Cheetah Mobile (CMCM) Q2 2020 Earnings Call Transcript

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Cheetah Mobile (CMCM 5.21%)
Q2 2020 Earnings Call
Aug 18, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Cheetah Mobile second-quarter 2020 conference call. [Operator instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Helen Zhu, investor relations director of Cheetah Mobile. Please go ahead, ma'am.

Helen Zhu -- Investor Relations Director

Thank you, operator. Welcome to Cheetah Mobile's second-quarter 2020 earnings conference call. With us today are our company's chairman and CEO, Mr. Fu Sheng; and our company's CFO, Mr.

Thomas Ren. 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 chairman and CEO, Mr.

Fu. Please go ahead, Fu Sheng.

Fu Sheng -- Chairman and Chief Executive Officer

Thank you, Helen, and hello, everyone. We delivered overall better-than-expected results in the second quarter of 2020. Today, total revenue came in at RMB 394 million, exceeding the high range of our revenue guidance. Non-GAAP net income grew to RMB 244 million.

However, we're still facing challenges in operating our business in overseas markets. We are unable to resume our cooperation with Facebook and Google. As a result, we have difficulty in acquiring new users and monetizing our traffic, and our overseas revenue continue to decline. Given today's environment, we are not confident in resuming our cooperation with Facebook and Google.

In the domestic market, the only advertising industry has been negatively impacted by the pandemic since the beginning of this year, leading to the decline of eCPM. Because of these headwinds, we choose to strategically shift our focus from overseas markets to the domestic market and introduce the user subscription model. Financially, we have reduced cost and expense and focused on our AI investments in the shopping malls. In today's call, I would like to highlight the following.

First, we significantly reduced our cost and expense during the quarter. As a result, the non-GAAP operating loss narrowed by RMB 8 million quarter over quarter in Q2 despite that our total revenue decreased by RMB 130 million from the previous quarter. The revenue decrease was primarily due to the suspension of our collaboration with Google since February 2020, as well as the outbreak of COVID-19, which continue to impact our online advertising business in China. During the quarter, we cut back our cost and expense for overseas markets, leading to a 51% year-over-year and 31% quarter-over-quarter decrease in costs and expense for our mobile Internet business, namely the utility products and the mobile game operation.

In the coming quarter, we will continue to improve operational efficiency, reduce cost and expense, and significantly narrow our operating loss on the corporate level. Second, PC revenue increased by 2% quarter over quarter to RMB 120 million, driving the growth of user subscription revenue. During the quarter, both paying user accounts and the daily subscription revenue from our Duba Anti-virus software reached new highs. This achievement proved the user subscription model within utility apps.

Recently, we have copied the user subscription model from PC to mobile by introducing premium service for Clean Master. The initial user adoption has been very encouraging as we have seen the paying user account and the daily subscription revenue remains growing since inception. Third, given today's environment, we believe the Chinese mobile Internet company will face increasing challenges abroad. As a result, our utility product business will move from overseas markets to the domestic market.

This move allow us to reduce costs and expense gradually. During the quarter, we introduced some new utility products in our home markets. In the future, we will add more utility products in the domestic market to further enrich our product offerings and boost our revenue. Fourth, the number of AI-related robots in shopping malls grew to about 7,000 by the end of the second quarter.

Our robots help customers find the shops and the brands they are looking for, improve the customer shopping experience, and created more business opportunity for merchants. The customer's daily inquiries with our robot has been growing. Increased customer usage has attached many shops and brands to come to us to gain coverage. Recently, we tried to work with several brands, including restaurants, auto companies, and accessories to direct traffic to their local shops.

The progress of our robots in shopping malls delayed about six months due to the pandemic. However, we will accelerate the monetization, along with the recovery from COVID-19 situation. Fifth, our long-term liquidity -- equity investment contains several well-known projects. As of June 30, 2020, we had USD 292 million long-term equity investments sitting on our balance sheet.

During the quarter, some of our major investees made a notable development. For example, LiveMe achieved profitability. Codemao, a leading Chinese online education platform that teach programming to children close to -- closed the new round of funding raising. Looking ahead, we expect to continue facing potential headwinds, so that we are unable to grow or sustain our total revenues in the second half of 2020.

However, we will continue to reduce cost and expense and narrow our operating loss in the coming quarters. At the same time, we will approach our commitment to AI packaged with our strong cash reserves. We believe AI will allow us to build a new growth engine for the company in the long term. With that, I will hand the phone over to our CFO, Thomas.

Thomas Ren -- Chief Financial Officer

Thank you, Fu Sheng, and good day, everyone. Thank you all for joining us today. Now, I will walk you through our financial results. Please note that unless stated otherwise, all money amounts are in RMB terms, and all comparisons are made on a year-over-year basis.

As we stated in previous quarters, LiveMe amended a share incentive plan on September 30, 2019. As a result, we no longer hold the majority voting power in LiveMe and have started to deconsolidate LiveMe's financial results since the fourth quarter of 2019. To better present our financial results, we will also provide year-over-year comparisons, excluding the impact of the deconsolidation of LiveMe. Total revenues were CNY 394 million in the quarter, exceeding the high end of our revenue guidance for the second quarter of 2020 and representing a decrease of 59%.

Excluding the impact of the deconsolidation of LiveMe, total revenue decreased by 48% in the quarter. This decrease was primarily due to the suspension of our collaboration with Google since February 2020, as well as the outbreak of the COVID-19, which continued to impact our online advertising business in China during the quarter. By business segment, revenues from utility products and related services were CNY 195 million in the quarter, representing 50% of our total revenues in the quarter. Revenues from our mobile games business were CNY 179 million in the quarter, representing 46% of our total revenue in the quarter.

By region, revenue from China accounted for 41% of our total revenue in the quarter, while revenues from overseas markets accounted for 59% of our total revenues in the quarter. By platform, PC revenues improved slightly quarter over quarter to CNY 118 million and represented 30% of our total revenue in the quarter, while mobile revenue accounted for 70% of our total revenue in the quarter. Turning to our costs and expenses. The following discussion of results will be on a non-GAAP basis, which excludes stock-based compensation expenses and goodwill impairment.

The use of non-GAAP measures in this context will help us to better present the results of our operating performance without the effect of noncash items. For financial information presented in accordance with U.S. GAAP, please refer to our earnings release. During the second quarter of 2020, we chose to strategically shift our focus from overseas markets to the domestic market, and thus continue to reduce our expenditures on our mobile Internet business in overseas markets in turn.

At the same time, we remain focused on our AI-related investments for shopping malls. As a result, total costs and expenses decreased by 47% year over year and 22% quarter over quarter to CNY 528 million in the quarter. Excluding the impact of LiveMe, our total cost and expenses decreased by 30% year over year and 22% quarter over quarter. In particular, cost of revenue decreased by 65% year over year and 23% quarter over quarter to CNY 113 million in the quarter.

R&D expenses decreased by 43% year over year and 17% quarter over quarter to CNY 113 million in the quarter. Selling and marketing expenses decreased by 46% year over year and 33% quarter over quarter to CNY 205 million in the quarter. Moving on to our profit and margin. Gross profit was CNY 281 million in the quarter.

Gross margin was 71% in the quarter compared to 66% in the same period last year and 72% in the previous quarter. Operating loss narrowed to CNY 133 million in the quarter from CNY 141 million in the previous quarter. The decrease in operating loss during the second quarter was a result of our strict cost-saving measures and representing the third straight quarter in a row of reducing operating losses since third quarter of 2019. During the quarter, we disposed our remaining stake in Bytedance, which resulted in an investment gain of about USD 66 million.

As a result, we reported a non-GAAP net income attributable to Cheetah Mobile shareholders of CNY 244 million in the quarter, compared to CNY 82 million in the same period last year and a non-GAAP net loss attributable to Cheetah Mobile shareholders of CNY 98 million in the previous quarter. In addition, we reported a non-GAAP diluted earnings per ADS of USD 0.25 in the quarter, which grew from USD 0.08 in the same period last year and a non-GAAP diluted loss per ADS of USD 0.30 in the previous quarter. Moving on to our balance sheet. As of June 30, 2020, we had cash and cash equivalents, restricted cash, and short-term investments of USD 453 million and long-term equity investment of USD 292 million.

On July 9, 2020, we used cash from our balance sheet to pay a special cash dividend from USD 1.44 per ADS to our shareholders. The aggregate amount of the cash dividend was about USD 200 million. Now, let me provide you with our third-quarter revenue guidance. We currently expect total revenues for the third quarter to be between RMB 310 million and RMB 360 million.

Excluding the impact of deconsolidating LiveMe, this guidance implies a year-over-year decline in total revenue between 47% and 55% in the period. Please note this forecast reflects our current and preliminary views and is subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you.

Questions & Answers:

Operator

[Operator instructions] And our first question today comes from Vicky Wei from Citi. Please go ahead with your question.

Vicky Wei -- Citi -- Analyst

[Foreign language] Good evening, management. Thanks for taking my questions. I have two small questions. The first is about the advertising market update.

So will management provide some color about the category performance of the advertising market in the second quarter and the first quarter? And my second question is about the U.S.-China tension. So a lot of Chinese ADRs are coming back to China to delist or they privatize. So what does management think of this? And what is the plan of the company? Thank you.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

OK. So I will answer your two questions. So first one is about the industry with good performance for our advertising business. So I think our situation is similar with other players in the advertisement industry.

As most of our advertising revenue is coming from major domestic platforms, we can see greater contribution from e-commerce and online education, but the increased investment for their -- like June 18 promotional contents or for summer holiday courses. And in categories such as automobile and consumer electronics, they marketed more aggressively with that as consumption recovered. Hope this answers your first question. For your second question, it's about what the management view about the delisting from U.S.

market or delisting in Hong Kong capital markets. So yes, we did know that recently, many Chinese company, they have either chosen to delist from the U.S. stock market or completed delisting in the Hong Kong stock market. Meanwhile, we have also noticed that many Chinese companies have completed their successful U.S.

IPOs in the past couple of months. So I believe that the different capital markets provide that variety of options for different companies at different growth stage. So for us, as Cheetah Mobile's management, our top priority is definitely the company's business development and growth. At the same time, we will also pay attention to various options available in different capital markets.

So, yes, for sure, if we have any plan, we will disclose to the public as soon as possible.

Vicky Wei -- Citi -- Analyst

Thank you.

Operator

[Operator instructions] And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Helen Zhu -- Investor Relations Director

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

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Helen Zhu -- Investor Relations Director

Fu Sheng -- Chairman and Chief Executive Officer

Thomas Ren -- Chief Financial Officer

Vicky Wei -- Citi -- Analyst

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