Cheetah Mobile Q1 2024 Earnings Call Transcript

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June 7, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Cheetah Mobile First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Helen, Investor Relations for Cheetah Mobile.

Speaker 1

You, operator. Welcome to Cheetah Mobile's 4th quarter 2024 earnings conference call. With us today are our company's Chairman and CEO, Mr. Fu Sheng and Director and CFO, Mr. Thomas Jun.

Speaker 1

Following management's prepared remarks, we will conduct the Q and A section. Before we begin, I refer you to the Safe Harbor statement in our earnings release, which also applies to our conference call today as we will make forward looking statements. At this time, I would now like to turn the conference call over to Chairman and CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Speaker 2

Susan. Hello, everyone. Thank you for joining us today. This is our first earnings call since November 2021 and we are excited to share our progress as we resume our quality updates. China Mobile is making changes.

Speaker 2

We are moving from focus on 2C to 2B. In Q1, our revenue from AI and others or enterprise focused increased by 60 compared to last year and 36% from the previous quarter. Now these revenues make up 43% of our total revenue. We expect this to grow to about 50% by the end of the year making significant steps in our transformation. Our recent acquisition of Beijing Orionstar, an AI service provider was an important move.

Speaker 2

It gave us a skilled sales team, strong ties with business customers and end to end capabilities for LMS, including model training, flight training, developing LMS based apps and enhancing service robots, a new attachment for interacting with end users and customers in the AI era. With Orinstar, we are now focusing on making customer enterprise apps with LMS and introducing LMS powered robot for specific business needs. We see 2 main reasons for this focus. 1st, market opportunity. Unlike competitive 2C market, enterprise are increasingly choosing RMB based apps on private cloud due to data security concerns.

Speaker 2

However, they face challenges in developing paired apps and presenting substantial opportunities in China's enterprise sector. 2nd, synergies bring together Cheetah and Oristar allow us to combine our app enterprise with AI skills, better targeting the market opportunities by saving robots to business, we can even find new ways to use LMs to improve efficiency. We are using product driving approach to enhance our LMM capabilities. This is why we focus on the 10B parameters, LMM segments and avoid large upfront investments in GPUs. We believe that the trading parameters, ARM, is unnecessary and the enterprise can deploy and use 10B LMs on private clouds at lower cost.

Speaker 2

Over past few months, we changed 14B parameters foundation models from scratch, which has been approved by authorities for a large scale rollout and the rank ranks among the top of various lists. Additionally, we are fighting nearly all leading open resource foundation models to offer more options for our customers, all without significantly increasing costs. Furthermore, we have seen positive developments by integrating R and M based apps into our service robot. In particular, our delivery robot can now interact better with users, leading to increased demand, especially in Japan and South Korea. Currently, our overseas revenue has surpassed MSP revenues and continue to grow steadily.

Speaker 2

With LMS, we believe the features of our robot service robot will expand even future. I would also like to highlight how we assist our customers in using LN based apps efficiently. For example, we have Hengdun University develop an OM based QA feature for its app, improving user experience. We also developed LMM powered customer service features for another customer product including WeChat Mini Programs, apps and our service robot. This service is now available in Ming Shan, helping local residents apply for housing funds.

Speaker 2

We are also working with enterprise in China's franchise industry to improve management efficiently with LN based apps. In the early stage of LN based apps development, we closely work with our customers to understand their needs and identify areas for improvement with LMS, find the most appropriate LMS, fine tune and develop customer apps. This process help us standardize some LN based apps and the capabilities, particularly in customer service, enterprise management and the training, which we can replicate to more customers. As a result, we are monitoring customer feedback and certification. Additionally, the other applications can be incorporated into our service robot.

Speaker 2

Our long term business model in LMS year we were involved selling robots and offering valued added service. As we focus on building LN based apps for enterprise, we will shift our resource from our agency Internet business to AI business. This will improve the operating margin of our Internet business which we use as a financial performance metric. In summary, LOM in a generation opportunities. With our installed and our clear strategy, we are now confident in our direction.

Speaker 2

We would like to emphasize that we don't want to set short time revenue growth targets, but we are aggressively prioritizing our customer satisfaction and building lighthouse projects. By doing so, we believe we will establish a new growth engine to drive sustainable long term growth in both revenue and margins over time. All we need is a bit of patience. We thank you all dedicated employees for their hard work in making this happen. Thank you.

Speaker 2

And Thomas?

Speaker 3

Thank you, Fudo. Hello, everyone on the call. Please note that unless stated otherwise, all money amounts are in RMB terms. Today, I'm going to talk about 2 topics. 1st, our continued investment in Large Language Models or LLMs resulting in a widened operating loss for the quarter, while total revenue has resumed its increase.

Speaker 3

2nd, our healthy balance sheet. First, we are investing in RMs. We aim to help enterprises quickly develop RMM based new apps. As Fuzong mentioned in his speech, our acquisition of Orange Star has allowed service robots to become a key revenue contributor to the segment of AI and others. In Q1 of 2024, revenues from AI and others increased by 62% year over year and 36% quarter over quarter to RMB81 1,000,000, accounting for 43% of total revenue in the same period, driven by contributions from Beijing Orange Star.

Speaker 3

Our total revenue increased at 12% year over year and 14% quarter over quarter to RMB190 1,000,000. This acquisition also allowed the 2 teams from Cheetah and Orange Star to work more efficiently together to better capture the opportunity in our RMs as we help Chinese enterprises develop apps on our aims to boost productivity. We expect this will lead to a substantial growth in revenue over time. In addition, our aims are enabling us to improve the product experience provided by our service robots, which are now more capable of answering users' different inquiries. This enhancement has strengthened our competitiveness and should drive the sale of our service robots over time.

Speaker 3

In Q1 of 2024, our total non GAAP cost and expenses increased 21% year over year and 19% quarter over quarter. And non GAAP operating loss was RMB66 1,000,000 in the quarter, up from RMB42 1,000,000 in the same period last year and RMB49 1,000,000 in the previous quarter. This is primarily due to the investments in RM and mentioned earlier. Through Beijing Orion Star, we acquired many R and D talents and 2B sales personnel, which are very important for us to capitalize on the opportunity in this sector. As of March 31, 2024, we had about 8.60 employees, up from about 720 a year ago.

Speaker 3

We are also ramping GPUs for model training at a fun tuning. Excluding the impact of the aforementioned investment in our R and D, our cost and expenses as well as our margins remain stable. For example, excluding SBC, our operating profit for the Internet business was 7.9% in the quarter, up from 3.1% in the same quarter last year. As we continue to review our product portfolio and remove products that did not address user pain points. We will continue this approach moving forward.

Speaker 3

At the same time, we will continue to invest in talent, both in R and D, specialized in R and D and to be sales personnel to help us seize the LLM opportunity to build a new growth engine for Cheetah. Our investments will be backed by our strong cash reserves. At the same time, we will continue to increase our operating profit for the Internet business. Secondly, Cheetah Mobile has a healthy balance sheet as of March 31, 2024. We had cash and cash equivalents and short term investments of about US215 1,000,000 dollars.

Speaker 3

In addition, we had about US130 million dollars of long term investments, which include several holdings in well known entities such as Mihasou.cn. Lastly, Yinland is the practice of comparable China based companies listed in the U. S. Capital market. We have decided not to provide revenue guidance going forward.

Speaker 3

Thank you.

Speaker 1

Everyone for today's call, management will answer questions in Chinese and an AI agent will translate management comments into English in a separate line. Please note the translation is for convenience purposes only in the case of any discrepancy management in Chinese as well. If you are able to hear the Chinese the English translation, a transcript in English will be available on our AdGuard website within 7 working days. Thank you so much. And operator, please now take questions.

Speaker 1

Thank you.

Operator

We will now begin the question and answer session. The first question today comes from Nancy Lu with JPMorgan. Please go ahead.

Speaker 1

Operator, please move to the second question. Thank you.

Operator

The next question comes from Thomas Chong with Jefferies. Please go ahead. The next question comes from Sifye Wang with Citi. Please go ahead.

Speaker 1

Operator, please go ahead. The

Operator

next question comes from Miranda Zhuang with Bank of America. Please go

Speaker 2

ahead.

Operator

Miranda, your line is open. You may ask your question. It appears we are unable to connect with Miranda at this time. So the next question comes from Karen Kong with TS Securities. Please go ahead.

Speaker 1

Okay. Operator, please move to the next question.

Operator

The next question comes from Miranda Zhuang with Bank of America. Please go ahead. The next question comes from Zhai Lulu with

Speaker 1

Next question please, operator.

Operator

The next question comes from Boris Fan with Bernstein. Please go ahead. The next question comes from Richie Sun with HSBC. Please go ahead. The next question comes from Wei Fang with Mizuho.

Operator

Please go ahead.

Speaker 1

Operator, we have no further questions. I'll end the call.

Operator

There are no further questions at this time. I'd now like to hand the call back over for closing remarks.

Speaker 1

Thank you, operator, and thank you so much for joining our conference call.

Speaker 2

Thank you.

Speaker 3

Thank you, everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Cheetah Mobile Q1 2024
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