Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to Q1 2020 Kingsoft Corporation Earnings Conference Call. [Operator Instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

Please be advised that today's conference call is being recorded. [Operator Instructions]

I would now like to hand the conference over to our first speaker today, Ms. Francie Lu. Please go ahead.

[Francie Lu, executive]

Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2021 first quarter earnings call. I'm Francie Lu, the IR Director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our own information and information from other sources, which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors which may affect our business and operations.

Having said that, please allow me to introduce our management team today who join us: Mr. Zou Tao, our Executive Director and CEO; Mr. Francis Ng, our Executive Director and CFO.

Now I'm turning the call to our CEO, Mr. Zou. [Foreign Language]

[Tao Zou, executive]

Okay. [Foreign Language]

[Francie Lu, executive]

Okay. I'll do the translation for Mr. Zou. [Interpreted] Our first quarter results signal a good start for the year as we continue to focus on office application services for government, enterprise and individuals and high-quality IPs and premium game. Kingsoft Office Group sees the opportunity for digital transformation and will continue to develop the ecosystem for cloud and collaboration. In the online game business, we maintained steady development of our core games, while actively carrying out R&D for new game genres.

In the first quarter, the company achieved a decent start to the year. Our total revenue came in at RMB 1,559.6 million, up 33% year-on-year, while our office software and services business recorded strong year-on-year growth of 104%. The online games and other business was down slightly year-on-year at 1%. With the robust growth of office software and services revenue, our operating profit in the first quarter was RMB 512.1 million, up 33% compared to the same period last year.

Now I'm turning the call to our CFO, Francis.

[Yuk Keung Ng, executive]

Thank you, Francie. Hello, everyone. For the first quarter of 2021, revenue for Kingsoft Office Group achieved significant growth, which is mainly driven by the accelerated development of its ecosystem for cloud and collaboration. Kingsoft Office Group is dedicated to transforming to a premium service provider of cloud and collaboration office solutions, providing upgrade products experience and promoting cloud office migration and penetration in the government and enterprise markets.

As localization business has entered a mature period, the customer procurement increased. Kingsoft Office has witnessed an exponential growth in office software product licensing business during this quarter. During the China 2021 [Foreign Language], customer office software document services of WPS Office were provided to facilitate online transmission review and approval of all official documents. Kingsoft Office Group has also accelerated its development of commercial distribution network. The 2021 partner conference, our Kingsoft office group was helped in April 2021, attracting more than 1,000 attendees from its distributor and service provider partner across the ecosystem.

Meanwhile, Kingsoft Office Group has continued to optimize user experience for individuals and enterprise and improving its customer loyalty full application of cloud and collaboration to enhance the penetration within the public cloud market and to promote the growth of office software subscription business. As of March 31, 2021, MAU of Kingsoft Office Group core product reached CNY 494 million, achieving a year-on-year growth of 11%. MAU of PC addition and mobile addition of WPS office amount to CNY 194 million and CNY 294 million with a year-on-year growth of 15% and 8%, respectively. In addition, our Internet advertising and promotion service business remained study during the quarter, which was in line with Kingsoft Office Group's overall strategy.

During the quarter, the online game business delivers solid performance with a key focus on new general and overseas market development. Revenue from JX Online III PC game increased by 23% year-on-year in the first quarter of 2021. And in April, online game business launched by [Foreign Language], a new expansion pack for JX Online III PC game, which enrich content and new play, resulting in a growth of daily active independent accounts after launch. Meanwhile, the performance of other JX Series PC game has remained stable.

In addition, the online game business has achieved breakthrough in overseas mobile game business. Apart the [indiscernible], the JX I Pocket mobile game was won the first vote in free top 3 charts and grossing charts for iOS and Android application in Vietnam.

In mobile, first person shooting, FPS, game Bullet Angel was released and gained popularity in Thailand, Malaysia. [Foreign Language] had multiple new games are scheduled for launch, for example, JX Online III Jing Xi, which is a retool version of JX Online III and War of the Visions: Final Fantasy Brave Exvius, FFBE, are expected to be launched in the middle of this year.

I will now discuss the Q1 operational and financial results using RMB as currency. Revenue increased 33% year-over-year and decreased 3% quarter-over-quarter to a RMB 1,560 million. The revenue split was 51% for our online games and others and 49% for office software and services. You can see that actually the revenue split has gradually toward a 50/50 split from the previous year where -- which the revenue are mainly contributed by our online game.

Revenue from online game and other business decreased 1% year-over-year and 7% quarter-over-quarter to RMB 789 million. The slight year-over-year decrease was mainly due to the decreased revenue of mobile games, partially offset by the revenue growth of JX Online III. And the quarter-over-quarter decrease was largely due to the natural declining life cycle of existing mobile games.

Revenue from office software and services increased RMB 104 million year-over-year and 2% quarter-over-quarter to RMB 771 million. You can see that this rapid increase actually contribute to the level split between our game and office software's revenue. The remarkable year-over-year increase was mainly attributable to the rapid growth of both licensing business from enterprise and government and a subscription service driven by the increasing demand for cloud and collaboration.

Cost of revenue increased by 21% year-over-year and decreased 6% quarter-over-quarter to RMB 244 million. The year-over-year increase was mainly due to the higher IDC costs and CDN costs associated with the fast growth of personal subscription service from Kingsoft Office Group. Gross profit increased 36% year-over-year and decreased 2% quarter-over-quarter to RMB 1,316 million. The group's gross profit margin increased by 1 percentage point year-over-year and kept flat quarter-over-quarter to 84%.

Our net research and development costs increased 38% year-over-year and 15% quarter-over-quarter to RMB 491 million. The increases were mainly attributable to the increased personnel-related expenses as we continue to increase our investment in technology, in innovation and new product development.

Selling and distribution expenses increased 39% year-over-year and decreased 26% quarter-over-quarter to RMB 205 million. And the year-over-year increase mainly reflect greater spending of Kingsoft Office Group to expand its reach into enterprise and government markets, and the quarter-over-quarter decrease was mainly due to fewer promotion activity during this quarter.

Administrative expenses increased 58% year-over-year and 4% quarter-over-quarter to RMB 148 million. The increases were primarily due to the increased staff-related costs.

Share-based compensation costs increased 3% year-over-year and decreased 61% quarter-over-quarter to a RMB 31.7 million. The quarter-over-quarter discretion was mainly largely due to the new grants of awarded share to selected employees of certain subsidization in the company, some of which were vested at a grand day in the fourth quarter of 2020. Operating profit before share-based compensation costs increased 31% year-over-year and decreased 15% quarter-over-quarter to RMB 544 million.

As a result of the combination of the above reasons, the operating profit margin before share-based compensation decreased by 1 percentage point year-over-year and 5 percentage point quarter-over-quarter to 35%.

Net added gain of RMB 33 million were recorded compared to net other gains of RMB 3 million for the first quarter 2020 and net other losses of RMB 111 million for the fourth quarter of 2020. Net other loss in fourth quarter of 2020 was mainly due to the recognition of a loss on deemed disposal of Kingsoft Cloud as a result of the dilution impact of the exercise of its employee options.

Finance costs was RMB 35 million compared with finance costs of RMB 6 million and RMB 36 million for the first quarter of 2020 and the fourth quarter of 2020, and the year-over-year increase primarily, due to issue convertible volume April 2020 with interest rate of -- an equipment market interest rate for a similar bond in accounting treatment instead of the actual yield to maturity, which would not result in any cash outflow.

Share of losses of associated RMB 225 million we record compared to share of losses of RMB 64 million for the first quarter of 2020 and a share of loss of RMB 21 million for the fourth quarter of 2020. And the losses in the first quarter 2021 were mainly due to the loss recognized in Kingsoft Cloud and Cheetah Mobile. And the losses in the first quarter of 2020 were mainly due to loss recognized in Cheetah Mobile, and the losses in the fourth quarter of 2020 were mainly due to the loss recognized in the Kingsoft Cloud, partially offset by the profit recognized in the Cheetah Mobile.

Income tax expenses increased 3% year-over-year and decreased 42% to RMB 66 million.

As a result of the reasons discussed above, profit attributable to the owners of parent for the first quarter 2021 was RMB 117 million compared to profit of RMB 6 million for the first quarter 2020 and a profit of RMB 221 million for the fourth quarter of 2020. Profit attributable to the owner of the parent, excluding eShop, was RMB 140 million compared to a profit of RMB 55 million for the first quarter of 2020 and a profit of RMB 266 million for the fourth quarter of 2020. And the net profit margin, excluding the effect of share-based compensation costs, was 9%, 2% and 17% for the 3 months ended March 31, 2021, March 31, 2020 and December 31, 2020, respectively.

As for our statement of financial position, as at December 31 -- March 31, 2021, the aggregate amount of cash resources of the group was around RMB 18 billion. Net cash from operating activity was RMB 238 million compared to net cash from operating activity, RMB 545 million and RMB 1,013 million for the 3 months ended March 31, 2020 and December 31, 2020, respectively. Capital expenditure was RMB 75 million, RMB 328 million and RMB 74 million for the 3 months ended March 31, 2021, March 31, 2020 and December 31, 2020, respectively.

We are pleased that all business performed well and started a strong footing in the first quarter. We have full confidence for our development going forward. Looking ahead, we will adhere to the high-intensity investment in research and development, with an emphasis in the new technologies such as cloud and artificial intelligence to promote innovation and optimization, to prepare for breakthrough and to achieve sustainable growth and development as well as creating a better future with our customers and partners.

This ended our brief introduction for tonight, and I hand over the call for questions and answers. Thank you.

[Francie Lu, executive]

Thanks, Francis. Operator, we're ready for Q&A session. Thank you.

[Operator]

[Operator Instructions] We have the first question. This is coming from Liping Zhao from CICC.

[Liping Zhao, analyst]

[Foreign Language] I have 2 questions here. The first one is related to the gaming business. So could management update us the gaming pipeline in the coming quarters? And also any update on the cloud gaming business?

And second question is related to the cloud. So we've seen the growth rate of Kingsoft Cloud in the first quarter is a little bit lower than the market expectation. So could management elaborate the strategy for this business from the Kingsoft Group's point of view?

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Mr. Zou. [Interpreted] So most of our new mobile games that will be launched will be in the second half of this year. So for the JX Online III virtual version UNT, this one will be launched in June or July, and for JXO III, this one will be launched in the third quarter, which is either August or September. And same as FFC 2, this one will also be launched around August or September. And lastly, in the fourth quarter, we have Wu Long and also [Foreign Language]. So this will be the new pipeline for the rest of the year. Thank you.

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Francis. [Interpreted] So the detailed guidance for Kingsoft Cloud they are given by the Kingsoft Cloud themselves. They are already an independent listed company. Based on their performance and also on the Board meeting we had, we are very confident with their operational performance going forward.

[Operator]

The next question comes from Thomas Chong from Jefferies.

[Thomas Chong, analyst]

[Foreign Language] My first question is about the gaming business. We have seen some of the game titles are very successful, for example, like Leng Shen. And we are also seeing that the gaming distribution is also having some kind of changes. So I just want to get a sense about how we are seeing the competitive landscape in the gaming market. And also, we have our game publishing initiative. Can management also comment about our strategy for this year?

And then my second question is about WPS, which shows a very good growth momentum. Can you comment about the addressable market in terms of the user base and the paying ratio as well as the competitive landscape? And then finally, it's about the 2021 outlook. Can management share about the revenue and the margin trend, if there's any qualitative color?

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

[Foreign Language] I'll translate first for Mr. Zou. [Interpreted] So after the launch of Genshin, we see that it's a very successful game and it's self-published and it's also published globally. So we do notice there are a few trends in the gaming market. So from the game publishing perspective, we think that now the game will be published in multiple regions, especially globally, instead of in the past, the game was mostly -- only published in a single region. And also in the past, the game was usually published by a single distribution channel. But now the game are usually published through multiple channels, especially now we have short video, live streaming platforms like [Foreign Language], other than Tencent. And also from the game R&D perspective, we think that the trend is not only happening now. The games are -- the games now have multiple game genres. For example, Genshin is an animation game and with the right of Bilibili is very successful. So -- and then we think that the games are also now more focused in the first tier group of games, including our own PC Game, JX Online III. We do notice that there is a trend there for 2 or 3 major games in the first year usually takes 80% to even 90% of the gaming market share. And lastly, we do notice that there is a change in gamers population with the recent year's development. We think that in total, there are 600 million to 700 million of gamers in China, and that age ranges from 18 to even more middle-aged people now. Thank you.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

I'll translate for Mr. Zou first. [Interpreted] So for the question on the addressable market, Mr. Zou now is also the Chairman for Kingsoft Office. And he said that now, we're most likely to use the PC user member as the KPI for our own user growth performance. So now for our PC user, we have 194 million. So we think that in China, the total number of PC user is around 400 million. So there's still a large opportunity for us to grow. And according to the third-party data research, they compare our PC user number with what Microsoft has. And although we have very fast growth in the past 5 to 10 years, but now Kingsoft Office and Microsoft office, they each have around roughly about 55% to 60% of the user group in PC users. So the third-party data is also in line with our own company data. We think now our user group -- or user base is only about 50% to 60% of the total addressable market. So there's still a lot more room to grow, and this will continue to become important an KPI for our own user growth performance.

And for the paying ratio number, we're not sure if the Kingsoft Office has disclosed a specific payment ratio -- number of paying users. But if you check the numbers in the past before they become separate listed, every since from 2017 up until now, if you see the graph and also the slope of the graph, we think that, that will be a more convincing graph to show our growth in the number of paid users. In terms of the revenue, I believe that the growth year-on-year was 68%. Thank you.

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

[Foreign Language] So I'll translate for Francis. [Interpreted] So Kingsoft Office now is also independent with the company, and they are even more strict with their guidance compared with Kingsoft Cloud. So they don't really disclose any forward-looking numbers. From the Kingsoft Group high-level perspective, we think that the localization project is going very strong. It's entering into a mature stage. So from 2021 and also going forward, we have very good confidence, strong confidence in the revenue growth for the Kingsoft Office business. And in terms of margin, we do have good growth potential for margin in the domestic market. But we think that right now, there are -- we are now at the point of pursuing short-term profits. Instead, we are actively searching for other office-related investment opportunities. So for example, by the end of 2021, we are also increasing around 1,000 people for the Kingsoft Office business, which is roughly about 35% of their total R&D personnel now. And also, we're setting up a Wuhan R&D center. So the margin performance going forward will be stable, but the investment in the 1,000 people and also the Wuhan R&D center may have a short-term margin pressure on Kingsoft Office, roughly a few percentage points. Thank you.

[Operator]

We have the next question coming from [ Kang Shao Li from Citi ].

[Unknown Analyst]

[Foreign Language] It's 1 year since last year's issuance of convertible bonds, how about the current use of the fund? And the second question is, why is the income of mobile games decline and what are the main revenue contributors of mobile games and their respective percentages?

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

[Foreign Language] I'll translate for Francis first. [Interpreted] So for the convertible bond we issued last year, and you're correct that we issued that bond around this time last year. And we do want to have a good strong cash balance for the future online collaboration, also the AI opportunity -- investment opportunities. So far, the use of cash, you could see that we use part of the cash not too much on the Wuhan R&D center that we mentioned earlier. And most of the cash we have on hand, but now you can see that we do have a strong balance of cash on hand. We have about RMB 18 billion, as we reported. So we will continue to invest in the online collaboration, also the AI-related investment opportunities.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

[Foreign Language] I'll translate for Mr. Zou. [Interpreted] So although we do have a strong growth of roughly about 20% in the JX Online III PC game, but the overall game revenue was flat from some -- year-on-year, also with a slight decline of 1%. This is because in the first quarter, we didn't launch any new games, and also for the old games, they all have different levels of decline. So the major games include JX Online I, [ Moyu ], [Foreign Language] and also JX Online III mobile games. These were mobile games have some level of decline. And for example, the JX Online I, even though it's already RPG mobile game with the strongest life cycle, but it's still -- the game set up still different from the JX Online II PC game. So it was launched in 2016. After 5 years of launch, we think that it's natural for it to have some level of decline. The total decline from the JX Online I, [ Moyu ], [Foreign Language] and also JX Online III mobile games roughly offset the growth from the JX Online III PC game. Thank you.

[Operator]

Last question comes from Yang Linlin from GF Securities.

[Linlin Yang, analyst]

[Foreign Language] The first question is about the guidance about our game sector in the following quarter and the full year of 2021. The second question is about our overseas game business. What's your development strategy and product plan of this business?

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Francis. [Interpreted] So for the question on the game guidance. We said that we do have a number of new games to be launched in the second half of this year. For the PC game JX Online III will continue to maintain a very steady performance. In the first quarter, you even had a 20% revenue growth. And for the -- all the other new games, for example, the JX Online III, the mobile game will be its launch time will be delayed by 1 or 2 months. And some of the other new mobile games, their launch time will also be delayed by 1 or 2 months. So this year, the overall game revenue, we expect it to be slightly lower than what we had last year. So it will be in the high teens level. Thank you.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Mr. Zou. Okay. I'll translate for Mr. Zou. [Interpreted] So our overseas gaming strategy was actually started in 2019, and it was one of our key strategy for the season. But because due to the COVID in 2020, there was some impact on the progress of our overseas development strategy. So now as we see that most of the global COVID is more under control, we started to take some actions for our overseas game strategy. And we -- our actions started in regions, areas where we had good reputation from our past development in terms of the game and also our brand. So we launched the JX Classic version in Vietnam and was very successful. And also, we launched the shooting game in Thailand and Southeast Asia. So going forward, we're also going to expand into other regions. We do have a number of games under development that we are targeting to the global market once they're launched. Thank you.

[Operator]

Thank you. We do not have any further questions at this moment. I would like to hand the conference back to the management for any closing remarks.

[Tao Zou, executive]

[Foreign Language]

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. Thank you all for your participants. And now this will conclude our presentation for today. Thank you.

[Operator]

Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]