Kingsoft Corp Ltd

HKEX:3888

Earnings Call Analysis

Kingsoft Reports Strong Revenue and Profit Growth in Q2 2024

Kingsoft's Q2 2024 results show impressive gains, with revenue hitting RMB 2.47 billion, up 13% year-on-year and 16% quarter-on-quarter. Operating profit surged by 32% to RMB 719 million from the previous quarter. Key drivers include a noteworthy 41% hike in online game revenues and a solid 6% rise in office software sales. The launch of the mobile game JX3 Ultimate significantly boosted user engagement, doubling daily active users to over 10 million. Profit attributable to shareholders skyrocketed by 588% year-on-year. The company continues to focus on AI-driven initiatives and cloud integration to enhance its robust performance.

Strong Financial Performance

In the second quarter of 2024, Kingsoft Corporation reported a notable financial performance. The total revenue increased by 13% year-on-year to reach RMB 2.47 billion, marking a 16% rise compared to the previous quarter. This growth was driven by robust performance in both the office software and online games segments. The operating profit surged by 18% year-on-year to RMB 719 million, with an improved operating profit margin of 32%, up 4 percentage points from the previous quarter.

Impressive Profit Growth

Profit attributable to shareholders saw a remarkable year-on-year increase of 588%, amounting to RMB 393 million. This substantial growth was bolstered by successful cost management and revenue expansion. The strong performance also translated to a quarter-on-quarter profit increase of 38%.

Office Software Segment

The Kingsoft Office Group's revenue reached RMB 1.19 billion, growing by 6% year-on-year. The number of monthly active devices for the office software grew steadily, reaching 602 million, a 3.08% increase from the previous year. The cumulative paying subscribers increased by 14.79% to 38.15 million. The company launched the WPS AI 2.0 strategy to enhance productivity and continued to innovate with AI-driven features and improved cloud services.

Online Games Segment

The online games and other business revenues rose by 20% year-on-year to RMB 1.29 billion, driven significantly by the launch of the mobile game JX3 Ultimate in June 2024. The game achieved notable success, with daily active users nearly doubling and the monthly active users reaching 11.46 million. This influx of users brought new vigor to the product IP, and the company plans to continue developing this segment aggressively.

Research and Development Investments

Kingsoft increased its research and development expenses by 11% year-on-year, focusing on staff costs and performance-based bonuses. The company continued to invest in AI and other innovative technologies to enhance its product offerings and maintain competitive advantage.

Capital Structure and Cash Flow

As of June 30, 2024, Kingsoft had cash resources of RMB 24 billion. Net cash from operating activities amounted to RMB 1.37 billion for the first half of 2024. The company also utilized RMB 164 million for capital expenditures, reflecting its continued investment in growth initiatives.

Future Outlook

Looking ahead, Kingsoft plans to further capitalize on AI capabilities and expand its market segments. The WPS AI Enterprise Edition and Government Edition are expected to drive digital transformation and improve efficiency for enterprise and government clients. In the gaming segment, the company will continue to focus on its core IP and explore new market opportunities to sustain user engagement and revenue growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Second Quarter 2024 Kingsoft Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Ms. 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 2nd quarter and the interim results earnings call. I'm Li Yinan, 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 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. 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 interpreter. On-site translation is solely to facilitate communication during the conference call. In case of any discrepancies 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 Zou, executive]

[Foreign Language]

[Interpreted] Hello, everyone, and thank you all for joining Kingsoft's 2024 Second Quarter and Interim Results Earnings Call. This quarter, we continue to achieve new improvement in both our revenues and operating profit. In particular, our total revenues reached RMB 2.47 billion, a year-on-year increase of 13% and a quarter-on-quarter increase of 16%. Operating profit reached RMB 719 million, a year-on-year increase of 18% and a quarter-on-quarter increase of 32%. The operating profit margin reached 32%, up 1 percentage point year-on-year and 4 percentage points quarter-on-quarter.

Next, profit attributable to shareholders reached RMB 393 million, a significant year-on-year increase of 588% and a quarter-on-quarter increase of 38%. Among this, Kingsoft Office Group's revenues in second quarter reached RMB 1.187 billion, a 6% year-on-year increase. Online games and other business revenues reached RMB 1.286 billion, a 20% year-on-year increase and a significant 41% increase quarter-on-quarter.

[Foreign Language]

[Interpreted] Next, I will walk through the business highlights of the second quarter of 2024. This quarter, Kingsoft Office Group focused on the development opportunities of new quality productive forces, continued to adhere to the strategy focused on AI collaboration, multi-screen, cloud, content, continued to invest in R&D of AI as a collaboration through technological innovation, product interaction, performance enhancement, and other initiatives to continuously enhance the competitiveness of product to realize the implementation of new quality product forces in the field of office.

Kingsoft Office Group officially launched the WPS AI 2.0 strategy aiming to enhance new productivity through the innovative applications in the personal enterprise and government edition, helping users and clients improve their office efficiency.

[Foreign Language]

[Interpreted] In terms of individual business, the number of monthly active devices of our key products maintained steady growth and reached 602 million, representing a year-on-year increase of 3.08%, of which the number of monthly active devices of the PC version products amounted to 270 million, representing a year-on-year increase of 6.11%. While the mobile version achieved 328 million monthly active devices with steadily rising year-on-year. The accumulated paying subscribers reached 38.15 million, a 14.79% year-on-year increase by continuously optimizing end-to-cloud integration experience on the product side, enhancing user stickiness to WPS cloud services and boosting user activity on the cloud.

[Foreign Language]

[Interpreted] Focused on individual users, WPS AI has newly launched AI writing assistant, AI reading assistant, AI data assistant and AI design assistant, assisting users in improving efficiency and quality during office tasks. AI writing assistant offers the user an immersive overall writing feature, significantly boosting writing efficiency. AI reading assistant helps users analyze, summarize, and perform Q&A and document.

AI data assistant enables users to perform large-scale data calculations, analysis and classifications through natural language interaction. AI design assistant helps users with fully complex layout design, image processing and other tasks, aiming to deliver a more practical differentiation in office experience across these 4 dimensions.

[Foreign Language]

[Interpreted] For enterprise clients, we have launched the WPS 365, new productive forces in office. For organizations or corporate clients, it integrated the upgraded version of WPS Office, WPS Collaboration and WPS AI Enterprise Edition, and actually connecting document management, collaboration and AI capabilities. The WPS AI Enterprise Edition helps government and enterprise customers solve problems in the AI construction process with AI Hub, AI Docs and Copilot Pro and realize the efficiency of collaboration and security control for the entire organization.

[Foreign Language]

[Interpreted] Proprietary as government clients, the Kingsoft Government Office Model was launched, based on which the WPS AI Government Edition was released. This edition includes capabilities such as government affairs AI writing, government affairs AI Q&A, and government affairs AI [ tour ] and is compatible with various environments such as domestically developed information technology innovation and to support private development, providing intelligent support for government affairs scenarios.

[Foreign Language]

[Interpreted] Meanwhile, we continue to explore feasible solutions for the active implementation of the WPS AI Enterprise Edition in office scenarios with leading enterprise customers. The concept of enterprise brand offered by WPS 365 integrated data, algorithms and computing power to provide a powerful intelligent platform through AI capabilities. This supports enterprises in their digital transformation, enabling personalities, customers and refined production and services. We have already carried out WPS AI Enterprise Edition for creation of projects with well-known enterprises in the field of security, banking, insurance, and Internet services.

[Foreign Language]

[Interpreted] We continue to promote the integration of government and enterprises and support the integration experience and collaborative office processes focused on the values and area of leading government and enterprise customers deep in the product capabilities. We are enhancing product capabilities and developing secure and efficient industry-specific solutions for sections such as finance, energy, translation, publishing, medical, and high-end manufacturing. We have serviced more than 18,000 leading government and enterprise clients including [indiscernible] China United Property Insurance, China [indiscernible] Group, [indiscernible] Metro, China National Gold Group, Shanghai Construction Group, Hyundai Group, [indiscernible] Group, BOE Technology Group, New Oriental Education and other well-known organizations have formed [indiscernible] effect.

[Foreign Language]

[Interpreted] In terms of online games business under the primary game strategy, we're focused on deeply developing the classic JX series. We are aggressively exploring new market segments and expanding into new genres.

[Foreign Language]

[Interpreted] The mobile game JX3 Ultimate was successfully launched in June 2024. Achieving full platform data in hurricanes and in connection with flagship game JX3 Online significantly increasing the number of daily active users on all platforms. The first month of open beta, the monthly active users reached 11.46 million, of which 6.91 million were returning players accounting for 18.29%, as the large number of dormant players returned and continued to pay. Improving the [indiscernible] for the long-term operation of the IP with successful launch of the mobile game JX3 Ultimate. The constant influx of new users have brought new vigor to the product IP.

[Foreign Language]

[Interpreted] After a long period of effort, we have achieved fruitful results in the [ ACG ] field. The sci-fi mecha game, Mecha BREAK, has completed its first domestic public beta test in August.

[Foreign Language]

[Interpreted] In the third quarter, we will hold the 15th anniversary celebration of JX3 Online and continue to release new versions to further consolidate the vitality of our core IP.

[Foreign Language]

[Interpreted] Looking ahead, we will continue to focus on our users adhere to technology, driving business, constantly innovate and output products and [ context ] and create a high-quality experience to create sustainable and long-term value for our users and shareholders.

Next, I would like to invite Ms. Li Yi to introduce the financial performance for the second quarter and the first half of 2024. Thank you.

[Yi Li, executive]

Thank you, Tao Zou and Yinan. Good evening, everyone. I will now discuss the second quarter and the first half of 2024 financial results. I'm starting from the second quarter, used RMB as currency. Revenue increased 13% year-on-year and 16% quarter-on-quarter to RMB 2,474 million. The revenue rate was 48% for office software and services and 52% for online games and others. Revenue from the office software and service business increased 6% year-on-year and decreased 3% quarter-on-quarter to RMB 1,188 million.

The year-on-year increase was mainly due to the growth of domestic individual office subscription business, partially offset by decreased domestic institutional licensing business of Kingsoft Office Group. The growth of domestic individual office subscription business was primarily attributable to the improved user stickiness and commercial [ rates ], driven by our continuous product enhancements and the optimization of user experience in cloud services and AI futures. The flat quarter-on-quarter decrease was mainly due to decreased domestic institutional licensing and subscription businesses, partially offset by the increase of individual office subscription business.

Revenue from the online games and others business increased 20% year-on-year and 41% quarter-on-quarter to RMB 1,286 million. The solid year-on-year increase was primarily driven by the contribution from several games, partially offset by decline in revenue for JX3 Online, which had a relatively high base in the second quarter of 2023. The significant cost-on-cost increase was mainly attributable to ongoing improvements in game experience and the successful launch of JX3 Ultimate.

Cost of revenue increased 19% year-on-year and 11% quarter-on-quarter to RMB 432 million. The increases were primarily due to higher server and bandwidth costs associated with the business expansion as well as increased channel costs along with the revenue growth of online games.

Gross profit increased 11% year-on-year and 17% quarter-on-quarter to RMB 742 million. Gross profit margin decreased by 1 percentage point year-on-year and increased by 2 percentage points quarter-on-quarter to 83%. The fluctuations were mainly due to changes in the revenue mix. Research and development costs increased 11% year-on-year and 4% quarter-on-quarter to RMB 741 million. The increases were mainly due to higher staff costs, including accrued performance-based bonus.

Selling and distribution expenses increased 26% year-on-year and 45% quarter-on-quarter to RMB 379 million. The increases mainly reflected the increased promotional efforts to support newly launched games. Administrative expenses increased 1% year-on-year and decreased 3% quarter-on-quarter to RMB 155 million. Share-based compensation costs decreased 10% year-on-year and increased 7% quarter-on-quarter to RMB 82 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 in this quarter.

Operating profit before share-based compensation costs increased 14% year-on-year and 29% quarter-on-quarter to RMB 876 million.

Net other losses for the second quarter of 2024 were RMB 12 million, compared with losses of RMB 103 million and RMB 4 million for the second quarter of 2023 and the first quarter of 2024, respectively.

Share of losses of associates of RMB 169 million were recorded for the second quarter of 2024 compared with share of losses of RMB 323 million and RMB 169 million for the second quarter of 2023 and in the first quarter of 2024, respectively.

Income tax expense for the second quarter of 2024 was RMB 48 million compared with income tax of RMB 78 million and RMB 42 million for the second quarter of 2023 and the first quarter of 2024, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 393 million for the second quarter of 2024, compared with a profit of RMB 57 million and RMB 285 million for the second quarter of 2023 and the first quarter of 2024, respectively.

Profit attributable to owners of the parent, including share-based compensation cost was RMB 441 million for the second quarter of 2024, compared with a profit of RMB 123 million for the second quarter of 2023 and RMB 329 million for the first quarter of 2024. The net profit margin, excluding share-based compensation costs was 18%, 6% and 15% for this quarter, the second quarter of 2023, and the first quarter of 2024, respectively.

I'm now on the first half of 2024. Revenue increased 11% year-on-year to RMB 4,611 million. Office software and services made up 52% and increased 11% year-on-year to RMB 2,413 million. Online games and others made up 48% and increased 10% year-on-year to RMB 2,198 million. Gross profit margin decreased by 1 percentage point year-on-year to 82%.

Operating profit before share-based compensation costs increased 20% year-on-year to RMB 1,554 million. Share of losses of associates of RMB 338 million and RMB 554 million were recorded for the first half of 2024 and 2023, respectively.

As a result of reasons discussed above, profit attributable to owners of the parent was RMB 678 million for the first half of 2024, compared with profit of RMB 250 million in the same period last year. Profit attributable to owners of the parent, excluding share-based compensation costs was RMB 770 million, compared with a profit of RMB 359 million in the prior year period. The net profit margin, excluding share-based compensation cost was 17% and 9% for the first half of 2024 and 2023, respectively.

Our statement of financial position. We had cash resources of RMB 24 billion as at 30 June 2024. Net cash from operating activities was RMB 1,374 million and RMB 2,308 million for the first half of 2024 and 2023, respectively. Cash used for capital expenditure was RMB 164 million and RMB 183 million for the first half of 2024 and 2023, respectively.

That's all for the introduction of financial results. Thank you all. Now we are waiting for the Q&A section. Thank you, operator.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC.

[Xiaodan Zhang, analyst]

[Foreign Language]

[Interpreted] I got 2 questions here. My first question is regarding the gaming business. So could you please share your views on the performance of JX3 Ultimate after its launch? And my second question is on office business. So Revenue growth of office business slowed down a bit during the second quarter. So what's your outlook on individual and institutional business respectively for the upcoming quarters?

[Tao Zou, executive]

[Foreign Language]

[Interpreted] So thank you, Xiaodan. Thank you for your question, and let me just answer the first question. And firstly, we've got to have the different -- the separate dimensions to prospect to answer your questions. Firstly is that regarding the JX3 Ultimate and when it launched. Firstly, we're going to check the users members. We observed that the growth of the daily active users grew nearly 100%. So as we mentioned previously that altogether all the users, when it launched at that day, firstly, their active users could reach to more than 10 million, so which is exceeding our expectations.

And the second is from the perspective of the income. So we know that for the Q2. And since June up to now, the time is quite short. So the performance is not that significant. But if we're going to take a look from this July and August, especially the last time, we can see stats for only 1 day, it could already reach their highest record since it launched in 2009. And there's also possibilities that in August, we can reach to its highest performances in the whole single month. So that together with Q3, and together with the data in July and August, so for this JX3 Ultimate, generally speaking, from income perspective, the total performance is quite good. It is exceeding our expectations. So this is from the users and also income, the 2 aspects to answer your question. So this is the first part of your question.

[Foreign Language]

[Interpreted] So the second way is that we're going to think about is regarding this office business. So how are we going to look at the [ C-end and B-end ]. So from the budget perspective, the office configuration rate is quite good. It's 100%. It's very good. So if we're going to look at the [ C-end, B end ], I would like to have further explanation. And for the [ B-end ] perspective, we're going to separate into institutional authorization. So for the institutional authorization, that is for the localization.

And basically, in the previous quarters, as we have previously mentioned that, currently, based on this situation, the whole environment, the business for localization, we're not going to have significant change. So it's going to be roughly the same as last year. Except for that, we were also going to have the subscription or the institutional subscription. So this is actually from the data we have. They are actually the exact subscription. The subscription growth is quite fast.

And actually from this financial report, it has slightly decreased, but this is actually from [indiscernible] perspective, and they have some reason. The reason is that last year, we were going to calculate the income by their annual income. But right now, we have changed it into this monthly [ bidding ]. That is why, from this financial accounting perspective, it can have smooth out.

Although the total income is quite high, but from this financial report, we'll have a slight decrease. So tomorrow and the day after tomorrow we're going to have the office business road show. We're going to have further explanation. Probably some of the investors have some misunderstanding regarding it. But this is actually from the 2B's perspective for the localization. Basically, it's based on our expectation to follow to growth.

And especially for the subscription, its way existing of our expectation. So from the [ C-end ], so from different data, and from this PC version, we can see that the user scores has tremendous growth. Last year, it reached to 7.1%. The total users could reach to 270 million. So the space is quite big. Initially, we thought that the first half year is going to have the growth of 5%. But right now, it is more than our expectation and the total income could reach to RMB 38 million -- more than RMB 38 million. So good. And for the year-on-year with an increase of 15%. And probably for this market, according to my judgment is that the whole market for the whole general commercialization for the AI probably at this stage is going to give too high expectation. But according to our internal judgment, the AI commercialization has already reached to our very good expectation like AIGC and [indiscernible].

They have released the 2.0 version, which has got phase 2 personnel and enterprise to have different functions and products. And target for this product, during the customer's experience process, they're going to have a very big space to develop. And also from the AI's commercialization perspective, it has slightly slowed down. The main reason is that we need to show the grinding for the improvement for those products. We hope that when we can make this product have a better experience from our customers and when we have a better experience for it, then we can carry up of the whole process for the commercialization. So from this data, the whole commercialization for the general AI, we have a very strong confidence for it.

[Yi Li, executive]

[Foreign Language]

[Interpreted] Okay. So I would like to have some adding is that for this office business, actually for the subscription revenue, we can see that for contract growth is much higher than the income increase. So later on, we would like to have a further explanation regarding this contract. And also, we can see from this contract competition, we can see that the subscription transformation speech is accelerating and has a very good course.

Operator, we are ready for the next question.

[Operator]

Our next question comes from the line of [ Jessie Chu ] from CITIC Securities.

[Unknown Analyst]

[Foreign Language]

[Interpreted] My first question is about AI Office applications. How do you view the competitive landscape. And my second question is about AI investment. How do you view the investment in AI when the group has sufficient cash on the balance sheet?

[Tao Zou, executive]

[Foreign Language]

[Interpreted] So actually, for this AI application, actually, that is correct. Indeed, that is emerging different products. And regarding the competition situation, regarding this topic, actually at each quarter we're going to have people to ask me this question. So I would like to share my perspective on this topic. So actually, basically speaking, except for this Microsoft, the other products, we don't think that they are our competitors. Why is that? It's because for the Kingsoft, if you can take a look of our office development history, you can take a look what exactly the product is.

So I actually can say that we are actually the creator for the content for the documentation. And right now, we also are going to have some like collaborative creation sharing in this platform. So if we can make it and simplify it, is that we're going to base on this documentation, creation and treatment. This is going to be a shared platform to have all these functions. So based on this, you can clearly understand that. This AI is also being included, including like [indiscernible] is going to have [indiscernible].

You can realize that they are very similar. Like some of them, especially they're going to have this AIGC. Based on AIGC, we can automatically have some abilities to create documents. And including TIMi, they also have this ability. We can understand that actually the market has a lot of products. Together with our office products, looks like we are competing with each other, but actually, they are based on this documentation creation, core generation, transform rate platform.

So you can realize that actually only the Microsoft, their identification is exactly the same as us. Actually, in the past 30 years, only Microsoft is our competitor. So weather it's going to, together with the AI exact function and abilities, become stronger and stronger. It's going to have like the content creation, added historical documentations, formatter, the [indiscernible] files, et cetera. It's only actually us together with Microsoft that are doing this. The other platforms, the other companies, they are based on the AIGC content creation, content productivity. So last year, we started to make a lot of models. And lastly, we have mentioned that we're going to have 3 parts. The first part is the AIGC.

If we don't care about the contract format or version, then we only need to produce 1 paragraph of the content. Actually, it doesn't necessarily require office software. Previously, if you can have the search engine, that would be enough, because if we don't care about the format, and you have some certain products that are based off AI knowledge, searching and creating an answer, then they've got to have some certain ability to do this content creation.

And actually, for those type of products, they are not our competitors. What we are doing mostly is for this content. When they have created the content, we need to have format just to realize it to have some format, especially a very complex format documentation treatment. This is actually the differences, which we can understand as a gap between us with the other companies and with the other products.

And even we're going to have this AI search. And after this, they have the ability to do the treatment for the documentation, but mostly during the search, that compete with each other for search certain products. So it doesn't have a significant competition relationship with us. So from a collaborative perspective, it's like thinking and facial -- and also the Tencent documentation that they are the online documentation perspective. Yes, this is also another way to explain that. So this is my understanding from macro solutions, macro expectations regarding your question.

[Yi Li, executive]

[Foreign Language]

[Interpreted] And regarding your second question for this investment of AI, and we can explain it from 2 aspects. Last year as we mentioned that we're going to have -- we're trying to find some cooperations with other companies, especially the startup companies. And from the financial perspective, and also from the business perspective, we have 2 different perspectives. We're looking for the cooperations.

And from our group perspective, because AI is just started, and our group is looking at suitable opportunities, and we are trying to make a balance with the 2 ends. The firstly is the shareholders' return. And for the first half year, the return is going to be HKD 400 million in the first half year, and the repurchase is canceled and the equity ratio is 1.5%. And we are also looking for [indiscernible] opportunities for this further communication with good opportunities for us regarding certain investments.

[Yinan Li, executive]

Thank you for joining us today, and this will conclude our presentation for our 2024 second quarter and interim results earnings call. Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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