Cheetah Mobile Inc. (CMCM) Q4 2020 Earnings Call Transcript

Cheetah Mobile Inc. (NYSE: CMCM) Q4 2020 earnings call dated Mar. 23, 2021

Corporate Participants:

Helen Zhu — Investor Relations Director

Sheng Fu — Chief Executive Officer and Chairman

Thomas Ren — Chief Financial Officer

Analysts:

Vicky Wei — Citigroup — Analyst

Melody Chan — Jefferies — Analyst

Presentation:

Operator

Good day, and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions].

I would now like to turn the conference over to Helen Zhu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma’am.

Helen Zhu — Investor Relations Director

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.

Sheng Fu — Chief Executive Officer and Chairman

Thank you, Helen. Hello, everyone. While the macro environment remains challenging, with focus and determination Cheetah Mobile improved operational efficiency [Indecipherable] our revenue stream beyond advertising and great focus on domestic market.

In 2020, we earned RMB1.6 million 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 robotic business to build sustainable growth for Cheetah Mobile in the long term — long run.

Here are the operating highlights. First, we cut our costs and expense. As a result, non-GAAP operating loss continued to narrow 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 profit of RMB71 million in the previous quarter. Thanks to our continued operating — optimization.

Cheetah Mobile still holds $255 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 stream beyond advertising in 2020, including [Phonetic] 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 [Indecipherable]. Such initiative helped us reduce reliance on advertising and allow our utility product to deliver a superior experience.

As a result, both paying user count and subscription revenue continue to grow in 2020. And we expect this metrics to continue to grow [Indecipherable] in the future, supported by the membership service and our efforts on enhance 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. [Indecipherable] is deploying our AI robots in shopping malls, COVID-19 in China has been well controlled and as Chinese economy has recovered, our AI related robots can help shopping mall operators better serve there customers and help brands and shops promote their products 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 reserve and our confidence in the shareholder return. In 2020 we will continue to cut our cost and expense and experiment more monetization models for our AI business to rebuild a sustainable 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.

Thomas Ren — Chief Financial Officer

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 collaboration with Google since February 2020, as well as the disposal of certain gaming related business and assets.

On February 21, 2020 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 the 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 include our utility products on both the PC and mobile platforms in the domestic market and a remaining and diminishing portion of the mobile game business. The other is the AI and other business. Therefore, we have started reporting our revenues and operating profit by the above two business lines from this quarter.

We have retrospectively revised segment information from the previous periods 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 from 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 segments. 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 we will help us to better present the results of our operating performance without the effect of noncash items. For financial information presented in accordance with US 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 51% 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 cost and expenses cutting.

As of December 31, 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 31, 2020 we had cash and cash equivalents, restricted cash and 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.

Questions and Answers:

Operator

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.

Vicky Wei — Citigroup — Analyst

Good evening, management. Thanks for taking my question. My question is about advertising market and AI robots. So what does management think of the common advertising market sentiment going into the first quarter 2021? And what was the top three key advertising verticals 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]

Thomas Ren — Chief Financial Officer

Thank you, Vicky. 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’ll now be focusing our reliance on advertising while we are developing the user subscription model. So we expect — we can see a 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.

Sheng Fu — Chief Executive Officer and Chairman

[Foreign Speech] 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 the — our investee OrionStar to reduce the cost of the robotics. So we can feel that the whole market acceptance to the AI robotics is becoming much more than before.

[Foreign Speech] Okay. So I will translate this part. So for example, our robotics in shopping mall along with the traffic in the shopping malls 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 where is toilet, etc. So we seeing that more and more customers in the shopping mall used to such kind of inquiry to our robotics.

[Foreign Speech] 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 waiters cost and efficiency on the delivery is already enough to substitute the waiters. And just in a couple of months OrionStar already entered into a few hundred restaurants in which they run restaurant robotics.

[Foreign Speech] 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 accepted by the market. And also we can see a untouched service and also the service with fewer fact to face communication is also gradually accepted by the market. So we think it’s a right timing we can benefit from the market acceptance. So that’s all the Fu Sheng’s response. Hope it answers your question, Vicky.

Vicky Wei — Citigroup — Analyst

Thank you very much.

Thomas Ren — Chief Financial Officer

Thank you.

Operator

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

Melody Chan — Jefferies — Analyst

Good evening. Thanks for taking my question. So, I have two questions. The first is, can management share some views on 2021 outlook across different sectors? And 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 Speech]

Sheng Fu — Chief Executive Officer and Chairman

[Foreign Speech] Okay. So I will translate this part for Fu Sheng who was talking about the outlook for our own business. So the first, as we mentioned just now, I think we met great 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 will — not only this stabilize our revenue level and also we expect we can regain some growth in this year and the growth will not only coming from the advertising and also coming from our user subscription model. And we believe for the Internet segment, we can see a recovery trend in this year.

[Foreign Speech] Yeah. So Fu Sheng was talking about the — in the coming year we can see a more severe competition for the whole Internet industry. And for us, our utility products 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 and then we can regain some energy for our utility software.

[Foreign Speech] Okay. So as I just said, for the AI and the robotics industry, I think it’s now the trending [Indecipherable] although you can see 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 published some essay [Phonetic] or been some price competition as [Indecipherable] standard. So I think now it had been trending 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 cost and to leverage or improve the users experience. I think that’s the core competition energy for the AI products.

[Foreign Speech] Yeah. I think [Indecipherable] you can see that the — for the robotic products, previously it depends highly on some government purchase but — or to use robotics in some exhibition, but now it has been converted to — by their use at either the restaurants or hotels as an efficient — a more efficient tool. So I think I’m quite confident that this industry will grow very fast.

[Foreign Speech] Yeah. For your second question about the new policy by Apple, I think, basically, there is a very minimum effect on our utility products, because our utility apps or products are mainly on the either, Android or PC platforms. And also for our overseas gaming products, we already — as we mentioned, we already disposed certain overseas gaming products. So for the Apple policy itself, there is very minimum impact on us.

[Foreign Speech] Yeah. Now I also want to emphasize that another 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 all apps developers, we can see from the recent March ’15 Gala by CCTV, either the fraud advertisement or disruptive advertisement is also becoming a focus by government.

[Foreign Speech] Yeah. For the whole industry, I think, in the future the advertisement at this low quality or violating some user privacy information will be controlled more and more strict by either the government or mobile phone — mobile phone manufacturers.

[Foreign Speech] Yeah. So when viewer facing some challenges from either a 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 are already — in 2020 we already started to reduce our advertisement and also to reduce our reliance to advertising. So we developed the user subscription model, I think it improves our user experience. And so in the — we just mentioned on the CCTV Gala, so there is no Cheetah Mobile’s product was involved. I think it has a big relation or a great relation with our [Indecipherable] business model for our utility products.

[Foreign Speech] So, thank you. And also I want to supplement about — a little bit about our outlook for 2021, because I want to emphasize that because, first, we were terminated by the 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 a decreased trend for the full year revenue, but we are confident that since Q2, because Q1 is always as slack season for advertising. So I think we can expect some recovery from our revenue trends this Q2. So that’s my [Indecipherable] information. Thank you.

Melody Chan — Jefferies — Analyst

Thank you.

Thomas Ren — Chief Financial Officer

Thank you.

Operator

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.

Helen Zhu — Investor Relations Director

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

Operator

[Operator Closing Remarks]