CHEETAH MOBILE INC (CMCM) Q4 2018 Earnings Conference Call Transcript

MarketsMotley Fool

CHEETAH MOBILE INC (NYSE: CMCM)Q4 2018 Earnings Conference CallMarch 25, 2019, 8:00 a.m. ET

Contents:

Continue Reading Below

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Helen Zhu, Investors Relations Director Mr. Zhu, please go ahead.

Helen Zhu -- Investor Relations Director

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and full-year 2018 earnings conference call . With us today are our Chairman and CEO, Mr. Fu Sheng and our Company's CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A section.

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 Company's Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Sheng Fu -- Chairman of the Board and Chief Executive Officer

Thanks Helen. Hello, everyone. We achieved a full year 2018 financial results that were in line with our previous expectations. Total revenues increased by 2% to RMB5 billion in 2018, in particular, revenues from mobile games operations increased by almost 50%, and the revenues from utility products and the related service in the domestic market grew by 22% for the full year 2018. Non-GAAP operating profits for the utility products and related service increased to RMB1 billion in 2018 and we further reduced our operating loss from the mobile and payment segment in 2018.

Above all, our core business generated RMB342 million of net cash from operating activities and RMB277 million of free cash flow in 2018. Our business progress and financial achievements in 2018 were mostly driven by growth in the following three areas: one, mobile games; two, mobile utility products in the domestic markets; and three, AI powered business.

First, we have made significant progress in our mobile game operation, which has already become a driving force of our total revenue. In 2018, our mobile games business earned RMB925 million in revenues, up to 48% from 2017. We successfully launched Bricks n Balls, our casual elimination game, Bricks n Balls remains one of the mobile casual game in US and on Google Play, and one of the top brand board game on Apple App store in terms of users downloads. Through operating Bricks n Balls we have discovered the right combination of tactics to grow our average revenue per month gamer -- per mobile gamer.

Bricks n Balls has a higher op than the channel high to (ph) Rolling Sky and the Dancing Line in the second half of 2018, Moreover, almost half of revenues from Bricks n Balls were generated through sales of in game visual items. In late February, we soft launched Rolling Sky 2, a musical game on Apple App Store. In the early March, Apple featured Rolling Sky 2, ranking it as a top three game, as well as special weekly promoting it in the musically game vertical on Apple App Store.

Importantly, we increased the operating profits for our mobile game business in 2018. For example, the combined operating profits for our three flagship type titles, namely Piano Tiles 2, Rolling Sky and the Dancing Line grew by about 200% year-over-year in 2018. And their non-GAAP operating margin increased to 25% from 10% in 2017. Going forward, we will continue to introduce new games, convert more of our gamers to paying users and further enhanced the profitability of our mobile game business.

Secondly, we introduced some new utility products in the domestic market in 2018, which have helped increase our user engagement and expand our user base. Our new utility products focus on a number of areas, including delivering personalized experience and leveraging our AI technology. For example, we introduced the CM Show a personalized ring tone app designed to appeal to Generation Z in China. The app has received widespread user adoption since its inception more. More recently we began adding premium content into CM Show to induce more user subscription. Also CM Show is still in it's early stage of monetization. Many users are willing to pay us more money to gain access to premium content, and thus providing its commercial viability.

We also introduced (inaudible) keyboard, a AI-driven keyboard last year -- later last year. In addition to smart prediction capabilities, voice input and thousands of themes. (inaudible) keyboard comes with a game site user tool -- user loyalty program that allow users to earn virtual callings through typing and order in-game activities. Users can then use their earned virtual coins within our apps to buy in-game virtual items, pay monthly subscription fees for specific online video platforms, and other online service and products. According to QuestMobile (inaudible) keyboard was one of the top rising star mobile apps in 2018. Going forward, we will continue to introduce new utility apps that can further increase our mobile utility product portfolio.

Importantly, our utility product business continued to earn healthy revenue and the profits. In 2018, we earned RMB3 billion in revenue and RMB1 billion in operating profit from our utility product business. Further, we began offering AI powered hardware in China in 2018, which has allowed us to serve more users and customers in new era of human-computer interaction. Our hardware business is joined efforts with Beijing OrionStar. Revenues from our other business segment increased to RMB83 million in 2018 from RMB37 million in 2017, mainly driven by sales of our AI powered hardware in China.

In particular, this growth was mainly driven by sales of Cheetah Translator, a AI-based interpretation device. Recently, we have found more use cases for Cheetah Translator to serve business. For example, VIPKid, an online educational company, purchased a large quantity of Cheetah Translators to help its young students learn English. Uroaming, an overseas WiFi service retential (ph) platform, also bought a number of Cheetah Translators through enrich product offerings.

Cheetah Translator makes an important milestone of our expansion in AI based product and solutions. And the success of Cheetah Translator have has further improved our AI technology and our capabilities to deliver AI-based solutions to customer and business.

Also, in 2018, Cheetah Mobile became exclusive distribution of Cheetah GreetBot, a human sized reception robot that focuses on the business to business market. In December 2018, Beijing OrionStar commercially launched Cheetah GreetBot. Recently, we have also found the more user case for Cheetah GreetBot to serve customers in device verticals in China, including as guides in museum, receptions, in hospitals, schools, and sales person in convenience store.

Although our AI powered hardware business is still in its (inaudible) in terms of revenue contribution, we believe it will become an important engine to drive our future growth as we proactively prepare for the new era of human-computer interactions.

In summary, we have made substantial progress in mobile games, mobile utility products in domestic markets and our AI powered business. We are confident that our long-term growth prospects remain healthy. Also, we acknowledge some temporary setbacks in our mobile utility products business in the overseas market.

With that, I will now turn the call to our CFO, Vincent Jiang, to go through the details of our third quarter financial results.

Vincent Jiang -- Chief Financial Officer

Thank you, Fu Sheng. Hello, everyone. In the fourth quarter of 2018, we grew our total revenues by 2% year-over-year and quarter-over-quarter to RMB1.4 billion. We generated RMB770 million in net income attributable to Cheetah Mobile shareholders. For the full year of 2018, we generated RMB5.0 billion in total revenue and RMB1.2 billion in net income attributable to Cheetah Mobile shareholders.

Now, let me walk you through the details of our 4th quarter and full year 2018 financial results. Please note that all financial numbers are in RMB terms, unless otherwise stated. Revenues from our mobile entertainment business increased by 39% year-over-year, and 12% quarter-over-quarter to RMB156 million in the fourth quarter of 2018. For the full year of 2018, revenues from our mobile entertainment business increased by 19% to RMB1.8 billion, mainly driven by Bricks n Balls, a casual elimination game that started ram ping up in the middle of July 2018.

Revenues from our mobile games operations increased by 91% year-over-year and 14% quarter-over-quarter to RMB326 million, which accounted for 24% of our total revenues in the first quarter of 2018. For the full year of 2018, our mobile game business generated RMB925 million in revenues, up 48% from 2017. Revenues from utility products and related services decreased by 17% year-over-year and 6% quarter-over-quarter to RMB783 million in the fourth quarter of 2018.

The year-over-year decrease was mainly due to the discontinuation of certain ad formats, which is ads on mobile phone lock screens by the Company's overseas third party advertising partners. The quarter-over-quarter decrease was mainly due to the disruption to our business as a result of certain allegations made by a third party in November 2018, about which the Company has made a number of public statements to clarify. For the full year 2018, revenues from utility products and related services were RMB3.1 billion.

Gross profit and gross margin both increase year-over-year. In the fourth quarter of 2018, gross profit grew by 4% year-over-year to RMB965 million, and gross margin expanded to 70% from 68% in the same period last year. For the full year of 2018, gross profit increased by 8% to RMB3.4 billion and gross margin expanded to 69% from 66% in 2017. The increase resulted from the reduced cost for our PC operations and mobile utility products business in our overseas markets as a part of our strategy to optimize the cost and expense structure for our utility products and related services business.

We grew both our operating profit and margin in 2018, despite our continued investment in our mobile game business and mobile utility products business in the domestic market. Operating profits for the full year of 2018 increased by 5% to RMB467 million, while our operating margin remained relatively flat year-over-year at 9%. In 2018, we continued our marketing efforts to acquire new users for our mobile games in our overseas markets and for our mobile utility products in the domestic market.

Our mobile entertainment business reduced its loss in 2018. For the full year of 2018, operating loss for the mobile entertainment business narrowed to RMB330 million from RMB470 million in 2017. The reduced losses were primarily the result of increased revenue from our mobile games operations. In addition, the disposal of the News Republic business in 2017 also contributed to the decreased operating loss for our mobile entertainment business, in particular the operating profit of our mobile games business grew by 48% in 2018.

Our core business continued to generate strong cash flow. For the full year of 2018, we generated RMB342 million in net cash from our operating activities and RMB277 million in free cash flow. We sold a certain portion of our equity ownership in Bytedance Limited, which further strengthens our earnings and balance sheet. Diluted earnings per ADS was RMB8.1, or $1.18 in 2018. As of December 31st, 2018, our cash, cash equivalents, restricted cash and short term investments were RMB3.7 billion.

As we have previously disclosed on November 26th, 2018, a third-party made certain allegations about some of our products which later led to a pause in our collaboration with some of our business partners in overseas markets. As the allegations are subject of pending litigation, we are not going to comment extensively on this, though we believe that the claims in the litigation are without merit and we intend to defend ourselves vigorously.

The Company is addressing these allegations with our business partners and the Company's audit committee is conducting an independent review of the allegations in consultation with our outside counsel, Skadden, Arps and experts from AlixPartners, which is an outside consulting firm. To-date the Company has not identified information inconsistent with its previous disclosures. All of our Board of Directors' swift and decisive actions are a testament to our Company's commitment to legal and regulatory compliance.

Before I give you our revenue guidance, I would like to remind you that this forecast reflects our current preliminary views and is subject to change. For the first quarter of 2019, we expect our total revenues to be between RMB1.06 billion and RMB1.09 billion, as we take a conservative stance on our near-term outlook following the temporary setbacks in our mobile utility product business in the overseas markets. However, we remain confident in the long-term sustainability of our growth prospects.

To express our confidence in our long-term growth prospects, our Board of Directors has approved a share repurchase program of up to $100 million of our outstanding ADS for periods not to exceed 12 months as previously announced on September 13th, 2018. As of March 22, 2019, the Company had repurchased approximately 4.5 million ADS for approximately $32 million under this program. Cheetah Mobile funded those repurchases from it's available cash balance.

This concludes our prepared remarks. Operator, we're now ready to take questions. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions) The first question today comes from Wendy Huang with Macquarie. Please go ahead.

Frank Chen -- Macquarie -- Analyst

This is Frank Chen with Macquarie on behalf of Wendy Huang. Thank you management for taking our questions. I basically have two questions. One is on the first quarter guidance. Could management share with us more color on this tough guidance, especially first quarter revenue breakdown by different business segment?

And the second question is about full-year outlook into 2019. Could management share any thoughts on the full-year revenue growth in 2019 and to the margin outlook in this year? Thank you.

Vincent Jiang -- Chief Financial Officer

Okay. I'll take that question. First of all, in terms of the revenue guidance, yes, it is a sequential and year-over-year decline in the guidance. The main reason, as actually we have explained in the prepared remarks, is because of the allegations made by third-party in November 2018, that has caused some of our business partners to pause their relationship with us. So that has a direct impact on the overseas utility products. But as we said earlier, we're working with those business partners and to address their concerns. And the Company has also retained -- the Company's audit committee has retained outside legal counsel Skadden, Arps and also has -- Skadden, Arps also in turn engaged outside consulting firm AlixPartners which is a well known consulting firm in the US to do the internal review for the -- and to relate to allegations. And as of today, Skadden and AlixPartners have now identified any issues that's inconsistent with our previous disclosure. So that explains the reason of the further weak first quarter guidance, but we are very confident that we shall be able to address those business partners' concern going forward.

For the full year guidance, again, I think, for the -- again, for the overseas utility products, probably we will have some setbacks, as we mentioned earlier because of that reason. I think it is something we're still working with our business partners. But for other parts, we expect that our -- there will be the new business driver, which is the mobile games. It is the new driving force for Cheetah Mobile and we have a high expectation on their new areas. Also I think, more importantly, we are starting to materialize our AI investments, especially for the hardware part. For example, we have started to -- we have had a certain commercial success, although it's a relatively small in terms of our scale right now, but the Cheetah Translator is a milestone that we have achieved. Actually, that's one on the first hardware we have launched in the past several months, because Cheetah Mobile was a software company, it doesn't have the gene for hardware. So now we have transformed ourselves into a Company that has been strategically focused on AI hardware and also we have already made a lot of progress in this area.

With the AI Translator, we have already achieved certain milestone on these areas. And I think also we have been -- a function of OrionStar's exclusive distributor for the Cheetah GreetBot, which is AI-robot that can function for different scenarios. Actually, in the prepared remarks, the CEO of the Company has mentioned that in different scenarios, for example, in hospitals, in supermarkets, convenience stores, we have all find different applications for the Cheetah GreetBot. So although this is still -- it's in early stage, but we have seen a lot of promise in these new areas and we will see some revenue contribution from the AI hardware for full year 2019.

Yeah. In terms of profitability, at this stage -- well, I can we -- normally, we don't give forecast on profitability -- on profit, but there is some general guidance here. I think because of the overseas utility products, we have some disruption here. So it does impact first quarter and probably Q2 as well. And so I think in this part the profit margin on this segment will be lower than last year. And also for the hardware part, because it's still in the relatively early stage and we don't expect that will bring us very high profit margin. So the overall profit margin will probably be lower than last year, than 2018, but again, I think this is a good transition for us. We are in the process of transforming ourselves from a pure software Company into a Company that has combined software and smart hardware. Frank, hope I have answered your question?

Frank Chen -- Macquarie -- Analyst

Thank you. Very clear. Thanks a lot.

Operator

(Operator Instructions) The next question comes from Robert Cowell with 86Research. Please go ahead.

Robert Cowell -- 86Research -- Analyst

Hi, management. Thanks for taking my question. There are two. The first one is about the MAU number. How do we think about -- it seems to be down a bit on a quarter-on-quarter basis and that how are we thinking about MAU going forward and balancing MAU versus ARPU? And then, the second question is about Beijing OrionStar and its fundraising plan. Does -- will Beijing OrionStar seek to raise funds from third parties, or will -- does Cheetah plan to invest more in that company at some point in 2019? Those are my two questions. Thanks.

Vincent Jiang -- Chief Financial Officer

Okay. I'll take the first question in terms of the monthly active users. Yes, the number is lower than we reported last quarter. And one of the main reason is because of -- also that's related to the temporary disruption to our overseas utility products. Because of the demonetization side of this, so we feel that -- we decided that we are -- we kind of temporary pull back all our user acquisition efforts in this quarter. So I think that's why you can see quite a relatively noticeable decline in the MAUs. We expect that when everything goes back to normal, I think that number will come back again.

In terms of our OrionStar -- in terms of fundraising for OrionStar, unfortunately, it is something -- it's not something that we can discuss in public. Of course, there will be some plans. The Company is open to all sort of possibilities, but right now, we cannot have any -- we cannot say any definitive plan at this moment.

Robert Cowell -- 86Research -- Analyst

Okay. Understood. Thank you.

Vincent Jiang -- Chief Financial Officer

Thank you, Robert.

Operator

(Operator Instructions) The next question comes from Carson Lo with Nomura. Please go ahead.

Carson Lo -- Nomura -- Analyst

Hi. Thanks management for taking my questions. So one question is about advertising market outlook. So we are seeing that the macro for both China and overseas ex maybe US, facing some kind of slowdown since the fourth quarter. So does management think -- can management share some color on how could that impact our advertising on our product, both on the utility side and also on our mobile gaming side? Thank you.

Vincent Jiang -- Chief Financial Officer

Yeah. In terms of the -- I think the macro economy does have impact on the advertising industry. But at this stage, I think it's really -- I think for us it's not very clear in terms of the general trends. For example, within -- in China's market, there have been different -- I think different views, right. I think, the last year -- at the end of last year, people were relatively pessimistic about the general macro economy. I think earlier this year, we have seen some positive signs. So we don't have a definitive (inaudible) yet in terms of whether that will have positive or negative impact on the advertising industry.

In the overseas markets, they will -- yeah, I think they will probably have some impact, but I think the overall industry, there probably will be some change under the new regulatory regime that we are still carefully following the trend. I mean we are carefully following the latest development in terms of the regulatory environment. Again, we don't have a definitive view on those.

Helen Zhu -- Investor Relations Director

Hello? Carson, do you have further questions?

Carson Lo -- Nomura -- Analyst

Thank you.

Helen Zhu -- Investor Relations Director

Yes. Thank you.

Operator

The next question comes from (inaudible) with Credit Suisse. Please go ahead.

Unidentified Participant -- -- Analyst

Hi management, this is (inaudible) speaking on behalf of Thomas. We basically have two questions. The very first question is about the revenue mix, as we see the revenue mix is changing, the -- as mobile game is generating more and more revenue, are we going to see probably a clearer trend for the gross margin profile change in 2019? Secondly is that, management mentioned about the temporary suspension of the business relationship with some overseas business partners. Can management -- given that the management has already done some work on that issue, can management give us some guidance whether the temporary suspension will become normalized? Thanks.

Vincent Jiang -- Chief Financial Officer

Okay. Again, I'll take the question. The first one in terms of the revenue mix, yes, the mobile game business become increasingly larger part of our total revenues. And I think we expect this trend will continue, because we have been able to identify some very scalable business operations that can help us to launch more games in relatively shorter period of time. In terms of the total profit margin for the games, I can say right now is that the existing games, like Piano Tiles 2, those more mature games have a very good profit margin.

I think for 2019, we will be in the expanding mode for the game operations. So, we will probably -- in the early stage, we will have a relatively large portion of marketing and user acquisition costs. So the overall profit margin, will -- I don't see any -- we will probably will not be better than what we have already. And in terms of the business relationship with our -- the relation with our business partners, this is something we're still working with, and we are very positive. And we have seen some positive signs to recover soon, but at this stage I cannot give you a definitive answer.

Unidentified Participant -- -- Analyst

Thanks management.

Operator

The next question comes from Hillman Chan with Citigroup. Please go ahead.

Hillman Chan -- Citigroup -- Analyst

Hi, management. Thank you for taking my question. My first question is related to the game pipeline, could management share more color on our game development effort, as to what kind of games that we are developing and in what game genres and more color on the timeline would be helpful as well? And my another question would be on the AI hardware side. How should we think about the profitability currently and also for the longer term? Thank you.

Vincent Jiang -- Chief Financial Officer

(Foreign Language) Okay. In Q3 and Q4 last year, we have accumulated a quite a some new games. For example, one of the top games in China called, Kill Virus. We have become its -- the exclusive distributor in overseas market. So we have more than 10 games. Some of those are very promising in our pipelines right now.

(Foreign Language)

More importantly, we think that the casual games actually have a very long lifecycle. For example Piano Tiles 2 which has been launched for more than three years, it is still generating very stable revenue for us. And some of those games have become -- already become well-known intellectual properties that have been recognized by many people.

(Foreign Language)

We also have done a lot of work to improve the ARPU of the casual games. For example, for those games that have been released by somewhere between three to six months, or more than that, meaning longer term, we call it mature games and those games have pretty good margins.

Operator

(Operator Instructions)

Vincent Jiang -- Chief Financial Officer

I'll take the second part, the second question in terms of the profitability of the AI hardware. I think at this stage, it's still relatively early for Cheetah Mobile to move into the hardware business. For the hardware, the margin initially will not be very good actually. We have to admit because the volume at this stage has not reach what we expected. But for the second part, for the AI -- yes, that's for the consumer side, for the profitability of the GreetBot, which is to businesses, that's the product for business. At this stage, we think that -- we expect they will be relatively healthy when we reach a certain volumes. Again, at this stage it's probably too early to say, because we are still ramping up the volume at this stage. Of course, for single units, we expect you will -- when you have appropriate allocation about the production costs and other costs, it can be pretty healthy.

Unidentified Participant -- -- Analyst

Thank you.

Operator

And next question is a follow up from Robert Cowell with 86Research. Please go ahead.

Robert Cowell -- 86Research -- Analyst

Hi. Thank you. I'd just like an update on, if we can provide any metrics for the volume of GreetBots that you all are shipping or planning to ship in the near future? And then also, there were a number of other AI robotics products that you all announced last year and I'm interested if any of those other one you have update that you're willing to share? Thank you.

Vincent Jiang -- Chief Financial Officer

(Foreign Language) Okay. So, we actually launched the product GreetBot last December and we have a spring break in between. And so we don't have actually a long time to implement those. Though also we have been using a lot of our distributors who will do secondary development for the actual applications for any particular scenario. So that also takes some time, that's why at this stage, we do have some volumes, but not as significant yet, but we do see a lot of promising signs at this stage.

(Foreign Language) Again, we have seen some very promising signs in some customer. We have some returning customer as well where they bought some GreetBots, they use it and they are likely to come back to buy more. We have seen -- we have found -- actually found the real cases that GreetBot actually can help a lot and save labor costs in many situations. For example, in museums and in convenience stores. So that's the translation. But let me add a little bit of more details in terms of the actual scenario. For example in the museums, our GreetBot can function as a tour guide. They will explain -- it will give introductions to various art pieces in the museums. It has a very high user interaction levels. For example, it can -- hundreds of interactions with different peoples that will -- we can see that one robot can easily replace one human being. But for more people in more -- in our situation can replace up to three people in terms of the amount of interaction you can provide. And in some -- and one of the scenario is the convenience store, we have a convenience store chain -- they bought one, they did some secondary development on it, so they kind of the customized that robot in their stores. Then they are likely to come back, buy 10 of those and they we put it in different locations. So in the night, in this store, normally they would have required two people, but now they can have only one person in store and have the robot actually patrolling in the store moving around. And they can function very well actually and translate the -- the convenience store chain they have see the values, and they are doing a lot of more applications using those robots.

Robert Cowell -- 86Research -- Analyst

Thank you.

Vincent Jiang -- Chief Financial Officer

Thanks, Robert.

Robert Cowell -- 86Research -- Analyst

Thank you very much.

Operator

(Operator Instructions) As there appears to be no further questions, I would now like to turn the conference back over to management for any closing remarks.

Helen Zhu -- Investor Relations Director

Thank you all for joining us today. And if you have any further questions, please do not hesitate to contact us. Thank you so much. Bye.

Operator

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

Duration: 47 minutes

Call participants:

Helen Zhu -- Investor Relations Director

Sheng Fu -- Chairman of the Board and Chief Executive Officer

Vincent Jiang -- Chief Financial Officer

Frank Chen -- Macquarie -- Analyst

Robert Cowell -- 86Research -- Analyst

Carson Lo -- Nomura -- Analyst

Unidentified Participant -- -- Analyst

Hillman Chan -- Citigroup -- Analyst

More CMCM analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Cheetah MobileWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Cheetah Mobile wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.