Earnings Call: Q1 2021

Jun 11, 2021

Earnings release

Good day, and welcome to the Cheetah Mobile First 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, operator. Welcome to Cheetah Mobile's Q1 2021 earnings conference call. With us today are Mr. Sheng Fu, our Chairman and CEO and Mr. Thomas Ren, our CFO. Following management's prepared remarks, we will conduct a Q and A session. Cheetah Mobile earnings release was distributed earlier and is available on our IR website at www.ir.qitamobile.com. Before we begin, I refer you to the Safe Harbor statements in our earnings release, which will also apply to this call today as we will make certain forward looking statements. Now, I would like to turn the conference call over to our Chairman and CEO, Mr. Sheng Fu. Please go ahead, Fuzong. Thank you, Sherry. Hello, everyone. In the Q1 of 2021, with our previous guidance, Chetan Global's revenue was about RMB200 1, 000, 000. The company has efficiently improved operational efficiency. Gross margin continuously increased to 70.1%. Operating loss narrowed to RMB57 1, 000, 000 and the net income attributed to our shareholder was RMB76 1, 000, 000. Our cash position has been increasing to about US276 million dollars as of March 31, 2021. The abandoned cash resource enable us to keep investing in our core business to empower the company's long term sustainable growth. For our Internet business in this quarter, the company has been focused on the domestic market and enhancing membership service. Our business has gradually transformed from a single advertising model to a diversified model of advertising plus subscription. Our products and service all center on how to deliver superior user experience and improve our user satisfaction. As a result, we see a continued increase in revenue from our membership service in terms of both absolute numbers and percentage of total Internet revenues. Besides, the company has been consistently developing new utility products on mobile platform to increase the user time and attract more high value young users. Despite the huge challenge from the market, our efforts to optimize our business model and the products, our Internet business managed to realize net profit for 5 consecutive quarters. For our AI business, we have seen some initial achievements in the business model of Xiaoping More robots. By now, we have more than 12, 000 robots in about 1200 shopping malls in more than 40 cities. Pilots in several shopping malls showed the selling coupons by our robots could effectively attract new customer to Manheim. Merchant. Merchant. They are very active to participate because it is a win win situation for both customer and merchants. We have also launched mini apps based on this shopping mall robot sending model. In May, we started to expand this business and have seen a rapid growth. We believe that we have found the key points to monetize this business and expect a boost in the coming quarters. Lastly, I would like to emphasize that in spite of its expansion headwinds last year, we have consistently realized net profit and increased our cash reserve. This cannot be achieved without our determination and improved operational efficiency. In the coming quarter, we will keep the profitable growth of our domestic TV Internet business. At the same time, our top priority will still be the monetization of our shopping mall robots business, which will create new growth engine for the company. With that, I will now turn the call to our CFO, Thomas Ren, to go through the detail of our Q4 financial results. Thank you, Fudong, and hello, 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 Q4 of 2021, our total revenues were RMB198 1, 000, 000, which was within our previous guidance. It represented a year over year decrease of 62% and a quarter over quarter decrease of 25%. The year over year decrease was from the suspension of the company's collaborations with Google since February 2020 and the company's strategic retrenchment of gaming related business and assets last year. The quarter over quarter decrease was mainly due to the normal seasonal change in the Q1 and the decreased revenues from the company's diminishing mobile gaming business. Now let me break down our revenues into Internet and AI and other sectors. Revenues from the company's Internet business decreased by 62% year over year and 25% quarter over quarter to RMB188 1, 000, 000 in the Q1 of 2021. Revenues from our Internet products have been account for a vast majority of our total revenues. So the changes were mainly due to the same reasons as stated above. Revenues from AI and others were RMB11 1, 000, 000 in the quarter, representing a year over year decrease of 66% and a quarter over quarter decrease of 24%. As our AI business is still in a very early stage, short term volatility is within our expectation. Turning to costs and expenses, the following discussion of results will be on a non GAAP basis, which excludes stock based compensation expense. 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. In the past several quarters, our ongoing streamlining of business is on the right track. We have successfully improved our operational efficiency and narrowed operating losses. In the Q4 of 2021, total costs and expenses decreased by 62 percent year over year and 20% quarter over quarter. As a result, our operating loss was RMB58 1, 000, 000 in the quarter compared to RMB141 1, 000, 000 in the same period last year and 57, 000, 000 in the previous quarter. Cost of revenues decreased by 60% year over year and 41% quarter over quarter to RMB59 1, 000, 000 in the Q1 of 2021. The decrease in costs were mainly from disposal of certain overseas utility and gaming related business and assets, as well as improved operational efficiency. Research and development expenses decreased by 48% year over year and increased by 9% quarter over quarter to RMB71 1, 000, 000 in the Q1 of 2021. Along with our efforts to streamline our business, we have been keeping investing in R and D in our domestic utility and AI business to optimize our products and services. Selling and marketing expenses decreased by 74% year over year and 14% quarter over quarter to RMB80 1, 000, 000 in the Q1 of 2021. This decrease was mainly due to more strategic and disciplined promotional activities. General and administrative expenses decreased by 44% year over year and 14% quarter over quarter to RMB49 1, 000, 000 in the Q1 of 2021. This year over year decrease shows well the excellent execution of our cost optimization strategy. Now let me turn to our balance sheet, which remains robust. As of March 31, 2021, we had cash and cash equivalents, restricted cash and short term investments of US276 $1, 000, 000 and long term equity investments of US365 million dollars Our strong balance sheet enables us to continue to invest according to our strategies to rejuvenate long term growth for the company. And for our Q2 revenue guidance, we currently expect total revenues to be between RMB175 1, 000, 000 RMB225 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. Thank you. We will now begin the question and answer session. And today's first question comes from Vicky Wei at Citi. Please go ahead. Good evening, management. Thanks for taking my question. So will management share with us the latest industry trend for the AI business and the company's strategy as we see AI revenue decline due to the decline in sales of consumer facing AI related products? Consumer facing the AI Okay. Let me translate the first part. So as your to your question regarding the decrease for our AI2C revenues, I think as we all know, the competition in the Chinese AI hardware industry is very severe, yes, facing to customers. So especially in the AI speaker industry and we think it's difficult to have a true or real gross profit or profit. And also for us, our company, we met some challenge in the overseas market, We should be increase some of our operating losses. So we do some strategy shift to cut down this 2C business, but I don't think it will affect our strategy in AI Yes. Now our company's strategy in the AI is still focusing on 2B business. And also we are seeing tremendous increase in the market regarding some service robots, especially after the pandemic. Yes. For example, we can see in the industry, for example, like delivery service or promotional service for the restaurant well as the delivery service in hotel, such demand is increasing significantly and also for the whole industry, the sales volume for such kind of service robots is also increasing verified. As for Orange Star, 1 of our investees, Orange Star promoted the service robot for restaurants to deliver dishes And our real start started to sell or lease such kind of service drivers since this January. And the rental per month is about RMB100 and we can see a tremendous growth for the past 5 months. Yes. Because Cheetah Mobile is the single largest shareholder of Orenstar. So actually through the cooperation with Orenstar CoreStar and also our investment in this company, this means we can have such kind of cooperation when we launch in such kind of new use scenario. As I mentioned in our prepared remarks, the pilot for the station model for our shopping mall, Robert, we have some initial achievements. So our pilots in past couple of years told us that for this model maybe the brand advertising is not the best way, but now we realize that we can sell coupons for the restaurant or the local merchants in the shopping mall through our service, Robert, and also to help the merchants to attract new customers. And we can see some very good trend in our pilot shopping malls. Also, the efficiency our service robots is we can see the great potential. Yes. The biggest difference between our model and the traditional screens in the shopping malls is that the actual customers can have real interaction with our robots in the shopping malls. And the customer may ask, is there any restaurant or service robots could such coupons with very high discount to attract the customers to the restaurant. So both the restaurant or the customers, they are very active for such kind of models and the I think, as I mentioned, it's like a win win situation. In conclusion, we believe that in like restaurant or shopping mall, we already see very fast growth potential for service robots. And I think we can launch or copy our initial pilots models to more shopping malls. Yes. Hope that answers your question, Mickey. Thank you. Our next question comes from Melody Chen with Jefferies. Please go ahead. Hi, management. Thank you for taking my question. I have a question regarding our Internet business. Given that we have transferred from the advertising model to membership subscription model, can you share a bit more on our strategy on the subscription business? And how should we think about the potential and the growth driver of it? Yes. As of today, I think for the Chinese Internet users having, we think it's already a trend that users would like to pay for the software or certain features of the software. Especially for some key features, for example, like some security functions on the PC or security protection functions or some functions like light office features like PDF conversion or PDF view features, we can see the growth on user payment is fast. As to the future outlook for this industry, we can see now nowadays, most software has adopted the subscription model or membership payment model. And the market size is also growing. And for us, we are just converting our previous users on both PC or mobile apps to payment users. And in the our PC revenue is also growing, contributed by the payment users growth. And for our key products on PC, it's called Xinshan Duba, which is virus detection software on PC. It's already existed for the next 20 years. And most users, I think, they don't like the advertising model. And so we convert the model and also we see great satisfaction by our users for our payment model. Yes. And based on that, we are very confident that we are confident that the our Internet business revenue can resume the growth in the next couple of quarters. Yes. Hope this answers your question, Melanie. Thank you. Thank you. Thank you for the detailed answer. And ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the conference back over to management for any final remarks. Thank you all for joining us today. If you have any questions, please do not hesitate to contact us. Thank you. Bye. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.