Cheetah Mobile Inc. (NYSE: CMCM) Q1 2020 Earnings Call Transcript

Cheetah Mobile Inc. (CMCM) Q1 2020 earnings call dated Jun. 10, 2020

Corporate Participants:

Helen Jing Zhu — Investor Relations Director

Sheng Fu — Chairman of the Board and Chief Executive Officer

Thomas Jintao Ren — Chief Financial Officer

Analysts:

Thomas Chong — Jefferies — Analyst

Vickie Wei — Citigroup — Analyst

Presentation:

Operator

Good day, and welcome to the Cheetah Mobile, First Quarter 2020 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 Jing Zhu — Investor Relations Director

Thank you, operator. Welcome to Cheetah Mobile’s first quarter conference call. With us today are our Company’s Chairman and CEO, Mr. Fu Sheng; and Mr. Thomas Ren, our Company’s CFO. 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 turn the conference call over to our Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Sheng Fu — Chairman of the Board and Chief Executive Officer

Thank you, Helen. Hello, everyone. Honestly, Cheetah Mobile is a mobile Internet business that still [Phonetic] faced some headwinds in the first quarter of 2020 due to epidemic as well as suspension of our partnerships with Facebook and Google. While we continue to communicate with Google and Facebook, we have not yet resumed our work with them. As a result, we are having difficulties in acquiring new users and monetizing our traffic in overseas markets.

In the first quarter of 2020, revenues from overseas markets decreased by 56% [Phonetic] year-over-year and 11% quarter-over-quarter. MAUs in overseas markets declined by 33% year-over-year and 40% quarter-over-quarter. Due to the epidemic, our ECPM in China declined significantly in Q1 resulting in a 75% year-over-year and 42% quarter-over-quarter decrease of our mobile utility products revenue in the domestic market. Overall, we expect our total revenues to decrease by 49% to 55% year-over-year in the second quarter of 2020 by excluding the impact of this [Indecipherable] LiveMe.

In face of these challenges, we have taken measures to sustain our profits, conserve our cash, and build a long-term growth engine. These measures include the following. First, we have streamlined our operations focused on the domestic mobile Internet market, and off-road some non-strategic, strategic business such as LiveMe.

Second, we have continued to optimize our cost and the expense structure, especially to our mobile Internet business including the utility product business and the mobile game business. Third, in terms of our investment in AI, we were focused on — we were focusing our results on AI-related robotics business in shopping malls. Fourth, we have liquidated our equity stakes in other companies which Thomas will provide some additional color in his part.

Our efforts to implement these four measures have started to pay off. Non-GAAP operating profits for our mobile Internet business unit in the first quarter of 2020 improved substantially from fourth quarter of 2019, despite a decline in revenue. The costs and the expense for our mobile Internet business decreased by 50% year-over-year and 28% quarter-over-quarter in the first quarter of 2020. Excluding the de-consolidation of LiveMe, the cost and the expense for our mobile Internet business decreased by 30% year-over-year, and 28% quarter-over-quarter in the first quarter.

As a reminder, we started to deconsolidation LiveMe’s financials since Q4 last year. As a result, the non-GAAP operating profit of our mobile Internet business include to RMB8 million from a non-GAAP operating loss of RMB92 million in the fourth quarter of 2019. As a corporate level, our gross margin expanded on both a year-over-year and the quarter-over-quarter basis in the quarter. Non-GAAP operating profit also improved sequentially from the fourth quarter of last year.

Looking ahead, we will continue to implement strict cost saving and expense control measures, while improving operational efficiency. Meanwhile, our PC revenues stabilized on both a year-over-year and quarter-over-quarter basis at around RMB120 million in the first quarter of 2020. Importantly, the composition of our PC revenues is changing. In addition to advertising revenues and gaming revenues, we generated an increased amount of PC revenues from paying user, who subscribed to the premium service of our Duba anti-virus software.

Both the paying user count and the daily subscription revenue reached record highest during the pandemic, while this metric declined slightly after the Chinese user had returned to work and school. They have recently started to grow again. In Q1, the decrease in our mobile utility products revenue in the domestic markets was due to the epidemic and our initiatives to proactively reduced some advertisement slots in China to enhance our user’s experience.

Now, we still have close to 100 million MAU on both PC and mobile in China. We believe our utility products business in China has been stabilizing. Going forward, we expect both our PC revenues and the mobile utility products revenues in the domestic market to remain resilient. At the same time, we will replicate our user subscription model from PC to mobile to rebuild our long-term growth engine.

We continue to focus our resource on selected AI related robotics business, such as AI new retail. Since last year, we have deployed our robots in more than 800 shopping malls throughout China’s Tier 1 and the Tier 2 cities. Our offering helps customers to find shops and the brands they are looking for, improve the customer’s shopping experience and to create more business opportunities for merchants.

Before the outbreak, the customers’ daily inquiries with our robot had been growing since inception, while engagement level decreased during the outbreak. It is back to the in recover model now. On the other hand, the accuracy rates of our Speech Interaction service has already surpassed 90% which is reaching the level of smart home speakers. Increased customer usage has attracted many shops and the brands to come to us to gain coverage. Our team has developed an online system which has helped users register and adjust and update the information on a real-time basis.

Recently, we have tentatively directed more traffic to certain users to monetize our user traffic. In the coming quarters we will focus on the monetization of our user traffic in shopping malls. Additionally, we have developed our robot throughout many hospital in China during the recent outbreak of COVID-19 further increasing brand awareness for our product and solutions.

With that, I will hand the phone over to our CFO, Thomas.

Thomas Jintao 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, and all growth comparisons are made on a year-over-year basis.

As we stated in previous quarters, LiveMe amended its share incentive plan on September 30th, 2019. As a result, we no longer hold the majority voting power in LiveMe, and have started to deconsolidate LiveMe’s financial results since the fourth quarter of 2019. During the fourth quarter of 2020, total revenues decreased by 51% to RMB528 million. Excluding the impact of the deconsolidation of LiveMe’s revenue, total revenues decreased by 36% in the quarter.

Let’s now look into our results for each business line, starting with the utility products and the related services. Revenue from utility products and related services decreased by 58% or RMB211 million during the quarter. Moreover, during the quarter, about 71% of our revenues from utility products were generated from advertising. This decrease was primarily due to the following. First, the decline in our mobile utility product business in overseas markets. Mobile utility product revenue in overseas markets decreased by 63% to RMB54 million in the quarter, which was mainly due to the suspension of our collaborations with Google on the advertising front, since February 2020.

Second, the decline in our mobile utility product business in the domestic market. Mobile utility product revenue in the domestic market decreased by 75% or RMB62 million in the quarter, which was the result of headwinds in China’s online advertising market. Third, the decline in PC-related revenue. PC related revenues decreased by 60% — 6% to RMB95 million in the quarter as Internet traffic in China continued to migrate from PC to mobile devices.

Revenues from our mobile game business decreased by 5% to RMB285 million in the quarter, mainly due to the suspension of our collaborations with Google on the advertising front since February 2020. In addition, during the quarter, about 70% of revenues from our mobile games business were generated from advertising. Now the remaining portion of revenues were 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.

In the fourth quarter of 2020, we implemented strict cost saving and expense control measures to our mobile Internet business, especially for our utility product business and the mobile game business. Total costs and expenses decreased by 38% year-over-year to RMB675 million in the first quarter of 2020. This year-over-year decrease was mainly due to the de-consolidation of LiveMe and our efforts to reduce cost and expenses for our mobile Internet business.

Excluding the impact of LiveMe, our total cost and expenses, decreased by 16% year-over-year in the quarter. In addition, on a sequential basis, total cost and expenses decreased by 18% in the first quarter of 2020. Turning to each line items of our cost and expenses. Cost of revenues decreased by 60% year-over-year and 19% quarter-over-quarter to RMB148 million in the quarter. The year-over-year decrease was mainly due to the deconsolidation of LiveMe. The quarter-over-quarter decrease was mainly due to the reductions in IDC and CDN costs, relating to the Company’s utility product business.

Gross profit decreased by 47% year-over-year and 12% quarter-over-quarter to RMB380 million in the quarter. Gross margin grew to 72% in the quarter from 66% in the same period last year and from 70% in the previous quarter. R&D expenses decreased by 25% year-over-year, and 1% quarter-over-quarter to RMB136 million in the quarter, mainly due to a reduction in the personnel for the Company’s utility products and related services business in overseas markets. Selling and marketing expenses decreased by 30% year-over-year and 11% quarter-over-quarter to RMB304 million in the quarter.

The year-over-year decrease was mainly due to the reduction in promotional activities for the Company’s utility products and related services business in the domestic market as well as the deconsolidation of LiveMe. The quarter-over-quarter decrease was mainly due to the reduction in promotional activities for the Company’s mobile game business in the overseas market.

G&A expenses decreased by 12% year-over-year and 46% quarter-over-quarter to RMB87 million in the quarter. The year-over-year decrease was mainly due to decreased professional fees. The quarter-over-quarter decrease was mainly due to lower salaries and employment benefits related to our G&A staff.

Operating loss was RMB141 million in the quarter, compared to an operating profit of RMB9 million in the same period of last year. However, our operating loss reduced by 31% on a sequential basis, thanks to our efforts to implement cost savings and expense control measures. Moving on to each reporting segment. Operating profit for our utility products and related services was RMB44 million in the quarter, decreasing from RMB123 million in the same period of last year. Expect this year-over-year decrease, which was mainly due to the decline in revenues, operating profit for our utility products and related services increased on a sequential basis from RMB29 million in the last quarter, thanks to our cost savings and expense control measures.

Operating loss for our mobile entertainment business was RMB36 million in the quarter, decreasing from RMB44 million in the same period of last year. This year-over-year decrease was mainly due to the deconsolidation of LiveMe. Sequentially, operating loss for our mobile entertainment business narrowed from RMB120 million to RMB36 million this quarter, which was mainly due to our cost savings and expense control measures for our mobile game business.

Operating loss for AI and other business was RMB149 million in the quarter, compared to RMB70 million in the same period of last year, mainly due to the increased investments in our AI-related business. Moving on to our balance sheet. As of March 31st, 2020, we had cash and cash equivalents restricted cash and short-term investments of US$331 million and long-term equity investments of US$361 million. We continue to review our investment portfolio and selectively liquidate some of our investments. Recently we disposed our remaining equity ownership in Bytedance Limited which will result in a gain on investment of approximately US$66 million and a cash inflow of approximately US$130 million in the second quarter of 2020. We also continue to return cash to our shareholders. Recently, our Board approved a special cash dividend of US$1.44 per ADS. The aggregate amount of the cash dividend was approximately US$200 million. Importantly, Cheetah Mobile’s cash position remains strong even after paying off this special cash dividend.

Now, let me provide you with our second quarter revenue guidance. We currently expect total revenues for the second quarter to be between RMB340 million and RMB390 million. Excluding the impact of deconsolidating LiveMe, this guidance implies a year-over-year decline in total revenues between 49% and 55% in the period. 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

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Thomas Chong from Jefferies. Go ahead.

Thomas Chong — Jefferies — Analyst

[Foreign Speech].

Thanks management for taking my questions. My first question is about the Q2 revenue guidance. Can management comment about the business trend for each segment on a monthly basis? And how we should expect the outlook in the second half? And my second question is about the momentum in terms of the recovery in domestic and overseas market. Given the coronavirus in terms of the timing and the recovery is different in China and overseas, how we should think about the impact to our business line going forward? Thank you.

Thomas Jintao Ren — Chief Financial Officer

Okay. Thomas, I will answer your first question, and Fu Sheng will answer your second question. So the first part of your question is about the — to provide more color on Q2 guidance.

So normally, we don’t provide breakdown for revenue guidance. And also, we don’t provide monthly revenue guidance as well. But you can see, our Q2 revenue guidance is between RMB340 million to RMB390 million compared to RMB530 million last quarter. So the decrease will mainly come from the utility business and gaming business being affected by Google’s termination of collaboration since late February. And for the Q2 AI revenue, we expected it to be stable compared to Q1. Although, the impact by COVID-19 to our supply chain and sales is recovering step-by-step, we do need some more time to pick up the AI revenue.

For the second half outlook, I would say that, because of the impact by Google’s termination of collaboration for our utility and gaming business i.e. our mobile Internet business, for short term we may expect some downturns on revenue side, mainly coming from overseas markets. While the domestic utility revenue has been stabilized, but we do think while we reconstructing our revenue composition then we are experimenting monetization model for AI new retail mentioned in our prepared remarks. AI and other revenue will contribute a more sizable part, if the experiment is successful during the second half of this year. Hope this answers your question.

Thomas Chong — Jefferies — Analyst

Thank you.

Thomas Jintao Ren — Chief Financial Officer

Yeah.

Sheng Fu — Chairman of the Board and Chief Executive Officer

[Foreign Speech]

Thomas Jintao Ren — Chief Financial Officer

Yeah. Let me translate the first part about the overseas market. So although, we are still trying to communicate with Google and Facebook, we still have no clear answer from both companies, how we — or what we can do to resume our collaborations. So, this cost us that we cannot upgrade our products to further serve our huge user base. So now, for the overseas market we are actively looking for some opportunities for asset sales, and we are also focusing our business on domestic market.

Sheng Fu — Chairman of the Board and Chief Executive Officer

[Foreign Speech]

Thomas Jintao Ren — Chief Financial Officer

Okay. Let me translate about the domestic market. So on the PC side, we are changing our model from free plus advertisement model to free plus premium subscription model, which we believe is more acceptable by all the PC users. Now our revenue on the domestic mobile side is declining. Our PC revenue is stabilizing currently. And we are also as we mentioned we also trying to replicate our model — user subscription model from PC to mobile.

Thomas Chong — Jefferies — Analyst

Got it. Thank you.

Operator

[Operator Instructions] Our next question is from Vicky Wei from Citi. Go ahead.

Vickie Wei — Citigroup — Analyst

[Foreign Speech].

Good evening, management. Thanks for taking my questions. I have two small questions. So would management provide some color on the progress on the strategic focus on mobile Internet market in China? And my second question is about margin churn. Would management provide on the gross margin trend after the deconsolidation of LiveMe in the future? Will there be any room to improve? Thank you.

Thomas Jintao Ren — Chief Financial Officer

So I will answer your question. So for the first part in your question, I believe we have mentioned for — our domestic utility business as we mentioned in the prepared remarks, although, the revenue is decreasing due to the epidemic and our sale adjustment [Indecipherable] it user experience. Our revenue has been stabilized, and we have also changed the revenue composition by adding premium member subscription model.

So based the paying user account daily subscription revenue has reached the record high. So — and also as we mentioned just now we will also replicate the same subscription model from PC to mobile. Now for the domestic gaming business we will be focusing key titles to ensure our profitability, while we also selectively and carefully choose new title if there is any available. So I hope this answers your first question.

So for your second question about gross profit ratio, actually our gross margin trend it really depends on our revenue composition. So normally, we have higher gross margin for mobile Internet business by utility and gaming business. And we believe for mobile Internet business, the gross profit ratio will be stabilized after deconsolidating LiveMe.

Well, for AI business because it includes robotic sales or consumer product sales, the margin will be lower than the traditional [Technical Issues] Internet business. So if we are increasing the portion of AI revenue later, the gross margin might be lower than the current level because of the different revenue compensation.

Yeah. Hope that answers your question.

Vickie Wei — Citigroup — Analyst

Thank you.

Thomas Jintao Ren — Chief Financial Officer

Thank you.

Operator

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

Helen Jing 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-bye.

Operator

[Operator Closing Remarks].