Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 2023 Kingsoft Corporation Earnings Conference Call. [Operator Instructions].

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

[Francie Lu, IR]

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2023 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. Zou Tao, our Executive Director and CEO; and Ms. Li Yi, our acting CFO.

And now I'm turning the call to Mr. Zou Tao.

[Tao Zou, CEO]

[Foreign Language] I'll do the translation for Mr. Zou. We had a good start in the first quarter of 2023. Kingsoft Office Group actively explores and promotes the practical application of AI technology, invest in related R&D and continues to empower the digital transformation of institutional and individual users. Online games business further enhances the value of original IP and remains committed to the strategy of developing premium games.

The group's businesses remained steady in this quarter, with total revenue reaching RMB 1,970 million, increasing by 6% year-over-year. Revenue from office software and services business reached RMB 1,052 million, up 21% year-over-year. Both domestic individual office subscription and institutional subscription businesses experienced robust growth during this quarter. demonstrating the significant effect of the subscription transformation.

Now I'm turning the call to Ms. Li. Li?

[Yi Li, CFO]

Thank you, Francie. Ladies and gentlemen, good evening and good morning. In face of the technological transformation brought about by generative AI and large language models, Kingsoft Office Group focuses on the AI field, collaborates with companies engaged in the large language models and concentrates on core businesses to excel in the application layer. Centering on the needs of organizational users, we continue to leverage the advantages of the digital office platform, actively promote the digital transformation and upgrading for organizations of all sizes, and empower their digital construction.

In April 2023, we launched WPS 365, a comprehensive package of office software suitable for a wide range of institutional users, which includes powerful office software and collaboration management capabilities aiming to improve their work efficiency. In order to achieve high-quality development of individual office subscription business, we consistently enhanced the user experience of our products in cross-platform scenarios like cloud and collaboration and reconstructed the membership system in April. Online games business made progress in iterating core IPs.

Based on the high-quality expansion pack launched in the fourth quarter of 2022, our flagship JX Online III achieved an increase in new users, expanding the user base. At the same time, the number of daily active users and revenue of JX Online III increased year-over-year in the first quarter of 2023.

At the end of February 2023, a new expansion pack of JX World III mobile game released, together with effective marketing and promotions, stimulated the game's vitality and improved user experience. At the end of March 2023, World of Sword Origin mobile game was initially launched in Vietnam. Upon its launch, it topped both the free and grossing charts in local iOS and Android stores.

Our anime mobile games, Snowbreak: Containment Zone and The Other Shore, are scheduled for launch in the second half of 2023.I will now discuss the first quarter operational and financial results using RMB as currency. Revenue increased just 6% year-over-year and decreased 7% quarter-on-quarter to RMB1,970 million. The revenue split was 53% for office software and services and 47% for online games and others. Revenue from the office software and services business increased 21% year-over-year and decreased 4% quarter-over-quarter to RMB 1,052 million.

The year-over-year increase was mainly due to the robust growth of domestic individual office subscription business, and rapid growth of domestic institutional subscription business of Kingsoft Office Group, partially offset by the decrease in domestic institutional licensing business. The solid growth of domestic individual office subscription business was primarily attributed to the continuous optimization of cloud and collaboration user experience.

The fast growth of domestic institutional subscription business was mainly driven by the continuous upgrades of digital office solutions and service quality, as well as the ongoing process of promoting cloud integration and collaborative office in government and enterprises. The decrease in domestic institutional licensing business was mainly due to the relatively high base in the first quarter of 2022 and reduction in new purchase orders on localization solutions in the current quarter. The slight quarter-on-quarter decrease was mainly due to declined internet advertisement promotion business.

Revenue from the online games and others business decreased 6% year-over-year and 10% quarter-on-quarter to RMB919 million. The year-over-year decrease was primarily due to a natural decline in revenue from the mobile games such as JX World III and JX I: Gui Lai, which had a relatively high revenue base in the first quarter of 2022. The decrease was partially offset by the revenue growth from JX Online III, which was attributed to our continuous efforts in enhancing user engagement and online and in-game consumption through game content updates and operations optimization.

The quarter-on-quarter decrease mainly reflected the natural decline of certain existing games. Cost of revenue decreased 2% year-over-year and [7%] quarter-on-quarter to RMB345 million. The quarter-on-quarter decrease was mainly due to reduced purchasing costs of products and services of Kingsoft Office Group. Gross profit increased 8% year-over-year and decreased 7% quarter-on-quarter to RMB1,625 million.

Gross profit margin increased by 1 percentage point year-over-year and kept flat quarter-on-quarter to 82%. Research and development costs increased 9% year-over-year and kept flat quarter-on-quarter to RMB661 million. The year-over-year increase was mainly attributable to higher personnel-related expenses of Kingsoft Office Group.

Selling and distribution expenses increased 31% year-over-year and 5% quarter-on-quarter to RMB351 million. The year-over-year increase mainly reflected greater marketing spending of Kingsoft Office Group to expand its presence in the domestic enterprise and government market. The quarter-on-quarter increase was mainly due to higher promotional spending on mobile games.

Administrative expenses increased 2% year-over-year and decreased 8% quarter-on-quarter to RMB150 million. The quarter-on-quarter decrease was mainly due to the reduction in professional service fees. Share-based compensation costs decreased 2% year-over-year and increased 21% quarter-on-quarter to RMB73 million.

The quarter-on-quarter increase was mainly due to the grants of awarded shares to the selected employees of certain subsidiaries of the company. Operating profit before share-based compensation costs decreased 7% year-over-year and 21% quarter-on-quarter to RMB533 million.

Net other gains for the first quarter of 2023 were RMB44 million, compared with gains of RMB23 million for the first quarter of 2022 and losses of RMB42 million for the fourth quarter of 2022, respectively. Share of losses of associates of RMB231 million were recorded for the first quarter of 2023, compared with losses of RMB275 million and RMB256 million for the first and the fourth quarter of 2022, respectively. Income tax expense decreased 26% year-over-year and 82% quarter-on-quarter to RMB26 million.

As a result of the reasons discussed above, profit attributable to owners of the parent was RMB192 million for the first quarter of 2023, compared with profit of RMB98 million and RMB48 million for the first and the fourth quarter of 2022, respectively. Profit attributable to owners of the parent excluding [Kingsoft] was RMB236 million for the first quarter of 2023 compared with profit of RMB142 million and RMB83 million for the first and the fourth quarter of 2022, respectively. The net profit margin excluding the effect of share-based compensation costs was 12%, 8% and 4% for this quarter in the first quarter and fourth quarter of '22 respectively.

The Group had a strong cash position towards the end of the reporting period. As at 31st March 2023, the Group had a cash resources of RMB21,510 million. Net cash generated from operating activities was RMB363 million, RMB189 million and RMB1,232 million for this quarter, the first and the fourth of 2022 respectively. Capital expenditure was RMB80 million, RMB85 million and RMB206 million for this quarter, the first quarter and the fourth quarter of 2022, respectively. We adhere to technology-driven business.

Looking forward, Kingsoft Office Group will continue to cultivate in AI, fully leveraging new technologies to drive the reconstruction and pattern innovation of office products and services.

Online games business will continuously adjust and optimize products and services in response to user needs, improve games reputation, introduce more unique gameplay and content, and further strengthen user recognition and confidence in our core IPs. We are committed to creating long-term value for our shareholders by enhancing our core competencies. Thank you for your attention.

Now I turn the call to Francie. Thank you.

[Francie Lu, IR]

Thank you, Ms. Li. Operator, we're now ready for the Q&A session.

[Operator]

[Operator Instructions] We will take our first question. The first question comes from the line of Xue Deng Zhang from CICC.

[Xue Deng, CICC]

[Foreign Language] Thanks management for taking my questions and congrats on the strong quarter. My first question is on the gaming business. Could you please update us on the performance of [magnitude] full platform release? And also what is our latest revenue guidance for the gaming segment for full year 2023. As for our office software business, we noticed that WPS AI has launched its [China-based] version. So could you please share your views on the public pipeline function update and also the commercialization plan?

[Tao Zou, CEO]

[Foreign Language]

[Francie Lu, IR]

I'll translate for Mr. Zou. So for the game question, [indiscernible] was launched, and we will discuss this game in 2 aspects. The first one is from the user point of view. From the number of users, this game is slightly less than our expected -- expectation.

But from the ARPU point of view, the performance is actually slightly better than our expectation.

And in the long term, we will continue to monitor the performance of [indiscernible]. I think overall, the game itself has met our expectation for -- in general. And the second part of the question is on our full year guidance for the game business. Overall, we did not change the guidance that we have given out in the beginning of the year. Our guidance was based on 3 factors.

The first one is the performance of JX Online III. The second is the performance of the upcoming new games. And lastly, we have the performance of our old mobile games. So for JX Online III, it has actually exceeded our expectation. Although in the first quarter, the online game business, its financial performance has slightly declined quarter-over-quarter and year-over-year, but the JX III online game itself is actually performing very strong. And for the new games product line, we have 3 upcoming new games.

For the first one, [indiscernible], this one will be launched in July. And [BCA] this one will be launched in August. And in October, we're launching the 2.0 version for JX Online III. And lastly, we have the performance of our old mobile games, which is JX World III. We recently launched expansion pack.

The natural decline of this game is slightly better than our expectation. So overall, we will keep the guidance that we have given out in the beginning of the year. Even though JX Online III has performed -- exceeded our expectations, but we still have the uncertainty coming from the upcoming new games. So we're not going to change the guidance that we gave out earlier.

[Tao Zou, CEO]

[Foreign Language]

[Francie Lu, IR]

I'll translate for Mr. Zou. So regarding the second question on WPS AI, starting from the February, we have fully optimized the product. We're going to continue to optimize the product itself. The performance of this product has actually exceeded our internal expectation.

Currently, we are not investing in doing the large language models. So we are cooperating with other partners in the large languish models. So the further monetization of this product will depend on the timing when our partners will get the license for their models and also on the future performance and user experience from the products.

So we are going to start -- our plan is that we're going to start the testing in June or July, but this also depends on the timing of the license. And after testing, we're going to first do the optimization based on the performance and also the user experience. And after the optimization, we will start the monetization of the WPS AI product.

So my own expectation is that the monetization will not start until the fourth quarter of this year or maybe next year. Operator, we're ready for the next question.

[Operator]

Your next question comes from the line of Linlin Yang.

[Linlin Yang, GF Securities]

[Foreign Language] My first question is about games. We say we launched the new games overseas. So how much growth can this new game bring, and we see positive growth in Q2. What do you think about the impact of AI on games? Are you think now cost reduction or efficiency in your business? [Technical Difficulty]

[Tao Zou, CEO]

[Foreign Language]

[Francie Lu, IR]

I'll do the translation for Mr. Zou. So regarding your question on the Q2 guidance for the game business. For JX III, it actually exceeded our expectation in the first quarter. But even though in the first quarter, our game revenue had declined quarter-on-quarter and year-on-year, but the actual performance of JX III actually exceeded our expectations, but it's due to the financial revenue deferral problems and some of the results will not show until in the second quarter.

And also due to the recent launch of the new expansion pack, the performance of JX World III actually also is better than our expectation. We expected a natural decline of this game. But with the new expansion pack release, the decline has not been as severe as what we expected earlier this year.

So generally speaking, Q2 will be a very good quarter for the game business, even though we don't have specific numbers yet. In the Board meeting, I also had this similar question that I said that even though the financial results for the first quarter was not as good as expected, but the actual performance in the first quarter due to the great performance of JX Online III and also the new expansion pack of JX World III, the actual performance is actually better than our company's expectation for the first quarter. The new game pipeline launch is scheduled in second half of the year.

So we don't have -- we don't know the detailed performance yet. But for the second quarter, specifically, we think the guidance should be better than our expectations. And the second part of the question is on the cost of AI. We do have applied AI technology in the [3D] visual image and also the testing aspects of the game. So the AI technology not only improves the efficiency of these aspects and also decrease the cost of this aspect. And some aspects if the cost is not significantly decreased, but the quality and also the user experience has improved due to the application of AI technology.

And also it depends on the type of games. For example, for the JX Online III with this 3D visual effect, the AI is not very helpful at this point, but we think that this will also improve in the future. And lastly, we have the question on the AI application for the game. We have not only applied the AI technology in the game, but our subsidiary, Seasun Shiyou will have new games launched maybe this year using the AI technology.

[Tao Zou, CEO]

[Foreign Language]

[Francie Lu, IR]

I'll do the translation for Mr. Zou. So for the new membership system launched for the Kingsoft Office business, the ARPU actually improved. But now we are in the progress of optimizing the system based on its current user experience. In the long term, we have confidence that the new membership system will meet our expectations and also improve the ARPU with the -- for the Kingsoft Office business. Operator, we're ready for the next question.

[Operator]

We will take our next question. Your next question comes from the line of Brian Gong from Citi.

[Brian Gong, Citi]

[Foreign Language] I will translate myself. Just I have 2 follow-up questions. First, for WPS AI monetization, how does Zou Tao, you see the potentials of the monetization in the future. And also for the application of large language models, we only bring a change to the competitive landscape for the office software industry in China.

[Tao Zou, CEO]

[Foreign Language]

[Francie Lu, IR]

I'll translate for Mr. Zou. So for the question on the potential for monetization of the WPS AI. We don't have any specific data yet. You could do the comparison with similar products of peers in the market, for example, like [Notion] even though Notion is now in China but its overseas data looks very optimistic.

So we could take that, for an example, let's say, if all members of WPS AI are waiting to pay a certain extra amount of money every month, let's say, for example, like USD10 or USD8 per month. The potential is actually great if we do this period comparison. And you can also do your own calculation to say if it's not all members using willing to pay, what is the half of the numbers or 1/4 of the members. But even with this data, you could say the optimistically speaking, like the potential of the monetization is great.

The second question is on the performance of the GPT is very strong, especially in content and generating aspect. So we think that in the future, the AI could replace humans in generating content data, but the change is not an impact on software is the way of generating content and data from humans to AI.

So the value of the existence of software has not changed, but it's the way of generating data and generating content that's changed. So with WPS AI, in addition to generating content, we also improved visual impact. We have added excels. We have added chart, we've added formulas that also greatly improved the efficiency of our users. So we think that the software itself is now changes the way of generating data and the way of sharing and using data that have greatly improved with using the WPS AI functions. Operator, we're ready for the next question.

[Operator]

[Operator Instructions] There seems to be no further questions at this time. Please continue. There are no further questions at this time.

[Francie Lu, IR]

Okay, operator. [Foreign Language].

[Tao Zou, CEO]

[Foreign Language]

[Francie Lu, IR]

Okay. Thank you for your attendance of our presentation today. And if you have any further questions, you can contact our IR team of Kingsoft. Thank you. Thank you, operator.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.