Kingsoft Corp Ltd

HKEX:3888

Earnings Call Transcript 2022-Q4

[Operator]

Good day and thank you for standing by. Welcome to the Q4 2022 Kingsoft Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, Francie Lu, IR Director. Please go ahead.

[Francie Lu, Director, Investor Relations]

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2022 fourth quarter annual results 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 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 Director and Chief Executive Officer]

[Foreign Language]

I'll translate for Mr. Zou. 2022 was full of challenges and uncertainties in which we actively embraced changes, maintained strategic focus and further strengthened our core competitiveness. Kingsoft Office Group was committed to empowering the digital transformation of institutional customers and enhancing the cloud office user experience for individual users.

Our business performance showed resilience with the strategy of multi-screen cloud content, AI and collaboration. Online games business focused on the development of premium games and our flagship and newly launched titles gained popularity. All these achievements have given us confidence to keep advancing our strategy in the enterprise services and online game sectors.

The Group's business continued to make robust progress in 2022 with total revenue reaching RMB 7636.7 million increasing by 20% year-on-year. In 2022, the office software and services business maintained solid growth with revenue of RMB 3890.6 million up 19% year-on-year.

Notably, individual and institutional subscription business grew robustly. Online games and other business experienced solid growth with our new revenue reaching a new record height of RMB 3746.2 million, up 21% year-on-year as the result of outstanding performance of JX World III mobile games.

Operating profit of the Group was RMB 1868.7 million in 2022 increasing significantly by 37% year-on-year. These results reflected the resilience of our business model, efficiency of our business execution, as well as years of investment in R&D of our Group's core products.

Now I'm turning the call to Ms. Li.

[Yi Li, Acting Chief Financial Officer]

Thank you, Francie. Good evening and good morning everybody. Despite the sluggish shipments of global PC and smartphone market, the number monthly active devices of Kingsoft Office Group's main products continued to grow against the trend in 2022. We constantly optimized the user experience of our products in cross-platform scenarios such as cloud and collaboration to encourage users to use cloud document services continuously.

At the end of 2022, the number of documents uploaded to the public cloud platform has exceeded 175.2 billion, up 35% year-on-year. We have continued to add membership privileges of WPS and Docer to attract users to become paying subscribers, enhance user loyalty, achieve stable growth in the number of paying subscribers, increase the proportion of long-term members and optimize the membership structure.

Kingsoft Office Group deeply served the digital transformation of domestic government and enterprises, catered for their needs of efficiency improvement, data management, information security and industry scenario applications and continued to promote their end-to-cloud integration and collaboration process.

We responded to the government demand for standardized, efficient and long-term electronic document management. We launched an electronic document resource library product. Making full use of cloud computing, big data, AI and other technologies, we assisted party and government agencies in building electronic document resource library platforms and supported the full lifecycle management of electronic documents in digital government construction.

For premium enterprise customers, we provided modular digital office empowerment services, continuously advancing the enterprise cloud integration process, addressing core pain points of enterprises, such as improving efficiency, enhancing data security and controlling costs, and assisting enterprises in achieving cost reductions and efficiency improvement. For the public cloud service, our full range of digital office platform products with the tiered versions were utilized to encourage customers to use cloud and collaboration applications in high frequency, which enhanced user engagement and payment retention.

Kingsoft Office Group has closely monitored the localization industry policy changes and customer demand, and taken the initiative to tap local government and industry localization markets in advance. Starting from the replacement needs of industries such as finance, operators and energy, we promoted the adoption of the Windows/Linux dual-version annual venue mode and deepened their cloud and collaboration office process.

Looking forward, following the strategy of multi-screen, cloud, content, AI and collaboration, Kingsoft Office Group will focus on AI to achieve more breakthroughs in technology applications, and continue to explore innovative business models and optimize user experience. At the same time, we will continuously improve service quality, empower government and enterprises with high quality products and technological services, and assist them in achieving digital transformation more effectively.

Online games business continuously cultivated key IP franchises more deeply and broadly, and further enhanced the value of core IPs. Flagship JX Online III marched into its thirteenth year and remained steady, and we put our focus on driving players’ engagement. We launched two expansion packs and conducted multiple in-game events and campaigns to improve player activeness in 2022.

In October, the number of daily active accounts achieved a recent high with the successful release of the anniversary expansion pack for JX Online III, Heng Dao Duan Lang. To further enrich our game content, we actively incorporated traditional cultural elements and launched a series of IP crossover campaigns in this game.

JX World III mobile game, one of the classic JX IP, performed strongly in 2022. In order to bring more immersive and authentic wuxia world experience to players, we continued to introduce distinctive gameplay and content to keep players engaged and entertained. We launched three expansion packs in 2022 on the basis of weekly updates. In August, we released the open beta across all platforms in Chinese mainland.

Looking ahead, we will proactively make progress in new genres and overseas markets. Our new anime games, Snowbreak: Containment Zone and The Other Shore, have received the approval of gaming licenses and are expected to be released in China and aboard from the second half of 2023. We will focus on long-term operation of existing titles. The upgrade version of JX Online III PC game is expected to be launched by the end of 2023, laying the foundation for JX3 Ultimate and ensuring high-quality game iteration.

At the time of our next results starting from Q4 using Renminbi as a [indiscernible] revenue increased just 60% year-on-year and 50% cost on product to RMB 2112 million. The revenue base was 52% for office software and services and 48% for online games and others. Revenue for the office software and services business increased 21% year-over-year and 9% quarter-on-quarter to RMB 1,090.2. The year-over-year increase was mainly due to the sustainable growth of subscription business subscription business and robust growth of institutional subscription business of Kingsoft Office Group.

The solid growth of individual subscription business was mainly driven by the increases in the number of accumulated paying subscribers. The remarkable growth of institutional subscription business was mainly attributable to the increasing demand for the digital office platform products from government and enterprises, conforming to the trend of the digital transformation. The quarter-on-quarter increase was mainly due to the growth of individual subscription business.

Revenue from the online games and others business increased 11% year-on-year and 23% quarter-on-quarter to RMB1,022 million. The year-on-year increase was mainly due to the revenue contribution from JX World III mobile game released in the fourth quarter of 2021, and revenue growth from JX Online III driven by continuous improvement in content, gameplay and overall experience, partially offset by decreased revenue from existing games. The quarter-on-quarter increase was mainly due to robust revenue growth from JX Online III in the fourth quarter, reflecting the successful launch of a large-scale expansion pack which boosted user engagement and in-game consumption.

Cost of revenue is flat year-over-year and quarter-over-quarter to RMB 372 million. Gross profit increased 20% year-on-year and 19% quarter-on-quarter to RMB1,741 million. The gross profit margin increased by 2 percentage points year-over-year and quarter-on-quarter to 82%.

R&D costs decreased 3% year-on-year and increased 3% quarter-on-quarter to RMB661 million. The year-on-year decrease mainly reflected fluctuations of outsourcing expenses.

Selling and distribution expenses increased 9% year-on-year and decreased 6% quarter-on-quarter to RMB335 million. The year-on-year increase was mainly due to increased marketing spending of Kingsoft Office Group to expand its presence in the domestic enterprise market, partially offset by reduced promotional spending of online games business as the result of fewer new released games in the fourth quarter of 2022. The quarter-on-quarter decrease was mainly due to a large-scale of promotion for JX World III mobile game in the third quarter of 2022.

Administrative expenses increased 5% year-on-year and 4% quarter-on-quarter to RMB163 million.

Share-based compensation costs decreased 18% year-over-year and 5% quarter-on-quarter to RMB60 million.

Operating profit before share-based compensation costs increased 68% year-over-year and 72% quarter-over-quarter to RMB679 million.

Net other losses for the fourth quarter of 2022 were RMB42 million, compared with gains of RMB28 million for the fourth quarter of 2021, and losses of RMB6,487 million for the third quarter of 2022, respectively. The losses in the fourth quarter of 2022 were mainly due to the impairment provisions of certain investee companies. The losses in the third quarter of 2022 primarily resulted from the provision for impairment on the investment in Kingsoft.

Share of losses of associates were RMB256 million for the fourth quarter of 2022, compared with losses of RMB580 million and RMB414 million for the fourth quarter of 2021 and the third quarter of 2022, respectively.

Income tax expense for the fourth quarter of 2022 was RMB146 million, compared with income tax expense of RMB53 million for the fourth quarter of 2021 and income tax credit of RMB588 million for the third quarter of 2022, respectively. The income tax credit for the third quarter of 2022 was mainly attributable to the deferred tax effect of the impairment provision recognized for Kingsoft.

As a result of the reasons discussed above, profit attributable to owners of the parent was RMB47 million for the fourth quarter of 2022, compared with loss of RMB335 million and RMB6,055 million for the fourth quarter of 2021 and the third quarter of 2022, respectively.

Profit attributable to owners of the parent excluding the effect was RMB82 million for the fourth quarter of 2022 compared with loss of RMB292 million and RMB6,007 million for the fourth quarter of 2021 and the third quarter of 2022 respectively. The net profit or loss margin excluding the effect was 4%, minus 16% and minus 327% for this quarter the fourth quarter of 2021 and the third quarter of 2022 respectively.

Now I'm on the year 2020 [ph]. Revenue increased 20% year-over-year RMB 7,637 million. Office software and services made up 51% increased 19% year-over-year to RMB 3,891 million. Online games and others made up 49% an increase of 21% year-over-year to RMB 3,746 million. GP margin decreased 1percentage point year-over-year to 81%. Operating profit before share based compensation costs increased 35% year-over-year to RMB 2,129 million.

Net other losses at the time was RMB6,498 million, compared with profit of RMB 398 million for the last year. The Group had a strong cash position towards the end of 2022. As at 31st December 2022, the Group had cash resources of RMB 21 billion. Net cash generated from operating activities were RMB2,574 million and RMB2,220 million for the years ended 31 December 2022 and 31 December 2021 respectively.

Capital expenditures was RMB5001 million and RMB364 million for the years ended 31 December 2022 and 31 December 2021, respectively. In 2022 we achieved said growth. In 2023 we will continue to see progress while maintaining stability and strong business growth with technology and service innovation.

For office software and service business we will continue to empower enterprise digital transformation, focus on AI to achieve more breakthroughs in technology application, reconstruct and optimize the membership system, further promote the transformation of subscriptions.

For online games business, we will continue to extend the longevity of premium games based on original IPs, actively expand new game genres, and pursue opportunities in overseas markets. Amid increasingly fierce industry competition, we believe that by relying on technology innovation, products and services enhancements and operations optimization, we will achieve further high-quality development.

Thank you all, and now I'll turn to Francie.

[Francie Lu, Director, Investor Relations]

Thank you Ms. Li. Hello, operator?

[Operator]

Hello there.

[Francie Lu, Director, Investor Relations]

Hi. We are ready for the Q&A session. And for the Q&A session for anyone who asks questions, please state your question in English and Chinese Mandarin if possible. Thank you.

[Operator]

Thank you. [Operator Instructions] First question is from the line of [indiscernible] from CICC. Please go ahead

[Unidentified Analyst]

Hi. [Foreign Language] So thanks management for taking my questions and I got two questions here. My first question is regarding our gaming business. So we've seen a recovery in the gaming license issuance in the past few months. So could you please update us with your latest gaming pipeline and especially in the overseas market and also the growth outlook for the segment in 2023?

My second question is related to our office software business. So it seems our monthly active devices dropped a little in the December from the September level. So could you please elaborate on the reasons behind and what's your expected trend for this year? Thank you.

[Tao Zou, Executive Director and Chief Executive Officer]

[Foreign Language]

[Francie Lu, Director, Investor Relations]

I'll translate for Mr. Zou. So for the game business, it was similar to our expectation. The license approval recovered, and we have got the license approval for both Shen Jianxin and [indiscernible]. So right now we have a new game called [indiscernible] II. This game we are planning to launch in the recent term. We did a small scale testing in the recent past, and we are planning to do the official launch probably in this week. And for Shen Jianxin and [indiscernible], these two games, we are planning to launch them in the second half of this year, probably in July.

As you all know, close to the end of December, close to the end of last year in December, we had the COVID pandemic situation and also we had the Chinese New Year. So we haven't started the monetization testing for these two games and we're planning to do the monetization testing for these two games in March, and we'll launch them in July or second half of this year.

We have another game called JX I: Gui Lai. This game we're planning to launch in Vietnam first, and its domestic launching will depend on the license approval progress. We expect to launch it probably in the second half of this year as well.

And regarding the outlook of the gaming business for 2023 the JX III flagship PC game is still very strong. We expect a stable performance of this game for 2023. And for JX World III mobile game and JX I: Gui Lai there may be a slight decline in this post billing due to the life, due to its life cycle.

And the other new games, we're planning to launch them in the second half of this year. Until we have our first month's data for these mobile games, we will take a more conservative take on the outlook expectation. So now we are expecting a single digit growth rate for the game business in 2023.

[Yi Li, Acting Chief Financial Officer]

[Foreign Language]

[Francie Lu, Director, Investor Relations]

Okay. Yi Li just corrected the game that we're planning to launch in Vietnam is called JX [indiscernible] instead of JX I: Gui Lai.

[Tao Zou, Executive Director and Chief Executive Officer]

[Foreign Language]

[Francie Lu, Director, Investor Relations]

Okay. I'll translate for Mr. Zou. So regarding your question on the monthly active devices decline by the end of December, I will explain this in both PC and mobile and domestic and overseas market. On the PC side, despite the impact of the COVID pandemic by the end of last year, we still have a quarter-on-quarter increase if you look at the data of the PC and MAD data numbers. So PC continued to grow quarter-on-quarter.

We did experience a slight decline on the mobile side in both domestic and overseas markets. I think the main reason behind this was due to the COVID pandemic, which affected both employees and also students in both domestic and overseas markets. So the PC maintain stable and the PC on your gross rate was 11%. Thank you.

[Francie Lu, Director, Investor Relations]

Hi, operator. We're ready for the next question.

[Operator]

Thank you. So, we'll now take the next question. Please stand by. And this is from the line of Linlin Yang from GF. Please go ahead.

[Linlin Yang, GF Securitites]

[Foreign Language]

My first question, questions about the growth of expenses in 2023. How do you expect and my second question is how before – could you share some opinions about GPT-4 and combination with office and preparations have you made? My third question is about, [indiscernible] could you share more details about the testing performance about this game, and how do you expect this to resonate? Thank you.

[Yi Li, Acting Chief Financial Officer]

[Foreign Language]

[Francie Lu, Director, Investor Relations]

Okay, I'll translate for Ms. Li. So regarding for the expenses growth of 2023, we expect the number of employees to remain stable. If you look at the number for 2022 which was similar to 2021, this situation will be similar for 2023 because we focus on the R&D development and the number of employees and developers will remain stable. And for the profitability expectations for 2023, we are expecting a reasonable profitability in 2023.

[Tao Zou, Executive Director and Chief Executive Officer]

[Foreign Language]

[Francie Lu, Director, Investor Relations]

I'll translate for Mr. Zou. To discuss on your question regarding the GPT, we think that especially for the Microsoft and GPT 4.0 and Microsoft combined with its office products, we pay closely, close attention on GPT since its 3.5 launched last year and also on the Microsoft new release. We think that this AI is revolutionary compared with what we had five years ago with AlphaGo, on the chess play. This time we think it's closely related to our life and work style.

We also want to improve the efficiency of our products and for our users. So, we are going to invest in the R&D in this sector and we do have new products under development, and we are planning to show the -- or to introduce our new products in the first half of this year in appropriate channels and applications. So we know that currently our technology compared with GPT 4.0, we are still behind what GPT 4.0 could offer. So we may take more time to catch up its level, but we think that in certain applications scenarios we are developing quickly and we are going to have new products under development as well.

[Tao Zou, Executive Director and Chief Executive Officer]

[Foreign Language]

[Francie Lu, Director, Investor Relations]

Okay. I'll translate for Mr. Zou. So regarding your question on the [indiscernible] game, we did a small scale testing on our website recently. From its performance and data, we think that the game itself actually met our expectation for the testing. So we are going to see how it will perform when we have a full platform, full platform release. Thank you.

Thank you, Operator. We're ready for the next question.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time, so I will hand back to you. Thank you, speakers. There are no further questions coming through at the moment.

[Francie Lu, Director, Investor Relations]

Okay, thank you, operator. So we're now going to conclude our presentation for today and thank you for joining us. Thank you.

[Operator]

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