NetDragon Websoft Holdings Limited

Ladies and gentlemen, our presentation will start very soon and it will be also live streamed on Rocio China, Futu and Tiger platform. Presentation PowerPoint is currently available under the webcast news and event tag on NetDragon's IR website. If investors on webcast wish to waste question, please feel free to enter your questions in the text box. Management will answer your questions during the Q&A section. Good morning. Thank you for joining us for NetDragon Websoft Holdings Limited today for our 2024 interim result presentation. First, please allow me to introduce the managements who are joining us today. Dr. Simon Leung, Group Vice Chairman and Executive Director. Mr. Ben Yam, Group CFO. Mr. Lin Chen, Group Senior Vice President. Now, please allow me to pass the time to Dr. Simon Leung.

Not very tall. Good morning. No, no, no, that's not what I was expecting. Sorry I have to get you working on a Friday, I guess. But anyway, it's good to be here. It's actually, I'm going to take you through some so-called highlights. It's going to, well, it's an eventful year for us. It's actually some challenges, some headwinds, but nonetheless, there's a lot of opportunity ahead of us. So from a company standpoint, from a management standpoint, and for the board, we ask, optimistic and enthusiastic as before. But that said, we need to hunker down and work on some of the issues, so I'm gonna go through that, some of that today. Now, before I do that, I need to remind everybody, it's like the education company, Mind.ai, is a separately listed company on the New York Stock Exchange under very different governance. Even though we own a big chunk of the company, we have a separate board running it, it's listed, on the U.S. is actually under the governance of the New York Stock Exchange rules. So I can only talk about it in kind of directional, with directional comments. I cannot go into the details because I'm the non-executive chairman of the company. In anticipation of that, actually we're going to arrange a separate capital day for everybody to call in and ask the management team very specific questions about what are the challenges, what are the opportunities going forward, okay? With that, some of you or most of you are very familiar with the agenda, so I'm not gonna say anything. So just here's some of the highlights. I'm not gonna go into detail. For gaming, the good news is actually we are growing. Actually, we have some short-term challenges, which Lin Chen will we'll talk about, we have a lot of them addressed already. Some of them like forex exchange issue is something that we cannot do. And then don't forget the worldwide economy is actually under some interesting, I would say, transformation from that standpoint. But I guess the good news is actually there's this new game called Wukong that came out that's got a shot in the arm, not only for China, but also for around the world. I happen to be on a board of directors of a Swedish gaming company, so a lot of people are talking about it. They're very enthusiastic about the gaming business going forward. On the mine side, it's actually like I said before, we're seeing some headwinds. For example, inflation is actually hitting the U.S. As you may or may not know, U.S. is our largest market in education. So we're dealing with that. And Europe is actually, we are also seeing economic downturn. I mean, you've been reading the news with the war in Ukraine and with Russia and all that stuff. But the good news is actually, we are growing in places like Germany. I can delve a little bit more into the detail later on. The other good news is that we're working on improving a lot of our metrics. For example, our cost, our margin, everything. Ben's going to highlight it at a very high level. Again, The upcoming capital days for Mind.ai, we will go into much more detail. Last but not least, for education. I think with the advent of AI, with challenges, you know, with inflation and everything, and schools around the world or school districts around the world are looking for opportunities to, number one, to enhance the productivity of the teachers and, you know, maybe also for the students, so that allow us to create services that we can help them out. So SaaS is actually, it's gonna be a term that you're gonna be hearing a lot going forward. It's actually, we also coined a term called CAS, which is actually Classroom as a Service, because it's of what we have. I can assure you we have a lot of activities going on to address that issue, but unfortunately, a lot of them are work in progress. I cannot disclose a lot of the activities that we are doing. We are very confident about moving from a pure hardware play into really a hardware and a services play. Our biggest asset in education with Mind.ai is our 1.5 million classroom around the world, and we keep adding to it every year. So with that, I'm going to tear it up. I think Ben's going to spend a couple of minutes to go through the financials, and then followed by the intern. I will come back and talk a little bit more about Mind.ai, and then we'll give you a view of what we see in the next, well, it's actually not six months, even though this is interim, for the next few months, and then how does it lead up to 2025, and then we open up for Q&A. Okay? Thank you.

Thank you, Simon. Good morning. All right, so I'm going to go through a couple of slides of financials. And as Simon mentioned, the first half is full of challenges and also opportunities. And specifically, I think we're seeing some challenges on the top line, on the revenue side. But I think we've been doing a lot to manage sort of the bottom line. So I think we've done... a lot of in terms of cost savings and also investment income, which really mitigate a lot of the decrease in revenue. So if I look at this overall P&L here, we're seeing stable game and application services revenue, while Mario.ai also experienced a decrease in revenue. And I'm gonna go into that in the next slide with a little bit more details. But the good news, the positive news is that we're seeing an increase in the gross margin percentage from 62% to 66.6%. So we're seeing an increase in gross profit margin. And also on the overhead side, we're implementing a lot of the cost savings measures, a lot of measures to improve our operational efficiencies. So as you can see, for selling and marketing expenses, we're seeing a 20% decrease. year over year in sales and marketing as we really try to optimize our sales force and also trying to use our resources more efficiently. And then if you look at admin expenses, it decreased a little bit sort of a smaller number, 3.3%. But if you exclude sort of the Singapore learning center operation that we acquired last year, that reduction in admin expense is actually about 11% year over year. And by the way, the Singapore operation is a positive EBITDA business. So just to put that on record. And then in terms of R&D, obviously we'll continue to invest in R&D because we have to continue to put resources to develop new offerings in terms of gaming and also in education. And then on the bottom line, as I mentioned, driven by cost efficiencies and also partially by investment income, we're actually seeing a positive growth in EBITDA by 12.9%. And also non-GAAP EBITDA as well, it's actually a larger 33% increase in EBITDA. and as well as profit before taxation, also a 21% increase in profit before taxation. And if you look at sort of the net profit attributed to owners, of the company, that's sort of the Bloomberg number, right? So it's a decrease of 20% to 400 million, but I want to point out that, I don't know if you guys can see this, so there's actually a one-time deferred tax provision of roughly about 40 million US dollars, which we, we have to record in the first half. And what that is, is really a provision on deferred tax asset that we have to record on the books of Mind.ai. The reason for recording that is because it's according to accounting principles. You have to record it just in case Mind.ai does not have enough income to sort of offset the tax loss carried forward. Because that's what that is. tax loss carried forward, that actually can be carried forward for seven years. So unless we can be profitable in the next four to seven years, otherwise, we actually can reverse that provision in the future years. So I think that's really a one-time, non-cash, non-operating item that you guys should take note of that. And if you exclude that item, our net profit actually increased by 24%. And actually, if I kind of look forward a little bit, so if I look forward at sort of the net profit figure for the full year, I think what we're looking at is actually a number that's actually very much in line with many of the sell side estimates and also the Bloomberg consensus. So I hope you guys can kind of take note of that, that we're confident of the full year sort of the bottom line performance. And then on the balance sheet, I guess, you know, I'll just, you know, highlight, you know, the cash balance. We want to include liquid investments sort of, you know, as a cash and liquid investments as a more proper, metric because we do invest in sort of very liquid investments. We invested in some Ethereum, as some of you guys would know, and we're actually sitting on a pretty profitable position right now on that. And so if you look at our cash and liquid investments balance, as of the end of the first half, it's actually increased by 11% compared to the end of last year. Okay, so this is the segmental financial highlights. Yeah, so first of all, the top line, you know, going through the gaming and application service segment first. So if you look at the gaming, it's a stable performance, a little bit slight, you know, 0.8% negative growth. And I would attribute that to a couple of reasons. One is, and this is something that Lin Chen is going to highlight, we had a little bit of a short-term issues, you know, on the overseas gaming side, and that led to sort of a material decrease in our overseas gaming. And the second thing is that I think overall the gaming spending, I think if you look at the industry gaming spending, looking at the research report, like the GammaSat report is first half is roughly about 2% growth for the entire gaming industry, domestic, right? And if you sort of take out the mini games, right, it's actually a reduction of 2.8%, right? So I think it's a very stable performance for us, you know, in line with the market. We did not launch any new games in the first half, right? So that's also part of what we have to consider. And yeah, I'll let the intern go more into that. And then... The gross margin, you know, decreased a little bit. I think that's mainly sort of a mixed issue, right? Because gaming, it's a slightly lower percentage of the whole, you know, segment revenue. So that led to a little bit of a lower gross margin. But if you look at a gaming gross margin per se, then it's actually pretty stable. And then, yeah, on the SG&A side, I think it's pretty much in sync with what I just sort of highlighted in the last slide. You know, we decreased our sales and marketing. We decreased our admin expense. A lot of that is driven by sort of cost efficiencies, right? Cost rationalization. What we did in the first half is actually we, you know, we did a headcount review and we actually rationalized some of the headcounts and in the meantime also upscale, you know, our resources and our people, right? And then on the mind.ai side, sorry, just, yeah, on the mind.ai side, I think, Yeah, so we're seeing a 23.5% decrease in our revenue. And I think there are a couple of factors, right? So first is, you know, we're still seeing a lot of normalization of sort of the demand of the hardware sector because of the, you know, after the sort of the very large COVID funding that we saw in the past. And I think that's one factor. And the other factor is really sort of, you know, inflation sort of also playing a role in that as well, because inflation really affected teacher salaries, affected some of the recurring overhead of the schools, and that sort of squeezed the budget a little bit for some of our customers, and that affected our hardware revenue. But I think the good news is that, honestly, we're not really focused on you know, sort of hardware, right? I mean, yes, we are focused on hardware because that's our bread and butter from a revenue standpoint, but we're more really going, moving into sort of the software and service-based model, right? So that's what Simon mentioned. This is something that we're really going to dive into that, you know, when we when Mind.ai has its own capital market state. And then for gross margins, you know, we increased by 4.3 percentage points. And I think that's, again, you know, cost savings, efficiencies, you know, we experienced decrease in the components cost, right? A lot of work on that. we had decrease in the freight cost. We also moved part of our contract manufacturing into Mexico, right, to reduce sort of the tariffs and some of the savings. And also we reduced our warranty, you know, expense as well. That's also part of the cost of good soap. So because our failure rate actually is lower, which is good, right? So that's why, you know, we... we saw an increase in the gross margin percentage. And then on the SG&A side, sales and marketing decreased by 26% as we optimize our sales team. while we continue to deepen the reach of our customer base. So we're not reducing our sales force to get a lower revenue. We're really rationalizing our sales force to get better revenue in the future. And therefore, the admin expense, you notice that it's a 37.9% increase, which sounds a lot, right? But again, remember we acquired this Singapore Learning Center business last year, and that business actually contributed a lot of sort of admin expense, right? It's a positive EBITDA business, but contributed a lot of admin expense. So if you look at that line item individually, you're seeing a very large increase. If you exclude that Singapore operation item, sorry, the Singapore entity, the admin expense only increased by 11%. So hopefully that sort of gives you guys a clear picture of the segmental and that's it for my part. I pass the stage to Lin Cheng. Thank you, Brent.