Cheetah Mobile Inc. (CMCM) Q3 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Cheetah Mobile Third Quarter 2019 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. Please note, this event is being recorded. I would now like to turn the conference over to Helen Zhu, Investors Relations Director of Cheetah Mobile. Please go ahead, Ma'am.

Thank you, operator. Welcome to Cheetah Mobile’s third quarter 2019 earnings conference call. With us today are our Chairman and CEO, Mr. Sheng Fu; and our CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the Safe Harbor statement in our earnings release, which will 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 Chairman and CEO, Mr. Sheng Fu. Please go ahead, Fu Sheng.

Thank you, Helen. Hello, everyone. In the quarter, our utility products business continue to fit headwinds due to favorable macro environment in both overseas and the domestic market. In overseas market, the recent global business environment had brought some difficult to Chinese enterprise in the process of going abroad. Today we continue to face challenges that results from the misleading statements made by our third-party last November. We have not yet resumed business relations with Facebook. Despite an independent review of faith misleading statements by outsides, conceal from certain apps and the use of Facebook pre-approved independent the data auditing firm AlixPartners. This audit is large and that is find any information inconsistent with our previous disclose. In the domestic markets, we continue to see softer than expected as demand due to macro headwinds. Additionally, handset market - handset maker have increasingly integration mission critical feature, for cleaning, security and the battery management into their operating system. The impact from our internal operating environments on our business is more significant than we expected. We expect those headwinds to continue affecting our business in the short-term. In spite of these short-term challenges, Cheetah Mobile remains fundamentally strong. In the third quarter of the 2019, revenues from our mobile entertainment business grow by 7% year-over-year to RMB532 million and revenues from our AI related business grew by 88 year-over-year to RMB35 million. Despite, the challenge of the pending revenue growth for our utility product business, which did earned almost RMB353 million in revenue and more than RMB24 million in operating profits from this business in the quarter. In the quarter, we continued to implement cost to consume measures for both our utility product business and our mobile entertainment business. During the quarter, cost and extent from, for our utility product business and our mobile entertainment business while reduced by almost 12% year-over-year. In the third quarter, we began to experiment with several new channels to acquire users and monetize our traffic into overseas markets. But it will still take sometimes, we have already seen some encouraging results. In addition, we began to introduce several new premium features raising our increasing utility product and a gain for users who subscribe to. The initial results have been very encouraging. Our user subscription model diversified our revenue thought. Particularly in the overseas markets, where we do not have a direct sales team for our ad business. The decline in operating profit in this quarter was largely attributed to our increased environment for AI, which amounts to roughly RMB140 million in the quarter and a one-time non-cash asset impairment of about RMB60 million. In the third quarter of 2019, we amended LiveMe’s share incentive plan to give LiveMe's current management team more flexibility and incentive to run the business independently in a increasing competitive market environments. As a result, Cheetah Mobile were no longer holders of majority voting power in LiveMe and we are not consolidate LiveMe's financial from 4Q 2019. We are confident in LiveMe's management team, and I believe they will lead as a team to execute its long-term growth strategy. Cheetah Mobile where intern benefit from LiveMe's growth as a major shareholder. Beside as LiveMe generates the majority of the lass for our mobile entertainment segments in the past, our margin for segments under the corporate level were gain - just starting in the fourth quarter of 2019. Importantly, Cheetah Mobile has a very strong balance sheet. As of September 30, 2019, we had in net cash of US$337 million, and the long-term equity investments of US$348 million, which includes [indiscernible], WiFi Master, Codemao and other well-known assets, in which we made early round investments. In the future, we will continue to use our cash to grow our business. As of today, we will look at capitalizing our private investments and using these funds for business development or shareholder’s rehab. Overall, we remain confident that our utility products business and the mobile game business will resume their growth. As a result, we will continue to invest in our AI related business to build a long-term growth for Cheetah Mobile. Our AI related businesses made substantial progress in the terms of consumer adoption and the user engagement in the quarter. Our AI business is a joint effort with Beijing OrionStar. Our service robots, which are powered by our proprietary way, and with a impacting to our technology, are now been used in many places, such as shopping malls, museums, schools and subways. Our service robots cover more than [220] (Ph) industries, service more than 800 enterprise customers and having attracted users to use more than 130 media times. In addition, daily voice target from our robot has recently surpassed two million. As more enterprise customers adopt service robot, we believe service robots will becomes the next traffic gateway in the posts smartphone era. As of today, we are already one of the largest service robot providers in China. And we are confident in both growing our market share and ability to become market leader in the coming quarter. In the third quarter, Beijing OrionStar signs a Series-B funding agreement with outside investor. At the same time, Cheetah Mobile will also fully excise its balance in Beijing OrionStar. We expect a deal to close by the end of November. Post transaction, Cheetah Mobile will remain a major shareholder of Beijing OrionStar. Importantly, this transaction will give us more flexibility in the execution of our AI strategy and it will take time for us to educate customers, build business model and generates material revenue from our AI businesses. However, we do believe, we are on the right track and that the development of 5G technology versus build up of this progress and at the same time, our experience in developing tool based consumer products, our knowledge of how the internet works and our service ticket wise and with a interactive technologies will enable us to capture their opportunities going forward. With that, we are now turn the call to our CFO, Vincent Jiang to go through the detail of our third quarter financial results.

Thanks Mr. Fu Sheng and hello everyone. I will now walk you through our financial results. Unless stated otherwise, all money amount are in RMB, and all gross comparisons are made on a year-over-year basis. For the third quarter, total revenues decreased by 32% to RMB920 million. Revenues from our mobile entertainment business increased by 7% to RMB532 million. Mobile gaming revenues increased by 4% to RMB297 million driven by the boost in popularity of Bricks n Balls, which we launched in early 2018. LiveMe revenue increased by 11% to RMB235 million, primarily driven by higher average revenue per paying user. Revenues from utility products and related services decreased by 58% to RMB353 million in the third quarter of 2019. Primarily due to the slowdown in our mobile utility business in overseas markets. Headwinds in a domestic online advertising market also affected our mobile utility product business in China. Moving to our cost expenses, to help facilitate the discussion of the Company's operating performance, with all the effects of noncash share based compensation expenses, the following discussion will be on a non-GAAP basis, which excludes stock based compensation expenses. For financial information presented in accordance with U.S. GAAP, please refer to our press release which is available on Cheetah Mobile's website at www.cmcm.com. Cost of revenues decreased by 4% to RMB366 million in the third quarter of 2019. Due to reduced costs associated with our utility product business, which will partially offset by the increases in channel costs related to our mobile games business and other costs associated with our AI business. Gross margin in the third quarter of 2019 decreased by 43% to RMB554 million and gross margin was 60% compared to 72% in the same period of last year. R&D expenses increased by 27% to RMB212 million in third quarter of 2019 primarily due to increased R&D personnel for our first mobile games and AI related business, offset by a decrease in the number of personnel for you utility products and related services. Selling and marketing expenses decreased by 30% to 397 million in the third quarter of 2019. This decrease was mainly due to reduced promotional activities for utility products and related services business with approximately offset by the increased marketing expenses for mobile games business. G&A expenses increased by 78% to 167 million in the quarter, which was primarily due to a one-time asset impairment charges, increases in employee benefits and other administrative expenses. Non-GAAP operating loss was 222 million for the first quarter of 2019, compared to a non-GAAP operating profit of 154 million in the same period last year. Moving to each reporting segments. Operating profit for utility product and related services was 24 million in the quarter. The decrease from 264 million in the third quarter of last year, mainly due to decreased revenues in the one-time increase in allowances for third quarter account as a Company periodically reviewing accounts receivable and other receivables. Operating loss for the mobile entertaining business is 142 million in the quarter and increase from 74 million in the third quarter of last year. Mainly due to increase the amount of investments meaning to our mobile games business as we continue to launch new titles. Operating loss for AI and other business with 103 million in the quarter an increase on premium loss of 36 million in the third quarter of last year, mainly due to additional amounts of investment meetings to our AI related business. Not only amended it sure you can do you plan on September 30, 2019. As a result, we no longer hold the majority voting power in LiveMe and we were deconsolidate LiveMe financial results starting the fourth quarter of 2019. Now, let me provide you with our fourth quarter revenue guidance. We currently expects total revenues for the fourth quarter to be RMB610 million and RMB650 million. This amount has reflected the fact that LiveMe’s revenue will no longer be included in the Company's revenues. Please know this forecast reflect the Company's current and preliminary view is subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Hillman Chan of Citigroup.

[Foreign Language] So my first question on fourth quarter guidance. The management provide more greater product on the guidance for fourth quarter for the mobile entertainment, mobile games and related products. And my second question is on the product roadmap for the AI products, could management share more color related to that? And how we should think about the monetization for the products for the AI products going forward?

Hello Hillman, this is Vincent. I will take the first question. Regarding the guidance for the fourth quarter, first of all, we want to point out that the LiveMe's revenue is not included in the guidance. So, you can see a substantial decrease in amount compared to last quarter and previous quarters. And secondly, in terms of the utility products and mobile entertainment which is now just now games now and currently we expect that both the utility products and games will have a slight decrease in the fourth quarter, which is mainly because for the utility product we still see soft reaction in our advertisers and the softness in the general for our three products. And for the game business, we do have a large pipeline, and we are promoting new games in various channels. Since those new games hasn't really picked up the momentum yet. So the fourth quarter will be relatively soft. But we do hope that by next year we will see significant increase in the more games business.

[Foreign Language]

Okay, let me talk right now. So our Q4 guidance is quite conservative from our point of view. For example, as I just mentioned, the, we do have our new games in the pipeline, we are promoting those games, but we haven't counted considerable amount of revenue contribution from those new games that have been reflected in our guidance. And also, we are taking a conservative stance because, in our earlier call we mentioned that the overseas revenues and overseas business partners still having resumed with his relationship with us. And the impact that has caused is run actually much more significant than we originally expected. That is why we are, again, we are trying to be more conservative in our guidance.

[Foreign Language]

Okay. There are two aspects of the business. First of all, in terms of the Cheetah Mobile response which is a product we have been selling to business and enterprise. And it is a relatively longer term process, because we are not selling to the consumer listen to enterprise and the decision properties is longer than the selling to consumers. We do have seen some transactions in which the enterprise has been coming back to us. We have seen recurring orders from those enterprise and we hope that by next year we will see a more meaningful increase in this part of sales for our robotic products. For the second part, we have been experimenting and exploring the new business model, which we have been placing thousands of robots in a lot of shopping malls. And those of us, who provide some kind of inquiry to the customers in those shopping malls. And those shopping malls all have a large foot traffic. And we are trying to experiment new advertising model for which to monetize to add inventory through the large traffic, [indiscernible] of the traffic.

[Foreign Language]

Okay. So the AI technology actually involves many different aspect of technologies and upstream downstream, it is along there with them. In terms of making AI products and providing related internet services and providing the [indiscernible] experience that an enterprise customer would wants is actually a very challenging job. For us, we have been able to - we do have a long the direction, we do have our full suite of technologies. So in terms of the customer experience to our enterprise customers, we do believe that we are in a leading position in the industry.

Thank you. The next question comes from Thomas Chong of Jefferies. Please to ahead.

[Foreign Language] Hi management this is [indiscernible] asking on behalf of Thomas. And thank you for taking my questions. I have two questions. Could management provide some colors on utilities and entertainment 2020 outlook. And any colors on revenue contribution of AI initiative in 2020 that would be helpful. Thank you very much.

[Foreign Language]

Okay. In some of the utility product, honestly the challenges we are facing in this quarter is beyond our expectation. And as we said earlier, into the those acquisition channels you will see the markets and in the domestic market, we are all facing some issues in those channels. We still think that next year, we do have gross potential here because we are rolling our new products and we are exploring new channels and for example in our PC business, which is our kind of traditional business, and many people think that they will be continuing to decline in PC relationship business. But, what we have seen today is that that part of business has been stabilized. And I also want to add a point that for example, for our PC business, one of the new products we have provided is actually the previous premium model which is, the user will subscribe for membership fees. And in return, they will have all the services they provided by our products, and without having to bother with ads. And this is kind of a reverse of the recent year’s trends in internet, especially in mobile internet companies. Because previously all the utility products and also the safety related products was a paid model. And then of course when the industry evolves, that model has been overthrown and replaced by the total free model supported by advertising industry and others high-end projects. But now, we tried back to the previous models using the user substitution model and we found that actually with the current generation of users, the model is very receptive to our users. So just one example. And now, let me go back to the interpretation about the second part of Mr. Sheng Fu’s interpretation - second part of our asset. Which is about the AI business and for that we are very confident because as we mentioned already, our product is very competitive when we are comparing the other player in this industry and you think about a macro environments, we can see a lot of customers and our business partners coming to us. Other custom made products to sell their users. Okay. well thank you.

The next question comes from Robert Cowell of 86 Research.

[Foreign Language] My question is about to warrant. After exercising the warrant what is our shareholding percentage going to be in Beijing OrionStar. And then also in our cooperation with Beijing OrionStar, how do we split up the work? What areas are our Cheetah investing and what areas does Beijing OrionStar invest Thank you.

Hello Robert, I will take the first question. After the exercise of the warrant. Also with the new round of Series B financing. Cheetah Mobile will still be the largest shareholder of OrionStar. But it will no longer be the - well it will not be the controlling shareholder of OrionStar, just nearly because of the dilution by new investment. But it will remain the largest one.

[Foreign Language]

Okay. The relationship between Cheetah Mobile and OrionStar is as follows. First of all, for similar products such as Cheetah GreetBot, Cheetah Mobile is the exclusive distributor for OrionStar. So that will sell the product to its customers, mainly to the business customers. And there will be some profit sharing arrangements between the two companies. And for the other part, OrionStar will provide the hardware and the basics or the lower level AI capabilities and Cheetah Mobile will develop the high level applications and also will be responsible for the implementation and deployments in the actual usage scenario. So it is kind of like Cheetah Mobile is developing mobile apps for an angle operated firms.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Helen Zhu for any closing remarks.

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

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