Cheetah Mobile's (CMCM) CEO Sheng Fu on Q2 2014 Results - Earnings Call Transcript

Aug.19.14 | About: Cheetah Mobile (CMCM)

Cheetah Mobile, Inc (NYSE:CMCM)

Q2 2014 Earnings Conference Call

August 19, 2014 08:00 ET

Executives

Helen Zhu - IR

Sheng Fu - CEO

Andy Yeung - CFO

Analysts

Philip Wan - Morgan Stanley

Alex Yao - JPMorgan

Jiong Shao - Macquarie

Ella Ji - Oppenheimer

Operator

Welcome to Cheetah Mobile’s second quarter 2014 earnings conference call. (Operator Instructions). We will be facilitating question and answer session towards the end of the conference call. At that point I would like to turn the call back to Helen Zhu, Cheetah Mobile’s Investor Relations Director. Thank you.

Helen Zhu

Thank you operator. Welcome to Cheetah Mobile’s second quarter 2014 earnings conference call. With us today are Mr. Fu Sheng, the Company’s CEO; and Mr. Andy Yeung, the Company’s CFO.

Following management’s prepared remarks we will open it up for Q&A section. Before we begin I will refer you to the Safe Harbor Statements in your earnings release which also applies to our earnings conference call today as we will make forward-looking statements. At this time I will now like to turn the call over to our CEO, Mr. Fu Sheng.

Sheng Fu

Hello everyone and thank you for joining us. Today we will like to highlight the progress we have made in the past quarters in terms of mobile users. Mobile monetization, our overseas business and mobile offering in Q2.

First, Cheetah Mobile’s user’s engagement and number of users from overseas market grew at an impressive rate in the quarter. As of the end of the second quarter our applications have been consorted on 662 mobile devices globally, up 32% quarter-over-quarter. Mobile MAUs increased 28% quarter-over-quarter reaching 284 million in the quarter most notably about 67% over mobile MAUs were from overseas market presenting a significant year-over-year increase. These strong growth and levels of engagements of our users has propelled Cheetah Mobile into a market leading position in both the overseas and domestic mobile internet industry and validate the strong market demand for our product portfolio.

Second, revenue generated from our mobile business jumped 10 fold year-over-year as 42% quarter-over-quarter to R&D 76.2 million in the second quarter. During the quarter we (indiscernible) format such as contextual native apps which significantly drove up mobile revenue exceeding management’s expectation specifically we embedded app distribution related apps into our products as launch of the most downloaded [ph] mobile app in the market. We also utilized feed data to analyze user preferences and recommend targeted apps specifically games to our users. Furthermore our success with innovations have allowed us to combine mobile with our utility products further booking the distributions of our mobile apps and games.

For example those that on the (indiscernible) one of our popular games reached 120 million global downloads and have been featured 60 times on the Google Play homepage. In addition we acquired HongKong Zoom Interactive during the quarter. HongKong Zoom Interactive operates a mobile advertising business. It's customers includes Google, Facebook and global mobile advertising network such as InMobi, Millennium Media, among others. HongKong Zoom has enriched advertising resources and enhanced technology and know-how. With HongKong Zoom Interactive Cheetah Mobile is expected to further strengthen it's global mobile monetization capability.

Third, we further deepened our penetration in overseas market, in June 57% of mobile MAU were from overseas market mostly from the U.S. and Europe, both equals to 119 million of mobile MAUs outside of China. According to our analysts [ph], Cheetah Mobile was the number two brand in the Google Play non-game app categories worldwide in June right behind Facebook. In addition, Clean Master and CM Security was once again awarded the top spot in in AV-Test's latest assessment of Android security for the fourth consecutive times in 2014. The AV-Test is conducted by an independent services supplier for global IT Security and Antivirus Research based in Germany. Based on AV-Test’s results Clean Master and CM Security achieved a 100% detection rate, had no false positives and maintained high performance in areas such as power, CPU and data usage. Moreover we’re growing global brand attracted more well-known handset suppliers as of today more than 20 handset makers preloaded our Clean Master’s on their devices some of the new handset partners include HTC, (indiscernible) a Europe based handset maker, and Micromax, an Indian based handset makers among others.

We believe those partnerships will further increase our user growth and will enhance our brand awareness in the overseas market.

First, moving on to our mobile products, we offer differentiating features and services while developing a product portfolio metrics of (indiscernible). In June, the 12 free most downloaded mobile apps in the Google Play, Tools categories worldwide were all developed by us. They were Clean Master, Battery Doctor and CM Security, also Photo Grid ranked number one in the photography category in Google Play by monthly download in the United States. According to iResearch in June Clean Master and Battery Doctor’s were the top two mobile tool applications in China in terms of monthly app users.

These achievements enable us to cross promote our other apps, for example during the quarter we launched an extremely light and fast mobile browser, CM Browser which was cross promoted by our other core apps. As a result CM Browser was one of the top 40 most downloaded mobile apps in Google Play in July. Our strong performance reflects not only the (indiscernible) but also our ability to recognize opportunities for product enhancement and our responsiveness to user feedback. During the quarter we launched multiple updates for our mobile apps with a number of differentiating features.

Looking ahead we will continue investing in expanding our mobile platforms especially in utility mobile apps further penetrate the global market especially in the U.S. and Europe markets and strengthen our strategic partnerships with leading internet app and mobile internet companies globally. We believe that those initiatives will allow us to further enhance or brand awareness, user growth and engagement as well as strengthen our global mobile monetization capabilities.

Now I will turn the call over to our CFO, Andy Yeung for a financial highlights.

Andy Yeung

We’re excited to announce second quarter financial results that exceeded our previous guidance. In addition to stronger than expected results, the success of our new product roll out (indiscernible) our quarter revenues growth continues on a strong trajectory, setting another new record for this quarter. As Sheng Fu mentioned we made significant progress in mobile monetization. Not only is mobile is the pure revenue contributor, it is also an increasing important driver of our top line growth. Mobile revenues dramatically increased over 1000% year-over-year to RMB76 million, now accounts for 20% of our total revenue, up from only 4% a year ago.

Looking forward we expect our strong business momentum to continue into the third quarter as we continue to make investments that will drive user growth and expand our product and service offerings. Now moving to our financial results, before we get started I will like to clarify that all financial numbers we will present today are in RMB amount and not otherwise listed.

For same quarter, total revenues were 380 million, an increase of 139% year-over-year increase and 21% quarter-over-quarter exceeding the high end of our guidance by 10%.

Revenues from online marketing services were approximately 283 million and 112% increase on the prior year period and a 22% increase of the prior quarter. The increase was largely due to higher revenues from our key online marketing customer which was driven by significant growth in our user traffic. While we continue to see robust demand from our top three customers we saw even stronger demand growth from our other key end customers but we have further diversified our revenue base.

In addition, we also experienced a significant growth in our mobile advertising business as we began to earmark our mobile advertising business overseas. Revenue from IVAS segment were 85 million up 571% year-over-year and 18% quarter-over-quarter.

This increase was primarily driven by an increase of both a number of day’s coverage and a number of paying users. With addition the company also expanded into online lottery services. Revenue from internet security services and others were 12 million, down 3% year-over-year, while 6% quarter-over-quarter. The year-over-year decrease was primarily due to the Company ceasing to promote subscriptions services in a strategic reorientation which started in 2011.

Moving on to our costs and expenses, this I would like to discuss our stock based compensation expenses. As these expenses were 52 million in the quarter, as we previously stated we will incur higher SBC expenses this year largely due to share and option granted to our management team and employees before the company’s IPO in May.

Share based compensation is an important tool for company to attract and retain top talent and help us to stay competitive. It is an important strategic investment that we will continue to make for the mix [ph].

Now to help to facilitate the discussion of the company’s operating performance. The following discussion will be on a non-GAAP basis which excludes stock based compensation expenses. For financial information presented in accordance with U.S. GAAP please refer to our press release which is available on our website. Also revenues was 82 million and an increase of 178% year-over-year mainly due to higher bandwidth and IDC costs as well as costs associated with the mobile game business. Gross profits for the quarter was 299 million, a 131% year-over-year increase. Gross margin for the quarter was 78.5% slightly down from the same period last year, slightly up from the previous quarter.

The sequential improvement was mainly due to high contribution from our online marketing services. R&D expenses were 89 million, an increase of 79% over the corresponding prior year period. This was primarily due to an increase in a number of R&D personnel; R&D employees grew approximately 66% year-over-year.

Selling and marketing expenses were 116 million, an increase of 308% year-over-year mainly due to promotional expenses for our mobile business. On a quarter-over-quarter basis, selling and marketing expenses increased only 4%. As stated previously 2014 will remain an investment year for our client mobile users, and developing our mobile game business.

G&A expenses increased by 14% year-over-year to 29 million due to increase of professional service fees associated with being a public company.

Non-GAAP operating profit was 65.5 million, an increase of 150% year-over-year and 97% quarter-over-quarter. Non-GAAP operating margins was 17.3% compared to 16% in the prior year period and 10.6% in the prior quarter.

Non-GAAP net income increased by 302% year-over-year and a 100% quarter-over-quarter to 65 million. Non-GAAP diluted earnings per ADS increased by 224% year-over-year and 75% quarter-over-quarter to RMB0.49.

Now let me provide you with our first quarter revenue guidance. We currently expect total revenues to be between RMB430 million and RMB440 million, representing a 132% to 137% year-over-year increase. Please note that this forecast reflect the company’s current and preliminary view on market and is subject to change. This concludes our prepared remarks for today.

Operator we’re now ready to the questions.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question comes from Philip Wan from Morgan Stanley.

Philip Wan - Morgan Stanley

My question is about your mobile advertising business. Could you share with us how much of your mobile advertising revenue in Q2 is from outside of China and also what’s your plan to monetize your overseas traffic in the coming quarters and maybe your internal target by the end of this year? Thank you.

Sheng Fu

So the second quarter our mobile revenues, and overseas mobile revenues have grown up (indiscernible). Yes so the mobile revenue growth are coming from overseas and domestic sales. At this point we don’t much disclose precise presentation of revenue coming from overseas but what we can say is that the growth is very strong and I think if I may add -- if you look at mobile revenues this year is quite significant, about 20% of revenue coming from mobile and we -- while overseas is – disclosing that -- it's not also not a significant amount for our revenue base. It has become more material, as we mentioned it's a mature cost connected to our overall revenues and it will be a big driver to our growth going forward.

Philip Wan - Morgan Stanley

So my next question is would you comment on a competitive landscape especially in the utility mobile app market given the success of Cheetah Mobile, will that excite more competition and impact your progress monetization. Thank you.

Sheng Fu

Our success overseas have a track other competitors from China and they have made a concentrated effort to expand to overseas market but over the past few months as you observed we continue to have a very largely issued gap between us and our competitors and we’re still going strong in overseas market.

Philip Wan - Morgan Stanley

(Foreign Language)

Sheng Fu

Yes. Three competitive advantage that we enjoy overseas -- this mobile application has enjoyed very strong leadership overseas. It's (indiscernible) number is only behind three application coming from Facebook and we’re number four, in Google Play worldwide.

On Clean Master, not only it's went very high but you also enjoy very good user feedback and rating and this is one of the area that is very difficult for our competitor to overcome.

Philip Wan - Morgan Stanley

(Foreign Language)

Sheng Fu

So if you look at our ability to cross sell our applications, we have demonstrated we’re able to cross sell mobile applications very successfully. If you look at our key applications that we Clean Master, Battery Doctor and CM Security, all are very high on the tools category and that’s somewhat -- is very difficult for our competitors to duplicated.

If you look at our ability to promote products and we have quite similarities with these promotional channels. Expect we are familiar with Facebook at an upstream and then on a downstream we are also developing a strong relationship with some best handsets manufacturer to create our applications.

So in some of overseas mobile monetization the limitation is not so much coming from our competitor it's more to from our own specific product view, how we want to cross sell and how we want to promote and monetize our mobile application.

Operator

Thank you. And the next question comes from Alex Yao with JPMorgan.

Alex Yao - JPMorgan

So my first question starts from the recent product metrics strategy as well as the M&A activities. So after all these strategy clearly Cheetah Mobile has gained a very significant increase in terms of touch points with the consumers and then do you guys have some kind of back-end system to consolidate and unify the interaction between Cheetah’s apps with the consumers. And what kind of features or characteristics are you -- do you’ve in mind to place into such a mechanism and then lastly does such a capability will be able to open to third party apps? Thank you.

Sheng Fu

So internally we have strengthened our infrastructure platform, in one of the feature that they are developing is called Face Mark. So our Face Mark system it actually analyze user behavior so that we can develop a big data analysis on the user behavior as such without invading on user privacy we’re able to analyze the user behavior such that we’re tuned with (indiscernible) to our user.

So another thing cross platform system that provide native contextual advertising successful -- when we have advertising on one application, user will be indicated advertising on their application. And as such we are able to provide user more targeted and more precise targeted marketing but without annoying the user much.

The cost competiveness of a company is not only the large user base that we have but also our ability to employee indicative analysis so that we can best understand our user and user behavior based on their ability to provide that kind of product [ph].

We will open up our platform to not only our old applications or the application that we require also to on the third parties active offers. However that would par take a bit lower on the cost [ph].

Alex Yao - JPMorgan

So the second question is about ROI of user acquisition, we note that the quarterly MAU net adds has increased compared to previous quarters but the quarterly sales and marketing cost didn’t grow too much so can you help us to understand the what is driving -- the improving user acquisition ROI and how to think about sales and marketing strategy and a trend? Thank you.

Sheng Fu

There are several factors, one is that both Cheetah Mobile and also Clean Master the branded value [ph] for those have been increasing and as you see we have very strong organic traffic download for our application and compared to our competitors they spend a lot of money on marketing to acquire user and I think we will continue to see strong organic download for our user --

If you look at our two application metrics strategy, we have been quite successful in cross selling our applications and so as you can see that on the two categories, top three applications come from Cheetah Mobile and that’s somewhat referring -- compared to other applications. And if you look at Clean Master -- the couple of applications, only Clean Master is promoted also through one or two channel because organic. All the other ones, Battery Doctor, CM Security all through our cross sell or natural target download. So I think that’s also significant factors in our high user acquisition.

As we mentioned in our early question we have gained quite a bit of experience in terms of developing our promotional channels. So if you and -- because we’re able to refine our overseas promotional strategies that helps us to lower the CTA [ph] for our promotion. This year and next year I think we continue to see an important point in year for user acquisitions. So as a result we will continue to invest in user acquisition and especially given the fact that once we acquire a new user we will cost our other applications and we think that considering these factors. If you look at mainly this year and next year we will continue to invest heavily on user acquisition.

Operator

Thank you. And the next question comes from (indiscernible) with Credit Suisse.

Unidentified Analyst

So my first question is regarding the part of your plan that basically you have present to maybe promote actively on some more commercial partners [ph] in the next coming quarters or you’re probably still focused on the current strategy of monetizing our existing utility based apps metrics? Thanks.

Sheng Fu

Well first of all we have better than expected revenue growth from our overseas existing markets and that’s what we can expect from second quarter. So we are very encouraged by the results and so we’re looking forward to setting forward our overseas mobile business. In Clean Master, where we have continued focused growth in MAU and so ourselves we are cross sell that in the long run we can monetize Clean Master type free application product.

But as we mentioned before that the importance of Clean Master is it's not necessarily only monetization and more importantly it's actually cross sell our other application. If you look at in the second quarter we rolled out a new product called CM Browser and it's a very light browser, that’s only 1.6 megabytes in size and it is rated very high in Google Play by user, 4.65 and moving couple of months of it's launch we entered into the Top 20 downloaded applications in July.

Recently we also acquired a company called Moxiu and it's a company that operates mobile desktop applications and will require additional 20% stake in the company. So as we mentioned we will continue to look forward to developing and acquire application that have stronger user engagement that are more natural to marketization.

Unidentified Analyst

My second question is on mobile games, so you see pretty strong traction on the other app, but probably due to some seasonality issue or some execution phase, the IVAS, spread the online games revenue growth is relatively slower. So my question is about like what do you expect for the game segment to grow for the download and also for shares (indiscernible) progress to about the extension of oversea publishing resources that will be really helpful. Thank you.

Sheng Fu

If you look at our mobile game, it's probably less than what you’ve expected but that’s probably because we specifically focus to develop our mobile game teams to develop that business. Also if you look at the Chinese mobile gaming industry you also experience quite significant change in the second quarter’s you know that (indiscernible) example has become a very dominant competitors -- a dominant market leader so we would also give significant pressure for our domestic mobile game operators.

But as you’re probably aware of that, our strategy is mobile and global and so we have for long time have strategy focusing on mobile business and so for our mobile operation we’re also very optimistic that we’re able to develop a very good business model in Chinese games to overseas market and if you look at our applications overseas, our market leadership overseas we can confirm that we will be able to develop a very unique and strong business model for our overseas gaming operation.

So we have actually started our mobile game operation overseas recently and we have also seen some very encouraging results. We have pretty strong product pipeline for our overseas game operation, so we expect -- we have seen pretty strong growth in our overseas mobile game operation.

Operator

Thank you. And the next question comes from Jiong Shao with Macquarie.

Jiong Shao – Macquarie

My first question is about the potential impact from acquisitions the company has made last couple of months on the results, any guidance? Thank you.

Sheng Fu

So first let me start with our M&A strategy, for our M&A particularly we are more focusing on a strategic margins for our acquisitions not necessarily for immediate financial returns. Well for our example, through our acquisitions, we usually look for technology or applications that can strengthen our own technology and product portfolio that our users will enjoy. So for our us that is more important than immediate financial revenues.

The second areas of our M&A focus is in area that we are relatively new to it as example for mobile monetization, we recently acquired a company called HongKong Zoom which has a very good experience and has a good team in mobile monetization and so you saw that, that talent and that technology that we want and make that acquisition.

Regarding the financial impacts for some of our recent acquisition, what we can say that as we look at while these acquisitions, we’re mostly looking at employing technology of application sometimes you know some of the users that they have and then in immediate, in the short term and mid-term financial returns widely impacts -- our earning impact is relatively small. So mobile growth coming from organic growth.

Jiong Shao – Macquarie

My second question is really about the mix in the mobile revenue, the advertising versus the gaming.

Andy Yeung

Okay so in term of the mobile mix, mobile games and mobile advertising I think as we have mentioned before we will continue focusing on both mobile advertising and mobile games. As today, on a quarter-to-quarter basis you see some fluctuation between the revenue mix between mobile advertising and mobile game but overall I think mobile focused in the long term we’re looking at more even growth on both. But as mentioned earlier in the second quarter mobile game operation will be slower because some of the seasonality [ph] change in China and as we also just beginning to ramp up our overseas game operation. On mobile, we have rapidly systematic and steady in terms of how we expand our mobile advertising business both domestic and overseas. So that’s something that we want to share with you.

Operator

Thank you. The next question comes from Ella Ji with Oppenheimer.

Ella Ji – Oppenheimer

So my first question is relating to mobile monetization as well. Just wonder if you can share some colors relating to the advertisers, what’s the mix between overseas and the domestic as well as if there is any colors relating to the user behavior differences between international and the domestic users and how is that going to affect your monetization going forward and also relating to your newly launched product such as Cheetah Browser. How long do you think it will take you to monetize meaningful from when you launched a product?

Sheng Fu

So of course if you look at mobile users there is some interest and behavior but if you look at in terms of receptiveness to mobile advertising, we see that overseas users are more receptive to mobile advertising. On the other hand in China domestic users are more receptive to mobile game business.

So in term of mobile monetization I think in the near term we don’t see too much pressure to do that, I think our focus in mid-term in mobile user acquisition. However, if you look at our only two genuine revenues are mobile advertising and mobile game we have demonstrated that is a lot of potential here when we have a user data [ph]. So if you look at our long term monetization strategy really it's not to try to squeeze as much revenues from our users possible but we wanted to develop the best product possible and to acquire user base and have very strong user loyalties and once we have that then I think mobile monetization will be very natural and logically kind of easier.

So first of all for CM Browser we have quite interesting strategy in terms of user acquisition and we have always good user feedback for our product. So in term of our strategy really it's trying to continue to refine our products such that we will continue to gain user and then once we have a strong competitive advantage over our competitors and a very large user base I think the mobile monetization on CM Browser will be relatively natural and easy.

So we continue to see that strong momentum in term of mobile revenue growth. However again I guess global monetization is not our highest priority, investment product [ph] is our top priority in the near term but in term of like large scale monetization big increase, significant revenue transition from probably be mixed years.

So if you look at the monetization it's not meaningful [ph] that it's at point. We have seen very strong momentum in our mobile revenue growth either if you look at our year-over-year growth in mobile, we are grown out percentage [ph] for example but we will continue to focus on mobile application departments developing our backlog infrastructure. As you can see we also acquire company is our focus and we have also (indiscernible) our capability in mobile monetization. So I think it's between our user growth, user acquisition, product development, our mobile structure developmental and also some monetization. So I guess you know in short you should expect a more gradual and steady growth in mobile.

Ella Ji – Oppenheimer

And so my second question is relating to your revenue growth on the PC end what’s your total PC MAU for this quarter and can you also talk about -- amongst the regional trend relating to your PC user conversion.

Andy Yeung

So Ella, as we mentioned in our press release our key monetization product on PC platform is Duba.com and we have seen significant user growth in our multi-active user for Duba.com increased by 70% year-over-year and 25% quarter-over-quarter to 68 million in June 2014 and that is our main product line monetization. So if you look at our PC revenue growth mainly coming from increased user traffic. Of course our flagship product on mobile is actually our Duba.com and our software and -- but however we have decided -- its better to actually focusing on some of the key metrics more than overall mobile -- our PC user base.

Operator

Thank you. And this concludes the question and answer session. I would now like to turn the call back to management for any closing comments.

Helen Zhu

Thank you all for joining us today. If you have any questions please do not hesitate to contact us. Thank you.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a nice day.

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