Cheetah Mobile Inc. (CMCM) Q2 2015 Earnings Report, Transcript and Summary

Hello and welcome to the Cheetah Mobile Second Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Helen Zhu. Please go ahead.

Thank you, Operator. Welcome to Cheetah Mobile's second quarter 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 begin, I refer you to the Safe Harbor Statements in our earnings release, which also applies 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 Sheng. Please go ahead, Fu Sheng.

Hi everyone, thank you for joining our call today. We are very happy to report another quarter of strong results. Q2 revenues came in at RMB871 million much higher than our previous guidance of RMB785 to RMB795 million. Due to stronger than expected amount for our mobile advertising service from both overseas and domestic advertisers, very importantly we continue to make very solid progress in our mobile and global strategy which should lead us strong foundation for our future growth. Only a year ago, we launched our overseas monetization efforts. In the second quarter this year, we set bridges another key milestone with our overseas mobile revenues nowaccounting for 50% of the total revenues for the first time. In Q2 mobile accounted for 64% of our revenues. We are happy with our transformation into a truly global and a mobile company. About three years ago, we decided to launch Clean Master in overseas market. As of June this year, five of our apps are now reaching amongst the top 40 most downloaded apps on Google Play worldwide. Today we have over 494 million mobile MAUs globally and 71% of our mobile user came – user base came from overseas. Additionally, about two years ago, we began to our mobile monetization efforts. Today mobile now accounts for 54% of our total revenues. As I mentioned early, we launched our overseas monetization efforts a year ago, yielding a very short amount of time. Overseas revenue has grown extremely faster and now accounts for 50% of our total revenues and 77% of our mobile revenues. Our solid progress in mobile and global was due to our continued improvements in commercial products and big data analytics expansion of direct sales and operational mobility worldwide, as well as our strong partnership with key global Internet players. First with our continued success of Clean Master and CM Security at the base, we are able to effectively close sale our other apps with higher frequency of use such as CM Launcher, CM Browser and CM Locker. This layering of products is creating a powerful metrics of utility apps that are not have highest expense our user base but also increased our user time spend and user engagement. Second, by integrating the demographic and interest data of our 494 million mobile MAUs with ad combined data of mobile partners 200 million mostly advertising audience. We are currently expanding our global reach and a developing richer user data loops. But just having a lot of data is not enough we need to be able to analyze the data and the jobs inside from the data. So far we have contracted more than 100 users achievers that can help us better understand our user base and improve our advertising and retaking compatibility. Big data analytics plays a important role in creating values for mobile advertising platforms and will remain a key focus for our investments in coming quarters. Third, we continue to expand our direct sales and operational capabilities worldwide with the integration of mobile partner and our own organic offers we now have sales in 10 countries and more than 200 overseas employees. We plan to continue to build out our overseas competitive to deliver better and more localized service to our advertisers plus our mobile monetization capabilities in particularly in overseas market have also benefited from strong partnership we have built with key global Internet players. For example, by allowing advisers to play their ads on our mobile apps through Facebook audience network, we are able to greatly expand our global reach results actually building a large scale network. As of today, advertisers own FAN contributes a large portion of our mobile revenues and we are already right of the biggest publisher partner for Facebook audience network if not the biggest. Recently, we have built - further expanded our partnership with Facebook beyond nature ads. In addition to Facebook, we continue to build and stronger our partnerships with other key industry player including Google and Tencent. In addition, we launched our global ad platform, Cheetah ad platform in June. The important steps for us in building one of the most robust mobile advertising platforms in the world throughout publishers including ourselves to deliver more relevant ads to mobile users, getting better results and to generate higher our ad for advertisers. We’ll continue to enhance our global ad platform with new service such as radio ads, and a new capability such as RTB. In short, we're happy with the progress we have made so far but it is just beginning for us. We know there is still a lot of work ahead of us. But we're very excited about the opportunities. We will continue to focus on the opportunities and invest our resource and efforts into achieving our goals. We’re looking forward to providing you and more updates on our progress next time. Now I will let turn microphone to our CFO, Andy.

Thank you, Fu Sheng. Good evening everyone. We had very strong performance in the second quarter both operationally and financially. The key highlight this quarter continues to be the strong progress in our mobile and global strategy especially a sustained momentum in our overseas operation. We had expected topline results close to our business model resulting in 180% year-over-year increase in growth in our GAAP operating income and 43% year-over-year increase in non-GAAP operating income. But as Sheng mentioned, this is just the beginning for us. The global mobile internet industry as a whole is due and incomplete. We continue to see significant opportunities in the global mobile space. Looking ahead we will continue to invest decisively in building up our overseas capability. Fixed data analytics and mobile ad technology in order to further support our business growth in the future. Now I will walk you through the details of our financial performance. All financial numbers are in RMB unless otherwise noted. Total revenue grew 129% year-over-year and 30% quarter-over-quarter to a record high of RMB831 million in the quarter. Mobile remains the key driver of our growth driven by ongoing strong demand for our mobile advertising services both domestically and overseas. Mobile revenues surged 634% year-over-year and 52% quarter-over-quarter RMB560 million in the quarter contributed 64% of our total revenue up from 20% last year. Most notably, having begun only one year ago overseas revenues now accounts for 50% of our total revenues and 77% of our mobile revenues. By segments, revenues from online marketing services for the second quarter was RMB752 million, an increase of 166% year-over-year and 34% quarter-over-quarter. The increase was primarily driven by strong demand for our mobile advertising solution especially in the overseas market. Mobile advertising business already accounts for 58% of total revenues and 90% of our mobile revenues in the quarter. The recent acquisition of MobPartner also contributed modestly to our revenue growth accounted for a little more than 5% of our total revenues in the quarter. Revenues from IVS for the second quarter were RMB109 million, an increase of 29% year-over-year and 13% quarter-over-quarter. The increases primarily reflect the growth of revenue from mobile and PC game published by the company. Revenues from Internet security services and others for the second quarter were RMB9 million, a decrease of 29% year-over-year and 42% quarter-over-quarter. The decreases were mainly due to the Company's ceasing to promote subscriptions services in a strategic reorientation which started in 2009. Now moving to costs and expenses, share based compensation expenses for the second quarter were approximately RMB56 million compared to RMB52 million in the same period last year and RMB46 million in the previous quarter. As we stated in the past, we will incur high SBC expenses this year, mainly due to shares and options granted to our management and employees for attracting and retaining headcount. 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. For financial information presented in accordance with U.S. GAAP, please refer to our press release which is available on our website. Non-GAAP cost of revenues for the second quarter were RMB222 million, up [171%] [ph] year-over-year and 54% quarter-over-quarter. The increases were primarily due to higher traffics and costs associated with the MobPartner's business, higher bandwidth and IDC cost associated with increased user traffic and Big Data analytics, as well as higher amortization costs from intangible assets resulting from acquisitions. Non-GAAP gross profit for the quarter was RMB649 million, up 117% year-over-year and 23% quarter-over-quarter. Non-GAAP gross margin for the second quarter was 74.5% compared to 78.5% in the second quarter of 2014 and the first quarter 2015 respectively. We expect gross margin to remain flattish in the coming quarters. Non-GAAP R&D expenses for the second quarter were RMB130 million, up 26% year-over-year and 10% quarter-over-quarter. The increases were primarily due to personnel related costs associated with the expansion of our mobile business. At the end of the second quarter, we have more than 1300 R&D personnel. We will continue to do that in global product development, big data analytics, mobile ad technologies in order to be with a robust global mobile advertising platform. Non-GAAP sales and marketing expenses for the second quarter were RMB338 million, up 193% year-over-year and 37% quarter-over-quarter. The increases were mainly due to promotional expenses for our mobile business. Our strong mobile traffic growth underpinned our continued robust management performance. Well going forward, we will continue to invest in our user acquisition. Non-GAAP G&A expenses for the second quarter were RMB87 million, up 203% year-over-year and 33% quarter-over-quarter. The year-over-year increase was due to increased professional service fee and headcounts associated with being a public company. The sequential increase was primarily due to increased professional service fee. Non-GAAP operating profit for the second quarter was RMB94 million, an increase of 42% year-over-year. Non-GAAP net income for the second quarter was RMB116 million, an increase of 77% year-over-year and 61% quarter-over-quarter. Non-GAAP diluted earnings per ADS for the second quarter was 65% year-over-year and 49% quarter-over-quarter, to US$0.81 or US$0.15. To help us to get a better understanding of the impact of amortization of intangible assets resulting from acquisitions on our operating expenses, we have started reporting adjusted EBITDA since first quarter 2015. Adjusted EBITDA is a 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 second quarter was RMB132 million, an increase of 59% year-over-year and 2% quarter-over-quarter. Now let me provide you with our guidance. We currently expect total revenues for the third quarter to be between RMB990 million and RMB1.01 billion, representing a 107% to 111% 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.

[Operator Instructions] And the first question comes from Alvin Jiang with Morgan Stanley.

Hi, good evening Fu Sheng, Andy, and Helen, thank you for taking my questions. Congratulations on a strong quarter. I have two questions. The first question is on your investment plan in the second half of 2015 and also the investment plan in 2016, because in the last two quarters, I think we are doing better on margins than what we expected or we guided, so do we still hold at our guidance for full year zero profit? And my second question is on the revenue growth. Can you give us some color on how big is the organic revenue growth and how big is the impacts from those acquisitions?

So, Mr. Fu would like to answer the first part of your questions and then I will answer the second part of your question. Regarding our margins, yes, the margins for our quarters were than expected and as we have mentioned, we have a pretty aggressive plan to invest in - to benefit this year to acquire user. Even though the overall expenses or the cost of user acquisitions globally have been increasing, but we are very cautious and very careful in terms of how we spend our marketing dollar. And so I think if you think about what we have forecast, we will have guide to investor or probably worst case scenario, and again as we have mentioned before still possibly – was never our strategy, I guess user acquisitions will continue to be our focus but it may not be as low as we have previously in terms of margin. And the second part of your question regarding organic growth, as I mentioned to you on our prepared remarks, MobPartner's account for slightly more than 5% of revenues in the second quarter. So, it's more than 95% of our revenue comes from organic growth is definitely the primary driver for our revenue growth.

Okay.

So if you look at our quarter, our revenue grew - total revenue grew 129% year-over-year and as we mentioned MobPartner accounts for about 5% of that contribution in the second quarter.

Got it. Thank you.

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

Hi, good evening Fu Sheng, Andy. Two questions, so questions regarding the product update. If you could provide some colors on how - I know you break down by products and what kind of the monetization contribution by some products and your growth rate by product especially the flagship Cheetah Mobile, Clean Master. And also if you have some major long-term plan for the product update in the next coming quarters will be very helpful. Thank you.

So if you look today, CM Clean Master is still our flagship product and still growing at very robust pace. Of course if you look at analytics products CM Security it’s also growing at a very fast pace right now. But in term of absolute size, you still have some distance from the size of Clean Master. So if you think about this, like we have to remind people that our MAU our monthly active user is defined on per device basis, so one device would have mobile application. So it's not so easy to say, like which one product has for how many and they use, but still if you look at the overall picture, our team still have the largest penetration only close to - yes more than 60% of our users would have same number. So if you look at our modernization on the other hand, we only have to go out from a single product monetization strategy which we never want to a very diversified monetization revenue stream coming from different products. In fact if you look at Clean Master is no longer the largest contributor to our mobile monetization. So in term of our product development, certainly we have a very good plan for new product development and we do expect potential nice price in term of our product development side. But if you look at our product layers today, you will say that because of our two applications like Clean Master, CM Security, Battery Doctor we only have layer products like CM Launcher, CM Block, and Lockers product that are very good growing also very nice product. So if you look at our on a game function side, last week we launched a game called Piano Tiles 2 right, and that product is right now is probably one of the top games in a lot of countries. And that I think is a fair percentage in term of direction where we want to go with sort of product and game. Another example is that, we have an ingoing muster for a small demand team - and that team the above launch recently and have one point, what's number one app in the U.S. and still today it’s still the top 10 apps in US. So if you look at those two, they're sort of perfect example of the products that we made in terms of product diversification and also building up a ecosystem for our product. So if we look at our all organic involved games and products, as well as the teams that we have invest in Tencent and other software, I think by next year we will probably see some nice prices coming from those efforts and also we’ll have more good news for you guys next year.

Thank you.

Thank you. And the next question comes from Henry Guo with Summit Research.

Hi, thanks for taking my question. Very quick one on the Cheetah Mobile ad platform. So I think you guys have launched platform - so can you just provide some color in terms of the traction over there and also do you guys see, I mean for example by the end of this year what portion of the mobile advertising revenue and mobile traffic can really come from this Cheetah Mobile ad platform. Thank you.

So let me translate question into Chinese first. So we have launched our mobile ad platform network for almost two months now. It's still pretty early for the development cycle. If you look at Facebook and other ad network, they're both in place for years now. So, we know where we want to go and what we need to do for our mobile ad network and we’ll continue to invest and focus on that. But I think it's too early to talk about the progress that is going. As a late comer to the low affecting industry, we got I think a very cooperative strategy. We like to cooperate with other large FA network and develop a differentiated strategy to supplement that. So that’s how we look at mobile network platform development.

Great, got it. Thank you.

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

Thank you for taking my question. So, I have two questions. The first question is about the company focuses, competition. So, as noticed the competition on the two apps in the overseas market is still very heavy. For example from other Chinese companies such as Qihoo, so I just wondering once the management start on the outlook of the comparative landscape, especially if you look at the 2016, do you think the competition was due being very heavy like this year? And then my second question is about the other income item in the income statement. Just wondering where does that come from? Thank you.

One clarification first, I think when you look at the 360 Security, the product is actually not been owned by 2 or 360, it's sort of by the product and license agreement with another company. So, they're not - In terms of another competitor, from the data that we have seems - monthly active users have actually declined, actually have not increased at all. So again as we have mentioned, one thing to look at the number of download in the scenario to look and then the monthly active user. And so I think these two are very early stage of results, and they spend a lot of money in terms of channels and to acquire downloads installation. But I think from our point of view that is not something that's useful. So, if you look at overall updates, even though sometimes you would see the download number may go up, it may go down during the quarter, but the overall size of those competitors is been competitive in terms of total user data and advantage is that we also have a lot of organic download. So, one finally, you would notice that our company have moved from a single product companies to a company down with a diversified portfolio of products and also we are in the process of moving to what we call a ecosystem environment. So, I think we are a few steps ahead of our competitors and what they're doing right now as we can see have been on our overall download number and our overall monthly active users. So actually the competitors you mentioned not the one that keep us from sleeping, but we are thinking in terms of moving ourselves from a multi based application developer to monetization and now we are - how can we move that to a platform and then to your ecosystem that can sustain our long term growth.

The second question, I will answer the second question which is about our added income. And so you look at our income slide, I think that's mostly coming from some of the investments gains that we have. As you can see from time-to-time we may have impairments or gains from our investments and this quarter we have about 30 million of investment gains. You would also notice that we also have impairments for our investments which mostly relate to our lottery business that we acquired last year. So, that's how the gain is, if you look at half quarter, there are some gains some impairments for those investments. That's not a big deal

[Operator Instructions] And our next question comes from Wendy Huang with Macquarie.

So my first question is, many related to your different marketing channels, so can you elaborate on what kind of channels that you're using to acquire the new users and how is the - how effective are those channels to actually convert the user traffic to a sticky traffic on our own platform. And also can you provide more details about your collaboration with Google and Tencent that you mentioned in the prepared remark. The second question is about, it's related to the R&D depreciation. So what is Cheetah's exposure to that. As far as what we're seeing, you currently have 50% of revenue coming from overseas, so if the management can provide some color on your business sensitivity to the currency changes that will be helpful as well. Thank you.

So, we've spent quite money on customizing, but - from our company perspective, the most important metric for us is actually our retention rate and monthly active users was this total download number. So if you look at our monthly active users and the trend there, you'll notice that we probably are doing much better than our adequate. And you also noticed that, most other competitors would only total user number, but for us and we use most product for us and we’re very much better sensitive to our user retention. So and then if you look at when we place our advertising - when utilized our user through channel. We also pay very close attention to the quality of the channel in terms of retention rate, in terms of conversion rate. And in fact we also have quickly expanded our disciplined channel beyond Google Play. In fact we have signed up more than 70 global smartphone manufacturer OEM to help us distribute our application. So those are experienced and channel strategy. So obviously other advertising platform are very key point partners for us in terms mobile market strategy. And so we pay a lot of attention to that especially Facebook, Google, and Tencent. And if you look at in China for example, Tencent moves was in quarter one of the highlights for the company was mobile typing performance so we have a good cooperation with Tencent as well. Well and then if you look at an overseas market, our cooperation with Facebook rather have got some press, thanks to the management - on the first quarter earnings call this year. We’re also - we have a cooperation with Google, we also were the early participants for ad word on mobile search area. So, in regards to your second question regarding RMB - financial performance, as we mentioned 50% of our revenue now comes from overseas market and obviously we had some far revenue and we also have the special costs that's also in U.S. dollars. And so the net impact for RMB is not as significant for our financial performance. And I think we potentially have little bit profit on the topline and we’ll be negative on the cost side. But net-net I think it’s been neutral for us.

I think our revenue from overseas market have increased continually maybe in terms of percentage of our revenue - total revenue overseas revenues were increased.

So if you look at our overseas revenues, I think our expectation is that it will continue to increase as a percentage of our overall revenues. And at the same time again like as we mentioned so that would be increasing main point to our overall company operations. So as we mentioned before our ultimate goal is to match our revenues start that with our user base. And I think potentially we’ll be able to exceed that in terms of our overseas revenue as a percentage of our total revenues.

Thank you.

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

Hi good evening. Thanks for taking my questions. I have three questions. The first question is about balance sheet, - expect the cash and cash equivalents is about RMB113 million. So I'm just wondering whether Cheetah Mobile is thinking of about - new capital to support the fast growth of your business. And my second question is about MobPartner's. I understand that it contributes about 5% of your total revenue, but any color about the long gap earnings contribution from MobPartner.

Thomas thanks for your question. I think first I think we need to clarify that. For the second quarter our cash short-term investment and cash equivalent was actually higher than the number that you have mentioned. In fact if you look at our press release and also our financial statements, you will notice that our – in the second quarter our total cash and short-term investment and cash equivalent were RMB1.3 billion which is about US$210 million. So we have a lot of liquidity that more than sufficient to support our investment. And also our company is also - have been generating positive cash flow for the past two years and in fact in the most recent quarter our operating cash flow was very positive more than RMB150 million. So from both in term of cash flow from operation and that also the degree on our balance sheet we have very sufficient liquidity. And then the second question that you have is about our MobPartner contribution to our net income. As we mentioned, MobPartner was about RMB15 million in revenues in the quarter. And it’s obviously as we mentioned June our acquisition, the company is due for scale right now. So we feel money losing operation that is not too negative so the net impact of our overall income is markedly small. The third question that you have is about, yes, Facebook contributions. As we mentioned firstly we do not have the policy to discuss our individual customer or supplier contribution and unless required by the social rule and the reason for that is because we have some special agreement with our final customer, we respect that and also for commercial reason as well. So it's quite harder as we mentioned before Facebook is a very important product for us. We’re currently probably one of their top partners on the Facebook Audience network if not the larger. And so they all contribute a large portion of our revenue, we won’t disclose more detail on that. Thank you.

Thank you. 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 today. If you have further questions, please do not hesitate to contact us. Thank you. Bye.

Thank you.

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