Kingsoft Corporation Limited

Thank you. Ladies and gentlemen, good evening and good morning.

I would like to welcome everyone to our 2020 second quarter and interim 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 reason. 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 joined 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. Thank you.

[Foreign Language] Okay. I'll translate for Mr.

ZOU. We saw strong growth in the second quarter driven by continued demand for subscription and licensing services of Kingsoft Office Group coupled with excellent performance by core online games.

Kingsoft Office Group focused on product development, product rollout, and exploration into complimentary verticals to build its core competitiveness. In the online game sector, we continue to improve the authority to develop an ultra-premium game, while extending into new game categories.

On May 8th, 2020, Kingsoft Cloud Holdings Limited was successfully listed on the NASDAQ. As the largest shareholder of Kingsoft Cloud, we have full confidence in its future performance.

Our revenue in the second quarter of 2020 with RMB1,420 million, up 49% year-on-year and 21% quarter-on-quarter. Our revenue in the first half of 2020 was RMB2,591 million, up 41% year-on-year.

In the second quarter of the year, our online game business recorded a year-on-year growth of 53% and office software services and other businesses grew 43% year-on-year respectively. Now, I will turn the call to Francis, our CFO.

Francis?

Hi, thank you, Francie. Hello everyone.

Let me start with the second quarter of 2020. Kingsoft Office as a beneficiary of the increased demand in remote working maintained stable and healthy development.

Kingsoft Office Group's office software and licensing business maintained its rapid growth. We continue to promote cloud office migration to our leading customer, further strengthening our market leadership in document and information processing.

In the first half of 2020, Kingsoft Office Group launched new edition of WPS Office, such as Integrated Edition, Business Edition and Graphics Edition, while establishing an open Application Program Interface with developer partner in our ecosystem. As of June, 2020, we have competed product adaptation with 190 development partners, achieving integration in area areas such as work collaboration, input method, mail, voice recognition, handwriting pad, and tablet.

In addition, over thousands of thousands of micro, small, and medium enterprises have used WPS+ cloud office service during the period. Kingsoft Group's personal subscription services continued to show robust growth, due to innovative content, rich features, as well as improved user outreach and experience via innovative channels such as live streaming sales.

In addition to online document editing, WPS Docs provides collaborative work products such as spreadsheet, calendar, to-do list, and meeting, enabling users to work together seamlessly via Kingsoft Office Group Cloud platform. We continue to expand our partnerships and brand awareness.

During this period, Kingsoft Office has become the official supplier of Beijing 2022 Winter Olympics. In addition, Kingsoft Office entered a strategic cooperation with the International Centre for Higher Education Innovation under the auspices of United Nations Educational, Scientific and Cultural Organization, providing WPS Office-related online courses to this global education resource platform.

Forging ahead, we continue to adhere to our philosophy of technological empowerment, focusing our efforts on technological innovation, product optimization, and continue to innovate the organizational structure, and strengthen the construction of R&D Center. In the second quarter, revenue from the online games achieved significant year-on-year growth.

Revenue and average daily active users of our flagship JX Online III PC game recorded year-on-year growth of 120% and 39% respectively, reflecting our track record in developing and operating blockbuster online games. In June, we launched a beta test for our JX Online III mobile game and received positive player response.

In the same month, we also started the pre-registration for War of the Visions: Final Fantasy Brave Exvius. Meanwhile, the cloud version of JX Online III PC game has officially launched its testing version in July, becoming one of the first cloud games in China.

We further strengthened cooperation with Tencent and launched JX Online II mobile game on all platforms in August, which was ranked number one in the iOS top free charts on its debut. In the coming quarters, we will continue to focus on new product development and operation optimization.

We will celebrate the 11th anniversary of JX Online III PC game and launch a new expansion pack to further strengthen the longevity and vitality of our core IP. During the year, JX Online I mobile game will be renamed as JX Online I: Yuan Qi Wang You with an all-new game appearance and experience for our gamers.

Wo Long Yin 2 will also be launched later this year. I will now discuss Q2 and first half of 2020 operation and financial results.

Let me start with the Q2 using RMB as the currency. Revenue increased 49% year-over-year 21% quarter-over-quarter to RMB1,420 million.

The revenue spilt was 61% for our online games and 39% for our office software and services and others. Revenue for our online games business increased 53% year-over-year and 11% quarter-over-quarter to RMB869 million.

The increases were mainly attributable to the impressive robust revenue growth from flagship game JX Online III, which was resulted from the frequent content updates and operational innovation, partially offset by decrease revenue from certain existing mobile game as the natural declining lifecycles. Revenue from the office software and services and others increased 43% year-over-year and 41% quarter-over-quarter to RMB551 million.

The increases were largely due to the sustainable grow from subscription services and license licensing business of Kingsoft Office Group, driven by the increased paid user resulting from the continuous improved products and services. Cost of revenue increased 90% year-over-year and 8% year-over-year [ph] to RMB218 million.

The increases were mainly due to higher server and bandwidth services speed associated with increased user traffic as well as creating content costs associated with increased personal subscription service of Kingsoft Office Group. Gross profit increased 55% year-over-year and 24% quarter-over-quarter to RMB1,202 million.

The Group's gross profit margin increased by four percentage points year-over-year and two percentage points quarter-over-quarter to 85%. The increases of the Group's gross profit margin were mainly due to accretive revenue contribution from the self-developed games in this quarter, which has relatively high gross profit margin, as well as improved gross profit margin of subscription service of Kingsoft Office Group.

Our net research and development expenses increased 4% year-over-year and 10% quarter-over-quarter to RMB390 million. The increases were mainly attributable to increase headcount as well as personnel-related expenses as we consistently focus on improving our R&D capability and further developing and enhancing our product and services.

Selling and distribution expenses increased 8% year-over-year and 31% quarter-over-quarter to RMB193 million. The year-over-year increase was largely due to the increased channel cost of Kingsoft Office Group aiming to expand and better serve government and enterprises.

The quarter-over-quarter increases were primarily due to the higher marketing expenses for online games. Administrative expenses increased 50 -- 35% year-over-year and 9% quarter-over-quarter to RMB101 million.

The year-over-year increase was primarily due to the increase staff-related costs and professional service fee. To accommodate for the rapid growth of our business, we moved into new office building in Beijing, which led to the increase rent expenses.

Share-based compensation costs increased 5% year-over-year and 18% quarter-over-quarter to RMB37 million. The increases primarily reflected a new grant of awarded shares to selected employees.

Operating loss excluding the impact of eShop increased 193% year-over-year and 41% quarter-over-quarter to RMB858 million. Funding were RMB28 million compared with financial cost of RMB5 million and RMB6 million for the second quarter of 2019 and first quarter of 2020.

The increases were primarily due to the new issue convertible bonds with the interest rate of increasing market interest rate for similar bond in their campaign treatment, which would not be something cash flow, in fact, which account debt as we accounted the actual yield to maturity. Net other losses were RMB105 million compared to the losses of RMB1,288 million in the corresponding period last year and a gain of RMB3 million in the first quarter of 2020.

Losses in the second quarter of 2020 were primarily due to loss of a deemed disposal of an associate and impairment position of certain investee companies. Losses in the second quarter 2019 were primarily due to the provision for impairment on accounting value on the investment in Cheetah Mobile.

We recorded a share of loss of total of RMB173 million compared with share of losses of RMB85 million for the second quarter 2019 and the share of losses of RMB54 million for the first quarter 2020. The losses in the second quarter of 2020 were mainly due to the losses recognized in Kingsoft Cloud as it was changed from subsidiary to the associate and recognized share of profit and losses using the equity method since may 8th, 2020, which was possibly offset the profit recognized in Cheetah Mobile as it disposed shares in certain investee company this quarter.

The losses in the second quarter of 2019 and the first quarter of 2020 were mainly due to losses recognized in Cheetah Mobile in this quarter. Income tax expenses for the second quarter 2020 and the second quarter of 2019 and the first quarter of 2020 were RMB83 million, RMB5 million, and RMB64 million respectively.

Profit and loss for the period from a discontinued operation, we factored the combination of gain on deemed disposal gain and the losses from Kingsoft Cloud, which was the profit of RMB8,927 [ph] million compared to losses of RMB418 million for the second quarter 2019 and the losses of RMB481 million for the first quarter 2020. The gain on deemed disposal of Kingsoft Cloud was RMB9,096 million recognizes in the second quarter of 2020, which arose from the spinoff and separate listing of Kingsoft Cloud.

As a result, profit attributable to the shareholders of parents, including debt on the continued and discontinued operation was RMB9,151 million, a loss of RMB1,450 million and a profit of RMB6 million for the three months ended June 30, 2020, June 30, 2019, and 31st March, 2020 respectively Over to the owner of parent excluding Asia, including debt on the continuing operation and a discontinue operation was RMB9,194 million, a loss of RMB1,372 million, and a profit of RMB55 million for the three months ended June 30th, 2020, June 30th, 2019, and March 31st, 2020 respectively. Net profit and loss margin excluding Asia was 500%, negative 73%, and 2% is three months ended June 30th, 2020, June 30th, 2019, and March 31st, 2020 respectively.

And now on the first half of 2021, revenue increased 41% year-over-year to RMB2,591 million. Online game make up of RMB64 million -- 64% and increased 61% year-over-year to RMB1,650 minute.

Office software and services and others make up another 36%, an increase of 4% -- 40% year-over-year and to RMB942 million. Gross profit margin increased by three percentage to -- year-over-year to 84%.

As a result of the reason discussed above, the profit attributable to the owner parent including that on the continuing operation and a discontinue operation was RMB9,158 million and the loss of RMB1,483 million for the six-month period ended June 30th, 2020, June 30th, 2019 respectively. Profit attributable to the owner of parent excluding Asia, including debt on the continuing operation and the discontinued operation was RMB9,249 million compared to a loss of RMB1,406 million in the prior year period.

The net profit margin excluding Asia, of course, was 211%, negative 39% for the six-month period that June 30th, 2020 and June 30th, 2019 respectively. In our statement of financial position, we have a cash and bank deposit of RMB50 billion at June 30th, 2020.

Net cash from operating activity was RMB1,308 million and RMB244 million for the six month ended June 30th, 2020, June 30th, 2019 respectively. Cash used for capital expenditure was RMB404 million and RMB604 million for the six months ended June 30th, 2020 and June 30th, 2019 respectively.

And we saw robust in the first half 2020 despite the impact of COVID-19. Going forward, we remain confident in resilience of our business model and the pace of the development.

We will continue to focus on optimizing our organization structure, technological innovation, and product enhancement so as to provide our customer with the best user experiences. We strive to deliver sustainable business growth and being strong -- solid return to our shareholders and partners.

On behalf of Kingsoft, I would like to extend our appreciation to our Kingsoft customers, shareholders, and employees, partners, and you for supporting us. I'm now turning back the floor to question-and-answer.

Thank you.

Hi operator, we're ready for the Q&A session. Thank you.

Thanks management for taking my questions and congratulations on a very strong set of result. I have two questions relating to the gaming and the WPS segment.

Given our strong performance for the online games segment in particular, the PC games, how should we think about the second half outlook? Andon WPS, how should we spend about the growth momentum in the second half and next year?

And also -- I would also like to ask about the full year guidance, is there any revision given the strong first half result? Thank you.

[Foreign Language]

[Foreign Language]

Hi, I'll translate for Francis. So, thanks Thomas for your question.

We are also very excited for the strong performance for the first half of 2020 and there's the COVID-19 and also the U.S.-China tension. Kingsoft performed very strong in the first half, both game and WPS business, they are not only unaffected by the COVID-19, but were actually speed-up doing a digital transformation and also the localization of the software and also the online game businesses.

We believe that the strong momentum will continue into the second half of 2020 and we are very optimistic about the full year guidance for Kingsoft. We also upgraded our full year guidance from the -- from what we gave to the market from the initial -- early initial in this year.

Early in this year, we gave a conservative guidance on the games performance due to the unpredictable factors for the game businesses. But based on the strong second quarter performance, we are now upgrading our full year game guidance.

Initially we gave a low teen guidance for the game business, but now we believe that the full year game will increase over 30% for the topline. And for the WPS, now the MAU is 454 million and also the accumulated paid users increased 40% from early this year to close to -- to close to 17 million.

So both of these numbers show a strong support for business growth and they also laid a very good foundation -- a strong foundation for the long-term growth of WPS going forward. So, we believe that for the second half of the year, WPS growth will keep the strong momentum from the first half and also the licensing business, slightly affected by the COVID situation.

But we are still very strong about the [Indiscernible] project, which we believe that we will have 90% of the market share. And we also encourage you to listen to the WPS earnings call for the detailed information and for the full year -- for the WPS, we belief that topline growth will be 30% and up and also the operating margin will be a few percentage points improved from last year.

Thank you.

[Foreign Language] I will quickly translate myself. Congratulations again on a strong quarter and I have follow-up questions on the gaming side.

The first one is on the JX Online III; we have triple-digit growth again for the quarter and just want to understand a bit more in terms of the growth driver apart from the 39% year-on-year growth in DAU, what are observing in terms of the user time spent, or it's more operationally related? And going ahead into next year, for example, can we expect sustained growth?

Then the second follow-up is really just on the 30% of the updated guidance that you have on the gaming side. I want to ask management, what's your expectation for the mobile gaming in the second half.

Thank you.

[Foreign Language]

Okay, I will translate for Mr. Zou and Francis.

So, for the JX III performance, we believe that the core growth driver is due to the strong performance from the expansion pack from last year in the fourth quarter and also the expansion pack we will believe in the May this year. Both expansion pack perform -- exceeded our expectation.

And also in the first half of the year, the COVID-19 -- due to the COVID-19, overall gaming industry also performed well. But in the recent three to four months, while the COVID-19 gradually recover in China, we believe that the key gross driver are still due to the performance of the expansion pack.

We think that the overall performance of the JX Online III PC game now is -- momentum is similar to what we had before 2018. So, the revamped version -- the growth of the new revamped version now is back on track to the -- to really strong growth momentum.

And for the mobile games, we usually don't give out specific guidance for each mobile game before they are launched, so what we would like to share is that for the upcoming quarters, basically every month, we have a -- either a new mobile game or a new expansion pack, so that's something that we're looking forward to. And also Francis added that, although we don't give out explicit guidance for the game business -- for the mobile games, but we do have a new product every month.

So, expectation is very good. For example, we have the -- [Indiscernible] the mobile game to be launched in September.

Also we have a new game for the JX III in October [Indiscernible] in October, and also we have Wo Long Yin and also JX World III in December. So, we have good segregation for the second half of this year on mobile games.

Thank you.

[Foreign Language]

Okay, I'll translate for Francis. Francis also added for the JX III PC game, we launched a revamped version in 2018.

So, our game had final season in 2018. But for this year, after our strong performance, I'll close the expansion pack in the fourth quarter last year and also the -- in May this year in the second quarter, the independent IP accounts increased 39% year-on-year and this is very important.

And that reflected the year-on-year of 120% revenue growth for JX III PC game. The JX III PC game reached its peak revenue performance in 2017, but in 2020, we believe that our revenue will be higher than what we had in 2017.

So, this is a very good expectation for the JX III PC game in the long-term. Thank you.

[Foreign Language] I will translate for myself. Thank you for taking my question.

I have two questions. The first is about the WPS, we noted a very strong growth for the WPS personal business.

And I also would like to follow-up on the licensing business, do you see any recovery of the licensing business? And can you give us some color on the [Indiscernible] projects.

And the second about the strong cash position and could you please give us some color on the MA progress? Thank you.

[Foreign Language]

Okay. I'll translate from Francis.

For the WPS business, for the consumer section, we had very strong performance in the first half. In the second quarter, revenue is RMB313 million, that's 73% year-on-year growth.

So, this is very strong. And also for the licensing section, we had a low season in the first quarter and in the second quarter, the licensing businesses recovered gradually, but due to the whole COVID-19 situation, the first half performance is a slightly lower than our original expectation.

But we think that in the second half of this year, the business will be back on track. For the China-U.S.

tension, this has been going on and off for the past quarters. We believe that they may not be able to reach certain agreements, the core technological aspects.

So, we think we are very positive on this new [Indiscernible] projects is now going backwards. And we see in July and August, there are already started government purchasing and in some regions, WPS have got 100% of the government contracts.

Overall in China, we believe that WPS will have 90% and up this [Indiscernible] project. So, this is a very big scale opportunities like we said in the past and we are going to get a very large market share in this project.

So, this is also why for -- the reason behind the strong performance of the Asia market value for WPS which is around RMB200 billion for WPS. So, we think that -- we encourage you to have a detailed look on the business.

Thank you.

[Foreign Language]

Okay, I'll translate for Francis. For the M&A opportunities, we can have a good level of cash on hand and the core use of the cash is still focused on -- in the area that we think -- we are focusing that includes the cloud, AI, and also some of the R&D development.

We are still in search for the M&A opportunities and later tonight WPS will also make some announcement regarding this topic. Thank you.

Hi operator, we're ready for the last question. Thank you.

[Foreign Language] I will translate to myself. The first question is about the bonus.

Do you consider to have some bonus because we have -- our cash is very sleek. And my second question is about the -- could you give us some guidance about games and the WPS and the cloud for this year?

Thank you.

[Foreign Language] Okay, I'll translate for Francis. For the dividend policy, we have been discussing this in the Board meeting.

So, some of the details will be announced in the future announcements when we have that details ready. We do have a good cash level on hand and after the cloud business becomes separately listed, both WPS and games business are cash positive, and we also get dividend from Cheetah Mobile.

So, this will all reflect from -- reflect to the dividend policy on the group level. And other than the dividend policy and other than the organic growth and also the M&A opportunities, we will also consider share repurchase.

And some of these details will also be announced in the future announcement once they are ready. And for the guidance for each business, for the games business, as I said earlier that earlier this year, we gave a conservative guidance, which is low teen.

And now we believe that the guidance will double, we believe that there will be a 30% and up revenue growth for the game business in this year. And also the profitability level will also improve higher in the game business, that's also something that you should notice.

And also for the WPS business, due to the strong growth for the subscription business, which offset some of the delays on the licensing business due to the COVID-19, we believe that a full year growth rate will be over 30% and also we encourage you to listen to the WPS earnings call later as well. And we think that the profitability will also improve a few percentage points for WPS business this year from last year.

For the cloud business, we will also have a separate release later. So, based on my discussion with the team is that the topline growth still very strong over 60% this year.

And also the gross margin already turned out positive in last year third quarter, and have been remaining -- remained positive for the quarters afterwards and also the EBITDA performance is still on track. We think that EBITDA will turn positive by the end of this year and we're very excited about the performance for the cloud business.

Thank you.

Okay. Hi, this will conclude the conference call for today.

Thank you all for your attendance. Thank you.