Kingsoft Corporation Limited (OTCPK:KSFTF) Q4 2021 Earnings Conference Call March 23, 2022 7:00 AM ET
Francie Lu – IR
Tao Zou – CEO
Francis Ng – CFO
Conference Call Participants
Thomas Chong – Jefferies
Liping Zhao – CICC
Good day, and thank you for standing by. Welcome to the Q4 2021 Kingsoft Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded, Wednesday, the 23rd of March 2022. [Operator Instructions]
I would now like to hand the conference over to your 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 2021 fourth quarter and annual 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. Tao Zou, our Executive Director and CEO; Mr. Francis Ng, our Executive Director and CFO.
Now I’m turning the call to Mr. Zou. Tao Zou?
Okay. [Foreign Language]
I will translate for Mr. Zou. In 2021, we are poised to achieve a steady growth in our core businesses, leveraging our continuous investment in technological innovation. Kingsoft Office Group focuses on user needs and has further enhanced its products and services. It has also continued to pursue the ecosystem strategy of multiscreen, cloud, content, AI and collaboration and achieved an excellent operational performance.
Meanwhile, our online game business has launched several new mobile games during the year while continuing to focus on the development of premium games, long-term operation and enrichment of core game IPs. The group’s business continued to achieve a steady growth in 2021, with revenue reaching RMB 6,371 million, increasing by 14% year-on-year. Our Office Software and Services business maintained a solid growth momentum and its revenue increased 45% year-on-year.
Now I’m turning the call to our CFO, Mr. Francis Ng. Francis?
Thank you, Francie. Ladies and gentlemen, good evening. In 2021, Kingsoft Office Group continued to enhance its product and services for cloud and collaboration office scenarios. With the increasing user activeness and the user stickiness in individual and enterprise user, cloud migration of both individual and institutional subscription has accelerated with a stable growth in the number of monthly active device of its key products. Kingsoft Office Group has continued to optimize its user experience and product function, promote cloud migration, increased usage of its value-added function and further drove the growth in its number of paying users.
In addition, the significant increase in the number of uploaded cloud documents and increase in the proportion of long-term paying users has also laid a solid foundation for the continuous growth of the individual subscription business in the future. Regarding the government and enterprise market, Kingsoft Office Group took the advantage of the industrial trend on demand of government and enterprise users for data asset management and also office efficiency improvement and has actively improved product system, enhanced user experience and expanded ecosystem to promote the cloud office migration of government and enterprise users. This has also set a solid foundation for a subsequent promotion of digital office platform solution. As the cloud migration of government and enterprise users continue, Kingsoft Office group is expected to increase its presence in the government and enterprise market.
In addition, Kingsoft Office Group has witnessed a strong demand growth from the government and enterprise users, as localization projects enter a booming stage with a fast-growing market leveraging their favorable policies. Moreover, Kingsoft Office group also received substantial orders for its re-flowable and fixed layout document format products, which led to a robust growth of its domestic institutional licensing business. In the fourth quarter, revenue for the flagship JX Online III PC game and a classic JX 2D PC game grew steadily over — quarter-over-quarter. Moreover, we have also achieved breakthroughs on product development, demonstrating the vitality of the core IP and our strong R&D and operational capabilities. Following the successful release of the JX I pocket mobile game in Vietnam in April 2021, JX I: Gui Lai, the domestic version of JX pocket mobile game was released in October.
Upon its debut, the JX I: Gui Lai was ranked third in the top 3 charts and first in the top grossing role-play games chart for iOS. In November, Wu Lin Xian Xia, our self-developed mobile game was released in China with highest ranking sixth in the top grossing chart for iOS, demonstrating our successful strategy cooperation with Nuverse. In December, JX World III, the third generation of JX World series mobile games was launched. Upon its launch, JX World III ranked first in the top free chart and ninth in the top grossing chart for iOS. In addition, the mobile game was also recommended on the front page of Apple Today, and was recognized as a superstar product by the Mobile Hardcore Alliance.
As a financial result. As usual, starting with the Q4 using RMB as a currency. Revenue increased 13% year-over-year and 21% quarter-over-quarter to CNY 1,822 million. The revenue speed was 50% for Office Software and Services and 50% for online games and others. Revenue from Office Software and Service increased 19% year-over-year and 12% quarter-over-quarter to CNY 904 million.
The year-over-year increase was mainly due to continuous growth of individual and institutional subscription business of Kingsoft Office Group. The vast growth of individual subscription business was mainly driven by continued expansion of paying users. The sustainable growth of institutional subscription business was largely driven by emerging demand for data management of enterprise-level user and the digitalization of industries. The quarter-over-quarter increase was mainly due to the sustainable growth of individual subscription business as well as institutional licensing business. Revenue from the online games and other business increased 8% year-over-year and 30% quarter-over-quarter to CNY 918 million.
The year-over-year increase was mainly due to the successful launch of several mobile games which broadened our game portfolio, partially offset by the decreased revenue from the existing games. The quarter-over-quarter increase was mainly due to the revenue contribution from newly launched mobile games and revenue growth from JX Online III. Cost of revenue increased 44% year-over-year and 38% quarter-over-quarter to CNY 373 million. The increases were mainly due to an increase in the purchasing cost of services and products, the greater channel costs along with the business growth of Kingsoft Office Group. Gross profit increased 8% and 17% quarter-over-quarter to CNY 1,450 million.
GP margin decreased by 4 percentage points year-over-year and 2 percentage points quarter-over-quarter to 80%. Our R&D costs increased 60% year-over-year and 10% quarter-over-quarter to CNY 684 million. The increases were mainly attributable to increased headcount as well as personnel-related expenses as a result of the continuous increased investment in products and services R&D. Selling and distribution expenses increased 11% year-over-year and 27% quarter-over-quarter to CNY 308 million. The increases were primarily due to an increase in marketing and promotional spending of online games business.
Administrative expenses increased 10% year-over-year and 16% quarter-over-quarter to CNY 155 million. The increases were largely due to the increased personnel-related expenses. Share-based compensation costs decreased 9% year-over-year and 1% quarter-over-quarter to CNY 73 million. Operating profit before share-based compensation costs decreased 37% year-over-year and increased 12% quarter-over-quarter to CNY 404 million. Net other gains were CNY 28 million compared to net other losses for the fourth quarter of 2020 were CNY 111 million.
The net other gain of CNY 734 million in the third quarter of 2021. The losses in the fourth quarter of 2020 were mainly due to the recognition of a loss deemed disposal of Kingsoft Cloud as a result of the dilution impact of exercising of its employee option. The gains in the third quarter 2021 were mainly due to that we recognized a gain on this deemed disposal of Kingsoft Cloud as a result of the dilution impact of issuance of new shares. We recorded share of losses of associates of CNY 580 million for the fourth quarter of 2021 compared with share of losses of CNY 21 million and CNY 286 million for the fourth quarter 2020 and third quarter 2021. The losses in the fourth and third quarter of 2021 were mainly due to the losses recognized in Kingsoft Cloud and Cheetah Mobile.
And the losses in the fourth quarter 2020 were mainly due to the losses recognized in Kingsoft Cloud, which was partially offset by the profit recognized in Cheetah Mobile. Income tax expenses decreased 54% year-over-year and 46% quarter-over-quarter to CNY 53 million. The year-over-year decrease was mainly due to lower taxable profit and the quarter-over-quarter decrease was primarily due to the decrease of deferred tax expenses. As a result of the reason discussed above, the loss attributable to the owner of parent was CNY 335 million for the fourth quarter of 2021 compared with profit of CNY 221 million and CNY 565 million for the fourth quarter of 2020 and third quarter of 2021, respectively.
Loss attributable to the owners of parent excluding eShop was CNY 292 million compared with the profit of CNY 266 million in the corresponding period last year and a profit of CNY 611 million in the third quarter of 2021, the net profit/loss margin excluding the effect of share-based compensation costs was minus 16%, 17% and 40% for the 3 months ended December 31, December 2020 and September 30, 2021, respectively.
Revenue increased 14% year-over-year to CNY 6,371 million. Office Software and Services make up 51%, increased 45% year-over-year to CNY 3,265 million. And Online Game and Other make up the remaining 49% and decreased 7% year-over-year to CNY 3,107 million. Gross profit margin decreased 2 percentage points year-over-year to 82%. Over to owner of parent, including that from continuing operation and discontinued operation was CNY 395 million compared with profit of CNY 10,045 million for last year.
As for the balance sheet, we have adequate cash reserve of CNY 19.1 billion at year-end 2021. Net cash generated from operating activities, including those from the continued operation and the discontinued operation was CNY 2,220 million, CNY 2,991 million for the year ended December 31, 2021, and December 31, 2020, respectively. Capital expenditures was CNY 364 million and CNY 684 million for the year ended December 31, 2021, and December 31, 2020, respectively. Looking forward, Kingsoft Group will ride on the trend of cloud and collaboration office and continue to invest in product R&D. It will also further explore the opportunity in the enterprise market and strive to empower the digital transformation of large-scale organization.
Regarding our online game business, we will continue to maintain the development of our core IP, while focusing on bridging the new game genre and the new IPs. Looking ahead, we will continue to promote technological innovation and upgrades, pursue social responsibility to ensure long-term sustainable growth of our business. This concludes our prepared remarks. I now hand over the mic to the floor for questions-and-answers. Thank you.
Hi, operator, we’re ready for the QA session.
[Operator Instructions] Your first question comes from the line of Thomas Chong from Jefferies.
[Foreign Language] I have a question regarding the 2022 outlook. Can management talk about how we should think about the growth momentum for different segments in the gaming and WPS as well as the overall margin outlook for this year? And given the dynamic industry environment and the macro uncertainties, how should we think about the first half and the second half business trend?
I’ll translate for Francis. So regarding the question for our full year revenue and profit guidance, I will discuss this in 2 parts. The first one is the game business. In 2021, our game revenue decreased 7% year-on-year for many reasons, mainly due to the government regulation challenge with the whole gaming market. So a number of our games did not launch on time as we expected.
But in 2022, we are most likely to turn the situation around. In the fourth quarter of 2021, we already launched 3 new mobile games and they all performed quite well after launch and also including the one that we launched in Vietnam last year, it was also very successful. Our classic JX IP game even though the rental version did not get license in long-term time, but the other classic JX IP games still performed steadily. JX Online III will also be steady in 2022. So with the JX Online III and also the new games that we just launched, we believe that for 2022, the top line growth will be over 20%.
And also, the operating profit will improve because the expenses are not capitalized until the new games are launched. We also have a few games in our pipeline that are ready in terms of development. So if the license releasing start in the second half of this year, we will have 3 more new games to be launched. With these new games, our total revenue for the gaming business in 2022, the growth will be 30% to 40%. But if we couldn’t get the license for these games this year and the whole year revenue growth for the game business will be over 20%.
The second part is the KSO business, the Kingsoft Office business. Starting from the fourth quarter last year, the Kingsoft Office business already contributed 50% of our revenue. We have discussed many times internally about the disclosure guidance for the Kingsoft Office business. But due to their own disclosure policy, so far, they have not officially give out any revenue or profit disclosure or guidance. So as the parent company, we could not disclose more than what Kingsoft Office disclosed to the market.
We could share more information in terms of this development direction. But for the financial numbers, we couldn’t develop any financial guidance yet. We hope that they could share more information in the future. But for the direction in terms of the development, we divide the business in 4 segments. The first one is the consumer business, the subscription business; and the second one is the [2B] subscription business; and third one is the [2B] licensing business.
And lastly, we have the advertising business.
A few years ago, when we first started monetize the business, we started with advertising. But this is not — but we believe that this is not the most appropriate way of monetization because it still affects the office user experience. So the percentage of advertising revenue will continue to decrease and the trend will continue in 2022. The consumer subscription business will continue to increase due to improvement in product functions and with the cloud multiscreen and collaboration demand from the users, we are already a clear leader in China. But with our user base keep growing, the percentage of growth may change in the future, but now the business still is growing at a high speed.
The [2B] subscription business is the same thing with the [2C] subscription business with improvement in products and functions and the user demand in office collaboration. This business is also growing quite fast. And for the [2B] licensing business, which is also the localization business, as the U.S.-China tension continues, we think the localization trend will definitely continue in China and KSO is already a clear leader in this market. The trend and the demand for localization are now going backwards. But we think that for 2022, this year, it may be the last year of the first 3-year cycle.
So in 2022, there may be a slower growth compared to 2021 in terms of the localization business, and you may discuss this more with the KSO business as well. But this will not impact long-term development for the business, we still have 40 million to 50 million small enterprise users. And so far, we only capture roughly about 20% of the localization business. So there’s definitely much more potential to grow. Thank you.
Your next question comes from the line of Liping Zhao from CICC.
[Foreign Language] I have 3 questions here. First, I want to know the gaming pipeline in 2022 and also the regulation updates? And second, whether the company has some strategy on more I think the synergy between our different segments? And thirdly, if the company is considering any share buyback projects, given the discount of the NAV?
I’ll translate for Mr. Zou. Like Francis already discussed that we will have another 3 to 4 new mobile games to be launched if we could get the license successfully. Regarding the time line, the game this one is operated by Tencent, we will be able to launch this one in the first half of the year. And the other game, including [indiscernible] and these games will be ready to launch in the second half of this year.
For the retro version of the JX Online III, this one is already under operation. We’re just waiting for the license for the monetization. Thank you.
I’ll translate for Mr. Zou. So I will add something more to the disclosure guidance question regarding the KSO business and they will also discuss more in their own earnings call. It’s quite difficult for us to give out a specific financial guidance and this is because we split the business in 4 parts that includes the consumer subscription, enterprise subscription, enterprise license and the advertising business. Even though we haven’t given out any specific numbers for the financial guidance for the consumer subscription and enterprise subscription business, but I could say that these 2 businesses, they will still maintain a high growth in 2022.
That means that it’s now going to be slower than the year-on-year growth which happened in 2021. But for the enterprise licensing business, simply speaking, the localization business, we could not make the predictions because it is mostly driven by the government policy. We cannot be sure about the exact amount of the localization business. So that’s why we couldn’t give out any specific guidance yet because the localization business is actually a large part of the enterprise licensing business. And regarding the question for the collaboration among our subsidiaries.
We could say that, firstly, as localization still exists, we will still maintain to achieve 90% to 95% of market share in the localization business. The first stage of the localization business, which is the institutional licensing business, more likely just a onetime licensing business.
But going forward, in the long run, we would like to migrate the business into this subscription mode, which is a cloud stack mode, a large-scale users will complete the migration from the subscription business to the cloud business. So in the past year, we have invested a lot of resources into this direction. So we would like to migrate our users from licensing to cloud office and then to integrate our services to our users to achieve a comprehensive office solutions for users.
So in the past year, we did a lot of work in this, including Kingsoft Cloud, which also joined us in this area. Kingsoft Cloud. also acquired Camelot. So Kingsoft Office and Kingsoft Cloud, they will work together to achieve this migration. So the collaboration work will start to take place in the second quarter of 2022, but the actual impact will take more than 1 year to show.
So later, we will discuss more information in terms of the collaboration among Kingsoft Office and Kingsoft Cloud, a year later when we see more — actual impact. Thank you.
I’ll translate for Francis. So regarding the question for share buyback. We have already started our share buyback program in the last quarter of 2021. But for the previous 2 months because we were in the blackout period, so we haven’t done any share buyback. After today, the result announcement, we will continue to monitor the market performance closely because recently, there’s a lot of turbulence in the stock market. We haven’t used up the previous buyback budget yet. So we will continue with our previous share buyback strategy.
I’ll translate for Francis. So lastly, I will share something about my own personal announcement. I have worked in Kingsoft for almost 10 years and due to my own age and health issues, I have decided to resign from the CFO position in the coming July. We have a solid team in Kingsoft. And also, I would like to announce that Yi LI who is the current Financial Director to take the CFO position after my resignation.
So I hope you to continue to support Yi LI like you supported me for the past 10 years. And — thank you. Hi, operator, this will conclude our presentation for today. Thank you all for joining us. Thank you.
Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.