Cheetah Mobile Inc. (CMCM) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in a listen-only mode. 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, ma’am.

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and full year 2020 earnings conference call. With us today are our company's Chairman and CEO, Mr. Fu Sheng; and our company's CFO, Mr. Thomas Ren. 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 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 and Chairman, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Thank you, Helen. Hello everyone. Whilst the macro environment remains challenging, with focus and determination, Cheetah Mobile improved operational efficiency, terrified [ph] our revenue streams beyond advertising and stayed focused on domestic markets. In 2020, we earned RMB1.6 billion in revenue and RMB417 million in net income attributable to our shareholders and our business began to take hold. Meanwhile, we remained committed to our AI-related robotics business to build sustainable for Cheetah Mobile in the long-term -- long run. Here are the operating highlights. First, we cut our cost and expense. As a result, non-GAAP operating loss continue to narrow this since Q4 2019. In the fourth quarter of 2020, non-GAAP operating loss was RMB57 million reduced from RMB204 million in the same period last year and RMB119 million in the previous quarter. Specifically, our internet business earned about RMB76 million in non-GAAP operating profit in the fourth quarter of 2020 compared to an operating loss of RMB92 million in the same period last year and operating profits of RMB71 million in the previous quarter, thanks to our continued operating optimization. Cheetah Mobile still holds $225 million at hand, despite that we paid $200 million cash dividends to our shareholders in 2020. Looking ahead, we will continue to cut our costs and expense and improve operating efficiency. Second, through offering membership service within our utility products, we diversified our revenue streams beyond advertising in 2020 will include user experience, user satisfaction, and our user privacy protection as our top priority in our home market. Our goal is to improve the user retention rate and attract more users through word of mouth. In the domestic market, we continue to encourage users to subscribe for an ad-free experience. Such individual -- initiative -- such initiative helped us reduce reliance on advertising and allow our utility products to deliver a superior experience. As a result, both paying user counts and subscription revenue continue to grow in 2020. And we expect this metrics to continue to grow tent in the future supported by the membership service and our efforts on enhancing our user experience, we expect revenue from our key internet business to gradually stabilize and resume quarter-over-quarter growth in the coming quarters. Third, we optimized our operation for our AI business by focusing on selected number of user case, while, they are deploying our AI robots in shopping malls. COVID-19 in China has been well-controlled. And this Chinese economy hasn't recovered. Our AI-related robots can help shopping mall operators better serve their customers and help brands and shops promote their product and service. While our AI business is still in its early stage, we believe we are on the right direction of our business. Before I turn the call to Thomas for financial highlights, I would like to emphasize our strong cash, cash reserves, and our confidence in shareholder return. In 2020, we will continue to cut our costs and expense and experiment more monetization models for our AI business to rebuild as a temporal growth model for the long-term. With that, I will now turn the call to our CFO, Thomas Ren to go through the details of our fourth quarter financial results.

Thank you, Fu Sheng and good day everyone. Thank you all for joining us today. Now, I will walk you through our financial results. Please note that unless stated otherwise, all money amounts are in RMB terms. In the fourth quarter of 2020, our total revenues were RMB271 million within our revenue guidance. It represented a year-over-year decrease of 56%. The year-over-year decline was primarily due to the suspension of our collaborations with Google since February 2020, as well as the disposal of certain gaming-related business and assets. On February 21st, 2020, the Cheetah Mobile announced that the company's Google Play Store, Google AdMob, and Google AdManager accounts had been disabled, which negatively affected its ability to attract new users and generate revenue from Google. Given the unfavorable environment in the overseas markets, we have chosen to shift our focus from overseas markets to the domestic market. In second half of 2020, the company disposed certain gaming-related business and assets in the overseas markets. As a result, we expect that revenue contribution from the mobile game business to decrease in the foreseeable future. Post such disposals, Cheetah Mobile's business primarily comprises of two pieces. One is the Internet business, which includes our utility product on both the PC and mobile platforms in domestic market and a remaining and diminishing portion of its mobile game business. The other is AI and other business. Therefore, we started reporting our revenues and operating profits by the above two business lines from this quarter. We have retrospectively revised segment information from the previous period to be comparable with the current period. Revenues from the company's internet business decreased by 56% year-over-year to RMB257 million in the fourth quarter of 2020 due to the above mentioned factors. In the fourth quarter of 2020, nearly 74% of the company's revenues from its internet business were generated by the utility products, while the remaining came from the diminishing mobile game business. In the future, we expect revenues from our utility products to account for a vast majority of this reporting segment. Revenues from AI and others were RMB14 million in the quarter, representing a year-over-year decrease of 50%, mainly due to a decline in consumer-facing AI-related products. Turning to our fourth quarter of 2020 costs and expenses, the following discussion 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 earnings release. In the past several quarters, we continue to streamline our operations and cut our costs and expenses. In the fourth quarter of 2020, total costs and expenses decreased by 61% year-over-year and 33% quarter-over-quarter. As a result, our operating loss significantly narrowed to RMB57 million in the quarter from RMB203 million in the same period last year and RMB119 million in the previous quarter. Notably, the operating profit for the internet business was RMB76 million in the fourth quarter of 2020, increased from an operating loss of RMB92 million in the same period last year and an operating profit of RMB71 million in the previous quarter due to our costs and expenses cutting. As of December 31st, 2020, Cheetah had about 150 full time employees, decreasing by about 50% from the end of 2019. In 2020, our total operating expenses decreased by 44%. In 2021, we will continue to cut our costs and expenses, particularly sales and marketing and personnel-related expenses. Turning to non-operating items, during the quarter the fair value of some of our investees increased. As a result, we reported a net income attributable to Cheetah Mobile's shareholders of RMB85 million in the fourth quarter. Importantly, our balance sheet remains strong. As of December 31st, 2020, we had cash and cash equivalents, restricted cash and the short-term investments of $255 million and long-term equity investments of $369 million. Our strong balance sheet gives us the confidence to continue to invest in the AI-related business to rejuvenate long-term growth for the company. And for our first quarter revenue guidance, we currently expect total revenues to be between RMB165 million and RMB215 million. Please note, this forecast reflects our current and preliminary views and is subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Vicky Wei with Citi. Please go ahead.

Good evening management. Thanks for taking my question. My question is about the advertising market and the AI robots. So, what does management think of the current advertising market sentiment going into the first quarter 2021? And what was the top three key advertising vertical for fourth quarter? And my second question is, post the pandemic, does management witnessed any behavioral changes in habits in terms of adoptions of AI robots? Any color about the progress of Cheetah Mobile's AI robots adoptions would be great. [Foreign Speech]

Thank you, Vicki. So, I will answer your first question about the general advertising market and Fu Sheng will answer your second question. So, for the advertising market, it seems that COVID-19 pandemic is now already under control in China. We can see a strong recovery trend of the macro economy in China, which in turn led to a recovery to advertising market as well. So, specifically for a few sectors like FMCG, auto, gaming, and education, I think those few sectors will maintain a strong growth momentum and also we can see the recovery from the travel and entertainment sectors from last year. But I also want to draw your attention that for us, as we mentioned in the prepared remarks, we are now be focusing our reliance on advertising, we are developing the user subscription model. So, we expect -- we can see more contribution from user contributed revenue for our domestic utility product. Hope this answers your question. So, I will turn to Fu Sheng to answer your question about the AI.

[Foreign Language] I will translate this part. So, after the COVID-19 pandemic, we indeed noticed that there are a lot of business customers, their acceptance level for the AI robotics accelerating and also it benefits us from the past few years, we continue to invest on AI technologies, including our investee, OrionStar to reduce the cost of the robotics. So, we can feel that the home market acceptance to the AI robotics is becoming much more than before. Okay. So, I will translate this part. So for example, our robotics in shopping mall along with the traffic in the shopping mall is recovering. We can see in more and more shopping mall, the interaction with our shopping mall robotics is increasing. So, some customers already used to asking our robotics about where to find certain brand of coffee or certain brands on restaurants and various toilet et cetera. So, we are seeing that more and more customers in the shopping mall used to such kind of inquiry to our robotics. Another example is robotics in restaurants promoted by our investee OrionStar again. So, towards the end of 2020, OrionStar promoted restaurant service robotics. The monthly rental OrionStar is collecting from one restaurant is less than RMB2,000. And actually this cost is already lower than common waiter's cost and efficiency on the delivery is already enough to substitute the waiter. And just in a couple of months OrionStar already entered into a few hundred restaurants which they run the restaurant robotics. So, especially after the COVID-19 pandemic and also our continuing investment into the AI technology, I think we already reduced our cost to a level that could be affected by the market. And also we can see untouched service and also the service with fewer face-to-face communication is also gradually accepted by the market. So, we think it's right timing. We can benefit from the market acceptance.

So, that's all the Fu Sheng's response. Hope it answers your question Vicky?

Thank you so much.

Thank you.

[Operator Instructions] And our next question today comes from Melody Chan with Jefferies. Please go ahead.

Good evening. Thanks for taking my question. I have two questions. The first is can m increase share some deals on 2021 outlook across different sectors? And then my second question is, so Apple recently increased its privacy control and all the app developers are required to have the approval from users to use data. So, will this impact advertising business? [Foreign Language]

[Foreign Language] Okay, so I will translate this part. So, Fu Sheng was talking about the outlook for our own business, so look forward as we mentioned just now, I think we met good challenge in the overseas market last year. So, the strategy for us in the prior year was to return to our home market which is domestic market and now it seems that our domestic mobile internet business, not only we stabilize our revenue level and also the fact, we cannot regain some growth in this year. And the growth is not only coming from the advertising and also coming from our user subscription model and we believe for the internet segment, we can see recovery trend in this year. Yes, so, Fu Sheng is talking about the -- in the coming year, we can see more severe competition for the whole internet industry and for us, our utility product can not only to do some functional features, and also we need to connect -- to be connected with content and community are the clock functions, then we can regain some under the -- for our utility software. Okay, so I said for the AI and robotics industry, I think it's now the turning point. Although, you can see some not -- some AI company, they are not doing great, or it's not smooth for them to either to new round of financing or the IPO. But I think generally it's not a bad thing for the whole industry. And for the AI and robotic business, it's not only about some certain technology indicator or you publish some assay, or win some prize on competition as just standard. So, I think now it has been turning to a stage that the product should be the core feature and as long as your product can meet your customers' need, and also to reduce customers' actual costs and to elaborate the -- or improve the user's experience, I think that's the core competition energy for the AI product. Yes, I think all the various CP [ph] nominal, we can see that for the robotic products, previously, it depends highly on the -- some governance parameters, but -- or to use robotics in some exhibition, but now it has been converted to -- by their use at either the restaurant or hotel as an efficient -- a more efficient tool. So, I think I'm quite confident that this industry will grow very fast. Yes. For your second question about the new policy by Apple, I think basically that very minimum effect on our utility products, because our utility apps or products mainly on the either Android or PC platforms and also for the -- our overseas gaming products, already as we mentioned, we already disposed certain overseas gaming products. So, for the Apple policy itself, there is a very minimum impact on us. Yes, no, I also want to emphasize that outlook is about no matter the overseas market or domestic market, now it's becoming more and more important to -- for the users' privacy information, it requires more and more focus for the all apps developers, because the -- on the recent March 15th gala by CCTV, the user -- the fraud advertisement or disruptive advertisement is also becoming focused by government. Yes, for the whole industry, I think in the future, the advertisement at this low quality or violating some user privacy information, it will be controlled more and more strict by either the government or mobile phone manufacturers. Yes. So, when we were facing some challenge from either Facebook or Google in last year or the year before, so we already realized that the user experience and also the low quality advertisement issue. So, we -- already in 2020, we already start to reduce our advertisement and also to reduce our reliance to advertising. So, we developed the user subscription model. I think it improves the -- our user experience and so in the -- we just mentioned on the CCTV Gala, there is no Cheetah Mobile product was involved. I think it has a big relation or a great relation is our change -- on our business model for our utility products. So, thank you. And also I want to supplement about a little bit about the -- our outlook for 2021 for the because I want to emphasize that because first we were terminated by Google last year and also secondly, we already disposed certain gaming related products or business in the second half of 2020. So, I think generally, for our full year outlook, I think we will still see decreased trend for the full year revenue. But we are confident that since Q2, because Q1 is always slack season for advertising. So, I think we can expect some recovery from our revenue crisis since Q2. So, that's my supplementary information. Thank you.

Thank you.

Thank you. And there are no further questions. So, at this time, I'd like to turn it back over to our management team for final remarks.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.