Kingsoft Corp Ltd

HKEX:3888

Earnings Call Analysis

Strong Financial Growth

In the third quarter of 2024, Kingsoft Corporation reported impressive financial results, with total revenue reaching RMB 2.915 billion. This figure marked a year-on-year increase of 42% and an 18% rise quarter-on-quarter. The operating profit was particularly noteworthy, soaring by 204% to RMB 1.14 billion compared to the same period last year, and increasing 44% from the previous quarter.

Revenue Breakdown

Diving deeper into revenue sources, office software and services generated RMB 1.207 billion, reflecting a 10% year-on-year and a 2% quarter-on-quarter growth. The online games segment outperformed expectations, with revenues jumping 78% year-on-year and 33% quarter-on-quarter to RMB 1.708 billion, driven by the popularity of titles like JX3 Online and the newly launched JX3 Ultimate.

Innovation and AI Integration

Kingsoft's growth has been significantly fueled by advancements in AI technology, particularly with the recent launch of WPS AI 2.0, which has enhanced user engagement. The company's Office Group recorded RMB 750 million in domestic individual office subscriptions, up 17.2% year-on-year. This demonstrates the successful rollout of AI features that improve user experience and increase conversion rates.

Strategic Focus on Subscription Services

The company is strategically expanding its subscription services. Its institutional subscription business delivered RMB 248 million in revenue this quarter, and domestic institutional licensing revenue increased by 9% year-on-year to RMB 143 million. This focus on subscriptions is supported by ongoing government investments in technology, which enhances Kingsoft's prospects.

Banking on Game Development

Looking ahead, Kingsoft plans to sustain momentum in its gaming sector. The management anticipates a robust annual growth rate of 30% for its gaming business and expects to launch five new games in the upcoming year. The recent success of the Mecha BREAK game has also positioned Kingsoft strongly within the market, with nearly 3 million global pre-registrations.

Cash Position and Future Investments

As of September 30, 2024, Kingsoft boasted a healthy cash reserve of RMB 25 billion, which provides sufficient capital for further investments in R&D and potential acquisitions. The company has reported net cash inflows from operating activities of RMB 1.387 billion this quarter, an improvement from the previous year's figures.

Commitment to Shareholder Returns

Regarding shareholder returns, Kingsoft plans to continue its share repurchase strategy, with approximately HKD 500 million allocated for the process. While specific plans for dividends are yet unclear, the management remains committed to considering shareholder returns in future assessments.

Distribution of Revenue Streams

The split of the company’s revenue illustrates a balanced portfolio: 41% derived from office software and services and 59% from online games. This diversification mitigates risks associated with reliance on a single revenue source, making Kingsoft's financial foundation stronger.

Outlook and Future Strategy

Kingsoft's overarching strategy emphasizes a commitment to AI and technology-driven solutions. The executives have reiterated their focus on innovation in both the office software and gaming industries, projecting a future characterized by sustainable growth through enhanced user experiences and international expansion.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to Kingsoft Corporation Third Quarter 2024 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, Ms. Li.

[Yinan Li, executive]

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 third quarter earnings call. I'm Li Yinan, the IR Director of Kingsoft.

I would like to start by reminding you that some information provided during 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 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 Third Quarter 2024 Earnings Call. We are pleased to report strong growth in both revenue and profitability this quarter, led by an exceptional performance from Seasun. Total revenue reached RMB 2.915 billion, representing year-on-year and quarter-on-quarter increases of 42% and 18%, respectively. Operating profit hit a record here of RMB 1.14 billion, a remarkable 204% increase year-on-year and a 44% increase quarter-on-quarter. Kingsoft Office Group contributed RMB 1.207 billion in revenue, up 10% year-on-year and 2% quarter-on-quarter, while our gaming and other business generated RMB 1.708 billion, a 78% year-on-year increase and 33% quarter-on-quarter increase. These results demonstrate our core business momentum and position us for sustained growth.

[Foreign Language]

[Interpreted] Now I will walk you through the business highlights of the third quarter of 2024. Kingsoft Office Group maintains leadership in domestic office software through long-term R&D investment. Aligned with our technology-driven strategy.

[Foreign Language]

[Interpreted] Our domestic individual office subscription business generated RMB 750 million in revenue this quarter, a 17.2% year-on-year increase. This growth was primarily driven by AI features, highlighted by the October 10 launch of WPS AI Co-writing. WPS AI 2.0 delivers a more efficient creation experience, boosting user engagement and the conversion rates. Additionally, the public beta of WPS HarmonyOS NEXT is extended to further enhance product penetration. Launched in October 2024, this version enables seamless document and data sharing across devices and platforms, supporting multiuser collaboration, posting, editing and version capabilities. At the end of September, our King product reached 618 million monthly active users, up 4.9% year-on-year growth, including 277 million PC users, up 7%, and 338 million mobile users, up 3.4%.

[Foreign Language]

[Interpreted] Our domestic institutional subscription business generated RMB 248 million in revenue this quarter, primarily driven by enhanced WPS 365 offering, which are seeing strong adoption among large private and state owner enterprise in our public cloud business. We are expanding this revenue stream while optimizing our revenue model, building a solid foundation for sustainable growth in our domestic institutional subscription business.

[Foreign Language]

[Interpreted] Domestic institutional licensing revenue reached RMB 143 million this quarter, up 9% year-on-year. By aligning with policy changes and customer needs, we successfully expanded our presence in lower tier government markets focused on localization solutions. This market expansion has driven order growth in our domestic institutional licensing business.

[Foreign Language]

[Interpreted] Our overseas business continues to see use groups, primarily in mobile, with substantial growth potential in PC. Leveraging our overseas AI capabilities, we recently achieved a second position on the product count leaderboard, demonstrating growing international recognition.

[Foreign Language]

[Interpreted] Following our primary strategy, the online game business continues to strengthen the classic JX Online series. We are making significant investments in new genres and market opportunities. JX and JX3 Ultimate has delivered strong performance since launch, reaching 11.46 million monthly active users in its first open beta month, with returning players accounting for 16.3%. In this quarter, coinciding with the 15th anniversary celebration of JX3 Online. The number of returning players has exceeded expectations, and the game achieved record-breaking revenue across all platforms in August.

[Foreign Language]

[Interpreted] For the western region's Grand World project, a celebration between JX3 Online, the Dunhuang Museum and the Dunhuang Intangible Culture Heritage Protection Center aims to digitally restore the historical Chinese group. This initiative has gained recognition from Xinhua News Agency, Chinese official news outline.

[Foreign Language]

[Interpreted] Our sci-fi mecha game, Mecha BREAK, successfully completed its first beta test in August, trying strong player response and global attention. The game garnered nearly 3 million global preregistrations and peaked at 17th on the Steam Global Wishlist, attracting more than 1 million new users.

[Foreign Language]

[Interpreted] The 15-year success of JX3 Online demonstrates our commitment to our prime game strategy, where the strong market response to Mecha BREAK reflects our successful expansion into new gaming genres.

[Foreign Language]

[Interpreted] Looking ahead, Kingsoft Office Group will maintain its long-term investment in AI and collaboration, delivering intelligent solutions across different office scenarios. Our game business will focus on innovation and quality improvement to provide expansional experience to players globally. We remain committed to our core principle of putting user first, promoting technology-driven business and fostering innovation to create value for our customers, shareholders and employees. Next, I would like to invite Ms. Li Yi to introduce the financial performance for the third quarter. Thank you.

[Yi Li, executive]

Thank you, Tao Zou and Yinan. Good evening, and good morning, everyone. I will now discuss the third quarter financial results using RMB as currency. Revenue increased 42% year-on-year and 18% quarter-on-quarter to RMB 2,915 million. The revenue split was 41% for office software and services and 59% for online games and others. Revenue from the office software and services business increased 10% year-on-year and 2% quarter-on-quarter to RMB 1,207 million. The year-on-year increase was mainly due to the increased domestic individual office subscription business of Kingsoft Office Group, which was primarily attributable to increased user stickiness and conversion rates, supported by the introduction of WPS AI Version 2 with 4 new assistants in this quarter that has provided more efficient, creative experience.

Revenue from online games and other business increased 78% year-over-year and 33% quarter-on-quarter to RMB 1,708 million. The remarkable year-on-year and quarter-on-quarter increases were largely attributable to, first, the outstanding performance of JX3 Online and the successful launch of JX3 Ultimate further boosting the game's popularity. And second, the active operation and enhanced experience of other games.

Cost of revenue increased 20% year-on-year and 7% quarter-on-quarter to RMB 460 million. The increases were primarily due to greater channel costs, along with the revenue growth of the online games, as well as higher personnel-related expenses of online game business. Gross profit increased 46% year-on-year and 20% quarter-on-quarter to RMB 2,454 million. Gross profit margin increased by 3 percentage points year-on-year and 1 percentage point quarter-on-quarter to 84%, which were mainly due to the changes in revenue mix.

R&D costs increased 28% year-on-year and 16% quarter-on-quarter to RMB 861 million. The increases were mainly due to increased headcount to support the development of AI and collaboration products, as well as higher accrued performance-based bonus. Selling and distribution expenses decreased 70% year-on-year and 4% quarter-on-quarter to RMB 365 million. The year-on-year decrease was largely due to high base in the third quarter of 2023 with the promotional and advertising activities for the launch of new games.

Administrative expenses decreased 11% year-on-year and increased 7% quarter-on-quarter to RMB 166 million. Share-based compensation costs decreased 20% year-on-year and 29% quarter-on-quarter to RMB 58 million. Operating profit before share-based compensation cost increased 168% year-on-year and 37% quarter-on-quarter to RMB 1,202 million. Net other losses were RMB 63 million for this quarter compared with gains of RMB 18 million and losses of RMB 12 million for the third quarter of 2023 and the second quarter of 2024, respectively.

Share of losses of associates of RMB 428 million were recorded for this quarter, compared with losses of RMB 307 million and RMB 169 million for the third quarter of 2023 and the second quarter of 2024, respectively. Income tax expenses were RMB 31 million for this quarter, compared with income tax expense of RMB 44 million and RMB 48 million for the third quarter of 2023 and the second quarter of 2024, respectively.

As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 413 million for this quarter compared with profit of RMB 28 million and RMB 393 million for the third quarter of 2023 and the second quarter of 2024, respectively. Profit attributable to owners of the parent excluding share-based compensation cost was RMB 453 million for this quarter, compared with the profit of RMB 69 million and RMB 441 million for the third quarter of 2023 and the second quarter of 2024, respectively. The net profit margin, excluding share-based compensation cost was 16%, 3% and 18% for this quarter, the third quarter of 2023 and the second quarter of 2024, respectively.

The group had a strong cash position towards the end of the reporting period. As at 30th September 2024, the group had cash resources of RMB 25 billion. Net cash generated from operating activities was RMB 1,387 million for this quarter. Net cash used in operating activities was RMB 752 million for the third quarter of 2023, and net cash generated from operating activities was RMB 1,045 million for the third quarter of 2024.

Capital expenditure was RMB 109 million, RMB 160 million and RMB 50 million for this quarter, the third quarter of 2023 and the second quarter of 2024, respectively. That's all for the introduction of our financial results. Thank you, all. Now operator, we are ready for the Q&A section. Thank you.

[Operator]

Thank you. [Operator Instructions] We will now take our first question from the line of Xiaodan Zhang from CICC.

[Xiaodan Zhang, analyst]

[Foreign Language]

[Interpreted] So thanks, management, for taking my questions. And first of all, regarding the gaming business, what is your view on its growth resilience in the upcoming quarters? And secondly, could you please share your outlook on individual and institutional business within the office software sector? And lastly, any insights regarding shareholder return? It would be highly appreciated.

[Tao Zou, executive]

[Foreign Language]

[Interpreted] So regarding my answer is that actually for the growth of the potential of the game in the future, basically next year, we still have 3 to 5 different type of games in stock. And which of that, 3 of the games we have already got their certifications, and another 2 is still under the application process. All of that, 2 of the games we are doing the distribution to do the operation for product, which is made by a function of the company and have a game and another 3 of the game, we have CF research. And also based on the performances in August that of the Mecha BREAK, the situation, we think that next year, the performances should be expected for the details regarding how it's going to look like most of the growth rate that is the same as our previous answer that the game doesn't have any indication yet. We cannot give a very clear answer for it. And also, we can only base on the data of the launch and to give some like guidance call based on the previous performances.

[Foreign Language]

[Interpreted] So actually, for the office side for the B-end or the C-end forecast, we would like to answer in several perspectives. Firstly, from the C-end, people always pay attention in the recent 2 years. We are always trying to promote the AI, AI value-added. Previously, we have this introduction that all the products we have launched, we're going to base on this area. We continue to have better performances to improve the customer experience and also increase the customers' feeling for it. This is the whole C-end. This is causing that we're going based on AI to have important innovation and have some development according to that. For the C-end business, our C-end strategy. And firstly, we need to increase the customer experience to have more customer numbers. And secondly, we need to have like strengthen their payments rate of the customers and third step is to update their value. And recently, we never changed this strategy yet and because of very good performances, including the AI promotion.

For the C-end, we actually need performance for the institutions subsidiary and also for subscriptions. And initially, we have included 2/3 from this like sites transcription -- transcription into their monthly institutional transcription. We think that this is quite good a big spot, especially we are thinking of the product companies this year, we have a very good improvement for the institutions' subscriptions. So we believe that this part still have a very bright future. And this also a product for the 365 module, we're going to have different pieces and combine this piece, we have matched with different enterprises demand compared with the whole general package. We believe that this still have a very good space to improve. And regarding the information innovation, and we think that this is actually have a step-by-step to be recovered, and we believe that in the future is going to have a very rapid growth.

[Foreign Language]

[Interpreted] So regarding the shareholders return question, we -- the same thing is that we're going to do it as there. But regarding this question, we're going to answer in 2 perspectives. Firstly is for this repurchase. Based on 2024, we constantly did have some repurchase. And the total amount could approximately HKD 500 million. And the total share rating is 1.55. And compare it to other companies, we excluded the repurchasement. Basically speaking, our share ratio of the repurchasement is quite leading. We will continue to do that.

And also, we're going to -- based on this Board of Directors periods the amount period, we're going to continue to do this action. And regarding the dividend, so every year, our proposal has to wait until the next year or the Q1 of next year. And the Board of Directors is going to base on that pure dividend situation and also their comprehensive elements of the company's development to give a proposal for the dividend. And currently, we cannot answer this question yet, whether we're going to expand this dividend or not. We can't answer the question at this moment.

[Operator]

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

[Unknown Analyst]

[Foreign Language]

[Interpreted] My first question is about office software business. Has the office software business fared the business recovery brought about by the improvement of the macro environment? Does WPS AI's product and commercialization progress meet our expectations? My second question is about internationalization. What are the prospects for office software and gaming businesses to expand overseas? My third question is about our profit. Which are the reasons for the strong performance in terms of profits?

[Tao Zou, executive]

[Foreign Language]

[Interpreted] So firstly, based on the change of this macro environment and regarding the question whether we can see this as a rebound. So actually, we have a lot of customers, they are government or they are state-owned enterprises. From the government perspective, especially recently the latest standing committee of the National People Congress mentioned that it's going to have a deposit of RMB 600 million only to do the investment. So based on this area, generally speaking, from the government perspective, they have money in hand. So they're going to get back to the regular like daily governance and operation. That is why I think that this is definitely a benefit for us.

In addition, to let the government get back to the regular daily governance and from their enterprise perspective, it's going to have a tremendous increase, so for us to do the promotion of the B-end, especially for the execution subscription area, is going to have a very big improvement. For the AI perspective, regarding the AI, that is whether we have reached the progress of product like commercialization, we -- I mentioned previously that, that is based on this really realized of our expectations after the reverse of our strategy.

Last year, when the AI has promoted out, especially for Microsoft, first reaching the concept of copilot. So the market expected to realize from 0 to 1 at once. But actually, based on our practice in the past 1 year's practice, especially we'd like to have a cooperation like innovation together with our customer.

We think that it's not going to go directly from 0 to 1, it's going to go like 0, 0.1, 0.2 [indiscernible] but we help our customers to increase their customer experience in different scenarios. That is why we mentioned that this is going to complete 0.1 or 0.2 process. This is actually more basically satisfied of the objective physical development process. And based on this, based on this dimension, we think that this year we have a very good development strategy for AI.

[Foreign Language]

[Interpreted] So actually, regarding the overseas strategy, we would like to talk about the game first. From the data perspective, we actually -- for the overseas game has tremendously increased of this income percentage. From the regions area, we can see that we started to get into -- get overseas since 2004. In the Vietnam and also the Southeast Asia, we kind of promoted the martial arts games. And last year, for the last year of the Emmy game, we have started the global layout.

And next year, for the Mecha BREAK, this is actually a product fitting into the global market. And we believe that it's going to have a breakthrough improvement. And for the office for the layout of the overseas, basically, in the past, we didn't have any promotion yet, especially since the COVID-19 period, and we didn't focus on it yet. But from the data perspective, no matter for the income for the mobile end or the PC end, our customers always have a very good increase no matter for the like monthly compared or the yearly compared. And although we didn't release the data yet, but the potential is quite big, especially for the entire PC end.

Previously, we only promoted the mobile app, but the customers is going to download the PC app once they recognize the games. And we can see that the monthly active users could reach to more than 10 million users and the increased number of the year-on-year and month-on-month would go to like more than 10%. Actually, we can see that the overseas customer recognized our products very well. So we think that in the future for the overseas market for the entire Kingdoms office is going to have a very strong growth.

Last year, initially, we would like to focus into the layout of the overseas market, but AI comes out. And that is why we transferred our key point into AI. And the -- and also through the 2 years development, we think that the AI is going to have localized for the office area and it's going to have step-by-step become more and more mature. Next year, we're going to develop the overseas market and that's going to have a good performance.

[Yi Li, executive]

[Foreign Language]

[Interpreted] So actually, from this profit perspective, we would like to expand into 2 perspectives. Firstly, from the income end. This season for the games is no matter for the internal expectation or the external expectation, it has actually expired of our expectation and the year-on-year growth reached 7%. And for the JX 3 Online, this has reached to -- when we have this annual ceremony for 15 years. And also in June, the daily active users has tremendously increased. And also in August for the annual ceremony, we realized that for the income perspective, it is quite good.

And also for the profit perspective for the Seasun 3 compared with the JX 3 Online, for the PC and the interest rate is quite high. For the Seasun 3 the mobile game since 2022, compared with the JX 3 Online, most of the customers coming from our official channel. And that means that we didn't share that much resources through the active channels. We always have communicated on the market that -- so the Seasun 3 business model is that going to have a CF research and published. So for the mobile game, we think that we're going to explain these 2 questions by these 2 perspectives. One is for the income and another one is from the profit end.

[Operator]

Thank you. Our next question comes from the line of Linlin Yang from GF Securities.

[Linlin Yang, analyst]

[Foreign Language]

[Interpreted] I have 2 questions. The first question is about the game business. Could you give us some guidance in Q4 and next year? My second question is about your losses of the affiliate companies. After excluding onetime portion, what would be the losses of the affiliate companies? Will there be any further impairment losses in the future?

[Yi Li, executive]

[Foreign Language]

[Interpreted] So our answer is that based on this market guidance for the games, we expect that the annual growth is going to reach to 30%. And currently, we don't have actual number comes out yet because we didn't complete it yet. But next year, we're going to have 5 games launched, 2 of the games were distributed via the agent and 3 of the games is CF Research and developed.

And so we can see that the market is quite expected for the 5 games, especially for the Mecha BREAK. And also we have the word of the wall and like the players develop these type of games that is for these 5 games is quite good and quite attractive in this market. From the number -- for the quality perspective, this is going to be a big year for us.

So for the Kingsoft Cloud, let's talk about the Kingsoft Cloud influence. We can see that the influence is roughly more than RMB 300 million. So this is actually the influence for this continuous, we think that the performance is going to from the 8 point -- just from the 8 points.

For the specific data, we're going to follow up later. And just now that I have a follow-up question is about Q4 for the JX3 Online, what about the expectation for the Q4 data? And our answer is that because we are doing this operation for long term. As we mentioned previously that we celebrate the 15th annual ceremony. So we will do some like quarterly adjustments. We cannot say that Q3 is going to be very high.

[Operator]

Thank you. We have now come to the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn the conference back to Ms. Yinan Li for closing comments.

[Yinan Li, executive]

Thank you for joining us today, and this will conclude our presentation for the 2024 third quarter 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.]