Kingsoft Corporation Limited (3888) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Q4 2024 Kingsoft Corporation's Earnings Conference Call. [Operator Instructions]. Please be advised that today's call is being recorded. I would now like to hand the call over to your host today, Ms. Li Yinan, IR Director. Thank you. Please go ahead.

Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 4th quarter and annual results 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 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 Ms. 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 Corp 2024 Fourth Quarter and Annual Results Earnings Call. Looking back at 2024, this was a year in which Kingsoft remained dedicated to our technology-driven strategy, drove high-quality business development and achieved significant results. The group delivered strong overall performance, achieving record highs in revenue, profitability and key operational metrics. Our annual revenue surpassed RMB 10.3 billion, making a 21% year-on-year increase. The group's overall operating profit reached RMB 3.646 billion, a significant 54% increase compared to the previous year with the operating profit margin improved from 26% in 2023 to 35%. Over the past year, we remained committed to a technological innovation, continuously optimizing our products and services to enhance market competitiveness and the user value, giving a strong boost to business growth and laid a stronger foundation for long-term divestments. Now I will walk you through the business highlights of the fourth quarter 2024. In 2024, Kingsoft Office Group remained user-centric, continuously enhancing product features and services systems to create a great value for users. This approach led to growth in both user base and commercialization capabilities. Total revenue for 2024 reached RMB 5.12 billion, reflecting a 12% year-on-year increase. In the fourth quarter, revenue reached RMB 1.5 billion, up 17% year-on-year. By the end of 2024, WPS Office PC has exceeded 100 million daily active devices in the domestic market, officially opening a new chapter for domestically developed office software. Regarding AI, we released the WPS AI version 2.0, providing comprehensive AI empowerment solutions that address the diverse needs of individual productivity and enterprise organizations. We are engaged in in-depth collaboration with domestic large language model manufacturers to continuously enhance the product enterprises of WPS AI. Currently, we have launched the AI office assistant, WPS [Foreign Language] with core functionalities, including intelligent writing, AI PPT generation, data analysis, information retrieval, document reading and summarization, cloud [indiscernible] and team collaboration. [indiscernible] and team collaboration. The deep integration of WPS [Foreign Language] with DeepSeek signifies a paradigm shift in intelligent office tools from assistive tools to cognitive partners. We have adjusted our membership structure, leveraged the synergistic development of traditional features and AI-powered value-added services within the membership system to continuously driving paid conversion. The cumulative number of annual paying individual users in domestic reached 41.7 million, representing a year-over-year increase of 17.5%. WPS 365 underwent a brand-new upgrade for institutional and enterprise customers. It now includes WPS Office, WPS Collaboration and WPS AI Enterprise Edition, integrating document management, collaboration and AI capabilities to enable a one-stop AI-powered office solutions. Additionally, we launched the Kingsoft Government Office Model based on which the WPS AI Government Edition was released, offering intelligent solutions for government applications. For WPS software business, we advanced the software legalization and document adoption, empowering government and enterprise in digital transformation. We're strengthening our presence in industries like government finance, engineering and telecommunications in addition to client-built, secure, self-sufficient digital office in the field of information technology application innovation. Based on the work habits and the payment performance of users in various overseas regions, we have adopted different localization strategies while maintaining our stronghold in the mobile sector. We have guided overseas WPS users to transition from mobile devices to large screens by offering differentiated value-added features. We are attracting users to convert to paid subscriptions. Throughout the year, overseas WPS personal revision reached 180 million, laying a foundation for development of our international business. In 2024, in line with our premise strategy, the online game business achieved outstanding growth with new user acquisition reached a record high. Total revenue for 2024 reached RMB 5.2 billion, a significant increase of 31% year-on-year. In the fourth quarter, revenue reached RMB 1.3 billion, representing a 26% year-on-year increase. JX Online 3 achieved the [indiscernible] across the platform integration for the boosting player in [Foreign Language] since the launch of JX automated. This class IP has been revitalized surpassing 10 million monthly active users. As a long-standing market piece in gaming industry with a 15-year history, JX Online 3 will remain deeply rooted in cultural enrichment, striving to transform the product into a new virtual for the traditional culture and inspire the younger generation to connect with their cultural heritage. World of Sword Origin as a [Foreign Language] classic continues to operate stably and maintain a dedicated player base. The Fate of Sword: Zero opened its game of product in 2024 as the next generation masterpiece in the JX series. It promised to deliver a fresh and exciting experience for players. In 2024, our long-term efforts in the anime game genre achieved a historic breakthrough while the anime shooter game, Snowbreak: Containment Zone faced the initial challenges upon its release. However, by accurately understanding player needs, continuously refining product details and engage deeply with the community, we have assuredly achieved our goal to create a new genre. Our flagship sci-fi mech game Mecha BREAK targeting the global market is set to launch in the first half of 2025, further diversifying our game portfolio and opening up a new genre. The new mobile game from the classical Sword series, The Fate of Sword: Zero, will also be released in the first half of the year, aiming to build up the legacy of Wuxia culture within established genre. Meanwhile, the flagship version of JX Online 3 will focus on optimizing core game play, enhancing environmental texture and refining atmospheric elements, setting a new benchmark for PC game graphics and redefining the virtual experience for players. Looking ahead, we will continue to iterate on our core products and technologies to meet users' needs and promote high-quality business development. Kingsoft Office Group will strength WPS 365 collaboration capabilities, deepening AI adoption in office productivity and expand global market reach. Targeting the entire platform and the global market, online game business will continue focusing on premium [Technical Difficulty] and into new genre and strive to create high-quality games that are deeply loved by players. We will adhere to technology empowerment to focus on product and service innovation and create long-term value for our customers, shareholders and employees. Next, I would like to invite Ms. Yi to introduce the financial performance for the fourth quarter and annual. Thank you.

Thank you, Tao Zou and Yinan. Good evening, and good morning, everyone. As for the financial results, I'm starting for Q4, use RMB as currency. Revenue increased 21% year-on-year and decreased 4% quarter-on-quarter to RMB 2,792 million. The revenue split was 54% for office software and services and 46% for online games and others. Revenue from the office software and services business increased 17% year-on-year and 24% quarter-on-quarter to 1,501 million. The year-on-year increase was mainly attributable to WPS 365 and WPS Individual business of Kingsoft Office Group. The increase of WPS 365 business was primarily due to the increased numbers of paid enterprises, supported by the enhanced AI and collaboration capabilities as well as the replication of typical industry solutions. As for the WPS individual business, the revenue increased as a consequence of enhanced user experience and improved conversion rate, driven by the enriched membership benefits and the wide adoption of the AI-powered features. The quarter-on-quarter increase mainly reflected a seasonal increase in WPS software business, along with the sustained growth of WPS individual and WPS 365 business. Revenue for the online games and other business increased 26% year-on-year and decreased 24% quarter-on-quarter to RMB 1,291 million. The notable year-on-year increase was mainly attributable to, first, the solid performance from JX3 Online as the launch of the JX3 Ultimate in 2024 further boosted players' engagement. Second, the revenue contribution from anime games, Snowbreak: Containment Zone, driven by the continuous content upgrade. The quarter-on-quarter decrease was mainly due to the release of less commercial content in certain games. Cost of revenue increased 9% year-on-year and decreased 2% quarter-on-quarter to RMB 449 million. The year-on-year increase was primarily driven by higher channel costs, the greater server and bandwidth costs, all of which were associated with the business growth of Kingsoft Office Group. Gross profit increased 24% year-on-year and decreased 5% quarter-on-quarter to RMB 2,343 million. Gross profit margin increased by 2 percentage points to 84% year-on-year and kept flat quarter-on-quarter. Research and development costs increased 7% year-on-year and decreased 50% quarter-on-quarter to RMB 730 million. The year-on-year increase was primarily driven by increased headcount and rising AI-related expenses to support the development of AI and collaboration capabilities of Kingsoft Office Group. The quarter-on-quarter decrease was mainly due to reduced accrued performance-based bonus. Selling and distribution expenses decreased 10% year-on-year and 7% quarter-on-quarter to RMB 340 million. The decreases were mainly due to decreased marketing expenditures related to online games business, partially offset by increased promotion efforts on products and service in intelligent office of Kingsoft Office Group. Administrative expenses decreased 11% year-on-year and 8% quarter-on-quarter to RMB 153 million. The year-on-year decrease was mainly due to the high base in the same period last year, caused by one-off expenses. The quarter-on-quarter decrease largely reflected decreased personnel-related expenses. Share-based compensation costs decreased 23% year-on-year and increased 2% quarter-on-quarter to RMB 59 million. Operating profit before share-based compensation costs increased 47% year-on-year and decreased 3% quarter-on-quarter to RMB 1,106 million. Net other losses from the fourth quarter of 2024 RMB 74 million compared with a gain of RMB 8 million for the fourth quarter of 2023 and losses of RMB 63 million for the third quarter of 2024, respectively. Share of losses of associates were RMB 148 million for the fourth quarter of 2024 compared with losses of RMB 286 million and RMB 428 million for the fourth quarter of 2023 and the third quarter of 2024, respectively. Income tax expense was RMB 212 million compared with RMB 126 million and RMB 31 million for the fourth quarter of 2023 and the third quarter of 2024, respectively. As a result of the reasons discussed above, profit attributable to Owners of the Parent was RMB 460 million for the fourth quarter of 2024 compared with the profit of RMB 205 million and RMB [ 430 million ] for the fourth quarter of 2023 and the third quarter of 2024, respectively. Profit attributable to Owners of the Parent excluding share-based compensation costs, was RMB 496 million for the fourth quarter of 2024 compared with the profit of RMB 257 million and RMB 453 million for the fourth quarter of 2023 and the third quarter of 2024, respectively. The net profit margin excluding share-based compensation cost was 18%, 11% and 16% for this quarter, the fourth quarter of 2023 and the third quarter of 2024, respectively. Now I'm on the yearly figures. Revenue increased 21% year-on-year to RMB 10.318 billion. Office software and services made up 50%, increased 12% year-on-year to RMB 5,121 million. Online games and others made up 50% and increased 31% year-on-year to RMB 5,197 million. Gross profit margin increased by 1 percentage point year-on-year to 83 percentage. Operating profit before share-based compensation cost increased 54% year-on-year to [ RMB 3,122 million ]. Profit to Owners of the Parent was RMB 1,552 million for the fourth quarter -- for the year of 2024 compared with the profit of RMB 483 million for the last year. The group had a strong cash position towards the end of 2024. As at 31st of December 2024, the group had cash resources of RMB 27 billion. Net cash generated from operating activities was RMB 4,587 million and RMB 3,489 million for the year ended December 31, 2024 and 31st of December 2023, respectively. Capital expenditure was RMB 426 million and RMB 474 million for the years ended December 31, 2024 and December 31, 2023, respectively. That's all for the introduction of our financial results. Thank you all. Now, we are ready for the Q&A section. Thank you.

[Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC.

[Interpreted] So thanks, management for taking my questions. First of all, the company has delivered notable growth in terms of earnings per share. So does management expect this improvement to be sustainable in 2025? And secondly, could management share your views on the use of cash and especially the strategic investment plans on the group level as well as our shareholder return plans?

[Interpreted] So first, let me just answer the first question. So in 2024, the EPS has a very good growth. We can see it from this financial report, but mainly has 2 reasons. And, recently, that is 2.5 reasons. The first reason is that for Office itself is the overall plan is quite good and also for the games, this exceeds our expectations, especially for the JX3 and also for [indiscernible]. So this is out of expectation. And the third point is about the loss has narrowed. It's furthermore narrowed. But regarding the question of the 2025 where we could continue this growth, we're also going to answer this question from 3 perspectives. They're currently based on the 3 points. Firstly, the office is also have a very strong growth. For the old games, generally speaking, it's quite stable. For the new games, currently, we are doing this test and external. Currently, the test results are quite good, but we don't know how after it's launched, what about the final data. We are not going to make that much comment for it. Once the whole general commercial operation has been finalized and also the result comes out, we can have a more detailed evaluation for it. So currently, based on this trend, we're going to get a pretty good results. And furthermore, for the [indiscernible] company, this has a furthermore net loss. So this is going to be continued in 2025. So I would to say that, in 2025, we're going to have a pretty big confidence that the general situation will be better. But for the details, we're going to based on actual business operation. And also, furthermore, I have mentioned that we're going to have a constant reinvestments from their -- mentioned previously is that we're going to constantly do the investment according to our schedule. And we definitely is going to do it. And based on the [ CI ], we definitely are going to do it. So the general planning is going to be more and more clear. But currently for the details, it's not clear yet. From the group perspective, we're going to furthermore do the research and planning. And for the details, it's not that convenient to release it. But it's for sure that based on AI, the other software groups will also do it and we're going to do it as well. For the shareholders' returns, we will always pay their dividends and repurchase from the market.

Our next question comes from the line of Linlin Yang from Guangfa Securities.

[Interpreted] My first question is about -- we saw recent -- the latest test, the current users exceeded 300,000, demonstrating high popularity. Meanwhile, its user feedbacks are polarized. Key issues include server crash and the debate about its [indiscernible] game play. How do you think about this test and user feedback? How should we expect its performance? Could you give us some guidance about the game business? My second question is about the AI. As DeepSeek is driving advancements in general-purpose model capabilities while reducing inference costs, could the management elaborate on WPS and gaming business change in AI investment strategies and applications?

[Interpreted] So based on the -- let us answer all the questions one by one. And firstly is regarding the addition of service game for the test. I would like to talk in several points. The first point is compared with the previous time, the whole scale is much bigger. And no matter for the people join this testing. And compared with the previous time, it is 100x bigger than the previous time. So generally speaking, it has reached our expectations. And because we're going to have such a big task from a wider perspective, we can say that how the customer -- how the players could accept it? And based on their after test or the feedback or the comments from users, I would like to say that this is actually what our Kingsoft needs. We have been doing the game business for so many years, and we always would like to cooperate together with our players, with our users to create a very good content. So the test itself is going to outperform our expectation. All the feedback we have collected from the users is not -- it doesn't mean that it's not good. It's actually what we want. So sometimes, the other friends may think that some will have negative feedback. We need that negative feedback. We need to realize the issues. Otherwise, how are we going to -- why we would like to do the test? So we are afraid that the test is not enough. This is the key point. And especially that we have a very high expectation for this game. That is why we need to do much more tests to test this market feedback. This is the key thing we need to focus on. And based on our history, when the first time, the first game compared with the first time we do the game. And so this time, we can see that the biggest scale of the testing almost completely released. And this is our thinking for the users. Their comments and their suggestions really improve ourselves. It really can help us. So we really have this confidence that we need to make friends with our players, make friends with our users. We need to work together with the players to create an excellent game. And of course, I would like to say that for this test, it's not only tests collected a very good result, but also for the ranking, we have reached several top rankings like, for example, the new games trend ranking and launching incoming ranking and several top ones, top ranking. And also I saw that on the first days' watching time, it's more than 27 hours -- the period is more than 27 hours. So all of these data are quite good. This actually have a very strong confidence for us to promote this game into this market. So from our perspective, we make this comment. So from the second question is that for this year for the game, how -- whether we can give the guidance or the expectations is we have 2 steps to answer the question. The first question is that for the old games, we have several parts. It's like the JX3 and the Fate of Sword and World of Sword, et cetera. So all of these series, these old series, we have confidence that we are going to have a quite stable performances. And whether it could be seen as last year, like JX3 compared with the year before last year, it's not only stable, but also have a very big growth. So competitively speaking, the growth rate of game is extremely good. But every year, we also have to, based on the actual situation, make a judgment. Especially for the gaming market, it's hard to make a judgment at this moment because we have confidence that we can have very stable performances and then we're going to move forward. We have an extra positive result. So we can use words used in the political situation is that we're going to make ourselves stable enough and then move forward. For the -- so make a conclusion is that for the old games, we have confidence. For the new games, everybody may think that no matter during the period of the testing, how good the data we're going to realize. We still hope that when the game has been launched, we still have to based on the commercial operations data in the first month to make a more accurate forecast. So based on my experience, it's quite hard, only based on the several samples without to make accurate judgment is really very hard. So make a conclusion is that this year, for the game, we have positive attitude. So based on this first question for the DeepSeek. Actually, we can see that for the AI, we have the investment strategy. For the DeepSeek, it's there. From the market perspective, it's kind of newly -- like new power and more efficient arrangement and the cost is much lower. It's a common module. So the promotion for it is we are seeing as the other companies that we have very quickly get connected with it. And previously, we also get connected with the other models as well as like [Foreign Language] or the other [indiscernible] that's a different type of the models. For the users themselves, they're going to have another option. So my perspective is that we are not going to face because of the change of DeepSeek to have any change yet because DeepSeek is just a common big model. For their application to get into the enterprise-specific region, we have to based on the application itself to furthermore adjust this model to do the practice for it. In that case, it could be better -- it could have better performances. So this is a big trend. It will not going to be changed. Based on this, we think that how to make it -- how to make this application in the typical customers' private scenario to furthermore invest it and make it a practice and to train it as possible, to make it have different abilities for common use and also in the different customers' private situation. We can have some power value and power value-added based on the different applications. And previously, for the development of these modules, we have the same [indiscernible]. And also that is why the abilities for these module has increased quite a lot. And -- but we believe that for it to be used in the typical scenario, how to make it as professional as possible to really have high value for the customers, we still have to constantly do the investment. So in this part, we think that for office, for the game, we need to have -- keep the big investments. For the game, from the global perspective, using AI to do the game creation, we're going to talk about it with 2 aspects. The first is that for the whole development process, of course, using AI is going to reduce the cost. This is common sense. But actually in the past 2 years, we did that way. That is the increase of efficiency of working. And in another perspective, to really make this game have a better experience, you have a good experience connection. This is the things we look at for it. So actually, the whole world is also using different perspective to actively trying to do the research how to make better performances by the game creating. For us, we're going to -- we all like the many games we make, like the [indiscernible] and also in the future, we're going to have more wider space. When AI comes out, it's like JX3, we're going to make it has a soul. It means that we're going to make the experience of this game is constantly improved and it's going to have different change and make the content richer. It's kind of a soul existing in the metaverse. So we are actually very active to explore this part. So in the future, we're going to promote it to our customers and also to make it a better experience. So to make a conclusion is that for DeepSeek, it's just advanced -- international advanced module, and the cost for it is much lower. But this is just a common model. And when the acceleration development of AI is going to get into different industries like officing or the game, we're going to have some benefit for it, for sure. But no matter for the internal performance or customer experience, it's definitely used in different industries. We still have to keep a very big investment to promote the AI application constantly.

Thank you for all joining us today, and this will conclude our presentation for the 2024 Fourth Quarter and Annual Results Earnings Call. Thank you.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]