Cheetah Mobile Inc. (CMCM) Q1 2015 Earnings Report, Transcript and Summary

Hello and welcome to the Cheetah Mobile First Quarter 2015 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. I would now like to turn the conference to Helen Jing Zhu, IR Director. Ms. Zhu, please go ahead.

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

Good evening, everyone and thank you for joining our first quarter 2015 earnings conference call. I’m excited to announce that we have made impressive progress and pleased we set our strategic growth at the beginning of 2015 to be among the top three global mobile advertising platforms. We have witnessed both strong growth in our mobile user base and a continued success in our mobile monetization during the quarter. Most importantly, Cheetah Mobile has achieved a major landmark milestone in the mobile and global transformation of our company with mobile revenue now accounting for a majority of a total revenue for the first time in our history. Now I would like to talk about the progress we had made – we have made in the mobile user growth and monetization. During the first quarter from a few perspective. First of all, our growth in mobile user base and mobile MAU demonstrates that with a continued strong growth momentum of our business, specifically our total mobile user installation has reached over 1.3 billion as of March 31, 2015. Additionally our mobile MAUs reached 444 million, an increase of 48 million user quarterly-over-quarterly or quarter-over-quarter. Today 71% of mobile MAUs cases from overseas market. This impressive result were mainly driving by our portfolio of popular great ad, as Joel Greenblat [ph] mentioned of mobile app and our continued investment in user application. On the product side, we continue to grow our new app and service in order to further enhance the mobile experience for our fast marathon users worldwide. In December 2014 we launched Personalization app called CM Launcher and according App Annie CM Launcher was among the top 20 non-game apps on Google Play and rated number two in the personalization application category on the Google Play in March 2015. CM Launcher rated at 4.6 out of 5 stars which was highly among the large mobile launcher we've had. In addition, we are creating a powerful of metrics of utility apps. In March, five of our apps were among the top-30 non-game apps on Google Play with continued success of Clean Master and CM Security as a base. We are able to effectively cross sell those app with high frequency of use, such as CM Launcher, CM Browser and CM Locker. In addition, we basically launched the CM-Backup, a cloud based back up restore service. The app has been well received by users and has been successful in – inherently of more and more of our app users to reach its results. This [indiscernible] app is a creating a powerful metric of utility apps that not only help us expand our user base, but also increase our user time spent and user engagement. On the user app monetization side, we continue to strengthen our market channel strategy to promote our apps. During the quarter we just build our partnership with key online marketing platform including Facebook, Google and Twitter. In addition, we have expanded our offline partnership with over 50 marathon makers and carriers to distribute our mobile app. Moreover, our mobile revenues, especially mobile revenues from overseas markets continue to deliver solid financial results, which has become the main driver of our growth. Specifically, our mobile revenues growth 584% year-over-year to RMB367 million accounting for 55% of Q1 total revenue. Overseas revenue growth 84% quarter-over-quarter to RMB2056 million, accounting for 38% of our total revenue and 70% of our mobile revenue in the quarter. This potential improvement in mobile and overseas monetization was driving by increasing success of our mobile advertising service. Mobile advertising revenues accounted for 48% of our total revenue and 89% of our mobile revenues. During the quarter we have also further expanded our partnership with leading mobile advertising network, making strategic investment and optimization – acquisition of key mobile advertiser’s assets. We have also increased investment into R&D to improve our big data analytics comparative, created better mobile and format and have continued to build our mobile advertising platform. This initiative enhanced our monetization capability and enabled us to drive the mobile revenue and overseas revenues higher during the quarter. We further expanded our advertiser base through strategic partnership during the quarter. Internationally, we currently expanded our partnership with leading global mobile advertising platform, including Facebook audience network and Google, Admob. We were very pleased that Facebook had highlighted our successful partnership with Facebook audience network in their earning call recently. In China the overall mobile advertising industry has been various – rapid evolution and the development as well. People are beginning to realize that a mobile advertising is much more than just a mobile app store. Now people are paying more attention to big data analytics and targeted mobile advertising solutions. And they sense, Cheetah Mobile has become a top partner of Tencent – for Tencent where we have all our core app increases into Wangyua, Tung [ph] and already show promising results from this partnership during the quarter. We also further accelerated our global mobile advertising capability through strategic investment and prioritization in the quarter. In April, we completed the acquisition of the mobile partner and are happy to report that the integration is progressing smoothly. Our investment in more customers further expanded our global sales footprint. Now we have set up and in the progress of taking up more than 10 overseas office to accelerate our localization of service offering. In March we made a strategic investment in Nanigans a social and mobile advertising software provider which marked a important move for us as we improved our big data analytics capabilities. Moreover, we enhanced our mobile app and talent pool, introduced additional mobile ad formats and made significant progress in the mobile advertising platform through investments in R&D. We are excited to have personalized recommendation team from Yahoo!, Beijing [indiscernible] join our Cheetah family. In addition to make you [ph] app, and video app we are all doing – is currently experimented with innovative mobile ad network for screen seek through the ad on the lock screen. Looking ahead, we are confident that by the effective – excluding this strategic initiatives we will continue to grow our mobile and overseas revenues. In closing, I would like to reiterate that we were – we will continue investing in our mobile and overseas business in 2015. Cheetah Mobile will continue investing in product and working to adjust more mobile users and improve our mobile advertising technology and platform in order to capture the vast global, mobile advertising opportunity ahead. We are very clear in what we are pursuing and I firmly believe this initiative were changing our leadership position in the industry and long-term shareholder value. This concludes my portion of the presentation. I will now turn the call over to our CFO, Andy Yeung.

Thank you, Sheng. Good evening, everyone. We are delighted to have once again delivered another record quarter of financial performance. Total revenues grew by 113% year-over-year and 14% quarter-over-quarter to a record high of RMB672.5 million in the quarter, while exceeding the high-end of our guidance. Our robust revenue growth was mainly driven by our mobile advertising business, especially in the overseas market. Revenue from mobile increased 584% year-over-year and 65% quarter-over-quarter and accounted for 55% of our total revenue in the quarter, a very important milestone for our global and mobile strategy. Particularly overseas was the biggest contributor to our mobile revenue growth, during the quarter overseas revenue contributed 38% of our total revenue and 70% of our mobile revenue. Our results and achievement have clearly shown that we are on the right track for ensuring our success as a big top global mobile advertising platform. But it is just a beginning for us as we continue to see significant opportunities in the vast and rapidly growing mobile market. But we're going to have – we will continue to invest in attracting more users, including big data analytics and build a sophisticated mobile advertising platform. 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 first quarter were RMB559.9 million, an increase of 141%year-over-year and 26% quarter-over-quarter. The increases were primarily driven by a strong demand for our mobile advertising business, especially in overseas markets. Mobile advertising business already account for 48% of our total revenue and 89% of our mobile revenues in the quarter. Looking ahead, we are confident in our ability to continue growing our mobile advertising revenues. Revenues from IVAS for the first quarter were RMB97.2 million, an increase of 35% year-over-year and a decrease of 29% quarter-over-quarter. The year-over-year increase primarily reflected the growth of revenue from mobile and PC games published by the company. The sequential decline was mainly due to defaults of our online lottery operation in response to regulatory changes in China. Revenues from internet security services and others for the quarter were RMB15.5 million, an increase of 32% year-over-year and 167% quarter-over-quarter. The increases were primarily due to the sales of the company's air purifier product. Now moving to costs and expenses, SBC expenses for the first quarter were approximately RMB46 million compared to RMB14 million in the same period last year and RMB51 million in the previous quarter. As we stated in the past, we will incur high SBC expenses this year mainly due to share and options granted to our management and employees prior to IPO in May 2014. To help facilitate the discussions of company's operating performance, the following discussion will be on a non-GAAP basis, which excludes stock-based compensation. For financial information presented in accordance with US GAAP, please refer to our press release which is available on our website. Non-GAAP cost of revenues for the first quarter were RMB140 million, up 105% year-over-year and 3% quarter-over-quarter. The increases were primarily due to high bandwidth and IDC costs from increased user traffic, as well as higher amortization costs from intangible assets resulting from acquisitions. Non-GAAP gross profit for the first quarter was RMB528 million, up 115% year-over-year and 18% quarter-over-quarter. Non-GAAP gross margin for the first quarter increased to 78.5% from 77.7% in the prior year period and 76.2% in the previous quarter, bolstered by the high percentage of revenue generated from mobile advertising. Non-GAAP R&D expenses for the first quarter were RMB117 million, up 64% year-over-year and 12% quarter-over-quarter. The year-over-year increases were primarily due to increased headcounts associated with the expansion of our mobile business. At the end of the first quarter we have approximately RMB1300 personal. We are delighted to have a personalized recommendation team Yahoo!, Beijing research centre join us recently. We will continue to invest in global product development to enhance our big data analytics capabilities and our mobile advertising platform technology in order to build a global mobile advertising platform. Non-GAAP sales and marketing expenses for the first quarter were RMB248 million, up 124% year-over-year and 36% quarter-over-quarter. The increases were primarily due to promotional expenses for our mobile business. As we have mentioned previously, we will continue step up investment in user acquisition for the rest of the year Non-GAAP G&A expenditure for the first quarter were RMB66 million, up 123% year-over-year and 17% quarter-over-quarter. The increases were due to increased professional services fees and headcounts associated with being a public company. Non-GAAP operating profit for the first quarter was RMB97 million, an increase of 192% year-over-year and a decrease of 8% quarter-over-quarter. Non-GAAP operating margin for the first quarter increased to 14.4% from 10.6% in the prior year period. Non-GAAP net income for the first quarter was RMB76.9 million, an increase of 135% year-over-year. Non-GAAP diluted earnings per ADS for the first quarter doubled year-over-year to RMB0.54 or US$0.09. To help basically better understanding of the impact of amortization of intangible assets resulted from acquisitions on our operating expenses, we reported adjusted EBITDA beginning this quarter. Adjusted EBITDA non-GAAP measure that is defined as earnings before interest tax, depreciation, amortization, other non-operating income and share-based compensation expenses. Our adjusted EBITDA for the first quarter was RMB129 million, an increase of 207% year-over-year. Now let me provide you with our guidance. We currently expect total revenues for the second quarter to be between RMB785 million and RMB795 million, representing a 106% to 109% year-over-year increase. Please note, this forecast reflects the company's current and preliminary view and is subject to change. And this concludes our prepared remarks for today. Operator, we are 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 Evan Zhou with Credit Suisse.

Hello. This is Evan from Credit Suisse. Thanks for taking my question. [Foreign Language] So my first question will be, so we have already set our goal to be next – the top three advertisers, mobile advertiser provider in around the world. So I was wondering like what kind of the scale of business that will be if we reached that goal. And if we reach that levels of scale what kind of the revenue mix will be like in terms of the mobile advertising and what kind of are the current run rate of over 600K US dollars per day compared to that goal? Thank you.

[Foreign Language]

Right. So Evan, thank you for your questions. Regarding what's the potential size for mobile advertising revenues, obviously there is a dynamic environment, right, if you look at the mobile advertising industry as a whole, we continued to grow. We think that in a couple of years we'll probably take – manage of billion dollars in revenues to be a top three mobile advertising platform. And I think the current run rate if you look some of the top three players is probably running at maybe a couple of million US dollars per day run rate. So again, is a dynamic situation. So – but we just can only give you a approximation and Evan do you have another question? Follow up question for that?

Actually he has been removed from the queue. And the next question comes from Thomas Chong of Citigroup.

Hi. Thanks for taking my questions. I have three questions. [Foreign Language] So I have three questions. The first question is about accounts receivable, any color about the sequential drawn by 60% quarter-on-quarter to about RMB420 million in the first quarter? And my second question is about the corporation with Samsung, any color about the lump sum payment, how much of years and when we should expect it to report in your P&L? And the third question is just I wanted to confirm the mobile advertising revenue represent 48% of your total revenue and 55% of your mobile revenue in the first quarter? Thanks.

Thomas, thanks. So I think regarding the foothold [ph] the receivable increased some, but you have to remember you know our total revenues also increased in the quarters and also if you remember that in the first quarter, January is a full flattening season for receivable and mainly due to the Chinese New Year and what not. So that’s primarily to the receivable collection. And as you know our company have one cash flow operation, profit cash flow operation for many, many quarters now and during the quarter we continued to launch positive effective operating cash flow. The second question that you asked is about Samsung. As we mentioned we have a partnership with Samsung, where they increased our application [ph] into their other business for their Samsung S6 smartphone and in late stage additional installation type of project, they actually is our customer. They say as technical people we don’t actually pay them for their application But however, the thing that we see from Samsung got to be small and we value their partnership more than what we valued their revenue trends in particularly from that partnership I'd say. So for us we're very delighted to have Samsung as our partner and we like to see from the past magnitude well and expand The first question as you have is confirmation of mobile advertising revenues as percentage of total revenue is shoot at now example 48% of our total revenue and about 89% of our mobile revenues. So thank you for your questions.

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

Hi. Good evening. Thank you for taking my question. [Foreign Language] I have two questions. First is regarding the first quarter results, just our guidance is the non-cash operating margin is around zero, but we have a made a relative profit in first quarter. So kind of imagine if I can get some color on the reason behind that? And my second question is about our new product strategy, Fuzhong [ph] mentioned number of new product was launched during the past quarters and the management comments on the promotion strategy for the new product for the following quarters? Thank you.

[Foreign Language]

Jeff, thank you for the questions. Yes, so like as for our last case, our strategy today maybe not driven by our competitor, as more – for us if you look at our competitors they are very participant from a leadership position. What we're trying to do is that, we were trying to experiment with our strategy and find the marketing and product strategy path will continue to view our success. And so but that was coming to Tencent, its not going to be more happened at once. And so it’s going to be progressive type of experimentation.

[Foreign Language]

So even though we have set a very broad and ambitious growing objective for our trend, but when we look at marketing in dollars, we really want to spend it effectively. And so we definitely look at how effective the channel is, look at the retention rate, look at the user feedback and then we decide adjusting our advertising and mobile promotional activity. So again, and while competitors who may you know, have one similar objective of breaking money and pull all the money into mobile promotional activities we would look at the market and respond it correspondingly.

Thank you. And the next question comes from…

And the second question is…

Yes, so we will follow up the second question, which is about our current new product…

Okay. [Foreign Language]

Right. So if you look at our current partnerships, we already have formed a very powerful metric with Clean Master and CM Security at the base, that base will address the user need for clean and secured smartphone operating environment. Today we are laying on some of that increasingly with product that have higher frequency of use of user.

Okay. [Foreign Language]

So if you look at for example one of our recently launched products CM Launcher, while its still at a stage where we continue to improve the user experience, but the product is probably ranked number top 20 on the non-game apps on Google Play and as we make the best product better, we will enjoy more user to meet our order.

[Foreign Language]

Right. With that you know, introducing high frequency free of use applications. We also have recently launched the trial base services, such as our CM Backup services and we already see there – the products is been well received by our users and we do expect we'll continue to launch new product in all these areas and see more user growth in that area.

Okay. Thank you.

Thank you.

Thank you. And the next question comes from Alex – I am sorry Alwyn Huang [ph] of Morgan Stanley.

[Foreign Language] I think the Cheetah Mobile has a very strong quarter-on-quarter MAU growth in oversea market. Can you share us more color on the geographic breakdown of this new addition? And my second question is on the mobile revenue in oversea market, can you give us a breakdown of how much percentage is for mobile ads and how much from gaming? Thanks.

Okay. [Foreign Language]

Right. So in term of our user base as we can see, our user base expands globally and obviously developed market like US and Europe still are largest markets. But the user base overall mobile user base in those market they are growing much faster for example today and that’s also happening to our user base well. We see new emerging markets user base going as fast, I think that’s much natural and normal.

Okay. [Foreign Language]

So if you look at mobile revenues, 89% of that is coming from mobile advertising, only 11% of that coming from games. And if you look at the overseas market that’s a portion greater for advertising because our mobile gaming operation in overseas is in a very, very early stage operation. So hopefully that addresses your question.

Thank you.

Thank you.

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

[Foreign Language] Good evening, Fu and Andy, I have two questions, number one is about the revenue split of first party mobile advertising i.e., you've monetized the inventory through your own monetization capability, first is the third party mobile advertising revenue, are you solving the traffic here, mobile apps networks, et cetera safe to audience and finishing Guangdong, Haung [ph] Can you share with us the rough stage hitting these two and what is the strategy to acquire the first party monetization capabilities here. On the maturity what can you share with us the difference between the development of mobile apps networks in China versus the rest of world, particularly we are interested here the difference in the ecosystem monetization capability and a competitive landscape? Thank you.

Okay. [Foreign Language]

So, thank you Alex for your question. If you look at how our current mobile revenues is a mix between our direct customers and third parties network. Obviously its a dynamic environment, its not a static environment, though our system actually look at what the pricing or the pricing scheme that coming from both ourselves and also from the third party and then reach almost reassign amicable way to determine what has actually state in our app. So that’s often changed over time and also at this time we don’t intend to disclose it at the moment because you know there are changing dynamic nature of this two.

[Foreign Language]

So if you look at to build a – I guess leading mobile advertising platform, it is more significant than multiple other thing. In fact you have not only have to look at the platform technology, but also have to do lot of big data analytics and you also have to acquire their advertiser and accessory touch phone. So it’s a complicated path [ph] and it may take some time as well. So for us its really important for us to – need to expand our cooperation with some of this other global technical network such as Facebook audience network, Glenmark [ph] and those guys. Now at the same time, each mobile platform have their own traffic and their own advantage and strength and we would like to continue to expand our mobile advertising platform and strengthen our own platform as well.

[Foreign Language]

So if you look at globally platform we've had, over time global mobile advertising –effective global mobile advertising network will be constituted in a few companies that have their own large organic traffic.

[Foreign Language]

So our view that, if you look at today lot of the independent mobile advertising network that does not have their own organic traffic would have limited growth opportunity. On the other hand, if you look at the properties or network that have their organic traffic, I think there is lot of opportunities for them, and as we felt you can see that, you know, the half the competitor have large traffic such as Facebook also have recently acquired mobile advertising network like Netflix [ph] Google has acquired AdMob and if you look at Yahoo! [indiscernible] all these top leader have sort of pressure on organic traffic have acquired their own advertising technology platform. I think that’s a trend and that’s similar to why we are interested and have acquired more partner in the first quarter.

[Foreign Language]

If you look at the global mobile advertising market, obviously traffic is a big barrier to entry. And I think what we have thought that that big barrier to entry because we ourselves have very strong global mobile traffic, and the next factor we wanted to use to improve big data analytics as you can see we are rapidly improving our capability there and that’s effecting the volume in total compared to total competition is in term of execution approved each to consolidate global advertising traffic to form a network. And I think we are cautioned that we are on the right track in that direction to become one of the top three mobile advertising platform.

[Foreign Language]

Thank you.

Thank you. And the next question comes from Ella Ji of Oppenheimer.

[Foreign Language] So my first question is also a follow up relating to your M&A strategy. So if you are aspired to become one of the top three global mobile ad platform. I wonder if you could comment on your M&A plan in the coming years, do you think you will continue to be very active with M&As and regarding the target are they most likely going to be independent mobile ad platform? And second question is relating to your domestic user and revenue, could you also share with us recent updates on that perspective. And last question is relating to your revenue driver, so we breakdown your revenue model by the click rates conversion rate and cost CPA, which is one do you think will be the largest revenue drivers in the next couple of years? Thank you.

Okay. Thank you. [Foreign Language] So I think Ella thank you for your questions. I think regarding acquisition, I think first of all acquisition is not [indiscernible] plan. In our M&As strategies I have always told, I have always been focusing on identifying complementary technology, know how company that will speak to our strategy. So we just don’t acquire companies for company sake and I think that – report that mentioned we may be acquiring traffic and selling traffic and current traffic, what we can tell you is that our organic traffic for example is – will expand more than 90% of our mobile revenue. So there is no reason for me that we are acquiring company just for traffic or for revenue.

[Foreign Language]

If you look at our acquisition strategies while we like use acquisition to compliment our global strategy to expand our global presence. But you know, at the same time we also very cautious because we are aware that there maybe integration issue and probably issues with large acquisitions. So you know, in that sense our acquisition strategy are probably on complementary target or potential target and we also very more as I say cautious with our plans.

[Foreign Language]

And I think as of the question is we have our expanded strategy, I think if you – as we have previously disclosed we also have [indiscernible] to secure more our applications in China. We also have a partnership with Xiaomi to increase our application on their Xiaomi Mi, Rep Mi [ph] smartphone. We also have shared partnership with Tencent not only with Intel [ph] but also with their [indiscernible] product their app store. And so you know, we have obviously invest in user expansion in China as well, but for us when we look at Chinese market we want to look at a – as a part of our global strategy, global market. And so obviously China is endpoint market and we will pay attention to it as well, but its part of our global strategy, and not a single strategy on a standalone basis.

[Foreign Language]

Right. So obviously we have achieved a very good of that in overseas market and have – with a strong leadership position in the mobile user applications stage globally. So you know, this year we definitely would focus on more resources in the Chinese market to make sure we also achieve some level of capacity in China and also put our potential competitors in more potential position.

[Foreign Language]

So, I think when we look at our growth opportunities, the growth driver for mobile advertising revenue, the number of environment impressions would be a significant driver. We are still very early in the mobile advertising game today. In addition to that, and also if you look at pricing what we're going to monetize per user, I think we still have much room to grow. If you look at Facebook for example, or other US platform, we generally tend – generate close to a dollar per month per user. Today we only a few penny's on a monthly basis. So I think there is significant room for us to grow our number of impression for advertising, as well as the pricing fund network.

[Foreign Language]

Right. So from a long-term perspective, my recommendation is to have a company focused more on increasing the value of our impression, rather then just trying to push through a lot of quantity on our – are affected our user. The main thing is that we want to see, because you know, when you see increase in the value of our organizing impressions that means that you know we have better targeting and also mean that our user will have better user experience. And as a result not being overly monetized or more overly advertised to by us. And so you know, from that perspective it means that we need to further improve our big data analytic capability, this is the area that we would probably invest significantly. So that we will have more targeted advertising, a better advertising. So we like to our self you not only become the leading user application provider globally, but also evolving to a big data analytic house, that can have very effective advertising.

Okay. Thank you.

Thank you.

And there are no further – all the questions, we have time for at the present time. So I would like to turn the call back over to management for any closing comments.

Thank you for joining our conference call today. If you have further questions, please do not hesitate to contact us. Thank you. Bye.

Okay. Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.