learn the very complicated table formula. such as dashboards and other complex concepts, you can complete very complex functions. Yes. So the conclusion is that it's not about the content generation, it's not about the impact on office software, but the way people generate content and make changes. And then the rest of the creation, sharing and using around the content generation, I'll translate for Mr. Zhou.

So for the question on the potential for monetization of the WPS AI, we don't have any specific data yet. You could do this with similar products of peers in the market. For example, like Notion, even though Notion is not in China, but its overseas data looks very optimistic. So we could take that for an example. Let's say if all members of WPS AI are waiting to pay a certain extra amount of money every month, let's say, for example, like $10 or $8 per month, the potential is actually great if we do this peer comparison. And you also do your own calculations. to say if it's not all members willing to pay, what if it's half of the members or one quarter of the members? But even with these data, you can see that optimistically speaking, the potential of the monetization is great. The second question is on the performance of the GPT. It's very strong, especially in content generating aspects. So we think that in the future, the AI could replace humans in generating content or data. But change is not an impact on software. It's the way of generating content and data from humans to AI. So the value of the existence of software It's not changed, but it's the way of generating content that's changed. So with WPS AI, in addition to generating content, we also improve the visual impact. We have added excels, we have added charts, we've added formulas that also really improve the efficiency of our users. So we think that the software itself is now changing the way of generating data. and the way of sharing and using data that have greatly improved with using the WPS AI functions. Hi, operator. We're ready for the next question.

Thank you. Once again, if you do wish to ask a question, please press star 1 and 1 on your telephone. There seems to be no further questions at this time.

Please continue.

Okay, operator. 周总,李毅,我们现在没有其他问题了。 Thank you for your attendance of our presentation today. And if you have any further questions, you can contact our IR team of Kingsoft. Thank you. Thank you, operator. This concludes today's conference call. Thank you for participating.

You may now disconnect.