Good day, and welcome to the Cheetah Mobile Third Quarter 2020 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 Helen Zhu, Investor Relations Director of Cheetah Mobile.

Please go ahead, ma’am..

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 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..

Thank you, Helen. Hello, everyone. While our total revenue exceeded our revenue guidance, we still face challenges in growing our revenues.

Total revenues decreased by 60% year-over-year and a 7% quarter-to-quarter to RMB335 million [sic] [RMB365 million]in the third quarter of 2020, mainly due to the decline in overseas business, where we suffered 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 monetize traffic overseas. Although we consistently communicated with Facebook and Google, offered several solutions to them to resume our work, where we are not able to rework with them.

Giving today’s international environment, we don’t expect to resume our cooperation in the near future. To cope with these headwinds, 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 RMB119 million from RMB220 million – RMB222 million in the same period last year and RMB133 million in the previous quarter. Our operating loss in the quarter also included certain one-off staff restructuring expense, though we expect to continue reducing our operating loss in the fourth quarter.

Second, our revenues from PC business and the mobile utility product 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 drive – which show an increase in pending user count and 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 from 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 quarter-over-quarter growth in Q3, driven by improved eCPM.

Revenues from mobile utility products 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 US$21 million in the second-half of 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 retained about US$300 million through our shareholders.

After the shareholder returns, we still have strong balance sheet to support our ambition and investments. Recently, Codemao, a Chinese online education platform, which focus on teaching programming to children, raised a new round of financing. Cheetah Mobile is an angel investor of Codemao.

Before this round of financing, Cheetah Mobile held about 10% of uptake 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 investor company, Beijing OrionStar, we have developed our AI-related robotics.

We have increased the number of user cases - user case. The recent outbreak of COVID-19 had –has also helped us expand usage of our robotics product and solutions. One highlight is our robot developed in shopping malls today. Our robots have been developed in about 1,000 shopping malls across 35 cities in China.

As more users use our robot in shopping malls, we have begun to build tentative business model. Meanwhile, we’ve found that hotel in China have increase welcome delivery and reception robots, so we quickly responded and developed customized robots for hotel customers in the fourth quarter.

Our cooperation with Beijing OrionStar in AI business built our respective gen. Beijing OrionStar develop and produce AI robots and Cheetah Mobile build user case for the customer. Notably, Beijing OrionStar’s robots has been nominated thrice in a row in the service robot contest held by Beijing.

With Municipal Scientists and Technology Commission for Beijing 2022 Olympic Games, we won four first prize and one second prize in this contract. Looking to the fourth quarter of 2020, we currently expect total revenues to be between RMB230 million and RMB280 million.

The quarter-over-quarter decrease was due to disposed assets and business, which Thomas will provide more details. Moving forward, utility product and service in particular in PC business were primarily drivers of our revenues, driving by subscription business, our PC revenue will resume sequential growth in Q4.

On the other hand, we'll 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 the call to our CFO, I'd like to emphasize that while we don’t want outplay the challenges we face, it is not the first time that China Mobile encounters our favorable outside environment, we believe that AI challenge will enable us to build a new future for China Mobile.

With that, we'll now turn the call to our CFO, Thomas Ren to go through the details of our third quarter financial results..

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 revenue were RMB365 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 RMB158 in the quarter representing 43% of our total revenue in the quarter.

As such, 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 RMB230 million and RMB280 million.

Please note, this forecast reflects our current and preliminary view 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 resulting in effect of non-cash items. For financially information presented in accordance with US 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 RMB481 million. Excluding the impact 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 RMB119 million in the quarter from RMB222 million in the same period last year and RMB133 million in the previous quarter.

During the quarter, we disposed some of our business and assets related to the gaming business in overseas market. 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 RMB266 million from RMB244 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 USD235 million and long-term equity investments of USD332 million. Our strong balance sheet gives us the confidence to continue to we invest in the AI-related business for our future.

This concludes our prepared remarks. Operator, we're now ready to take questions. Thank you..

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Thomas Chong with Jefferies. Please go ahead..

Thanks, management, for taking my questions. My question is about the 2021 outlook. Can management share about your view about the business trend across different segments as well as the competitive landscape? Thank you..

[Interpreted] Okay. Let me 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 as you know, before our – most of our utility revenues coming from overseas market.

But after we performed the – such adjustments, as we mentioned just now, after we were removed from Google, Google Play Store, now we’re focusing our efforts to domestic market.

And in domestic market, PC side, we already completed the pivoting from advertising model to the subscription model as we rely on utility products, we rely on advertisement a lot previously. But on the advertising industry view, we're influenced by the – our partners significantly. So we think now we have improved significantly, as we just talked.

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

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’re 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.

Yes, for the greater economic view, I'm not a professional. But from my point of view, we think for sure in China next 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.

Yes, hope that answers your question, Thomas..

Thank you..

Thank you..

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

So, management, thanks for taking my questions. My question 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 imply for the company cash balances in the mid-term? Thank you..

[Interpreted] Yes, let me highlight a few points from 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 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 us a little bit in Q2. But now, I think, we have seen some rebound of our AI business in this quarter.

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. Yes. 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. Yes. So as we mentioned just now, in Q3, there is some one-time stock restructuring expenses in Q3. So in Q4, we expected 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 mid-term. And also as we – when we explore the monetization model or shopping mall and hotels, as we mentioned, I think, we – you may expect some more growth on AI front next year. 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 expenses cutting, you may see greater improvement on our bottom line, and also we have sufficient cash and investment.

So I think our vision is to make the business of service robotics great to be our new growth engine..

Thank you..

Thank you. 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 all for joining us today. 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..