Helen Zhu - IR Sheng Fu - CEO Vincent Jiang - CFO.

Thomas Chong - Crédit Suisse Wendy Huang - Macquarie Research Robert Cowell - 86Research Limited Liping Zhao - CICC.

Hello, and welcome to the Cheetah Mobile First quarter 2018 Earnings Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Helen Zhu. Please go ahead, ma'am..

Thank you, operator. Welcome to Cheetah Mobile's First Quarter 2018 Earnings Conference Call. With us today are our Chairman and CEO, Mr. Fu Sheng; and our CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A session. A presentation for the company's earnings call is also available at our IR website.

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 Sheng. Please go ahead, Fu Sheng..

Thanks, Helen. Hello, everyone. We began 2018 on a solid note. Total revenues came in at high end of our guidance. Profits and margins continued to improve. Today, I would like to highlight our progress in both core business and AI-powered business. First, our mobile game business has been a key growth driving for -- of our company's total revenues.

Both its revenue and profits continued to grow in Q1, primarily driving by mobile casual games that we introduced in early 2017. In Q1, the operating margin for our mature games had already reached 15% due to operating leverage. We define mature game as games that are more than 1 year old.

Cheetah Mobile has already created a powerful matrix of casual games. Our games features carefully selected background music, including popular songs we licensed and original music generated by our users. This music content had allowed us -- allowed our game to enjoy around the 100 million monthly active user players.

Different from many other casual game, our games have longer life cycles. For example, Rolling Sky and Dancing Line achieved record high MAU in Q1 even though they had a been in the market for a while. These achievements were a result of our efforts to keep adding new game levels and an interesting content to our games.

For example, we recently added a new level to both Dancing Line and Piano Tiles 2 based on Alan Walker's popular sounds, Faded, which attracted a lot of active players and allowed us to convert many of them to paying users. We are confident in our ability to grow both revenues and profits for our mobile game in 2018.

In additional to our innovating titles, we continue to spend the general of our games and the publishing third-party casual games. In the past month, our teams focused on identifying popular and profitable mobile games and made certain adjustments to these games for a global launch in later part of Q2.

Our team had a long track record in successfully publishing third-party casual games globally, and we have hundreds of millions of users that we can leverage to cross-promote our new titles. Second, our utility products and the related service business continued to earn strong profits and cash flow in the quarter.

Non-GAAP operating profits for our utility products and related service increased by 49% year-over-year to CNY267 million in Q1. This non-GAAP operating margin increased to 36% in Q1, up from 21% in the same period last year.

The improvements showed that our previous investment in utility product business had paid off, and we expect this segment will continue to generate a steady return of profits. Further, we will start to monetize the Cheetah Keyboard.

In the past year, Cheetah Keyboard's user base and user engagement continued to increase, thanks to our efforts in products innovation. Driven by organic downloads, the DAU of Cheetah Keyboard had recently achieved almost 10 million. Cheetah Keyboard's feature AI-powered smart replies and a collection of 3D keyboard themes.

Recently, we have introduced several music driving themes, which allowed the app to make beautiful sounds when user touch the keys. In addition, the DAU of theme launcher already surpassed 10 million in Q2 -- or Q1. Next, I would like to talk about our progress in our AI-powered business.

About 1 year ago, we began to focus on the bottom line growth of our core business. We have optimized the cost and expense structure for our utility products business and the disposal of News Republic. This strategy has allowed us to generate strong profit and a cash flow to fund our investment in AI-powered business.

In Q1, our AI-powered business made solid progress by dutifully introducing some robot products with Beijing OrionStar. Cheetah Mobile has about 30 equity interest in Beijing OrionStar and has a 2-year warrants to gain more equity interest to achieve a controlling position.

All the robotics products that we introduced are powered by OrionStar, an open, robust platform developed by Beijing OrionStar.

Orion OS allow hardware device to hear, see, understand and navigate to fulfill user's needs, making Beijing OrionStar one of handful companies to have a comprehensive set of technologies to make practical and the easy-to-use robots.

Recently, Beijing OrionStar achieved a record 98.355% recognition rate for its facial recognition technology in the [indiscernible] MegaFace challenge. In April, we started developing -- delivering our Cheetah Voicepod, the AI-based smart speaker to customer. We have found that playing music is the most preferred function for our AI speaker users.

As a result, we focus on our resource to providing the best experience in playing music.

We have integrated OrionStar's OS industry-leading far-field voice recognition and automatically speech recognition technologies into Cheetah Voicepod to allow the product to recommend and stream music in both Chinese and English with a superior sound quality powered by Beijing OrionStar's text-to-speech technology.

Cheetah Voicepod also speaks with a natural and a pleasant voice. Initial user feedback has shown its sound and voice had been top 2 favorite features of our users. Cheetah Voicepod features a 2-year QQ Music subscription service to customers.

In addition, by partnering with several leading third-party online audio and content provider, Cheetah Voicepod offers hundreds of podcasts and audiobooks that entertain and educate by leveraging Beijing OrionStar's voice print technology.

User can also purchase premium online audio content through WeChat or UnionPay directly through Cheetah Voicepod. To distribute Cheetah Voicepod, we have opened online stores on leading e-commerce platforms such as JD.com and Tmall. We have also extended our off-line channel by working with China Telecom and several hotel chains.

Recently, we featured Cheetah Voicepod on some of our China's leading radio social platform such as Miaopai and Douyin as part of our marketing campaign. We have also made a significant progress on Cheetah Voicepod production ramp-up since its launch.

We believe that voice recognition technology will be a game-changer -- game-changing in the mobile Internet space. Voice-enabled interaction is most likely to be the next major traffic gateway for user access to the mobile Internet in China.

By leveraging OrionStar's AI technology and data in far-field voice, our extensive product experience, talent R&D team, strong cash position and a strong connections in China's Internet space, we are confident about Cheetah Voicepod's long-term potential.

I would also like to mention Cheetah GreetBot, which is a full-sized reception robot developed by Beijing OrionStar. Cheetah GreetBot can recognize visitors when they arrive, communicate with them, help them find their contacts and accompanying them to meeting rooms.

With Beijing OrionStar's end-to-end knowledge of robot production, they can tailor maker -- tailor make Cheetah GreetBot for customers such as companies, banks and hospitals at a compelling price. Beijing OrionStar had made significant progress on Cheetah GreetBot production testing since its launch.

If they execute according to plans, we expect to start delivering Cheetah GreetBot to customer in Q4 2018. We expect to become the distributor of Cheetah GreetBot, so the sales of their robotics products will contribute to our top line.

Going forward, we expect our core business to continue to generate profits and cash flow in the second quarter of 2018 and beyond to support our investment in AI-powered business. At the same time, we will use AI technology to empower smart hardware.

To achieve this goal, we will leverage Beijing OrionStar AI technologies and our product experience to make practical and easy-to-use robotic products that are focused on the best user experience. We believe 2018 will be a transformational year for Cheetah mobile.

While our evolution has had its ups and downs, over the years, we have successfully adjusted our operational reduction and a strategy to address the rapid changes in the Internet and mobile Internet space.

With our extremely talent R&D team, massive user base and a strong cash position, we remain confident about our long-term growth prospects and believe that we are on the right track. Thank you for your continued support. With that, I will now turn the call to our CFO, Vincent Jiang, for Q1 business and financial updates..

Okay. Thank you, Fu Sheng. Hello, everyone. On the first quarter results were in line with management expectations. Total revenue for the first quarter of 2018 was RMB1.15 billion, exceeding our previous guidance range of RMB1.1 billion to RMB1.14 billion.

Mobile games revenues grew by 25% year-over-year to RMB175 million in Q1, already accounted for 15% of our total revenues in the quarter.

Importantly, we continued to expand our profit margins in the quarter, thanks to our strategy to optimize the cost and expense structure for our utility products and related services business and the disposal of News Republic. Gross profit increased by 3% year-over-year to RMB754 million in the first quarter of 2018.

Gross margin expanded to 65.8% from 61.5% in the same period last year. Operating profits increased to RMB136 million from RMB26 million in the same period last year. Operating margin expanded to 11.9% from 2.2% in the same period last year. Overall, we continued to drive higher operational efficiency for our core business.

At the same time, backing with our strong cash position, we are investing in AI-powered business to view the long-term growth for Cheetah Mobile. As of March 31, 2018, our cash, cash equivalents, restrict cash and short-term investments were RMB3.36 billion. Moving on to each of our reported segments.

Please note that all financial numbers are in RMB, unless otherwise noted. Note that starting on January 1, 2018, Cheetah Mobile adopted ASC 606, the new revenue accounting standards, which took out value-added tax from the revenue and cost of revenue line items.

To increase comparability with the first quarter of 2018 numbers, 2017 revenue number for today's discussion have been adjusted net of VAT. For our utility product and related-services business, revenue decreased by 8% year-over-year to CNY745 million in Q1 2018.

The year-over-year decrease was mainly due to two factors, first, a decline in revenues from mobile utility products in the overseas markets. As we stated in the past, Facebook and Google have discontinued the placement of ads on mobile phone lock screens since May 2017 and January 2018, respectively, which reduced our ad inventory.

Second, a decline in PC revenues as the Internet traffic continued to migrate from PC to mobile. However, the revenue decrease was partially offset by the growth of our mobile utility products business in China, driven by a year-over-year increase in both eCPM and ad impressions in this quarter.

The profit and margins of our utility product and related services continued to improve, thanks to our strategy to optimize the cost and expense structures for this business. In the first quarter of 2018, non-GAAP operating profits for our utility product and related services increased by 48% year-over-year to RMB265 million.

The non-GAAP operating margin for our utility product and related services expanded to 36%, up from 22% in the same period last year.

The year-over-year increase in profits and margins were due to two factors, first, we continued to optimize our product offerings that improved our operating efficiency, which led to a decrease in the bandwidth and IDC costs and a reduction in R&D headcount for the segment.

Second, we adjusted promotional activities for our utility products in overseas markets. For our mobile entertainment business, revenues increased by 8% year-over-year to CNY392 million in the first quarter of 2018. The year-over-year increase was driven by our mobile game business, which grew by 25% year-over-year to RMB175 million in the quarter.

The growth was primarily driven by the mobile casual games that we introduced in early 2017. As Mr. Fu Sheng mentioned, our casual games have longer life cycles than many other casual games. For example, Rolling Sky was launched in mid-2016, but it continued to drive our revenue growth in the quarter.

Over the past years, we kept adding interesting game levels, features and in-game purchase items to Rolling Sky. Our efforts have been well received by the Rolling Sky gamers. Another example is Dancing Line, one of the most popular titles we launched in early 2017.

The game was recently selected by Google Play as one of the best Android apps and games for 1Q 2018. Further, we have also brought some of our favorite mobile games in the overseas markets to our home markets. For example, the DAU of Piano Tiles 2, Rolling Sky and Dancing Line hit record highs in China during the Chinese New Year.

Revenues for our content-driven products decreased by 3% year-over-year to CNY280 million in the first quarter of 2018. The decrease was a result of year-over-year growth in revenues from Live.me, which were offset by decline in revenues from the News Republic application as we disposed of this business in the first quarter of 2017.

The increase in Live.me revenue was driven by growth in both the number of paying users and ARPU. We have seen that overseas live streaming users are more willing to buy virtual gifts to give to their favorite broadcasting host and they are more generous.

However, we are still in the early stage of building live broadcasting and virtual gift model in overseas markets, so we will continue to focus on improving our product features, enrich our content offerings and explore innovative ways to operate the platforms.

Our non-GAAP operating losses for the mobile entertainment business shrank to RMB75 million in the quarter from RMB128 million in the same period last year.

The reduced losses were primarily attributable to, first, a 25% year-over-year increase in the mobile game revenues, which also drove the profit improvement of our mobile game operation; second, the reduced costs and expenses from the News Republic business as we disposed of News Republic in Q4 2017.

The reduced losses were partially offset by our increased investments in the Live.me operation. Now I would like to provide a revenue guidance. For the second quarter of 2018, we expect total revenues to be between RMB1.02 billion and RMB1.08 billion. The Q2 guidance is a bit faster than we previous expected, let me explain the reasons.

First, Facebook and Google Play discontinued lock screen ads in May 2017 and January 2018, respectively. This reduced the ad inventory for our utility products in overseas markets. The impact to our revenues started in Q1 and now has fully reflected in the Q2 financials.

With that said, we expect that our utility product and related services business in overseas market will remain healthy and continue to generate strong profits and cash flow.

Second, we noticed that some Chinese advertisers in the news, live streaming and short video categories scaled back their online promotional activities in Q2 due to the government's tightened control toward online contents.

We believe this is a temporary issue and has limited impact on our long-term business prospects given that we have always been very selective on ad placements within our products to provide the best user experience. We expect many of these advertisers will resume their marketing campaign in the second half of the year as they seek business growth.

We are also introducing new categories of advertisers on our platform and further expand our partnership with third-party mobile advertising platforms in China.

Importantly, our mobile MAU in China achieved a record high of 170 million in first quarter of 2018, up 33% year-over-year and representing a 34 million net addition from the previous quarter. Third, the growth of our mobile games also had a temporary setback in Q2.

We have been focusing on improving our advertising and in-game purchase platform in Q1 to improve monetization efficiency. As a result, we postponed the marketing campaign for some of our new games. However, we expect that revenues from our mobile game business will continue its growth trajectory in the second half of 2018.

Finally, the depreciation of U.S. dollar against RMBin 2017 will continue to add some pressure on the yearly comparison for our overseas revenues as the majority of our overseas revenues, which accounted for 61% of our total revenues in Q1 2018, are recognized in U.S. dollar, but reported in RMB.

Please note that this forecast reflects our current and preliminary views and is subject to change. This conclude our prepared remarks. Operator, we are now ready to take questions. Thank you..

[Operator Instructions]. And today's first question comes from Thomas Chong with Crédit Suisse..

I'll translate my question to English. I have 2 questions. My first question about the margin trend for Q2 and 2018 due to our investment in the robotics business. And my second question is about our competitive strengths and our differentiations in the robotics business versus our peers..

Let me take on the first question. First of all, for the OrionStar, Beijing OrionStar, this is a -- we are not controlling the company right now. We only have a warrant to acquire controlling position. So at this moment, it was [indiscernible] alternative measurements, so we have not recognized the cost and expenses of Beijing OrionStar yet.

So just on our book is our costs. The expense and costs will not impact the bottom line of Cheetah Mobile. In term of the margin, we expect that the gross margin will probably be slightly lower because the top line was reduced. The other -- but the related costs such as IDCs and bandwidth, they will be proportionately reduced.

And for the marketing expenses and all other expenses, we expect that they will maintain probably several -- similar levels. So overall, our profit margin would probably be narrower than the previous quarter. For the full year, yes, probably will be similar trends. Okay.

First of all, since we have the comprehensive technology set for our robotic products, which includes voice, image recognition and navigations, so we can custom-made our product based on a particular application and scenario. Okay. So we'll not just launch the product by ourself.

Actually, we have our business partners, we also have companies that we invested. We'll jointly roll out all the products and that's why we launched 5 robotic product in March. Okay. So in terms of the technology itself, actually at this stage of development, it's the data itself that makes more difference.

So we have launched our voice product, Xiaoya, smart speaker with Himalaya and we have been using all those user datas since the beginning because the entire voice interactive system was developed by Beijing OrionStar.

Also, we are one of the supplier for Xiaomi smart, smart speaker and we have its -- we provide voice recognition and text-to-speech technologies, so we have a lot of data from Xiaomi as well. So also for our Cheetah Voicepod, we launched that in April and we are gradually increasing the production capacity, so we are getting more datas now.

Also for the image recognition technologies, we have been ranked #1 on one of the challengers, which is MegaFace challenges, so which means that we are also having a pretty good image recognition technology as well. So in terms of the gap between us and those giants, we actually we don't think there's a huge difference here right now.

So in summary, we have a been developing other products by ourselves and we have been focusing to improve the user experience, so we think that we do have competitive strengths in the market..

The next question comes from Wendy Huang with Macquarie..

I have a few questions. I will translate the question myself. So first, can you provide some volume or value data from 5 robotics products that you launched in March? And secondly, just want to clarify with you about your prepared remarks comments about the OrionStar's profitability.

Did you mention that the OrionStar will actually turn profitable and there is positive cash flow from second quarter onwards? And lastly, on your second quarter revenue guidance, I think it implies both year-over-year and as well as a sequential decline which touch upon several factors that may contribute your second quarter revenue guidance, just wanted to qualify the impacts from those factors.

And also given the single-digit revenue decline in the first half, shall we still expect on the full year basis that you can achieve a flat or maybe even slight growth?.

Okay. Let me take on this question. So first of all, right now, I think it's premature to discuss the number of sales for the robotics business products, so -- because we expect to have production -- we expect the product to go to -- in production probably later this year. So this is slightly too early to discuss in that.

For the second part, probably there are some misunderstanding here. We don't -- Beijing OrionStar has not -- we did -- actually, we didn't discuss that Beijing OrionStar is profitable right now actually. So for the third part, in terms of the Q2 guidance, yes, we did mention a few factors, but let me go through those factors one by one now..

So on the guidance there for profit, can you -- yes, can you break down because the -- yes, the guidance implied the single-digit revenue decline. So I just wonder if you can quantify the impact from each factors that you mentioned in the prepared remarks..

Okay, okay. The easy part is the depreciation of U.S. dollars because in Q1 the overseas revenue account for 61% of our total revenues. And we know that in Q2, if we compare the exchange rate in Q2 last year and this year, it's about 6% of increase in terms -- or increase in terms of RMB.

So here you got the 6x -- 61% is about slightly close to 4% of the total impact. Now in the remaining part, you kind -- Facebook and Google Play, that has a more significant impact actually. We will probably -- we never disclose the exact amount actually for this kind of impact. We would say it's a lower single digit.

And then the remaining from the advertisers in PRC market and the setback from lower games..

Regarding the impact from Google, so you mentioned -- you also mentioned in the prepared remarks that the second quarter fully reflects that impact, although it started in the first quarter.

So does that mean we shouldn't expect further impact from Google in Q3? And also, given that it's a truly reflecting in second quarter, so by the end of second quarter, what is actually the revenue -- what will be the revenue contribution from Google? Because last time I think when the [indiscernible] you kind of mentioned that, okay, 40% of the Google is related then it got affected.

I just wonder if you actually imply that, yes, the 60% will be completely wiped out in second quarter? Or that's not really the case? Yes, if you can provide any color on that, that would be helpful..

Actually, in either ways to -- just to compare the overseas revenues in terms of utility products, you can see that we actually disclosed the numbers for the mobile utility products in overseas market, so you just compare the number from Q2 last year and Q2 this year, you can see the difference here.

In terms of -- by the end of Q2 and in term of Q3 and Q4, we explained that, in Q3, we will see sequential growth for the overseas revenues..

[Operator Instructions]. And the next question comes from Robert Cowell with 86Research..

I wanted to ask about the MAU number. You showed some strong growth in MAU, so I'm wondering what products in particular is that growth coming from. And then it also seems that the domestic MAU is outperforming -- even stronger based on your comment that there is 170 million domestic MAU now.

So what products are driving that? And specifically, in the domestic market, are there any products that are performing particularly strong?.

Robert, this is Vincent. So actually, there are 2 products. First one is the Clean Master. Its MAU has increased significantly in China. And the second one is the Cheetah Keyboard. We have seen significant increase in overseas markets. And also we have an increase in the games as the games is pretty significant in China now..

If I could ask maybe one more follow-up. You mentioned that monetization of Cheetah Keyboard is in the cards for the coming quarters.

How should we be thinking about how that monetization is going to impact your performance?.

Well, initially, it will be relatively insignificant. We're still in the early stage of experimenting a different monetization approach..

And the next question comes from Liping Zhao with CICC..

Okay. I have two questions for the management. The first one is related to our games business because we have a very strong growth -- revenue growth in our games sector.

So how many games in our portfolio right now? And what's the MAUs for our games sector? And what will be the pipeline for next quarters in this year? My second question is related to our cash.

I noticed that in our balance sheet, we have around RMB3.3 billion right now, and what's management plans for this kind of a cash?.

We having been launched, also operated probably a dozen or so casual games. And we do have quite a few in the pipeline and -- because we are not only -- some of those are developed by ourself, but we also license from the third-parties.

For the increase in Q1, it's mainly because the Chinese national holiday in Q1, the Spring Festivals, and because the user numbers and the in-game purchase have both generally require significant growth in this period, that's why our Q1 revenues are -- have a very good increase.

And in terms of the number of game users, we have around 100 million game users and this number fluctuates, but we expect that number will increase because we do have more games in the pipeline and also we're kind of adapting a new approach because we are going to release and launch new games more frequently than previous.

And we also have quite a few -- even smaller casual games in pipeline because we have been talking to quite a few third-party publishers and we are hoping that those new games can bring more users to us. For the cash, we do have quite a significant amount of cash on our balance sheet.

We plan to using this cash to invest in AI-powered business, which is actually our key strategy right now. So our overall strategy is to continue to generate strong cash from our existing business, including utility products, casual games and Live.me.

And we are going to invest heavily in AI-powered technologies because, as we said previously, this is our transitional trends in years. The current utility products and games will continue to be cash cow business and we expect that, in the long run, our AI business will become a more significant and probably even the major part of our business.

Thank you..

[Operator Instructions]. All right. As there are no more questions at the present time, I would like to return the call to management for any closing comments..

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

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