Good evening and welcome to the Cheetah Mobile Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Helen Zhu, Investors Relations Director Mr. Zhu, please go ahead..

Thank you, operator. Welcome to Cheetah Mobile's fourth quarter and full-year 2018 earnings conference call. With us today are our Chairman and CEO, Mr. Fu Sheng and our Company's CFO, Mr. Vincent Jiang. Following management's prepared remarks, we will conduct a Q&A section.

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 Company's Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng..

one, mobile games; two, mobile utility products in the domestic markets; and three, AI powered business. First, we have made significant progress in our mobile game operation, which has already become a driving force of our total revenue. In 2018, our mobile games business earned RMB925 million in revenues, up to 48% from 2017.

We successfully launched Bricks n Balls, our casual elimination game, Bricks n Balls remains one of the mobile casual game in US and on Google Play, and one of the top brand board game on Apple App store in terms of users downloads.

Through operating Bricks n Balls we have discovered the right combination of tactics to grow our average revenue per mobile gamer.

Bricks n Balls has a higher op than the channel high to [Rolling Sky] and the Dancing Line in the second half of 2018, Moreover, almost half of revenues from Bricks n Balls were generated through sales of in game visual items. In late February, we soft launched Rolling Sky 2, a musical game on Apple App Store.

In the early March, Apple featured Rolling Sky 2, ranking it as a top three game, as well as special weekly promoting it in the musically game vertical on Apple App Store. Importantly, we increased the operating profits for our mobile game business in 2018.

For example, the combined operating profits for our three flagship type titles, namely Piano Tiles 2, Rolling Sky and the Dancing Line grew by about 200% year-over-year in 2018. And their non-GAAP operating margin increased to 25% from 10% in 2017.

Going forward, we will continue to introduce new games, convert more of our gamers to paying users and further enhanced the profitability of our mobile game business. Secondly, we introduced some new utility products in the domestic market in 2018, which have helped increase our user engagement and expand our user base.

Our new utility products focused on a number of areas, including delivering personalized experience and leveraging our AI technology. For example, we introduced the CM Show, a personalized ringtone app designed to appeal to generation group in China. The app has received widespread user adoption since its inception.

More recently, we began adding premium content into CM Show to induce more user subscriptions. Although CM Show is still in its early stage of monetization, many users are willing to pay more amount to gain access to premium content, thus providing it a commercial viability.

We also introduced Qu Keyboard, AI-driven keyboard last year -- later last year in addition to smart prediction capabilities, voice input and thousands of themes. Qu Keyboard comes with gamified user loyalty program that allow users to earn virtual points through typing and other game activities.

Users can then use their earned virtual points using our app to buy in-game virtual items, pay monthly subscription fees for specific online radio platform and order other online services and products. According to Quest Mobile, Qu Keyboard was One of the Top Rising Star Mobile Apps in 2018.

Going forward, we will continue to introduce new utility apps that can further enrich our mobile utility product portfolio. Importantly, our utility product business continued to earn healthy revenue and profits. In 2018, we earned RMB3 billion in revenue and RMB1 billion in operating profit from our utility product business.

Thirdly, we began offering AI-powered hardware in China in 2018, which has allowed us to serve more user and customers in New Year of Human-Computer Interaction. Our hardware business is joint effort with Beijing OrionStar.

Revenues from our other business segments increased to RMB83 million in 2018 from RMB37 million in 2017, mainly driven by sales of our AI-powered hardware in China. In particular, this growth was mainly driven by sales of Cheetah Translator a AI-based interpretation device.

Recently, we have found more use cases -- use case for Cheetah Translator served business. For example, VIPKID, an online educational company purchased a large corporate kit of Cheetah Translators to have its young students learn English.

Uroaming, an overseas Wi-Fi service retention platform also bought a number of a Cheetah Translators to enrich its product offerings. Cheetah Translator makes important milestone of our expansion in AI-based products and solutions.

The success of Cheetah Translator have has further improved our AI technology and our capabilities to deliver AI-based solutions to customers and businesses. Also in 2018, Cheetah Mobile became exclusive distributor of Cheetah GreetBot, a human-sized reception robot that is focused on the business-to-business market.

In December 2018, Beijing OrionStar commercially launched Cheetah GreetBot. Recently, we have also found more user case for Cheetah GreetBot to serve customers in device vertical in China, including as guide in museum, receptionist in hospitals, school and salesperson in a convenience store.

Although, our AI-powered hardware business is still in its infancy in terms of revenue contribution, we believe it will become an important engine to drive our future growth as we very proactively prepare for the New Year of Human-Computer Interactions.

In summary, we have made substantial progress in mobile games, mobile utility products in domestic markets and our AI-powered business. We are confident that our long-term growth prospect remains healthy, although, we acknowledged some temporary setbacks in our mobile utility product business in the overseas market.

With that, I will now turn the call to our CFO, Vincent Jiang, to go through the details of our fourth quarter financial results..

Thank you, Fu Sheng. Hello, everyone. In the fourth quarter of 2018, we grew our total revenues by 2% year-over-year and quarter-over-quarter to RMB1.4 billion. We generated RMB770 million in net income attributable to Cheetah Mobile shareholders.

For the full year of 2018, we generated RMB5.0 billion in total revenue and RMB1.2 billion in net income attributable to Cheetah Mobile shareholders. Now, let me walk you through the details of our fourth quarter and full year 2018 financial results. Please note that all financial numbers are in RMB terms unless otherwise stated.

Revenues from our mobile entertainment business increased by 39% year-over-year and 12% quarter-over-quarter to RMB556 million in the fourth quarter of 2018.

For the full year of 2018, revenues from our mobile entertainment business increased by 90% to RMB1.8 billion, mainly driven by Bricks n Balls, a casual elimination game that started ramping up in the middle of July 2018.

Revenues from our mobile games operations increased by 91% year-over-year and 14% quarter-over-quarter to RMB326 million, which accounted for 24% of our total revenues in the fourth quarter of 2018. For the full year of 2018, our mobile gaming business generated RMB925 million in revenues, up 48% from 2017.

Revenues from utility products and related services decreased by 17% year-over-year and 6% quarter-over-quarter to RMB783 million in the fourth quarter 2018. The year-over-year decrease was mainly due to the discontinuation of certain ad formats which is ads on mobile phone lock screens by the company’s overseas third-party advertisement partners.

The quarter-over-quarter decrease was mainly due to a disruption to our business as a result of certain allegations made by a third-party in November 2018, about which the company has made a number of public statements to clarify. For the full year of 2018, revenues from utility product and related services were RMB3.1 billion.

Gross profit and gross margin both increased year-over-year. In the fourth quarter of 2018 gross profit grew by 4% year-over-year to RMB965 million and gross margin expanded to 70% from 58% in the same period last year. For the full year of 2018, gross profit increased by 8% to RMB3.4 billion and gross margin expanded to 69% from 66% in 2017.

The increase resulted from the reduced costs for our PC operations and mobile utility product business in the overseas markets as part of our strategy to optimize the cost and expense structure for our utility products and related services business.

We grew both our operating profit and margin in 2018 despite our continued investment in our mobile gaming business and mobile utility product business in the domestic markets. Operating profit for the full year of 2018 increased by 5% to RMB467 million, while our operating margins remained relatively flat year-over-year at 9%.

In 2018, we continued our marketing efforts to acquire new users for our mobile games in our domestic markets and for our mobile utility products in the domestic markets. Our mobile entertainment business reduced its loss in 2018.

For the full year 2018, operating loss for the mobile entertainment business narrowed to RMB330 million from RMB470 million in 2017. The reduced losses were primarily the result of increased revenue from our mobile games operations.

In addition, the disposal of the News Republic business in 2017 also contributed to the decreased operating loss for our mobile entertainment business, in particular the operating profit of our mobile games business grew by 48% in 2018. Our core business continued to generate strong cash flow.

For the full year 2018, we generated RMB342 million in net cash from operating activities and RMB277 million in free cash flow. We sold a certain portion of our equity ownership in Bytedance Ltd., which further strengthens our earnings and balance sheet. Diluted earnings per ADS was RMB8.1 or US$1.18 in 2018.

As of December 31, 2018, our cash, cash equivalents, restricted cash and short-term investments were RMB3.7 billion. As we have previously disclosed, on November 26, 2018, a third-party made certain allegations about some of our products, which later led to a pause in our collaboration with some of our business partners in overseas markets.

As the allegations are the subjects of pending litigation, we're not going to comment extensively on this. So we believe that the claimed allegations are without merit and we intend to defend ourselves vigorously. The company is addressing these allegations with our business partners.

And the company's Audit Committee is conducting an independent review of the allegations in consultation with our outside counsel at Skadden, Arps and experts from AlixPartners which is an outside consulting firm. To-date the company has not identified information in consistent with its previous disclosures.

All of our Board of Directors’ swift and decisive actions are a testament to our company's commitment to legal and regulatory compliance. Before I give you our revenue guidance, I would like to remind you that these forecasts reflect our current preliminary reviews and are subject to change.

For the first quarter of 2019, we expect our total revenues to be between RMB1.06 billion and RMB1.09 billion, as we take a conservative stance on our near-term outlook following the temporary setbacks in our mobile utility product business in the overseas markets. However, we remain confident in the long-term sustainability of our growth prospects.

To express our confidence in our long-term growth prospects, our Board of Directors have approved a share repurchase program of up to US$100 million of our outstanding ADS for a period not to exceed 12 months.

As previously announced on September 13, 2018, as of March 22, 2019, the company had repurchased approximately 4.5 million ADS for approximately US$32 million under this program. Cheetah Mobile funded those repurchases from its available cash balance. This concludes our prepare remarks. Operator, we are now ready to take questions. Thank you. .

Thank you. [Operator Instructions]. The first question today comes from Wendy Huang with Macquarie. Please go ahead. .

This is Frank Chen with Macquarie on behalf of Wendy Huang. Thank you management for taking our questions. I basically I have two questions. One is on the first quarter guidance.

Could management share with us more color on this set of guidance, especially first quarter revenue breakdown by different business segments? And the second question is about full year outlook into 2019. Could management share any thoughts on the full year revenue growth in 2019 and the margin outlook in this year? Thank you..

Okay. I'll take the question. First of all, in terms of the revenue guidance, yes, it is -- there’s a sequential and year-on-year decline in the guidance.

The main reason and actually we have explained in the prepared remarks is because of the allegations made by a third-party in November 2018 that has caused some of our business partners to pause their relationship with us. So that has a direct impact on overseas utility products.

But as we said earlier, we're working with those business partners to address their concerns.

And the company has also retained -- the company's Audit Committee has return retained outside legal counsels, Skadden, Arps and also has -- Skadden, Arps also has in turn engaged outside consulting firm AlixPartners, which is a well-known consulting firm in the US to do the internal review for the -- they -- and to relate to allegations.

And as of today Skadden and AlixPartners has not identified any issues that's inconsistent with our previous disclosure. So that explains the reason of the further weak first quarter guidance. But we are very confident that we shall be able to address those different partners’ concern going forward. Yes.

For the full year guidance, again, I think for the -- again for the overseas utility products, probably we will have some setbacks, as we mentioned earlier because of that reason. I think it is something we're still working with our business partners.

And therefore, other part, we expect that our -- there'll be the new business driver, which is the mobile games. It is the new driving force for Cheetah Mobile and we have high expectation on the new areas. Also, I think more importantly, we are starting to materialize our AI investments for the -- especially for the hardware parts.

For example, we have started to -- we have had a certain commercial success although it’s relatively small in terms of our scale, and now the Cheetah Translator is a milestone that we have achieved, that they are actually -- that's one of the first hardware we have launched in the past several months because Cheetah Mobile was a software company, it doesn’t have the gene for hardware.

So now we have transformed ourselves into a company that has been strategically focused on how AI hardware and also we have already made a lot of progress in this area. With the AI Translator we have already achieved a certain milestone in this area.

And I think also we have been functional exclusive distributor for the Cheetah GreetBot, which is AI robot that can function for different scenarios actually.

In the prepared remarks, the CEO of the company had mentioned that in different scenarios, for example, in hospitals, in supermarkets, convenience stores, there we are -- we have all different applications for the Cheetah GreetBot.

So although this is still -- it's in early stage but we have seen a lot of promise in these new areas, and we will see some revenue contribution from the hardware for full year 2019. Yes. In terms of profitability, at this stage, well, I can’t -- normally don't give forecast on profitability -- on profit.

But based on general guidance here, I think because of the overseas utility products, we have some disruption here, so it does impact first quarter and probably Q2 as well. And so I think in this part, the profit margin on this segment will be lower than last year.

And also for the hardware part because it's still in a relatively early stage and we don't expect that will bring up a very high profit margin. So the overall profit margin will probably be lower than last year, than 2018. But again, I think this is a good transition for us.

We are in the process of transforming ourselves from a pure software company into a company that has combined software and smart hardware. Okay, Frank, hope I have answered your questions..

[Operator instructions]. The next question comes from Robert Cowell with 86 Research. Please go ahead..

Hi, management. Thanks for taking my question. I just have two. The first one is about the MAU number. How do we think about -- it seems to be down a bit on a quarter-on-quarter basis and how are you thinking about MAU going forward and balancing MAU versus ARPU? And then the second question is about Beijing OrionStar and its fundraising plan.

Will Beijing OrionStar seek to fund from third-parties or it will -- does Cheetah plans to invest more in that company at some point in 2019? Those are my two questions. Thanks..

Okay. I'll take the first question in terms of monthly active users. Yes, the number is lower than we reported last quarter. And one of the main reasons is because of ARPU that's related to the temporary disruptions around our overseas utility product, because of the monetization side of this.

So we feel that -- we decided that we kind of temporarily pulled back all our user acquisition efforts in this quarter. So I think that's why you can see a quite -- relatively noticeable to decline in MAUs. We expect that when everything goes back to normal, I think the number will come back again.

In terms of OrionStar -- in terms of fund raising plan for OrionStar, unfortunately, it is something -- it's not something that we can discuss in public. Of course, there will be some plans that company is open to all sorts of possibilities. Right now we cannot have any -- we cannot say any definitive plan at this moment..

[Operator Instructions]. The next question comes from Carson Lo with Nomura. Please go ahead..

So I have one question about advertising market outlook. So we’ve seen that the macro for both China and also may be US facing some kind of slowdown since the fourth quarter.

So does management -- can management share some color on how could that impact our advertisings on our product, both on the utility side and also on our mobile gaming side? Thank you. .

Yes. In terms of the -- I think the macro economy does have an impact on the advertising industry. So at this stage, I think it's very -- I think for us it's not very clear, in the internal or general trend.

For example, within -- in Chinese market, there have been different -- I think different views right? In last year -- I think the last year, at the end of last year, people were relatively pessimistic about the general marc economy. But I think over this year we have seen some positive signs.

So we don't have a definitive sight of it yet in terms of whether that will have a positive or negative impact on the advertising industry. In overseas markets, we will -- yes, I think we will probably have some impact.

But I think the overall industry there probably will be some change under the new regulatory regime, so we are still carefully following the trends. I mean we're carefully following the latest developments in terms of regulatory environment. Again, we don't have a definitive view on those. .

Hello, Carson, do you have further questions?.

Thank you. .

Your next question comes from [indiscernible] with Credit Suisse. Please go ahead. .

Hi management. This is [indiscernible] speaking on behalf of Thomas. We basically have two questions.

The very first question is about the -- as the revenue mix -- as we see the revenue mix is changing, as mobile game is generating more and more revenue, are we going to see probably a clearer trend for the gross margin profile change in 2019? Secondly is that, management mentioned about the temporary suspension of business relationship with some overseas business partners.

Can management -- given that management has already done some work on that issue, can management give us some guidance whether the temporary suspension will become normal or will become normalized? Thanks..

Okay. Again I'll take the question. The first one in terms of revenue mix, yes, the mobile gaming business has become an increasingly large part of our total revenues.

And I think we expect this trend will continue, as we have been able to identify some very scalable business operations that can help us to launch modems in relatively shorter period of time.

In terms of the total profit margin for the games, what I can say right now is that the existing games like Piano Tiles 2, those more mature games have very good profit margin. I think for 2019, we will be in the expanding mode for the game operations.

So we will probably -- in early stage, we will have relatively large portion of marketing and new acquisition cost. So overall profit margin will -- I don't see any -- well probably will not be better than what do we have already.

In terms of the business relationship with our -- the relation with our business partners, this is something we are still working with and we're very positive. We have seen some positive signs with the progress. At this stage, base I cannot give you a definitive answer. .

The next question comes from Hillman Chan with Citigroup. Please go ahead. .

My first question is related to the game pipeline. Could management share more color on game development effort as to what kind of games that we're developing and in what game genres and more color on the timeline would be helpful as well? And my -- and other question would be on the AI hardware side.

How should we think about the profitability currently and also for the longer term? Thank you. .

Okay, in Q3 and Q4 last year, we have accumulated quite some new games, for example, one of the top games in China called Kill the Virus. We have become its exclusive distributor in the overseas markets. So we have more than 10 games, some of those are very promising in our pipelines right now.

Fortunately, we think that arcade games actually have a very long lifecycle, for example Piano Tiles 2 which has been long for more than three years, it is still generating very stable revenue for us and some of those games have become -- already become intellectual properties having recognized by many people.

Yes, we also have done a lot work to improve the ARPU of arcade games, for example for those games have been released by somewhere between three to six months or more than that, longer term, we call it mature games and those games have pretty good margins. .

[Operator instructions].

Actually I’ll take the second part -- the second question in terms of the profitability of the AI hardware. I think at this stage, it’s still relatively early for Cheetah Mobile to move into the hardware business.

So the hardware margin initially will not be very good actually, we have to admit, because the volume at this stage has not reached where do we expect it.

But for the second part -- for the AI -- yes, that’s on the consumer side, right? So for the profitability of the GreetBot, which is to business -- that’s the product for business, at this stage, we think -- we expect they will be relatively healthy when we reach certain volumes.

Again at this stage it’s probably too early to say, because we’re still ramping up the volume at this stage. Yes, for single units, we expect we will have appropriate allocation about the production costs and our other costs, it can be pretty healthy. .

The next question is a follow-up from Robert Cowell with 86 Research. Please go ahead. .

Hi, thank you.

Just maybe an update on -- if you can provide any metrics for the volume of GreetBot that you are shipping or planning to ship in the near future? And then also there were a number of other AI robotics products that you announced last year and I'm interested if any of those other ones you have updates that you're willing to share? Thank you..

Okay. So, we actually launched the product GreetBot last December and we have a spring break in between. And so we don't have actually a long time to implement those. Though also we have been using a lot of our distributors who will do secondary development for the actual applications for any particular scenario.

So that also takes some time, that's why at this stage, we do have some volumes, but not as significant yet, but we do see a lot of promising signs at this stage. Again, we have seen some very promising signs in some customer.

We have some returning customer as well where they bought some GreetBots, they use it and they are likely to come back to buy more. We have seen -- we have found -- actually found the real cases that GreetBot actually can help a lot and save labor costs in many situations. For example, in museums and in convenience stores. So that's the translation.

But let me add a little bit of more details in terms of the actual scenario. For example in the museums, our GreetBot can function as a tour guide. They will explain -- it will give introductions to various art pieces in the museums. It has a very high user interaction levels.

For example, it can -- hundreds of interactions with different peoples that will -- we can see that one robot can easily replace one human being. But for more people in more -- in our situation can replace up to three people in terms of the amount of interaction you can provide.

And in some -- and one of the scenario is the convenience store, we have a convenience store chain -- they bought one, they did some secondary development on it, so they kind of the customized that robot in their stores. Then they are likely to come back, buy 10 of those and they we put it in different locations.

So in the night, in this store, normally they would have required two people, but now they can have only one person in store and have the robot actually patrolling in the store moving around.

And they can function very well actually and translate the -- the convenience store chain they have see the values, and they are doing a lot of more applications using those robots..

[Operator Instructions]. As there appears to be no further questions, I would now like to turn the conference back over to management for any closing remarks..

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

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