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Cheetah Mobile Announces Fourth Quarter and Full Year 2018 Unaudited Consolidated Financial Results

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BEIJING, March 25, 2019 /PRNewswire/ -- Cheetah Mobile Inc. (NYSE:CMCM) ("Cheetah Mobile" or the "Company"), a leading mobile internet company with global market coverage, today announced its unaudited consolidated financial results for the fourth quarter and full year ended December 31, 2018.

Fourth Quarter 2018 Financial Highlights

  • Total revenues[1] increased by 1.8% year over year and 2.2% quarter over quarter to RMB1,381.2 million (US$200.9 million).
  • Revenues[1] from the mobile entertainment business increased by 39.4% year over year and 11.6% quarter over quarter to RMB555.6 million (US$80.8 million), accounting for 40.2% of total revenues in the fourth quarter of 2018.
  • Gross profit was RMB964.8 million (US$140.3 million). Gross margin was 69.9%. Non-GAAP[2] gross profit was RMB964.9 million (US$140.3 million). Non-GAAP gross margin was 69.9%.
  • Net income attributable to Cheetah Mobile shareholders was RMB770.2 million (US$112.0 million). Non-GAAP[2] net income attributable to Cheetah Mobile shareholders was RMB805.5 million (US$117.2 million).
  • Diluted net income per ADS was RMB5.35 (US$0.78). Non-GAAP[2] diluted net income per ADS was RMB5.60 (US$0.81).

Fiscal Year 2018 Financial Highlights

  • Total revenues[1] increased by 2.2% to RMB4,981.7 million (US$724.6 million).
  • Revenues[1] from the mobile entertainment business increased by 19.0% to RMB1,778.9 million (US$258.7 million).
  • Gross profit was RMB3,441.1 million (US$500.5 million). Gross margin was 69.1%. Non-GAAP[2] gross profit was RMB3,441.3 million (US$500.5 million). Non-GAAP gross margin was 69.1%.
  • Net income attributable to Cheetah Mobile shareholders was RMB1,203.8 million (US$175.1 million). Non-GAAP[2] net income attributable to Cheetah Mobile shareholders was RMB1,288.9 million (US$187.5 million).
  • Diluted net income per ADS was RMB8.10 (US$1.18). Non-GAAP[2] diluted net income per ADS was RMB8.69 (US$1.26).
  • Net cash from operating activities in 2018 was RMB342.1 million (US$49.8 million). Free cash flow was RMB276.7 million (US$40.2 million) in 2018.

 

[1] Starting from January 1, 2018, Cheetah Mobile adopted a new revenue accounting standard (ASC 606), which reclassifies value added tax from the cost of revenues to net against revenues. To increase comparability of operating results and help investors better understand the Company's business performance and operating trends, 2017 net revenues have been used to calculate all percentage changes in revenues. 2017 net revenues are defined as gross revenues under legacy GAAP after the deduction of value added taxes, which is presented on the same basis as 2018 and going forward.

[2] Non-GAAP measures exclude share-based compensation expenses. See details in the section titled "USE OF NON-GAAP FINANCIAL MEASURES".

Fourth Quarter 2018 Operating Metrics

  • The average number of global mobile monthly active users ("Mobile MAUs") was 470 million in the fourth quarter of 2018. The number of Mobile MAUs from markets outside of China, or overseas markets, accounted for 72% of the total number of Mobile MAUs in the fourth quarter of 2018. 

Mr. Sheng Fu, Cheetah Mobile's Chairman and Chief Executive Officer, stated, "We achieved full year 2018 financial results that were in line with our previous expectations, mostly driven by growths in our mobile games operation, mobile utility products business in the domestic market, and artificial intelligence ("AI") powered business. In 2018, we further expanded our product offerings by launching many new games including Bricks n Balls, a popular casual elimination game, and introducing a number of new utility products focused on delivering personalized experiences. We also made substantial progress in attracting our users to purchase virtual items and premium services within our mobile applications, which diversified our revenue streams. More importantly, we have been leveraging AI technologies and expanding into AI-powered businesses. We have successfully launched AI hardware such as Cheetah Translator and deployed Cheetah GreetBot in many customer locations. Looking ahead, we are confident that our long-term growth prospects remain healthy and that our business will maximize the benefits of our users and advertisers continuously."

Mr. Vincent Jiang, Cheetah Mobile's Chief Financial Officer, commented, "In 2018, we grew our profits and expanded our margins. Our gross profit increased to RMB3.4 billion, and gross margin expanded to 69.1%. Our operating profit increased to RMB467 million and operating margin expanded to 9.4%. In addition, we continued investing in our mobile games business and our mobile utility products business in the domestic market. More importantly, we generated RMB342 million of net cash from operating activities in 2018. In the fourth quarter of 2018, we sold a certain portion of our equity ownership in Bytedance Ltd., which generated a total investment gain of US$87 million and further augmented our balance sheet. As of December 31, 2018, we had cash and cash equivalents, restricted cash, and short-term investments of approximately US$541 million. Our strong cash generation capabilities and our high cash balance should allow us to continue to invest in our long-term growth and our business expansion into the AI space."

Fourth Quarter 2018 Consolidated Financial Results

REVENUES

Total revenues in the fourth quarter increased by 1.8% year over year and 2.2% quarter over quarter to RMB1,381.2 million (US$200.9 million). 

Revenues from utility products and related services decreased by 16.5% year over year and 6.3% quarter over quarter to RMB783.0 million (US$113.9 million) in the fourth quarter of 2018. The year over year decrease was mainly due to the discontinuation of certain ad formats, i.e., ads on mobile phone lock screens, by the Company's overseas third-party advertising partners. The quarter over quarter decrease was mainly due to disruptions to the Company's business as a result of the negative publicity caused by a news article released in November 2018, about which the Company has made a number of public clarification statements.

Revenues from the mobile entertainment business increased by 39.4% year over year and 11.6% quarter over quarter to RMB555.6 million (US$80.8 million) primarily driven by the growth of the Company's mobile games business in the fourth quarter of 2018. Revenues from the mobile entertainment business contributed to 40.2% of total revenues in the quarter.

  • Revenues from the mobile games business increased by 91.4% year over year and 14.3% quarter over quarter to RMB326.2 million (US$47.4 million). The increases were mainly due to contributions from Bricks n Balls, a casual elimination game that started ramping up in the middle of July 2018.
  • Revenues from the content-driven products, namely LiveMe, increased by 0.6% year over year and 7.9% quarter over quarter to RMB229.4 million (US$33.4 million), primarily driven by growths in both of its paying user count and average revenue per user as LiveMe continued to introduce new features to increase its user stickiness.

Revenues from others increased to RMB42.6 million (US$6.2 million) from RMB20.0 million in the same period last year and RMB18.5 million in the third quarter of 2018, mainly driven by the sales of Cheetah Translator, an AI-based interpretation device. Revenues from others accounted for 3.1% of total revenues in the fourth quarter of 2018.

By region, revenues generated from the China market increased by 3.7% year over year, but decreased by 0.6% quarter over quarter to RMB533.2 million (US$77.6 million), and constituted 38.6% of the Company's total revenues in the fourth quarter of 2018, compared to 37.9% in the same period last year and 39.7% in the third quarter of 2018. The year over year revenue growth in the China market was primarily attributable to the sales of Cheetah Translator.

Revenues generated from the overseas market increased by 0.7% year over year and 4.0% quarter over quarter to RMB848.0 million (US$123.3 million), constituting 61.4% of the Company's total revenues in the fourth quarter of 2018, up from 62.1% in the same period last year and 60.3% in the third quarter of 2018. The revenue growth in the overseas market was primarily driven by the rapid growth of the Company's mobile games business, whose market is mostly overseas.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues decreased by 3.2% year over year and increased by 9.1% quarter over quarter to RMB416.4 million (US$60.6 million) in the fourth quarter of 2018. The year-over-year decrease was primarily due to (i) reduced traffic acquisition costs associated with third-party advertising, and (ii) reduced bandwidth and IDC costs and personnel costs involved in the Company's operation for the News Republic business. The quarter-over-quarter increase was primarily driven by (i) higher revenue sharing with live broadcasters of the Company's LiveMe business, (ii) higher costs as a result of revenue growth in the Company's hardware business, and (iii) higher costs of payment channels, such as Google Play and Apple's App Store, for the Company's mobile games business, as in-game purchase revenues from the Company's mobile games business grew. Non-GAAP cost of revenues decreased by 3.5% year over year and increased by 9.1% quarter over quarter to RMB416.2 million (US$60.5 million) in the fourth quarter of 2018.  

Gross profit increased by 4.1% year over year and remained relatively flat quarter over quarter at RMB964.8 million (US$140.3 million). Non-GAAP gross profit increased by 4.3% year over year and remained relatively flat quarter over quarter at RMB964.9 million (US$140.3 million) in the fourth quarter of 2018. Gross margin was 69.9% in the fourth quarter of 2018, as compared to 68.3% in the same period last year and 71.8% in the third quarter of 2018. Non-GAAP gross margin was 69.9% in the fourth quarter of 2018, as compared to 68.2% in the same period last year and 71.8% in the third quarter of 2018.

OPERATING INCOME AND EXPENSES

Total operating expenses increased by 26.3% year over year and 5.6% quarter over quarter to RMB889.7 million (US$129.4 million) in the fourth quarter of 2018. Total non-GAAP operating expenses increased by 22.1% year over year and 4.7% quarter over quarter to RMB854.6 million (US$124.3 million) in the fourth quarter of 2018.

  • Research and development (R&D) expenses increased by 25.9% year over year and 9.0% quarter over quarter to RMB191.1 million (US$27.8 million) in the fourth quarter of 2018. The increases were primarily due to increased share-based compensation expenses and increased R&D headcount for the mobile games business. Non-GAAP R&D expenses, which exclude share-based compensation expenses, increased by 19.4% year over year and 5.5% quarter over quarter to RMB176.0 million (US$25.6 million) in the fourth quarter of 2018.
  • Selling and marketing expenses increased by 38.1% year over year but remained relatively flat quarter over quarter at RMB580.3 million (US$84.4 million) in the fourth quarter of 2018. The increases were mainly due to increased marketing promotions for the Company's utility products and related services business in the domestic market and its mobile games business in all markets. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 36.5% year over year and 2.2% quarter over quarter to RMB577.7 million (US$84.0 million) in the fourth quarter of 2018.
  • General and administrative expenses increased by 14.6% year over year and 21.8% quarter over quarter to RMB131.8 million (US$19.2 million) in the fourth quarter of 2018. The year-over-year increase was primarily due to the increased share-based compensation expenses. The quarter-over-quarter increase was primarily due to higher employee benefits. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, increased by 2.2% year over year and 22.0% quarter over quarter to RMB114.6 million (US$16.7 million) in the fourth quarter of 2018.

Operating profit decreased by 66.2% year over year and 41.3% quarter over quarter to RMB75.1 million (US$10.9 million). The year-over-year decrease in the Company's operating profit was primarily due to the Company's investments in both its mobile utility products business in the domestic market and its mobile games business in all markets. Non-GAAP operating profit decreased by 51.1% year over year and 28.4% quarter over quarter to RMB110.3 million (US$16.0 million). 

The Company has reported its operating profit along the following segments since the second quarter of 2017:

  • Operating profit for utility products and related services decreased by 31.5% year over year and 15.2% quarter over quarter to RMB224.0 million (US$32.6 million) in the fourth quarter of 2018. The decreases were primarily due to a decrease in revenues from this segment and the Company's increased marketing promotions for its utility products and related services business in the domestic market.
  • Operating loss for the mobile entertainment business was RMB64.8 million (US$9.4 million) in the fourth quarter of 2018, compared to an operating loss of RMB61.8 million in the same period last year and RMB74.1 million in the third quarter of 2018. The wider year-over-year loss was mainly due to higher sales and marketing expenses for the Company's mobile games operation. The reduced quarter-over-quarter loss was mainly a result of reduced expenses from the LiveMe business.

Share-based compensation expenses increased to RMB35.3 million (US$5.1 million) in the fourth quarter of 2018 from RMB3.4 million in the same period last year and RMB26.3 million in the third quarter of 2018, as the Company granted a certain quantity of restricted shares to key employees.

IMPAIRMENT OF INVESTMENTS

Impairment of investments were RMB98.9 million (US$14.4 million) in the fourth quarter of 2018 primarily due to a one-time non-cash write-down of some investment assets, which the Company considered as other-than-temporary, to its fair value. This write-down was the result of lower-than-expected performance and financial position of the investment assets.

OTHER INCOME, NET

Other income, net, was RMB789.3 million (US$114.8 million) in the fourth quarter of 2018, mainly resulting from the disposals of a certain portion of the Company's equity ownership in Bytedance Ltd., whose transaction agreement was entered in the fourth quarter of 2018 and resulted in a disposal gain of investment of US$43.3 million. This transaction also resulted in a fair value gain of US$43.3 million in the fourth quarter of 2018 for the remaining portion of the equity ownership which the Company still holds, in accordance with ASC 321, adopted on January 1, 2018.

NET INCOME ATTRIBUTABLE TO CHEETAH MOBILE SHAREHOLDERS

Net income attributable to Cheetah Mobile shareholders decreased by 26.4% year over year, and increased by 361.1% quarter over quarter to RMB770.2 million (US$112.0 million) in the fourth quarter of 2018. Non-GAAP net income attributable to Cheetah Mobile shareholders decreased by 23.3% year over year and increased by 316.6% quarter over quarter to RMB805.5 million (US$117.2 million) in the fourth quarter of 2018.

NET INCOME PER ADS

Diluted income per ADS decreased by 26.4% year over year and increased by 390.8% quarter over quarter to RMB5.35 (US$0.78) in the fourth quarter of 2018. Non-GAAP diluted income per ADS decreased by 23.2% year over year and increased by 340.9% quarter over quarter to RMB5.60 (US$0.81) in the fourth quarter of 2018.

BALANCE SHEET

As of December 31, 2018, the Company had cash and cash equivalents, restricted cash, and short-term investments of RMB3,720.6 million (US$541.1 million). 

SHARES ISSUED AND OUTSTANDING

As of December 31, 2018, the Company had a total of 1,433,343,199 Class A and Class B ordinary shares issued and outstanding. One ADS represents 10 Class A ordinary shares.

Fiscal Year 2018 Results

REVENUES

Total revenues increased by 2.2% to RMB4,981.7 million (US$724.6 million) in 2018. 

Revenues from utility products and related services decreased by 6.7% year over year to RMB3,119.5 million (US$453.7 million) in 2018. The decrease was due to (i) a decline in revenues from the Company's mobile utility products and related services business in the overseas markets mostly as a result of the discontinuation of certain ad formats, i.e., ads on mobile phone lock screens, by the Company's overseas third-party advertising partners, and (ii) a decline in the Company's PC-related revenues. This decrease was largely offset by an increase in revenues from the mobile utility products and related services business in China. Revenues from utility products and related services in the domestic market increased by 22.3% year over year to RMB1,794.4 million (US$261.0 million) in 2018, accounting for 36.0% of total revenues.

Revenues from the mobile entertainment business increased by 19.0% year over year to RMB1,778.9 million (US$258.7 million), mostly driven by the growth of the Company's mobile games operations. Revenues from the mobile entertainment business contributed 35.7% of total revenues in 2018.

  • Revenues from the mobile game business increased by 48.5% year over year to RMB925.0 million (
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