Kingsoft Corporation Limited (3888) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q4 2022 Kingsoft Corporation Earnings Conference Call. [Operator Instructions] And please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Francie Lu, IR Director. Please go ahead.

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2022 Fourth Quarter and Annual Results Earnings Call. I'm Francie Lu, the IR Director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various 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. 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.

[Foreign Language]

I'll translate for Mr. Zou. [Interpreted] 2022 with full of challenges and uncertainties in which we actively embrace changes, maintain strategic focus and further strengthen our core competitiveness. Kingsoft Office Group was committed to empowering the digital transformation of institutional customers and enhancing the cloud office user experience for individual users. Our business performance showed resilience with the sharp strategy of multiscreen, cloud content, AI and collaboration. Online game business focused on the development of premium game, and our flagship and newly launched titles gained popularity. All business shipments have given us confidence to keep advancing our strategy in enterprise services and online game sectors. The group's business continued to make robust progress in 2022, with total revenue reaching RMB 7.6367 billion increasing by 20% year-on-year. In 2022, the office software and service business maintained solid growth with revenue of RMB 3.8096 billion, up 19% year-on-year. Notably, individual and institutional subscription business grew robustly. The online games and other business experienced solid growth with annual revenue reaching a new record high of RMB 3.7462 billion, up 21% year-on-year as a result of outstanding performance of JX World III mobile game. Operating profit of the group was RMB 1.8687 billion in 2022, increasing significantly by 37% year-on-year. These results reflected the resilience of our business model, efficiency of our business execution as well as years of investment in R&D of our group's core products. Now I'm turning the call to Ms. Li.

Thank you, Francie. Good evening and good morning, everybody, despite the sluggish shipment of global PC and smartphone market, the number of monthly active devices of Kingsoft Office Group's main products continue to grow against the trend in 2022. We constantly optimize the user experience of our products in cross-platform scenarios such as cloud and collaboration to encourage users to use cloud document services continuously. By the end of 2022, the number of documents uploaded to the public cloud platform has exceeded 175.2 billion, up 35% year-on-year. We continue to add membership privileges of WPS and Docer to attract users to become paying subscribers, enhance user loyalty, achieve stable growth in number of paying subscribers, increasing the proportion of long-term members, and optimize the membership structure. Kingsoft Office Group deeply served the digital transformation of domestic government and enterprises, catered for their needs of efficiency improvement, data management, information security and industry scenario applications, and continued to promote their end-to-cloud integration and collaboration process. In response to the government's demand for standardized efficient and long-term electronic document management, we launched an electronic document resource library product. Making full use of cloud computing, Big Data, AI and other technologies, we assist party and government agencies in building electronic document resource library platform and supported the full life cycle management of electronic documents in digital government construction. For premium enterprise customers, we provided modular digital office empowerment services, continuously advancing the enterprise cloud integration process, addressing core pain points of enterprise such as improving efficiency, enhancing data security and controlling costs and assisting enterprises in achieving cost reduction and efficiency improvement. For the public cloud service, our full range of digital office platform product with the tiered versions were utilized to encourage customers to use cloud and collaboration application in high frequency, which enhanced user engagement and payment retention. Kingsoft Office Group has closely monitored the localization industry policy changes and customer demand, and taking the initiative to tap local government and industry localization markets in advance. Starting from the replacement needs of industries such as finance, operators and energy, we promoted the adoption of the Windows and Linux dual-version annual venue mode and deepened their cloud and collaboration office process. Looking forward, following the strategy of multiscreen, cloud, content, AI and collaboration, Kingsoft Office Group will focus on AI to achieve more breakthroughs in technology applications and continue to explore innovative business models and optimize user experience. At the same time, we will continuously improve service quality, empower government and enterprises with high-quality products and technological services, and assist them in achieving digital transformation more effectively. Online games business continuously cultivated key IP franchises more deeply and broadly, and further enhance the value of core IPs. Flagship JX Online III marched into its 13th year and remained steady, and we put our focus on driving players' engagement. We launched 2 expansion packs and conducted multiple in-game events and campaigns to improve player activeness in 2022. In October, the number of daily active accounts achieved a recent high with the successful release of the anniversary expansion pack for JX Online III, Heng Dao Duan Lang. To further enrich our game content, we actively incorporated traditional cultural elements and launched a series of IP crossover campaigns in this game. JX World III mobile game, one of the classic JX IP, performed strongly in 2022. In or to bring more immersive and authentic wuxia world experience to players, we continue to introduce distinctive gameplay and content to keep players engaged and entertained. We launched the 3 expansion packs in 2022 on the basis of weekly updates. In August, we released the open beta across all platforms in Chinese Mainland. Looking ahead, we will proactively make progress in new genres and overseas markets. Our new anime games, Snowbreak: Containment Zone, and The Other Shore, have received the approval of gaming license and are expected to be released in China and aboard from the second half of 2023. We will focus on long-term operation of existing titles. The upgrade version of JX Online III PC game is expected to be launched by the end of 2023, laying the foundation for JX3 Ultimate and ensuring high-quality game iteration. As for the financial results, I'll starting from the Q4 using renminbi as the currency. Revenue increased 16% year-on-year and 15% quarter-on-quarter to RMB 2.112 billion. The revenue was 52% for office software and services and 48% for online games and others. Revenue from the office software and services business increased 21% year-over-year and 9% quarter-over-quarter to RMB 1.090 billion. The year-over-year increase was mainly due to the sustainable growth of individual subscription business and robust growth of institutional subscription business of Kingsoft Office Group. The solid growth of individual subscription business was mainly driven by the increases in the number of accumulated paying subscribers and the proportion of long-term paying subscribers. The remarkable growth of institutional subscription business was mainly attributable to the increasing demand for the digital office platform products from governments and enterprises, conforming to the trend of digital transformation. The quarter-on-quarter increase was mainly due to the growth of individual subscription business. Revenue from the online games and other business increased 11% year-over-year and 23% quarter-over-quarter to RMB 1.022 billion, the year-over-year increase was mainly due to the revenue contribution from JX World III mobile game released in the fourth quarter of 2021 and revenue growth from JX Online III driven by continuously improvement in content, gameplay and overall experience, partially offset by decreased revenue from existing games. The quarter-on-quarter increase was mainly due to robust revenue growth from JX Online III in the fourth quarter, reflecting the successful launch of large-scale expansion pack which boosted user engagement and in-game consumption. Cost of revenue kept flat year-on-year and quarter-on-quarter to RMB 372 million. Gross profit increased 20% year-on-year and 19% quarter-on-quarter to RMB 1.741 billion. GP margin increased by 2 percentage points year-on-year and quarter-on-quarter to 82%. R&D costs decreased 3% year-on-year and increased 3% quarter-on-quarter to RMB 661 million. This year-on-year decrease mainly reflected fluctuations of outsourcing expenses. Selling and distribution expenses increased 9% year-on-year and decreased 6% quarter-on-quarter to RMB 335 million. The year-on-year increase was mainly due to increased marketing spending of Kingsoft Office Group to expand its presence in the domestic enterprise market, partially offset by reduced promotional spend of online game business as a result of fewer new released games in the fourth quarter of 2022. The quarter-on-quarter decrease was mainly due a large scale of promotion for JX World III mobile game in the third quarter of 2022. Administrative expense increased 5% year-on-year and 4% quarter-on-quarter to RMB 163 million. Share-based compensation costs decreased 8% year-on-year and 5% quarter-on-quarter to RMB 60 million. Operating profit before share-based compensation cost increased 68% year-on-year and 72% quarter-on-quarter to RMB 679 million. Net other losses for the fourth quarter of 2022 were RMB 42 million compared with gains of RMB 28 million for the fourth quarter of 2021 and losses of RMB 6.487 billion for the third quarter of 2022, respectively. The losses in the fourth quarter of 2022 were mainly due to the impairment provision of certain investee companies. The losses in the third quarter of 2022 primarily resulted from the provision for impairment on the investment in Kingsoft. Share of losses of associates were RMB 256 million for fourth quarter of 2022 compared with losses of RMB 580 million and RMB 414 million for the fourth quarter of 2021 and the third quarter of 2022, respectively. Income tax expense for the fourth quarter of 2022 was RMB 146 million compared with income tax expense of RMB 53 million for the fourth quarter of 2021 and income tax credit of RMB 588 million for the third quarter of 2022, respectively. The income tax credit for the third quarter of 2022 was mainly attributable to the deferred tax effect of the impairment provision recognized for Kingsoft. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 47 million for the fourth quarter of 2020 compared with a loss of RMB 335 million and RMB 6.055 billion for the fourth quarter of 2021 and the third quarter of 2022, respectively. Profit attributable to owners of the parent excluding the effect was RMB 82 million for the fourth quarter of 2022 compared with a loss of RMB 292 million and RMB 6.007 billion for the fourth quarter of 2021 and the third quarter of 2022 refectory. Net profit or loss margin excluding effect was 4%, minus 16% and minus 327% for this quarter, the fourth quarter of 2021 and the third quarter of 2022, respectively. Now I'm on the year 2020 (sic) [ 2022 ]. Revenue increased 20% year-on-year to RMB 7.637 billion. Office software and services made up 51%, increased 19% year-on-year to RMB 3.891 billion. Online games and others made 49% and increased 21% year-on-year to RMB 3.746 billion. GP margin decreased 1 percentage point year-on-year to 81%. Operating profit before share-based compensation cost increased 35% year-on-year to RMB 2.129 million. Loss to owners of the parent was RMB 6.048 billion compared with profit of RMB 395 million for the last year. The group had a strong cash position towards the end of 2022. As at 31st of December 2022, the group had cash resources of RMB 21 billion. Net cash generated from operating activities was RMB 2.574 billion and RMB 2.220 billion for the year ended 31st December 2022 and 31 December 2021, respectively. Capital expenditure was RMB 509 million and RMB 364 million for the year ended 31st of December 2022 and 31st December 2021, respectively. In 2022, we achieved a steady growth. In 2023, we will continue to seek progress while maintaining stability and drive business growth with technology and service innovation. For office software and service business, we will continue to empower enterprise digital transformation focused on AI to achieve more breakthroughs in technology applications. reconstruct and optimize the membership system, further promote the transformation of subscription. For online game business, we will continue to expand the longevity of premium game based on original IPs, actively expand new game genres, and pursue opportunities in office markets. Amid increasingly fierce industry competition, we believe that by relying on technology innovation, product and service enhancements and operation optimization, we will achieve further high-quality development. Thank you all, and now I turn to Francie.

Thank you, Ms. Li. Hi, operator.

Hello, there.

Hi, we're ready for the Q&A session. [Operator Instructions] Thank you.

[Operator Instructions] First question is from the line of [ Xue Deng Jian ] from CICC.

[Foreign Language] I got two questions here. My first question is regarding our gaming business. So we've seen a recovery in gaming license issuance in the past few months. So could you please update us with your latest gaming pipeline and especially in the overseas market and also the growth outlook for the segment in 2023? My second question is related to our office software business. So it seems our monthly active devices dropped a little in the December from the September level. So could you please elaborate on the reasons behind? And what's your expected trend for this year?

[Foreign Language]

I'll translate for Mr. Zou. [Interpreted] So for the game business, it was similar to our expectation. The license approval recovered, and we have got a license approval for both [indiscernible]. So right now, we have a new game called [indiscernible]. This game, we're planning to launch in the recent terms. We did a small scale testing in the recent past and we are planning to do the official launch probably in this week. And for [indiscernible] and [indiscernible], these 2 games, we are planning to launch them in the second half of the year, probably in July. As you all know, close to the end of December -- close to the end of last year, in December, we had the COVID pandemic situation and also we have the Chinese New Year. So we haven't started the monetization testing for these 2 games. And we're planning to do the monetization testing for these 2 games in March, and we'll launch them in July or second half of this year. We have another game called JX Gui Lai. This game, we're planning to launch in Vietnam first and its domestic launching will depend on the license approval progress. We expect to launch this probably in the second half of this year as well. And regarding the outlook of the games business for 2023, the JX3 flagship PC game is still very strong. We expect stable performance of this game for 2023. And for JX World III mobile game and JX Gui Lai, there may be a slight decline in gross billings due to the life -- due to its life cycle. And we -- the other new things we're planning to launch them in the second half of this year until we have our first month data for these mobile games, we will take a more conservative take on the outlook expectation. So now we are expecting a single-digit growth rate for the game business in 2023.

[Foreign Language]

[Foreign Language]

Okay. Ms. Li just corrected. The game that we're planning to launch in Vietnam is called JX [indiscernible] instead of JX Gui Lai.

[Foreign Language]

Okay. I'll translate for Mr. Zou. [Interpreted] So regarding your question on the monthly active devices decline by the end of December, I will explain this in both PC and mobile and domestic and overseas market. On the PC side, despite the impact of the COVID pandemic by the end of last year, we still have a quarter-on-quarter increase if you look at the data of the PC and maybe data numbers. So PC continues to grow quarter-on-quarter. We did experience a slight decline on the mobile side in both domestic and overseas market. I think the main reason behind this was due to the COVID pandemic, which affected both employees and also students in both domestic and overseas markets. So the PC maintained stable and the PC year-on-year growth rate was 11%. Hi, operator. We're ready for the next question.

And this is from the line of Linlin Yang from GF.

[Foreign Language] My first question is about the growth of expenses in 2023. How do you expect? And my second question is about, could you share some opinions about GPT-4 and combination with office and the preparations have you made? My third question is about [indiscernible] could you share more details about the testing performance about this game? And how do you expect this revenue?

[Interpreted]

Okay. I'll translate for Ms. Li. [Interpreted] So regarding for the expenses growth of 2023, we expect the number of employees to remain stable. If you look at the number for 2022 which were similar to 2021, this situation will be similar for 2023 because we focus on the R&D development and the number of employees and developers will remain stable. And for the profitability expectation for 2023, we are expecting a reasonable profitability in 2023.

[Foreign Language]

I'll translate for Mr. Zou. [Interpreted] To discuss on your question regarding the GPT, we think that especially for the Microsoft and GPT4.0 and Microsoft combined with its office products, we pay closely -- close attention on GPT since it's 3.5 launched last year and also on the Microsoft new release. We think that this AI is revolutionary compared with what we had 5 years ago with AlphaGo on the chess play. This time, we think it's closely related to our life and work style. We also want to improve the efficiency of our products and for our users. So we are going to invest in the R&D -- in this sector. And we do have new products under development, and we are planning to show the -- or to introduce our new products in the first half of this year in appropriate channels and applications. So we know that currently, our technology compared with GPT4.0, we are still behind what with GPT4.0 could offer. So we may take more time to catch up its level, but we think that in certain application scenarios, we are developing quickly, and we are going to have new products under development as well.

[Foreign Language]

Okay. I'll translate for Mr. Zou. [Interpreted] So regarding your question on [indiscernible] game, we did a small sale testing on our website recently. From its performance and data, we think that the game itself actually met our expectation for the testing. So we are going to see how it will perform when we have a full platform release. Thank you. Thank you, Operator. We're ready for the next question.

[Operator Instructions] There are no further questions at this time. So I will hand back to you. Thank you, speakers. There are no further questions coming through at the moment.

Okay. Thank you, operator. So we're now going to conclude our presentation for today, and thank you for joining us. Thank you.

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.