Cheetah Mobile Inc. (CMCM) Q4 2014 Earnings Report, Transcript and Summary

Hello and welcome to the Cheetah Mobile Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Now I’d like to turn the conference over to Helen Jing Zhu, IR Director. Please go ahead.

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and full-year 2014 earnings conference call. With us today are Mr. Fu Sheng, our CEO; and Mr. Andy Yeung, our CFO. Following management's prepared remarks we will conduct the Q&A session. Before we start, I refer you to the Safe Harbor Statements in your earnings release, which also apply to our conference call today, as we will make forward-looking statements. At this time, I’d like to turn the call over to our CEO, Mr. Fu Sheng. Please go ahead Fu Sheng.

Okay. Thank you. Good evening, everyone and thank you for joining our call today. I’m excited to report that we made a significant break through in our global business in Q4 in 2014. Revenues for our mobile increased more than six times year-over-year and doubled quarter-over-quarter and now accounted for 38% of our total revenue as of Q4. More importantly, we continue to see very strong reception for our mobile and recognizing business in the overseas market. Already our overseas market revenue accounted for over 24% of our total revenues and 63% of mobile revenues in last quarter. This success clearly demonstrates the potential value of our ability to monetize our mobile apps and users, both in China and internationally. Given those strong chance, we’re confident that the mobile will remain the key growth driver for our Company and they accounted for more than 50% of total revenue by the end of first half of 2015. Additionally, our recent investment in MobPartner will further strengthen our mobile advertising technology and in reach of our global talent pool, which further accelerating our monetization capabilities. Going forward, we will remain focused on building – [indiscernible] building global mobile advertising platform. Now I’d like to highlight the progress in the three strategic areas. First, our product and the user growth. During the Q4, our global mobile user installation has surpassed tremendous milestone by exceeding 1 billion installations. On the MAU front, we have now reached over 395 million globally. This is increased of 138% year-over-year and now over 69% of our mobile users outside of China. Also for the full-year of 2014, we added about 230 million mobile MAUs, led by the success of Clean Master; we have built a strong product matrix of mobile apps by using our existing products to cross crumbled [ph] new apps. Today five of our apps are among the top 40 non-game apps on Google Play and four of our apps have more than US$100 million on Google Play. According to App Annie, Cheetah Mobile was the number 2 publisher for non-game apps globally on Google Play, and is the Number 1 publisher for the tools category. Furthermore, we continue to rollout new apps and the service that improve the mobile UPRS for user worldwide. For example, recently Samsung has integrated Clean Master into its flagship S6 smartphone worldwide. In China, Tencent, Xiaomi and WiFi Master are all promoting Clean Master. With these strong partnerships we’re confident that our mobile user growth will remain strong both in China and overseas. Second, with this strong progress in our overseas monetization capabilities, and during Q4 mobile revenues grow 610% year-over-year and doubled quarter-over-quarter to RMB222 million, accounting for over 38% of total revenue. For the full-year 2014, mobile revenue grow 741% year-over-year and to RMB465 million. Our overseas monetization has already exceeded our expectations and are now accounts for 22 -- 24% of our total revenues and 63% of mobile revenue in Q4. The growth in the overseas mobile advertising was driving by our growth in user base. The significant progress we made in Big Data analytics and mobile advertising technology, as well as we expanding partnership with key mobile advertising platform worldwide. In 2014, we improved as a Big Data analytics which can improve our efficient ads for our advertisers. In addition, we have greatly expanded partnership with more than 20 leading global mobile advertising platforms resulting in U.S, being the top partner of Facebook Audience Network. As a result, not only can we increase the availability of our 80 ad inventory, we’re also seeing a significant increase in revenue [ph] for our ad inventory. We expect that overseas will continue to be the major growth driver for our Company. Third, we will continue investing in mobile and global. Our results and our achievements in 2014 have clearly shown that our validity of our previous investment such, this is just beginning of us -- for us as we navigate that our expanding mobile market recently the bidding [indiscernible] rate of our overseas mobile ad revenues surpassed US$500,000 per day. The repeating growth in our overseas mobile monetization demonstrates the huge value of our utility apps in the global market. In 2015, we will continue to invest in -- aggressively in developing our service and build better apps and expanding our successful promotion efforts. Our recent acquisition of MobPartner will also further enhanced our monetization capabilities and the global sales footprint, allowing us to improve the efficient effective of our advertising and expanding the -- our customer base. We also plan to open additional overseas office to localize our service offer. This initial [indiscernible] surpass further enhanced [ph] foundation for our future success. In short, through our hard work and assorted results in 2014, we have demonstrated that a China-based company such as Cheetah Mobile can successfully monetize its utility apps in the overseas market. It clearly demonstrates that the free use model of Chinese tool apps can copied in global market. Additionally it significantly change our result and confidence in investing aggressively in the mobile [indiscernible]. We are confident that we can build Cheetah Mobile into a leading global mobile advertising platform over the next two or three years. We expect 2015 to be another year of high growth in mobile users as well as over all mobile advertising market. We have aggressive strategy that we were significant increase our investment in product element and marketing in order to solidify and expand our leading position in the mobile space. Through large scale investment we aim to: reach 600 million mobile MAUs by the end of 2015. Two, increase our revenues by 100% growth year-to-year in 2015. And three, increase mobile revenue, especially overseas mumble revenue making it in the main source of revenue and our key growth engine going forward. In fact, we anticipate Q1 mobile revenues could exceed 50% of our total revenues. This concludes my portion of the presentation. I will now turn the call to our CFO, Andy Yeung.

Thank you, Sheng. Good evening, everyone. We close a landmark year with a solid quarter. For the full-year 2014, our total revenues increased by 135% year-over-year to RMB1.76 billion. In the fourth quarter, our total revenues grew 119% year-over-year and 23% quarter-over-quarter to RMB589 million, exceeding the high-end of our guidance. This strong performance was driven by organic business growth primarily due to our robust mobile platforms performance globally. As Sheng mentioned earlier, mobile revenues grew 610% year-over-year and doubled quarter-over-quarter to RMB228 million, accounting for over 38% of total revenues. For the full-year 2014, mobile revenues grew 741% year-over-year to RMB465 million. Most notably, our overseas monetization have exceeded our expectations since its launch in same quarter 2014 and now. This already accounts for 24% of total revenues and 63% of mobile revenues in the fourth quarter. Our success in mobile are clearly in the overseas market clearly validates our previous investments in mobile and global arenas. Now I will walk you through the details of our financial performance. All financial numbers are in RMB unless otherwise noted. Revenue from online marketing services for the fourth quarter were approximately RMB426 million, an increase of 110% year-over-year and 24% quarter-over-quarter. For the full-year 2014, revenues from online marketing services increased by 116% year-over-year to $1.3 billion. The increases were primarily driven by a strong demand for our mobile adverting business in both the domestic and overseas markets. Mobile advertising business already accounts for 28% of our total revenue and 75% -- almost 75% of our revenues in the fourth quarter. Looking ahead, we see strong trends that will allow mobile are facing to be the key growth driver for the Company. Our revenues have continued to diversify to double year. In 2014, revenue contribution from top three customers in aggregate was 41% of total revenues compared to 58% in 2013. This was mainly due to the significant ramp up in our mobile business. Revenue from IVAS for the full -- to the fourth quarter were approximately RMB137 million, an increase of 226% year-over-year and 28% quarter-over-quarter. For the full-year 2014, revenues from IVAS increased by 282% year-over-year to RMB401 million. The increases were primarily driven by a large number of games and paying users compared to the same period last year. Revenues from internet security services and others for the quarter were approximately RMB6 million, a decrease of 60% year-over-year and 44% quarter-over-quarter. For the full-year 2014, revenue from internet security services and other decreased by 26% year-over-year to RMB40 million. The decrease was primarily due to the company ceasing to promote subscriptions services in a strategic reorientation which started in 2011. Now moving to costs and expenses, SBC expenses for the fourth quarter were approximately RMB51 million compared to RMB10 million in the same period last year and RMB57 million in the previous quarter. SBC expenses for the full-year 2014 were approximately RMB173 million compared to RMB37 million in 2013. As we stated in the past, we have incur high SBC expenses in 2014 largely due to share and options granted to management and employees prior to the Company IPO in May 2014. To help facilitate the discussions of the Company's operating performance, the following discussion will be on a non-GAAP basis, which excludes stock-based compensation expenses. For financial information presented in accordance with US GAAP, please refer to our press release which is available on our Web site. Non-GAAP cost of revenues for the fourth quarter were RMB140 million. Non-GAAP cost of revenues for the full-year 2014 were RMB402 million. The increases were primarily due to higher costs associated with the mobile game business and high bandwidth and IDC costs from increased user traffic as well as higher amortization costs from acquired intangible assets. Non-GAAP gross profit for the fourth quarter was RMB449 million, up 105% year-over-year and 22% quarter-over-quarter. Non-GAAP gross profit for the full-year 2014 was RMB1.36 billion, up RMB123% year-over-year. Non-GAAP gross margins for the fourth quarter was 76% compared to 81% in the same period last year and 77% in the previous quarter. Non-GAAP gross margin for the full-year 2014 was 77%. Non-GAAP R&D expenses for the fourth quarter were RMB105 million, up 96% year-over-year and down 12% quarter-over-quarter. The year-over-year increase was primarily due to increased headcounts associated with the expansion of our mobile business. Non-GAAP R&D expenditure for the full-year was RMB386 million, up 90% year-over-year. Non-GAAP sales and marketing expenses for the fourth quarter were RMB182 million, up 115% year-over-year and 11% quarter-over-quarter. Non-GAAP sales and marketing expenditures for the full-year 2014 were RMB573 million, up 189% year-over-year. The increases were mainly due to promotional expenditures to expand our mobile business and deepen our global penetration. As Sheng mentioned, in 2015 will be another investment year for acquiring mobile users and overseas expansion. Non-GAAP G&A expenditure for the fourth quarter were RMB56 million, up 176% year-over-year and 73% quarter-over-quarter. Non-GAAP G&A expenses for the full-year 2014 were RMB147 million, up 89% year-over-year. The increase was mainly due to increased professional fees and headcounts associated with being a publicly-listed company. Non-GAAP operating profit for the fourth quarter was RMB105 million, an increase of 76% year-over-year and 103% quarter-over-quarter. Non-GAAP operating profit for the full-year 2014, was RMB256 million, an increase of 98% year-over-year Non-GAAP operating margin for the fourth quarter was 18% compared to 22% in the prior year period and 11% in the prior quarter. Non-GAAP operating margin for the full-year 2014 was 15% compared to 17% in 2013. Non-GAAP net income for the fourth quarter was RMB83 million, an increase of 132% year-over-year and 37% quarter-over-quarter. Non-GAAP net income for the full-year 2014 was RMB241 million, an increase of 143% year-over-year. Non-GAAP diluted earnings per ADS for the fourth quarter increased by 105% year-over-year and 37% quarter-over-quarter to RMB0.59 or US$0.10. Non-GAAP diluted earnings per ADS for the full-year 2014 increased by 108% year-over-year to RMB1.80 or US$0.29. Now let me provide you with our first quarter 2015 revenue guidance. We currently expect total revenues for the first quarter to be between RMB640 million and RMB650 million, representing a 103% to 106% year-over-year increase. Please note, this forecast reflects the Company's current and preliminary view and is subject to change. Finally, as we mentioned previously, while we experience non-GAAP operating margin improvement quarter-over-quarter in the second half of 2014, mobile internet is still in its early stages of development. I’d like to emphasize that probably it’s still not a priority for us yet. We will continue to see 2015 as an investment year as the results we will continue to invest heavily and aggressively in improving our products and acquiring more users to fortify our leading position in this growing market. And this concludes our prepared remarks for today. Operator, we’re now ready to take questions.

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from George Meng with Morgan Stanley.

Hi. My question is about your overseas advertising monetization, especially you’re now taking a three-pronged approach, so basically you have your own sales force selling your advertising directly, you actually partnered with Facebook in terms of their Facebook audience network and you also are now with some of the third-party ad exchanges. So just wondering what’s the revenue mix and how do you allocate that? Is it all on RTB real-time bidding basis or you actually allocate those budgets or inventory manually? And is there any one particular resource that shows higher ROI or any particular trades than the others? That’s my question. Thanks. Okay. Yes, I will say the question in Chinese and Andy translate it for me.

Okay. Thank you for your questions, George. Your question about the distribution between our revenue share with that -- the percentage of our advertising from overseas coming from Facebook or third-parties or other sales force, I think that percentage continue to change and evolve as we develop our mobile advertising business overseas and I think at this point we’d not like to disclose too much details about that at this moment. Of course like partnership with overseas mobile platform is very important for us, and in fact I will be attending the Facebook Audience Network Partner Conference F8 in -- F8 Audience Conference next week and I think that shows you how much we’re involved in the overseas partnership there. So obviously we are fully developing our mobile advertising technology platform. We have a rudimentary RTB system, but again it’s still in early stage. Its help us to automate the atomization’s of billings, but again I emphasize we still, it’s a work in progress right now. So obviously we continue to look at strengthening our direct sales force in the overseas market and that’s probably the key reason for our acquisition of MobPartners, which we announced couple of days ago to basically strengthen our overseas presence and also acquire some technology there. In addition to that [audio break]. So that’s still we -- in many area we can continue to improve in our mobile entertainment technology platform. So that’s the probably reason why we expect as we improve each one of them, we’d see significant improvement in our revenue generation capabilities.

Thank you.

Thank you, George.

Thank you. And the next question comes from Jeff Hao with China Merchants Securities.

So thank you for taking my question. And my question is regarding overseas competition. So we’ve seen the overseas competition has been quite severe in the first quarter this year, especially among those Chinese two apps developers especially [indiscernible]. So can the management comment on what's your view on the competitive landscape and are you planning to spend more marketing dollars to deal with the current competition? Thank you.

Well, thank you for the question, Jeff. Obviously our success in the overseas market have such high product entrance from China and other places, but those entrance have not really impacted in our user decisions or our business overseas. So, you know that some of the competitors, their main way of acquiring users are through very aggressive promotional activities there, and then that certainly help in term of certain monthly download numbers. But in term of the size and the scale, I think they are still very significantly behind us. So given our success in the overseas market we believe that we have a lot of opportunity to create even bigger scales and better technologies overseas. So in order for us to solidify our leading positions in overseas market and expand it and to achieve the scale of economy that we want to see, we would definitely increase our investment in marketing, in cost department in overseas market. So obviously, some of you guys might have seen that quite a bit about competitions on the Google Play ranking at this moment, but the part you don’t see is the, the activity that we have or the success that we have achieved in the offline, user acquisition channels. In fact if you look at our recent announcement Samsung has integrated our Clean Master technologies into their recent [indiscernible] product, and in addition to that we’re also working with other major OEM including HTC and [indiscernible] either to principal applications or to provide certain services for them. So I think we are quite confident that offline channel would also help us to both our user acquisition as well. Yes, so we’re confident that we can maintain our leading positions despite the competitions that’s coming in. Thank you.

Thank you. And the next question comes from Evan Zhou with Credit Suisse.

My question is regarding the overall spending plan to pursue the large opportunities we foresee in the future. What's kind of the breakdown by different types of spending scheme like, for example that pre-installation, that partnership or tax utilization? Thanks.

As you can probably tell from the mobile industry globally is due at a fair high phase of growth. And if you look at our peers most of them have announced significantly increase in investment in mobile business. I think previously there’s some questions about our business model in terms of monetizing our apps in overseas market. But if you look at our first quarter result and in overall 2014 results you will see that we have a strong growth in our overseas market revenues. I think that clearly demonstrate the Chinese company like Cheetah Mobile ability to actually monetize using applications in overseas markets. So, today our Board of Director have approved our plan to be more aggressive in investing in a mobile business. So, number one as we mentioned we want to achieve 600 million monthly active users for, so far mobile user base in 2015. So despite a high growth that we achieved in 2014 we also aim to double our revenues in 2015. But unlike last year or unlike 2014, in 2015 we anticipate that the main key driver for our growth will be coming from mobile not PC. We believe that we will be able to achieve a very important milestone’s in the first quarter when our revenues which we anticipate from mobile to exceed 50% of total revenue. So to achieve this type of revenue growth, those three revenue growth, we believe that it’s important to invest, to achieve those ambitious goal, and so, in 2015 we will invest aggressively. And number one thing that we want to invest in is in product development. We have seen the values of those applications. We want to create a powerful product matrix both not only in utility applications but also in other area including in lifestyle and content areas. So that’s a key area for our investment. I think some of our peer have tried to monetize in overseas market and may face some challenges. I think one of the key challenges for them was the ability to develop a monetization technology advertising platform. So this is an area that we continue to likely focus and investing in it as we mentioned we want to be one of the leading mobile advertising platforms globally. So this is one key are of investment. So number three is that given we already have proven a very successful monetization model in overseas market is the right time for us to increase and strengthen our user experience in overseas knowledge to achieve the scale of the economy that we like to see. These are the three key areas of our investment focus. So thank you.

Thank you. And the next question comes from Alex Yao with JPMorgan.

Okay, good question. Before I translate Fu Sheng answers, maybe I will translate the question in English first. The question was about in 2015 one of our strategic goal is to achieve the 600 million monthly active user market. And the question is, to achieve that are we going to maintain a flagship part of one or two products or are we going to have a more balanced [indiscernible] products. And also in terms of user engagement, what’s the trend for us?

And so the answer that Fu Sheng initially mentioned is that one, obviously our flagship product Clean Master is very important for us, it continued to grow very fast and it’s a very important tool for us to promote our -- to [indiscernible] our application. But if you look at some other applications that we have launched particularly CM Security which we launched in fist question 2014, we only have accumulated more than 100 million users in just one, less than one year. So, from the user base perspective its probably one of the largest mobile security software application today globally. So, in addition to CM Security impact, I think we have two added products that has more than 100 million user downloads already. But in addition to that we have, also we’ll launching several products including CM Launcher. So in the coming year we expect that we will form a very strong product matrix and to cost promote the application. So we expect that the penetration among our own applications will be even higher. So in terms of the ad inventory that we make available for advertising, I do not want to disclose the precise number of impressions. But I think if you look at on a year-over-year basis we have more than double the inventory that we have made available for advertising. And I think if you look at the ability for us to increase impressions and inventory and page view, we think we still have significant room to improve on that. So, if you look at in addition to the volumes of inventory that of increase, another key area for increasing mobile revenue is what we call eCPM. And eCPM have way to a lot of the [indiscernible] technologies in terms of mobile advertising. So it’s how we can optimize pricing, its how we can do better tracking, how can you source more advertisers and so you can and also you can vary different type and model. So we continue to improve on that. So overall I think you look at volume, you look at ECM; we continue to see a lot of room for improvement and a lot of room for growth.

Thank you.

Thank you, Alex.

Thank you. And the next question comes from Thomas Chong with Citigroup.

Hi. Thanks for taking my questions. I have two questions. Can management give us some color about the geographical revenue mix for your advertising business? And my second question is any color about your business strategy in the China market going forward.

So, as we mentioned earlier already mobile account for overseas revenue account for more than 60% -- I think almost 60% of our total mobile revenues. So, obviously they advertise [ph] in China. For overseas, you can tell that our business [indiscernible] very much the existing international advertising, mobile advertising market which is mainly coming from North America and also Europe. And we also want to point out that even in China we see again a big acceleration of our growth in the mobile advertising business. Reflecting our user base right now, so a lot of users today are coming from North America and Europe, and also for the mobile advertising business in those country are more -- also more developed. So the revenue generating abilities in those markets are bigger. So our focus in those markets today in addition to user growth, user monetization. Now we also want to point out that, the office trend today in the mobile market is that, in the emerging market, your user growth is growing faster. So a country like India and those places we fee faster user growth. And I think that represent a very important potential market for monetization in the future. So that’s our view on both the current revenue contributions for mobile and also our future outlook for that in terms of geographic outlook. Thank you.

Thank you. And the next question comes from Henry Guo with JG Capital.

Thanks for taking my question, so a very quick one. So, Andy, this question is for Andy. So could you break out the Mobile advertising and mobile game for the mobile revenue for the quarter?

Right. So right now the majority of our revenues are coming from advertising. In fact I think we mentioned that almost 75% of our mobile revenue today are coming from advertising in the fourth quarter.

Okay. Thank you.

Thank you.

All right. And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

Thank you for joining our conference call. And if you have any questions, please let us know. Thank you so much.