Cheetah Mobile Inc.'s (CMCM) Q2 2020 Results - Earnings Call
Cheetah Mobile Inc. (NYSE:CMCM) Q2 2020 Results Earnings Conference Call August 18, 2020 8:00 AM ET
Company Participants
Helen Zhu - Investor Relations Director
Fu Sheng - Chairman & Chief Executive Officer
Thomas Ren - Chief Financial Officer
Conference Call Participants
Vicky Wei - Citi
Operator
Good day, everyone and welcome to the Cheetah Mobile's Second Quarter 2020 Conference Call. After today’s presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.
At this time, I would like to turn the conference call over to Helen Zhu, Investor Relations Director of Cheetah Mobile. Please go ahead, ma’am.
Helen Zhu
Thank you, operator. Welcome to Cheetah Mobile's second 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 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. Please go ahead, Fu Sheng.
Fu Sheng
Thank you, Helen, and hello, everyone. We delivered overall better than expected results in the second quarter of 2020. Today our total revenue came in at RMB 394 million exceeding the high end of our revenue guidance. Non-cash net income grew to RMB 244 million. However, with the facing challenges in operating our business in the overseas markets we are unable to resume our cooperation with Facebook and Google. As a result, we have difficulty in acquiring new users and monetizing our traffic and our overseas revenue continued to decline. Given today's environment, we are not confident in resuming our cooperation with Facebook and Google.
In the domestic markets, the only advertizing impact share has been actively impacted by the pandemic since the beginning of this year, leading to the decline of eCPM. The group [ph] of this headwind we chose to strategically shift our focus from over this market to the domestic market and introduced the users subscription model. Financially, we have reduced costs and expense and the focus on our AI investments in the shopping mall.
In today's call, I would like to highlight following. First, we've significantly reduced our costs and expense during the quarter. As a result, the non-cash operating loss narrowed by RMB 8 million quarter-over-quarter in Q2 despite that our total revenue is created [ph] by RMB 130 million from the previous quarter. The revenue decrease was primarily due to the suspension of our collaboration with Google since February 2020, as well as the outbreak of COVID-19, which continued to impact our online advertizing business in China.
During the quarter, we cut back our costs and expense for overseas market leading to 61% year-over-year and 31% quarter-over-quarter decrease in costs and the expense for our mobile internet business, namely the utility products and the mobile game operations. In the coming quarter, we will continue to improve operational efficiency, reduce costs and expense and significantly narrowed our operations loss [ph] on the corporate level.
Second, PC revenue increased by 2% quarter-over-quarter to RMB 120 million, driving the growth of user subscription revenue. During the quarter, both paying user accounts and the daily subscription revenue from our DuBa Antivirus software reached new heights. This achievement proved the users subscription model with utility app recently we have copied the users subscription model from PC to mobile by introducing premium service for Clean Master, the initial user adoption has been encouraging as we have seen the paying user count and the daily subscription revenue remained growing since inception.
Third, even today's environment we believe Chinese and mobile internet company will face increasing challenges abroad. As a result, our utility products business will move from overseas market to the domestic market. This move allows us to reduce costs and the expense gradually. During the quarter, we introduced some new utility products in our home market. In the future, we will add more utility products in the domestic market to further enrich our products offering and boost of our revenue.
Four, the number of AI related robots in shopping malls grew to about 7000 by the end of the second quarter. Our robots help customers find the shops and the branded – shops and brands they are looking for, improve the customer shopping experience, and encouraged more business opportunity for merchants. The customers [indiscernible] with our robots has been growing. Increased customer usage has attached many shops and brands to come to us to gain coverage.
Recently, we tried to work with several brands including restaurants, outdoor companies and accessories to direct traffic to their local shops. The progress of our robots in shopping malls delayed about six months due to the pandemic. However, we will accelerate the monetization along with recovery from COVID-19 situation.
Fifth, our long-term equity investments contain several well known projects. As of June 13, 2020 we had U.S. $292 million long-term equity investments sitting on our on our balance sheet. During the quarter some of our major investees made a note about developments. For example, LiveMe achieved profitability called MAU leading Chinese online education platform that teaches program to children closed a new round of [indiscernible].
Looking ahead we expect to continue facing potential headwinds, those are we are unable to grow or sustain our total revenues in the second half of 2020. However, we will continue to reduce costs and the expense and then narrow our operating loss in the coming quarters. At the same time, we will uphold our commitment to AI package with our strong cash reserves. We believe AI will allow us to build a new growth engine for the company in the long-term.
With that, I will hand the phone over to our CFO Thomas.
Thomas Ren
Thank you, Fu Sheng. A good day 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 and all comparisons are made on a year-over-year basis. As we stated in previous quarters, LiveMe amended its share incentive plan on September 30th, 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 RMB 394 million in the quarter exceeding the high end of our revenue guidance for the second quarter of 2020 and represent in the decrease of 59%. Excluding the impact of the deconsolidation of LiveMe, total revenues decreased by 48% in the quarter. This decrease was primarily due to the suspension of our collaboration with Google since February 2020 as well as the outbreak of the COVID-19 which continued to impact our online advertizing business in China during the quarter.
By business segment, revenues from utility products and related services were RMB 195 million in the quarter representing 50% of our total revenue in the quarter. Revenues from our mobile games business were RMB 179 million, representing 46% of our total revenue in the quarter.
By region, revenue from China accounted for 41% of our total revenue in the quarter, while revenues from overseas markets accounted for 59% of our total revenues in the quarter. By platform PC revenues improved slightly quarter-over-quarter to RMB 118 million and represented 30% of our total revenue in the quarter, while mobile revenue accounted for 70% of our total revenues in the quarter.
Turning to our costs and expenses, the following discussion of results will be on 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 without the effect of non-cash items. For financial information presented in accordance with U.S. GAAP, please refer to our earnings release.
During the second quarter of 2020, we sought to strategically shift our focus from overseas markets to the domestic market and as a result continued to reduce our expenditures on our mobile internet business in overseas markets in turn. At the same time, we remain open to our AI related investments for shopping malls. As a result, total costs and expenses decreased by 47% year-over-year and 22% quarter-over-quarter to RMB 528 million in the quarter.
Excluding the impact of LiveMe, our total costs and expenses decreased by 30% year-over-year and 22% quarter-over-quarter. In particular, cost of revenue decreased by 65% year-over-year and 23% quarter-over-quarter to 113 million in the quarter. R&D expenses decreased by 43% year-over-year and 17% quarter-over-quarter to RMB 113 million in the quarter. Selling and marketing expenses decreased by 46% year-over-year and 33% quarter-over-quarter to RMB 205 million in the quarter.
Moving on to our profits and margins. Gross profit was RMB 281 million in the quarter. Gross margin was 71% in the quarter compared to 66% in the same period last year and 72% in the previous quarter. Operating loss narrowed to RMB 133 million in the quarter from RMB 141 million in the previous quarter. The decrease in operating loss during the second quarter was a result of our strict cost saving measures and represented the third straight quarter in a row of reducing operating losses in the third quarter of 2019.
During the quarter, we disposed our remaining stake in Bytedance which resulted in an investment gain of U.S. $66 million. As a result, we reported a non-GAAP net income attributable to Cheetah Mobile shareholders of RMB 244 million in the quarter compared to RMB 82 million in the period last year and a non-GAAP net loss attributable to Cheetah Mobile shareholders of RMB 98 million in the previous quarter.
In addition, we reported a non-GAAP diluted earnings per ADS of U.S. $0.25 in the quarter, which grew from U.S. $0.08 in the same period last year and a non-GAAP diluted loss per ADS of U.S. $0.10 in the previous quarter.
Moving now to our balance sheet. As of June 30, 2020 we had cash and cash equivalents restricted cash and short term investments of U.S. $453 million and long-term LiveMe investments of U.S. $292 million. On July 09, 2020 we used cash from our balance sheet to pay up special cash dividend of U.S. $1.44 per ADS to our shareholders. The aggregate amount of the cash dividend was about U.S. $200 million.
Now, let me provide you with our third quarter revenue guidance. We currently expect total revenues for the third quarter to be between RMB 310 million and RMB 350 million. Excluding the impact of deconsolidating LiveMe, this guidance implies a year-over-year decline in total revenue between 47% and 55% in the period. Please note, these forecasts reflect 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.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question today comes from Vicky Wei from Citi. Please go ahead with your question.
Vicky Wei
[Foreign Language]
Thanks for taking my questions. I have two small questions. The first is about advertising market update. So will management provide some color about the category performance of the advertising market in the second quarter and the third quarter? And my second question is about the U.S. China tension. So lots of Chinese ideas are coming back to China to list or they privatize. So what does management think of this and what is the plan of the company? Thank you.
Thomas Ren
[Foreign Language]
Okay, so I will answer your two questions, so first one is about the industry with good performance for our advertising business. So I think our situation is similar with other players in the advertising industry, as most of our advertising revenue is coming from major domestic platforms.
We can see greater contribution from e-commerce and online education and the increased investment for their June 18 promotional content or for summer holiday courses. And in the categories such as automobile and consumer electronics, they marketed more aggressively with that as consumption recovered. Hope, this answers your first question.
For your second question is about the, how what's the management view about the delisting from U.S. market or they were listing in Hong Kong capital markets?
So yes, we did know that recently many Chinese companies, they have either chosen to delist from the U.S. stock markets or completed new listing in the Hong Kong Stock Market. Meanwhile, we also noticed that many Chinese companies have completed their successful U.S. IPOs in the past couple of months. So, I believe that the different capital markets provide a variety of options for different companies at different growth stage.
So for us, that Cheetah Mobile’s Management, our top priority is definitely the company's business development and growth. At the same time, we also pay attention to various options available in different capital markets. So yes, for sure if we have any plan we will disclose to the public as soon as possible.
Vicky Wei
Thank you.
Operator
[Operator Instructions] And ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
Helen Zhu
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.
Operator
Ladies and gentlemen with that, we will conclude today's conference call with you. Thank you for attending. You may now disconnect your lines.
