Earnings Labs

Cheetah Mobile Inc. (CMCM)

Q4 2019 Earnings Call· Tue, Mar 24, 2020

$5.50

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Transcript

Operator

Operator

Good day, and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2019 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, Investor Relations Director of Cheetah Mobile. Please go ahead.

Helen Zhu

Analyst

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter 2019 and full year 2019 earnings conference call. With us today are our Chairman and CEO, Mr. Fu Sheng; and our CFO, Mr. Thomas Ren. Following management's prepared remarks, we will conduct a Q&A section. A presentation of the company’s earnings release is already on our IR website. Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our earnings conference call today as we will make forward-looking statements. At this time, I would now like to turn the call over to our CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Fu Sheng

Analyst

Thank you, Helen. Hello everyone. Our fourth quarter revenues were in line with the management expectation. However, we incurred a record non-GAAP operating loss about RMB200 million in the quarter. Two key factors contributed to this loss. First was our increased investment into our mobile game business, particularly for overseas markets. Second was our strategic investment for AI initiatives. Starting from early January 2020, we would strategically cut down our spending for our overseas mobile game business due to the slower – due to slower than expected progress in launching new games as well as intense competition in the market. On February 20, 2020, we were made aware of the fact that the Google had disabled our accounts for the Google Play Store, Google AdMob and Google Ad management. As a result, our company's apps have been removed from the Google Play Store and we were unable to generate revenues from Google, which negatively impacted our overseas business. According to Google, the decision was made because some of our apps were not incompliance with Google policies, which has resulted – results on certain invalid traffic. During the quarter, we engaged in talk with Google to clarify this potential misunderstanding. However, despite making an appeal and providing more information, we were recently notified that Google was unable to reinstate our accounts. While we continue to speak with Google, we cannot guarantee that we will be able to resume this collaboration. Nevertheless, we have already rolled out some measures to adjust the current headwinds. Such measures include the followings. First, we have significantly cut cost and expenses, while streaming our operations in overseas markets. As a result, the corporate lever, we expect to reduce our operating loss from the first quarter of 2020 going forward. Second, we will choose to refocus our…

Thomas Ren

Analyst

Thank you, Fu Sheng, and good day everyone. Thank you all for joining us today. I am very excited to have joined the Cheetah Mobile team and look forward to meeting with everyone in the coming months. Now, let’s turn our attention to our financial results in the fourth quarter of 2019. Please note that unless stated otherwise, all money amounts are in RMB terms and all growth comparisons are made on a year-over-year basis. Total revenues decreased by 56% to RMB612 million in the fourth quarter of 2019. Excluding the impact of the deconsolidation of LiveMe's revenues, total revenues decreased by 47% year-over-year in the quarter. As we stated in the previous quarter, LiveMe amended its share incentive plan on September 30, 2019. As a result, we no longer hold the majority voting power in LiveMe and have started to deconsolidate LiveMe's financial results in the fourth quarter of 2019. Let's now look into our results for each business line starting with utility products and related services. Revenues from utility products and related services decreased by 62% to RMB299 million in the quarter. Moreover, during the quarter, about 80% of our revenues from utility products were generated from advertising. The decrease was primarily due to the following. First, a decline in our mobile utility product business in overseas markets. Mobile utility product revenue in overseas markets decreased by 69% to RMB93 million in the quarter. This was mainly due to the suspension of our collaboration with Facebook on the advertising front since December 2018 and a decline in MAU. Second, a decline in our mobile utility product business in the domestic market. Mobile utility product revenue in the domestic market decreased by 70% to RMB107 million in the quarter, which was a result of headwinds in China’s online advertising…

Helen Zhu

Analyst

Operator, we are now ready to questions please. Operator?

Operator

Operator

Yes.

Helen Zhu

Analyst

We are now ready to take questions.

Operator

Operator

Can you hear me?

Helen Zhu

Analyst

Yes, go ahead.

Operator

Operator

Okay, thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong

Analyst

[Foreign Language] Thank you many for taking my questions. I have few questions. First question is about the update about our advertising trends in domestic and overseas market as a result of COVID-19. And what are the new games in the pipeline on the entertainment segment? And how is the performance of existing games? And the increase in time spent at home helped the performance of game. And thirdly, about the investment strategy on AI initiatives and when should we expect it to achieve breakeven? Thank you.

Unidentified Company Representative

Analyst

[Foreign Language]

Thomas Ren

Analyst

Okay. So let me answer your first question about the coronavirus effect to our overseas and domestic advertising business, right?

Thomas Chong

Analyst

Yes.

Thomas Ren

Analyst

Yes. I think for the overseas advertising business, I think for this year as we mentioned because we received a notification from Google that our collaboration with Google was terminated since late February. I think this will be the biggest impact for our overseas advertising business. For the domestic advertising business, we do see some increase from the user – user login numbers and user’s time spent, but I think there was some impact by the coronavirus that some advertisers reduce their advertising budget at least for the first couple of quarters of this year. So it may have some like negative impact for our domestic advertising revenues. So your second question is about the – it's about our gaming pipelines, right.

Thomas Chong

Analyst

Yes.

Thomas Ren

Analyst

And also the performance of our current games.

Thomas Chong

Analyst

Yes.

Thomas Ren

Analyst

I will say that, as mentioned in our prepared remarks, the Google events did have some impacts also on our gaming business. So, for this year, we will be pivoting somehow from overseas market for – to domestic market for the gaming business as well. So we do have some – a large amount of gaming pipeline, but that will be transitioning from overseas to domestic. We may need some time to figure out what's the right channel, what's the right strategy for the gaming in the domestic market. And for the current games like the hot games, we used to have like Piano Tiles, Rolling Sky, Dancing Line and B 'N B, I think most of them, we can see the type of games useful life is reaching to a saturation or maturity. So we may see some slight decrease for those existing games. Yes.

Thomas Chong

Analyst

Yes.

Thomas Ren

Analyst

Yes. The third question about the AI and the breakeven point, right?

Thomas Chong

Analyst

Yes.

Thomas Ren

Analyst

Yes. For the AI business that we have mentioned in the prepared remarks, we do see some significant customer demands, especially during the coronavirus outbreak here in China, and we also do – do something to relieve the pressure by the medical staff, but also because of the – people can now retaining to work, there was some impact on both the supply and also the sales side. So I think we may need one or two quarter to pick up all the orders if we can – the coronavirus situation can recover in near future, we believe we can see some sizable revenue from the AI business. Along with the increase – the forecasted increase on revenue, we may see some reducing loss for the AI business, but I think for now it’s a little bit too early to tell that it’s apparent to breakeven, but I think, as we mentioned, the whole company’s loss, operating loss, on corporate level will be reducing quarter by quarter compared to the Q4 results. So, we remain confident that maybe in another a couple of quarters we can see more clear when we can breakeven. Hope that answers your question.

Thomas Chong

Analyst

Thank you.

Unidentified Company Representative

Analyst

Thank you.

Operator

Operator

The next question comes from Vicky Wei with Citi. Please go ahead.

Vicky Wei

Analyst · Citi. Please go ahead.

Good evening management. Thanks for taking my questions and wish everyone good help under the pandemic. I have two questions. The first one is about the Google collaboration. So does company have any plan B if the Google Corporation cannot resume within short-time? And my second question is about the AI investment. So would management please provide some color on the 2020 AI investment strategy and the margin profile? Thank you.

Unidentified Company Representative

Analyst · Citi. Please go ahead.

[Foreign Language]

Helen Zhu

Analyst · Citi. Please go ahead.

[Foreign Language]

Fu Sheng

Analyst · Citi. Please go ahead.

[Foreign Language]

Thomas Ren

Analyst · Citi. Please go ahead.

Okay. So I will translate Fu Sheng’s answer for your two questions. First question is regarding the business plan after Google’s termination of collaboration. So we think on the mobile internet front, our focus will be domestic market in the future and China already has large enough market to accommodate all kinds of players. And on the Google front, we kept communicating with them, but you cannot guarantee or cannot predict it when or whether we can be restored to Google – Google Store. And also we realize that for the Android system utilities apps no longer a must to have. From our own revenues, we can see that we already have gaming revenues very larger than utility revenues. So, yes, for the gaming we will also focus on the domestic market. So for the AI investment initiative, so during the coronavirus outbreak, our business, AI business is being kind of delayed because people cannot travel. But while we can see our people are returning to the office and the situation is being recovered as we speak right now, so we do see a great, great growth potential on the AI front. And also during the outbreak of the coronavirus, we also realized that the scenario that AI can be applied is actually larger than we originally think. So our original scenario for AI application was in like library, shopping mall, government, but now we realized that robotic product can do way more than that. With the robot we can do the remote infrared temperature management. The doctors can do remote consultation with patients without being facing the rick of the infection. So we do see a lot of increasing demand for the business. So we will continue to invest to the – our AI business and to discovering more thoughtful selling opportunities.

Vicky Wei

Analyst · Citi. Please go ahead.

Thank you.

Thomas Ren

Analyst · Citi. Please go ahead.

Yes, hope that answers your question.

Vicky Wei

Analyst · Citi. Please go ahead.

Yes, thank you.

Unidentified Company Representative

Analyst · Citi. Please go ahead.

Thank you.

Operator

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Cheetah management for any closing remarks.

Helen Zhu

Analyst

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

Operator

Operator

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