Kingsoft Corporation Limited

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

I would like to welcome everyone to our 2025 interim earnings call. I'm Yinan Li, 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.

The third-party interpreter will provide consecutive interpretation into English. During the Q&A section, we will accept questions in both English and Chinese with alternating interpretation provided by the third- party interpreter.

On-site 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 Mr. Li Yi, our acting CFO.

Now I'm turning the call to Mr. Zou Tao.

[Interpreted] Hello, everyone, and thank you all for joining Kingsoft 2025 Interim Results Earnings Call. In the second quarter of 2025, we remain committed to executing our established strategies and the core business maintained stable.

Kingsoft Office Group focused on AI collaboration and internationalization continued to strengthen the allocation of R&D resources in related fields and development of solutions deeply aligned with user scenario needs to stay competitiveness in the field of intelligent office. The online game business continued to advance content innovation and global expansion, achieving the development of flagship IPs and new genres.

In the second quarter, Kingsoft's total revenue reached RMB 2.07 billion, representing a year-on-year decrease. Revenue from the office software and services business amount to RMB 1.36 billion, up 14% year-on-year.

The online game business affected by the high base in the same period last year, generating revenue from nearly RMB 1 million, representing a year-on-year decline. However, the expansion into new journals and global layout have opened a new chapter.

In the second quarter, our office software and services business continues to grow steadily. For WPS AI products, we released the WPS AI 3.0 and launched the native office intelligent agent, WPS Lingxi’, WPS AI 3.0 drives steep integration between AI and office software through bidirectional transformation, achieving native embedding of AI capabilities and the deep involvement in office workflow.

WPS Lingxi’ servicing core capability module of WPS AI 3.0, integrated multiple AI functions, marking our transition from 2 base AI application to collaborate intelligent agents. We have also implemented that intelligent to upgrades to WPS 365 components, launching messaging, meeting and e-mail assistance to enhance office productivity.

For WPS individual business, we have the product capability and user experience and strengthen the refiner of operations and commercial strategy adjustments. Their efforts have ensured stable domestic revenue growth.

In the first half of the year, monthly active AI user reached nearly 13 million with the transition of AI feature rollout as well as the launch and the promotion of new AI product. The numbers of AI users and mostly active AI users is expected to grow rapidly in the second half of the year.

For overseas markets, we initiated the development of the new WPS international edition to gradually migrate a high-value domestic features. For WPS 365, we consistently improved the collaboration component functionalities and advanced application development integration will enhance end-to-end security capabilities.

At the same time, we continuously enhance the deep into industrial and scenarios, actively promoting the implementation of AI projects and engaging in corporation with key clients. Based on industrial typical solutions, we replicated and scaled up their successes.

For WPS software business, we actively participate in the bidding for office software among central and local government and enterprises. Their effect has helped us maintain a leading market share in both low and fixed layout document software market.

In the second quarter, our online game business continued to enrich the value of the classic JX series and expand into new game genre. Our flagship IP JX3 Online, maintained and engaged player base and demonstrated resilience through consistent content updates and continued technical optimization.

We launched The Fate of Sword: Zero used on the core gameplay of the classic JX series IP and introducing new innovations. The anime shooter game Snowbreak: Containment Zone continue to follow its long-term operation strategy and keeping stable user base.

At the same time, we have made a significant progress in the new game genres and global expansion. Our sales development sci-fi mech game Mecha BREAK commenced its global public data in July.

On its launch date, it topped Steam's Most Played and the Trending Games list and earned the high scores from several international authoritative media outline like IGN. This reflects our progress in new genres and the global market expansion.

Additionally, we are actively strengthening our collaboration with high-quality overseas IPs and deepening our localized operation capabilities in the domestic market. We have obtained our published license for the social deduction game Goose Goose Duck in June, and it has already surpassed 5 million preregistration, it's set to launch in the second half of the year.

We obtained a published new license for Cats & Soup: Magic Recipe in May and began preregistration in August, generating immediate excitement in the market. We will focus on refining the operations of our core products and continuously optimize the gaming experience based on players' feedback.

Looking ahead Kingsoft Office Group will continue to increase its R&D investments in AI and collaboration and promote the implementation of its products and services across a wide range of office scenarios in various industries. The online game business will remain focused on premier games continue to cultivate its IP franchise and steadily advance global expansion.

It aims to enhance the quality of long-term operations, we believe that their effort will strengthen the Group's core competitiveness and lay a solid foundation for achieving long-term high-quality growth. Next, I would like to invite Ms.

Li Yi to introduce the finance performance for the second quarter and first half of 2025. Thank you.

Thank you, Zou Tao and Yinan. Good evening, and good morning, everyone.

I will now discuss the second quarter and first half of 2025 operational and financial results. And starting from the second quarter used RMB as a currency.

The revenue split was 59% for office software and services and 41% for online games and others. Revenue from office software and services business increased 14% year-on-year and 4% quarter-on-quarter to RMB 1,356 million.

The year-on-year increase was mainly attributable to the growth of WPS 365, WPS individual business of Kingsoft Office Group. The robust growth of WPS 365 business was primarily attributable to enhanced productive capabilities, high-quality service as well as further penetration into industry and business scenarios, driven by the replication and promotion of typical solutions.

The steady growth of WPS individual business was mainly driven by enriched AI-enabled features, improve user experience and optimize operations. Revenue from online games and other business decreased 26% year-on-year and 8% quarter-on-quarter to RMB 952 million.

The year-on-year decrease was mainly due to the high base of anime game Snowbreak: Containment Zone and JX3 Online in the second quarter of 2024. The quarter-on-quarter decrease was mainly due to the decline of Snowbreak: Containment Zone and JX3 Online, partially offset by revenue growth from other games.

Cost of revenue increased to 5% year-on-year and 8% quarter-on-quarter to RMB 454 million. The increases were primarily due to higher server and bandwidth costs, greater channel costs as well as increased producing costs along with the business growth of Kingsoft Office Group, partially offset by the lower channel cost of online game business.

Gross profit decreased to 9% year-on-year and 3% quarter-on-quarter to RMB 1,854 million. Gross profit margin decreased by 3 percentage points year-on-year and 2 percentage quarter-on-quarter to 80%.

Research and development costs increased 15% year-on- year and 3% quarter-on-quarter to RMB 854 million. The year-over-year increase was mainly driven by continued investments in AI and collaboration capabilities as well as increased investments in new game genres.

Selling and distribution expenses increased to 12% year-on-year and 25% quarter-on-quarter to RMB 424 million. The increases were mainly driven by greater marketing and the promotional activities of Kingsoft Office Group as well as increased promotional and advertised efforts in supporting pre-launch activities of new games.

Administrative expenses increased to 12% year-on-year and 8% quarter-on-quarter to RMB 174 million. The year-over-year increase was mainly due to personnel-related expenses of Kingsoft Office Group.

Share-based compensation costs decreased to 13% year-on- year and increased 32% quarter-on-quarter to RMB 71 million. The quarter-on-quarter increase was mainly due to the grants awarded shares to the selected employees of certain subsidiaries of the company in this quarter.

Operating profit before share-based compensation costs decreased 48% year-on-year and 31% quarter-on-quarter to RMB 454 million. Net other gains for the second quarter of 2025 was RMB 343 (sic) [ 443 ] million compared with losses of RMB 12 million and RMB 22 million for the second quarter of 2024 and the first quarter of 2025, respectively.

The gains in this quarter were mainly due to that we recognized a gain on deemed disposal of Kingsoft Cloud as a result of the dilution impact of issue of new shares of it in the second quarter of 2025. Share of loss of associates of RMB 170 million were recorded for the second quarter of 2025 compared with a share of losses of RMB 169 million and RMB 153 million for the second quarter of 2024 and the first quarter of 2025, respectively.

Income tax expense for the second quarter of 2025 was RMB 104 million compared with income tax expenses of RMB 48 million for the second quarter of 2024 and the first quarter of 2025, respectively. The increases were mainly due to the accrued deferred tax expense related to deemed disposal of Kingsoft Cloud in the second quarter of 2025.

As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 532 million for the second quarter of 2025 compared with the profit of RMB 393 million and RMB 284 million for the second quarter of 2024 and the first quarter of 2025, respectively. Profit attributable to owners of the parent excluding share-based compensation costs was RMB 570 million for the second quarter of 2025 compared with the profit of RMB 441 million and RMB 316 million for the second quarter of 2024 and the first quarter of 2025, respectively.

The net profit margin, excluding share-based compensation costs was 25%, 18% and 14% for this quarter. The second quarter of 2024 and the first quarter of 2025, respectively.

And now on the first half of 2025. Revenue increased 1% year-on-year to RMB 4,645 million.

Office software and services made up 57% and increased 10% year-on-year to RMB 2,657 million. Online games and others made up 43% and decreased 10% year-on-year to RMB 1,988 million.

Gross profit margin decreased by 1 percentage point year-on-year to 81%. Operating profit before share-based compensation costs decreased 29% year-over-year to RMB 1,109 million.

Share of losses of associates of RMB 323 million and RMB 338 million were recorded for the first half of 2025 and 2024, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 816 million for the first half of 2025 compared with a profit of RMB 678 million in the same period last year.

Profit attributable to owners of the parent, excluding share- based compensation costs was RMB 886 million compared with a profit of RMB 770 million in the prior year period. The net profit margin, excluding share-based compensation cost was 19%, 17% for the first half of 2025 and 2024, respectively.

Our state of financial position, we had cash resources of RMB 25 billion as at 30 June 2025. Net cash from operating activities was RMB 665 million and RMB 1,374 million for the first half of '25 and 2024, respectively.

Cash used for capital expenditure was RMB 203 million and RMB 164 million for the first half of 2025 and 2024, respectively. That's all for the introduction of our operational and financial results.

Thank you all. Now we are ready for the Q&A session.

Thank you.

[Interpreted] And my first question is on the gaming business. So could management share your views on the performance of Mecha BREAK after its release in July and also any update on the full year revenue guidance for the sector?

And secondly, on the revenue growth of WPS Office business seems to reaccelerate since the second quarter. So what is the outlook for the second half of this year?

[Interpreted] So firstly, let me just answer the question and regarding the Mecha BREAK, as everybody pay attention to it, and when we officially get into the -- entered into their test and our P&L is already passed the 1 month. And based on this conclusion, didn't realize the expectation.

Although the early stage when we launched the population and also the good comments are quite good, but after 1 month. So generally speaking, for the whole game in a lot of the comprehensive elements.

Right now, the key point is that firstly, after the test in February and March, actually, based on the feedback from the players with this modification. So generally speaking is that the player told us that this game is really like needs to put a lot of energy and also spend a lot of money into it.

This is their feedback, that is why we -- based on this feedback to do some modification and trying to avoid that. But actually, our team is actually the overlap.

So if the player told us that they're going to spend too much energy into it and too much money into it. It means that this game is worth to invest.

So it means that this game is good for them, they could play, they would like to play out, so in different perspectives. But right now, because we have this modification, so this game becomes not that meaningful.

So we think that this is actually a very like fierce point with this modification. And second is that when we did the official test and also started to get into the charger operation, we think that the whole ecosystem has been changed, which we didn't expected that, especially in China, like the blocked industry, it's really bad, especially in the game industry.

We didn't expect it that much. And so because of that, it really has a very big damage for the ecosystem in the game industry.

And because it's become worse, and also we have some content where we officially get launched for the target design, and finally, the actual results for the final players is going to have a very big differences. So comprehensively speaking, one side that this is a new IP, we have some improvements, and we have some progress, but we also realize that in this new type categories and also their new play way, we need more time to control it as we -- is quite similar like JX3 Online.

So our strategy is that we need to have a very close interaction with the players to build up this IP. So we need some certain time to do the adjustments and optimization.

Okay. So regarding the officing and the outlook of the office, and it's going to include for the office.

And based on our internal evaluation, we have some progress. And basically speaking, with all of the elements compared with the strategy last year and here at the beginning of this year, a lot of like the personnel business, the office business and software business.

From the personnel business in the first half year of this year, based on this AI function improvement, as I just mentioned, and especially in these 2 days, we have a lot of meetings and together with the Broad meetings, we realize that this direction is correct. As I mentioned at the beginning of this year, we hope that from the positioning going from 0 to 1.

And step by step to realize all of them. So currently, we are moving into 0.5 and 0.6 and probably 0.7.

So it's more stick to the reality, the official like officing situation. And we believe that for the continuity with this year, for the Goose of the membership, we have a strong confidence for that.

And regarding the 365 business since last year, this year, and we can see that is good and currently based on the situation, we have strong confidence as well that's based on the collaboration of AI, we're going to promote strategically, and this is going to be quite successful as well. And so we have a lot of breakthroughs in the first half year, and we're going to continue to do it.

And in the second half year, we believe that this is going to be a very strong business. For the software perspective, and basically, we're going to have this domestic replace and also some innovation creation.

So in the first half year, we're going to have a pretty high market share. And in the second half year, we're going to continue for this trend.

And at this moment, for the second half year, generally speaking, no matter for 365 or software organization, we're going to have a very big confidence that we're going to be the -- maintain the same growth rate as the first half year.

[Interpreted] I'll quickly translate the questions. The first one is about JX3.

Could you please share the recent trends in active user base and ARPU for JX3 and considering the upcoming high base effect in the second half of this year, how do you see the JX3 revenue growth and the potential impact on our gross margin and operating profit margin? And the second question is regarding the office software, WPS AI recently updated, the AI agent features for PPT and knowledge library and how do you see the WPS AI agent differentiating from competitors like Manus and [indiscernible] to a broad sense of software sector, which types of products are more vulnerable to the disruption by AI agent and which have a relatively deeper mode in your view?

[Interpreted] So firstly, I would like to answer the question regarding JX3 Online. So this is actually a very good question.

And for JX3 Online, last year and when we promote the mobile version and no matter for the income and also the active players, it's going to reach to a peak level historically. So this year, this is actually a pretty big pressure for us.

And up to now, although they're JX3 Online is still pretty high, but compared with last year, it's a slightly drop. And also, we have like the season and we also put a lot of energy in the Mecha BREAK.

So in the first half year, we're going to put too much energy into the Mecha BREAK. And this is slightly influence of the JX3 Online, but no matter for the product and also for the improvement, we think that to maintain JX3 Online as a pretty high level.

We still have confidence on it, because we have been operating for JX3 Online since 2009 up until now, it has been 16 years. We have met a lot of challenges.

We have met a lot of difficulties. It all happens.

So from the long-term operation, it still works. And -- but we believe that if we would need to reach to a such a high foundation as last year, and whether we could maintain this high level, we still have a little bit pressure for it.

So regarding the second question, this is actually a very good question. And actually, you mentioned that especially the configuration with the other companies, I think this -- regarding this question from the basic thing that for the next generation, we can see that for a big module, it has been created for 2 to 3 years up until now and how the big module is going to actually increase the working efficiency and also to do the collaboration with the human things in the actual real like typical scenario.

So I think that this is going to get back to what exactly the AI is. So for us, we're going to have a typical documentation creation.

That is not just a notebook. This is actually a typical documentation and also together with rating.

So we are kind of a platform like this. That is why this is not just our regular, very general solution for customers.

This is actually typically for the office working. So we have to very clear identified our position.

Otherwise, we cannot compete with the other things because we need to compete in the same type of the product. So I think that for the users compared with the users, as you just mentioned, you have mentioned 2 companies for the matrix.

So I actually didn't think they are our competitors. So for the big module, for their Kingsoft, their Office AI.

The key things, I think I would like to express myself is that, I don't think this 2 -- the other companies are our actual competitors. So target for this drop, we are in the officing, in this area.

And for the AI, whether we could make a very good scenario and better serve for our customers. So my idea is that we need to have a core scenario to serve our customers, including the data.

We have enough users. We have enough data.

So all of this could help us to constantly improve and optimize the AI. So compared with the other companies, they are very hard to do that.

And this is actually recently we got the feedback internally. This is kind of a closed loop.

So from this perspective, we can think that our monthly active users could reach to 650 million. And for the daily active users is more than 100 million.

And for the PC, this is actually for the monthly active users would be more than 300 million. So actually, no matter for the B end or C end for the office working scenario, we have enough customers, we have enough data and we have enough scenarios to help us to optimize our product and for the AI from 1.0 to 3.0 version, the monthly active users growth has improved, what I just mentioned.

This is not just a general things. So we can see from the monthly active users, we have compared with the other companies, that this is way much better.

So we are actually in this officing field, this is kind of a very vertical characteristics. So we have almost 30 million users doing it.

And another thing is that compared with last year, the increase of the average users could be more than 50%. So competitively speaking, so competitive speaking is that we are focusing on the AI to improve the creation for the documentation, and we have enough users.

We have enough data to help us to create a better product and better experienced platforms from our customers. That is why we have a strong confidence that at least for the officing field compared with the other 2 companies you have just mentioned.

They are not directly competitors for us. So each of us have vertical field and which is going to help us to improve better, to do better.

And also, we know that after the several years hard work, we're going to find a way that we think is quite actuary, and we have enough customers, we have enough scenarios to help us to improve our service and constantly to create a better product for our customers.

[Interpreted] A quick follow-up question about the Mecha BREAK. Similar situation has occurred with other games during their initial launch period, but they eventually achieved great success.

So what is this game's current user base situation? And how will the game be operated going forward?

Second question is about AI team. What's the management perceived of this AI team?

And what is its knowledge of this team? Can management give us some comment about the product progress and monetization outlook and the synergies with WPS and Cloud business?

[Interpreted] And so we think that regarding the Mecha BREAK and your absolutely correct for the Kingsoft games. And from the historically, it can prove many times that better feel to have always have good comments.

And like JX3 Online and also for the Snowbreak: Containment Zone. And at the beginning -- at the initial stage when we launched, we have quite good feedback.

And then we did modification. And so from a historical perspective, that is true.

So at the early stage, we -- our team internally, we have a communication and after launch because the player is going to give us their feedback, and we need to hear about their actual experience and then they're going to get back to our team and then we're going to modify it to improve it. And from a long-term perspective, the strategy is quite good, it's correct.

And so this game is just launched for 1 month. So we have a lot of work like to repeat of the work, to think back how we're going to improve it and we are doing the job right now.

So I don't have that much things to say, but I think that generally, the main direction is that we need to give some time to our team. And then we think that after a certain period of time, we're going to have a more clear picture, including how long time we're going to improve and which part we have to improve.

I think that we need to observe for a certain time, then we have some better clear conclusion. So regarding the second question, this is a quite good question.

So when I need to have further explanation. So let me just quickly explain that.

For the Kingsoft AI product, what is our core positioning. So our positioning is that we're going to help the enterprises to use the AI better, as I just previously mentioned.

So this is actually the whole lay system, how we consider that. Firstly is that for their big module, their AI technology is deeply influenced the human digital economic system.

So which means that all of the enterprises digital system based on this AI, it's going to have the rate structure, but for the AI itself for majority of the enterprises, they doesn't have that ability to train a big module and for majority of the enterprises, even in the future, we're going to have this machine module that we believe that the machine model is going to shrink up to 3 to 5 type of machine module. But actually, even we have the machine module, majority of the enterprises, they doesn't have this IT abilities for them to use the AI better.

So comprehensively speaking, based on the several points. Plus, the lay systems, the ecosystem like Xiaomi, we have the JV merger has already been launched, and we also have a reference module, which is going to be launched at the end of this year.

So based on that, including some other big modules like DeepSeek, [indiscernible] et cetera. So basically speaking, in home market, target for the whole lay systems scenario based on the Xiaomi's big module and also we have -- we're going to solve their machine models issue.

So the remaining is that we need a certain team to complete the engineering ability for the AI to help their enterprises to use the AI better. So firstly is that we need to have a machine module.

And secondly, we need to have good team at the back to help them to realize the AI usage. So this is actually the background explanation.

So how about our progress, let me just report that. Actually, for the same as officing, we collaborated with the Cloud.

And we currently work together with state-owned bank. We have delivered the first scenario.

So currently, for the national bank, they need to report, they need to generate the credit report in the -- like the loan. So this is actually for them is a quite heavy job.

So we have already completed and delivered. We work together with the Kingsoft Cloud, the Kingsoft Office, together with the Cloud AI.

And up to now, we got a very positive feedback. So altogether, the full score is 100 score and we reached to above 85%.

So if the feedback is that good quality and usable. And the secondly is that we collaborated with regional government for the officing area.

We've worked together with them and after 1 year's optimization. Basically speaking, right now, it's almost 80 score, and we are still improving it.

So based on this financing, based on the governance, and we also have collaborated with a big law firm and work together with like law university, and we need to have a deep cooperation with them. We need to have a legal module using the legal scenario.

And we're going to create a deep product. This is actually the current progress.

So since last time until now, the total delivery we have realized from 0 to 1, including the governance, this is on the process and also the legal scenario basically is still on the process. So my understanding is that needs to have a smaller scale that's suitable and we didn't officially promote it yet, but I believe that in the future, the AI big module is definitely is going to be used for a lot of different scenarios.

And for the big module in the future, it's going to shrink into 3 to 5 types. The key thing is that we need to have the AI engineering ability, which means that we need to have this IT ability.

This is actually a very big gateway for majority of the enterprises. That is why we need to help them to use the AI better.

We believe that this is going to be a very big market. So currently, we have selected several scenarios.

We have completed from 0 to 1. In the future, we're going to constantly improve it to have some strategy layout.

And then based on this progress from 0 to 1, we have already delivered 2 to 3 projects. The next stage, we need to think about how we have realized from 0 to 1.

So we need to think about how to realize from 0 -- from 1 to end. So lastly, it's actually the same choosing experience for -- together with the Kingsoft officing, Kingsoft Cloud, this collaboration in future we're going to collab with Xiaomi to realize the machine model.

And in the future, we're going to have metrics of the AI to working together target for how to help the enterprises to use the AI data. This is going to realize the whole chain of the AI assistance.