Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 2024 Kingsoft Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Yinan Li, IR Director of Kingsoft. Please go ahead.

[Yinan Li, executive]

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 first quarter earnings call. I'm Yinan Li, 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 information and information from our 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.Additionally, in today's earnings call, the management will deliver prepared remarks in both Chinese and English. A third-party interpreter will provide a consecutive interpretation into English. During the Q&A session, we will accept questions in both English and Chinese with alternating interpretation provided by the third-party integrator. On-site translation is solely to facilitate communication during the conference call. In case of any discrepancy between the original remarks and the translation, the statements made by the management will prevail.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. Now I'm turning the call to Mr. Zou Tao.

[Tao Zou, executive]

[Foreign Language]

[Yinan Li, executive]

So, now we are turning the call to translator.

[Tao Zou, executive]

[Interpreted] Yes. So welcome to [Technical Difficulty] achieving double growth in both total income and profit in the first quarter. The total income amounted to RMB 2,136 million, representing a year-on-year increase of 8%. The operating profit amounted to RMB 602 million, representing a year-on-year increase of 31% [Technical Difficulty] attributable to shareholders of the parent company amounted to RMB 280 million, representing a significant year-on-year increase of 48%. In particular, the revenue of Kingsoft Office Group reached RMB 1,225 million in the first quarter. representing a year-on-year increase of 16.5%. The revenue generated from the games business and other amounted to RMB 912 million.Now I would like to summarize our performances in the first quarter of 2024. In this quarter, Kingsoft Office Group has maintained a solid operation, focusing on the strategy of multi-screen, cloud, content, collaboration, AI, Kingsoft Office Group continued to invest in R&D of collaboration and AI and strengthened the competitiveness of its products through technical innovation, product integration, performances, enhancements, other initiatives. [Technical Difficulty] our key products exist of 600 million for the first time and reached 602 million, representing a year-on-year increase of 2.2%, of which the number of monthly active devices of the PC version product amounted to 270 million, representing a year-on-year increase of 7.1%.In terms of individual subscription, we have continuously enriched membership benefits to enhance user stickiness and paying conversion and realized the revenue of RMB 734 million in the quarter, representing a year-on-year increase of 24.8%. The pricing of the WPS AI product was announced at the end of March which is under [ Gray Box ] testing, marking its initial steps towards commercialization. In terms of institutional subscription, we have continued to improve the product offerings, enhance the service experience, broaden the [ eco ] channels and actively promoted application of the cloud and collaboration in office with the sales module of institutional subscription entering the stage of transformation, achieving the revenue of RMB 242 million in this quarter, representing a year-on-year increase of 13.6%.In terms of institutional licensing, the institutional licensing business achieved growth driven by increased purchase orders on localization solutions, we achieved the revenue of RMB 194 million in the first quarter, representing a year-on-year increase of 6.31%, too elegant with divestment trends of application of the cloud. [Technical Difficulty] on April 9, we launched the upgraded new quality productive force in office WPS 365, covering the upgraded WPS Office, WPS AI for enterprises and WPS Collaboration, offering a one-stop AI office solution for users. The WPS AI Enterprise Edition designed as an enterprise brand for clients [Technical Difficulty] intelligent document library and [ Copilot ] for enterprise smart assistance. [indiscernible] reduces the threefold for enterprises to deploy large modules and integrates the AI capabilities of mainstream large modules in China, such as MiniMax, Grupo AI, [ AI and IT Book ], [indiscernible] and and [ Crane ].Our position in the field of large modules is the application provider, and we have accommodated hundreds of modules in China to achieve the basic AI services out of the box, which also allows users to overcome the difficulties in the selection of large modules and greatly reduces the threefold for use. AI. absorbs the users' pain points of digital asset management, transferring the traditional cloud document library into an intelligent document library through 1 click upgrade so that the thought of the intelligent correction has basic and the completed document authorization system guarantees that the information is not overstepping the authority. [ Copilot ] can automated tasks through natural languages, optimize users' workflow, have operational staff to analyze data using BI products driven by natural languages and use WPS 365 APIs and enterprises owned APIs to address the new needs for office automation. WPS AI for enterprises provides future support for customers to improve their collaboration efficiency, manage their R&D projects and set up low-cost approval processes, et cetera.In terms of online games business, under the overall guiding principle of prime game strategy, the focus is on cultivating and expanding the critical JX series and actively exploring new market segments so as to venture into innovative game genres. The flagship game JX3 online showed strong vitality, maintaining steady development. The conducted multiple rounds of testing the mobile version of JX3 Ultimate for research, elaboration, adjustment and optimization with users so that the game quality continues to improve. The game we launched in June, which will bring about multi-technical integrated experience for players. Achieving accessibility of JX3 online, our flagship through all platforms. while deeply involving the cultivation of the material apps generating, we have also made incremental process in exploring new game genres, Since the official launch of the anime shooter game, Snowbreak: Containment Zone on July 20 last year, we have appeared to the tenets of putting users first engaging since [indiscernible] communication with users to other product experience, attach great importance to user feedback and suggestions. And other improving its graphics and gameplay through the number of the active users and income in the first quarter achieved a significant quarter-on-quarter growth, indicating a continuous rise in popularity. The sci-fi main game Mecha BREAK has received the license approval in March 2024. It has been tested and continuously optimized in Mainland China and overseas regions. It is still being ranked in the top 100 of Steam Wishlist since it was first exposed last December, attracting exclusive interviews for internationally renowned gaming media such as [ IGM ], PC Gamer and [indiscernible].Looking ahead, Kingsoft Office will continue to adhere to the strategy of multi-screen, cloud, content, collaboration, AI, firmly invest in AI and elaborate and investment and continuously explore the application of WPS AI in office scenarios in various industries. In terms of online games business, we will certainly adhere to the strategy of products in playing games and strive to achieve effective implementation of the strategy of expanding new genres. We will continue to actively listen to the voices of players, striving to provide better gaming experience. Also, we will remain dedicated to the product philosophy of putting users first, being technology-based, upholding innovation and strive to create sustainable and long lasting value for our customers, shareholders and employees.Now let's give it up for Mrs. Li Yi to present financial results for the first quarter 2024. Thank you.

[Yi Li, executive]

Thank you. Good evening, everyone. I will now discuss the first quarter financial results, use RMB as currency. Revenue increased 8% year-on-year and decreased 7% quarter-on-quarter to RMB 2,137 million. The revenue split was 57% for office software and associates and 43% for online games and others. Revenue from the office software and service business increased 70% year-on-year and decreased 5% quarter-on-quarter to RMB 1,227 million. The year-on-year increase was mainly due to the growth of domestic individual office subscription business, institutional subscription business and institutional licensing business of Kingsoft Office Group. partially offset by the decreased Internet advertising business. The growth of domestic individual office subscription business was mainly attributable to the increases in both the user stickiness and the paying ratio. Resulting from enriched membership benefit, the growth of domestic institutional subscription business was mainly because we continuously promoted the transformation to subscription model at the launch of the WPS 365, the new product [indiscernible] in office.The increase of institutional license business was mainly driven by purchase orders on localization solutions. The decrease of Internet advertising business was mainly due to the shutdown of our domestic third-party advertising business at the end of 2023. Revenue from the online games and others business decreased 1% year-on-year and 11% quarter-on-quarter to RMB 912 million. The slightly year-on-year decrease was primarily due to a natural decline in revenue from certain existing games, partially offset by revenue contribution from titles released in the second half of 2023. The quarter-on-quarter decrease mainly reflected the natural decline of certain existing games, partially offset by the growth from proactive operation of the anime shooter game, Snowbreak: Containment Zone.Cost of revenue increased 50% year-on-year and decreased 4% quarter-on-quarter to RMB 396 million. The year-on-year increase was primarily attributable to great server and bandwidth costs as well as higher service costs of institutional clients, both of which were associated with the business growth of Kingsoft Office Group. Gross profit increased 7% year-on-year and decreased 8% quarter-on-quarter to RMB 1,741 million. Gross profit margin decreased by 1 percentage point year-on-year and quarter-on-quarter to 81%. Research and development costs increased 8% year-on-year and 4% quarter-on-quarter to RMB 730 million. The year-on-year increase primarily reflected the continued investment in AI and collaborate products and service of Kingsoft Office Group.Selling and distribution expenses decreased 26% year-on-year and 31% quarter-on-quarter to RMB 261 million. The decreases mainly reflected decline in promotion spending on online games. Administrative expenses increased 7% year-on-year and decreased 6% quarter-on-quarter to RMB 160 million. The year-on-year increase was mainly due to personnel-related expenses of Kingsoft Office Group. The quarter-on-quarter decrease was largely due to a one-off expense in the fourth quarter of 2023. Share-based compensation costs increased 5% year-on-year and decreased 1% quarter-on-quarter to RMB 76 million. The year-over-year increase was mainly due to the ground awarding shares to the next employees of certain subsidiaries of the company.Operating profit before share-based compensation costs increased to 27% year-on-year and decreased 14% quarter-on-quarter to RMB 678 million. Net other losses were RMB 4 million for this quarter compared with a gain of RMB 44 million and RMB 8 million for the first quarter and fourth quarter of 2023, respectively. Share of losses of associates of RMB 169 million were recorded for this quarter compared with losses of RMB 231 million and RMB 286 million for the first quarter and the fourth quarter of 2023, respectively. Income tax expenses increased 53% year-on-year and decreased 66% quarter-on-quarter to RMB 42 million. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 287 million compared with a profit of RMB 192 million and RMB 205 million for the first quarter and fourth quarter of 2023, respectively. Profit attributable to owners of the parent, excluding share-based compensation costs was RMB 329 million compared with a profit of RMB 236 million and RMB 257 million for the first and fourth quarter of 2023, respectively.The net profit margin, excluding the effect of share-based compensation costs, was 50%, 12% and 11% for this quarter, the first quarter and the fourth quarter of 2023, respectively. The Group had a strong cash position towards the end of the reporting period. At March 31, 2024, the Group had cash resources of RMB 23 billion. Net cash generated from operating activities was RMB 329 million, RMB 363 million and RMB 1,734 million for this quarter, the first quarter and the fourth quarter of 2023. Capital expenditure was RMB 115 million, RMB [ 80 ] million and RMB 131 million for this quarter, the first quarter, and fourth quarter of 2023. That's all for the brief of our first quarter operational and financial results. Thank you all. Now operator, we are ready for the Q&A section. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC.

[Xiaodan Zhang, analyst]

[Foreign Language] And I got 2 questions here. So first, just regarding the gaming business. The new version of Containment Zone launched in April has become a hit in the market. So how should we think of its performance going onwards? And what is your operational strategies for the anime game sector? And second is on WPS AI. So could you please update us with the commercialization progress of your individual-oriented products as well as the enterprise version?

[Tao Zou, executive]

[Foreign Language]

[Yinan Li, executive]

Please translate for Mr. Zou.

[Tao Zou, executive]

[Interpreted] Okay. So actually from this game perspective, is that we constantly is going to improve ourselves. And so this afternoon, we just finished the meeting with the Kingsoft Board of Directors meeting. talked about this question. We also have [indiscernible]. So today, during the [indiscernible] [ Kris ] is on the site. So our conclusion is that according to the Kris feedback, it thinks that we're going to continue to do it. It's not just a short time. We're going to make it as a long term. We got constantly to ask ourselves and our team actually for the 8 years of the divestments we have got into the third generation. And from this initially, we started to do this game to this publishing and onto have so many games comes out. We could have the 8 years of this exploration and the experience collection.We believe that for the game industry, the competition is quite heavy. But probably we can see that we have find a dedicated classification, which is super for us. We have the confidence that in this trial, currently we're quite competitive enough, which is showing from the date of April and May, which can prove ourselves. And also for this whole total annual income, we also have an update. We're going to have a very big increase. And we got to do some adjustments, which we can think that probably we can make it around 10% of increase. If, of course, the other game is going to launch in time. So the results will be much better.From the strategy perspective, last year, since the game has launched, the 20th last July, we constantly to cooperate, communicate with our clients, players, especially from this February, we have listened the suggestions and ideas from the players. And this year, our team has found the true feeding that we need to, based on the users to continue to do the optimization. So we need to firstly make friends with our users and then constant you have different generations comes out to optimize it constantly. So we can see that this kind of a milestone for us.So actually, from the WPS AIC and the progress and also the strategy from this [ Gray Gear ] testing, we have made a conclusion that we have realized our expectation. If we need to expand it to describe it like from this the users module and also the AI scenarios application and also for these activities for the users stick with the AI, which has realized our great testing expectation, but we will still spend a very long time, especially for this customer experience to have different functions optimized. We're going to constantly optimize it, including some different optimization for different scenarios. From this straight answer call point, we think that we already have some existing customers, and then we would like to have a deep connection with them to have innovation together. So what does that mean is that we all know that for the AI big module since it comes out into the market last year for the [indiscernible], we have discussed quite a lot like AI [indiscernible] or whatever these type of things. So from the CM perspective, we constantly did have practice. And also for the [ BNs ], for the enterprise, how are they going to use it for the whole industry, we are confident to trying to understand it and trying to catch it to get into a certain perspective. But we believe that for the big module for this enterprise is to get to have some value added, it's going to be very powerful, but which is going to be the correct road for it? And in the future, how we're going to use this big module to make the small module to have the industry module to have these private customers scenarios to integrate them together.So from last Q3, we have discussed with our customers that we need to create together. We already have some practices. So we're going to have some localize it. So from the BN perspective, we think that we're going to have the communication with our customers together. Target for this big module, you have this creation together. So generally speaking, that for the BNs, what exactly the industry is going to have a very good future, a very good result is hard to say. But for the AI industry to have value added, it's going to be a very big trend, and the market will be very big.

[Yinan Li, executive]

We're ready for the next question.

[Operator]

Our next question comes from the line of Linlin Yang from Guangfa.

[Linlin Yang, analyst]

[Foreign Language] My first question is about the growth of game. Can you break down the 10% growth for us? How much incremental growth [indiscernible] each contribute? My second question is about the dividend and share buyback. As the bottom line tends to improve, will you consider to increase the amount of the dividend payout and share buyback?

[Tao Zou, executive]

[Interpreted] So actually, for this [indiscernible] for this contribution for our growth, we need to discuss it from a different perspective. If for the other income and also the profit, of course, [indiscernible] which is going to be better. The reason is that for [indiscernible] is going to be an ERP game. From this test perspective, we believe that the focus, the future is going to be much better. But for the [indiscernible], which is this the mobile version for this total users quantity for this Kingsoft game is going to have a much bigger percentage from this financial feedback and also [indiscernible] is going to be much better. So the Kingsoft users total quality, we think that for [indiscernible] which is going to be much better, which this is according to our expectation.Actually, the profits of the entire Kingsoft, the whole group from this other office and also game, the performance is quite good. And also for [indiscernible], this type of products we have for this reduction of the losing. So from the Kingsoft Group, the whole profit is going to get into [indiscernible]. And also for the repurchase density and because today, we have the Board meeting and also discussed about the total amount of the stocks. So the Board meeting has authorized of HKD 1 billion this amount. And last year, the repurchase limit is going to be [ 310 ] million. So regarding this topic, my opinion is that I think currently for this Kingsoft Group, our whole evaluation has been reduced quite a lot, it has been evaluated quite low because [indiscernible] will answer this question. The whole market situation is a very important part, we need to consider. If the whole market is going to get into a better performances, then of course, the repurchasement limitation. no matter for the amount and also for the frequency is going to be higher. But if the whole quality of this whole market is going to be getting worse and worse, then our repurchase limit quality and also the frequency will be higher. So this is just very frankly used to express myself.So competitively speaking, is that to comprehensively for a conclusion is that our evaluation has been considered lower than the market. And also for this repurchase limit the total amount and also the frequency it depends on the home market.

[Yinan Li, executive]

Operator, we are ready for the last question.

[Operator]

Our last question comes from the line of Bing Duan from Nomura.

[Duan Bing, analyst]

[Foreign Language] So a follow-up on AI, how do you think about the competition landscape. First, the large language models pricing are declining, will that affect our WPS AI's cost positively? The other one is how do we think about other like Microsoft's Copilot product or [indiscernible] China will affect the competition landscape for WPS AI?

[Tao Zou, executive]

[Interpreted] So from this industry, that is correct that for this [indiscernible] and also the cost is quite low. And also for Alibaba and [indiscernible] they also followed up with the topic. For the Kingsoft office perspective, we actually motto to explore the third parties and also we are charging for these members, for our users from the AI perspective. So for the [indiscernible] itself, of course, the cost is going to be decreased. That is going to be good for us. But if we're going to really explore this whole situation to make sure that the cost is lower from the surprise of the users and also from this gray test, we also have to do the adjustment of quality to reduce the price, and this is only for the office itself. And from the industry perspective, lastly, we have already got that everybody is trying to do it because they are trying to get a lower price to grab market and why did everybody is thinking that it is impossible that we're going to have such a lot of the big modules existing. I personally think that 1 or 2 big module existing in the market should be good enough.The third one is probably not possible. And also for the very semi-like the searching engine. And so the searching engine initially supposed to be a very heavy competition but currently, and there's only 1 company or several companies existing in the market. And also for like comprehensive media competition is also the same thing. It's like the TikTok and also the [indiscernible], they are the 1 or 2 very big ones. This is from a C perspective. Of course, from B perspective, it's different in different industries and different models.From the AI perspective, my understanding is that for the office products, the AI competition is quite hard. We are discussing about the 2 companies, one is for software, the other is for the teams. We actually did internal discussions. We are not worried about Microsoft yet. Until now, even we are doing this office AI value added, we are not later than Microsoft, especially after so many years development up here today. We have a very solid customer foundation. Our AI have very quickly updating. For the Chinese market, we are not worried about that. And also for the [indiscernible], this is a very like hot topic. We're also discussing it. [ Kimi ] is actually our partner. My understanding is that it is different than WPS. This is different product type. My understanding is that for the skin stops, we have many passed the AITC, the close and insight. And we have this the documentation excel, PowerPoint [indiscernible] to have multiple documentations from [indiscernible]. And for [indiscernible], that is mostly like insight reading understanding. Of course, the AITC is quite strong. But for WPS, it's based on this document. We're going to have the innovation for the document, sharing collaboration to have added value function added. So probably everybody is thinking that we are competitors is like facial [indiscernible], but actually, we are completely different. WPS is kind of addition for the document sharing the rating and top discussion for this topic. And for the officing, it become everybody thinks that it's going to be a competitor. But our perspective, our understanding and our idea is that [indiscernible] is different. We are definitely much better than [indiscernible]. But office is a very general concept. So basically, is that we're going to, based on the office to have some collaboration, to have the creation for the board, and we're going to have using the digital platform. And right now, AI is coming. So we're going to have AI to value add on it. In that it's gotten easier for us to have a division of different products. So [indiscernible] would like to cooperate with us with us. So they would like us to do the addition for the documentation. So we we are partners, we are not competitors.

[Yinan Li, executive]

Thank you for joining us today, and this will conclude our presentation for the 2024 first quarter earnings call. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]