Kingsoft Corp Ltd Adr

Good day and thank you for standing by. Welcome to the Q2 2023 Kingsoft Corporation earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 and 1 on your telephone and you will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 and 1 again. And please be advised, today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Francie Liu. Please go ahead.

Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2023 second quarter and income results 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 call 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. Zhou Tao, our Executive Director and CEO, and Ms. Li Yi, our acting CFO. Now I'm turning the call to Mr. Zhou. Okay.

Hello, everyone. In the second quarter of 2023, our core business will develop steadily. Jinshan Office Group will seize the opportunity to develop the large language model, actively invest in the product development in the large language model field, and improve the efficiency of the user office. At the same time, the deep service organization The user's digital transformation needs. Surrounding multi-screen, cloud, content, AI cooperation strategy. Business performance achieves steady growth. Game business focuses on developing high-quality games. The flagship game, Overwatch 3, is still popular with players. The season is flowing, and the history is high. The 20-year-old game, Chen Bai Jin Qu, has expanded the user circle and entered the overseas market. and showed our determination to explore new products and the global market. The steady development of our core business has provided a solid foundation for our strategic execution. In the second quarter, we achieved a strong financial performance. The total revenue reached RMB21.93 billion, which increased by 20% compared to the previous year. The outstanding performance of Jianlang3 and Jinshan Office Group I would like to translate for Mr. Zhou.

Our core businesses achieved robust growth in the second quarter of 2023. Kings of Office Group has seized the emerging opportunities brought about by large language models and actively engaged in product development within this field to enhance users' work efficiency. Meanwhile, it addresses the digital transformation needs of institutional users, aligning with the multi-screen, cloud, content, artificial intelligence, and collaboration strategy. presenting solid growth in its business performance. Online game business focuses on developing premium games. Flagship JX Online 3 continued to enjoy popularity among players and achieved record-high quarterly growth billings. Anime game Snowbreak Containment Zone extended our user base and tapped into international markets, showcasing our determination to explore new game genres and global markets. The steady progress of our core businesses provided a solid foundation for the execution of our strategy. We achieved solid financial performance in the second quarter. Our revenue reached RMB 2,193 million, representing a year-on-year increase of 20%, primarily driven by the exceptional performance of the JX Online 3 and sustainable growth in subscription business of both individuals and institutional users. from Kingsoft Office Group. Operating profit amounted to RMB 676 million, exhibiting a year-on-year growth of 61%. These achievements reflected our continuous efforts to enhance our core competitiveness, getting well prepared to seize new opportunities. Now I'm turning the call to Ms. Lee.

Thank you, Francine. Good evening and good morning, everyone. Keysoft Office Group introduced WPS AI, an intelligent office assistant powered by large language models and initiated its open beta overseas. We also released the spring version of WPS Office, enhancing product capabilities and providing seamless cloud integration experience. In individual office subscription business, we took comprehensive steps towards improving the user experience. While adhering to a long-term membership strategy, we merged functional and resource-based memberships, upgrading the membership benefits structures, and offered tailored benefits for specific needs. Regarding institutional subscription business, we continued promoting cloud integration and collaborative office programs and delved into business scenarios for government and enterprises. We deepened product capabilities to serve industries such as finance, energy, publishing, healthcare, and high-end manufacturing. This involved incubating secure and efficient industry-specific solutions aimed at enhancing organizational efficiency for institutions. We constantly expanded our ecosystem and jointly built digital office applications now with partners. We have closely monitored the localization industry policy changes and customer demand and taking the initiative to tap local government and industry localization markets in advance. In terms of overseas business, based on our solid foundation in the mobile sector, we continue to cultivate our user base on desktop platforms. Looking ahead, Keysoft Office Group will uphold the concept of user-first and relentless innovation, ensuring that more users can easily enjoy the benefits of intelligent office solutions. In the second quarter, online games business demonstrated outstanding performance. The year-on-year growth in both daily active users and growth billing of GX Online 3 reflected our ability to sustain premium games longevity. We have remained committed to enhancing the content and players' experience of GX Online 3, resulting positive response. Self-development games, Slow Break, Containment Zone, combining the shooting game player and anime aspects provided players with fresh and innovative gaming experience. This game was simultaneously launched on both PC and mobile platforms worldwide. It achieved instant acclaim by topping the free games chart on the iOS app store in China, as well as in major international markets like the US, Japan, and South Korea upon its launch. Looking forward, we will maintain our commitment to a user-oriented approach and pay close attention to feedback and suggestions from our players. We are dedicated to improving and optimizing our games constantly to further enrich the overall player's experience. In the fourth quarter, we plan to launch an upgraded version of GX Online 3 PC game to further extend the IP's vitality. Additionally, our self-developed mobile game, World of Sword Origin, which has received license approval, is scheduled for release in Chinese mainlines. I will now discuss the second quarter and first half of 2023 operation and financial results. I'm starting from the second quarter, used renminbi as the currency. Revenue increased 20% year-over-year and 11% quarter-on-quarter to $2,193 million. The revenue split was 51% for office software and services and 49% for online games and others. Revenue from the office software and service business increased 21% year-on-year and 7% quarter-on-quarter to $1,121 million. The increases were mainly due to the sustainable growth of both domestic individual office subscription business and institutional subscription business of Kinsoft Office Group. The growth of domestic integrated office subscription business was primarily attributable to enhance user experience in cloud and collaboration. The growth of domestic institutional subscription business was mainly driven by the continuously 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 quarter-on-quarter growth was mainly attributable to domestic individual office subscription business. Revenue from the online games and other business increased 18% year-on-year and 17% quarter-on-quarter to $1,073 million. The increases were primarily driven by the remarkable revenue growth of GX Online 3. due to continuous updates and optimizations of user experience, partially offset by natural decline in revenue from the existing mobile games, such as Jigsboard 3 and Jigs 1 Greenline. Cost of revenue decreased 1% year-on-year and increased 5% quarter-on-quarter to $362 million. The quarter-on-quarter increase was primarily attributable to higher server and bandwidth costs, increased purchasing costs for products and services, along with the business expansion of Kingsoft Office Group. Gross profit increased 25% year-on-year and 30% quarter-on-quarter to $1,831 million. Gross profit margin increased by 4 percentage points year-on-year and two percentage points quarter-on-quarter to 84%. The increases were mainly attributable to changes in the revenue mix. Research and development costs increased 4% year-on-year and 1% quarter-on-quarter to $666 million. Selling and distribution expense increased 6% year-on-year and decreased 14% quarter-on-quarter to $301 million. The flat to insurance mainly resulted from changes in promotion spending in corresponding quarters. Administrative expenses kept flat year-on-year and increased 2% quarter-on-quarter to $153 million. Share-based compensation costs increased 45% year-on-year and 25% quarter-on-quarter to $91 million. The increases were mainly due to the growth of awarded shares to the selected employees of 30 subsidiaries of the company. Operating profit before share-based compensation costs increased 59% year-over-year and 44% quarter-on-quarter to 737 million. Nature of losses for the second quarter of 2023 were 103 million, compared with gains of 6 million and 44 million for the second quarter of 2022 and first quarter of 2023, respectively. The losses were primarily attributable to the combined effects of losses from deemed disposal of certain investee companies, and second, foreign exchange losses. Shares of losses of associates of $323 million were recorded for the second quarter of 2023, compared with the shares of losses of $418 million and $231 million for the second quarter of 2022 and the first quarter of 2023, respectively. Income tax expense for the second quarter of 2023 was $78 million, compared with income tax expense of $30 million and $26 million for the second quarter of 2022 and the first quarter of 2023 respectively. As a result of the reasons discussed above, profit attributable to owners with a parent was $57 million for the second quarter of 2023, compared with loss of $140 million for the second quarter of 2022 and a profit of $192 million for the first quarter of 2023, respectively. Profit attributable to owners of the parent, including shop-based compensation costs, was $123 million for the second quarter of 2023, compared with loss of $97 million for the second quarter of 2022, and a profit of $236 million for the first quarter of 2023, respectively. The net profit or loss margin, excluding the effect of share-based compensation cost, was 6%, minus 5%, and 12% for this quarter, the second quarter of 2022, and the first quarter of 2023, respectively. And now, on the first half of 2023, revenue increased 30% year-over-year to $4,164 million. Office software and services made up 52% and increased 21% year-over-year to $2,172 million. Online games and others made up 48% and increased 5% year-over-year to $1,991 million. Gross profit margin increased by 2 percentage points year-over-year to 83%. As a result of the reasons discussed above, profit attributable to owners of the parent was $250 million and a loss of $42 million for the six months ended 30 June 2023 and 30 June 2022, respectively. Profit attributable to owners of the parent, excluding share-based compensation costs, was $359 million, compared with the profit of $45 million in the prior year period. The leading profit margin, excluding share-based conversion costs, was 9% and 1% for the six months ended 30 June 2023 and 30 June 2022, respectively. Out of state of financial position, we had cash resources of $24 billion as of 30 June 2023. Late cash from operating activities was $2,308 million and $1,053 million for the six months ended 30 June 2023 and 30 June 2022, respectively. Cash used for capital expenditure was $183 million and $197 million for the six months end date 30 June 2023 and 30 June 2022, respectively. We are confident to embrace future opportunities and challenges. We will continue to manage our core businesses steadily, drive innovation and create top-type digital office services and premium gaming content for global user base. We adhere to technology-driven business committing to high-quality, sustainable development, aiming to deliver better products and services to our users and create long-term value for our shareholders. Thank you all for your patience. Now I'll turn the call to Francie. Francie, please.

Thank you, Ms. Lee. Hi, operator. We're ready for the Q&A session now.

Thank you. To ask a question, you'll need to press star, one, and one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one, and one again. Please stand by while we compile the Q&A roster. Thank you. We'll now take our first question. Please stand by. First question is from the line of Xiaodang Zhang from CICC. Please go ahead.

Good evening, Mr. Zhou, Mr. Li, and Mr. Franci. I'm Zhang Xiaodan, an analyst at Zhongjing. Thank you for accepting my question. I have two questions. The first one is that we see that the second quarter has achieved a very bright growth in the game business as a whole. It should be largely due to the contribution of the third-end network. I would like to ask the management level what are the main driving factors of the second quarter's third-end network performance exceeding the expected one? How much has the MAU and ARPU contributed to the growth? 那展望后续季度的话 我们对于这个体检端游的一个表现 应该如何的展望 我的第二个问题是关于这个二季度的OP margin 那我们看到二季度的这个OP margin 环比提升是比较明显的 那想请管理层介绍一下 就是我们分业务来看的话 这个OP margin是一个怎么样的趋势 那这个改善在三四季度是否可以持续 那我快速翻译一下我的问题 So thanks management for taking my questions And I have two questions here My first question is on your gaming business So your flagship PC game, JX Online 3, has achieved a remarkable growth in the second quarter. And could you explain in details what are the main drivers behind and what is the outlook for its performance in the upcoming quarters? And my second question is on the OP margin. Since we have seen a significant sequential improvement in the operating profit margin this quarter, do we expect this improvement to be sustainable in the upcoming quarters? Thank you.

Uh, hello, I'll answer the first one first. Li Yi will answer the second one. I think the most core reason for this network to exceed the period is that I think we are still in this category. This should be said to be, especially that the new data piece released last year, uh, users can still feel that we continue to grow on this product. So uh uh There is a lot of confidence This is what I think is the most core So whether it is the number of users or the ups All aspects have been greatly improved So I just talked about it. I am jealous of the re-creation of historical height Yes, the back view is actually Q3 What I usually talk about is the relative of the season It's going to be a little weaker Because everyone knows that our main drama is going to be on Q4 We should call it the 2.0 version to be launched this year. In fact, it is after we restarted 1.0 in 1819. After about five years, we will once again improve the overall performance level of this network 3 and enrich its gameplay and new culture. So in general, I have a lot of confidence in whether this year's strong performance of the network 3 will be able to continue. Thank you for your question.

There are eight points of growth in terms of our profit and loss ratio. We will explain them from the perspective of the game and office. As I mentioned earlier, in the first half of the year, the performance of Genshin Impact was relatively bright. Genshin Impact is a long-term game. So, from its rhythm, Q3 is a late game. In this way, its profit has an impact of fluctuation. Another point of view is that we are in the white-and-white zone in July. In the early stage, it has invested some marketing expenses. From the trend of the whole industry, we do not consider the new factors mentioned just now. From our current situation, we expect that the performance of Q3 in the second half of the year should be weaker than that of Q2. There is a line of business, but from the whole year, Our overall game will still maintain a reasonable and healthy profit rate. From the perspective of the office, we also have a growth in the quarter. In the second half of the office year, they will still maintain the same rhythm. Then from the level of profit, we may have a factor that is not so extreme, which is the development of our AI business in the second half of the year. But from the current perspective, its profit rate level should be relatively even with the second half of the year. Okay, I'll translate for Mr. Zhou and Ms.

Li. So the strong performance of JX Online 3 in the first half of this year, Mr. Zhou believes that the core reason is the company's determination to deepen our development in the JX Online 3 game as a long-term game in this genre. So our user actually increased 20% in the first half, but the growth spilling increased 40%. So this shows that the user has a strong confidence in the game's performance. And for the outlook of this game in the upcoming quarters, we believe that the third quarter is a relatively seasonal week quarter for this year. So our core development will be mainly happening in the fourth quarter when we have our upgrade version of the 2.0 version of the JX Online 3 by the end of this year. This is our second upgrade since our last upgrade was the 1.0 upgrade version from the 2018 to 2019. So Mr. Zhou has strong confidence in its performance in the upcoming quarters, but the details will be depending on the new content released and the new gameplay released with the 2.0 version in the upgrade version. And for the second question, Ms. Lee said that the operating profit margin increased by 8 percentage points year-on-year and quarter-on-quarter. So she explained that for the game business, in the first half, JX Online 3 had a strong performance. It's a long-term game, and it was a flagship long-term game for the company. In the third quarter, it's a relatively seasonal low quarter. And also in July, we have launched the Snowbreak Containment Zone, and we had the promotional expense upon its launch. So in the third quarter, the OP margin will be less than the second quarter. But the full year, we will maintain healthy and reasonable operating profit margin level. And for the Kings of Office business, The OP margin will keep quite stable in the second half of the year compared with what we had in the first half of the year. But the details will also be depending on the AI development and the progress for the Kingsoft Office business. Thank you. And we're ready for the second question.

Thank you. We'll now take our next question. Please stand by. This is from the line of Linlin Yang from GF Securities. Please go ahead.

Hello, Mr. Guan. I have two questions for you. One is, because this year's second quarter, the overall game performance is very good, can you tell us more about it? One is, what are the next games to be prepared? And is there any guidance for the whole-year games? And the second question is about this. Because I see that our cost end is basically stable in the past four seasons. So the overall cost rate has a better control. How do you look at the cost in the future? I have two questions. The first question is about the game. We see the strong revenue performance in other games this quarter. So I want to ask about the game pipeline. And could you give us some guidance about game business? The second question is about the expense. We saw expenses were relatively stable in the past four quarters, leading to a decrease of expenses ratio. So, how to expect this future change?

Thank you. Let me answer the first question. In the following games, Uh, July 20th, we have that Chen Baiqing has been officially online. Uh, it's been online for exactly a month, and now that one is still in continuous operation. In addition, we are in. Uh, in September, it should be the end of September and the beginning of October, we will be online. Uh, the other one has already taken the license plate number. This is a version of the origin of the world. Yes. Then the new game will be released this year. In the future, we will enter the test and post-production of products. For example, a design of a mecha. In the first half of next year, we will release the mobile version of Sword and Shield 3. In the second half of next year, we will probably release the online version of our movie Legend. This is currently some of the projects that can communicate with the outside world, okay? As for the guidance, we still keep it unchanged for the time being, because considering that although the growth of Jianwang Mountain is very good, but in fact, last year's Jianxia World Mountain, including Jianwang 1 coming back, uh uh We haven't adjusted our entire support.

Okay? Okay. Hello, Linlin. About the fee rate, I'll explain it to you in two pieces. The first one is that our goal is to improve our business efficiency for the original business. So you can see from our interest rate, and then the other one is from other fees, our staff basically didn't grow in the first half of the year. Including market fees, it's also based on the situation. Okay, I'll translate for Mr. Zhou and Ms.

Li. So for the second half this year, our game pipeline includes the Snowbreak Containment Zone, which we have already launched on July 20th. And by the end of September or beginning of October, we have another game. It's called the World of JXO Vision. We already got the license for that game, so that game will also be launched by then. And we have a number of other games that are under testing, but these will be launched in the upcoming years, next year or the year after. For example, we have a shooting and mechanic game that's under testing, and we have our JX3 mobile version, which will be launched next year. And we have a new version for the Yueying Transhore, which will also be launched next year as well. So right now, we're going to keep our original guidance for the game business, Although JX Online 3 had a very strong performance in the first half of this year, but because we have two other games, for example, like the JX World 3 and JX One Gui Lai, these two games, they were launched last year. So last year was their first year of launch. For this year, these two games will have some natural decline. So this will balance the growth from the JX Online 3 game from the first half this year. So the details of the guidance will be depending on the new version, the performance of the new version of GX Online 3 in the fourth quarter, and also the progress for the performance of the old games, including GX World 3 and GX Online 3 Live. And for the second question, for the expenses, we have two aspects. The first one is the expenses for the original business. For the original businesses, our goal is to try to improve the working efficiency. So you could see that we have improved the gross profit margin, and we have kept flat the number of employees, and also the administrative expenses are also kept flat. And we will experience some new investment in the new businesses, But primarily, our main goal is to improve the working efficiency for the operational businesses. Thank you. Operator, we're ready for the next question.

Thank you. As a reminder, if you would like to ask a question, please press star 1 and 1 on your keypad and wait for your name to be announced. That's star 1 and 1 for any further questions. There are no further questions at this time, so I will hand back to the speakers. We have a question coming through. Okay, one moment, please. A question from the line of Lingling Yang from GF Securities. Please go ahead.

I have a question to follow up on. I want to ask, because I see that this quarter, the cash has reached the cash and bank deposits of almost 200 billion, 216.8 billion. So I'm thinking about how we can deal with this cash in the future. Are there any plans, for example, will you consider increasing the fund or are there any other considerations? I have a follow-up question. Could you share some of your considerations about the cash plan, such as improve the buyback or dividends? Thank you.

Hello, Linlin. The current cash flow is more than $2 billion. The company's plan is the same as before. The first part is based on the current big environment. We will keep some cash and look at some new businesses, especially in the AI field, and make some new investments. This is the first part. The second part is the bonus and repurchase you mentioned. The public is also looking at it. Especially if it is a repurchase, we will do a repurchase based on the company's situation and the market situation. In May, we also approved 10 pages of the board meeting. OK, I'll translate for Ms.

Li. So right now we do have over 20 billion of cash on hand. But first of all, we want to keep a certain level of cash to look for new opportunities in the markets. including the new AI opportunities. So we want to keep a certain level of cash on hand. And regarding buyback and dividend, we're also going to consider these two options. For example, especially buyback, in May this year, our board already granted a $1 billion buyback budget for us. So we will consider the market conditions and also other factors

to improve our backpack and dividend policies thank you hi operator we're ready for the next question thank you one moment please and we have a question from the line of how yang from founder securities please go ahead

First of all, I'd like to ask two questions about AI. The first one is about games. We've seen that companies in the industry have already started to make AI-tested game products. I'd like to ask if there are any game-related actions in this area, such as going to the IP. The second question is about WPS AI. I have two questions about AI. Firstly, we've seen AI has brought a huge concern and MMORPG games enhanced with AI have launched by the end of last quarter. So I wonder if you mind to tell us, is there any plan about applying any AI technology in our games, like our big titles, Gen 1? And my second question is about WPS. WPS AI has launched both in mainland China and overseas. Can you share some feedback from our overseas users? Thank you.

Let me answer your question. Regarding some applications in the field of AI in the game industry, to be honest, we have been trying it in several different fields, including AI NPCs. Especially in RPGs, it makes the NPCs more emotional. There is also a kind of support for rendering. We are also actively introducing and trying the engine. And in the non-core art production, we are also helping with the support production. So it's still quite a lot. Of course, like the plot, some of the initial writing of the script, these are also being applied. So of course, the biggest one, we still think that the core is the technical direction. It's still the 3D rendering of this A itself. Of course, this cycle will be longer. And we think this is the most valuable place for us in the future. Right, this one is still in the process of testing the technology, right? Then the office side, this WCN is true. In fact, we did not formally upload this. It's just that we did it together. Let's call it an internal test. Some of the accounts were posted. In fact, for us, this is this. This is good for writing and writing. Smart assistant is good, including this. uh, uh, uh,

So regarding the AI application in our game business, we have already started trying the different applications to have more automated NPC and also engine and partially non-core visual artistic applications and also in the content providing aspect. So I think the main or the core use of AI application in games is still focusing on the 3D visual artistic application. So we are still trying and learning to improve the technology here and to try more AI applications in the game business. And for the WPS AI products, we have not officially launched all of our AI functions yet. Some of our AI functions are still under testing, but we have already received very positive feedback from users for those AI functions that have already launched with the WPS AI products. So a lot of users are also very interested in the timing for the official launch and also for the upcoming monetization of the WPS AI products. So we are going to continue to optimizing our WPS AI functions in the future. Thank you. Hi, operator. We're ready for the next question.

Thank you. As a reminder, if there are any further questions, please press star 1 and 1 on your keypad. star one and one if you would like to ask a question. There are no further questions at this time, so I will hand back to the speakers.

Hi, operator. We're going to end our presentation for today. Thank you.

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.