Cheetah Mobile Inc

NYSE:CMCM

Good day, and welcome to the Cheetah Mobile Third Quarter 2021 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sheryl Zhang, Investor Relations Director of Cheetah Mobile. Please go ahead, ma'am.

Thank you operator. Welcome to Cheetah Mobile third quarter 2021 earnings conference call. With us today are Mr. Sheng Fu, Chairman and CEO, and Mr. Thomas Ren, CFO. Following management's prepared remarks, we will conduct the Q&A session. Before we begin, I refer you to the Safe Harbor statements in our earnings release, which will also apply to our conference call today, as we will make forward-looking statements. At this time, I now would now like to turn the conference call over to our CEO, Mr. Sheng Fu. Please go ahead, Fu.

Thank you, Sheryl. Hello everyone. In the third quarter of 2021, consistent with our previous guidance, Cheetah Mobile’s revenue was RMB196 million. For our internal business, we continue to transform our business from single advertising model to a diversified model of our advertising plus subscription. The numbers of our members kept a double-digit growth. And the revenues from our membership business have increased for more than five quarters consecutively.

In business [ph] platform, we further enhanced our service and membership privilege. The overall members fixed [Indiscernible] states a high level of our mobile platform we include user interference through products -- optimization and the more regular service. The present percentage of a penny [ph] users as well as the renewal rates, both increased. In general after the huge external challenges our internet, internet business has been packed to the right check as we planned.

However, now globally, advertising is facing some uncertainly in China sectors such as education, real estate, tower have slowed down due to COVID-19. Garment supervision and regulation and some other reasons the impact has been passed on to advertising business. Companies, including Baidu and Tencent are not very optimistic about our advertising in the coming quarters. Our outlook for the first quarter also reflects this factors overseas, advertising business of big companies such as Facebook, also faced headwinds from the change of iOS 14.

Macroeconomic and COVID related factors. Our overseas advertising agency business is in inevitably adversely affected, as this might be a March [ph] quarter impact. This also has been factored in our fourth quarter guidance. Good news is revenues from our global cloud service has been growing very well due to expanding service categories and the clients base in this quarter, and the price which try to explore overseas markets as a rare demand for this service. We are very opportunistic about its future growth.

For our AI business, GMU and the revenue from shopping malls, coupon-selling robots has been up for several months in a row. We applied both offline and online marketing, marketing strategies [Indiscernible]. We have deployed more than 10,000 robots in more than 40 cities online, we use our own WeChat Mini Program, Chando some other local network community as well as some maze gyms, third party platforms.

Customers can register in Chando through our shopping mall robots and choose their favorite coupons from our list of opportunities we displayed in this mini program. Machines can also use Chando’s professional platform to review the data of sale, coupon sale, and then to analyze. Currently, our robots sell more than 5000s 10s of coupons for more than 1000 merchants in more than 700 shopping malls all over the country.

At the end of October, GMV at the weekend has achieved another milestone. For this business, we have gradually created competition -- it has been widely welcomed by more and more merchants and the customers. Generally speaking, revenue from our new business such as the membership business, the global cloud service business and the shopping mall, coupon-selling robots business were typically.

While revenues from advertising related business we have faced some challenges in the coming quarter, for cost and expense. Our operational efficiency has been greatly improved in the past quarters, upon this we will continue to the strict control still comes due to control our cost and expense to maximize our operational investment efficiency and as the interest of our shareholders. Additional as of September 30, 2021 our cash position with around USD$288 million and the long term equity investments was about US$376 million. The [Indiscernible] capital reserves issue us to focus on our state strategies and grow the rows that they believe.

With that, I will now turn the call to our CFO Thomas Ren to go through the detail of our third quarter financial results.

Thank you, Sheng. And hello, everyone. Thank you all for joining us today. Now, I will walk you through our key financial highlights. Please note that unless stated otherwise, all money amounts are in RMB terms. As Sheng just mentioned in the third quarter of 2021, our total revenues are RMB196 million, representing a year-over-year decrease of 46% and a quarter-over-quarter decrease of 7%. The revenue was within the range of our previous guidance. To explain the reasons behind the changes, now let me break down our revenues into Internet and AI and other sectors.

As a result of the Company's on-going business streamlining efforts be realigned our meeting segments based on the change of the way that the amendment assesses the company's segment performance. The company's overseas advertising agency services, which assists company to launch advertisements on overseas advertising platforms, a change from the internet business into AI and others due to the synergies created between the company's advertising agency services and global cost services.

Consequently, the company has retrospectively revised segment information and the related revenue presentation to confirm the change in the company's segments. Revenues from the company's internet business increased by 51% year-over-year, and the 16% quarter-over-quarter to RMB161 million in this quarter. The year-over-year decrease was due to the company's strategic efforts to diminish the gaming-related business in past quarters.

The quarterly increase was mainly because revenue in the second quarter of 2021 was temporarily increased due to drill at promotional events, and a no such promotional event occurred in this quarter. Revenues from AI and others as the reclassification of segments from this quarter, this segment now includes our shopping mall coupon selling pieces. Overseas advertising agency business, global cloud business and some other business.

Revenues from this segment were RMB36 million in the third quarter of 2020 representing a 9% year-over-year decrease and a 63% quarter-over-quarter increase. The year-over-year decline was primarily attributable to the planned drop in sales of AI related hardware products. The quarter-over-quarter increase was from our global cloud services, as well as shopping mall coupon selling robots business.

Turning to costs and expenses. The following discussion of results will be our non-GAAP basis, which excludes stock-based compensation expenses. 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 non-cash items.

For financial information presented in accordance with U.S. GAAP, please refer to our earnings release. Our operating loss was RMB59 million in the third quarter of 2021 compared with RMB119 million in the same period of last year, and RMB56 million in the previous quarter.

Our adjusted EBITDA was negative RMB38 million in the third quarter of 2021 compared with negative RMB101.6 million in the same period last year, a negative RMB47.7 million in the previous quarter. Cost of revenue decreased by 34% year-over-year and increased 48% quarter-over-quarter to RMB74 million in the third quarter of 2021. The year-over-year decrease was primarily due to the decreased revenue. The quarter-over-quarter increase was from increased spending over AI related business.

Research and development expenses decreased by 54% year-over-year, and increased by 11% quarter-over-quarter to RMB52 million in the third quarter of 2021. The decrease was due to the deconsolidation of certain gaming related business in past quarters. Our investment in research and development has been getting flat. The quarter-over-quarter change was mainly due to less government grants in this quarter.

Selling and marketing expenses decreased by 49% year-over-year, and 30% [Ph] quarter-over-quarter to RMB85 million in the third quarter of 2021. This year-over-year decrease was attributable to the streamlining of our business and the strategic reduction of our costs, while the quarter-over-quarter decrease was mostly because we incurred the incremental promotion expenses for the 18 promotional events in the second quarter.

General and Administrative expenses decreased by 46% year-over-year, and 7% quarter-over-quarter to RMB48 million in the third quarter of 2021. The decrease was mainly due to the streamlining of our business and our effective expense control.

Now, let me turn to our balance sheet. As of September 30, 2021, we had cash and cash equivalents, restricted cash and short term investments of US$288 million and long term equity investments of US$376 million. This strong balance sheet ensures us to follow our long term development plans and achieve our strategic goals. And for our fourth quarter revenue guidance, we currently expect total revenues to be between RMB130 million and RMB180 million. As Sheng just mentioned, our guidance has reflected the uncertainty we face in the fourth quarter due to the headwinds in global advertising business. 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.

We will now begin the question-and-answer session. [Operator Instructions] When asking the question, please state your question in Chinese first, then repeat your question in English for the convenience of everyone on the call. Please be online as we poll for questions. And today’s first question comes from Melody Chan of Jefferies. Please go ahead.

[Foreign Language]

Let me translate my question. My first question is on the advertising business. So how should we think about the impact of the COVID uncertainty and the macro witness? And also the regulation impact? And my second question is on the AI business, how should we think about the AI business outlook in 2022? Thank you.

Okay, thank you, Melody. I will answer your first question and Mr. Sheng will answer your second question, and I will translate for him. So your question, I think it's regarding the advertising business. And first, firstly, I would briefly answer the impact by our COVID uncertainty and some also market weakness. Yes, we think COVID uncertainty and market weakness will affect our business. And we can see now globally, advertising is facing some uncertainty. In China, sectors, such as education, real estate travel, have been slowed down due to COVID-19, and also the government supervision regulations, some of the reasons. So the impact has been passed on to advertising business. So there is some bigger internet light from companies are not very optimistic about advertising in the coming quarters. And also, our outlook for the fourth quarter also reflect these negative factors. And overseas, on the overseas market advertising business as we mentioned, for the big platform company like Facebook, they are also facing headwinds from the change of iOS 14, macroeconomic and COVID related factors.

So our overseas advertising agency business is also adversely affected. And this might be impacted by multi-quarters. This also has been factored in our fourth quarter guidance. And also for our shopping mall coupon-selling robot business, there were also some negative impacts from our business in certain cities, some shops in these cities were closed or some restaurants stop. It did, but it is controllable and the impact was only in limited areas. So we didn't see a significant impact on our shopping mall go about in this. And also, I think your question also involves the regulation impact by the Personal Information Protection Law. Yes, we also see, the strict government supervision and regulations could also slow down the advertising busienss. This has already been reflected in some Chinese internet company’s financial results. And as we mentioned earlier, we also expect some negative impact on our advertising related business.

And for us, internally, our related departments have been starting and following the regulations and laws seriously. We also adjusted how we display advertisements on our platforms and how we can collect user’s information. We conducted some internal restructure to better comply with the updated government regulations. And also as we mentioned, now we are focusing on new business such as membership, shopping mall coupon-selling and the global cloud service, we are confident about the goals of this new business. So generally speaking, about the regulation we strictly comply and at the same time we also have made business strategies to ensure the growth of our overall business. Hope this answers your question.

[Foreign Language]

Okay, let me translate this part. So we have deployed over 10,000 service robots in dozens of cities across China. We recently realized that all the customers they are already used to talking to the robots in the shopping malls, like inquiring the information of merchants in that shopping mall or the service provided by those merchants.

[Foreign Language]

Because we found the customer already used to now communicating with our service robots, we found that when you when the customers is asking the location or interaction with our service robots, the focus [Ph] we recommend for the customers could be acceptable.

[Foreign Language]

And all the merchants in the shopping malls, especially the restaurants, they also need that to deploy some of their coupons in this shopping mall to attract its traffic.

[Foreign Language]

And when the customer is shopping in the mall for most of the times, they didn't have clear targeted restaurant. So sometimes it might be -- they might go in to recommend restaurants because of the coupons we recommend.

[Foreign Language]

Combining the three parties demands, we are promoting the mini program called [Indiscernible]

[Foreign Language]

When the customers -- when the customer interacts with our robots, so they firstly they need to register our mini program to become a member of our mini program. And then they pay the coupons through our program. And then they can bring the electronic coupons to the restaurant or to the merchants who enjoy the discounts.

[Foreign Language]

So by promoting our service robots around the shopping malls, we can successfully convert the offline traffic into the online traffic or online user as of our mini program.

[Foreign Language]

As this business model, we can -- we can apply our advantage of the internet traffic business model to combine with the offline traffic user base.

[Foreign Language]

Yes, we have provided over 5000 coupons in the our mini program.

[Foreign Language]

We believe this business model could be grow fast because as we just mentioned it’s a combination of three parties demands.

[Foreign Language]

This could also convert our traditional internet business from the previous a pure advertisement model into the consuming and payment procedures.

[Foreign Language]

We can also earn commissions by selling the coupons. This could be another source of our future commercial income.

[Foreign Language]

This is basically our shopping mall service robots business model.

[Foreign Language]

[Foreign Language]

Thank you, Melody.

Ladies and gentlemen. [Operator Instructions] And as – there are no further questions at this time, I'd like to hand the conference back to our management for closing remarks.

Thank you, operator. Thank you all for joining us today. If you have any questions, please don't hesitate to contact us. Thank you. Bye.

And ladies and gentlemen, this concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.