Q1 2017 Cheetah Mobile Inc Earnings Call
May 22, 2017 AM EDT
CMCM - Cheetah Mobile Inc
Q1 2017 Cheetah Mobile Inc Earnings Call
May 22, 2017 / 12:00PM GMT
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Corporate Participants
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* Helen Jing Zhu
* Sheng Fu
Cheetah Mobile Inc. - CEO and Director
* Zhenyu Jiang
Cheetah Mobile Inc. - CFO
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Conference Call Participants
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* Andrew John Orchard
Nomura Securities Co. Ltd., Research Division - Research Analyst
* Joyce Ju
Citigroup Inc, Research Division - Senior Associate
* Robert W. Cowell
86Research Limited - Research Analyst
* Thomas Chong
* Tianxiao Hou
T.H. Capital, LLC - Founder, CEO, and Senior Analyst
* Yuyin Sun
Morgan Stanley, Research Division - Research Associate
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Presentation
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Operator [1]
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Good day, and welcome to the Cheetah Mobile First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please also note that this event is being recorded. I would now like to turn the conference over to Ms. Helen Zhu, Director of Investor Relations. Please go ahead.
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Helen Jing Zhu, [2]
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Thank you, operator. Welcome to Cheetah Mobile's First Quarter 2017 Earnings Conference Call. With us today are our CEO, Mr. Fu Sheng; and our CFO, Mr. Vincent Jiang.
Following management's prepared remarks, we will conduct a Q&A session.
Before we begin, I refer you to the safe harbor statement 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. Fu Sheng. Please go ahead, Fu Sheng.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [3]
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Thanks, Helen, and hi, everyone. 2017 is a very transformational year for Cheetah Mobile. We will continue to enhance our AI-based technology platform that brings new opportunity to the mobile utility space and the drivers -- drives the rapid progress of our mobile content products. In addition, AI is the core of our mobile content strategy, enable us to connect our over 600 million users with highly personalized content.
Recently, our company reached our 3-year anniversary as a publicly listed company in the U.S. In just 3 years, our total revenue grew by almost 3x. Our mobile MAU surpassed 600 million. We achieved our goal to transform into a mobile and global company.
In Q1 2017, mobile revenues accounted for almost 85% of our total revenues, and overseas revenues accounted for over 70% of our total revenues. We made significant progress on our content-driving apps, which already contribute to 19% of our total revenues in the quarter, and we have a very healthy balance sheet.
We understand that there is still a lot of work ahead of us in order to transform into a mobile content platform. With our rich experience in mobile Internet industry and our proven track record, we are very confident in achieving our new targets.
Today, I would like to first discuss the progress we have made in the development of content-driving products. On the revenue side, our content-driving products are beginning -- becoming an important driver of our total revenue growth. In Q1, revenues from content-driving products grew by 55% quarter-over-quarter, which pushed our overseas revenues to an all-time high. Live.me was a key contributor for this growth.
On the other side, we have made strong demand for live broadcasting platform in developed markets. Users in Europe and the North America love to express themselves and as they say live broadcasting as an efficient channel to help them express their thoughts and lifestyles. That's why the organic live broadcasting radio is very high in these markets with a number of our top broadcasting hosts become fully performers. For example, one of our top broadcasting hosts used to be construction worker in the U.S. He considers Live.me as a social platform and a creative way to earn significant income. He has created interesting live broadcasting content to attract followers. Currently, he has more than 220,000 followers and he has received virtual gifts that is worth more than USD 170,000. Going forward, we will continue to encourage our users to generate more content and actively interact with other users on our platform through either text or voice messages.
In addition, we are experimenting real-time interpretation service for our top broadcasting hosts speaking in different language, which have improved user experience and user engagement.
On the content side, we have used AI to improve the Live.me platform. For example, Live.me is committed to building a healthy social platform without violent or obscene content as more than 200,000 hours of live video are broadcasted daily on Live.me. We would have to spend a lot of time and resource to review the content if done manually.
At the same time, it would be hard to reduce human error and ensure content quality. Therefore, we have applied AI technology for image recognition, which enabled us to reveal real-time video content more efficiently and vastly reduced our workload.
Live.me platform recently reached USD 60 million from several well-known (inaudible) funds, which is an endorsement of its strong future market potential. We believe outside investments will enable Live.me to execute its growth strategy more efficiently. We look forward to seeing its continued growth.
News Republic, another one of content-driving product, also made solid progress in the first quarter. After we acquired News Republic in June last year, we began to utilize AI technology to deliver personalized news content to our users. Since then, the DAU in U.S. market has increased by more than 10x.
AI is transforming the way of news delivery. People no longer receive news just by actively searching keywords or being exposed to what is shared on social media. Instead, they can receive highly relevant content automatically recommended to them based on their interests and their reading habits. This is a model that has been proven very successful in China as a pioneer among Chinese Internet company winning in the overseas market. Cheetah is again taking their model abroad. We believe that AI will better drive News Republic's product improvement and growth in the coming quarters.
In addition, News Republic recently has content portfolio including news from more than 2,500 top global media outlets, which will also help us achieve this goal.
In terms of monetization, news-led app is popular among brand advertisers as they have much higher value than tool-led apps. This is a key reason why we remain focused on investing in News Republic.
Moving on to our mobile utility products. Our utility products and related service continued to generate a strong profit, which formed a solid foundation from our mobile content transformation.
For the first quarter, non-GAAP operating margin from our utility business remained stable at around 22%. In addition, AI allowed us to further expand our utility product portfolio. For example, we launched Panda Keyboard, an AI-enabled app, early this year. This app is able to predict the words of users want to type based on the context and their typing preferences. Recently, Panda Keyboard has been rated as one of the top 5 personalized apps in the U.S. on Google Play. Panda Keyboard enables us to better leverage our users preferences and deliver more personalized content to them.
Another example is Photo Grid, leveraging its AI-enabled facial recognition technical. Photo Grid has added more than interesting dynamic features, which have been well received by our users who upload millions of photos daily.
Looking ahead, we will continue to invest in our AI technology platform, which recent has been driving the growth of most of our products. We will continue to employ new product opportunities that might be derived from our AI technology platform. We will also optimize our cost structure on the utility products side to maintain its profitability. Okay.
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [4]
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Hello, thank you. Thank you, Sheng, and hello, everyone. This is Vincent just joined the company about 1.5 months ago.
For the first quarter of 2017, we reported solid financial results with total revenues beating the high end of our guidance. Non-GAAP net income increased to RMB 115 million.
Now let me walk you through the details of our first quarter financial performance. All financial numbers are in RMB unless otherwise noted.
For the quarter, total revenues increased by 7% year-over-year to RMB 1.19 billion, driven by the fast growth of our content-driven products. As our various business lines are in different phase of growth, starting this quarter, we will report our revenues according to business line in order to help investors better understand our business. We expect to provide more transparency in the performance of these business lines in the coming quarters.
Revenues from content-driven products increased by 55% quarter-over-quarter, which contributed to 19% of total revenues in the first quarter of 2017 as compared to 11% in the first quarter of 2016. The growth was primarily driven by Live.me, a popular live video streaming app serving overseas users, particularly in developed countries. In the second quarter of 2016, we introduced the virtual gift function aiming to enhance our user engagement and interaction. This function has been well received by our users who purchased virtual gift to show support and appreciation for their favorite broadcasting hosts.
The increase in Live.me in the first quarter was driven by both paying user growth and an increase in ARPU. The paying user growth was a result of DAU expansion and the paying ratio increase, and the ARPU growth was driven by an increase in number of live broadcasting events during Valentine's Day.
Revenues from utility products and related services decreased by 13% year-over-year and 18% quarter-over-quarter to CNY 827 million in the first quarter of 2017. The year-over-year decrease was primarily due to the decline in PC revenues as Internet traffic migrated from PC to mobile in China.
In the first quarter of 2017, PC revenues decreased to 15% of total revenues as compared to 26% in the prior year period and 19% in the prior quarter.
Mobile utility products and related services remained relatively stable year-over-year in the first quarter of 2017. Specifically, advertising revenues from mobile utility products and related services continue to improve year-over-year in overseas markets, primarily driven by the increase in total impressions.
Other revenues from mobile utility products and related services decreased year-over-year in China, primarily due to the decline in eCPMs. The sequential decrease was due to seasonality.
Our utility products business has been a stable source of revenues and operating cash flows. It also allows us to invest in content-driven products.
In addition, as Mr. Fu Sheng just mentioned earlier, we believe that AI will bring new opportunities to the mobile utility space in the future.
Revenues from mobile games decreased by 16% year-over-year, but increased by 15% quarter-over-quarter. The year-over-year decrease was primarily due to a decline in the revenues from Piano Tiles 2 as the user number was at its peak in early 2016. The quarter-over-quarter increase was primarily due to our continuous efforts to introduce more mobile casual games in the first quarter of 2017, further enriching our mobile game portfolio.
Cheetah Mobile was ranked as one of the top 4 game publishers in the U.S. on Google Play, and 3 of its games were listed in the top 10 most downloaded games in March 2017.
Moving on to our cost and expenses. For utility products and related service, we will continue to optimize our organizational and cost structures to maintain profitability.
For content-driven products, the largest cost and expense components for the content-driven products are, first, the revenue sharing with live broadcasters and payment channel costs associated with Live.me, which were the primary driver of our year-over-year cost of revenues increase in Q1, excuse me. R&D personnel costs is the second one, which is associated with the development of AI technologies. Our previous investments in AI translated into our progress in technology platform, which has supported our initial success in content-driven products. And lastly, new user acquisition costs of content-driven products in overseas markets.
These investments in content-driven products decreased our operating margin by approximately 14.4 percentage points in the first quarter. In addition, we reported approximately CNY 68 million of other income net as a result of gains from the disposal of certain investment assets in the first quarter.
We have significant long-term minority investments in the portfolio of companies. Most of these assets were booked with the cost method and the remaining with equity method. The total book value of these investments were approximately RMB 955 million as of March 31, 2017. We plan to gradually dispose these investment assets to focus more on our core businesses.
Turning to our balance sheet items. As for March 31, 2017, we had net cash and cash equivalents, restricted cash and short-term investments of approximately RMB 1.47 billion. Our strong cash position enables us to fund our mobile content transformation.
Looking into our revenue guidance, for the second quarter of 2017, we expect total revenues to be between RMB 1.19 billion and RMB 1.24 billion, representing a 14% to 18% year-over-year increase and 0% to 4% quarter-over-quarter increase.
Looking ahead at the rest of 2017, we expect revenues from content-driven products to continue to grow. In addition, we will continue to refine Live.me products, expand its user base and experiment with monetization and operational models that have been proved effective in China.
We expect our revenues from utility products and related services to decrease year-over-year as certain ad formats have been recently discontinued by some of our overseas third-party advertising partners, and the resulting ad inventory may not be fully filled up by our other advertising partners for some periods. Please note that we are still working with these advertising partners on other ad formats.
In addition, we are exploring new initiatives in our mobile utility products. For example, as just mentioned by Mr. Fu Sheng, we have been successfully applying AI technologies to new products such as Panda Keyboard and to existing products such as Photo Grid. Going forward, we expect these new initiatives to drive the recovery of our mobile utility app revenues.
For mobile games, we expected more titles to be released in the second half of 2017.
Please know that this forecast reflects the company's current and preliminary view and is subject to change.
This concludes our prepared remarks. Operator, we are now ready to take questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question comes from Tian Hou of T.H. Capital.
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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO, and Senior Analyst [2]
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First of all, Vincent, Helen (foreign language). So congratulations on a good Q1 results. My question is related to user acquisitions for Live.me going forward. So what's the plan to acquire more users for Live.me? And also the traffic on Live.me, what's the synergy between Live.me and News Republic and utility apps? That's my question.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [3]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [4]
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Although Live.me has finished external investments and -- but it's still the majority-owned subsidiary of Cheetah Mobile and they still operate as the same company. So although it has certain independence in its operation, but it will still be operated as the same company. In that sense, Cheetah Mobile will find a way to effectively convert its current user into Live.me users.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [5]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [6]
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Okay. Although we have seen many successful model such as normal and they have attracted significant traffic -- user traffic using a live broadcasting model, but there are also other approaches, and we will using the same approaches such as social platform and short video streaming -- short video content to attract more user traffic to the platform.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [7]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [8]
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Okay. Cheetah Mobile is using -- is developing its AI technologies, and we believe that when we achieve certain level of technology excellency, we will be able to, using AI technologies, to bring...
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [9]
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Traffic.
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [10]
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Yes. (foreign language)
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [11]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [12]
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Traffic, sure. So we will be able to using AI technology to find out the current user's preference and interests and then we will recommend the appropriate user traffic to the Live.me platform.
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Operator [13]
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Our next question comes from David Sun of Morgan Stanley.
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Yuyin Sun, Morgan Stanley, Research Division - Research Associate [14]
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(foreign language) So I will translate the question by myself. So the first question is regarding the reclassification of revenue reporting lines. So we have reclassified revenue into utility apps, content products and mobile games. So just want to get a sense what do the margin profile look like for these 3 key segments and also the revenue outlook for this year. So the second question is that we see the company currently has 3 key business functions: core utility apps such as Clean Master and Battery Doctor, second one is content apps such as Live.me and News Republic and last one is AI or robotic-related initiatives. So just want to know how do management view the short-term and mid- to long-term opportunities of these different businesses? And how do company allocate resources accordingly?
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [15]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [16]
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Okay, okay. Well, you can consider those products in this way. The utilities tools is utilities of today, and the content product is for tomorrow and the robotics products for the day after tomorrow, in the future.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [17]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [18]
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Okay. In the past 3 years, Cheetah Mobile has turned its 2 utility apps into global products and it has refined its business model. And although it has reached a relatively mature phase of its life cycle, but it will continue to be a -- it will continue to maintain its profitability.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [19]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [20]
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Okay. Today, the 2 apps is still the best approach to acquire users and the quickest approach to acquire users.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [21]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [22]
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It also helps us create a significant amount of user data.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [23]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [24]
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Yes. We also generate a lot of user traffic that can support our products of the AI technologies.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [25]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [26]
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Okay. The content product can help us -- can help our more than 600 million users to spend more time with our products to increase their user engagement and user stickiness and also helps our monetization model.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [27]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [28]
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Using the content we have acquired that helps to refine our AI technologies, and that's the -- first, that will be a foundation for our next stage, which is the robotics business.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [29]
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Okay. So you answer the first question.
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [30]
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Yes, so that's the...
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [31]
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Second question.
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [32]
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Second question. Now I'll answer the first question about the segments and margins, okay. Starting, well, in this quarter, we still view the company as a single segment, but we start to divide the revenues into 3 parts, which is the 3 business lines. For the second quarter, we plan to present the company's financial into 3 segments, which will not only have revenues for each business lines, you also have operating costs and expenses. So that -- with that, we'll have better visibilities for the 3 segments. In terms of profitable -- profit margins, we expect that the margin for the utility products will decrease year-over-year next quarter. And the margin for the content products -- well, right now, it's still in a loss, but the relative amount of loss will narrow in the next quarter as we have starting to see economy of scales for our content products. For the game, we expect we will -- that the profit margin probably were similar. We will not see a significant change, at least in the next quarter. Have I answered your questions?
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Yuyin Sun, Morgan Stanley, Research Division - Research Associate [33]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [34]
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Thank you.
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Operator [35]
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Our next question comes from Joyce Ju of Citi.
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Joyce Ju, Citigroup Inc, Research Division - Senior Associate [36]
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(foreign language) I will translate my questions. We have seen this quarter the R&D costs actually reduced year-over-year and quarter-on-quarter. So my question is because we saw in the, like, press release that is due to the personnel reduction. So I'm wondering how many, like, R&D personnel now have in the R&D department, and in the future, how these numbers will change? Will we add more R&D investment to continue to grow our AI technology or content products?
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [37]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [38]
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Okay. So right now, for the R&D personnel, we have more than half of them are still in the utility apps segment. In the past 2 years, we have seen that -- we still see some room that we can help the R&D people to increase their productivity. So I think we still have some room for the improvements.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [39]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [40]
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Okay. So in the past year, we have already invested heavily in the AI technology, and we have significant high in the last year. So right now, the workforce for the AI technologies were, even though we may not be able to compare to those super large company, but we're comparable to many other so-called AI companies. So we do not expect we'll have a larger headcount increase in the next year. Instead, we will be focused on to improve the productivity and have more product to go to the markets.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [41]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [42]
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Okay. So there'll be something, such as Live.me, they will -- they may still increase their R&D strength and the skill sets. So they might add other headcounts. But overall, for the company, we will probably not see a large R&D fee increase. We'll be more focused on the productivity again.
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Joyce Ju, Citigroup Inc, Research Division - Senior Associate [43]
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(foreign language)
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [44]
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Okay. Thank you.
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Operator [45]
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Our next question comes from Thomas Chong of BOCI.
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Thomas Chong, [46]
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I have 2 questions. The first question is about Live.me. When should we expect the business to be profitable? Should we expect it to happen in the fourth quarter? And my second question is about the second quarter guidance on the utility apps revenue, about our relationship with advertisers. Can management talk a little bit more about the ad formats and why we have to experience year-on-year decline? Should we expect it to happen i the first and the fourth quarter? (foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [47]
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Okay. Let me answer your first question. For the Live.me business, although it's approaching a break-even point right now, but seeking profitability is not the focus of this business right now. So we will be more focused on increase the user base at this stage. Just hold on just a second. So I'll come back. For the second question, which is about the certain ad formats, and see, this is what happens. There are a lot of utility app companies. They have various type of ad formats, and certain formats may not be considered to be user-friendly by some advertise platforms. So some of our third-party advertising platforms, we decide to discontinue to deliver apps to those type of formats, so that will impact us as well. And we will see some ad inventory, which now may not be filled up immediately by our other advertising platform partners. So that's what's happening right now. Thomas, does that answer your question? Or do you have some follow-up?
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Thomas Chong, [48]
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Yes. Yes, I'll go back to the queue.
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Operator [49]
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Our next question comes from Andrew Orchard of Nomura.
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Andrew John Orchard, Nomura Securities Co. Ltd., Research Division - Research Analyst [50]
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(foreign language) So just a quick question on the investment structure of the robotics business. Can you give us some update or some color on how this investment is going to be structured?
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [51]
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Andrew, I'll answer that question. Right now, this -- the robotics business, it is still -- it has not been -- well, let me put it this way. It's still in progress. It hasn't been signed or closed yet, so -- but we expect to have a public release pretty soon. But today, we probably will not be able to talk too much about this.
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Operator [52]
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Our next question comes from Robert Cowell of 86Research.
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Robert W. Cowell, 86Research Limited - Research Analyst [53]
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(foreign language) So my question is also about some of your investments items. In the first quarter, it looks like there's a RMB 67 million gain from other income. I'd like to know what investment this gain is coming from.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [54]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [55]
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(foreign language)
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [56]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [57]
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Okay, let me translate. Well, we had 2 exits in this quarter. One is for company that has been listed in Asian markets in China, and the other one is a normal VC investment exit. Cheetah Mobile has invested in a portfolio of about -- with more than 40 companies right now, and from time to time, we may make exit because the portfolio is actually performing pretty well. Okay, thank you.
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Sheng Fu, Cheetah Mobile Inc. - CEO and Director [58]
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(foreign language)
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Zhenyu Jiang, Cheetah Mobile Inc. - CFO [59]
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Okay. So when we decide that the investee, the investor company, is not strategically significant to our business, we may want to make an exit when the timing is appropriate. So this time, the 2 companies we exit, one is a gaming company, another one is advertisement platform and actually we had a pretty good return on this. Thank you.
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Operator [60]
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(Operator Instructions) There are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.
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Helen Jing Zhu, [61]
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Thank you for joining our call today. If you have any further questions, please do not hesitate to contact us. Thank you. Bye.
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Operator [62]
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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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