Earnings Transcript for 3888.HK - Q4 Fiscal Year 2024

Operator: Good day, and thank you for standing by. Welcome to Kingsoft Corporation's Third Quarter 2024 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'd now like to hand the conference over to your first speaker today, Ms. Yinan Li, IR Director of Kingsoft. Please go ahead, Ms. Li.

Yinan Li: Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 third quarter earnings call. I'm Li Yinan, 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 English and Chinese with alternating interpretation provided by the third party interpreter. On-site of 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 Ms. Li Yi, our Acting CFO. Now, I'm turning the call to Mr. Zou. Please go ahead.

Tao Zou: [Foreign Language] [interpreted] Hello, everyone, and thank you all for joining Kingsoft third quarter 2024 earnings call. We are pleased to report strong growth in both revenue and profitability this quarter, led by an exceptional performance from Seasun. Total revenue reached RMB2.915 billion, representing year-on-year and quarter-on-quarter increases of 42% and 18%, respectively. Operating profit hit a record high of RMB1.14 billion, a remarkable 204% increase year-on-year and a 44% increase quarter-on-quarter. Kingsoft Office Group contributed RMB1.207 billion in revenue, up 10% year-on-year and 2% quarter-on-quarter, where our gaming and other business generated RMB1.708 billion, a 78% year-on-year increase and a 33% quarter-on-quarter increase. These results demonstrate our core business momentum and position as for sustained growth. Now I will walk you through the business highlights of the third quarter 2024. Kingsoft Office Group maintains leadership in domestic office software through long-term R&D investment, aligned with our technology driven strategy. Our domestic individual office subscription business generated RMB716 million in revenue this quarter, a 17.2% year-on-year increase. This growth was primarily driven by AI features, highlighted by the October term launch of WPS AI call writing. WPS AI 2.0 delivers a more efficient creation experience, boosting user engagement and conversion rates. Additionally, the public beta of WPS HarmonyOS NEXT is expanded to further enhance product penetration. Launched in October 2024, this version enables seamless document and data sharing across devices and platforms supporting multi-user collaboration, browsing, editing and version capabilities. At the end of September, our key product reached 618 million monthly active users, up 9 point -- 4.9% year-on-year growth, including 277 million PC users, up 7%, and 338 million mobile users, up 3.4%. Our domestic institutional subscription business generated RMB248 million in revenue this quarter, primarily driven by enhanced WPS 365 offering which are seeing strong adoption among large private and state owner enterprises. In our public cloud business, we are expanding this revenue stream while optimizing our revenue model, building a solid foundation for a sustainable growth in our domestic institutional subscription business. Domestic institutional licensing revenue reached RMB143 million this quarter, up 9% year-on-year. By aligning with policy changes and customer needs, we successfully expanded our presence in lower-tier government markets focused on localization solutions. This market expansion has driven order growth in our domestic institutional licensing business. Our overseas business continues to see youth growth primarily in mobile, with substantial growth potential in PC, leveraging our overseas AI capabilities. We recently achieved a second position on the Product Hunt leaderboard, demonstrating growing international recognition. Following our prime strategy, the online game business continues to strengthen the classic JX Online series. We are making significant investments in new genres and market opportunities. JX3 Ultimate has delivered strong performance since launch, reaching 11.46 million monthly active users in its first open beta month, with returning players accounting for 16.3% in this quarter, coinciding with the 15th anniversary celebration of JX3 Online. The number of returning players has exceeded expectations and the game achieved record breaking revenue across all platforms in August. The Western Regions' Grand World Project, a celebration between JX3 Online, the Dunhuang Museum, and the Dunhuang Intangible Cultural Heritage Protection Center, aims to digitally restore the historical safe rooms. This initiative has gained recognition from Xinhua News Agency, Chinese Official News Outline. Our Sci-fi mecha game, Mecha BREAK, successfully completed its first beta test in August, drawing strong player response and global attention. The game garnered nearly 3 million global pre-registrations and peaked at 17th on the Steam Global Wishlist, attracting more than 1 million new users. The 15-year success of JX3 Online demonstrates our commitment to our prime game strategy, where the strong market response to Mecha BREAK reflects our successful expansion into new gaming genres. Looking ahead, Kingsoft Office Group will maintain its long term investment in AI and collaboration delivery intelligent solutions across deliver office scenarios. Our game business will focus on innovation and quality improvement to provide expansion of experience to players globally. We remain committed to our core principle of putting users first, promoting technology driven business and fostering innovation to create value for our customers, shareholders and employees. Next, I would like to invite Ms. Li Yi to introduce the financial performance for the third quarter. Thank you.

Yi Li: Thank you, Tao Zou and Yinan. Good evening and good morning, everyone. I will now discuss the third quarter financial results using RMB as currency. Revenue increased 42% year-on-year and 18% quarter-on-quarter to RMB2,915 million. The revenue split was 41% for office software and services and 59% for online games and others. Revenue from the office software and services business increased 10% year-on-year and 2% quarter-on-quarter to RMB1,207 million. The year-on-year increase was mainly due to the increased domestic individual office subscription business of Kingsoft Office Group, which was primarily attributable to increased user stickiness and commercial res, supported by the introduction of WPS AI Version 2 with four new assistants in this quarter that provided more efficient creative experience. Revenue from the online games and other business increased 78% year-over-year and 33% quarter-on-quarter to RMB1,708 million. The remarkable year-on-year and quarter-on-quarter increases were largely attributable to, first, the outstanding performance of JX3 Online and the successful launch of JX3 Ultimate, further boosting the game popularity. And second, the active operation and enhanced experience of other games. Cost of revenue increased 20% year-on-year and 7% quarter-on-quarter to RMB460 million. The increases were primarily due to Greater China costs, along with the revenue growth of the online games as well as higher personal related expenses of online games business. Gross profit increased 46% year-on-year and 20% quarter-on-quarter to RMB2,454 million. Gross profit margin increased by 3 percentage points year-on-year and 1 percentage point quarter-on-quarter to 84%, which were mainly due to the changes in revenue mix. R&D costs increased 28% year-on-year and 16% quarter-on-quarter to RMB861 million. The increases were mainly due to increased headcount to support the development of AI and collaboration products as well as higher accrued performance based bonus. Selling and distribution expenses decreased 17% year-on-year and 4% quarter on quarter to RMB365 million. The year-on-year decrease was largely due to high base in the third quarter of 2023 with the promotional and advertising activities for the launch of new games. Administrative expenses decreased 11% year-on-year and increased 7% quarter-on-quarter to RMB166 million. Share based compensation costs decreased 20% year-on-year and 29% quarter-on-quarter to RMB58 million. Operating profit before share based compensation costs increased 168% year-on-year and 37% quarter-on-quarter to RMB1,202 million. Net other losses were RMB63 million for this quarter compared with gains of RMB18 million and losses of RMB12 million for the third quarter of 2023 and the second quarter of 2024, respectively. Share of losses of associated of RMB428 million were recorded for this quarter compared with losses of RMB307 million and RMB169 million for the third quarter of 2023 and the second quarter of 2024, respectively. Income tax expenses were RMB31 million for this quarter compared with income tax expense of RMB44 million and RMB48 million for the third quarter of 2023 and the second quarter of 2024, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB413 million for this quarter compared with profit of RMB28 million and RMB393 million for the third quarter of 2023 and the second quarter of 2024, respectively. Profit attributable to owners of the parent excluding share based compensation cost was RMB453 million for this quarter compared with the profit of RMB69 million and RMB441 million for the third quarter of 2023 and the second quarter of 2024, respectively. The net profit margin excluding share based compensation cost was 16%, 3% and 18% for this quarter, the third quarter of 2023, and the second quarter of 2024, respectively. The group had a strong cash position towards the end of the reporting period. As at 30 September 2024, the group had cash resources of RMB25 billion. Net cash generated from operating activities was RMB1,387 million for this quarter. Net cash used in operating activities was RMB752 million for the third quarter of 2023. And net cash generated from operating activities was RMB1,045 million for the third quarter of 2024. Capital expenditure was RMB109 million, RMB160 million and RMB50 million for this quarter, the third quarter of 2023, and the second quarter of 2024, respectively. That's all for the introduction of our financial results. Thank you all. Now operator, we are ready for the Q&A section. Thank you.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] We will now take our first question from the line of Xiaodan Zhang from CICC. Please ask your question, Xiaodan.

Xiaodan Zhang: [Foreign Language] [interpreted] So thanks management for taking my questions. And first of all, regarding the gaming business, what is your view on its growth resilience in the upcoming quarters? And secondly, could you please share your outlook on individual and institutional business within the office software sector? And lastly, any insights regarding shareholder return would be highly appreciated? Thank you

Tao Zou: [Foreign Language] [interpreted] So regarding my answer is that actually for the growth of the potential of the game in the future, basically next year we still have three to five different types of games in stock and which of that three of the games we have already bought their certifications and another two is still under their application process. Among that, two of the games we are doing their distribution to do the operation for the product, which is made by a function of the company and we certainly have a game and another three of the games we have are CF Research, and also based on the performances in August that of the Mecha BREAK, the situation we think that next year the performances should be collected for the details regarding how it's going to look like and also the growth rate that is the same as our previous answer that the game doesn't have any indication yet, so we cannot give a very clear answer for it and also we can only based on the data of the launch and to give some, like, guidance for based on the previous performances. So actually for the office side for the B-end or the C-end, the forecast, we would like to answer in several perspectives. Firstly, for the C-end, people are always paying attention in the recent two years, we are always trying to promote the AI value added. Previously, we have this introduction that all the products we have launched we're going to based on this area to continue to have better performances, improve the customer experience, and also increase the customers' feeling for it. This is the whole C-end. This is causing that we're going to face our AI to have improved innovations and have some development according to that for the C-end. This is our C-end strategy and firstly we need to increase the customer experience to have more customers' members and, secondly, we need to have like strengthen the payment rate of the customers and strength that we need to upgrade their up-value. And recently we never changed it to strategy yet and we got a very good performances including the AI promotion. For the B-end, we actually did quite performances for the institutions' subsidiary and also the subscriptions and initially we have [Technical Difficulty] from like site subscription, subscription into their monthly institutions' subscription. We think that this is quite good for a big start, especially we are facing, sort of, hard companies here. We have a very good improvement for institutions' subscriptions. So we believe that this part still have a very bright future. And this also proves that for the 365 Module, we're going to have different pieces and combined deeply we have matched with different enterprises amount compared with the whole general package. We believe that this has a very good space to improve. And regarding the information innovation and we think that this is actually have a slight step by step to be recovered and we believe that in the future it's going to have a very rapid growth. So regarding the shareholders' return question, we -- the same thing is that we're going to do it as there, but regarding this question we're going to answer in two perspectives. The first is for this repurchase. Based on 2024, we have some repurchase and the total amount could approximately HKD500 million and the total share ratio is 1.55 in comparison with other companies who did the repurchasement. Basically speaking, our -- the share ratio of the repurchasement was quite leading. We will continue to do that and also we're going to -- based on this product directives period, the amount period, we're going to continue to do this action. And regarding the dividends, so every year our proposal has to wait until the next year for the Q1 of next year and the Board of Directors is going to based on that share dividend situation and also their comprehensive elements of the company's development to give a proposal for the division. And currently, we cannot answer this question yet whether we're going to expand this dividend or not. We can't answer the question at this moment.

Operator: Thank you. Our next question comes from the line of [Jiahui Zhu] (ph) from CITIC Securities. Please ask your question, Jiahui.

Unidentified Analyst: [Foreign Language] [interpreted] My first question is about office software business. Has the office software business failed the business recovery brought about by the improvement of the mecha environment? Does WPS AI's product and commercialization progress meet our expectations? My second question is about internationalization. What are the prospects for office software and gaming businesses to expand overseas? My third question is about other profits. What are the reasons for the strong performance in terms of profits? [Foreign Language]

Tao Zou: [Foreign Language] [interpreted] So firstly -- and please understand of this mecha environment and regarding the question whether we can feel it has a rebound, so actually we have a lot of customers they are government or they are state-owned enterprises. From the government perspective especially, recently the latest standing committee of the National People's Congress mentioned that it's going to have a budget of RMB600 million to do the investment. So based on these areas, generally speaking, from the government perspective, they have money in hand, so they're going to get back to their regular like daily governance and operation. That is why, I think, that this is definitely a benefit for us. In addition for -- let the government get back to the regular daily governance and from their enterprise's perspective is going to have a tremendous increase. So for us to do the promotion of B-end, especially for the institution subscription area, is going to have a very big improvement. For the AI perspective, regarding the AI, that is whether that we have reached the progress of the product like commercialization. We have -- I have mentioned previously that that is based on -- is really realized of our expectations after we reverse -- of our strategy. Last year, when the AI has promoted out, especially for Microsoft, first it became, like, concept of the [Cold Palace] (ph), so the market is expected to realize from zero to one at once. But actually, based on our practice, in the past one year's practice, especially we'd like to have a cooperation like innovation together with our customer. We think that if we're not going to go directly from zero to one, it's going to go like 0.1, 0.2 [Technical Difficulty] but we help our customers to increase their customer experience in different scenarios. That is why we mentioned that this is going to complete the 0.1 or 0.2 process. This is actually more basically satisfied of the objectives physical development process. And based on this, based on this dimension, we think that this year we have a very good development strategy for AI. So actually regarding the overseas strategy, we would like to talk about the game first. From the data perspective, we actually, for the overseas game, has tremendously increased of this income percentage. From the regions area, we can see that we started to get into -- get overseas since 2004 in the [indiscernible] and also the Southeast Asia, we kind of promoted the martial arts games. And last year, for the last year of the Emmy Game, we have started the global layout and next year for the Mecha BREAK, we -- this is actually a product fitting to the global market and we believe that is going to have a breakthrough improvement. And for the office, for the layout of overseas, basically in the past we didn't have any promotion yet, especially since the COVID-19 period and we didn't focus on it yet. But from the data perspective, no matter for the income for their mobile end or the PC end, that our customers always have a very good increase, no matter for their -- like monthly compared or the yearly compared. And although we didn't release the data yet, but the potential is quite big, especially for the entire PC end. Previously we only promote the mobile end, but the customers is going to download the PC end once they recognize the game and we can see that the monthly active users could reach to more than 10 million users and the increase numbers of the year-on-year and the month-on-month compared to like more than 10%. Actually, we can see that the overseas customer recognize our products very well. So we think that in the future for the overseas market for the entire [Technical Difficulty] obviously it's going to have a very strong growth. Last year -- initially, we would like to focus to lay out of the overseas market, but AI comes out and that is why we transferred our key point into AI in the -- and also through the two years development we think that the AI is going to have localized for the office area and it's going to have a step by step -- become more and more nature. Next year, we're going to develop their overseas market with -- we believe, that is going to have a good performance.

Yi Li: [Foreign Language] [interpreted] So actually from this -- the profit perspective, we would like to extend into two perspectives. Firstly from this -- their income end. This season for the dry-games is no matter for the internal expectation or the external expectation is -- has extra -- expired of expectation and their year-on-year scores could reach 7%. And for their JX3 Online, this has reached to -- when we have this annual ceremony for 15 years and also in June, the dailies -- the active users has tremendously increased and also in August, for the annual ceremony, we've realized that for their income perspective is quite good. And also for the profit perspective, for the Xiangzhi compared with the JX3 Online for the PC end their interest rate is quite high. For the Xiangzhi, the mobile game since 2022 compared with the JX3 Online, most of the customers are coming from our official channel and that means that we didn't share that much resources to other active channels. We always have to communicate on the market that, so the Xiangzhi business model is that it's going to have a safe research and safe publish. So for the mobile game, we think that this -- we're going to explain these two questions by these two perspectives. One is for the income end and another one is from the profit end.

Operator: Thank you. Our next question comes from the line of Linlin Yang from GF Securities. Please ask your question, Linlin.

Linlin Yang: [Foreign Language] [interpreted] I have two questions. The first question is about the game business. Could you give us some guidance in Q4 and next year? My second question is about the losses of the affiliate companies. After excluding one-time portion, what would be the losses of the affiliate companies? Will there be any further impairment losses in the future? Thank you.

Yi Li: [Foreign Language]

Linlin Yang: [Foreign Language]

Yi Li: [Foreign Language] [interpreted] So our answer is that, based on this market guidance for the games we expect is that the annual growth is going to reach to 30% and currently we don't have an actual number comes out yet, because we didn't complete it yet. But next year we're going to have five games launched. Two of the games were distribution -- distributed, but we are their agent and three of the games is there for research and developers. And so we can see that the market is quite expected for these five games, especially for the Mecha BREAK. And also we have the word of the [SWAP 4] (ph) and like the players of the [Sword 0] (ph), this type of games that is for -- these five games is quite good and quite attractive in this market. From the number -- for the quantity perspective, this is going to be a big year for us. So for the Kingdom Cloud, let's talk about the Kingsoft Cloud, the -- I believe, OnceInfluence. We can see that the OnceInfluence is roughly more than RMB300 million, so this is actually the OnceInfluence for this continuous. We think that the performance is going to -- from the eight points -- to start from the eight points. For the specific data, we can follow up later. And just now then we had a follow up question, it's about Q4 for the JX3 Online. What about their expectation for the Q4 data? And our answer is that, because we are doing this operation for long term, as we mentioned previously that we are celebrating our 15th annual ceremony. So we will do some, like, quarterly adjustments. We cannot say that Q3 is going to be very high.

Operator: Thank you. We have now come to the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn the conference back to Ms. Yinan Li for closing comments.

Yinan Li: Hi. Thank you for joining us today. And this will conclude our presentation for the 2024 third quarter earnings call. Thank you.

Operator: Thank you for your participation in today's conference. This does concludes the program. You may now disconnect.