Good evening and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a 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 over to Helen Zhu, Investors Relations Director Mr. Zhu, please go ahead.

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and full-year 2018 earnings conference call. With us today are our Chairman and CEO, Mr. Fu Sheng and our Company's CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A section. Before we begin, I refer you to the Safe Harbor statement 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 Company's Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Thanks Helen. Hello, everyone. We achieved a full year 2018 financial results that were in line with our previous expectations. Total revenues increased by 2% to RMB5 billion in 2018, in particular, revenues from mobile games operations increased by almost 50%, and the revenues from utility products and the related service in the domestic market grew by 22% for the full year 2018. Non-GAAP operating profits for the utility products and related service increased to RMB1 billion in 2018 and we further reduced our operating loss from the mobile and payment segment in 2018. Above all, our core business generated RMB342 million of net cash from operating activities and RMB277 million of free cash flow in 2018. Our business progress and financial achievements in 2018 were mostly driven by growth in the following three areas: one, mobile games; two, mobile utility products in the domestic markets; and three, AI powered business. First, we have made significant progress in our mobile game operation, which has already become a driving force of our total revenue. In 2018, our mobile games business earned RMB925 million in revenues, up to 48% from 2017. We successfully launched Bricks n Balls, our casual elimination game, Bricks n Balls remains one of the mobile casual game in US and on Google Play, and one of the top brand board game on Apple App store in terms of users downloads. Through operating Bricks n Balls we have discovered the right combination of tactics to grow our average revenue per mobile gamer. Bricks n Balls has a higher op than the channel high to [Rolling Sky] and the Dancing Line in the second half of 2018, Moreover, almost half of revenues from Bricks n Balls were generated through sales of in game visual items. In late February, we soft…

Thank you, Fu Sheng. Hello, everyone. In the fourth quarter of 2018, we grew our total revenues by 2% year-over-year and quarter-over-quarter to RMB1.4 billion. We generated RMB770 million in net income attributable to Cheetah Mobile shareholders. For the full year of 2018, we generated RMB5.0 billion in total revenue and RMB1.2 billion in net income attributable to Cheetah Mobile shareholders. Now, let me walk you through the details of our fourth quarter and full year 2018 financial results. Please note that all financial numbers are in RMB terms unless otherwise stated. Revenues from our mobile entertainment business increased by 39% year-over-year and 12% quarter-over-quarter to RMB556 million in the fourth quarter of 2018. For the full year of 2018, revenues from our mobile entertainment business increased by 90% to RMB1.8 billion, mainly driven by Bricks n Balls, a casual elimination game that started ramping up in the middle of July 2018. Revenues from our mobile games operations increased by 91% year-over-year and 14% quarter-over-quarter to RMB326 million, which accounted for 24% of our total revenues in the fourth quarter of 2018. For the full year of 2018, our mobile gaming business generated RMB925 million in revenues, up 48% from 2017. Revenues from utility products and related services decreased by 17% year-over-year and 6% quarter-over-quarter to RMB783 million in the fourth quarter 2018. The year-over-year decrease was mainly due to the discontinuation of certain ad formats which is ads on mobile phone lock screens by the company’s overseas third-party advertisement partners. The quarter-over-quarter decrease was mainly due to a disruption to our business as a result of certain allegations made by a third-party in November 2018, about which the company has made a number of public statements to clarify. For the full year of 2018, revenues from utility product and…

Thank you. [Operator Instructions]. The first question today comes from Wendy Huang with Macquarie. Please go ahead.

This is Frank Chen with Macquarie on behalf of Wendy Huang. Thank you management for taking our questions. I basically I have two questions. One is on the first quarter guidance. Could management share with us more color on this set of guidance, especially first quarter revenue breakdown by different business segments? And the second question is about full year outlook into 2019. Could management share any thoughts on the full year revenue growth in 2019 and the margin outlook in this year? Thank you.

Okay. I'll take the question. First of all, in terms of the revenue guidance, yes, it is -- there’s a sequential and year-on-year decline in the guidance. The main reason and actually we have explained in the prepared remarks is because of the allegations made by a third-party in November 2018 that has caused some of our business partners to pause their relationship with us. So that has a direct impact on overseas utility products. But as we said earlier, we're working with those business partners to address their concerns. And the company has also retained -- the company's Audit Committee has return retained outside legal counsels, Skadden, Arps and also has -- Skadden, Arps also has in turn engaged outside consulting firm AlixPartners, which is a well-known consulting firm in the US to do the internal review for the -- they -- and to relate to allegations. And as of today Skadden and AlixPartners has not identified any issues that's inconsistent with our previous disclosure. So that explains the reason of the further weak first quarter guidance. But we are very confident that we shall be able to address those different partners’ concern going forward. Yes. For the full year guidance, again, I think for the -- again for the overseas utility products, probably we will have some setbacks, as we mentioned earlier because of that reason. I think it is something we're still working with our business partners. And therefore, other part, we expect that our -- there'll be the new business driver, which is the mobile games. It is the new driving force for Cheetah Mobile and we have high expectation on the new areas. Also, I think more importantly, we are starting to materialize our AI investments for the -- especially for the hardware parts. For…

[Operator instructions]. The next question comes from Robert Cowell with 86 Research. Please go ahead.

Hi, management. Thanks for taking my question. I just have two. The first one is about the MAU number. How do we think about -- it seems to be down a bit on a quarter-on-quarter basis and how are you thinking about MAU going forward and balancing MAU versus ARPU? And then the second question is about Beijing OrionStar and its fundraising plan. Will Beijing OrionStar seek to fund from third-parties or it will -- does Cheetah plans to invest more in that company at some point in 2019? Those are my two questions. Thanks.

Okay. I'll take the first question in terms of monthly active users. Yes, the number is lower than we reported last quarter. And one of the main reasons is because of ARPU that's related to the temporary disruptions around our overseas utility product, because of the monetization side of this. So we feel that -- we decided that we kind of temporarily pulled back all our user acquisition efforts in this quarter. So I think that's why you can see a quite -- relatively noticeable to decline in MAUs. We expect that when everything goes back to normal, I think the number will come back again. In terms of OrionStar -- in terms of fund raising plan for OrionStar, unfortunately, it is something -- it's not something that we can discuss in public. Of course, there will be some plans that company is open to all sorts of possibilities. Right now we cannot have any -- we cannot say any definitive plan at this moment.

[Operator Instructions]. The next question comes from Carson Lo with Nomura. Please go ahead.

So I have one question about advertising market outlook. So we’ve seen that the macro for both China and also may be US facing some kind of slowdown since the fourth quarter. So does management -- can management share some color on how could that impact our advertisings on our product, both on the utility side and also on our mobile gaming side? Thank you.

Yes. In terms of the -- I think the macro economy does have an impact on the advertising industry. So at this stage, I think it's very -- I think for us it's not very clear, in the internal or general trend. For example, within -- in Chinese market, there have been different -- I think different views right? In last year -- I think the last year, at the end of last year, people were relatively pessimistic about the general marc economy. But I think over this year we have seen some positive signs. So we don't have a definitive sight of it yet in terms of whether that will have a positive or negative impact on the advertising industry. In overseas markets, we will -- yes, I think we will probably have some impact. But I think the overall industry there probably will be some change under the new regulatory regime, so we are still carefully following the trends. I mean we're carefully following the latest developments in terms of regulatory environment. Again, we don't have a definitive view on those.

Hello, Carson, do you have further questions?

Thank you.

Your next question comes from [indiscernible] with Credit Suisse. Please go ahead.

Hi management. This is [indiscernible] speaking on behalf of Thomas. We basically have two questions. The very first question is about the -- as the revenue mix -- as we see the revenue mix is changing, as mobile game is generating more and more revenue, are we going to see probably a clearer trend for the gross margin profile change in 2019? Secondly is that, management mentioned about the temporary suspension of business relationship with some overseas business partners. Can management -- given that management has already done some work on that issue, can management give us some guidance whether the temporary suspension will become normal or will become normalized? Thanks.

Okay. Again I'll take the question. The first one in terms of revenue mix, yes, the mobile gaming business has become an increasingly large part of our total revenues. And I think we expect this trend will continue, as we have been able to identify some very scalable business operations that can help us to launch modems in relatively shorter period of time. In terms of the total profit margin for the games, what I can say right now is that the existing games like Piano Tiles 2, those more mature games have very good profit margin. I think for 2019, we will be in the expanding mode for the game operations. So we will probably -- in early stage, we will have relatively large portion of marketing and new acquisition cost. So overall profit margin will -- I don't see any -- well probably will not be better than what do we have already. In terms of the business relationship with our -- the relation with our business partners, this is something we are still working with and we're very positive. We have seen some positive signs with the progress. At this stage, base I cannot give you a definitive answer.

The next question comes from Hillman Chan with Citigroup. Please go ahead.

My first question is related to the game pipeline. Could management share more color on game development effort as to what kind of games that we're developing and in what game genres and more color on the timeline would be helpful as well? And my -- and other question would be on the AI hardware side. How should we think about the profitability currently and also for the longer term? Thank you.

Okay, in Q3 and Q4 last year, we have accumulated quite some new games, for example, one of the top games in China called Kill the Virus. We have become its exclusive distributor in the overseas markets. So we have more than 10 games, some of those are very promising in our pipelines right now. Fortunately, we think that arcade games actually have a very long lifecycle, for example Piano Tiles 2 which has been long for more than three years, it is still generating very stable revenue for us and some of those games have become -- already become intellectual properties having recognized by many people. Yes, we also have done a lot work to improve the ARPU of arcade games, for example for those games have been released by somewhere between three to six months or more than that, longer term, we call it mature games and those games have pretty good margins.

[Operator instructions]

Actually I’ll take the second part -- the second question in terms of the profitability of the AI hardware. I think at this stage, it’s still relatively early for Cheetah Mobile to move into the hardware business. So the hardware margin initially will not be very good actually, we have to admit, because the volume at this stage has not reached where do we expect it. But for the second part -- for the AI -- yes, that’s on the consumer side, right? So for the profitability of the GreetBot, which is to business -- that’s the product for business, at this stage, we think -- we expect they will be relatively healthy when we reach certain volumes. Again at this stage it’s probably too early to say, because we’re still ramping up the volume at this stage. Yes, for single units, we expect we will have appropriate allocation about the production costs and our other costs, it can be pretty healthy.

The next question is a follow-up from Robert Cowell with 86 Research. Please go ahead.

Hi, thank you. Just maybe an update on -- if you can provide any metrics for the volume of GreetBot that you are shipping or planning to ship in the near future? And then also there were a number of other AI robotics products that you announced last year and I'm interested if any of those other ones you have updates that you're willing to share? Thank you.

Okay. So, we actually launched the product GreetBot last December and we have a spring break in between. And so we don't have actually a long time to implement those. Though also we have been using a lot of our distributors who will do secondary development for the actual applications for any particular scenario. So that also takes some time, that's why at this stage, we do have some volumes, but not as significant yet, but we do see a lot of promising signs at this stage. Again, we have seen some very promising signs in some customer. We have some returning customer as well where they bought some GreetBots, they use it and they are likely to come back to buy more. We have seen -- we have found -- actually found the real cases that GreetBot actually can help a lot and save labor costs in many situations. For example, in museums and in convenience stores. So that's the translation. But let me add a little bit of more details in terms of the actual scenario. For example in the museums, our GreetBot can function as a tour guide. They will explain -- it will give introductions to various art pieces in the museums. It has a very high user interaction levels. For example, it can -- hundreds of interactions with different peoples that will -- we can see that one robot can easily replace one human being. But for more people in more -- in our situation can replace up to three people in terms of the amount of interaction you can provide. And in some -- and one of the scenario is the convenience store, we have a convenience store chain -- they bought one, they did some secondary development on it, so they kind of the customized that robot in their stores. Then they are likely to come back, buy 10 of those and they we put it in different locations. So in the night, in this store, normally they would have required two people, but now they can have only one person in store and have the robot actually patrolling in the store moving around. And they can function very well actually and translate the -- the convenience store chain they have see the values, and they are doing a lot of more applications using those robots.

[Operator Instructions]. As there appears to be no further questions, I would now like to turn the conference back over to management for any closing remarks.

Thank you all for joining us today. And if you have any further questions, please do not hesitate to contact us. Thank you so much. Bye.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.