Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 2020 Fourth Quarter and Annual Kingsoft Corporation Earnings Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker for today, Ms. Francie Lu. Thank you. Please go ahead.

[Francie Lu, executive]

Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2020 fourth quarter and annual 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 join us today: Mr. Zou Tao, our Executive Director and CEO; and Mr. Francis Ng, our Executive Director and CFO.

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

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll do the translation for Mr. Zou. In the landmark year, we took advantage of the industry trend to expand our core businesses. Kingsoft Office Group seized the opportunity for online collaboration and brought high-quality products and services to a larger group of users. Meanwhile, online game business continue -- made continued efforts to strengthen the R&D capabilities, maintaining longevity and vitality of core games and achieved steady growth. We believe that the efforts will lay a solid foundation for our further penetration in the office service market and online gaming market.

We achieved a solid growth in 2020, with revenue up 28% year-on-year to RMB 5,594 million. The momentum continued in both office software and services business, as well as online games and other business, with revenue of the segment surging by 43% and 19% year-on-year, respectively.

In tandem with our strong revenue growth, our operating profit increased 83% year-on-year to RMB 1,855 million during the year.

And now I'm turning the call to our CFO, Francis.

[Yuk Keung Ng, executive]

All right. Thank you, Francie. Hi, everyone.

Our office software and service business achieved outstanding performance, with revenue increased significantly by 43% year-on-year during the year.

For government and enterprise business, Kingsoft Office Group is committed to accelerate the development within the industry and has assisted in the formulation of certain office application and services standards.

In addition, Kingsoft Office Group has completed product application with its development partners and consolidated cooperation with other core hardware and software suppliers, which further optimize office ecosystem development.

Riding the wave of remote working, online collaboration has become the new core product strategy for Kingsoft Office Group, and a series of online collaboration products has been launched in 2020. In addition, Kingsoft Office Group has launched WPS Plus for micro, small and medium enterprise.

As a beneficiary of rising demand due to increased remote working amidst the pandemic, the market penetration and customer loyalty of WPS Plus cloud office services has significantly improved.

Kingsoft Office Group's personal subscription business achieved outstanding performance during the year, driven by the rapid growth in number of WPS members. Kingsoft Office Group focused on expanding content and resources to promote organic growth of WPS members. And the key operational indicator of personal cloud services grew rapidly. Kingsoft Office Group also expanded channel for marketing to enhance the penetration rate of paying subscriber.

In addition, WPS Office will feature as one of the second-level examination subjects in the National Computer Rank Examination, demonstrating significant progress in terms of awareness of our office software solution in China.

Looking ahead, Kingsoft Office Group will continue to adhere to technological empowerment and user-oriented principle, aiming to drive office innovation for individual and enterprise user globally.

During the year, online game business delivered a steady year-on-year growth, mainly attributable to the focus in product development and a stable growth of core premium games. JX Online III and other PC game of the JX Series has achieved double-digit growth during the year. In the fourth quarter, online game business launched Feng Tian Zheng Dao, the anniversary expansion pack for JX Online III mobile.

Mobile game business recorded stable performance. Double Life World [Foreign Language] was launched in South Korea this year, and it won the Google Play's Best Innovative Games of 2020 award in South Korea.

Online game business continued to enhance the inference of JX IP and make strong effort to expand its presence in the cultural and creative industry.

JX Online III: The Adventure of Shen Jianxin in Chang'an, an animation series based on the JX Online III was released on Bilibili in October 2020 and was much welcomed by our gamers. Multiple film and television production based on the JX IP has been in process in 2020.

Looking forward to 2021, online game business will continue to place its emphasis on the JX series to drive sustained growth.

Meanwhile, we are also committed to invest in the R&D of new games genre and operation, aiming to enhance its competitiveness within the overall online gaming industry.

As for financial result, I'm starting the Q4 using RMB as a currency. Revenue increased 8% year-over-year and 15% quarter-over-quarter to CNY 1,606 million. The revenue split was 53% for our online game and others and 47% for office software and services.

Revenue from our online games and other business decreased 9% year-over-year and increased 5% quarter-over-quarter to CNY 849 million. The year-over-year decrease was mainly due to the declined revenue from JX Online III as a large-scale expansion pack being successfully launched in the fourth quarter of 2019. And the quarter-over-quarter increase was mainly due to the healthy growth of JX Online III, partially offset by the decreased revenues of mobile games.

Revenue from office software and services increased 30% year-over-year and 29% quarter-over-quarter to CNY 756 million. The year-on-year increase was primarily due to, firstly, the rapid growth of institutional licensing from enterprise and government users. And secondly, solid growth of individual subscription services, driven by the increased demand for remote working and cloud collaboration. The sequential increase was mainly due to the strong revenue growth from licensing business and subscription services.

Cost of revenue increased 11% year-over-year and 8% quarter-over-quarter to CNY 259 million. The year-over-year increase was mainly due to the higher server and data storage costs associated with the increased user as well as greater content costs associated with increased personal subscription service of Kingsoft Office Group. The quarter-over-quarter increase was mainly due to the greater channel costs associated with the increased revenue of the licensed game.

Gross profit increased spend [ 10% ] year-over-year and 16% quarter-over-quarter to CNY 1,347 million. Gross profit margin kept flat with the fourth quarter of 2019 and increased by 1 percentage point quarter-over-quarter.

Our R&D costs net increased 5% year-over-year and decreased 12% quarter-over-quarter to CNY 427 million. The year-over-year increase was mainly attributable to increased personnel-related expenses. And the quarter-over-quarter decrease was primarily due to the accrual bonus.

Selling and distribution expenses increased 22% year-over-year and 25% quarter-over-quarter to CNY 278 million. The increases were primarily due to an increase in marketing and promotion spending of Kingsoft Office Group in expanding the enterprise and government market.

Administrative expenses increased 9% year-over-year and 21% quarter-over-quarter to CNY 142 million. The increases were largely due to the increased staff-related costs and professional services fee.

Share-based compensation costs increased 107% year-over-year and 159% quarter-over-quarter to CNY 81 million. The increases were primarily due to the new grants of awarded shares to selected employees of certain subsidiaries of the company.

Operating profit before share-based compensation costs increased 16% year-over-year and 63% quarter-over-quarter to CNY 641 million.

Net other losses were CNY 111 million compared to the net other gains of CNY 48 million in the corresponding period last year and the net other gains of CNY 368 million in the third quarter 2020. The net other losses in the fourth quarter of 2020 were mainly due to the recognition of losses on deemed disposal of Kingsoft Cloud as a result of the dilution impact of exercising of its employee options. The net other gains in fourth quarter of 2019 was mainly due to the regulation of gain on deemed disposal of partial interest in a subsidiary. The gain in the third quarter 2020 were mainly due to the fact that we recognized a gain on deemed disposal of Kingsoft Cloud of CNY 301 million as a result of dilution impact of issue of new share of Kingsoft Cloud.

Finance cost was CNY 36 million compared to -- compared with finance costs of CNY 4 million and CNY 37 million for the fourth quarter of 2019 and third quarter of 2020. The year-over-year increase was primarily due to the issued convertible bonds in April 2020, with the interest rate of an equivalent market interest rate for a similar bond in accounting treatment, which would not result in cash outflow but instead of the actual yield to maturity.

We record share of losses of associates of CNY 21 million compared to share of losses of CNY 402 million for the fourth quarter of 2019 and share profit of CNY 12 million for the third quarter of 2020. Losses in fourth quarter 2020 were mainly due to the losses recognized in Kingsoft Cloud, partially offset by the profit recognized in Cheetah Mobile. And the losses in fourth quarter 2019 were mainly due to loss recognized in Cheetah mobile. And the profit in third quarter 2020 were mainly attributable to the gains recognized in Cheetah Mobile and which partially offset by the loss recognized in Kingsoft Cloud.

Income tax expenses increased 46% year-over-year and 1,068% quarter-over-quarter to CNY 140 million. The increases were mainly due to the accrued withholding tax and higher operating profit we recognized in this quarter.

As a result of the reasons discussed above, the profit attributable to the owners of parent, including those from continuing operation and discontinuing -- discontinued operation was CNY 221 million compared to losses of CNY 99 million in the corresponding period last year and profits of CNY 667 million in the third quarter of 2020.

Profit attributable to the known owner of parent, excluding eShop, which also including the debt from continuing operation and discontinued operation, was CNY 266 million compared to a loss of CNY 56 million in the corresponding period last year and a profit of CNY 687 million in the third quarter of 2020.

The net profit or losses margin, excluding the effect of share-based compensation, was 17%, minus 2% and 49% of the 3 months ended December 31, 2020, December 31, 2019 and September 30, 2020, respectively.

Now on year-ended 2020. Revenue increased 28% year-over-year to CNY 5,594 million. Online games and other made up 60%, increased 19% year-over-year to CNY 3,337 million.

Office software and service make up 40% and increased 43% year-over-year to CNY 2,257million.

Gross profit margin increased 3 percentage points year-over-year to 84%.

Profit to owners of parent, including that from continuing operation and discontinued operation, was CNY 10,045 million compared to a loss of CNY 1,546 million for the year 2020 and 2019, respectively.

On the balance sheet, we have cash and bank deposit of CNY 14.1 billion at year-end of 2020.

Remember that we have approximately CNY 400 million, which were recorded in a short-term deposit, which is basically very similar to the bank and cash. Adding the 2 together, we have approximately about [ CNY 80 million ] at year-end.

Net cash generated from operating activity, including those from continued operation and discontinued operation was CNY 2,991 million.

Capital expenditure, including that from continuing operation and discontinued operation, was CNY 684 million, CNY 1,362 million for the year ended December 31, 2020 and December 31, 2019, respectively.

Amidst the tough economic environment and the global COVID-19 pandemic in 2020, we still managed to achieve a solid performance. Looking ahead, we will continue to focus on our office software and service business and continue to deepen our online collaborative and cloud office strategy, aiming to improve the industry's ecological development and our core competitive advantage.

Regarding our online game business, we will continue to maintain the solid development of our core games while bringing new gaming genre to further strengthen our development in the online game business. We remain confident of our robust operation -- operational outlook and sustained growth for 2021.

That ended my brief introduction. And I hand over the floor for question and answers.

[Francie Lu, executive]

Thanks, Francis. Operator, we're ready for the Q&A session.

[Operator]

[Operator Instructions] First question comes from the line of Yiwen Zhang of Citigroup.

[Yiwen Zhang, analyst]

[Foreign Language]

The first question is regarding online game business. Can management update the pipeline and the timetable and also the publishing decision whether we are to self publishing or whether we will license to third-party.

And secondly on the WPS business. Can you comment on the government and the enterprise business. What kind of growth do we see for 2021 given 2020, there's COVID impacting continuing work. So what kind of growth trajectory do we see for this year?

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Mr. Zou first. Regarding the game plan and pipeline for 2021, first, we have the self-developed and self-published games. That include the JX Online III mobile game of Nostalgia version. And also the JX World III. JX World III mobile game, originally we plan to launch the game in the first half of this year, but now it may be delayed to the September of 2021.

And secondly, we have the licensed mobile game, more 3D version. This one, we plan to launch the game in the second half of this year. The [indiscernible] 2D version, we launched that game in 2017.

And thirdly, the [ Wulin 2 ]. This one we're cooperating with Tencent. And this game, we plan to launch in July or August of 2021.

And also we have another licensed game. It's called FFBE II. This one we already got a license approval early this year. And now we plan to launch the game in the second quarter or the third quarter of 2021.

And lastly, we have a game that's called [ Wulin Xian Xia ] for the tentative name of the mobile game. This one, we plan to cooperate with a third-party partner. And this one, we plan to launch the game in June or July of 2021.

So, so far, these are the major game projects that we have for 2021. But the detailed time line will be depending on the -- our partner and also the maturity of the game development.

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Francis. So regarding the question on the WPS, the [ Syndrome ] project development. For 2020, you mentioned that due to the COVID, our development was slower than expected. But for 2021, I recently also joined the Kingsoft Group -- Kingsoft Office Group Board meeting and discussed on the 2021 plan with their Board. But because PSO is also an independent listed company, so to avoid future issues, they explicitly stated that they are not going to give any future financial guidance. So as the parent company, we do not want to disclose more than what Kingsoft Office disclosed to the market.

But I do have 2 things to share with you. First is that we are very confident on the development of the [ Syndrome ] project. This is not going backwards. But how fast the development is, is not controlled by any one single company. It's more a government-driven project.

And secondly, last year, our target for the [ Syndrome ] project, that we want to get over 90% of the total market share in this project. And eventually, our actual market share was close to 94%. And this trend will continue in 2021. We want to continue to maintain the leader in terms of the market share of the [ Syndrome ] project.

[Operator]

The next question is from the line of Thomas Chong of Jefferies.

[Thomas Chong, analyst]

[Foreign Language]

The first question is how should we see the competitive landscape of mobile games in 2021?

The second one is how are we going to use the cash. Is there any possibility of M&A activities and what are the potential targets?

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Mr. Zou. So regarding the question on the mobile game competition landscape for this year, I would like to comment a few points of my understanding for the game competition landscape in the future.

So first one is the multiple channels development on the game distribution. And the second one is the shift of the competition to more core and premium games. So we noticed that in the last year, the quality of the mobile games are becoming better and better on the mobile game development. So there is a shift to more and more core and premium mobile games overall.

And thirdly, I think that the -- in the past years, this happened in the past years, and this will also continue to happen in the future, is that the mobile games are more -- or the users of the mobile games are more focused on the first tier products. So the market share of the first tier products are becoming larger and larger, and the users and the gamers are more focused in the first tier game product.

And lastly, I think that there is a requirement for the innovation of the mobile game development. So we think that in the future, there will be more innovation in the mobile game development.

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Francis. So regarding the question on how we use our cash and the merchant acquisition consideration, so I want to clarify that we do have a good level of cash on hand, and we would like to invest it in the direction of our core business, which include online collaboration and the cloud direction.

In the recent U.S. and China competition on technology, we do see there is a high demand in the domestic core technology development. So we are -- Kingsoft is actually in a very good position in this direction. So we would like to invest more in the core tech products and also in the SaaS direction.

And we also have Wuhan strategy. So we are building a large-scale R&D center in Wuhan as well. And our merchant acquisition plan is also closely related to our strategy. So we would like to consider the potential merchant acquisition opportunities alongside with our core strategy of the business.

[Operator]

Yes. Our next question is from the line of Yang Linlin of GF Securities.

[Linlin Yang, analyst]

[Foreign Language]

The first question is about [ JX Online ] III. [ JX Online ] III has increased in the fourth quarter quarter-on-quarter and seems it rebounded in the second half year of 2019. What about the 2021 and future growth? What is the driver?

The second question is about the guidance, about the guidance about our 3 business, such as gaming business and WPS and cloud in 2021.

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

I'll translate for Mr. Zou. So regarding on the question for the growth driver for JX Online III PC game, so we think that there is a strong growth for JX Online III PC game since the expansion pack was launched in the fourth quarter of 2019. But I believe that the growth in 2019 and 2020 is not unusual. The game was launched in 2009. And ever since 2012 to 2017, the game has experienced strong growth in the past years. So our plan is that we launch 3 expansion packs every year. So basically, 1 expansion pack every 4 months. And we provide new game content in each expansion pack to continuously attract the gamers to play this game.

In 2018 and 2019, we did an upgrade on the game engines because the game was developed in 2003 to 2009 so -- because we think that there will be a long life cycle for this game. So we think that it's quite important for us to do a complete upgrade on the game engine for the game to continue to grow in the long term.

So in 2018 and 2019, in those 2 years, the game performed -- the gross -- the game performed differently from the previous strong growth in the previous years. But ever since we have done the upgrade on the game engine, we started to launch expansion packs again in the fourth quarter of 2019. The game started to grow again quite successfully.

So we proved ourselves in 2020 that the 3 expansion packs launching plan is still a quite successful strategy for JX Online III PC game.

So I want to clarify that we didn't do much special things in 2020. Even though the content is quite different, we upgrade the game content in each expansion pack, but our strategy actually stayed the same for operating this game.

And another thing I want to state is that other than the in-game, game content upgrade for the JX Online III PC game, we also did a lot of other things for this game in the past years, which include the animation, include the online competition and also the TV fiction. We did a lot of things around the JX III PC IP.

So whether the game -- the gamers are still playing the game is not the only factor to decide they are still a gamer for JX III. If they still follow our -- the animation or TV online competition, then we consider that these games are still in our circle, in our JX Online III ecosystem.

So in addition that we are going back to the extension pack launching schedule in the future, we are also going to continue to focus on the operation of our JX III ecosystem for this game in the future as well.

So in addition to these 2 factors, for 2021, another special thing that we're going to do for JX Online III PC game is that we are planning to launch the JX Online III PC classic version by the end of May this year. This game is not a new game. It's actually a game that's targeted to a lot of the gamers that I mentioned earlier that they might stop playing the game some time in the past, but they still follow our IP. And then now they may have more time, and they may want to play the game again in the future. But since the game have been operating for a long time in the past, so we did a lot of updates for the game. So we do plan to launch [ Nostalgia ] version for this type of gamers, so then they can come back and play the game again.

[Yuk Keung Ng, executive]

[Foreign Language]

[Francie Lu, executive]

Okay. I'll translate for Francis. Like I said earlier, that Kingsoft Office and Kingsoft Cloud are both independently listed companies. So as the parent company, we could only share on the overall picture and direction for these 2 businesses. For detailed guidance, they will also give out their specific guidance for 2021.

So I know that Kingsoft Cloud, they also share their quarterly guidance, like the other U.S.-listed companies. So we are also a large shareholder for Kingsoft -- Kingsoft Cloud, and they are an important associate company to us. We are quite satisfied with their 2020 performance in both their financial performance and also in their share price performance. Their revenue growth was over 60% last year, which outperformed their original guidance. And their profit margin also improved due t our economies of scale and also their control in costs, including CDN and also their adjusted EBITDA, which breakeven by the year-end.

So in the -- for the 2021, we also remain confident with their future performance. We believe that they will continue to maintain a relatively high-growth rate in terms of revenue and then their profitability will continue to improve. And their financial cloud and also health care cloud will also continue to improve in addition to their strong growth from the video cloud sectors. And also their share price grew 3x in the past year. So we are also confident with their future performance.

And the same thing apply to Kingsoft Office. We are confident with their 2021 performance. The team is very strong in the [ Syndrome ] project. We are going to continue to maintain our leading position in this project. But like I said earlier, that project itself is not dependent on any single company. So it's more government-driven. But we believe that this project will not go backward, and we are going to maintain our leading position in the project.

And thirdly, for the game business, Tao Zou already mentioned the 2021 game pipeline. So we are confident with the future game performance. We have the JX III Nostalgia version. And also, we have a number of mobile games to be launched in 2021. So we are quite confident with the revenue growth for the game business. We believe that the growth will not be less than what we had in 2020 in terms of the top line growth.

And also we have a publishing team for the game business. Now we have over 100 people in this team. So in 2021, we also have a number of published games in this business. So the revenue will continue to grow.

Regarding the profitability, we believe that the absolute dollar terms will continue to grow, but the growth may be less than growth in revenue. This is because that in 2021, the salaries will improve significantly for our game employees.

And also for the published games, we -- if the number of published games increase, the revenue will increase. But this will somehow dilute our profitability, because we do -- we will encounter initial costs for publishing games. So the gross profit margin of the publishing games may be less than the self-developed, self-published games.

[Linlin Yang, analyst]

[Foreign Language]

[Tao Zou, executive]

[Foreign Language]

[Francie Lu, executive]

We'll closely monitor, but we don't have the specific time line for the merchant acquisition.

Thank you. We will now conclude our presentation for today. Thank you.

[Tao Zou, executive]

[Foreign Language]

[Operator]

Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.