Kingsoft Corporation Limited

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 a 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.

ZOU Tao?

[Foreign Language] 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 continued - made continuous 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 our revenue up 28% year-on-year to RMB5,594 million.

The momentum continued in both office software and services business as well as online games and other business with revenue of the segments 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 RMB1,855 million during the year.

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

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 adaptation with its development partners and consolidated cooperation with other core hardware and software suppliers, which further optimized 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+ for micro, small, and medium enterprises. As a beneficiary of rising demand due to increased remote working amidst the pandemic, the market penetration and customer loyalty of WPS+ cloud office services have 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 indicators of personal cloud services grew rapidly.

Kingsoft Office Group also expanded channels for marketing to enhance the penetration rate of paying subscribers. 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 solutions in China.

Looking ahead, Kingsoft Office Group will continue to adhere to technological empowerment and user oriented principles aiming to drive office innovation for individual and enterprise users globally. During the year, online games business delivered a steady year-on-year growth mainly attributable to the focus in product development and the stable growth of core premium games.

JX Online III and other PC games of the JX series have achieved double-digit growth during the year. In the fourth quarter, online games business launched Feng Tian Zheng Dao, the anniversary expansion pack for JX Online III Mobile.

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

Online games business continued to enhance the influence of JX IP and made strong efforts to expand its presence in the cultural and creative industries. JX Online III - The Adventure of Shen Jianxin in Chang'an, an animation series based on 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 have been in process in 2020. Looking forward to 2021, online games business will continue to place its emphasis on the JX series to drive sustained growth.

Meanwhile, we are also committed to investment in R&D of new game genres and operation aiming to enhance its competitiveness within the overall online gaming industry. As to the financial results, I'm starting the Q4 using RMB as the currency.

Revenue increased 8% year-over-year and 15% quarter-over-quarter to RMB1,606 million. The revenue split was 53% for our online game and others and 47% for office software and services.

Revenue from online games and other business decreased 9% year-over-year and increased 5% quarter-over-quarter to RMB849 million. The year-on-year decrease was mainly due to declined revenue from JX Online III suite as the 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 38% year-over-year and 29% quarter-over-quarter to RMB756 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 the licensing business and subscription services. Cost of revenue increased 11% year-over-year and 8% quarter-over-quarter to RMB259 million.

The year-over-year increase was mainly due to the higher server and data storage costs associated with 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 licensed games.

Gross profit increased 8% over year-over-year and 16% quarter-over-quarter to RMB1,347 million. Gross profit margin kept flat with the fourth quarter of 2019 and increased by 1 percentage point quarter-over-quarter.

Our R&D cost net increased 5% year-over-year and decreased 4% quarter-over-quarter to RMB427 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 RMB278 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 RMB142 million. The increases were largely due to the increased staff related costs and professional services fee.

Share-based compensation costs increased 107% year-on-year and 159% quarter-on-quarter to RMB81 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 4 - RMB641 million. Net other losses were RMB111 million compared to net other gains of RMB48 million in the corresponding period last year and the net other gains of RMB368 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 recognition 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 RMB301 million as a result of dilution impact of issue of new shares of Kingsoft Cloud. Finance cost was RMB36 million compared to with - compared with finance costs of RMB4 million and RMB37 million for 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 equivalent market interest rate for a similar bond in the accounting treatment, which would not result in cash outflow but instead of the actual yield to maturity. We recorded share of losses of associates of RMB21 million compared to share of losses of RMB402 million for the fourth quarter of 2019 and share of profit of RMB12 million for the third quarter of 2020.

Losses in fourth quarter 2020 were mainly due to the loss - 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 profits in third quarter 2020 were mainly attributable to the gain 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 RMB114 million.

The increases were mainly due to accrued withholding tax and higher operating profit we recognized in this quarter. As a result of reasons discussed above, the profit attributable to the owners of parent including those from continuing operation and discontinued operation, was RMB221 million compared to losses of RMB99 million in the corresponding period last year and profits of RMB667 million in the third quarter of 2020.

Profit attributable to the owner or parent excluding share, which also including that from continuing operation and discontinued operation, was RMB266 million compared to a loss of RMB56 million in the corresponding period last year and a profit of RMB687 million in the third quarter of 2020. The net profit or losses margin excluding the effect of share-based compensation was 70%, minus 2%, and 49% for the three 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 RMB5,594 million.

Online games and others make up 60% and increased 90% year-over-year to RMB3,337 million. Office software and service make up 40% and increased 43% year-over-year to RMB2,257 million.

Gross profit margin increased 3 percentage points year-over-year to 84%. Profit to owners or parent including that from continuing operation and discontinued operation was RMB10,045 million compared to a loss of RMB1,546 million for the year 2020 and 2019 respectively.

On the balance sheet, we have cash and bank deposit of RMB14.1 billion at year-end of 2020. Now remember that we have approximately RMB400 million which will be recorded in the short-term deposit, which is basically very similar to our banking cash.

Adding the two together, we have approximately about RMB80 million at year-end. Net cash generated from operating activity, including those from continued operation and discontinued operation, was RMB2,991 million.

Capital expenditure including that from continued operation and discontinued operation was RMB684 million, RMB1,362 million for the year ended December 31, 2020 and December 31, 2019 respectively. Amidst a turbulent economic environment and 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 game genre to further strengthen our development in the online game business.

We remain confident of our robust operational outlook and sustained growth for 2021. That ended my brief introduction and I hand over the floor for question and answers.

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

[Foreign Language] Thank you, management, for taking my question. The first question is regarding online game.

Can management update the pipeline and the timetable and also the publishing essentially whether we will do self-publishing or whether we will license to third-party? And secondly on Xichuan, can you comment on the government and enterprise business?

What kind of growth do you expect we will see for 2021? Given 2020 there's COVID impacting some pending work so what kind of growth strategy do we see for this year?

Thank you.

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

ZOU first. So, regarding the game channel pipeline for 2021.

First, we have the self-developed and self-published games that include the JX Online III mobile game nostalgia version and also the JX World III. JX World III mobile game, originally we planned to launch that game in the first half of this year, but now it may be delayed to September of 2021.

Secondly, we have the licensed mobile game, [Foreign Language] 3D version. This one we plan to launch the game in the second half of this year.

The [Foreign Language] 2D version we launched that game in 2017. And thirdly, the [Foreign Language].

This one we are cooperating with Tencent and this game we plan to launch in July or August of 2021. And also we have another licensed game called FFBE II.

This one we already got the 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 [Foreign Language] 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 far, these are the major game projects that we have for 2021.

But the detailed timeline will be dependent on the - our partner and also the maturity of the game development. Thank you.

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

So regarding the question on the WPS, the Xichuan project development. For 2020 you mentioned due to the COVID, our development was slower than expected.

But for 2021, we - I recently also joined the Kingsoft Group - Kingsoft Office Group Board meeting and discussed on the 2021 plan with the Board. But because KSO 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 two things to share with you.

First is that we are very confident on the development of the Xichuan project. This is not going backward.

But how fast the development is not controlled by any one single company, it's more a government driven project. And secondly, last year our target for the Xichuan 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 Xichuan project. Thank you.

[Foreign Language]

[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 any activities and what are the potential targets? Thank you.

[Foreign Language] 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 contribution 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 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 pipeline. 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. Thank you.

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

So, regarding the question on how we use our cash and the merger and 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 includes the online collaboration and the cloud direction.

In the recent US and China competition on technology, we do see that there is a high demand in the domestic core taxable - core technology development so we are - we think we're 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.

We also have a Wuhan strategy so we are building a large scale R&D center in Wuhan as well. And our merger and acquisition trend is also closely related to our strategy.

So, we would like to consider the potential merger and acquisition opportunities alongside with our core strategies of the business. Thank you.

[Foreign Language]

Operator, we're ready for the next question.

[Foreign Language] The first question is about the JX Online III. JX Online III has increased in the fourth quarter quarter-on-quarter and since it rebounded in the second half year of 2019.

What about 2021 and the future growth, what is the driver? The second question is about the guidance about our three business such as gaming business and WPS and cloud in 2021?

Thank you.

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

So, regarding on the question for the gross driver for JX Online III PC game. So, we see 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 three expansion packs every year so basically one expansion pack every three - every four months.

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 two years, the game performed - the growth performed - 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 three 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. Another thing I want to state is that other than the game content upgrade for the JX Online III PC game, we also did a lot of other things with this game in the past years which include the animation, include the online competition, and also the TV section, and 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 animation or TV online competition, then we consider that these gamers are still in our so-called JX Online III ecosystem.

So in addition that we are going back to the expansion 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 two 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 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 is targeted to a lot of the gamers that I mentioned earlier that they may have stopped playing the game sometime in the past, but they still follow our IP and 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 a nostalgic version for these type of gamers so then they can come back and play the game again.

Thank you. And we're ready for the next question.

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

Like I said earlier that our 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 two 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 US listed companies. So, we are also a large shareholder for Kingsoft Office - 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 increased due to economies of scale and also their control in costs including CDN and also their adjusted EBITDA reached 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 healthcare cloud will also continue to improve in addition to the strong growth from the video cloud sectors. And also their share price grew 3 times in the past year.

So, we are also confident with their future performance. And the same thing applies to Kingsoft Office, we are confident with their 2021 performance.

The team is very strong in the Xichuan project. We are going to continue to maintain our leading position in this project.

But like I said earlier, the 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, ZOU Tao 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 topline 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 our growth in revenue.

This is because that in 2021 the salaries will increase significantly for our game employees. And also for the published game, 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 cost for publishing games.

So, the gross profit margin of the publishing games may be less than the self-developed, self-published games. Thank you.

[Foreign Language] You don't have any time schedule about the M&A?

[Foreign Language] We'll closely monitor, but we don't have the specific timeline for the merger and acquisitions.

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

Thank you.

[Foreign Language]