Kingsoft Corp Ltd

HKEX:3888

Earnings Call Analysis

Solid Revenue and Profit Growth for Kingsoft

In 2023, Kingsoft continued its growth journey with total revenue hitting RMB 8,534 million, a 12% increase from the previous year. The office software and service sector saw a 17% rise to RMB 4,557 million in revenue, while online games and other businesses also grew by 6%, contributing RMB 3,977 million. The Group's technological focus and continuous product investment resulted in a 19% year-on-year operating profit leap to RMB 2,227 million. The launch of WPS AI and upgrades to WPS Office were significant milestones aimed at enhancing user experiences. Notably, Kingsoft's R&D expenses climbed by 4% to CNY 685 million to support innovation, and the firm's operational efficiency before share-based compensation costs surged 17% year-on-year to CNY 792 million.

Robust Revenue Growth in 2023 Amidst Expansion Initiatives

In 2023, the company had overall solid growth with a 12% increase in total revenue, reaching RMB 8,534 million. The office software and services segment was particularly strong, with a 17% jump in revenue, amounting to RMB 4,557 million. The online games and other businesses also saw a rise, contributing RMB 3,977 million to the revenue pool, up 6% year-on-year.

Operating Profits and Strategic Developments

Operating profits soared by 19% to RMB 2,227 million due to the company's commitment to technology-driven businesses and an ongoing investment in product and technology to enhance user experience. On the strategic front, the company launched WPS AI, an intelligent office application, and conducted public beta testing, laying the groundwork for future commercialization.

Institutional Advancements and Cloud Service Push

Institutional offerings were bolstered by upgrading WPS 365 to cater to government and enterprise clients. The company also pushed for cloud adoption and collaboration applications, aiding customers in managing digital assets and increasing market penetration through channel partners. Additionally, the company ceased its domestic third-party advertising business in December 2023 as part of focusing on user-centric strategies.

Growth in Online Games and Foray into New Genres

The online games business experienced steady growth, with the flagship game, JX3 Online, hitting a record annual revenue after 14 years of operation. New territories were explored with the launch of World of Sword Origin in Vietnam, and the company expanded its anime and overseas market footprint with Snowbreak: Containment Zone. Moreover, the debut of Mecha BREAK received international attention, signaling the company's venture into new gaming genres.

Financial Highlights of Q4 2023

Q4 saw a 9% increase in revenue year-on-year and a 12% bump quarter-on-quarter to CNY 2,310 million. Office software and services commanded 56% of revenue, with a notable 18% year-on-year growth due to increased subscriptions. Online games revenue remained consistent year-on-year but rose by 7% quarter-on-quarter, thanks to the performance of World of Sword Origin. Gross profit margins remained steady year-on-year and inched up by 1 percentage point quarter-on-quarter to 82%. R&D costs grew modestly, reflecting continuous product and service enhancement initiatives.

Operating Profit and Net Gains Improvement

Operating profit before share-based compensation showed a robust increase of 17% year-on-year and an impressive 76% quarter-on-quarter jump to CNY 792 million. Additionally, the company ended Q4 2023 with CNY 8 million in net other gains, a turnaround from the CNY 42 million loss in the same period of the previous year.

Earnings Call Transcript 2023-Q4

[Operator]

Good day and thank you for standing by. Welcome to the 2023 fourth quarter and annual 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 speaker today, Yinan Li. Please go ahead.

[Yinan Li, executive]

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2023 fourth quarter and annual results earnings call. I'm Li Yinan, the IR Director of Kingsoft.I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our information and information from other sources, which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors, which may affect our business and operations.Additionally, in today's earnings call, the management will deliver prepared remarks in both Chinese and English. A third-party interpreter will provide 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. Onsite 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]

[Interpreted] Hello, everyone. In the year 2023, the group's overall performance maintained solid growth despite challenges. We actively promoted our core business to lay a solid foundation for sustainable development in the future. Focusing on the strategy of multi-screen, cloud, content, collaboration and AI, Kingsoft Office Group continued to invest in R&D of AI and collaboration, and strengthened the competitiveness of our products through technological innovation, product iteration, performance enhancement and other initiatives. In terms of online games business, we adhered to the original intention of creating prime games and insisted on long-term operation. As developing wuxia games, we are also making incremental progress in exploring new game genres.In 2023, the group's business demonstrated growth resilience with the group's total revenue of RMB 8,534 million representing a year-on-year increase of 12%. The office software and service business maintained solid operation, with annual revenue of RMB 4,557 million, representing a year-on-year increase of 17%, driven by the growth of domestic individual and institutional subscription businesses. Revenue from online games and other business amounted to RMB 3,977 million, representing a year-on-year increase of 6%, mainly driven by the strong growth of JX3 Online. Operating profit of the group amounted to RMB 2,227 million in 2023, increasing by 19% year-on-year. These results reflect our efforts to adhere to the technological-driven businesses, continuously invest in product and technology, and [ adhere ] user experience.Now, I'm going to turn the call to Ms. Li Yi.

[Yi Li, executive]

Thank you. Good evening, and good morning, everyone. Kingsoft Office Group has released WPS AI, an intelligent office application, powered by large language models, focusing on the development of 3 strategic directions: AI Generated Content, Copilot and Insight. WPS AI officially launched public beta testing in the Chinese Mainland in the fourth quarter, laying a solid foundation for further commercialization. We have also upgraded the WPS Office to improve user experience. In addition, we continued to improve the end-to-cloud integration experience and enhanced user activity in the cloud. While adhering to long-term membership strategy, we have upgraded the membership benefits structure, launched the super membership system to meet the needs of different users through a flexible combination of benefits.For institutional customers, we have upgraded WPS 365, new productive forces in office, to provide content creation, office collaboration, open ecosystem and digital asset management capabilities. We continued to promote the end-to-cloud integration and collaboration process and focused on the business scenarios of government and premium customers of state-owned and private enterprises.We deepened product capabilities to serve industries such as finance, transportation, energy, publishing, healthcare, consumer retail, high-end manufacturing and the Internet, incubated secure and efficient solutions that can be applied across the industry, and continued to replicate typical cases for widespread adoption. Meanwhile, we have been continuously collaborating with premium customers to explore feasible solutions for the implementation of WPS AI in government and enterprise office scenarios to advance its application in various industries and office settings.In the field of public cloud service, we encouraged customers to use cloud and collaboration applications, enabling them to manage their digital assets, and expanded market reach with channel partners. By highlighting the features of our products, we attracted enterprise customers and increased their user engagement and payment retention.We have closely monitored the localization industry policy changes and customer demand, and taken the initiative to tap local government market in advance. Under the localization industry, starting from the replacement needs of localization industries such as finance, energy and operators, we promoted the adoption of the new license mode and deepened their cloud and collaboration office process. We put users first and officially shut down our domestic third-party advertising business in December 2023.In terms of overseas business, based on our solid foundation in the mobile sector, we continued to cultivate our user base on desktop platforms. Looking ahead, Kingsoft Office Group will continue to focus on AI and collaboration, further polish the products and provide high-quality AI collaborative office products and services to individual and institutional users.In 2023, the online games business saw steady growth. The flagship game, JX3 Online, demonstrated resilience and strong vitality. It has been in operation for 14 years and achieved a record high in annual revenue. JX3 Online continued to iterate and release new expansion packs with upgraded graphics, providing players with more diverse and enriched gaming experience. World of Sword Origin was successively launched in Vietnam and Chinese Mainland, attracting dedicated players with its classic gameplay and [ nostalgic ] appeal, which also contributed to the global reach of traditional Chinese culture.The global release of the anime shooter game, Snowbreak: Containment Zone, expanded the user base of anime and overseas markets. The sci-fi mech game Mecha BREAK made its debut at The Game Awards at the end of the year, gaining widespread attention from international market for its art design and innovative gameplay, eagerly awaited by global players.Looking forward to 2024, the release of JX3 Ultimate will offer players brand-new experience across multiple platforms. We will continue to expand into new genres, refine sci-fi mech game Mecha BREAK and continuously optimize anime game Snowbreak: Containment Zone.As for the financial results, I'm starting from Q4 use RMB as the currency. Revenue increased 9% year-on-year and 12% quarter-on-quarter to CNY 2,310 million. The revenue split was 56% for office software and services and 44% for online games and others. Revenue from the office software and services business increased 18% year-on-year and 17% quarter-on-quarter to CNY 1,286 million. The increases were mainly due to the growth of both domestic individual office subscription business and institutional subscription business of Kingsoft Office Group.The growth of domestic individual office subscription business was mainly attributable to the increases in both the paying ratio and average revenue per paying user, resulting from enriched membership benefits and upgraded membership system. The growth of institutional subscription business mainly benefited from the increase in cost reduction, efficiency improvement and digital transformation needs of government and enterprises, as well as our optimization of products and services to improve the intelligent office experience and accelerate order conversion.Revenue from the online games and other business kept flat year-on-year and increased 7% quarter-on-quarter to CNY 1,024 million. The quarter-on-quarter increase was primarily driven by the revenue contribution from World of Sword Origin released in Chinese Mainland in September, partially offset by decreased revenue from certain existing games.Cost of revenue increased 11% year-on-year and 8% quarter-on-quarter to CNY 414 million. The increases were mainly due to higher server and bandwidth costs, along with the business expansion of Kingsoft Office Group.Gross profit increased 9% year-on-year and 13% quarter-on-quarter to CNY 1,896 million. Gross profit margin kept flat year-on-year and increased by 1 percentage point quarter-on-quarter to 82%.Research and development costs increased 4% year-on-year and 2% quarter-on-quarter to CNY 685 million. The increases were mainly due to increased headcount and personnel-related expenses of Kingsoft Office Group, reflecting our continuous efforts to improve products and services.Selling and distribution expenses increased 13% year-on-year and decreased 14% quarter-on-quarter to CNY 377 million. The fluctuation mainly resulted from changes in promotion promotional spending of online games business in corresponding quarters.Administrative expenses increased 5% year-on-year and decreased 9% quarter-on-quarter to CNY 171 million. The quarter-on-quarter decrease was mainly due to decreased personnel-related expenses. Share-based compensation costs increased 28% year-on-year and 6% quarter-on-quarter to CNY 77 million.Operating profit before share-based compensation cost increased 17% year-on-year and 76% quarter-on-quarter to CNY 792 million. Net other gains for the fourth quarter of 2023 were CNY 8 million, compared with losses of CNY 42 million for the fourth quarter of 2022 and gains of CNY 18 million for the third quarter of 2023, respectively.Share of losses of associates were CNY 286 million for the fourth quarter of 2023 compared with losses of CNY 256 million and CNY 307 million for the fourth quarter of 2022 and the third quarter of 2023, respectively. Income tax expense decreased 13% year-on-year and increased 187% quarter-on-quarter to CNY 126 million.As a result of the reasons discussed above, profit attributable to owners of the parent was CNY 205 million for the fourth quarter of 2023 compared with profit of CNY 48 million and CNY 28 million for the fourth quarter of 2022 and the third quarter of 2023, respectively.Profit attributable to owners of the parent, excluding share-based compensation costs, was CNY 257 million for the fourth quarter of 2023 compared with profit of CNY 83 million and CNY 69 million for the fourth quarter of 2022 and the third quarter of 2023, respectively. The net profit margin, excluding share-based compensation costs, was 11%, 4% and 3% for this quarter, the fourth quarter of 2022 and the third quarter of 2023, respectively.Now I'm on year 2023. Revenue increased 12% year-over-year to CNY 8,534 million. Office software and services made up 53%, increased 17% year-over-year to CNY 4,557 million. Online games and others made up 47% and increased 6% year-over-year to CNY 3,977 million.Gross profit margin increased by 1 percentage point year-on-year to 82%. Operating profit before share-based compensation costs increased 19% year-on-year to CNY 2,541 million. Profit to owners of the parent was CNY 483 million for the year of 2023 compared with a loss of CNY 6,049 million for the last year.The group had a strong cash position towards the end of 2023. As at 31st of December 2023, the group had cash resources of CNY 24 billion. Net cash generated from operating activities was CNY 3,489 million and CNY 2,574 million for the year ended 31st of December 2023 and 31st of December 2022, respectively. Capital expenditure was CNY 474 million and CNY 509 million for the years ended 31st December 2023 and 31st December 2022, respectively.In 2023, our core businesses have steadily advanced. In 2024, Kingsoft Office Group will firmly seize the opportunities of digital economic development and continuously explore the business opportunities of digital office services. We will continue to carry out product innovation and user experience optimization around multi-screen, cloud, content, collaboration, AI to continuously improve service quality and provide individual and institutional users with more efficient and intelligent office solutions. At the same time, we will deepen our presence in the field of wuxia games and make progress in the new genres of sci-fi mech games, bringing players all-new gaming experience. Looking ahead, we will continue to leverage technology, embrace AI and seize new opportunities to pursue high-quality and sustainable development.Thank you, all. With that, let's go to the Q&A session. Hi, operator, we are ready for the Q&A session.

[Operator]

[Operator Instructions] Your first question comes on the line of Xiaodan Zhang from CICC.

[Xiaodan Zhang, analyst]

[Foreign Language] My first question is on the gaming business. So JX3 Online delivered a strong record in 2023. So what is your expectation for its performance this year? And could you please share with us your latest full year guidance for the gaming segment? And secondly, could you please give some color on your plans of cash usage and shareholder returns for 2024?

[Tao Zou, executive]

[Interpreted] I'm going to take the first question, and also I'm going to answer a part of the second question. Thank you so much of the question. I think in the first quarter of this year, we are having a really stable outlook since -- majorly contributed by the JX3 and since we have prioritized and [ throwing ] all of our effort in the JX3 origins and all of our team are welcoming the birth or the release of the JX3 origins. And if we are going to take a look of this year's priority, obviously, our priority release is going to be focusing on the releases in the fourth quarter of this year, where we are going to see the release of the mech games and also the games including [ the Creation of God ] and also [indiscernible]. And if we are taking outlook here, we might not be having quite clear conclusions since the major focus of this year is going to be concentrated on the performance of the fourth quarter and the performance of the game. We can only draw a quite clear conclusion of the performance of the game after 1 month of the release.

[Yi Li, executive]

[Interpreted] Let me take the second question about the cash on our account. Currently, our cash is affluent in terms of the whole operations in the Kingsoft Office Group, but we have kept a proportion of our cash in our account. Since we are facing a rapid development of the artificial intelligence, we are not going to exclude the possible opportunities where probably in the first half of this year, we might be investing in a potential AI-related business, especially in the field of AI-empowered [ 2B site ]. And after the first half of this year, we might have a clearer conclusion in that part.Now let me introduce you the performance or the cash figures or index that we have in the year 2023. The year 2023 has witnessed a very stable while solid growth in terms of our revenues, which is growing by 10%, while we have already registered a 19% in terms of our profit. And the profit increase ratio has been growing from 24% to 26% year-by-year, and our cash flow has increased by 36%.And in terms of the dividend, as well as the buyback, which is our commitment to our shareholders, let me talk about the dividend first. We have kept a very stable and solid dividend to our shareholders. And we have always provided a very stable cash dividend to the shareholders. In the field of the buybacks, this year, we have planned for CNY 300 million buybacks, where CNY 2.5 million -- where CNY 250 million goes to the shareholders and CNY 5 million goes to the employees as an incentive to the employees. And in terms of the dividend and buybacks this year, we are going to grant the number according to the performance of the market, as well as the cash in our account. And currently, what I have at my hand is the first tranche of the dividend. We are planning to have RMB 1 billion dividend. But the concrete figure is going to be decided by the actual situation in the market. And we are going to disclose the number at that time. Thank you so much for your question.

[Operator]

The next question comes from the line of Linlin Yang from GF Securities.

[Linlin Yang, analyst]

[Foreign Language] My first question is about the OP margin. We saw -- the OP margin recovered to more than 30% in Q4. How should we -- how is the -- its performance should we expect for 2024?The second question is about WPS AI. How is the testing performance? And I saw the growth rate of paying users has increased in the last quarter. What are the main drivers and how should we expect its growth in 2024?And the third question is about cloud. What positive changes are there in the cloud business recently? And has there been an improvement in industry demand? How should we expect the bottom line in the next year?

[Yi Li, executive]

[Interpreted] Let me take the first question from you about the operational margins. You could see from the previous record in the Q2 and Q4 of the year 2023, we have registered our operational margin much more than 30%, while the Q3 of the year 2023 have witnessed the lowest point across the year. And because in the year, that is to say by the year 2023, the 2 business sectors of our group, the gaming sector and the office sector, have kept a very good momentum, while in the year 2024, we are seeing that the -- we are focused in the artificial intelligence-related field is still at a budding stage, where we are going to focus on the investment opportunities, both in our office software sector and also in our gaming sector. And this is going to have an impact in terms of the operational margins, where we are going to see in the short term, the operational margin is going to be [ shrinked ], while in the long term, the operational margin is going to be benefited from the current investment. In the year 2024, the operational margin is going to be developed in a very healthy and a reasonable manner. It might not be as high as over 30%.

[Tao Zou, executive]

[Interpreted] Let me take your second question, which is about the WPS AI. What I can tell you about the WPS AI is that we finished the testing -- internal testing of the WPS AI in November 2023 last year. And we have discovered the problems and issues, and we have improved in terms of the different variants. Our engineers and our -- are working on improving the user experience in the field of WPS AI. But in terms of the functions of the product improvement and the final release variant, I'm not going to introduce it with such a very simple manner, and I cannot introduce it with 1 sentence or 2 sentences on this phone call. I believe tomorrow, our colleagues in the office sector, they are also going to have a road show, where you can attend and you can also have more understanding towards this field. So what I can tell you about the WPS AI is that we have concluded the testing, and we have continuously [ improving ] the user experience. The testing and improvement of the user experience has met up our expectations and our target that we set up before. And this is what I want to say about the WPS AI.In terms of the reasons for the increase of the subscribed users, we are also seeing an increase of the subscribed users in the previous while, but what is the reason behind it? It might be because AI has created some of the highlights on the software-related sectors, but we have not released the AI memberships. We are not going to -- there might be some other reasons that the artificial intelligence might have shifted the focus of the public to us, and that's the reason why they want to pay for our software. But these might not be the mainstream reasons for the increase of the users. Currently, I think the increase of the users might be majorly because the brand appeal of the WPS Office. Some of the users, they are office workers who enjoyed our product and they like it and they recommend it to their friends and colleagues. That's the reason why for our 9.7% year-on-year growth in our PC users.Let me answer the third question, which is a question about the [ core ] business sectors. I believe the artificial intelligence is going to keep its momentum in the year 2024, especially after the Spring Festival. We are seeing the release of the follow-on models, which has also delighted the whole industry and provided us more confidence. I have a very optimistic outlook towards this field.The second part of my answer is about the changes in the year 2024. We have seen the Ministry of Finance recently publish important governmental documents related to the procurement of the data and also computer-related sectors. This has -- gave us very important business opportunities where we can provide our data-related and cloud-related services to the state-owned enterprises. And I also believe moving into the future, data is going to be the future cash. And this has provided us a very important business opportunity. Once again, our company has adapted to the principles where we find unities between the cloud and the data. And I also take a very optimistic outlook towards the domestic market.The third part of my answer is about the operational CDNs. And this is what we quote, I believe that at the end of last year, this part of the sectors has -- I've seen some of the competitors decreased their price, while this year, according to what I have understand from our competitors and from the inside of the industries, that we are all planning to increase our prices because there is more value added to the operational business, and it's also affecting our cloud business. This is my personal take of the development momentum of our industry.So generally speaking, to wrap it up, I would say that the artificial intelligence and also the data asset is going to bode quite well for the cloud-related sectors. I have once again illustrated that in the different scenarios that the development of artificial intelligence and these data-related business models is also going to be very beneficial for our operational business. What I have already repeated is that it has opened up the limits for the development of the cloud sectors. And tomorrow, we are going to have the earning call of the Kingsoft Cloud, where you can get more information from their operation. I'm not going to elaborate here.

[Operator]

[Operator Instructions] Your next question comes from the line of Daley Li from Bank of America.

[Huiqun Li, analyst]

[Foreign Language] I have 2 questions. Number one is about the monthly active devices. We see the number is getting [ better-ish ] in the 4Q last year. And many I know if the key driver is from the AI products launched in 4Q?My third question is about the AI development strategy. Management, in our last earnings call, mentioned we prioritized the number of the monthly active devices and the paying user and the ARPPU. So how is our strategy right now? Do we make any adjustment after we have done some testing about the product and the consumer feedback?

[Tao Zou, executive]

[Interpreted] Let me answer your question about the increase of the number of the large active devices. I'm not going to -- to answer the question of whether our growth is related to the artificial intelligence, my frank answer is that I don't know whether it's because of artificial intelligence or for the other reasons, we are seeing the rapid growth. But I definitely believe the office -- we have benefited from this field. These large language models with the -- empowered in the AI field definitely going to bring us more active experiences in the field. But the increase of the numbers might be due to very comprehended reasons, including we are providing better office software experiences for the users, and spread by month to month, the user number increased. But AI definitely empowers the field of office-related software. And this is also one of the important reasons for the growth.And for the strategies that we have adopted in the office software, I would say all of our strategies, first and foremost, is designed to satisfy our end users. Providing the satisfying products to our end users is the [ most path ] we are going to take in order to increase the user numbers. And we have always [ focusing ] on increasing the numbers of the subscribed users, increasing the OP values. This strategy continues. I have mentioned about this strategy in last year's call, and this year, we are also going to increase the OP values. And artificial intelligence definitely brings us to the new field where we are going to empower our product with the large language models. This year, we are going to continue our strategy and focusing on satisfying the user first. By improving the user experience, we are going to harvest more subscribed users. That is my answer to your question.

[Yinan Li, executive]

Thank you for joining us today. And this will conclude our presentation for the 2023 fourth quarter and annual results earnings call. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.