Q3 2019 Earnings Call

Just a pinch will be in a listen only mode should you need assistance. Please signally conference specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.

No, but to turn the conference over to Helen Xu Investor Relations Director of Cheetah Mobile. Please go ahead ma'am.

Thank you operator, welcome to Cheetah Mobile's third quarter 20, Nike Inc. earnings Conference call, We said today, our chairman and CEO Mr. show.

Oh, I see Apple Mr Winkle Yeah.

Management's prepared remarks, well come back into it a section before we begin I refer you to the Safe Harbor statement Ernest Rady. We also applied for conference call today I will make forward looking statement at this time I would now like to attend the conference call all work toward chairman and CEO Ms.

They're shuffle. Please go ahead.

Thank you Hello.

Hello, everyone.

So caught up all your prepared about keeping you continue to face how do we.

You too.

Favorable my macro environment, both overseas and domestic Mackie.

Well what is the market.

The recent global business environment, how to produce some difficult to try to tiny Chinese enterprise.

The process of go you a bought deal we continue to face challenges that are resolved realms that misleading statements made a basket of poppy locked into one but we have not yet.

Disease Relations relations with the Facebook despite.

It depends on to your view of faith misleading statement.

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Cofield conceal problem.

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And that they use Facebook great accrued independent that they'd have all the key fun.

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This audit this audience you did not.

And that's fine I mean, you formation in concert with all appropriate it's close.

Let's go.

He's the domestic market.

We continue to see so current then expand expected.

The amount due to macro.

When I.

Additionally, I must say the markets.

Mark maker has nothing to make or how we increasingly integrated mission critical Peach feature from for cutting security and the battery management into their own Greg. This is Tim.

Bringing parts from Oh, what it can show.

We've had no operating environments.

Our business.

It's a more significant than we used about it.

We expect those how do we need to continue affecting our business either shortcomings.

Right off the short term challenges sure how mobile remains.

Fundamentally John .

In the third quarter over 2000.

Nike revenues from our mobile entertainment business grew by seven.

I think 7% year over year to RMB 500, a 32 media and the revenues brought our AI relates heater business grew by 88 year over year to Unburied 35 media.

Despite the challenge often the spending revenue could own girls for a lot utility upper about business.

With the a and almost RMB 300 to <unk>.

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53 media he revenue and the more than unburied, Kentucky for medium <unk> operating profit from this business is the quota.

What are we continue to two you Clemens college to conceal control measures for both our your parity bread box business and all of mobile.

Entertainment business.

During the quarter call it an expense from well all while utility Brad with any and all up mobile at a time a beating me.

Well I reviewed by almost.

12% year over year.

Settle caught her we began to.

If the pure.

Hi than men to lead the summer out you kind of to acquire new there and then monetize our traffic in the overseas markets, but it's about deal. It takes some time, we have already seen some encouraging results.

Yeah addition, we began to.

Introducing several new granular feet feature we leaving all lot of if they do.

The ability of Red Dot and that game for users who says quite too.

The initial results, how we're being very encouraging.

Our used at the heart assist subscriber.

Subscription model.

U.S. fights I'll watch revenue source.

Particularly means Oh, what these markets, where we do not have was that Iraq sales team for all will be.

Business.

The decline.

Operating profits even caught her with the Luckily.

Did you feel to two I like Crazy.

Green environment.

Which amounts to roughly RMB 114 before Ti.

Media in the quota and a onetime noncash asset I sat in payments of about RMB 16, ethics Ti media.

It's a third quarter over 2000.

19, we amended limey share.

Even if you plan to give you buy me, it's kinda its management team more flexibility.

And.

He said she incentive to run the business independently and increasingly compared to you would come back.

Concocted huge market environments as does the results Cheetah mobile where I know.

No longer hold is a majority voting power Eli me I know we're not.

On Sunday July meets the financial from for Q2 thousand 19, we are confident you line is managing 90 team.

Thank you managing and nobody would they will need as a team to execute is a long term growth jot teacher.

Sure it on mobile where intent, but any peach bottom line. These girls as a major shareholder.

Besides as alignment generates the majority of the loss for our mobile at the Qimonda pigments in the past all margin for to commence under the cooperate lever web game as well.

John .

[noise] juncture lap labs study in the fourth quarter over 2019.

Importantly, she'd on mobile has the various Joan balance.

Well it's JJ.

Hi itself.

September 30 30.

2000, and lighting, we had a net cash of U.S. dollar 337 medium and long term.

I could actually be lumpy investments all for you as 348 million.

Which include Hi, Don.

I don't know why if I'm not to hold them, all and the other where no that's it.

In which we made early round you bafflement.

In the future we will continue to use our cash to grow our business at the thing we were Luke.

Look at we've got a little cats.

[noise] capitalizing our pro whites investments and the using this phone for business development shareholder returns.

Overall, we remain confident that our utility per account business and a mobile game business.

Resume their growth as a result, we will continue to you but.

Our AI relates to the business to be able to long term growth for Cheetah mobile.

Our AI related to business made substantial progress is that some of <unk> consumer a docking adoption and the using engagements in the quarter. Our AD business is that joint airport at least debate you're already style.

Our surveys robots, which are powered by our.

Robert proprietary why I know weve intact, she with her knowledge.

I will now being used in many places such as a shelf he more new then schools and establish.

Our summit.

Always truck robots, how were more than two couldn't pay industry.

So surveys more than 800 enterprise customer and having a Chad keetch users to use the more than one time charges such Ti media time.

In addition.

Daily with Kyrie from our robot has recently surpassed two medium.

The more as a more enterprise customer adult SOVEST crop adult, but we do you sell these rapace web becomes the next traffic gateway ends up post smartphone yep.

As of today, we are already went off the largest to sobeys dropbox providers in China, and the way our confidence in both growing.

Our market share and up relative to become.

Make makita leader in the coming put her in the South corridor Beijing already stopped find a serious the founding agreements.

He's out outsider you might do matter at the same time CIT on mobile they also fully.

Excite imbalance in page or a stop we expect a deal that year to close.

By the end of November post transaction.

Cheetah mobile every Matt a major search.

Major shareholder of pitching already style importantly, this transaction will give us more.

Correct.

Further flexibility in the execute ings execution of our hey, I start each and eat well make take time for us.

To add new page customers build a business models and agenda it generates.

Much Israel.

Material revenues from all on AI business. However, we do believe we are owns a write a check.

And at the development of Fiveg technology recipe not but this progress and the at at the same time, our experience in developing to a base to consumer products our knowledge of.

How to Internet walks and I'll.

So sophisticated wife and a wager intact. He would have knowledge is where you may boss took.

After the opportunities going forward, we that we are now turn the call to our CFO Vincent Chao to go through the details of our set a quarter of financial results.

Thank you Mr Bush and Hello, everyone.

I will now walk you through our financial results.

Unless stated otherwise well money amount or your R&D and all growth comparisons made no year over year basis.

For the third quarter total revenues decreased by 32% to 920 million.

Revenues for an hour mobile entertainment business increased by 7% to 532 million.

Mobile game revenues increased by 4% to 297 million.

Driven by the boost popularity of bricks boss.

Which we launched a you early 2018.

Let me revenues increased by 11% to 235 million, primarily driven by higher average revenue per paying user.

Revenues for utility products and related services decreased by 58% to 353 million the third quarter of 2019.

Primarily due to the slowdown Nava mobile utility business in overseas markets.

How do wings in a domestic online advertising market also affected our mobile utility products business in China.

Moving to our cost expenses.

To help facilitate the discussion of the company's operating performance without the effects of noncash share based compensation expenses.

The following discussion will be on a non-GAAP basis.

Which excludes shipped stock based compensation expenses.

Well financially information presented in accordance with U.S. gap. Please refer to our press release, which is available on Cheetah Mobiles website Www policy MCM dotcom.

Cost of revenues decreased by 4% to 366 million in the third quarter of 2019.

Due to reduce the cost associated with our utility product business.

Which were partially offset by the increases in channel costs.

Related to our mobile games business and other costs associated with our AI business.

Gross margin in a full quarter over 2019 decreased by 43% to 400 coming to 554 million in gross margin was 60%.

Pair to 72% in the same period last year.

R&D expenses increased by 27% 200, 219, excuse me 212 million in third quarter on 2019.

Primarily due to increased R&D personnel follow our put mobile games.

I like to the business.

Offset by a decrease in a number of personnel for our utility products and related services.

Selling and marketing expenses decreased by 30% to 397 million in the third quarter of 2019.

This decrease was mainly due to reduced promotional activities.

Now I will tell you to product related services business.

Which will partially offset by the increased marketing expenses for our mobile games business.

DNA expenses increased by 78% to 167 million in the quarter Miss was primary due to.

Onetime asset impairment charges.

Increases in employee benefits and other administrative expenses.

non-GAAP operating loss, well 222 million for the third quarter of 2019.

Compared to a non-GAAP operating profit of 154 million the same period last year.

Moving to each reporting segments.

Operating profit when your Threed product related services.

24 million in a quarter.

<unk> decreased from 264 million in a third quarter of last year, mainly due to decrease the revenues in a onetime increase in lawlessness for doubtful accounts as a company periodically review with accounts receivable and other receivables.

Operating loss for the mobile Entertainment business was 142 million in the quarter.

An increase from 74 million in a third quarter of last year.

Mainly due to increased amounts of investments made into our mobile games business has continued to launch new titles.

Operating loss for AI, and other business, where the 103 or 3 million in the quarter.

An increase from an operating loss of.

36 million in a third quarter of last year, mainly due to additional amount of investments made into our AI later the business.

Not me amended its share incentive plan on September 30.

2019, as a result, we no longer hold the majority voting power in Miami, and we went deconsolidate lively financial results.

During the fourth quarter of 2019.

Now, let me provide you with our fourth quarter revenue guidance.

We currently expect poor revenues for the fourth quarter to be fits in.

610 million RMB.

650 million R&D.

This amount has reflected the fact that line means revenue when no longer be included in the company's revenues.

Please note. This forecast reflects the company's current and preliminary review and he is subject to change.

This concludes our prepared remarks.

Operator, we are now ready to take questions. Thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if you're using you speakerphone. Please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.

[noise] please.

Kindly ask your question first an English then repeated.

Excuse me. Please ask your question in Chinese then repeated in English at this time, we will pause momentarily to assemble a roster.

The first question comes from Hillman Chan of Citigroup. Please go ahead.

And it sounds like how to sit here so you what.

Oh Gee Valenti second dimension values have you guys anybody on the took a secure the cadence.

Okay, I think he tightly on Monday that tolerate so can you maybe tell us and mobile entertainment not your ticket.

I'll hand, the Medicaid the agenda, that's secure the topline LD why you wouldn't just acquiring the AI to pull that kids English and go on that says well I did take a topic I guess.

Al you eat I'll mention your t. to that so can you.

That.

So on that you say set yet when you laid out you get caught quite to that.

Mm.

No I quite nicely.

Okay. So much.

Fourth quarter guidance.

Management pull far more granular column on the guided for fourth quarter for mobile and attainable about games and utility products and it. My second question is on the product roadmap for the AI products could management share more calibrated, but it could that how we should think about monetization.

Hey, I products going forward. Thank you very much.

I don't know human or this is Vince and Oh it take the first question.

Regarding the guidance for the fourth quarter.

First of all the way we wanted to point out that the line is revenue isn't there were no included in the guidance. So you can see substantial decrease in amount compared to last quarter in previous quarters.

Secondly in terms of the.

Usually the products and a woman 10, which is now just games now and.

I'm confident we expect that.

Both the utility products and games will have a slight decrease or in the fourth quarter, which is mainly because.

For the.

Three products, we still see.

Oh, sorry reaction I know more advertiser.

Advertisers and or the.

Oh, the softness NNA general falling between products and.

For the game business, we do have a large pipeline and we are promoting new games.

In various channels the.

Since those new games haven't really pick up the momentum yet so the first quarter will be relatively soft, but we do.

Hope that by next year, we'll see significant increase in the mobile games business.

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Yeah. Thanks, that's it.

Okay. Let me now let me tell right now.

So our Q4 guidance is quite conservative from our point of view.

For example, as I just mentioned.

The Oh, we do how our new games in the pipeline were promoting those games, but we haven't to account.

Me a considerable amount of revenue contribution from those new games.

That has been reflected in our guidance and also were taking a conservative stance because.

You know early call, we mentioned that the overseas revenues and a overseas.

Isn't that partners still haven't resumed the bins relationship with us and the impact that have caused is actually I'm much more significant than we originally expected.

That's why we are.

Again, we are trying to be more conservative you know what guidance.

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Well machine, that's a good chunk to do whatever they agenda.

Additionally tissue.

Okay.

Now to aspect on the business so in terms of.

The.

The Cheetah mobile with Bob which is product we have been selling to business enterprise.

And this is a relatively its a really for the longer term process. Because you are when offsetting to the consumer direct selling to.

Enterprise the decision processes is long or them.

Yeah.

The selling to the consumers.

We do have seen some.

Oh.

Some transactions in which.

The enterprise has been coming back to US we have seen recurring orders from those enterprise.

We hope done by next year, we'll see a more meaningful increase.

In this part of sales for the.

While a robotic products.

Uh huh.

Operating for the second part we had been experiment in exporting deep and new business model, which we have being placing thousands all robots in a lot of shopping malls.

And.

So Bob will provide some kinda inquiry to the customers no shopping malls.

Musante, most all have a large foot traffic.

And we are trying to experiment a new advertising model.

Through which to monetize the AD inventory through.

The large traffic.

Thanks for the audio the traffic.

Mm there how should you just you should see the agents. They didn't how should you also know well I think Oh Gee or today that you still had second crop hail comments you along with all four senior woman in gosh. It I just highlighted shimon as a ticket he doesn't it situation you guys haven't yet the Hong and talking I should highlight the others.

Shatner Silimed, Israel, how should the additions.

Okay.

No so the AI and taking always like to involve many different.

Packs of technologies and.

Upstream downstream these are long battle with him.

In terms of making I products.

And Uh huh.

Providing a related the internet services.

And providing the.

Teibel experience not an enterprise customer would want.

Is actually a very challenging job.

Oh, we have being able to we do have.

Alone.

Well on the balance than we do have our full suite of technologies. So.

In terms of the customer experience along enterprise customers. We do believe that we are in a leading position in the industry.

Okay, Yes.

Okay. Thank you. The next question comes from Thomas Chong of Jefferies. Please go ahead.

Oh, hi minutes.

Oh thanks.

Yes.

When you think you're not willing to do you guys see.

And the team and she has hung in there.

Turning and Uh huh.

Well Hi, this is a woman.

<unk> yeah, there so naturally I'll hand, it many wendy leaves us asking on behalf of Thomas and Thank you for taking my question Ive two questions could management provide some color on it has deep and entertainment when you take a look and any color on revenue contribution. Okay. I appreciate it in 22.

Helpful. Thank you very much.

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Just a lot you should think that you do these initial discussion.

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Publishing isn't that Hyatt attaching shoes, and let's see the Cohu was off about yet so within that I see this element to the dingy here for which he shouldn't say on changing initially a highly likely to the bigger chunk in Philadelphia.

Okay.

In some of the utility products honestly.

Challenges, we're facing this quarter is beyond our expectation and time.

As we said earlier in the U.S acquisition channels on you'll see the markets in the domestic market.

Oh, well often from issues in those channels.

And the but we still think that next year, we do have gross potential here because we are rolling out new products, and we're exploring new channels and time.

For example, in our PC business, how much is I want not kind of traditional business.

And many people are things that they will be continued decline in PC related opinion.

What do we have seen today is that that part of business has been stabilized.

And I I also want to add a point that for example for PC business with the new one on the new product we provided.

It's actually the.

That does the previous premium model, which is the user will subscribe for membership fees and ER.

In return they will have audit services provided by our products and without having to bother with the ads and this is kind of a reverse on the recent years trends.

Internet.

Spring mobile internet companies because.

Previously Audi.

Yeah.

Utility products and also on the safety related products.

Was that paid a model and then of course when the industry evolves the model hasn't been overthrown and replaced by the total free model supported by advertising.

Industry and advertising budget, but now we tried back to the previous model are using the use of true use a subscription model and we found that.

That actually with the current generation of users d'amato, he's a very receptive.

Through our users so just one examples.

And now let me go back reinterpretation about the second part I'll solutions and.

Oh, well chunks in a second part of will answer.

She was about the AI business and for that we're very confident about.

Because.

How do we mentioned earlier our product he is very competitive.

We are comparing the other player in this industry.

And you think about a macro.

Our men's we can see a lot of customers our business partners.

Coming to us order customer custom made products to sell their users.

Okay.

Well thank you.

The next question comes from Robert Cole of 86 Research. Please go ahead.

Yeah, Hi, Tony on the decision a what Eagle Twentys, Shane Glenn you take Oh, there's a warrants shengli true whole woman Tiago around started demand that you got a trend that John do you guys or something.

Oh sure as you well mongering, yeah, we've seen call. So its would questions I'm going to take a I'm sure sure tolling.

Usually don't spend.

Sure.

The about you don't I think they said deep on quite true total Oh look we've seen cone Quaker foods in Asia.

Just a little or.

I would find yourself.

My question is about to warrants after exercising warrants what is our what is our shareholding percentage going to be in Beijing Orion start and then also.

In our crop in our cooperation with Beijing Orion Star, how do we split up the work what areas alright, our cheetah investing in what areas.

Dave Beijing around start invest.

Thank you.

No Robert I'll take the first question.

Oh, absolutely the exercise of the warrant and.

Also with the new one, though she will be financing.

Cheetah mobile will still have a still be the largest shareholder of almost all but he will no longer PD.

Well you will not be the controlling shareholder of Loren Starr, just mainly because of the dilution by the new investment.

But it will remain a are the largest along.

Oh, Yeah Oh.

Yeah that Nick the attrition, it's a much you could sort of sound that make a booth and I will Miss Omega you, who the shallow it seems idea about your door should give wishing Honda we eat I'd like California.

And that's how you actually see the who that even home Oh, the about your ideal pushing cautious on us and good teachers and a engine time team, Chad and Jen diagonally Yahoo, thereby either when do you Cook, who does show to that their time and have I. He know she just sounds like anybody you don't we ends okay. If I knew who then.

Uh huh.

Uh huh.

Okay that relationship between.

See the mobile and Golden Star.

Hmm is as follows first of all for some older product lines, such as she though we bought.

Cheetah mobile is the exclusive distributor for install so that will sell the product to its customers mainly to the business customers.

And they will be some profit sharing arrangement between the two companies.

And for the other part.

Oh install will provide the hardware and the basic or or the lower level AI capabilities.

And.

Cheetah mobile will.

Develop the high level applications and also will be responsible for the.

Well the implementation and deployment the actual usage Serrano scenario.

So it's kind of like she the mobile is developing a.

Mobile apps.

For an angle operated forms.

Okay Yeah.

The Ken if you have a question.

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[noise] [noise].

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

Thank you all for joining US today, if you have any further questions. Please do not hesitate to contact that things are so much bye.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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