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Cheetah Mobile (NYSE:CMCM)
Q3 2020 Earnings Call
Nov 24, 2020, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day and welcome to the Cheetah Mobile third-quarter 2020 conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Helen Zhu, investor relations director of Cheetah Mobile. Please go ahead, ma'am.

Helen Zhu -- Investor Relations Director

Thank you, operator. Welcome to Cheetah Mobile's third-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 call -- in our earnings release, which also apply to our conference call today as we will in our forward-looking statements. At this time, I would now like to turn the conference call over to our chairman and CEO, Mr.

Fu Sheng. Please go ahead, Fu Sheng.

Fu Sheng -- Chairman and Chief Executive Officer

Thank you, Helen. Hello, everyone. While our total revenue is rated, our revenue guidance, will still face challenges in growing our revenues. Total revenues decreased by 17% year over year and a 7% quarter to quarter to RMB 335 million in the third quarter of 2020, mainly due to the decline in overseas business.

We will separate some setbacks in overseas markets, Facebook and Google, our ex-largest business partners, stopped working with us. As a result, we lost two significant channels to acquire users and to monetize traffic overseas. Also, we were consistently communicating with Facebook and Google, offered several solutions to them to resume our work but we not able to rework with them. Given today's international environment, we don't expect to resume our cooperation in the near future.

To cope with this headwind, we have taken several measures and have seen some initial results as following: first, we have streamlined our operations and cut our costs and expense. As a result, non-GAAP operating loss narrowed to RMB 119 million from RMB 220 million -- RMB 222 million in the same period last year and RMB 133 million in the previous quarter. Our operating loss in the quarter also included certain one-off charge restructuring expense, so we expect to continue reducing our operating loss in the fourth quarter. Second, our revenues from PC business and the mobile utility products in our home market as a whole stabilized.

Our PC business has transformed from advertising model to a membership subscription model. During the quarter, we continue to diversify our premium content and the service, which show increased impending user count and the subscription revenues. As a result, daily PC revenues from membership subscription fees increased 14 times year over year and 42% quarter over quarter in the quarter. Daily member subscription fees already accounted for about 50% of our daily PC revenues, which demonstrated that our PC business has transferred from an advertising model to a membership subscription model.

Besides our mobile utility product business in our home market resumed the quarter-over-quarter growth in Q3, driven by improved recipient. Tevenues from mobile utility product business in our home market grew by 7% quarter over quarter in Q3. Third, we disposed certain business and assets in the quarter, resulted -- result a net cash gain of USD 21 million in the second half of 20 -- 2020. Thomas will provide more details about the deal in his part, but I would like to emphasize that we will continue to create and deliver shareholder value in the future.

As of today, we have already returned about USD 300 million through our shareholders. After the shareholder return, we still have strong balance sheet to support our ambition and investment. Recently, Codemao a Chinese online education platform, which focus on teaching programming to children, reached a new round of financing. Cheetah Mobile is an angel investor of Codemao.

Before this round of financing, Cheetah Mobile held about 10% of active [Inaudible] in Codemao. Fourth, we continue to focus our results on AI-related robotics business to build our ecosystem and eventually build our long-term growth. Together with our investing company, OrionStar, we have developed our AI-related robotics and have increased the number of user cases -- user case. The recent outbreak of COVID-19 has also helped us expand usage of our robotics products and solutions.

Highlighted our robot developed in shopping malls. Today, our robot has been developed in about 1,000 shopping malls across 35 cities in China. As more users use our robots in shopping malls, we have began to build tentatively -- tentative business model. Meanwhile, we found that a hotel in China had increasing workaround delivery and the reception robot, so we quickly responded and the developed customized robots for hotel customers in the fourth quarter.

Our cooperation with OrionStar in AI business built our respective gen. OrionStar developed and produced AI robots and the Cheetah Mobile build user case for the customer. Notably, OrionStar robots has been nominated high in the service robot contest held by Beijing Scientists and the Technology Competition -- Commission for Beijing 2022 Olympics games, we won four first prize and one second prize in this contest. Looking to the fourth quarter of 2020, we currently expect total revenues to be between RMB 230 million and RMB 280 million.

The quarter-over-quarter decrease was due to disposed assets and business, which Thomas will provide more details at his portion. Moving forward, utility product and service in particular in PC business were primary drivers of our revenues. Driven by subscription business, our PC revenue will resume sequential growth in Q4. On the other hand, we will continue to cut our cost and expense and narrow our operating loss on both year over year and quarter over quarter basis.

Before I hand over to the call the -- to our CFO, I would like to emphasize that while we don't want to downplay the challenges we face, it is not the first time that Cheetah Mobile encounters unfavorable outside environment. We believe that AI challenge will enable us to build a new future for Cheetah Mobile. With that, we will now turn the call to our CFO, Thomas Ren, to go through the details of our third-quarter financial results.

Thomas Ren -- Chief Financial Officer

Thank you, Fu, and good day, everyone. Thank you, all, for joining us today. Now, I'll walk you through our financial results. Please note that unless stated otherwise, all money amounts are in RMB terms.

As we stated in previous quarters, LiveMe amended its 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 RMB 365 million in the quarter, exceeding the high end of our guidance, representing a year-over-year decrease of 60% and a sequential decline of 7%.

Excluding the impact of the deconsolidation of LiveMe, total revenues decreased by 47% year over year in the quarter. This decrease was primarily due to the suspension of our collaboration with Google since February 2020. By business segment, revenues from utility products and related services decreased by 47% year over year and 5% quarter over quarter to RMB186 million in the quarter, representing 51% of our total revenue in the quarter. PC revenues and mobile utility products revenues in our home market are stabilizing, already contributing to 33% of our total revenue in the quarter.

Revenues from our mobile games business were RMB 158 million in the quarter, representing 43% of our total revenue in the quarter. As of September 30, 2020, the company had disposed certain business and assets related to the gaming business in the overseas market. In the third quarter of 2020, the disposed business and assets as a whole contributed approximately 27% of our total revenues and generated operating losses.As a result, for the fourth quarter of 2020, we expect revenues from the mobile games business to shrink significantly. However, we expect revenues from PC and mobile utilities products in our home market to remain stable and account for the vast majority of our total revenues.

And for our fourth-quarter revenue guidance, we currently expect total revenues to be between RMB 230 million and RMB 280 million. Please note, this forecast reflects our current and preliminary views and is subject to change. Turning to our third quarter of 2020 cost 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, results, and effect of non-cash items.

For financially information presented in accordance with U.S. GAAP, please refer to our earnings release. In the past several quarters, we continue to streamline our operations and cut our costs and expenses. In the third quarter of 2020, total cost and expenses decreased by 58% year over year and 9% quarter over quarter to RMB 481 million.

Excluding the impact of LiveMe, our total costs and expenses decreased by 38% year over year. As a result, the gross margin expanded to 59% in the third quarter of 2020 from 60% in the same period last year. Operating loss reduced to RMB 119 million in the quarter from RMB 222 million in the same period last year and RMB 133 million in the previous quarter. During the quarter, we disposed some of our business and assets related to the gaming business in overseas markets.

This disposal boosted our earnings and helped us to create shareholder value. In the third quarter of 2020, our net income attributable to Cheetah Mobile shareholders grew to RMB 266 million from RMB 244 million in the previous quarter. Importantly, our balance sheet remains strong. As of September 30, 2020 we had cash and cash equivalents, restrictive cash, and short-term investments of USD 235 million and long-term equity investments of USD 332 million.

Our strong balance sheet gives us the confidence to continue to invest in the AI-related business for our future. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

Questions & Answers:


Operator

Thank you. We will now begin to question-and-answer session. [Operator instructions] Our first question today comes from Thomas Tang with Jefferies. Please go ahead.

Thomas Tang -- Jefferies -- Analyst

[Foreign language] Thanks, management, for taking my questions. My question is about the 2021 outlook. Can management share about your view about the business trends of course different segments as well as the competitive landscape? Thank you.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

OK. Let me first translate the first part of Fu Sheng's answer. So, indeed this year, the year 2020, for us, Cheetah Mobile, is a difficult year especially after our product was removed from Google. And in fact you know before most of our utilities revenues coming from overseas market.

But after we performed such adjustments, as we mentioned just now after we were removed from Google, Google Play Store, now we are focusing our efforts to domestic market. And in domestic market, pieces the -- already completed the pivoting from advertising model to the subscription model that we rely on. On the utilities products, we rely on advertisement a lot previously. But on the advertising industry, we were influenced by our partners significantly, so we think now we have improved significantly as we -- I just talked.

Aand now PC as a vertical market, it will not disappear, along with the -- with widely use of our mobile phones and now we can see the user base is stabilizing our PC front and with a slight increase. So we think next year, for our utility business, we can regain some increases.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

OK. For the AI business, especially our shopping mall robotics, it depends on the offline. So due to the COVID-19, it was affected a little bit. But now, I think we are recovering from the COVID-19 situation and also the whole offline traffic in the shopping mall.

So I think there is still a great chance in our shopping mall business model.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Yes, yor the greater economic view, I'm not a professional. But from my point of view, we think, for sure, in China, last year, the growth should be in the leading part globally. And now our strategy is focusing on the China market to focusing on our utility and AI business to do a great job in the -- in our home market.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Yes. Hope that answers your question, Thomas.

Thomas Tang -- Jefferies -- Analyst

Thank you.

Fu Sheng -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Vicky Wei with Citi. Please go ahead.

Vicky Wei -- Citi -- Analyst

[Foreign language] So, firstly, management, thanks for taking my question. My is about the AI investment -- the AI business investment. So given the company does not anticipate significant revenue from the AI business in the foreseeable future, what does management think of the investment needed for the AI business and what does it imply for the company cash balances in the midterm? Thank you.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Yes. Let me highlight a few points from the AI front. So first, previously, we combined both our 2C and 2B AI business revenue in the AI revenue. So for the 2C product, we used to have a product named the Cheetah Translator, which is AI-based interpretation device.

But due to the situation of COVID-19, people don't travel abroad. So this product, we almost suspended it for now. And also for the COVID-19 in Q2 for our 2B sales, we cannot meet our customers due to some travel restrictions, so it impacted a little bit in Q2. But now I think we have seen some rebound of our AI business in this quarter.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

After the recovery of the COVID-19 situation, I think the market is having a greater acceptance for the low-touch service, like robotic services. So the acceptance for the industry is growing, as we speak.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Ye, and our investment in AI is -- mostly consists of R&D expenses. So after some functions were developed, the -- such investment may not be continued investments.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Yes, so as we mentioned just now, in Q3 -- there is some onetime staff restructuring expenses in Q3. So in Q4, we expect that our operating loss level could be improved a lot and -- as per our own estimation. So as for such a trend, our balance sheet can support our investment in the midterm. And also as we -- when we explore the monetization model or shopping mall and hotels, as we mentioned, I think we -- we may expect some more growth on AI front next year.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Yes, I think we don't need to worry too much about our AI investment. On the investment, as we mentioned, the market is recovering quickly, including both the hotel and also the shopping mall industry and also we are exploring our business model. And also, on the other hand, along with our cost and the expenses cutting, you may see greater improvement on our bottom line. And also, we have sufficient cash and investments, so I think our vision is to make the business of service robotics great, to be our new growth engine.

Fu Sheng -- Chairman and Chief Executive Officer

[Foreign language]

Thomas Ren -- Chief Financial Officer

Thank you.

Vicky Wei -- Citi -- Analyst

Thank you.

Operator

As there are no further questions at this time, I'd like to hand the conference back to our management for 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: 33 minutes

Call participants:

Helen Zhu -- Investor Relations Director

Fu Sheng -- Chairman and Chief Executive Officer

Thomas Ren -- Chief Financial Officer

Thomas Tang -- Jefferies -- Analyst

Vicky Wei -- Citi -- Analyst

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