Good day and welcome to the Cheetah Mobile First Quarter 2021 Earnings 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's first quarter 2021 earnings conference call. With us today are our Mr. Sheng Fu, our Chairman and CEO; and Mr. Thomas Ren, our CFO. Following management's prepared remarks, we will conduct a Q&A session.

Cheetah Mobile earnings release was distributed earlier and is available on our IR Web site at www.ir.cheetahmobile.com. Before we begin, I refer you to the Safe Harbor statements in our earnings release, which will also applies to this call today as we will make certain forward-looking statements.

Now, I would like to turn the conference call over to our Chairman and CEO, Mr. Sheng Fu. Please go ahead, Fu Sheng..

Thank you, Sheryl. Hello everyone. In the first quarter of 2021 with our progress guidance, Cheetah Mobile's revenue was about RMB200 million. The company has efficiently improved operational efficiency, gross margin continuously increased to 70.1%.

Operating loss narrowed to RMB57 million, and the net income attributed to our shareholder was RMB76 million. Our cash position has been increasing to about US$276 million as of March 31, 2021. The abundant cash resource enabled us to keep investing in our core business to empower the company's long-term sustainable growth.

For our internet business in this quarter, the company has been focused on the domestic markets, enhancing memberships service. Our business has gradually transformed from a single advertisement -- advertising model to a diverse supply model of advertising plus subscription.

Our product and service all centered on how to deliver superior to user experience and improve our user satisfaction. As a result, we see a continued increase in revenue from our membership service in terms of both absolute numbers and the percentage of total internet revenues.

Besides, the company has been confidently develop -- developing new utility products on mobile platform to increase the user time and attract more high value young users.

Despite the huge challenge from the markets, our efforts to optimize our business model and the products, our internet business manages to realize net profit for five consecutive quarter. For our AI business, we have seen some initial achievements in the business model of shopping mall robots.

By now, we have more than 12,000 robots in about 1,200 shopping malls in more than 40 cities, pilot in several shopping malls showed that the selling coupon by our robots could efficient -- effectively attract new customer to merchants. They are very active to participate, because it is a win-win situation for both customer and merchants.

We have also launched mini [ph] app based on this shopping mall robot, coupon selling model. In May, we started to expand this business and housing our rapid growth. We believe that we have found the key points to monetize this business and expect a boost in the coming quarter.

Lastly, I would like to emphasize that in spite of extension headwinds last year, we’ve consistently realized that net profit -- sorry, net profit and increase our cash reserves. This cannot be achieved without our determination and improved operational efficiency.

In the coming quarters, we will keep the profitable growth of our domestic internet business. At the same time, our top priority will still be the modernization of our shopping mall robot business, which will create new growth engine for the company.

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

Thank you, Fu Sheng, and hello, everyone. Thank you all for joining us today. Now, I will walk you through our financial results. Please note that unless stated otherwise, all money amounts are in RMB terms. In the first quarter of 2021, our total revenues were RMB198 million, which was within our previous guidance.

It represented a year-over-year decrease of 62% and a quarter-over-quarter decrease of 25%. The year-over-year decrease was from the suspension of the company's collaborations with Google since February 2020, and the company's strategic retrenchment of gaming related business and assets last year.

The quarter-over-quarter decrease was mainly due to the normal seasonal change in the first quarter, and the decreased revenues from the company's diminishing mobile gaming business. Now, let me break down our revenues into internet and AI and other sectors.

Revenues from the company's internet business decreased by 62% year-over-year, and 25% quarter-over-quarter to RMB188 million in the first quarter of 2021. Revenues from our internet products have been account for a vast majority of our total revenue. So the changes were mainly due to the same reasons as stated above.

Revenues from AI and others were RMB11 million in the quarter, representing a year-over-year decrease of 66% and a quarter-over-quarter decrease of 24%. But our AI business is still in a very early stage. Short-term volatility is within our expectation. Turning to costs and expenses.

The following discussion of results will be on a non-GAAP basis, which excludes stock-based compensation expense. 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. In the past several quarters, our ongoing streamlining of business is on the right track. We have successfully improved our operational efficiency and narrowed operating losses.

In the first quarter of 2021, total costs and expenses decreased by 62% year-over-year and 20% quarter-over-quarter. As a result, our operating loss was RMB58 million in the quarter, compared to RMB141 million in the same period last year, and RMB57 million in the previous quarter.

Cost of revenue decreased by 60% year-over-year, and 41% quarter-over-quarter to RMB59 million in the first quarter of 2021. The decrease in costs were mainly from disposal of certain overseas utility and gaming related business and assets as well as improved operational efficiency.

Research and development expenses decreased by 48% year-over-year and increased by 9% quarter-over-quarter to RMB71 million in the first quarter of 2021. Along with our efforts to streamline our business, we have been keeping investing in R&D in our domestic utility and AI business to optimize our products and services.

Selling and marketing expenses decreased by 74% year-over-year, and 14% quarter-over-quarter to RMB80 million in the first quarter of 2021. This decrease was mainly due to more strategic and disciplined promotional activities.

General and administrative expenses decreased by 44% year-over-year and 14% quarter-over-quarter to RMB49 million in the first quarter of 2020. This year-over-year decrease shows the excellent execution of our cost optimization strategy. Now, let me turn to our balance sheet, which remains robust.

As of March 31, 2021, we had cash and cash equivalents, restricted cash and short-term investments of US$276 million and long-term equity investments of US$365 million. Our strong balance sheet enables us to continue to invest according to our strategies to rejuvenate long-term growth for the company.

And for our second quarter revenue guidance, we currently expect total revenues to be between RMB175 million and RMB225 million. Please note, this forecast reflects our current and preliminary view and is subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you..

[Operator Instructions] And today's first question comes from Vicky Wei of Citi. Please go ahead..

Good evening, management. Thanks for taking my questions. So when management share with us the latest industry trends for the AI business and the company's strategy as we see AI revenue decline due to the decline in sales or consumer facing AI related products. Thank you..

Okay. Let me translate the first part. So, as your -- to your question regarding the decrease for our AIB revenues, I think as we all know, the competition in Chinese AI hardware industry is very severe, yes facing to customers, so especially in the AI speaker [ph] industry. And we think it's difficult to have true or real gross profit.

And also for us, our company, we made some challenges in the overseas market, which should increase some of our operating losses. So we do some strategy shifts to cut down these 2C business. But I don't think it will affect our strategy in AI business. Yes, now our company's strategy in the AI is still focusing on 2B business.

And also we are seeing tremendous increase in the market regarding some service robots, especially after the pandemic.

Yes, for example, because we are in the industry, for example, like delivery service or promotional for the restaurant as well as the delivery service in hotels, such demand is increasing significantly and also for the whole industry sales volume for such kind of service robot is also increasing very fast.

OrionStar, one of our investees, OrionStar promoted the service robot for restaurants to deliver dishes. And OrionStar started to sell or lease such kind of service robots in this January. And the rental per month is about RMB100 and we can see tremendous growth for the past 5 months.

Yes, because Cheetah Mobile is the single largest shareholder of Star, so actually through the cooperation with OrionStar and also our investment in this company, it means we can have such kind of cooperation than the launch in such kind of new scenario.

As I mentioned in our prepared remarks, on the pilot for the nation [ph] model for our shopping mall robot, we have some initial achievement. So our pilots in past couple of years told us that for this model, maybe the brand advertising is not the best way.

Now we realize that we cannot sell coupons for the restaurant on the local merchants in the shopping mall through our service robots and also to help the merchant to attract new customers and we can see some very good trend in our pilot shopping mall. And also efficiency [ph] of our service robots is we can see the great potential.

The biggest difference between our model and the traditional screens in the shopping mall is that the actual customers can have real interaction with our robots in the shopping malls and the customer may ask is there any other [ph] restaurants where the service robots could search with coupon with very high discount to attract the customers to the restaurant.

So both the restaurant or the customers, they're very active for such kind of models and I think -- as I mentioned, it's like a win-win situation.

In conclusion, we believe that it seems like in restaurant or shopping mall, we already see very fast growth potential for service robots and I think we can launch our -- copy our initial pilot model to more shopping malls. Yes, hope that answers your question, Vicky..

Thank you..

[Operator Instructions] Our next question comes from Melody Chan with Jefferies. Please go ahead..

Hi, management. I thank you for taking my question. I have a question regarding our internet business.

Given that we have transferred from the advertising model to membership subscription model, can you share a bit more on our strategy on the subscription business and how should we think about the potential and the growth driver of it?.

Yes, as of today I think the -- for the Chinese internet users, we think it's already a trend that users would if -- would like to pay for the software or certain features of the softwares.

Especially for some key features for example like some security functions on the PC, our security protection function or some functions like office features like PDF conversion or PDF view features because the growth on user payment is fast.

As to the future outlook for this industry, we can see now -- nowadays, most software has adopted as a subscribe -- subscription model or membership payment model, and the market size is also growing. And for us the -- just converting our previous users on both PC or mobile apps to payment users.

And our PC revenue is also growing, contributed by the payment user growth. And for our key products on PC is [indiscernible] which is virus detection software on PC. It's already existed for like, 20 years. And most users, I think they don't like the advertising model.

And so we convert the model and also we see great satisfaction by our users of our payment model. Yes, and based on that, we are very confident that -- we are confident that the -- our internet business revenue can resume the growth in the next couple of quarters. Yes, hopefully this answers your question, Melody. Thank you..

Thank you. Thank you for the detailed answer..

And ladies and gentlemen, this concludes today's question-and-answer session. I'd like to turn the conference back over to management for any final remarks..

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..