NetDragon Websoft Holdings Limited (777) Earnings Call Transcript & Summary

Dear friends and investor, good morning. Thank you for joining us for our NetDragon Websoft Holdings Limited 2023 Annual Results Presentation. [Foreign Language] Our presentation material is currently available under the Webcast, News and Event tab on the NetDragon's IR website at ir.netdragon.com. [Foreign Language] So before the start of our presentation, please allow me to introduce the management who are joining us today. Dr. Simon Leung, Group Vice Chairman and Executive Director; Mr. Ben Yam, our Group CFO; Mr. Lin Chen, Group Senior VP. Now let's pass our time to Dr. Simon Leung to host our presentation today.

Thank you. Good morning. Are you kind of awake? Actually, this is a real test. I have a microphone on one end and this on the other hand, but I'm going to put it down. So well, it seems like it's been what, how many years that we kind of get together face-to-face, Ben, like I mean, 4 years. So it's kind of refreshing -- actually, I'm not very tall, so -- exactly. It's kind of refreshing to be here with you physically and also some online. So it's a very interesting year for us because it's actually we did quite a bit last year. One of the big things I'm going to talk about is actually we spun off one of our subsidiary, which is the overseas business of education. So that makes this earning announcement a little bit interesting because it's actually the company is now under the jurisdiction of New York Stock Exchange, which is the U.S., which has a different Board. I happen to be a Chairman of that, but it's a very different composition. In terms of the Board, it got his own team, its -- actually, its own CFO. So what we're going to do when we talk about the education business, we can only do directional comments because it's actually -- the company is actually is on its own with its own Board, okay? So we are doing a lot right now. I think we just filed our -- yesterday, is it Ben? Yes, we're just -- so we be doing a lot of filing. Board meeting will be coming up for the company. So I'll give you a post. Now by the way, if you want to get to know a lot more about the business, what we can do is to arrange a different session with you with the management team of Mynd.ai so we can go into all the details. So without further ado, I'm going to go ahead, and maybe I'll use this. So well, you know what we look like, you know the agenda. So it's actually a good year for us last year. A lot happened, like I said before. I'm not going to steal Lin Chen’s thunder too much. Exactly, if you look at our gaming business, our revenue is up. It's actually above average, and it's actually over the market growth rate, which is good. One of the things Ben keeps reminding me so that I can remind you, our gaming business has been growing 9 out of the last 10 years. Frankly, I wish it will be 10 out of 10, but 9 is actually not too bad. One of the things we do, again, Lin Chen is going to go through in detail; is actually how we focus to drive our business, which is on the content side, quality content and so which actually attract a lot of people. We also start embracing the AI technology. I don't think we can not talk about AI in everything we do, everything talk about AI. So we started embracing it. So it's an early stage, but I think we can share some insights on what we have done and what we can do going forward. Of course, we're going to step up our investment. So if you look at our numbers, we've been hiring a lot of people, we've been stepping up. So we're very excited about our gaming business. I did talk about our overseas education business, let me be very specific. So a big part of it is actually Promethean, which some of you are probably quite familiar with. So we spun it up. It's actually on the New York Stock Exchange right now, under the ticker of MYND, and then the new company is called Mynd.ai. I want to remind you, MYND happens to be sound like my NetDragon. So actually, I like that ticker quite a bit. It's actually -- there's a lot of changes in the market, both from an economic standpoint, I mean Europe is actually under a lot of stress. And the U.S. is actually -- the market is being rationalized because of a lot of funding in -- with CARES Act. Actually, that money has been spent, so now we're back to the normal growth in terms of the education business. We will talk directionally about it later on. And then one of the things we would -- we have done that will continue to do is actually look at acquisition opportunities. One of the company we acquired is called Explain Everything. It's for collaboration, it's a very interesting company. Actually, a lot of people based in Poland, very good people. We love that product. So we start to integrate it with the panel. So when you collaborate, so you have a seamless kind of user experience. With that, I'm going to turn it over to Ben, so he's going to take you through the financials. And we have bridges and all the stuff because a lot happened when we spun off the company. So with that, Ben.

Well, thank you, Simon. Good morning. Great to see everyone. So I'm going to go through the financials of the company. And first, I'll start with the P&L. As Simon mentioned, 2023 is a very interesting year, right? On the one hand, our gaming business came back with a very healthy growth rate. And then on the other hand, our overseas education business in Mynd.ai went through a normalization of the market, right? And we see a lot of opportunities during this normalization as this market came back to normal, we see a lot of opportunities. But in the meantime, 2023, we see because of the digestion of demand, that led to a decrease in the education revenue. And as a result, the overall revenue went down by 9.7%. And if we look at the gross profit line, despite the decrease in revenue, our gross profit actually increased by 1.9%. And if you look at the gross margin, our integrated -- our combined gross margin is 62%, that's actually above the Bloomberg consensus estimate. If we continue to go down the P&L, we look at sales and marketing expense, went down by 14.6% as we optimize our sales and promotion both in the gaming unit and also in the education unit. And in terms of the administrative expenses, you guys will see a 23% increase year-over-year. But I would like to highlight that a lot of that is due to the one-time expense related to the listing of the overseas education business. And specifically, we're talking about roughly CNY 250 million one-time expense related to the listing, that includes items such as stock award and some of the other one-time items. And if you exclude this CNY 250 million, if you take that out of the picture, the normalized or adjusted sort of administrative expense would have increased by only 4%, okay? And then on the R&D expense, it also increased by 12.9%, and that is -- a lot of it is really because of our gaming aspect because we hire more people. And I'll get into that in the next slide. Going down the list, if we look at EBITDA, EBITDA and operating cash flow, actually, I believe, is actually a more sort of a fair approach to kind of look at our operational capability. You look at EBITDA, our EBITDA went down by 8.7%, is CNY 1.3 billion. That's actually also above the consensus estimate. And I look at operating cash flow, actually increased by 4% because we optimize and carry out effective working capital management, both in the gaming and education business. And then if you look at the bottom line, we look at operating profit and the net profit, right? So operating profit was CNY 821 million, net profit of CNY 550 million, and I think in terms of these 2 numbers, I think -- let me see, sorry, I just forgot. Yes, so there's a substantial GAAP charge that is included in the operating profit and also net profit, and that's roughly about CNY 250 million that I just talked about. And if you exclude that CNY 250 million GAAP charge, which is related to the spin-off of the business, we're talking about instead of a 28% decrease and 34% decrease, we're talking about a 4% decrease and -- for the net profit and 6.9% decrease for the operating profit year-over-year. So I just want to kind of highlight that so that you guys will understand sort of the adjusted nature of these 2 numbers. And also, this one thing that's also not highlighted here is cash position. We continue to have a very strong cash position with roughly about CNY 2.9 billion of cash and cash equivalents and also bank deposits. So we believe that we have a very strong cash position to drive our business. Okay. And on to the segment of financials highlights. So first of all, I think first things first, its's -- starting in this period, we decided to change our segmental presentation to show 2 segments. In the past, we've always shown gaming segment and the education segment. But with the listing of our overseas education business in Mynd.ai, we believe that it makes sense to change presentation to gaming application service and then Mynd.ai. So that you guys will see a very clear picture of where we're at. And we also put some of the incubational business within the gaming and application service. So I think that will present a much more easy picture for you guys to understand. So first of all, with the gaming and application services segment, you can see we increased our revenue by 6.6%. Gross profit percentage -- gross profit margin increased by 2.6% as we optimize the usage of our service. We use less servers to generate more revenue effectively, and that led to a 2.6% increase in the margin. And then our core segmental profit also increased by 12.9%. We're going down the list, R&D for gaming increased by 16.4%, and that's largely due to the hiring of the people to develop basically more new games with higher quality. And then sales and marketing expense decreased by 9.9% despite the increase in gaming revenue, and that's because we decided that we optimize our sales and promotion expense, and we basically increased -- we invest in marketing promotion programs that generate the greatest return. And moving on to the Mynd.ai side, as Simon mentioned, I mentioned, 2023 is a year of normalization, right? The whole industry came down in terms of shipment because there was an extraordinary amount of government funding all over the world during the 2 or 3 years of COVID period. And 2023 year was a year where demand was digested and the market returned to normal, but we believe that this actually works to our strength because as the market normalizes, people will return to emphasis on quality. And as the market leader, we believe that we're in the best position to actually capitalize on that. And then if you look at the gross margin percentage, it increased by 1.3%. And that's despite the decrease in revenue. We optimize our cost management. And that percentage increase is due to a combination of a decrease in material cost, decreasing in the freight cost and also there's a bit of exchange rate fluctuations in that. If you look at our ex-tariff basis because we disclosed ex-tariff basis in the past, 25%, there will be another 1.7% on top of that. So our gross profit margin actually increased both on an absolute basis and also on an ex-tariff basis. And then on the core segmental side, we had a loss of CNY 93 million compared to a profit of CNY 30 million, and that is largely due to decrease in revenue because of the normalization of the market, as I mentioned, and offset by the savings in the OpEx. And as you can see, for Mynd.ai, R&D, sales and marketing expense went down significantly, especially sales and marketing expense. We did the optimization of our team to be more well prepared for the future. And then administrative expense also increased by only 1.5%. All right. With that, that's the end of my session. And with that, I'll pass the stage back to Lin Chen to go through the gaming business.

Thank you, Ben. [Foreign Language]

Okay. I'm going to go through education very quickly. I said it earlier, I can't go into detail because it's actually under New York Stock Exchange, but I can certainly talk about direction. So again, I mean, if you want to understand the education -- the overseas education better, we can arrange a meeting with our management team. As a result of this spun-off is actually we still own a significant share of the company, which is listed on New York Stock Exchange. By the way, I mean, it's actually -- it is not our goal to maintain that percentage. We will do whatever we can because this spun-off is actually the first of many things that we will do with the education business, it is our intention to raise more money and invest into this company. So we'll do whatever we can to help the overall -- our overall overseas education business. So this is actually the current picture, I would say. Good news is actually maintain our market share. It's -- a lot happened in 2023. It's actually -- it started happening towards the end of 2022. If you remember, I mean, we have a big, huge Q4 and then the market was corrected. So that's quite last year's kind of revenue, and everything looks a little bit odd. We are more than happy to go through it, of course, with the new management team. The opportunity is actually in education, is not only -- is actually the current market we're in. I mean some emerging market is actually growing in there, for example, like Indonesia. We were impacted by Egypt quite a bit, to be honest. It's actually like Lin Chen said, the gaming business, because of the devaluation of the Egyptian pound. Same thing for us, if you remember, in education. We did quite a lot of business in Egypt for a while, but the devaluation is really putting a lot of stress. One of the things we did here last year is that we launched a low-end product called LX. And also, we started to focus on driving the SaaS revenue, which is actually very important. So this is actually the SaaS revenue part. It's actually -- we're very confident because that we can deploy it, because we have a huge user base. We have 4,000 channels that work for us so we can effectively take this into all the new customers and also the existing incumbent customers. As such, it's a very busy side. I'm going to talk at a very high level. I mentioned some of it. We're very confident, even though 2023 is a correction year. But going forward, we believe with all the things that we have been doing is actually we can continue to kind of enjoy the market growth by taking share from our competitors. We're going to grow our business continue. It's actually, like I said, our plan is to take share. We will continue to invest into our software side and also look at directionally what are some of the new technology that we can embrace. We talked too much about explaining everything, but it's important because that's our SaaS revenue stream. And then again, I mean, it's actually we're going to expand our portfolio and see. Again, we have a good plan, and then we will unveil it at the right time, so that you know, the new Board of Mynd.ai will be ready to work with the team to approve the strategic plan. Once we get it approved, that we can take you through. Okay. Very quickly on the outlook. I think you heard all about it. So actually, I'm not going to go into detail. So new games, of course, AIGC is actually that some of the direction that we're going for 2024 is actually for education. Actually, I did talk about it. Driving SaaS revenue is a big thing, looking at our product direction and some of the new market that they will be looking at. So with that, I'm going to stop, and then I think we're going to open it up for Q&A, right? Okay. Let's do it.

[Operator Instructions] [Foreign Language]