Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 2022 Kingsoft Corporation Earnings Conference. [Operator Instructions] Please be advised that today's conference is being recorded, Tuesday, the 24th of May, 2022. [Operator Instructions] I would now like to hand the conference over to your speaker today, Francie Lu. Please go ahead.

[Francie Lu, executive]

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2022 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 who joined us today: Mr. Tao Zou, our Executive Director and CEO; Mr. Francis Ng, our Executive Director and CFO. Now I'm turning the call to our Executive Director and CEO, Mr. Zou Tao. Tao Zou?

[Tao Zou, executive]

Okay. [Foreign Language]

[Francie Lu, executive]

[Interpreted] Okay, I'll translate for Mr. Zou. Amidst the evolving market and new challenges, we have successfully seized the opportunity for digital transformation and achieve a decent start in our core businesses. During the first quarter, Kingsoft Office Group continued to pursue the strategy of multiscreen, cloud, content, AI and collaboration. After its cloud office services and solutions, expanded user base and enhanced market penetration.

In the online game business, we continue to focus on the R&D of premium games, promote the long-term development of core games and overseas market expansion. The group maintained steady performance across all businesses in the first quarter with total revenue reaching RMB 1,853 million, increasing by 19% year-on-year. driven by the continued growth of subscription revenue from individual and institutional users, our office software and services business in the first quarter increased by 13% year-on-year.

With the contribution of our new mobile games launched in the fourth quarter of 2021, our online games and other business in the first quarter increased by 25% year-on-year. Now I'll turn the call to our Executive Director and CFO, Francis Ng. Francis?

[Yuk Keung Ng, executive]

Thank you, Francie. Good evening, everybody. During the quarter, the robust year-on-year growth of domestic individual subscription business was primarily driven by the ongoing user base expansion and growth in the number of long-term paying users. Meanwhile during the COVID-19 pandemic, the highly effective collaboration function of WPS Docs, facilitated information sharing and [indiscernible] continuous increase in the number of upload cloud documents.

Regarding the government and enterprise market, Kingsoft Office Group continues to enhance the solution, quality of cloud and collaboration, bring brand-new experiences to users and further promote cloud office migration and penetration. Kingsoft Office Group continued to optimize the solution, enhanced the ecosystem construction and channel capabilities. And squeeze new opportunity arising from digital government and industry digital transformation.

JX World III, which has launched at the end of 2021, achieved an excellent performance in the quarter and further demonstrated our strength in R&D and operation of premium games. Meanwhile, we continue to optimize the newly launched titles. In April 2022, we have received a lightened approval for JX Online III origin and launched its open beta in May.

In view of the globalization, we try to increase our product presence and international vendors. As such, JX World III was launched in Southeast Asia in March 2022, and Wu Lin Xian Xia was launched in Hong Kong, Macao and Taiwan in April 2022 and will also be release in South Korea in the third quarter of the year.

I will now discuss the Q1 operational and financial results using RMB as currency. Revenue increased 19% year-over-year and 2% quarter-over-quarter to RMB 1,853 million. The revenue split was 47% for office software and services and 53% for online games and others.

Revenue from office software and services business increased 13% year-over-year and decreased 4% quarter-over-quarter to RMB 871 million. The year-over-year increase was mainly due to the continued growth of individual and institutional subscription business, partially offset by the decrease in institutional licensing and internet advertising business of Kingsoft Office Group. The growth of individual subscription business was mainly driven by the increases in the user base and the proportion of long-term paying users.

The increase in institutional subscription business was largely driven by increased cloud office migration of government and enterprise users and increase market penetration. The decrease in institutional licensing business was largely due to the relatively high base of localization in the first quarter of 2021. The decrease in internet advertising business was a result of strategic contraction for the purpose of user experience enhancements and the quarter-over-quarter decrease was mainly due to the lower internet advertising revenue.

Revenue from online games and other business increased 25% year-over-year and 7% quarter-over-quarter to RMB 982 million. The increase was mainly due to the successful launch of several mobile games and broadened our game portfolio in the fourth quarter of 2021, partially offset by decreased revenue from existing game.

Cost of revenue increased 44% year-over-year and decreased 6% quarter-over-quarter to RMB 351 million. The year-over-year increase was mainly due to the following reasons: Firstly, greater channel cost and increased personnel-related expenses of online games business; and secondly, the increases in servers and bandwidth cost, purchasing cost of service and product and the channel costs of Kingsoft Group. The quarter-over-quarter decrease was largely due to the decreased channel cost of Kingsoft Office Group.

Gross profit increased 14% year-over-year and 4% quarter-over-quarter to RMB 1,502 million. The GP margin decreased by 3 percentage points year-over-year and increased by 1 percentage point quarter-over-quarter to 81%.

R&D costs increased 24% year-over-year and decreased 11% quarter-over-quarter to RMB 608 million. The year-over-year increase was mainly attributable to increased headcount as well as personnel-related expenses as our continued investment in research and innovation, aiming to create value for our users. The quarter-over-quarter decrease was largely attributable to decreased accrued bonuses of Kingsoft Office Group.

Selling and distribution expenses increased 33% -- 32% year-over-year and decreased 13% quarter-over-quarter to RMB 269 million. The year-over-year increase was mainly due to greater marketing spending on mobile games as well as increased personnel-related expenses of Kingsoft Office group, aiming to expand its presence in enterprise and government market. The quarter-over-quarter decrease mainly reflected less marketing spending on mobile games, partially offset by increased personnel-related expenses of Kingsoft Office Group.

Administrative expenses kept flat year-over-year and decreased 5% quarter-over-quarter to RMB 147 million. The quarter-over-quarter decrease was mainly due to decreased personnel-related expenses.

Share-based compensation costs increased 134% year-over-year and 2% quarter-over-quarter to RMB 74 million. The year-over-year increase was mainly due to the grants of awarded shares to selected employees of certain subsidiaries of the company in June 2021.

Operating profit, before share-based compensation costs, increased 5% year-over-year and 42% quarter-over-quarter to RMB 574 million.

Net other gains for the first quarter of 2022 were RMB 23 million compared to a gain of RMB 33 million and RMB 28 million for the first and fourth quarter of 2021, respectively.

Share of losses of associates of RMB 275 million were recorded for the first quarter of 2022, compared with the share of losses of RMB 2,025 million (sic) [ RMB 225 million ] and RMB 518 million for the first and fourth quarter of 2021, respectively.

Income tax expense decreased 49% year-over-year and 36% quarter-over-quarter to RMB 34 million.

As a result of the reason discussed above, open attributable to the owner of parent was RMB 99 million for the first quarter of 2022 compared with profit of RMB 117 million for the first quarter of 2021 and the losses of RMB 335 million for the fourth quarter of 2021.

Profit attributable to the owners of the parent, excluding the use of expenses, was RMB 143 million for the first quarter of 2022 compared with profit of RMB 140 million for the first quarter of 2021 and a loss of RMB 292 million for the fourth quarter of 2021. The profit and loss margin, excluding the effect of share-based compensation cost, was 8%, 9% and minus 16% for the quarter. for this quarter, the first and fourth quarter of 2021, respectively.

Our statement of financial position, we have cash resources of RMB 18.8 million at March 31, 2022. Net cash generated from operating activities was RMB 189 million, RMB 238 million and RMB 861 million for this quarter, the first and fourth quarter of 2021, respectively.

Capital expenditure was RMB 85 million, RMB 75 million and RMB 78 million for this quarter, the first and the fourth quarter of 2021, respectively. And the result we achieved in the first quarter laid a solid foundation for the year of 2022.

Looking ahead, the group will continue to adhere to the technological empowerment and keep investment in R&D. We will also strengthen our product and services, optimize user experience and try to build a brighter future together with our users and partners. This concludes our prepared remarks for this quarter financial performance.

I now open the floor for question and answer. Thank you.

[Francie Lu, executive]

Thank you, Francis. Hi, operator, we're ready for the Q&A session.

[Operator]

[Operator Instructions]

Your first question comes from the line of Liping Zhao from CICC.

[Liping Zhao, analyst]

[Foreign Language] I have 3 questions here. The first one is related to the gaming business. Since JX III origin got license approved a few weeks ago, how do your management expect the impact on our gaming sector, P&L? And could management share the pipeline of gaming sector in coming 3 quarters?

And second question is about the COVID-19 impact. Since March and April, Shanghai and Beijing has tightened COVID-19 controls, respectively. And how big will be the impact on our Kingsoft Office and Kingsoft Cloud business?

And third question is about the R&D expenses. Because last year, the company has invested a lot in the R&D. And how should we expect the trend for this year?

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

[Interpreted] Okay. I'll translate for Mr. Zou. So for the first question regarding the JX Online III origin, we recently just got the license approval. So overall, there will be a big improvement on the game business, especially on the JX Online III series. We started our open data on May 13, and there will also be another big promotion in July during the summer vacation.

So overall, there will be a big improvement on this game theory for this entire year. But for the detailed financial forecast, since we just recently started the monetization in May, and we are still adjusting and optimizing the monetization details. So after our optimization and also based on our big promotion in July, we will have a more detailed financial forecast for the JX Online III origin game.

And for the pipeline, we have the games that already have the licenses, for example, [indiscernible]. This one, we are still expecting to launch the game in June. And another game, we already got the license, which is the [indiscernible], this one, we are still planning to launch game in the fourth quarter.

There are also some other games that are under development, but we haven't got the license yet. For example, [ The Key Game ], we are the tentative launching day still in the fourth quarter, but we cannot confirm this because there are still uncertainty regarding when we'll be getting the license for these games. So similarly, with the other games that haven't got the licenses, we can't confirm on the date yet.

And regarding the question on the pandemic impact, so I'll talk more on the KSO business. We have recently reviewed the data. And based on our numbers, we have a good improvement in the number of users, which is very positive, and we have already completed our KPI so far.

But starting in April with the recent COVID pandemic impact, we do see that the monetization is slightly affected. But so far, there's not a big impact on our financial performance. But right now, we're still monitoring what happens in the second half of the year with the overall economic condition and the COVID impact, because the COVID impact may start to show more in the second half. But so far, we haven't seen any big negative impact on our financial business from the pandemic.

And regarding the last question on the expenses control. So for the KSO business, I have already said that last year, we were actually catching up what we halted in the year before -- in year 2020. Because we halted our recruiting in 2020 due to COVID pandemic impact.

So we actually catch up our recruiting in 2021, so there was a big increase in the R&D expenses last year. But starting from 2022, we actually resumed to normal. So if there's no other special conditions, there won't be any aggressive increase in the R&D expenses in 2022, like what we did in 2021.

And for the game business, last year, in the beginning, we actually have a big adjustment in our level of compensation to match the overall market condition. But other than that, we are now going to have another big increase this year. We actually adjusted some of our businesses in the game business.

So the number of employees in the game business actually decreased. So overall, there won't be any big increase in terms of R&D expenses in this year. Thank you.

[Operator]

Your next question comes from the line of...

[Francie Lu, executive]

Yes, go ahead, operator.

[Operator]

Your next question comes from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

[Foreign Language] May I ask about the first question is about our overseas gaming strategy. Second is about WPS on [indiscernible]. And thirdly, on our share repurchase and dividend policy. Thank you.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

[Interpreted] Okay. I'll translate for Mr. Zou. So regarding the overseas gaming expansion, we have a number of new game genres that will be launched in the overseas market. For example, the animation type of games, we are expecting to launch them in the second and the third quarter. And for the other type of games, we are going to launch them in the fourth quarter and also next year.

And regarding Kingsoft [indiscernible], we have the SSP and also the animation car strategy game. These games will be launching in next year, except for [indiscernible], we are going to launch the game in the third quarter of this year.

And regarding the financial forecast, we usually will need to get the data for the first month and then we can be able to give a more detailed financial forecast for these games. So these games, so far, are still categorized as uncertain revenue for the game business and not as our core revenue sources for the game business.

And for the second question on the KSO localization project. We have emphasized many times in the past that the localization project is government policy driven. So it's now controlled on our own -- by our own company. So we usually emphasize on our market share instead of the actual piece of the localization.

In the beginning of May, we have heard there are some sources said that the government enterprises localization project will have to complete by the year 2025, but these are just based on our -- some of the stores in the market. So once -- but this -- actually in line with our own expectation. We have said that once the localization has started, we don't think that it will stop half away.

We think it will continue to a full completion of the localization project. But this is based on our own view. And for the -- because of the pandemic situation in China right now, so there may be some delay in the localization project because currently, the government resources, especially the financial resources, are still more focused on finding the pandemic rather than other projects.

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

[Interpreted] Okay, I'll translate for Francis. So regarding the question on the share repurchase we have a HKD 1 billion share repurchase budget a couple of quarters ago. And today, we just had our Director meeting, and we actually issued another HKD 1 billion budget for the repurchase plan. So right now, we are closely monitoring the overall market conditions and also our own stock price and also the performance of peer company. And so we are closely monitor the share repurchase plan.

[Operator]

[Operator Instructions] Your next question comes from the line of Yang Linlin from GF Securities.

[Linlin Yang, analyst]

[Foreign Language] I have three questions. The first is about the game guidance in 2022 in the second quarter of this year. And also the [indiscernible] guidance.

And the second question is about [indiscernible], its future -- how do you expect its future growth and contribution?

And the third question is about the strategy about Kingsoft Cloud.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

[Interpreted] I will translate for Francis. So regarding the financial guidance for the gaming and the KSO business, for the game business, like Mr. Zou said in the beginning, by the end of last year, we have launched a number of mobile games, and they performed very well so far. So for the first quarter, our gaming business had a revenue increase of 25% year-on-year.

And also the licenses reopened in April, and we got a license for the JX Online III origin, but there are still another 2 or 3 games in our pipeline that haven't yet received the license yet. So, there are still uncertainty in terms of the timing of when these games will be able to receive the licenses even though the license approval line have already reopened.

And also Mr. Zou mentioned earlier that the JX Online III origin have already started to open data on May 13, but it's still too early to say this overall impact on the game for the whole year. We're still monitoring its performance. So like we said in the last quarter, the gaming business overall this year will have a revenue increase of over 20%.

And based on the games on the pipeline and based on the timing and then also the performance of the new games on the pipeline, we may have a chance for our game revenue to increase -- to have an increase of 30% or even over 30%, but this was based on the performance of the new games and also the timing that they will launch.

And also for the KSO business, we have said that many times in the past that we are not able to disclose more than what KSO disclose to the market. And also based on our information so far, that KSO has not yet given out any specific financial guidance to the market at this point. So we can see the detailed numbers for the KSO business.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

[Interpreted] Okay. I'll translate for Mr. Zou. So regarding the JX World III game performance guidance, Firstly, based on the performance in the first quarter and also including April and May, this -- the performance of this game is actually much, much better than our expectation from early this year. And also, we have announced the game in Malaysia.

And a week earlier, we also launched the game in Hong Kong, Macao and Taiwan. And in the second half of this year, we're going to announce the game in Vietnam. So overall, we have strong confidence in the gaming performance of JX World III this year. And based on the domestic data, the long-term retention rate for this game is also better than our expectation.

And regarding the question on the cloud business, I think your question may be related to our shareholding in the cloud business. So far, we don't have any plan to decrease our shareholding in the cloud business. And also for -- regarding whether we will increase our investment in the cloud business, so far, we haven't got any direction or any requirements from our Board members from -- so basically, we don't have any decrease or increase in shareholding for the cloud business.

[Operator]

Your next question comes from the line of [ Kang-Ki Li ] from Citi.

[Unknown Analyst]

[Foreign Language] How to understand the narrowing of loss is shared by associates?

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

[Interpreted] Okay. I'll translate for Francis. So regarding the question on the narrow in the loss of associates, so far, the numbers on our P&L is a preliminary data. Because for the Cheetah Mobile game, their financial numbers are still under -- or there's no final audited financial numbers coming out yet. So regarding the narrowing, we have Cheetah Mobile in the fourth quarter, we have adjustments in terms of the impairment for the business.

And also for the cloud business, the upcoming financial result will be on the 8th of June. So far, our number in the P&L is a preliminary data based on the two businesses. Thank you.

[Operator]

As there are no further questions, I would like to hand the conference back to management for any closing remarks.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. So thank you for your support, and we will conclude our call for today. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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