Cheetah Mobile Inc. (CMCM) Q2 2021 Earnings Call Transcript

Cheetah Mobile Inc. (NYSE: CMCM) Q2 2021 earnings call dated Sep. 07, 2021

Corporate Participants:

Sheryl Zhang — Investor Relations Director

Sheng Fu — Chairman of the Board and Chief Executive Officer

Thomas Jintao Ren — Chief Financial Officer

Analysts:

Melody Chan — Jefferies — Analyst

Presentation:

Operator

Good day and welcome to the Cheetah Mobile Second Quarter 2021 Conference Call. All participants will be in 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 Sheryl Zhang, Investor Relations Director of Cheetah Mobile. Please go ahead ma’am.

Sheryl Zhang — Investor Relations Director

Thank you, Anju [Phonetic]. Welcome to Cheetah Mobile’s second quarter 2021 earnings conference call. With us today are Mr. Sheng Fu, Chairman and CEO and Mr. Thomas Ren, CFO. Following management’s prepared remarks, we will conduct the 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, Mr. Sheng Fu, please go ahead.

Sheng Fu — Chairman of the Board and Chief Executive Officer

Thank you, Sheryl. Hello everyone. In the second quarter of 2021, Cheetah Mobile’s revenue was RMB212 million, which is within our previous guidance. It is worth mentioning that it is for the first time in the past 10 quarters, we realized quarter-over-quarter revenue growth. For our Internet business, our membership maintained a strong momentum in both membership number and revenue. We are happy to see increase in the renewal rate and more and more members have been choosing three months, six months, and even longer time membership.

This shows our members are satisfied with our superior experience we deliver. The single advertising model has been successfully transformed to a diversified model of advertising plus subscription. We will stick to this strategy to expand the size of our membership business. In addition, on our mobile platform, we have been developing and launching new products to attract more high value young users. These products has efficiently increased user times and brought in revenue for the company.

In general although in the past two years, we experienced huge external challenges, we efficiently reshaped our Internet business into right direction. As you see, this quarter we have resumed sequential quarterly revenues growth. Besides resuming domestic Internet business we just mentioned, we also have two services to utilize our overseas experience and resource to empower Chinese company to develop business outside China.

One service assists domestic companies to launch advertisement on large overseas advertising platform. The other service provides an integrated cloud platform for enterprise so they can simulate [Phonetic] alternative multi-cloud platforms at low cost. With our service, company can improve operation and save costs. We expect these two businesses will take off in the second half of 2021.

For our AI business, we have made good progress with business model of shopping-mall, coupon-selling robots. We created a brand new inside shopping mall marketing model to attract customers for merchants and have got really positive feedback. So far, our robots sell [Phonetic] more than 1,000 kinds of coupons for more than 1,000 merchants in nearly 40 cities all over the country.

Weekly average GMV has increased consecutively for 11 weeks with a compounded growth rate of about 20%. Next, we plan to deepen our focus on high-quality shopping mall and merchants. In this model, merchants can attract customers. Customers can get good benefit and we can achieve sustainable growth. This is a real marketing [Phonetic] situation.

Lastly, I would like to mention that with a great effort, the company’s operational efficiency has been significantly improved. In past quarter, the gross margin has been increasing and non-GAAP operating loss has been narrowed. We will keep working to get the best outcome with very reasonable input. As of June 30th, 2021, our cash position was around $259 million and long-term equity investments was about $374 million.

The abundant cash enables the rally of our Internet business as well as the rapid development of our AI and other business. We are confident in the second half of 2021. We will get out difficult position and achieve all-round growth in our business. With that, I will now turn the call to our CFO, Thomas Ren to go through details of our second quarter financial results.

Thomas Jintao Ren — Chief Financial Officer

Thank you, Fu Sheng and hello everybody. Thank you all for joining us today. Now I will walk you through our key financial highlights. Please note that unless stated otherwise, all money amounts are in RMB terms. As Sheng just mentioned, we delivered a healthy quarter. In the second quarter of 2021, our total revenues were RMB212 million representing a year-over-year decrease of 46% and a quarter-over-quarter increase of 7%. The revenue was within the range of our previous guidance.

To explain the reasons behind the changes, now let me break down our revenues into Internet and AI and other sectors. Revenues from the company’s Internet business decreased by 46% year-over-year and increased by 9% quarter-over-quarter to RMB204 million in this quarter. The year-over-year decrease was due to the company’s strategic efforts to diminish the gaming-related business in past quarters and the quarter-over-quarter increase was mainly from the growth of our membership business and the commercialization of several new utility products.

Revenues from AI and others were RMB8 million in the second quarter of 2021, representing a 59% year-over-year decrease and a 27% quarter-over-quarter decrease. The year-over-year decline was primarily attributable to the planned drop in sales of consumer-facing AI-related products. The quarter-over-quarter decrease was from the expected volatility during the transition of business model. Although in the last couple of months, we have still some preliminary success in the business model of shopping-mall coupon-selling robots, fluctuations could happen in the short-term as we are still optimizing this business model.

Turning to costs and expenses. The following discussion of results will be on a non-GAAP basis, which excludes stock-based compensation expenses. 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.

Our operating loss has been further narrowed with consistently improved operational efficiency. In the second quarter of 2021, our operating loss was RMB56 narrowed from RMB133 million in the same period of last year and RMB58 million in the previous quarter. Cost of revenue decreased by 56% year-over-year and 15% quarter-over-quarter to RMB50 million in the second quarter of 2021. The decrease reflects our ongoing efforts to streamline the business and improve the operational efficiency.

Research and development expenses decreased by 58% year-over-year and 33% quarter-over-quarter to RMB47 million in the second quarter of 2021. The decrease was due to the deconsolidation of certain gaming business in past quarters and at the same time, the technologies to support our current AI business has been relatively well developed. So comparing these past quarters, the investment in AI-related R&D was lower in this quarter.

Selling and marketing expenses decreased by 41% year-over-year and increased by 52% quarter-over-quarter to RMB121 million in the second quarter of 2021. This year-over-year decrease was attributable to the streamlining of our business and the strategic cost cutting while the quarter-over-quarter increase was mostly from the promotion of our new utility products.

General and administrative expenses decreased by 47% year-over-year and increased by 6% quarter-over-quarter to RMB52 million in the second quarter of 2021. The year-over-year decrease was mainly due to the streamlining of our business and our effective expense control while the quarter-over-quarter increase was caused by a one-time reversal of share-based compensation expenses due to forfeitures in the first quarter of 2021.

Now let me turn to our balance sheet. As of June 30th, 2021, we had cash and cash equivalents, restricted cash, and short-term investments of $259 million and long-term equity investments of $374 million. We have maintained a strong balance sheet as always, which makes it possible for us to invest across our core business to support our long-term growth plan.

And for our third quarter revenue guidance, we currently expect total revenues to be between RMB180 million and RMB230 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.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Melody Chan of Jefferies. Please go ahead.

Melody Chan — Jefferies — Analyst

[Foreign Speech] Thanks management for taking my question. I have two questions. The first one is on the advertising sector outlook and the second one is about our AI shopping-mall robots business. Can management share a bit more on the emerging trends [Phonetic]. Thank you.

Thomas Jintao Ren — Chief Financial Officer

Thank you, Melody, for your questions. So I will answer your first question regarding the advertising industry and I think Fu Sheng will answer your second question regarding the AI business. So for the advertising industry, recently in Q2, as we all know, there were some seasonal COVID-19 cases in several cities across China. So, therefore, we can see some negative impact on advertising for travel and transportation and also because of the recent regulation on the K-12 education, so we can see the online education industry is gradually spreading [Phonetic] out of the market. However, we still see industry very active such as Internet service, consumer goods, cars and so on.

And for us, as we mentioned, we have been transforming our single advertising business model to a diversified business model of both advertising and subscription. So currently, for some of our utility products, we can see more than half our daily cash revenue received is from membership for user subscription. And also, as we mentioned, the renewal rate is up and more and more members are choosing longer-term membership. So this will be our continuing strategy in the long run. And at the same time, as we mentioned, we also launched some new utility products. These products revenues are mostly from the user paying models. Hope this answers your first question.

Sheng Fu — Chairman of the Board and Chief Executive Officer

[Foreign Speech] Okay, let me translate this part. So based on our recent exploration, we realize that in the shopping mall, our robots can provide to the customers about the — like inquiries of location and also the information about the local merchants and we think there is a great chance we can do a really successful business model on the shopping mall.

[Foreign Speech] The local traffic in the shopping malls is increasing in the recent years.

[Foreign Speech] Yeah and the size of the local shopping mall is becoming bigger and bigger. So it will be difficult for customers entering the shopping mall. There is lack of signage [Phonetic] to obtain merchant information.

[Foreign Speech] Our robots in the shopping malls, especially in the noisier environment in the shopping malls, our robots can provide good voice interaction with customers so that they can quickly obtain the merchants information in this shopping mall.

[Foreign Speech] This also helps the shopping mall to improve its service quality.

[Foreign Speech] When the customer is inquiring the information regarding certain merchants, we can also recommend some coupons for the merchants he is asking.

[Foreign Speech] This can bring more traffic to the local merchants in the shopping mall.

[Foreign Speech] This is a multi-vendor solution for the three parties i.e., the shopping mall, the merchants, and the customers.

[Foreign Speech] Yeah, as we all know, the local merchants nowadays, their user acquisition is mostly from the big Internet platforms and the cost is becoming more high for the local merchants. So we can provide quick channels for the merchants to obtain local traffic.

[Foreign Speech] So far, our robots are selling more than 1,000 kinds of coupons for more than 1,000 merchants in nearly 40 cities all over the country and the weekly average GMV has increased for consecutive 11 weeks with compounded growth rate of about 20%.

[Foreign Speech] We believe this kind of business model can increase our growth substantially and also we can create a service platform based on the shopping mall environment.

[Foreign Speech] So that’s our answer about your second question. Thank you.

Operator

As there are no further questions at this time, I’d like to hand the conference back over to the management team for closing remarks.

Sheryl Zhang — Investor Relations Director

Thank you, Anju [Phonetic]. Thank you all for joining us today. If you have any further questions, please don’t hesitate to contact us. Thank you, bye.

Operator

[Operator Closing Remarks]