Kingsoft Corporation Limited (3888) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q2 2023 Kingsoft Corporation Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [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. Please go ahead.

Thank you. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2023 second quarter and interim 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 own 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. Zou Tao?

[Foreign Language]

[Interpreted] I would like to translate for Mr. Zou. Our core businesses achieved robust growth in the second quarter of 2023. Kingsoft office group has seized the emerging opportunities brought about by large language models and actively engaged in product development within this field to enhance users' work efficiency. Meanwhile, it addresses the digital transformation needs of institutional users, aligning with the multi-screen cloud content, artificial intelligence and collaboration strategy, presenting solid growth in its business performance. Online game business focuses on developing premium games. Flagship JX Online III continue to enjoy popularity among players and achieved record high quarterly growth billings. Anime game, Snowbreak: Containment Zone, extended our user base and tapped into international markets, showcasing our determination to explore new game genres and global markets. The steady progress of our core businesses provided a solid foundation for the execution of our strategy. We achieved solid financial performance in the second quarter. Our revenue reached RMB 2,193 million, representing a year-on-year increase of 20%, primarily driven by the exceptional performance of the JX Online III and sustainable growth in subscription business of both individuals and institutional users from Kingsoft Office Group. Operating profit amounted to RMB 676 million, exhibiting a year-on-year growth of 61%. These achievements reflected our continuous efforts to enhance our core competitiveness, getting well prepared to seize new opportunities. Now I'm turning the call to Ms. Li.

Thank you, Francie. Good evening, and good morning, everyone. Kingsoft Office Group introduced the WPS AI, an intelligent office assistant, powered by large language models and initiated it's Open Beta overseas. We also released the spring version of WPS Office, enhancing productive capabilities and providing seamless cloud integration experience. The individual office subscription business, we took comprehensive steps towards improving the user experience. While adhering to a long-term membership strategy, we merged functional and resource-based memberships, upgrading the membership benefits structure and offered tailored benefits for specific needs. Regarding institutional subscription business, we continued promoting cloud integration and collaborative office progress and delved into business scenarios for government and enterprises. We deepened product capabilities to sell industries such as finance, energy, publishing, health care and high-end manufacturing. This involved incubating secure and efficient industry-specific solutions, aiming at enhanced organizational efficiency for institutions. We constantly expanded our ecosystem and jointly built a digital office application scenarios with partners. We have closely monitored the localization industry policy changes and customer demand, and take the initiative to tap local government and industry localization markets in advance. In terms of overseas business, based on our solid foundation in the mobile sector, we continued to cultivate our user base on desktop platforms. Looking ahead, Kingsoft Office Group will uphold the concept of user first and relentless innovation, ensuring that more users can easily enjoy the benefits of intelligent office solutions. In the second quarter, online games business demonstrated outstanding performance. The year-on-year growth in both daily active users and growth billings of JX Online III reflected our ability to sustain premium game longevity. We have remained a commitment to enhancing the content and players experience of JX Online III, resulting in positive response. Self-developed game, Snowbreak: Containment Zone, combining the shooting game play and anime aesthetics, provided players with fresh and innovative gaming experience. This game was simultaneously launched on both PC and mobile platforms worldwide. It achieved instant acclaim by topping the free games chart on the iOS App Store in China, as well as in major international markets, like the U.S., Japan and South Korea upon its launch. Looking forward, we will maintain our commitment to use oriented approach and pay close attention to feedback and suggestions from our players. We are dedicated to improving and optimizing our games constantly to further enrich the overall players experience. In the fourth quarter, we plan to launch an upgrade version of JX Online III PC game to further extend the IP's vitality. Additionally, our self-developed mobile game, World of Sword Origin, which has received license approval, is scheduled for release in Chinese Mainland. I'll now discuss the second quarter and first half of 2023 operation and financial results. And starting from the second quarter. Use renminbi as the currency. Revenue increased 20% year-over-year and 11% quarter-on-quarter to RMB 2,193 million. The revenue split was 51% for Office Software and Services and 49% for online games and others. Revenue from the Office Software and Service business increased 21% year-on-year and 7% quarter-on-quarter to RMB 1,121 million. The increases were mainly due to the sustainable growth of both domestic individual office subscription business and institutional subscription business of Kingsoft Office Group. The growth of domestic individual office subscription business was primarily attributable to enhance user experience in cloud and collaboration. The growth of domestic institutional subscription business was mainly driven by the continuously upgrades of digital office solutions and service quality as well as the ongoing process of promoting cloud integration and collaborative office in government and enterprises. The quarter-on-quarter growth was mainly attributable to domestic individual office subscription business. Revenue from the online games and others business increased 18% year-on-year and 17% quarter-on-quarter to RMB 1,073 million. The increases were primarily driven by the remarkable revenue growth of JX Online III due to continuous upgrade -- updates and optimizations of user experience, partially offset by natural decline in revenue from the existing mobile games, such as JX World III and JX I: Gui Lai. Cost of revenue decreased 1% year-on-year and increased 5% quarter-on-quarter to RMB 362 million. The quarter-on-quarter increase was primarily attributable to higher server and bandwidth costs, increased purchasing costs for products and services, along with the business expansion of Kingsoft Office Group. Gross profit increased to 25% year-on-year and 13% quarter-on-quarter to RMB 1,831 million. Gross profit margin increased by 4 percentage points year-on-year and 2 percentage points quarter-on-quarter to 84%. The increases were mainly attributable to changes in the revenue mix. Research and development costs increased 4% year-on-year and 1% quarter-on-quarter to RMB 666 million. Selling and distribution expense increased to 6% year-on-year and decreased to 14% quarter-on-quarter to RMB 301 million. The fluctuations mainly resulted from changes in promotion spending in corresponding quarters. Administrative expenses kept flat year-on-year and increased 2% quarter-on-quarter to RMB 153 million. Share-based compensation costs increased 45% year-on-year and 25% quarter-on-quarter to RMB 91 million. The increases were mainly due to the grants of awarded shares to the selected employees of certain subsidiaries of the company. Operating profit before share-based compensation costs increased 59% year-on-year and 44% quarter-on-quarter to RMB 737 million (sic) [ RMB 767 million ]. Net other losses for the second quarter of 2023 were RMB 103 million compared with gains of RMB 6 million and RMB 44 million for the second quarter of 2022 and the first quarter of 2023, respectively. The losses were primarily attributable to the combined effects of losses from deemed disposal of certain investee companies and second, foreign exchange losses. Share of losses of associates of RMB 323 million were recorded for the second quarter of 2023 compared with shares of losses of RMB 418 million and RMB 231 million for the second quarter of 2022 and first quarter of 2023, respectively. Income tax expense for the second quarter of 2023 were RMB 78 million compared with income tax expense of RMB 30 million and RMB 26 million for the second quarter of 2022 and the first quarter of 2023, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 57 million for the second quarter of 2023, compared with loss of RMB 140 million for the second quarter of 2022 and a profit of RMB 192 million for the first quarter of 2023, respectively. Profit attributable to owners of the parent, excluding share-based compensation cost, was RMB 123 million for the second quarter of 2023, compared with a loss of RMB 97 million for the second quarter of 2022 and a profit of RMB 236 million for the first quarter of 2023, respectively. The net profit or loss margin, excluding the effect of share-based compensation cost, was 6%, minus 5% and 12% for this quarter, the second quarter of 2022 and the first quarter of 2023, respectively. And now on the first half of 2023. Revenue increased to 13% year-over-year to RMB 4,164 million. Office Software and Services made up 52% and increased 21% year-over-year to RMB 2,172 million. Online games and others made up 48% and increased 5% year-over-year to RMB [ 1,191 ] million. Gross profit margin increased by 2 percentage points year-over-year to 83%. As a result of results discussed above, profit attributable to owners of the parent was RMB 250 million and a loss of RMB 42 million for the 6 months ended 30 June 2023 and 30 June 2022, respectively. Profit attributable to owners of the parent, excluding share-based compensation costs, was RMB 359 million compared with a profit of RMB 45 million in the prior year period. The net profit margin, excluding share-based compensation cost, was 9% and 1% for the 6 months ended 30 June 2023 and 30 June 2022, respectively. Our state of financial position, we had cash resources of RMB 24 billion as at 30 June 2023. Net cash from operating activities was RMB 2,308 million and RMB 1,053 million for the 6 months ended 30 June 2023 and 30 June 2022, respectively. Cash used for capital expenditure was RMB 183 million and RMB 197 million for the 6 months ended 30 June 2023 and 30 June 2022, respectively. We are confident to embrace future opportunities and challenges. We will continue to manage our core businesses steadily, drive innovation and create top-tier digital office services and premium gaming content for a global user base. We adhere to technology-driven business, committing to high-quality sustainable development, aiming to deliver better products and services to our users and create long-term value for our shareholders. Thank you all for your patience. Now I'll turn the call to Francie. Francie, please?

Thank you, Ms. Li. Hi, operator, we're ready for the Q&A session now.

[Operator Instructions] We'll now take our first question. First question is from the line of Xiaodan Zhang from CICC.

[Foreign Language] I have 2 questions here. My first question is on your gaming business. So on your flagship PC game, JX Online III, has achieved a remarkable growth in the second quarter. And could you explain in details what are the main drivers behind? And what is the outlook for its performance in the upcoming quarters? And my second question is on the OP margin. Since we have seen a significant sequential improvement in the operating profit margin this quarter, do we expect this improvement to be sustainable in the upcoming quarters?

[Foreign Language]

[Foreign Language]

[Interpreted] Okay. I'll translate for Mr. Zou and Ms. Li. So the strong performance of JX Online III in the first half of this year, Mr. Zou believes that the core reason is the company's determination to deepen our development in the JX Online III game as a long-term game in this genre. So our user actually increased 20% in the first half, but the gross billing increased 40%. So this shows that the users have a strong confidence in the game's performance. And for the outlook of this game in the upcoming quarters, we believe that the third quarter is a relatively seasonal weak quarter for this year. So our core development will be mainly happening in the fourth quarter when we have our upgrade version of the 2.0 version of the JX Online III by the end of this year. This is our second upgrade since our last upgrade was the 1.0 upgrade version from the 2018 to 2019. So Mr. Zou has strong confidence in its performance in the upcoming quarters, but the details will be depending on the new content released and the new game play released with the 2.0 version in the upgrade version. And for the second question, Ms. Li said that the operating profit margin increased by 8 percentage points year-on-year and quarter-on-quarter. So she explained that for the game business, in the first half, JX Online III had a strong performance. It's a long-term game, and it was a flagship long-term game for the company. In the third quarter, it's a relatively seasonal low quarter. And also for -- in July, we have launched the Snowbreak: Containment Zone, and we had the promotional expense upon its launch. So in the third quarter, the OP margin will be less than the second quarter. But the full year, we will maintain a healthy and reasonable operating profit margin level. And for the Kingsoft Office business, the OP margin will keep quite stable in the second half of the year compared with what we had in the first half of the year, but the details will also be depending on the AI development and the progress for the Kingsoft Office business. Thank you. And we're ready for the second question.

We'll now take our next question. This is from the line of Linlin Yang from GF Securities.

[Foreign Language] I have 2 questions. The first question is about the game. With the strong revenue performance in working this quarter, so I want to ask about the game pipeline. And could you give us some guidance about game business? The second question is about the expense. We saw expenses were relatively stable in the past 4 quarters, leading to the decrease of expenses ratio. So how to expect this [ future ] change?

[Foreign Language]

[Foreign Language]

[Interpreted] Okay. I'll translate for Mr. Zou and Ms. Li. So for the second half of this year, our game pipeline includes the Snowbreak: Containment Zone [indiscernible], which we have already launched in July -- on July 20. And by the end of September or beginning of October, we have another game. It's called the World of [ JX Origin ]. We already got the license for that game. So that game will also be launched by then. And we have a number of other games that are under testing, but these will be launched in the upcoming years, next year or the year after. For example, we have a shooting and [indiscernible] game that's under testing. We have our JX III mobile version, which will be launched next year. And we have a new version for the [indiscernible], which will also be launched next year as well. So right now, we are going to keep our original guidance for the game business. Although JX Online III has a very strong performance in the first half of this year, but because we have 2 other games, for example, like the JX World III and JX I: Gui Lai. These 2 games, they were launched last year. So last year was the first year of launch. For this year, these 2 games will have some natural decline. So this will balance the growth from the JX Online III game from the first half of this year. So the details of the guidance will be depending on the new version, the performance of the new version of JX Online III in the fourth quarter and also the progress for the performance of the old games, including JX World III and JX I: Gui Lai. And for the second question, for the expenses, we have 2 aspects. The first one is the expenses for the original business. For the original businesses, our goal is to try to improve the working efficiency. So you could see that we have improved the gross profit margin, and we have kept flat the number of employees and also the administrative expenses also kept flat, and we will experience some new investment in the new businesses. But primarily, our main goal is to improve the working efficiency for the original businesses. 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 the speakers. We have a question. Okay. One moment please. A question from the line of Linlin Yang from GF Securities.

[Foreign Language] I have a follow-up question. So could you share us some of your consideration about the cash plan such as improve the buyback or dividends.

[Foreign Language]

[Interpreted] Okay. I'll translate for Ms. Li. So right now, we do have over RMB 20 billion of cash on hand. But first of all, we want to keep a certain level of cash to look for new opportunities in the market, including the new AI opportunities. So we want to keep a certain level of cash on hand. And the -- regarding buyback and dividend, we're also going to consider these 2 options. For example, especially buyback in May this year, our Board already granted a RMB 1 billion buyback budget for us. So we will consider the market conditions and also other factors to improve our buyback and dividend policies. Thank you. Hi, operator, we're ready for the next question.

And we have a question from the line of Hao Yang from Founder Securities.

[Foreign Language] So I have 2 questions about AI. Firstly, we've seen AI has brought a huge [ concept ], and MMORPG game enhanced with AI launched by the end of last quarter. So I wonder if you mind to tell us is there any plan about -- apply any AI technology in our games, like our [indiscernible]. And my second question is about WPS. Recently WPS have launched both the -- WPS AI has launched both in Mainland China and overseas. Can you share some feedback from our overseas users?

[Foreign Language]

[Interpreted] I'll translate for Mr. Zou. So regarding the AI application in our game business, we have already started trying the different AI applications to have more [ automotive NPC ] and also engine and partially noncore visual artistic applications and also in the content providing aspect. So I think the main or the core use of AI application in games is still focusing on the 3D visual artistic application. So we are still trying and learning to improve the technology here and to have -- to try more AI applications in the game business. And for the WPS AI products, we have not officially launched all of our AI functions yet. Some of our AI functions are still under testing. But we have already received very positive feedback from users for those AI functions that have already launched with the WPS AI product. So a lot of users are also very interested in the timing for the official launch and also for the upcoming monetization of the WPS AI product. So we are going to continue to optimizing our WPS AI functions in the future. Thank you. Hi, operator, we're ready for the next question.

[Operator Instructions] There are no further questions at this time. So I will hand back to the speakers.

[Foreign Language] Hi, operator, we're going to end our presentation for today. Thank you.

This does conclude the conference for today. Thank you for participating, and you may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]