Earnings Call: Q2 2021

Sep 7, 2021

Earnings release

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 Cheryl Zhang, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am. Thank you, Andrew. Welcome to Cheetah Mobile's Q2 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 and A session. Before we begin, I refer you to the Safe Harbor statements 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, Fu Zeng. Thank you, Sherry. Hello, everyone. In the Q2 of 2021, Xuekan Mobile's revenue was RMB212 1, 000, 000, 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, member and the revenue. We are happy to see increase in renewal rate and more and more members has been choosing 3 months, 6 months and even longer time membership. This shows our members are satisfied with our superior experience we deliver. The second advertising model has been successfully transformed to a diversified model of advertising class subscription. We will stick to this strategy to expand the size of our membership business. In addition, our mobile on mobile platform, we have been developing and launching new products to attract more high value young users. This product has efficiently increased user time and brought growth in revenue for the company. In general, although in the past 2 years, we experienced huge external challenges. We have efficiently reshaped our Internet business into right direction. As you see, this quarter, we have resumed sequential quarterly revenues growth. Besides resume, the domestic internet business we just mentioned, we also have 2 service to utilize our overseas experience and the resource to empower Chinese company to develop business outside China. 1 service assist domestic companies to launch advertisement on large overseas advertising platform. The other service provides an integrated cloud platform for enterprise, so they can seamlessly through multi cloud platform at low cost. With our service, companies can improve operation and save costs. We expect these 2 businesses will take off the second half of 20 21. For our AI business, we have made good progress with business model of shopping mall, coupon selling robots. We created brand new inside shopping mall marketing model to attract customers for machines and have got really positive feedback. So far, our robots see more than 1, 000 kinds of coupons for more than 1, 000 merchants in nearly 40 cities all over the country. Weekly average GMU has increased for consecutive 11 weeks with a compounded growth, growth rate of about 20%. Next, we plan to deepen our focus on high quality shopping malls and the merchants. In this model, merchants can attract customers. Customers can get good benefits and we can achieve sustainable growth. This is a real multi win situation. Lastly, I would like to mention that with great efforts, the company's operational efficiency has been significantly improved. In past quarter, the gross margin has been increasing and the non GAAP operating loss has been narrowed. We will keep working to get the best outcome with very reasonable input. As of June 30, 2021, our cash position was around $259, 000, 000 and the long term equity investment was about US374 million dollars The abundant cash enables the rally of our Internet business as well as the repeat development of our AI and other business, we are confident in the second half of 20 21, We will get out difficult position and achieve all around growth in our business. With that, I will now turn the call to our CFO, Thomas Ren, to go through details of our 4th Q2 financial results. Thank you, Fudong, and hello, everyone. 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 R and D terms. As Sheng just mentioned, we delivered a healthy quarter. In the Q2 of 2021, our total revenues were RMB212 1, 000, 000, representing a year over year decrease of 46 percent 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 204, 000, 000 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 1, 000, 000 in the Q2 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 seen 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 US GAAP, please refer to our earnings release. Our operating loss has been further narrowed with consistently improved operational efficiency. In the Q2 of 2021, our operating loss was RMB56 1, 000, 000 narrowed from RMB133 1, 000, 000 in the same period of last year and 58, 000, 000 in the previous quarter. Cost of revenue decreased by 56% year over year and 15% quarter over quarter to RMB50 1, 000, 000 in the Q2 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 1, 000, 000 in the Q2 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 have been relatively well developed. So comparing with past quarters, the investment in AI related R and D was lower in this quarter. Selling and marketing expenses decreased by 41% year over year and increased by 52% quarter over quarter to 121, 000, 000 in the Q2 of 2021. This year over year decrease was attributable to the streamlining of our business and the strategic 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 52, 000, 000 in the Q2 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 1 time reversal of share based compensation expenses due to features in the Q1 of 2021. Now, let me turn to our balance sheet. As of June 30, 2021, we had cash and cash equivalents, restricted cash and short term investments of US259 million dollars and long term equity investments of US374 million dollars 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 Q3 revenue guidance, we currently expect total revenues to be between RMB180 1, 000, 000 and RMB230 1, 000, 000. 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. You. And our first question will come from Melody Chen of Jefferies. Please go ahead. Thanks management for taking my question. I have 2 questions. The first 1 is on the advertising sector outlook. And the second 1 is about our AI shopping more robust business. Can management share a bit more on the future strategy? Thank you. Thank you, Melody, for your question. So I will answer your first question regarding the advertising industry and I think Fuzong will answer your second question regarding the AI business. So for the patent industry, recently in Q2, as we all know, there were some occasional COVID-nineteen 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 K-twelve education, so we can see the online education industry is gradually stepping out of the market. However, we still see industry very active such as Internet service, consumer goods, cars and so on. 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 the subscription. So currently, we can for some of our utility products, we can see more than half of our daily cash revenue received is from membership or user subscription. So 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, we also as mentioned, we also launched some new utility products. These products revenues are mostly from the user paying models. Hope this answers your first question. Okay. Let me translate this part. So based on our recent exploration, we realized that in the shopping mall, we 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. Yes. The local traffic in the shopping malls are increasing in recent years. Yes. And the size of the local shopping malls are becoming bigger and bigger, so it will be difficult for customer when entering the shopping mall, there is a lack of channel to obtain merchant information. Our robots in the shopping malls, especially the noisy environment in the shopping malls, our robots can provide good voice interaction with customers so that they can quickly obtain the merchant information in this shopping mall. This also helps the shopping mall to improve its service quality. When the customer is inquiring information regarding certain merchants, we can also recommend some coupons for the merchant he is asking. This can bring more traffic to the local merchants in the shopping mall. Yes. This is a multi solution for the 3 parties, I. E, the shopping mall, the merchant and the customers. Yes. As we all know, the local merchants nowadays, their user acquisition is mostly from the big Internet platforms and the cost is becoming more heavier for the local merchants. So we can provide quick channel for the merchants to obtain local traffic. 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 a compounded growth rate of about 20%. Yes. We believe this kind of business model can be can increase or grow substantially and also we can create service platform based on the shopping mall environment. So that's our answers about your second question. Thank you. 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. Thank you, Anju. Thank you all for joining us today. If you have any further questions, please don't hesitate to contact us. Thank you. Bye. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.