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

Dear friends, good morning. Thank you for joining NetDragon Websoft Holdings Limited for our 2024 Annual Results Presentation. [Foreign Language] The presentation will be broadcast on Rosho China, Futu, and Weiyun platform. The results PPT is available for download on our company website at ir.netdragon.com under the Webcast News and Events tab. [Foreign Language] Before the start of our presentation, please allow me to introduce the management who are joining us today. [Foreign Language] Dr. Simon Leung, Group Vice Chairman and Executive Director.

Hello.

Mr. Wood Lau, Group Interim CFO. [Foreign Language].

Hello, everyone.

Mr. Lin Chen, Group Senior Vice President [Foreign Language].

[Foreign Language]

Now let's pass our time to Dr. Simon Leung to host our presentation today. [Foreign Language].

Okay. Thank you. It's that time of the year again. Thank you for joining our call wherever you are. So good morning, good evening, good afternoon and all that. Essentially, what we're going to do today is that we not only taking you through what we have done in 2024, but also look forward to 2025. I think some exciting strategies that we have. You have read our press release. And throughout this call, you will hear a lot about how we will be embracing AI as our future, which is actually the right thing to do. I think all along, we've been kind of looking at AI more from a supportive kind of perspective, i.e., helping us to maybe cut costs, managing our business a little bit better, but we have decided last year that we're going to be all in. So, we talk about how we can help managing our costs and at the same time, creating products around the world that we can help us to grow in the future. This not only applies to our core businesses, gaming and education. We're going to make an announcement later on today on one of a very exciting venture that we're going to have is all around IP and all around AI with our own IP. With that, I'm going to go through the quick highlight of our 2 businesses. One is gaming, the other one is education. On gaming, I said many times, we're going to be doing AI and gaming. Actually, if I can look over to education, we do AI and education at the same time. So not only we are using it to reduce costs, in the gaming side in both development and also creating great graphics. What we're also going to do is actually really focus on extending our life, which is our evergreen IP on Demand, which Lin Chen is going to take us through in more detail. On the education side, it's unfortunately, we are facing some headwinds, both in the U.S. and in Europe for many different reasons. So, by the way, you know those are our 2 strongest markets for education. U.S. is just a lot of things, inflation that's been bothering us for the last 2 years, the uncertainty of the budget allocation because President Trump wants to suspend the Department of Education. So, there's a lot of unknown. The good news is actually the money is actually still there. The question is actually how it's going to be passed on to the state and then subsequently to the district. Same thing applies to Europe with a war going on in Ukraine and Russia, a lot of election going on, for example, like Germany. The good news is actually they form a government and they're going to be -- they have a big budget for education. And Germany is our #1 market in Europe. So that's light at the end of the tunnel. So, we do expect continued headwind in 2025, but we do expect a recovery in 2026, sorry to be a little bit more long-winded on those subjects, but I think it's key for you to understand. One very exciting aspect of our product is actually we launched ActivPanel 10, which is we call AP10, which is a modular architecture. Actually, we took the converting device out of the screen that allow us to be very flexible in terms of how we configure the product. We can go with Android, we can go with Chrome, Windows and even Mac. So, it's actually depending on the customers' requirement. At the same time, we have a device that we can deploy a lot more services on, which is actually the thing we call CaaS for the last few years, and we can continue to take advantage of that. Of course, AI and education that's also the services that will go into that box. So very exciting stuff. At the same time, because of the headwind, we try to manage our P&L and also our balance sheet. So, we have done a bunch of work. And I mean, you read the detail. I mean we're going to be very prudent in terms of how we manage our balance sheet. Okay. I'm going to talk a little bit more about 2025 later on. I'm going to stop right now and turn this over to Wood, our new interim CFO.

Thank you, Simon. I will be presenting the financial part to you. And our gross margin is up 3.3% to 65.2% and our EBITDA margin is going up 4.8% to 23.4%. And our profit before tax is up 90% to RMB 759 million. So, demonstrate that even though we drop in the revenue, but our profitability is still there. And our net cash increased 30% to RMB 2.1 billion. And our operating cash flow, we want to highlight here that we have 6 consecutive years over RMB 1 billion operating cash flow, which demonstrates our business model is sustainable. And finally, the dividend, we declared a 2.5 for each share, we have a 7.6% dividend yield based on the yesterday share price. And here are some key financial highlights which the group revenue dropped to RMB 6 billion, which the gaming and application services due to the proactive optimization efforts to respond to the market demand our gaming and application service dropped 6% to RMB 3.9 billion. And the revenue for Mynd.ai is still on the transition period. So, the revenues dropped by 17% to RMB 2.1 billion, but our gross margin is still improved from 3.3% to 65.2%. And the OpEx, which remains stable with the OpEx is around RMB 3.3 billion, which is about the same in the last year. And remember that we increased our AI initiatives to control the cost. So that means we've taken place the cost optimization in the last quarter of 2024, which means the cost savings will be expected to materialize in this year. And our EBITDA margin, profit before tax is going up in 2024. And one point we want to highlight is the taxation. The taxation which includes a onetime noncash deferred tax provision expenses of RMB 452 million, which mainly to the operating of the Mynd.ai, which is not successful loss-making in the previous year, which means the loss carry forward in the deferred taxes has been the impairment provision for Mynd.ai this is a provision. So that means if the Mynd.ai performance is improved in the future year, this provision may be able to revert back to our P&L. And cash flow, we have stable operating cash flow and increased the cash basis. So that's why we have increased our dividend per share from 0.4 to 0.5 in this final dividend in this year, which marked a 25% increase. Turning into segment and most will be highlighted in the report and [indiscernible] how you see the gaming represent about 87% of our gaming and application services. And as mentioned before, optimization only taken place in the last quarter of 2024, which means we will be a full year cost saving impact in 2025. That means it will be a quite good position for us to going for financial performance. And for Mynd.ai, although the revenue dropped, but our gross margin is improved by 1 percentage point due to the lower unit cost and the freight charge costs. And our segmental expenses, which means want to highlight here, we disposed our GEH Singapore last year, which means in this figure which include about USD 10 million in the last year in the mine business. So, if you take out - actually the OpEx will be dropped about 3.4% in the compared year 2024 and 2023, so which is a good cost saving taking place in the Mynd.ai level as well. And we want to highlight here that since IPO, we have been declared a lot of the dividend in the past, which has already surpassed HKD 80 since our IPO, which our dividend - the final dividend also increased 25% Y-o-Y to HKD 4.5 per share, which means we are wanting to share our return to our shareholder. In summary, 2024 was a year of mixed financial performance and our strategic execution and enhanced shareholder returns. And this will be a good position for us going forward. Thank you for your attention. Now I turn to Lin Chen to talk about the gaming business. [Foreign Language]

Okay. Thank you, Lari. So, that was Lin's 'presentation, we have mentioned AI so many times. So, you will just hear it as a continual theme for us going forward. Okay. I'm going to take you through very quickly high level on Mynd.ai because is a company listed on New York Stock Exchange. So, I don't think I can go into too many details, but I think it's good as a shareholder. I'll take you through what we've been doing. So next page. Revenue was down because of the headwind, but the good news is that we have done good cost management. Freight is down, materials down, operation is down, and we have also rationalized our employee count. So, actually that's why actually we can achieve higher gross margin and all that. So, continue the theme of AI. This is our opportunity going forward. With 1.5 million classrooms around the world, our ability, which we will talk about on the next page with our new architecture, we can put AI services into the classroom allow teachers and students to interact much more effectively. Next one. This is around our AP 10. I talked quite a bit about it during the highlight, just to give you a visual of what we can do. We can configure it in many different ways, so which is covering the entire classroom allow teachers and students to interact. Next page. This is a continuation of why we are doing the AP 10 because we can unbundle basically the brain from the panel that we can deploy more services. Actually, we started doing it in 2024. That's why you can see we're building up our recurring revenue stream. We will continue to do that in 2025 and onwards. AI, again, is a big element of that. Next page. We'll talk a bit about it. I just want to have your attention that we are doing a lot of like a better term, cleanup of our balance sheet and also get ourselves structured in a way that we can take advantage of the capital market in the U.S. when we need to. So, with that, I'm going to go into the outlook for 2025. The first one I want to take you through, which is actually very exciting for us is our partnership with a company called Wenge, actually we have signed a term sheet with them. We're going to be investing RMB 75 million, not limited to, by the way, it's actually RMB 75 million of cash and AI assets. Cash is actually important, but the key on this one is actually the AI asset they're going to put in into the company. I think this is actually a match made in heaven. It's actually is actually a spin-off from [Cherrypicks]. They have a lot of technology, which I will talk about a little bit later on. We're going to put the IP into this company. And we're going to be working exclusively on markets outside of Mainland China, i.e., Hong Kong, Macao, and the rest of the world. It's actually AI is going to be a key on this one, so which is the technology part. But Cherrypicks, we've been working with a lot of major customers in Hong Kong, government, Hong Kong Airport, MTR, and also, we're going to take everything out to the rest of the world. So, it's actually a match between IP and AI and the ability to execute and deliver not only in Hong Kong, but around the world. I forgot to talk about, we also work very closely with the Hong Kong government and also one of the software that Cherrypicks has worked on is PayMe. I'm sure a lot of you, if you're living in Hong Kong, we build that product for Hong Kong China Bank. Let me talk a little bit about Yayi, it's actually if you go to the chart on the right-hand side, it's actually something that we own in the company outside of China. It's actually, if you've been tracking the large language model of the AI agent tests. So, Yayi has been moving up. So, if you look at the ranking, it's actually we only rank behind some of the very notable large language model, GPT 4.5, Gemini, DeepSeek, Qwen and then it's us. So, we are very exciting. We are very excited about it. I think what we're going to do is we will leverage this IP and focus on certain verticals, i.e., industries, including education, by the way, I mean, actually, that's going to be very exciting to see how this venture can help us in AI education going forward. Next one. I think the chart probably be a little bit misleading, so I apologize on that one. Let me give you the gist of all this. We are going to build our AI plus content creation strategy. This platform will support both gaming, which Lin Chen talked a lot about and also AI educational gaming, which I talked about many times before. So that AI educational gaming is actually spent across Mynd.ai plus what Cherrypicks is going to do and all that. So, I think that's going to be extremely exciting. So okay. With that, I'm going to end on the outlook for this year. On the gaming, I kind of repeated what Lin Chen has been saying. Our strategy is AI plus gaming. So, we're going to help with our costs, not only just on graphics, but also on coding. We're going to make sure our evergreen IP agreement will continue to grow. So very important for us. For Mynd.ai, I think we'll continue to optimize our cost structure, and then we're going to set ourselves up for success when the market returns. I didn't say when, I didn't say, I just. Last but not least, I think we're going to be really focusing on shareholder return. So simply put, we're going to continue to look at our dividend strategy and also possible buy shares in the market at the right time. So, with that, thank you for your attention. Thank you for bearing with us. So, we're going to open it up for Q&A. Thank you.

Thank you, Simon. Now it's our Q&A. [Operator Instructions] [Foreign Language] Let's welcome our first question from the teleconference system. [Foreign Language]

Good question. So, we like it because we know what we are focusing on. And by the way, I mean, we've been working with them even before we're talking about getting together. So, we have experience with them. Obviously, if you look at the ranking of Yayi in the market, it actually moving up. So, we much rather work with somebody with up and coming which is actually a little bit smaller that we work together to really focus on certain industries rather than working with GPT 4.5, which they are trying to approach the wider market. Where we are right now is actually we have signed a term sheet. We're moving towards on the SPA, but that doesn't mean we are not working together. So, I can't go into detail, but I think there are a few exciting projects that we are working on. Hopefully, at the right time, we will be in front of you telling you the good news of those projects. [Foreign Language] Very good question. And then if I may point you to what has done is actually the last page of this presentation to give you a little bit of history on what we have done. I also point you to my closing comments when I was talking about the outlook. We're going to be looking at returning -- how we can return the value to the shareholders. So, we will -- I expect we'll continue to have dividend paying back to our shareholders. And at the right time, we will definitely look at buying that. [Foreign Language]

Our next question comes from Victor Khoo from Lumiere Capital. Actually, this question we have answered already, but I will just repeat it. Why did the game core profit drop so significantly from RMB688 million in 1H to RMB237 million in 2H 2024? Can we expect a meaningful rebound in 1H 2025?

This is a proactive adjustment we're taking for evergreen IP so that the revenue is taking a strong in the 2024 second half. And for this year, we expect the over will be a little bit flat in the first half. And the second half because of the new games coming in and the adjustment taking place in the second half in the last year. So that means second half we will have the bounce back to our revenue or the core segment performance. So once again, the first half because of the adjustments made in the last year second half. So that means first half we still a little bit drop back in the first half. But the second half, we will have a healthy growth again in the future. [Foreign Language]