Q2 2019 Earnings Call

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Note that this event is being recorded I would now like to turn the conference over to Helen Zhu Investor Relations Director of Cheetah Mobile. Please go ahead ma'am.

Thank you operator, welcome to Cheetah Mobiles second quarter 20, Nigel earnings conference call with US today, Oh, it's colony's chairman and CEO Mr. for show and the company's CFO Mr. Vincent Yeah. Following managements prepared remarks, well what comes out the acuity section.

Before we begin I refer you to the safe Harbor, saying they are early.

Which will also apply to our conference call today I will make for different things at this time I would now like to turn the conference call over to our chairman and CEO Mr. Shao. Please go ahead.

Thank you Hello, Hello, everyone.

The second quarter of 2000 and Nike.

But the revenue you think.

Because if he does the high end.

Okay, that's driving by our robust ship building, our mobile games and eight AI to relocate to be linear however, we must admit.

Does that allow you to take a bread box business is still facing some challenges due to the mid misleading statements made by a third party innovator in November 2018, which led to call. It.

Oh Wow.

Hi, Robert collaborations, which beat the need to put a nurse in overseas market.

Why are we how we continue to to talk leads them to carry out. This confusion, we have not yet being able to address.

We used to be the case.

Isn't it the nutrition wages, some including Facebook in the first half over 2019 revenues growing utility parent and it actually the studies.

Decreased by 39 to be 39%.

Two on <unk>.

921 million.

In the second half of 2000 and <unk>, we will continue to face the challenge you thoroughly and.

[laughter], stating our utility products business revenue.

Oh, a year over year basis.

The slow down probably to the upper Dutch I didn't relate to the Soviet could it be could lead to a decrease in our total revenues for the full year 2000 and Nike.

Also continues and that's true yeah, yeah, that's how I'd be isn't easy deal based early stage. It would development as a result, we could report Oh routine law.

For the full year over 2000 the Nike.

Even though we have taken several steps to restart the drilling of all appealing some of these steps have already issue early upbeat resolved.

But oh, why your kind of your product and that relates to the silliest business continues to make Uh huh.

Healthy profits and the cash flow in the first half over 2000, a Nike this business.

This isn't it's incumbent on be too.

Hundred 40 people media he obregon profit.

About 400 to eat and I'm able we'll continue to do so.

So at this juncture soft overall revenue under age foundation for developing Neil could not necessarily.

Second our mobile game mobile game business has a computer to girls Jolie and has become a growth.

And you bought the company is the first call over 2000, the Nike revenues from our mobile games business.

Got it okay bye.

Eight.

88% year over year to RMB four <unk>.

500, Nike you want me to.

We continue to see that really.

Severely user adoption of our mobile card, okay. The overseas market.

According to us to set a puppet they they'd huh.

So oh Laura.

Mobile code, you're getting Lucky it's increased by 100%, Yeah, Oh, Yeah, Egypt June 2019 timeframe by you use the girls you both developed countries and emerging markets, such as India, Russia, and the Braves Brazil.

They just got Peter this is if you broke it out well. It's also driving by Gamer, who had never played mobile game people enjoy all cash flow.

So the girl you mobile casual game buckets had to continue to boost this grille grille, you know our mobile game business.

Cheetah mobile continues to creep.

To create two [laughter] games, our games have been downloaded to more than 2 million times is a path to beat him kinda sorry to be that kind of is a policy years face Nike.

Oh 2000, a Nike.

We have launched several gave some of this game related.

Related <unk> co. good yeah.

What this market.

And I will be featured by either we go Oh I will stop.

For example in late July we launched Beach clean Beechcraft is a light quarter game set of Cricklade became a top three app a game.

Oh, Google play the United States.

And a number of other developed for the country.

We also continue to explore additional monetization opportunities through our.

[laughter] Lynch.

Current high.

Hi, Noah.

By launching in game purchase items and the game reward this how how cost to continue grow your own.

Oh no up.

Importantly, our flagship game, including <unk> piano tiles, two run this guy I don't see light and the brake boy.

Continue to do quite well and how he got to from a portfolio of well not mobile game IP in the second quarter of 2019, Oh flat flagship game operating margin expanded to two.

28% from 23% in the thing periods last year you drew.

Due to better operating leverage.

Good.

Despite the early despite the early stage of development, we have already launched however, several <unk> based the paradox.

'cause has always been one where it's not.

We are also our single largest shareholder of Beijing, or if not we have to deal with the developments oval fiveg technology brokerage opportunity to grow the number of life and their results into actually product.

And the solution and the lucky to quickly.

Oh wise I know, we just need to execute paradigms offering how were being used in many places such as.

Okay, then, yes, Oh, Oh, Oh, Oh phase build his pinky leaf show him on hotel Oh School CACI Clos, an a mall in the first half of 2019, our <unk> and other revenue increased to two.

HM HM.

Hey, Hey, Theodore HCCI medium from.

I'm being punky two medium in the same period.

Last year.

In the future, we will be able to enhance the monetization of our <unk> related business as the user adoption.

For our service continues to grow.

We say the mine, we will continue to be in that team and the folks Oh, hi to resume our growth.

Lastly, I would like to finish my speech today by announcing our bought that our board has declared a cash driving.

Definitely is in the amount of the U.S. dollar.

They are deploying a five plus eight yes, what did you buy amount to a total cash payments of about U.S. dollar 17 to media.

Our special cash.

But even then dividend payment demonstrates our commitment to do Larry shareholder value.

Well actually we are facing some difficult.

We are confident in our Companys long come potential we have to deal with that Oh.

Let me see mobile Internet business.

Rich if you include our utility parent <unk> business mobile game business and aligning whereas the Super Tucano ends alone wrong and they remain profitable.

In addition, we are.

Im excited about some of the new.

Prospects of a building and yield growth engine around it's a <unk> to <unk>.

Underpriced surveys and the way our confidence in our long come. It has is the aim estimates.

Despite its out of our <unk> business is still in its early stage of development, we have sufficient cash to do so he's though to found that these new business. We have also made good progress in building.

[laughter] dependable business modal for other AI business, and we hope to see meaningful they 10 older and less money. So.

With that we will no trend.

The call to our CFO listen the Jones, who goes through the details of our second quarter financial results.

[noise], Thanks, Hello, everyone.

I'll walk you through the financial results our money amount are you R&D I stated otherwise.

[laughter] second quarter total revenues were 970 million decreased by 12% year over year.

Revenues falling utility products and related services decreased by 44% year over year to 424 million in the second quarter of 2019, primarily due to slowdown in our overseas mobile utility business.

As a result of the negative publicity caused by a news article published in 2019, and easiest softness only domestic advertising industry.

Revenues from the mobile entertainment business increased by 50% year over year to 498 million driven by a laundry and 9% year over year growth in the mobile game business and an 8% year over year growth lightening business.

The increase in mobile game revenue was mainly driven by the strong performance of brief boss, which started to run off from the middle of July 2018.

The increase in my view is primarily driven by higher average revenue per user.

His line, we introduced several new features in the quarter to account using direction competition engagement.

Please note that the company will begin to Deconsolidate smarmy is revenue starting in the fourth quarter of 2019.

[noise] <unk> other revenue grew by 236% year over year to 49 million many to them trying to sell the AI based competition in Dubai.

She doesnt translate huh.

Moving to our Kaufman.

To help facilitate the discussion of the company's operating performance.

Without the effect of non cash share based compensation expenses.

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

Which exclude <unk>, which excludes stock based compensation expenses.

The financial information presented in accordance with U.S. GAAP. Please refer to our press release, which is available on the company's website at www part of CMC and of course.

Cost of revenues in Q2 was 327 million RMB.

The decrease of 7% year on year, mainly due to reduced traffic acquisition costs associated with our third party advertising telephone business.

Partially offset by increases in content and channel costs related to our mobile game business.

As well as the costs associated with the high business.

Gross profit for the quarter was 643 million and gross margin for the quarter was 66 cents.

R&D expenses in Q2.

Well 211 million, an increase of 36% over the corresponding period in 2018.

Primarily due to an increased number of R&D personnel of our mobile game AI related business.

[noise] selling and marketing expenses in Q2 or 380 to me.

An increase of 3% year over year, mainly due to increased promotional efforts for our new mobile games.

Jan they expenses increased by 18% year over here.

Two 180 million RMB in the quarter, primarily due to increased professional service fees.

non-GAAP operating loss was 22 million.

Compared to 143 million in Q2 last year.

Moving to each reporting segments.

Operating profits for utility products related to services was 121 million in the quarter.

Decreased from 282 million in Q2 last year.

Many due to the revenue decrease.

Operating loss for the mobile Entertainment business was 58 million in the quarter reduced from an operating loss of 99 million in Q2 last year.

[noise], mainly attributable to the increase in operational leverage.

Stricter cost and expense management for like me.

And the improved operating profits fall off election campaigns.

Partially offset by initiatives launched new titles.

Please note that the company would begin to Deconsolidate alignments financial from September 32019.

Operating loss for AI and other business was 74 million in the quarter.

Increased from an operating loss of 41 million in Q2 last year.

Many do trial last step up investments they are linked to the business.

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

We currently expect total revenues for the third quarter to be between.

My hungry and 40 million RMB.

And my 180 million RMB.

Please note that this forecast reflects the company's current.

Preliminary in your view.

He is subject to change.

Overall, we are confident that our business remains healthy.

I also wanted to emphasize that the company has a very strong balance sheet.

As of the second quarter in 2019, we have 488 million U.S. dollar in cash and cash equivalents restricted cash and short term investments.

We also have 287 meeting your stars Mountain investments, which contains several well known projects I received only around investments.

The second quarter of 2019, the company recognized again from equity investments.

11 million.

And other income net 34 million.

Primarily due to an increase in fair value on certain long term investments in this quarter.

For example, our investments in code now the Chinese online education platform, a teacher's programming to children.

Our investment in Super icon, and online finance platform, focusing on the southeast Asian markets.

Oh again strong lunch, how you Messman helped the company reported net income.

49 million.

This concludes our prepared remarks, operator, we're now ready to take questions. Thanks.

We will now begin the question and answer session.

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Please ask your questions in Chinese first then repeat your questions in English at this time.

<unk> roster.

[noise].

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

Hi, Hello.

It actually was at even when she's actually value on your lunch.

Thanks, you too that the new guidance.

Funny, Utah and <unk>.

Got it.

I hope youre going to see probably tick up AI and others, Keith and the topic.

So that's it got sheet type late <unk> and <unk>.

Yes.

Okay, well give you that color why did you wait <unk>.

Tito AI whatever it is hobbies and they've all been take Oh, there's about tell the tick up in spend that you've got your content, which.

Oh, it's actually Jon yes.

Touching that casino.

Equation.

That's all it is is it Alex I.

Thank you management sticking my question.

So my first question is part of third quarter revenue guidance can management, a shambolic, how awful Egypt is something into that caught up here and my second question is either Telefonica just should just shoot a woman that you don't realize the year would somehow knowing she oh what was your question is it sounds you feel you are entitled to abandon it does take Oh tend to use it sounds as though so I must say do one each in Asia you Marshall results.

Yeah that is one thing I'll mention is the wish bone marrow, where you know we do realize that sometimes you're human abuse off what content. How did she thought he currently the yoshi Saharan she needs to be Ukraine due to see this season and those who know generally without change what does pick up but we'll make what does.

You'll see about a we still although we have some short term disruption due to.

What happened last year, but still we are very confident provides long term prospects.

Just give an example.

We recently launched mobile game called beats Kim.

We have the right.

Top three globally, both UBS tolls and go away.

The way we launched this new new game, it's not following our old model, we actually were trying a new approach and somehow that the revenue and profit profitability.

After a very good that's why we are confident that.

Even though his autos.

Disruptions in the past.

We are still confident about the long term prospects and the same applies to.

Your threed product as well.

<unk>, how does that count link claims it seems that just will either agency that we'll be able to township.

To be it will have to see how would that put me as I've had the chance I can see the total higher bulk well she's out a chance are those your hobby out how she's yet casual kinda joshing, just George in Hungary, and you're sure Fuji. She then a woman vision completes would eat into the U.S. So there's a certain agencies. So soon China you should diesel engine does says how to cope with us is.

Potentially might I'm not sure what the bulk was you could see that some bit who is you have to see how she doesn't change will only leniency them.

She said she would Julien Jeff we are that you shared a blessing in Washington investments and also to build distribution channels. Also takes time. However, we think that the service robot for example, robot that can deliver good.

We have seen very encouraging results from our clients are very eager to try our new products.

And in terms of voice related services more deliberate robot.

We think there's a lot of room for growth in the near future.

[noise] mission because of the legal costs in the developed countries and we think that there's still a lot of opportunities for us to expand our robot business should only see the market.

So that it is part of it is possible that like you reduced the level cost for the business. So we think that the AI to be we have a lot of opportunities here.

She had her yeah, okay. So now.

I'll take the first part D him I'm as Christians in terminal to Threeq items, though.

We can in general we can say that.

The.

Revenue from the utility product they'll be slightly decrease but the revenue from the mobile entertainment business.

Well, we haven't gross and.

The AI and other specimens segments to grow as well.

Tony.

Normally we don't provide further details.

In the forecast so I think thats all we can say at this point of time.

Sure you're kind of starting to show an you may well turn Salvador Sim or should I say, the silly to somebody I won't say that if you watch out so they see more should I Shouldnt say lucky Shaley hip we shouldn't see plenty some data each issue should be charged cigarettes is about showed up.

Instead, I will miss portfolio handle Yoshida, San Vicente they'll change reality than that yes, I don't know if they share erosion. The point is that how should that show woman. They say they consider to accommodate you'll see some people. He says it says if I have called it should be no shop.

Israel hires junket tiago.

Hey, that's either because oh sure.

Okay.

Okay.

Uh huh.

Because we are trying new business models for both.

The utility products and games Thomas Chong of Jefferies. Please go ahead.

She said one it's hung somehow oh land going he or she is going to sound odd Lj Sigal should Oh, what you thought was a momentous year, okay, and making sure that your guidance does she wants minimum and kinda moment see the Pfizer dosage.

Hi, Matt you all I ought to be that she had a solutions. She is a woman remain idle Paula will mean that the massage.

Margin, the Pope up and things I'm, not sure, but possibly a little bit about Bob.

A choppy.

Our revenue growth over the next column Alex field, Yes, how should we think about.

The contribution from the new initiatives as well as the margin profile should we expect the margin profile in the future it will be very different from what we see.

At the moment and my second question you asked about M&A, given the fact that our new initiate it takes time to take off or should we expect any oh any M&A opportunities that the company would pursue arguing that transition.

Process. Thank you.

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Thing she has a cause of about sort of have shown that she boumediene shed and how that how did she dollar Peugeot dampier shopper behavior shots it sound to differentiate here, while filling his sounds maybe I'll turn unleashes either did not fit.

Tanesha.

And you'll show essentially yourselves Uh huh.

Future results that shows how changing so he has a shopping one man. She went on holiday that's about how that is shared by the whole cannot exceed 1 billion would always our hedging positions. It somehow that's either didn't fall off with us attach a food city now on their own. They show feel June units held for sale on the Shyam wash. Its just how about you would house milestones you have for sometime now that somehow founder John D. Data. So you won't see the you guys had a monopoly on Russia.

She has happened order Jim option.

So just.

I'm going to Ace in town as usual well be about you don't do that you wouldn't want on enterprise and say you don't want to go untreated leads is your balance does it assume because all my slides here, what's your shelf happily eating freaked out about a nickel a locally.

She said that Oh, I see those indices have cheated the issues like how do you see the definitely had they shared pinkel below one day of wishing to show that it used to be Moshe saves out how do you want to take that yes. It has always had that exactly.

Good shares of capitalism look at all that you deal with them all but one quick quick how are you doing.

Okay.

Let me try to translate okay.

Oh.

Two in terminal AI to be behind us.

We have been.

We have seen some quite a good progress new viewers.

We also exploring new applications for our robotics for example, we have been deploying our roll off.

In places with larger foot traffic for example in shopping malls.

And we have.

You, probably hundreds of them most often loss.

The consumers customers.

I'm very eager to go to these robots to ask questions such as.

The location of a sudden rush home.

And whether they are some discount information concerning shops.

Well this is a new application similar to.

Moving the offline traffic to online traffic.

Actually this is the operator of the mobile application the so called auto right online to offline applications.

And in terms of merger and acquisition activities.

Oh Cheetah mobile has established a very stable.

Casual games and utilities business and the company right now have been looking for opportunities to invest AI related areas.

We have.

A minority investment we have minority positions in those companies.

And we have.

Plastics definitely mathematically recently and there are potential synergies between Cheetah mobile and those massive companies.

You Tomorrow.

Larger mergers and acquisition activity activities.

We are open to opportunities.

Well not gone up quite a large mature companies because that may not be able to when we might not be able to find that the pipeline as well. So we are looking for new opportunities.

Give you an example.

Our install which right now cheetah mobile is the largest shareholder and.

He doesn't apart.

And Cheetah mobile has the priority on a preference right.

To apply the controlling position in the company and one point the growing size growing relatively well and that fits into the overall strategy on the Cheetah mobile.

So that answers the second part I think the questions.

Thomas Us ask.

And thank you let me go back to your first part of the question is in terms of the margins of autos different segments.

Right.

Yeah.

So in terms of the utility products.

We expect overall right now of our revenue is lower than previous years and the operating margin.

I want to be lower accordingly.

I think in the longer term, we are looking past the current a couple of quarters.

We hope that.

The margin will go back to what we had in the previous years.

And in terms of.

Oh my hardware.

HM.

Right now, it's hard really hard to say it depends on the mix of our products.

Oh, Hey, I to see products currently have relatively lower margin because of the competition.

But in terms of the eye to be business.

Which we mentioned for example for the.

Oh shopping mall applications of our service robots and also the delivery robot. We just mentioned earlier, we see a good gross margin over there.

Okay.

Got it thank you.

Thanks, Tom.

Again, if we have a question. Please press star then one.

[noise].

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

Thank you all for joining US today, if you have any further questions. Please now has continued to contact us.

Thank you so much bye.

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