Cheetah Mobile Inc. (CMCM) Q4 2019 Earnings Report, Transcript and Summary

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.

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.

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 business strategy on the domestic mobile internet market. As such, we have brought back both our mobile utility products and the light casual games business. By doing so, we plan to build a robust medium-term growth engine for the company in the coming quarters. Our mobile internet business has already made good progress in domestic markets. Notably since January 2020, our product and game has experienced a significant growth in DAUs, user time spent, retention rates and commercial impressions. This achievement was a result of our proactive efforts to improve our user experience while also reducing some of our ads in our products. The delay in employees retaining to work following the spring festival holiday, also DAU, our engagement and the user time spent. We will believe that our product recovery of user might share will help to pave the way for the future monetization in the post-crisis period. Also in the domestic market, we introduced some premium surveys for our utility products in the middle part of 2019, which results in our number of paying user experience – experiencing significant growth. For example, the paying users count for Duba Antivirus grow by about 60% between December 2019 and March 2020. In addition, all our flagship mobile casual games including Piano Tiles 2, Rolling Sky, Dancing Line and Bricks 'N Balls has already received their gaming license for distribution in China. Third, we will continue to execute our AI strategy to drive long-term growth. The recent coronavirus outbreak has increased customer demand of our robotic products and solutions. Since the outbreak started, we have launched anti-epidemic for hospitals to relieve some of the pressure caused by shortage of medical personnel and a threat of the cross-infection. As of today, our medical robots – our medical robots have been deployed in many Chinese hospitals including Peking University Shougang Hospital, Beijing Haidian Hospital, Wuhan Wuchang Hospital and Zhengzhou's Xiaotangshan Hospital. Notably, we have received high price from local governments in this area for our initiatives in response to the outbreak. In early March, four of our robotics products were nominated for the use in 2022 Winter Olympic Games. We are the only company with the most products being nominated. While it may take a while for our robotics products and solutions to generate material revenues, we have already witnessed an increase in consumer awareness and demand for our offering as a result. On the past several years, we have built a great team, developed a strong balance sheet and executed a number of successful business transactions – transition. With that in mind, we remain confident in our ability to weather these short-term challenges and rejuvenate our growth in the coming quarter. With that I will hand the phone over to our CFO, Thomas.

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 market. Third, a decline in PC related revenue. PC related revenue decreased by 26% to RMB99 million in the quarter, but internet traffic in China continued to migrate from PC to mobile devices. Revenues from our mobile games business decreased by 13% to RMB285 million in the quarter, mainly due to a lack of new hit games and the market saturation of our existing hyper-casual games. In addition, during the quarter, about 77% of revenues from our mobile games business were generated from advertising, while the remaining portion of revenue was generated from in-game purchases. Turning to our cost and expenses. The following discussions of results will be on a non-GAAP basis, which excludes stock-based compensation expenses and goodwill impairment. The use of non-GAAP measures in this context will help us to better present the results of our operating performance without the effect of non-cash items. 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 ir.cmcm.com. During the quarter, we continue to implement strict cost and expense controls. As a result, total non-GAAP costs and expenses decreased by 36% to RMB815 million in the quarter, mainly due to our efforts to reduce cost and expenses for our utility product business and the deconsolidation of LiveMe. Cost of revenues decreased by 56% to RMB182 million in the quarter. Gross profit decreased by 56% to RMB430 million in the quarter. R&D expenses decreased by 22% to RMB138 million in the quarter. Selling and marketing expenses decreased by 41% to RMB343 million in the quarter. G&A expenses increased by 40% to RMB161 million in the quarter, mainly due to the one-time asset impairment charges. Operating loss was RMB204 million in the quarter compared to an operating profit of RMB110 million in the same period of last year. Moving on to each reporting segment. Operating profit for our utility products and related services was RMB29 million in the quarter, decreasing from RMB224 million in the same period of last year, mainly due to the decrease in revenues. Operating loss for our mobile games business was RMB120 million in the quarter compared to an operating loss of RMB11 million in the same period of last year, which was caused by the increased amounts of investments made into our mobile games business as we continue to launch new game titles. Moving on to our balance sheet. We have amassed a strong balance sheet as of December 24, 2019. We have cash and cash equivalents, restricted cash, and short-term investments of US$338 million, and long-term equity investments of US$362 million. Our portfolio of long-term equity investments includes Bytedance, Wifi Master, Codemao and other well-known assets, all of which we made early-round investments into. Now, let me provide you with our fourth quarter revenue guidance. We currently expect total revenues for the fourth quarter to be between RMB490 million and RMB540 million. Please note this forecast reflects the company’s current and preliminary view and is started to change. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

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

Yes.

We are now ready to take questions.

Can you hear me?

Yes, go ahead.

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.

[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.

[Foreign Language]

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

Yes.

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.

Yes.

And also the performance of our current games.

Yes.

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.

Yes.

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

Yes.

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.

Thank you.

Thank you.

The next question comes from Vicky Wei with 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.

[Foreign Language]

[Foreign Language]

[Foreign Language]

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.

Thank you.

Yes, hope that answers your question.

Yes, thank you.

Thank you.

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

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.

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