Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2022 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 first 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 Third 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.

Now I'm turning the call to Mr. Zou.

[Tao Zou, executive]

[Interpreted] The group adhered to technological empowerment with the focus on developing core products and technologies. During the third quarter, our core businesses demonstrated strong resilience, leveraging its accumulated experience and strength in products and technologies development. Kingsoft Office Group continued to pursue the strategy of multi-screen, cloud, content, AI and collaboration and improve its product services solutions, aiming to increase user stickiness for cloud and collaboration offer scenarios.

Regarding our online game business, we have adhered to the strategy of premium game and focus on the long-term development of core games. During the third quarter, total revenue reached RMB 1,837 million, up 22% year-on-year, driven by the continued growth of individual and institutional subscription businesses. Revenue from office software and services business reached RMB 1,005 million, up 25% year-on-year.

Now I will turn the call to Ms. Li Yi.

[Yi Li, executive]

Good evening, and good morning, everyone. In the third quarter, with the continuous expansion of the individual user, Kingsoft Office Group strived to increase user engagement and stickiness, as well as the promotion of long-term pay subscribers by promoting cloud services and enriching product functions.

With respect to the institutional subscription business, Kingsoft Office Group has dedicated to catering to the demand of government and enterprises such as user efficiency, data management, information security, and industry application scenarios, which led to a growing penetration of enterprise level product.

Kingsoft Digital Office platform. As for the institutional license business, our products continued to gain acceptance by increasing demand for domestic office software from government and enterprises, partially offset the high base for the same period last year and a slower organization progress this year.

Recently we released the WPS official document version for the government users. On the basis of WPS professional version, it offers industry-leading document model, document template, document conversion and other auxiliary functions to help government users to improve the writing efficiency.

Regarding the online games business, we continue to refine the core IP, further enrich the gaming content, enhance gaming qualities through technological innovation and provide players with better gaming experience.

In respect to the flagship JX Online III PC game, we celebrated its 13th anniversary in August and launched the anniversary expansion pack Heng Dao Duan Lang, and a new section Dao Zong in October. The third season of JX Online III; Chivalrous Shen Jianxin, an animation service based on the JX Online III was released on Bilibili in July. The ratings on the animation series on Bilibili reaches a record high, which demonstrates that the influence of IP has been further enhanced.

As for JX World III mobile game, we launched the open beta across all platforms and a new expansion packs in Chinese mainline in August. The launch has further improved user engagement and reached a broader user base, which laid a solid foundation for our long-term development.

I will now discuss the Q3 operational and financial results using Renminbi as currency. Revenue increased 22% year-over-year and kept flat quarter-over-quarter to RMB 1,837 million. The revenue split was 55% for office software and services and 45% for the online games and others.

Revenue from office software and services business increased 25% year-over-year and 9% quarter-over-quarter to RMB 1,005 million. The year-over-year increase was mainly due to the continued growth of individual and institutional subscription business of Kingsoft Office Group.

The fast growth of individual subscription business was mainly driven by the increases in the number of accumulated paying subscribers and the proportion of long-term paid subscribers. The growth of institutional subscription business was largely driven by increased penetration of Kingsoft Digital Office platform in government and enterprises. The quarter-over-quarter increase was mainly due to the increased institutional license business as well as the sustainable growth of institutional subscription business of Kingsoft Office Group.

Revenue from online games and other business increased 18% year-over-year, and decreased 8% quarter-over-quarter to RMB 832 million. The year-over-year increase was mainly due to revenue contribution from mobile titles released in the fourth quarter of 2021, such as JX World III and JX I: Gui Lai, partially offset by decreased revenue from the existing games. The quarter-on-quarter decrease mainly reflected the declined revenue from certain existing games.

Quarter revenue increased 38% year-over-year and 1% quarter-over-quarter to RMB 371 million. The year-over-year increase mainly reflected greater channel cost, servers and bandwidth costs, as well as purchasing cost of products and services along with the business growth of Kingsoft Office Group.

Gross profit increased 18% year-over-year and kept flat quarter-over-quarter to RMB 1,466 million. Gross profit margin decreased by 2 percentage points year-over-year and kept flat quarter-over-quarter to 80%.

Research and development cost increased 3% year-over-year and kept flat quarter-over-quarter to RMB 642 million. The year-over-year increase was mainly attributable to increased headcount as well as personnel-related expenses of Kingsoft Office Group in an effort to enhance products and provide high-quality cloud and collaboration experience, partially offset by decreased outsourcing expense on certain online game projects.

Selling and distribution expenses increased 47% year-over-year and 26% quarter-over-quarter to RMB 356 million. The increases were mainly due to the expanded scale of promotion for JX World III mobile game during its open beta in August 2022.

Administrative expenses increased 17% year-over-year and 2% quarter-over-quarter to RMB 156 million. The increases were mainly due to increased personnel-related expenses.

Share-based compensation cost decreased 14% year-over-year and increased 1% quarter-over-quarter to RMB 64 million.

Operating profit before share-based compensation cost increased 10% year-over-year and decreased 80% quarter-over-quarter to RMB 395 million.

Net other losses for the third quarter of 2022 were RMB 6,487 million compared with gains of RMB 734 million and RMB 6 million for the third quarter of 2021 and the second quarter of 2022, respectively. The losses in the third quarter of 2022 primarily resulted from the provision for impairment on the investment in Kingsoft Cloud.

As at 30th September 2022, the company holds certain ordinary shares in Kingsoft, which are listed on the NASDAQ in the form of ADS. The company has observed that the recoverable amount of investment in Kingsoft Cloud has been significantly impacted by the sluggish stock prices and recent financial performance of Kingsoft Cloud. The company performed an impairment assessment and made an impairment loss of RMB 6,486 million before tax, filling the difference of carrying amount in excess of the recoverable amount of investment in Kingsoft Cloud.

The gains in the third quarter of 2021 were mainly due to the recognition of a gain on team disposal of Kingsoft Cloud as a result of the dilution impact of issuing new shares by Kingsoft Cloud.

Share of losses of associates of RMB 414 million were recorded for the third quarter of 2022 compared with losses of RMB 286 million and RMB 418 million for the third quarter of 2021 and in the second quarter of 2022, respectively.

Income tax credit for the third quarter of 2022 was RMB 588 million compared with income tax expense of RMB 97 million and RMB 29 million for the third quarter of 2021 and the second quarter of 2022, respectively. The income tax credit for the third quarter of 2022 was mainly attributable to the deferred tax effect of impairment provisions recognized for Kingsoft Cloud.

As a result of the reasons discussed above, loss attributable to owners of the parent was RMB 6,055 million for the third quarter of 2022, compared with a profit of RMB 565 million for the third quarter of 2021 and a loss of RMB 139 million for the second quarter of 2022, respectively.

Loss attributable to the owners of the parent exclude Kingsoft was RMB 6,007 million for the third quarter of 2022, compared with the profit of RMB 611 million for the third quarter of 2021 and a loss of RMB 96 million for the second quarter of 2022, respectively.

The group had a strong cash position towards the end of the reporting period. But at September 30, 2022, the group had cash resources of RMB 20 billion, represented 64% of the Group's total asset.

Looking ahead, we will maintain our investment in research and development of [ screen ], cloud and collaboration office services and expanding new game genre. We will strive to build core competitiveness and improve efficiency aiming for the long-term sustainable development of the group.

Thank you all for your attention. Now I turn the call to Francie.

[Francie Lu, executive]

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

[Operator]

[Operator Instructions] First question is from the line of Liping Zhao from CICC.

[Liping Zhao, analyst]

[Foreign Language] I have 2 questions here. The first one is for the games, during the second quarter results release call, the management mentioned several new games release might be strategically postponed due to the soft macro-environment. Is there any change? And how should we expect the full year gaming business revenue growth rate?

And secondly, I want to ask about the WPS because during this quarter we have achieved very good results on the personal subscription business line. And could management share the outlook for next year on those personal and business side?

[Yi Li, executive]

[Foreign Language]

[Tao Zou, executive]

[Interpreted] So for the game revenue growth expectation, because we launched a couple of successful mobile games in the fourth quarter of 2022. So originally we expect the growth rate for this year is around 20%. But now due to the overall economy condition and also the consumer spending behavior, we decided to postpone our [indiscernible] game to next year around spring festival time. So now our overall 2022 game revenue growth will be slightly lower than 20%.

For both the old and new games, actually we -- especially for the old games, the JX World III performed very well. It actually outperformed our expectation. The new expansion pack that launched in August and September performed very well. So the old games, actually, their performance are quite stable. And the new games regarding [indiscernible] we just mentioned that it will be postponed to next year around spring festival time.

And another game is [indiscernible]. This game is already in the final stage of getting the licenses. But now since we still haven't got the license in November. So we think that this year -- that we may be able to get the license for [indiscernible] next year, and we may be able to launch the game around next March.

And because we think that the overall economic condition is recovering, including the COVID condition, so by postponing some of our mobile games to be launched next year, we think that is a good decision at this time and also in line with our expectation regarding the COVID and also the license release frequencies.

And the second question regarding the Kingsoft Office performance. We did very well in both the subscription business, including individual and institutional subscription business. These 2 subscription business, we think that they are going to perform very well going forward. The [indiscernible] business is not really 100% under our control. So we want to put more emphasis on the subscription businesses.

For the next year outlook, we think that the individual subscription business will continue to grow stably. For the institutional subscription business the next year and also the year after, we think that the growth rate may even be faster than this year.

And for the [indiscernible] project, we think that there will be the 1.0 and also the 2.0 stage, it will reach even higher efficiency, efficient stage. So Mr. Zou has very strong confidence in the institutional subscription business growth.

[Francie Lu, executive]

Hello, operator, we're ready for the next question.

[Operator]

This is from the [ Mrs. Y L L from GF. ]

[Unknown Analyst]

[Foreign Language] The first question is about the comment about our games launching time overseas. And how do you expect its performance? And the second question is about our Shen Jianxin, this quarter grew about 47%. How you expect its growth in the following year and in 2023?

[Tao Zou, executive]

[Interpreted] So we launched a couple of games over last year, including the JX I: Gui Lai and JS World III. They performed very well in Hong Kong, Macau, Taiwan and also other Southeast Asia district -- regions. They actually outperformed our expectation. So we have more games to be launched overseas going forward.

For example, Shen Jianxin III, we're planning for a global launch next year. The launch for this game in China has been delayed due to the license approval, but we are still aiming for a global launch next year if we could get the license on time. And if we still are unable to get a license by next May, we may be launched launch Shen Jianxin III in the overseas regions first before we launched in China.

We also have a few other games that have already started testing in overseas market. They may have further testing plans and even launch times for next year as well. I will have a more detailed launching schedule when we are doing our annual result by next March. And now we're still doing the internal budget and also the pipeline and planning for the game business.

Starting from many years ago, we have already decided that we are not going to give out any specific guidance for games until they are launched. So at this time, we are not able to give out a specific guidance for the overseas -- for the launch of the overseas games next year. I will have a more accurate guidance for these things when we have a more specific schedule on the launch time.

[Yi Li, executive]

[Foreign Language]

So for the selling and distribution expenses increased is mainly because our platform promotion that we did in August for JX World III mobile games. We are planning for a long-term development for the game. And based on the result of the promotion for the past 3 months, the user retention rate is very good.

Going forward, we are going to maintain a stable selling and distribution promotion costs for this game. The increase for the past August was a onetime increase in your selling and distribution costs.

[Francie Lu, executive]

Hello, operator, we're ready for the next question.

[Operator]

[Operator Instructions] There were no further questions at the moment. So I'll hand back to the speakers.

[Francie Lu, executive]

[Foreign Language] Okay. Thank you, operator. So we'll now conclude our presentation for today. And if you have more questions, please feel free to contact the IR team of Kingsoft. Thank you.

[Operator]

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.

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