Earnings Transcript for 3888.HK - Q1 Fiscal Year 2024

Operator: Good day and thank you for standing by. Welcome to the Q1 2024 Kingsoft Corporation Earnings Conference call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Yinan Li, IR Director of Kingsoft, please go ahead.

Yinan Li : Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 First Quarter 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. A third-party interpreter will provide a consecutive interpretation into English. During the Q&A session, we will accept questions in both the English and Chinese with alternating interpretation provided by the third-party interpreter. On that translation is solely to facilitate the 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 join us today; Mr. Zou Tao, our Executive Director and CEO; and Ms. Li Yi, our acting CFO. Now I'm turning the call to Mr. Zou.

Tao ZOU : [Foreign Language] Hi, now we are turning the call to translator. So welcome to Q1 2024 [technical difficulty] achieving double growth in both total income and profit in the first quarter. The total income amounted to RMB2,136 million representing a year-on-year increase of 8%. The operating profit amounted to RMB602 million, representing year-on-year increase of 31%. [technical difficulty] attributable to shareholders of the parent company amounted to RMB280 million, representing a significant year-on-year increase of 48%. In particular, the revenue of Kingsoft Office Group reached RMB1,225 million in the first quarter, representing a year-on-year increase of 16.5%. The revenue generated from the games, business, and other amounted to RMB912 million. Now, I would like to summarize our performances in the first quarter of 2024. In this quarter, Kingsoft Office Group has maintained a solid operation, focusing on the strategy of multiscreen, cloud, content, collaboration, AI. Kingsoft Office Group continued to invest in R&D of collaboration and AI and strengthened the competitiveness of its products through technical innovation, product integration, performances, enhancement, other initiatives. Further, our key products exist of 600 million for the first time and reached 602 million, representing a year-on-year increase of 2.2%, of which the number of monthly active devices of the PC version product amounted to 270 million representing a year-on-year increase of 7.1%. In terms of individual subscription, we have continuously enriched membership benefits to enhance user stickiness and paying conversion and realized the revenue of RMB734 million in the quarter, representing a year-on-year increase of 24.8%. The pricing of the WPS AI product was announced at the end of March, which is under [great bulk] (ph) testing, marking its initial steps towards commercialization. In terms of institutional subscription, we have continued to improve the product offerings, enhance the service experience, broaden their equal channels, and actively promoted application of the cloud and collaboration in office with the sales module of institutional subscription entering the stage of transformation achieving the revenue of RMB242 million in this quarter, representing a year-on-year increase of 13.6%. In terms of institutional licensing, the institutional licensing business achieved growth driven by increased purchase orders on localization solutions. We achieved the revenue of RMB194 million in the first quarter, representing a year-on-year increase of 6.31%. To elegant with divestments trends of application of the cloud. [technical difficulty] On April 9, we launched the upgraded new quality productive force in Office WPS 365, covering the upgraded WPS office, WPS AI for enterprises, and WPS collaboration, offering an one-stop AI office solution for users. The WPS AI Enterprise Edition is designed as an enterprise [print] (ph) for clients. [technical difficulty] intelligent document library and co-applied for enterprise smart assistance. AI Hub reduces the [indiscernible] for enterprises to deploy large modules and integrates the AI capabilities of mainstream large modules in China, such as MiniMax, Drupal AI, Ernie Bot, [indiscernible]. Our position in the field of large modules is the application provider, And we have accommodated hundreds of modules in China to achieve the basic AI services out of the box, which also allows users to overcome the difficulties in the selection of large modules and greatly reduces the threshold for use. AI dots, solves the user's 10 points of digital asset management, transferring the traditional cloud documents library into an intelligent document library through one click upgrade so that the source of the intelligent creation has a basic and the completed document authorization system guarantees that the information is not overstepping the authority. [indiscernible] can automate tasks through natural languages. Optimize users workflow, help operational staff to analyze data using BI products driven by natural languages. And use WPS 365 APIs and enterprises-owned APIs to address the needs for office automation. WPS AI for enterprises provides a feature support for customers to improve their collaboration efficiency, manage their R&D projects, and set up low-cost approval processes, et cetera. In terms of online games business, under the overall guiding principle of Prime Game strategy, we focus on cultivating and expanding the classical JX series and actively exploring new market segments so as to venture into innovative game genres. To flagship game, JX3 online showed strong vitality, maintaining steady development. The conducted multiple rounds of testing the mobile version of JX3 Ultimate for research, elaboration, adjustment, and optimization with users so that the game quality continues to improve. The game will be launched in June, which will bring about multi-technical integrated experience for players. Achieving accessibility of JX3 Online, our flagship through all platforms. While deeply involving the cultivation of the material [indiscernible], we have also made an incremental process in exploring new game genres. Since the official launch of the anime shooter game, Snowbreak

Yi Li : Thank you. Good evening everyone. I will now discuss the first quarter financial results using RMB as currency. Revenue increased 8% year-on-year and decreased 7% quarter-on-quarter to RMB2,137 million. The revenue split was 57% for Office Software and Services and 43% for Online Games and Others. Revenue from the Office Software and Services business increased 70% year-on-year and decreased 12% quarter-on-quarter to RMB1,225 million. The year on year increase was mainly due to the growth of domestic individual office, subscription business, institutional subscription business, and institutional licensing business of Kingsoft Office Group, partially offset by the decreased internet advertising business. The growth of domestic individual office subscription business was mainly attributable to the increases in both the user stickiness and the paying ratio. Resulting from enriched membership benefits, the growth of domestic institutional subscription business was mainly because we continuously promoted the transformation to a subscription model as the launch of the WPS 365, the new productive forces in office. The increase of institutional licensing business was mainly driven by purchase orders on localization solutions. The decrease of internet advertising business was mainly due to the shut-down of our domestic third-party advertising business at the end of 2023. Revenue from the online games and others business decreased 1% and 11% quarter-on-quarter to RMB912 million. The slightly year-on-year decrease was primarily due to a natural decline in revenue from certain existing games, partially offset by revenue contribution from titles released in the second half of 2023. The quarter-on-quarter decrease mainly reflected the natural decline of certain existing games, partially offset by the growth from proactive operation of the anime shooter game, Snowbreak

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC. Please go ahead, your line is.

Xiaodan Zhang: [Foreign Language] Thanks management for taking my questions. And I got two questions here. The first is regarding the gaming business. The new version of Containment Zone launched in April has become a hit in the market. So how should we think of its performance going onwards and what is your operational strategies for the anime game sector? And second is on WPS AI. So could you please update us with the commercialization progress of your individual oriented products as well as the enterprise version? Thank you.

Tao ZOU: [Foreign Language] Hi, translator, please translator for Mr. ZOU. Okay. So actually from the game perspective, is that we constantly is going to improve our sales and services, afternoon we just finished the meeting with the Kingsoft of the Board of Directors -- Board of Meeting and thank you for the question, we also have [raised this] (ph). So today during the -- Mr. Kris is on the site. So our conclusion is that according to the Kris feedback, he thinks that we're going to continue to do it. It's not just a short time. We're going to make it as a long term. We're going to constantly to ask ourselves and our team actually for the eight years of the development we have for getting to the third generation. And from this, initially, we started to do this game to the publishing. And until we have so many games come out, we're going to have this eight years of this exploration and experience collection. We believe that for the game industry, the competition is quite heavy. But we probably can see that we have find a dedicated classification which is super-fast. We have the confidence that in this trial, currently we're quite competitive enough, which is showing from the data of April and May, which can prove ourselves. And also for this whole total annual income, we also have an update. We're going to have a very big increase. And we're going to do some adjustments, which we can think that probably we can make it around 10% of increase. Compared with the -- if of course, the other game is going to launch in time, so the results would be much better. From the strategy perspective, last year since the game has launched, the 20th last July, we constantly to cooperate -- to communicate with our clients, with players, especially from this February, we have listened to -- the suggestions and ideas from the players. And this year, our team has found the true feeling that we need to -- based on the users to continue to do the optimization. So we need to firstly make friends with our users, and then constantly have different generations come out to optimize it constantly. So this is, we can say that is kind of a milestone for us. [Foreign Language] Okay. So actually from this WPS AI's see and the progress and also the strategy from this [great gear] (ph) testing, we have made a conclusion that we have realized our expectation. If we need to expand it to describe it, like from this the user's module and also the AI scenarios application and also for these activities for the users to stick with the AI which has realized our great testing expectation. But we will still spend a very long time, especially for this customer experience, to have different functions optimized. We're going to constantly optimize it, including some different optimizations for different scenarios. From the [C-and] (ph), core point, we think that we already have some existing customers, and then we would like to have a deep connection with them to have innovation together. So what does that mean is that we all know that for the AI big module, since this comes out into the market last year, for the C-and, we have discussed quite a lot. It's like AIGC out there for this type of things. So from the C-and perspective, we constantly have to practice. And also for the B-and, for the enterprises, how are they going to use it for the whole industry? We are constantly trying to understand it, trying to touch it to get into a certain perspective. But we believe that for the big module for this enterprises, they're going to have some value added. It's going to be very powerful, but which is going to be the correct road for it. And in the future, how are we going to use this big module to make the small module, to have the industrial module, to have these private customers scenarios, to integrate them together? So from last Q3, we have discussed with our customer that we need to create together. We already have some practicers, so we're going to have some localize it. So from the B-and perspective, we think that we're going to have the communication with our customers together, target for this big module, you have this creation together. So generally speaking that for the B-and, what exactly the industry is going to have a very good future, a very good result, it's hard to say, but for the AI industry to have the value added is going to be a very big trend and the market will be very big.

Yinan Li: So, operator, we're ready for the next question.

Operator: Thank you. Please stand by. Our next question comes from the line of Linlin Yang from [Guangzhou] (ph). Please go ahead. Your line is open.

Linlin Yang: [Foreign Language] My first question is about the growth of games. Can you break down the 10% growth for us? How much incremental growth does [Foreign Language] each contribute? My second question is about the dividends and share buyback. As the bottom line tends to improve, will you consider to increase the amount of the dividend payout and share buyback? Thank you.

Tao ZOU: [Foreign Language] Actually for this Tier-1 for this contribution for our growth we need to discuss it from different perspective, it’s [indiscernible] further income and also the profit of course, [indiscernible] which is going to better. The reason for the tier 1 is going to be an ERP game. From the tester perspective, we believe that the focus, the future is going to be much better. But for this [indiscernible], which is the [indiscernible] mobile version, for this total user's quantity for this Kingsoft game is going to have a much bigger percentage from this financial feedback. And also for [Chongbai] (ph) is going to be much better. So the Kingsoft users total quantity, we think that for [indiscernible] which is going to be much better, which this is according to our expectation. [Foreign Language] Okay. So, from this -- actually the purchase of the entire Kingsoft, the whole group from Office and also Game, the growth performances is quite good. And also for [indiscernible] this type of products we have for this reduction of the losing. So from this Kingsoft Group, the whole profit is going to get into a better performances. And also for the repurchase density. And because today we have the board of meeting and also discussed about the total amount of the stocks. So the Board of meeting has also realized of the HKD1 billion is amount, and last year the total -- the rate purchase limit is going to be this RMB310 million. So regarding this topic my opinion is that I think currently for this Kingsoft Group, our whole evaluation has been reduced quite a lot, has been evaluated quite low because [indiscernible] going to answer this question. The whole market situation is the very important part we need to consider. If the whole market is going to headed into better performances, then of course the repurchasing limitation, no matter for the amount and also for the frequency, is going to be higher. But if the whole economy -- of this whole market is going to be getting worse and worse, then our repurchase limit, quality and also the frequency will be higher. So this is just a very frankly to express myself. So competitively speaking is that, so comprehensively for better conclusion is that our evaluation has been considered lower than the market. And also for this repurchase limit, the total amount and also the frequency depends on the whole market.

Yinan Li: Hi operator, we are ready for the last question.

Operator: Thank you, please stand by. Our last question comes from the line of Bing Duan from Nomura. Please go ahead, your line is open.

Bing Duan: [Foreign Language] Thank you, management, for giving me the opportunity for the last question. So a follow-up on AI, how do you think about the competition landscape? First, the large language models pricing are declining. Will that affect our WPS AI cost positively? The other one is how do we think about other like copilot, Microsoft's copilot product or key-mean chats in China will affect the competition landscape for WPS AI. Thank you.

Tao ZOU: [Foreign Language] So from this industry, that is correct. For [indiscernible] the cost is quite low, and also for Alibaba and Baidu, they are also followed up with the current topic. For the Kingsoft Office perspective, we are actually the module to explore the third-parties. And also we are charging for these members, for our users from the AI perspective. So for the moderate sales, of course, the cost is going to be decreased. That is going to be good for us. But if we're going to really disclose this whole situation to make sure that the cost is lower from the price of the users. And also from this grid test, we also have to do the adjustment of quality to reduce the price. And this is only for the Office itself. And from this industry perspective, last year we have already got that everybody is trying to do it because they are trying to get a lower price, to grab this market, and finally everybody is thinking that it is impossible that we're going to have such a lot of big modules existing. I personally think that one or two big modules existing in the market should be good enough. The third one is probably not possible. And also for the very similar like the searching engine. And so the searching engine initially is supposed to be a very heavy competition, but currently, and there's only one company or several companies existing in the market. And also for like our comprehensive media competition is also the same thing. It's like there's a TikTok and also the [Zhihu] (ph). They are the one or two very big ones. This is from a C perspective. Of course from B perspective it is different. Different industries have different models. From the AI perspective my understanding is that for Office products the AI competition is quite hard. We are discussing about the two companies, one is for the software, the other is for the teams. We actually did internal discussion. We are not worried about Microsoft yet. Up till now, even we are doing this office AI value-added. We are not later than Microsoft, especially after so many years development up here today, we have a very solid customer foundation. Our AI have a very quickly updating. For the Chinese market, we are not worried about that. And also for the Kimi, this is a very hot topic. We are also just discussing it. Kimi is actually our partner. My understanding is that it is different than WPS. This is different product type. My understanding is that for this Kingsoft, we have three daily parts, the AIGC, the Closed, and Insight. And we have the documentation, Excel, PowerPoint, et cetera, to have the multiple documentations profile. And for Kimi, that is mostly like Insight, Reading, Understanding. Of course, the AIGC is quite strong, but for WPS, it's based on this document. We're going to have this innovation for the document, sharing, collaboration to have the value-added, value function added. So probably everybody is thinking that we are competitors. It's like [indiscernible], but actually we are completely different. WPS is kind of an addition for the document, just sharing the reading and discussing for this topic. And for the office thing, it's become, everybody thinks that it's going to be a competitors, but our perspective, our understanding and our idea is that Fisher is different. We are definitely much better than Fisher. But Office is a very general concept. So basically it's that we're going based on this Office to have some collaboration, to have creation for the support and we're going to have using the digital platform. And right now AI is coming, so we're going to have AI to value-added on it. In that case, it's going to be easier for us to have division of different products. So Kimi would like to cooperate with us. So they would like us to do the addition for this documentation. So while we are partners, we are not competitors.

Yinan Li: Hi, thank you for joining us today and this will conclude our presentation for the 2024 first quarter earnings call. Thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.