Good day, and thank you for standing by. Welcome to the second quarter twenty-twenty four Kingsoft Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Miss Yinan Li, IR Director of Kingsoft. Please go ahead.
Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 second quarter and interim results earnings call. I'm Li Yinan, the IR director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our information and information from other sources, which we believe to be reliable. Please refer to the other publicly disclosed documents for a detailed discussion on risk factors, which may affect our business and operation. Additionally, in today's earnings call, the management will deliver prepared remarks in both Chinese and English. A third-party interpreter will provide a consecutive interpretation into English.
During the Q&A session, we will accept the questions in both English and Chinese with alternating interpretation provided by the third-party interpreter. On-site translation is solely to facilitate communication during the conference call. In case of any discrepancies between the original remarks and the translation, the statements made by the management will prevail. Having said that, please allow me to introduce our management team who joined us today. Mr. Zhou Tao, our Executive Director and CEO, and Miss Li Yi, our acting CFO. Now, I'm turning the call to Mr. Zhou.
[Foreign language]
Hello, everyone, and thank you all for joining Kingsoft's 2024 second quarter and the interim results earnings call. This quarter, we continue to achieve dual improvement in both our revenues and operating profit. In particular, our total revenues reached RMB 2.47 billion, a year-on-year increase of 13%, and a quarter-on-quarter increase of 16%. Operating profit reached RMB 719 million, a year-on-year increase of 18%, and a quarter-on-quarter increase of 13.2%. The operating profit margin reached 13.2%, up one percentage point year-on-year and four percentage points quarter-on-quarter. Net profit attributable to shareholders reached RMB 393 million, a significant year-on-year increase of 588%, and a quarter-on-quarter increase of 13.8%.
Among these, Kingsoft Office Group's revenues in second quarter reached RMB 1.187 billion, a 6% year-on-year increase. Online games and other business revenues reached RMB 1.286 billion, a 20% year-on-year increase, and a significant thirty-one percent increase quarter-on-quarter.
[Foreign language] 。
...I will walk through the business highlights of the second quarter of 2024. This quarter, Kingsoft Office Group focused on the development opportunities of new quality productive office, continued to adhere to the strategy focused on AI, collaboration, multiplayer, cloud, content. Continue to invest in R&D of AI and collaboration through technological innovation, product interaction, performance enhancement, and other initiatives to continuously enhance the competitiveness of product. To realize the implementation of new quality productive forces in the field of office, Kingsoft Office Group officially launched the WPS AI 2.0 strategy, aiming to enhance new productivity through the innovative applications in the personal, enterprise, and government editions, helping users and clients improve their office efficiency.
[Foreign language] 。
In terms of individual business, the number of monthly active devices of our Kingsoft products maintained a steady growth and reached 602 million, representing a year-on-year increase of 3.08%, of which the number of monthly active devices of the PC version products amounted to 270 million, representing a year-on-year increase of 6.11%, while the mobile version achieved 328 million monthly active devices, with steadily rising year-on-year. The calculated paying subscribers reached 68.15 million, a 14.79% year-on-year increase. By continuously optimizing end-to-cloud integration experience on the product side, enhancing user stickiness to WPS cloud services, and boosting user activity on the cloud.
[Forei language] 。
Focused on individual users, WPS AI has newly launched the AI Writing Assistant, AI Reading Assistant, AI Data Assistant, and AI Design Assistant, assisting users improving efficiency and quality during office tasks. AI Writing Assistant offers user an immersive co-writing feature, significantly boosting writing efficiency. AI Reading Assistant help users analyze, summarize, and perform Q&A on documents. AI Data Assistant enables users to perform large-scale data AI calculations, analyzing, and classification through natural language interaction. AI Design Assistant help users with fully complex layout, style design, image processing, and other tasks, aiming to deliver a more practical, differentiated office experience across these four dimensions.
Around enterprise users, we launched a new intelligent productivity platform for office oriented towards organizations and enterprise customers. The comprehensive upgrade version of WPS 365, WPS Office, WPS Collaboration, and WPS AI Enterprise Edition integrates documents, collaboration, AI three major capabilities. Among which, WPS AI Enterprise Edition through AI Hub intelligent base, AI Docs intelligent document library, Copilot Pro enterprise intelligent assistant....
[Foreign language]。
For enterprise clients, we have launched the WPS 365 new productive forces in office. For organizations or corporate clients, it integrated the upgraded versions of WPS Office, WPS Collaboration, and the WPS AI Enterprise Edition, seamlessly connecting document management, collaboration, and AI capabilities. The WPS AI Enterprise Edition helps governments and enterprise customers solve problems in the AI construction process with AI Hub, AI Docs, and the Copilot Pro, and realize the efficient collaboration and the security control for the entire organization.
[Foreign language] 。
For party and government clients, the Kingsoft Government Office Model was launched, based on which the WPS AI Government Edition was realized. This edition includes capabilities such as governmental affairs AI writing, governmental affairs AI Q&A, and governmental affairs AI tool, and is compatible with the various environments, such as domestically developed information, technology, innovation, and support private development, providing intelligent support for government affairs scenarios.
[Foreign language] 。
Meanwhile, we continue to explore feasible solutions for the ample implementation of the WPS AI Enterprise Edition in office scenarios with leading enterprise customers. The concept of enterprise brain offered by WPS 365 integrates data, algorithms, and computing power to provide a powerful intelligence platform through AI capabilities. This supports enterprises in their digital transformation, enabling personalization, customers, and refine the production and services. We have already carried out WPS AI Enterprise Edition for co-creation projects with well-known enterprises in the field of securities, banking, insurance, and internet services.
[Foreign language] 。
We continue to promote the integration of government and enterprise, and to flow the integration experience and collaborative office processes, focus on the value scenarios of leading government and enterprise customers, deepening product capabilities. We are enhancing product capabilities and developing secure and efficient industry specific solutions for sections such as finance, energy, translation, publishing, biomedical, and high-end manufacturing. We have serviced more than eighteen thousand leading government and enterprise clients, including CITIC Bank, China United Property Insurance, China Huaneng Group, Guangzhou Metro, China National Gold Group, Shanghai Construction Group, Tongwei Group, Haier Group, BOE Technology Group, New Oriental Education, and other well-known organizations, and have formed a demonstration effect.
...[Foreign language]。
In terms of online game business, under the primary game strategy, we focused on deeply developing the classical JX series. We are aggressively exploring new markets, segments and expanding into new genres.
[Foreign language]。
The mobile game JX3 Ultimate was successfully launched in June 2024, achieving full platform data in inheritance and interconnection with the flagship game JX3 Online, significantly increasing the number of daily active users on all platforms. The first month of open beta, the monthly active users reached 11.46 million, of which 6.91 million were returning players, accounting for 18.29%, and the large number of the mark of players returned and continued to pay, improving the baseline for the long-term operation of the IP. With the successful launch of the mobile game JX3 Ultimate, the constant influx of new users has brought new vigor to the product IP.
[Foreign language] 。
After a long period of efforts, we had achieved a fruitful result in the ACG field. In the sci-fi mecha game, Mecha Break, have completed its first domestic public beta test in August
[Foreign language]。
In the third quarter, we will hold the fifteenth anniversary celebration of JX3 Online and continue to release new versions to further consolidate the wide quality of our core IP.
[Foreign language]！
Looking ahead, we will continue to focus on our users, adhere to technology-driving business, constantly innovator and, output products and context, and create a high quality experience to create a sustainable and long-term value for our users and shareholders. Next, I would like to invite Miss Li Yi to introduce the financial performance for the second quarter and the first half of twenty twenty-four. Thank you!
Thank you, Zhou Tao and Yinan Li. Good evening, everyone. I will now discuss the second quarter and first half of 2024 financial results. I'm starting from the second quarter, use RMB as the currency. Revenue increased 30% year on year, and 60% quarter on quarter to RMB 2,474 million. The revenue rate was 48% for office software and services, and 52% for online games and others. Revenue from the office software and service business increased 6% year on year, and decreased 3% quarter on quarter to RMB 1,188 million. The year on year increase was mainly due to the growth of domestic individual office subscription business, partially offset by decreased domestic institutional licensing business of Kingsoft Office Group. The growth of domestic individual office subscription business was primarily attributable to the improved user stickiness and commercial rates, driven by our continuous product enhancements and the optimization of user experience in cloud services and AI features. The slight quarter on quarter decrease was mainly due to decreased domestic institutional licensing and subscription businesses, partially offset by the increase of individual office subscription business....
Revenue from the online games and others business increased 20% year-on-year and 41% quarter-on-quarter to RMB 1,286 million. The solid year-on-year increase was primarily driven by the contribution from several games, partially offset by declining revenue for JX3 Online, which had a relatively high base in the second quarter of 2023. The significant quarter-on-quarter increase was mainly attributable to ongoing improvement in game experience and the successful launch of JX3 Ultimate. Cost of revenue increased 19% year-on-year and 9% quarter-on-quarter to RMB 432 million. The increases were primarily due to higher server and bandwidth costs associated with the business expansion, as well as increased channel costs, along with the revenue growth of online games. Gross profit increased 11% year-on-year and 17% quarter-on-quarter to RMB 2,042 million.
Gross profit margin decreased by one percentage point year-on-year and increased by two percentage points quarter-on-quarter to 83%. The fluctuation were mainly due to changes in the revenue mix. Research and development costs increased 11% year-on-year and 4% quarter-on-quarter to RMB 741 million. The increases were mainly due to higher staff costs, including accrued performance-based bonus. Selling and distribution expenses increased 26% year-on-year and 45% quarter-on-quarter to RMB 379 million. The increases mainly reflected the increased promotional efforts to support newly launched games. Administrative expenses increased 1% year-on-year and decreased 3% quarter-on-quarter to RMB 155 million. Share-based compensation costs decreased 10% year-on-year and increased 7% quarter-on-quarter to RMB 82 million. The quarter-on-quarter increase was mainly due to the grants of awarded shares to the selected employees of certain subsidiaries of the company in this quarter.
Operating profit before share-based compensation costs increased 14% year-on-year and 29% quarter-on-quarter to RMB 876 million. Net other losses for the second quarter of 2024 were RMB 12 million, compared with losses of RMB 103 million and RMB 4 million for the second quarter of 2023, and the first quarter of 2024 respectively. Share of losses of associates of RMB 169 million were recorded for the second quarter of 2024, compared with the share of losses of RMB 323 million and RMB 169 million for the second quarter of 2023 and the first quarter of 2024, respectively.
Income tax expense for the second quarter of 2024 was RMB 48 million, compared with income tax of RMB 78 million and RMB 42 million for the second quarter of 2023, and the first quarter of 2024, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 393 million for the second quarter of 2024, compared with a profit of RMB 57 million and RMB 285 million for the second quarter of 2023, and the first quarter of 2024, respectively. Profit attributable to owners of the parent, including share-based compensation cost, was RMB 441 million for the second quarter of 2024, compared with a profit of RMB 123 million for the second quarter of 2023, and RMB 329 million for the first quarter of 2024.
The net profit margin, excluding share-based compensation cost, was 18%, 6%, and 15% for this quarter, the second quarter of 2023, and the first quarter of 2024, respectively. And now on the first half of 2024, revenue increased 11% year-on-year to RMB 4,611 million. Office software and services made up 52% and increased 11% year-on-year to RMB 2,413 million. Online games and others made up 48% and increased 10% year-on-year to RMB 2,198 million. Gross profit margin decreased by one percentage point year-on-year to 82%. Operating profit before share-based compensation costs increased 20% year-on-year to RMB 1,754 million.
Share of loss of associates of RMB 338 million and RMB 554 million were recorded for the first half of 2024 and in 2023, respectively. As a result of reasons discussed above, profit attributable to owners of the parent was RMB 678 million for the first half of 2024, compared with a profit of RMB 250 million in the same period last year. Profit attributable to owners of the parent, excluding share-based compensation cost, was RMB 770 million, compared with profit of RMB 359 million in the prior year period.
...The net profit margin, excluding share-based compensation costs, was 70% and 9% for the first half of 2024 and in 2023, respectively. Our statement of financial position. We had cash resources of RMB 24 billion as at 30 June 2024. Net cash from operating activities was RMB 1,374 million, and RMB 2,308 million for the first half of 2024 and in 2023, respectively. Cash used for capital expenditure was RMB 164 million and RMB 183 million for the first half of 2024 and in 2023, respectively. That's all for the introduction of financial results. Thank you all. Now, we are ready for the Q&A section. Thank you, operator.
Thank you. We will now begin the question and answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Xiaodan Zhang from CICC. Please ask your question, Xiaodan.
[Foreign language]。So, thanks management for taking my questions, and I got two questions here.
My first question is regarding the gaming business. So could you please share your views on the performance of JX3 Ultimate after its launch? And my second question is on office business. So revenue growth of office business slowed down a bit during the second quarter. So what's your outlook on individual and institutional business, respectively for the upcoming quarters? Thank you.
[Foreign language]...
[Foreign language]。
Okay, okay. So thank you, Xiaodan. Thank you for your question. And let me just ask the first question. And firstly, we're going to have the different, the separate dimensions to the prospects to answer your question. Firstly, that regarding this JX3 Ultimate and when it launched. Firstly, we're going to check the users, members. We observed that the growth of the daily active users could grow to nearly 100%. So as we mentioned previously, that altogether, all the users, when it launched at that day, on the first day, their active users could reach to more than 10 million, so which is exceeding our expectations. And the second is from this perspective of the income.
So we know that for the Q2, since June up to now, the time is quite short, so the performance is not that significantly. But if we're going to take a look from this July and August, especially the last time, we can see is that for the only one day, it could already reached their highest record since it launched in two thousand and nine. And, it also possibility is that in August, we can reach to this highest, performances in the whole single month. So get together with Q3 and the data in July and August. So for this JX3 Ultimate-... Generally speaking, from the income perspective, the total performance is quite good. It is exceeding our expectations. So this is from the users and also income, the two aspects to answer your question. So this is the first part of your question.
The second question is about the office business, how to look at the future of the C-end and B-end. Actually, from our own budget perspective at the beginning of the year, the office completion rate is 100%, which is very good. Right, breaking it down, let's look at it separately from the C-end and B-end. I will give everyone some more interpretation. Let's talk about B first. For the B-end, mainly there are a few parts. We call this institutional licensing and institutional subscription. For institutional licensing, it mainly refers to Xinchuang. This part, basically, as we have communicated with everyone in previous quarters, we basically believe that under the current environment, the Xinchuang business will not have any substantial changes, so this is basically within expectations, similar to last year's situation. Right. In addition, the rest is institutional subscription. For institutional subscription, actually, from our own data, the real subscription growth rate is very, very fast. I do not know exactly how much the office business did, but it is a very high growth rate. Right, actually, from the financial revenue recognition perspective in this financial report, it seems that quarter-on-quarter there is still a bit of a decline. For the to B part, actually, this is because the two types, that is, the institutional subscription model has undergone some changes. Last year, we used annual billing for institutional subscriptions, and now it has shifted to real monthly billing. If you smooth out the financial revenue recognition perspective, we are still at a relatively high growth rate. I will also provide some explanation here. The office business roadshow in the next couple of days should also communicate more with everyone on this aspect, because some investors may have some misunderstandings. This is not a decline; it is actually still growth, just that the financial revenue recognition method has changed. Right, so overall, we believe that for to B, Xinchuang is basically progressing as expected, it is the opposite. From another perspective, the growth rate of this fast institutional subscription has far exceeded our expectations. I think the momentum is still very, very good. Right. For the C-end, actually, from a few data points, for example, for our PC version, looking at the user growth rate, in the first half of the year it still reached 7.1% growth, and the total number of users reached 271 million. This also basically met our expectations. Since the base is already quite large, our forecast at the beginning of the year was to achieve 5% growth in the first half, and actually it is higher than expected. The number of users, as disclosed, reached more than 38 million, and the year-on-year growth is also 15%, also 15%. Right, so, but maybe the market will...
This is my own judgment. The market might feel that actually, previously, for the whole AI commercialization step, maybe there were too high expectations at this stage. Actually, according to our own internal pace, our AI commercialization has also very well met expectations. Right, because since last year, the whole AI, last year we divided it into several parts, the AIGC, including Insight and Copilot. This year, they released 2.0 and also launched many enterprise-level or personal and enterprise-oriented AI functions and products. Focusing on these products and continuously deepening the user experience, we also found that, especially in Copilot, there is still a lot of room for improvement. In terms of AI commercialization on the C-end, there is still a certain degree of slowdown. The main purpose is still to hope that through product polishing, I still hope to wait until the overall product experience is better and more complete before gradually increasing the pace of commercialization. From a strategy perspective, under the guidance of this strategy, from the actual data, we also believe that the whole AI commercialization has very well met our expectations, right? And for the future growth and potential, we still have a lot of confidence, right? Please translate.
[Foreign language]。So the second way is that we gonna think about is regarding this the office business, so how we gonna look at the C end and B end? So from this the budget perspective, the office completion rate is quite good, is 100% is very good. So if we're gonna look at the C end, B end, I would like to have a further explanation. And for the B end perspective, we're gonna separate into the institutional authorization. So for the institutional authorization is that is for the localization. And basically in the previous quarters, as we have previously mentioned that currently, based on this situation, the whole environment, the business for localization is we are, we're not gonna have a significantly change. So it's gonna be roughly the same as last year, except for that... We were also gonna have the subscription, all the, the institutional subscription.
This is actually from the data we have; they're actually the exact subscription. The subscription growth is quite fast. Actually from this, the financial report, we can see is that from this financial report, it has a slightly decrease, but this is actually from this To B's perspective, and so they have some reason. The reason is that last year, we're gonna calculate their income by their annual income, but right now we have changed it into this monthly billing. That is why from this financial accounting perspective, it can cover; it can have smooth out. Although the total income is quite high, but from this financial report, it will have a slight decrease. In there tomorrow and the day after tomorrow, we're gonna have their office business roadshow.
We're gonna have a further explanation. Probably, some of their investors have some misunderstanding regarding it, but this is actually from the To Bi's perspective for the localization. Basically, it's based on our expectation to follow to growth, and especially for the subscription, it is way exceeding of our expectation. So from the C end, so from different data and from this PC's version, we can see is that the user growth has tremendous growth. Last year, it reached to 7.1%. The total users could reach to this two hundred and seventy million. So this basic is quite big.
Initially, we thought that the first half year is gonna have the growth of 5%, but right now it is more than our expectation, and the total income could reach RMB 38 million, more than RMB 38 million. So the growth, and for the year-on-year could increase up 15%, and probably for this market, according to my prejudgment, is that the whole market for the whole general commercialization for the AI, probably at this stage, is gonna give too high expectation, but according to our internal judgment, the AI commercialization has already reached to our very good expectation. Like AIGC and the Insignia Pair, they have released the 2.0 version, which is gonna fit to personal and enterprise to have different functions and products.
The target for this product, during the customer's experience process, they're gonna have a very big space to develop, and also from the AI's commercialization perspective, it has a slightly slowed down. The main reason is that we need to do still the grinding for the improvement for the products. We hope that when we can make this product have a better experience for our customers and when we have a better experience for it, so then we can hurry up of the whole process for the commercialization, so from this data, the whole commercialization for the general AI, we have a very strong confidence for it.
Hi, operator.
Okay, so I would like to have some adding, is that, for this office business, actually for the subscription revenue, and we can see is that for its contract growth it is, much higher than the income increase. So later on, we would like to have a further explanation regarding from this contract. And also we can see from this contract composition, we can see is that, the subscription transformation speed is, accelerating and is, have a very good, course.
Hi, Operator. We are ready for the next question.
Thank you. Our next question comes from the line of Juexi Zhu from CITIC Securities. Please go ahead, Juexi.
Hey, Zhou Tao, Li Yinan. My first question is about AI office applications. How do you view the competitive landscape? My second question is about AI investment. How do you view the investment in AI when the group has sufficient cash on its balance sheet? And thank you.
...
[Foreign language]。
Okay. So actually for this AI application, actually that is correct, that indeed that is emerging different products and regarding their competition situation regarding this topic, actually at each quarter is going to have people to ask me this question, so I would like to share my perspective on this topic. So actually basically speaking, except for the Microsoft, the other products, we don't think that they are our competitors. Why is that? It's because for the Kingsoft, if you can take a look of our office development history, you can take a look what exactly product is. So actually you can see is that we are actually is the creation for the content... for the documentations. And right now, we also is gonna have some, like, a collaborative creation sharing in this platform. So if we can make it as simplified as that, we're gonna base on this documentation, creation, and treatment.
This is gonna be a shared platform based to have all these functions, so based on this, you can clearly understand that this AI is also being included, including like, Alibaba is gonna have Quark. You can realize that they are very similar, like some of them, especially they're gonna have this AIGC. Based on AIGC, they can automatically to have some abilities to create document, and including Kimi, they also have this ability. We can understand that actually, the market has a lot of products in together with our office products. Looks like we are competing with each other, but actually they are based on this documentation's creation, coordination, transform, read platform, so you can realize that actually only the Microsoft, their identification exactly the same as us. Actually, in the past thirty years, only Microsoft is our competitor.
So whether it's gonna together with the AIs extract their function and abilities become stronger and stronger, it's gonna have, like, the content creation, added historical documentations, format, formatter, the horizontal files, et cetera. It's only actually is us together with Microsoft that are doing this. The other platforms, the other companies, they are based on the AIGCs, content creation, content productivity. Last year, we started to make a lot of modules, and lastly, we have mentioned that we're gonna have three parts. The first part is the AIGC. If we don't care about the content format or version, then we can only need to produce one paragraph of the content. Actually, it doesn't necessary to require Office software.
Previously, if you can have the search engine, that would be enough, because if you don't care about the format and you have some certain products, they are based on this AI knowledge search and question and answer, then they're gonna have some certain ability to do this content creation. Actually, for those type of products, they are not our competitors. What we are doing mostly is for this content. When they have created the content, we need to have format. They're to realize it, to have some format, especially a very complex format, documentation, presentations. This is actually the differences, which we can understand as a gap between us with the other companies and with the other products.
Even they're gonna have this, the AI search, and after this, they have the ability to do the treatment for the documentation, but mostly they are doing the searching. They compete with each other for search the certain products, so it does not have a significant competition relationship with us. From a collaborative perspective, like DingTalk and Feishu, they are, and also the Tencent Docs, so that they are the online documentations perspective. Yes, this is also another way to explain that. This is my understanding from a macro solutions, macro expeditions regarding your question.
Hello. Just about our recent AI investment, there are two aspects. Starting from last year, we collaborated with Shunwei. Basically, we have invested in some initial companies and large model companies. These investments are on two levels: one is financial investment, and the other is collaboration in business operations. In terms of the group, since AI is just beginning, our group is still looking for opportunities at the application level. So based on the funds you mentioned earlier for the group as a whole, we are still balancing two aspects. The first is shareholder returns. Looking at the first half of the year, our overall repurchase funds were approximately HKD 400 million. Basically, our repurchases have been cancelled. So its impact on our overall shareholding is around 1.5.
On the other hand, we are also looking for new opportunities, and we have been actively exploring. If the right opportunity arises, we will also communicate further with the market. Yes, thank you.
Regarding your second question for this, the investment of AI, and we can explain it from two aspects. Last year, we, as we mentioned that we're gonna have- we're trying to find some cooperation with other companies, especially the startup companies. From the financial perspective and also from this business perspective, we have two different perspective. We're looking for the cooperations. From our group perspective, because AI is just started, and so our group is looking at the suitable opportunities, and we are trying to make a balance with the two ends. The first three is the shareholders' return, and for the first half year, the return is gonna be HKD 400 million in the first half year. The repurchase is canceled, and their equity ratio is 1.5.
We are also looking for suitable opportunities for this further communication with the good opportunities for our strategic investment. Thank you.
Hi, thank you for joining us today, and this will conclude our presentation for our 2024 second quarter and the interim results, the earnings call. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.