Cheetah Mobile Inc. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a quarterly filing; it does not provide a clear standalone 2019 Q4 income statement or cash-flow figure. Financial statements are prepared under U.S. GAAP and reported primarily in RMB. U.S. dollar figures are translations for convenience.
Business context
Cheetah Mobile operates mobile utility products and related advertising services, mobile games and other entertainment products, and AI-related products including robotics hardware. Live.me was deconsolidated effective September 30, 2019; the company retained a 49.6% voting interest. The filing says user declines and advertising-partner disruptions challenged the utility business, while the company was scaling back international markets.
Key financial metrics
| Metric | FY2019 | FY2018 | Change / note |
|---|---|---|---|
| Revenue | RMB3,587.7 million (US$515.3 million) | RMB4,981.7 million | Down 28.0% |
| Gross profit / margin | RMB2,345.8 million / 65.4% | RMB3,441.1 million / 69.1% | Gross profit down 31.8%; margin down 3.7 percentage points |
| Operating income (loss) / margin | Loss of RMB1,110.9 million / (31.0%) | Profit of RMB467.2 million / 9.4% | Shifted to a substantial operating loss |
| Net income (loss) attributable to Cheetah Mobile | Loss of RMB314.0 million (US$45.1 million) | Income of RMB1,166.9 million | Shifted to a loss |
| Basic and diluted loss per ADS | RMB2.5140 (US$0.3611) | Basic earnings per ADS RMB8.0478 | Each ADS represents ten Class A ordinary shares |
| Net cash from operating activities | Outflow of RMB239.5 million | Inflow of RMB345.6 million | Cash generation weakened |
| Cash and cash equivalents | RMB983.0 million | RMB2,783.8 million | Down substantially |
| Short-term investments | RMB1,369.1 million | RMB930.6 million | Combined with cash and restricted cash, liquidity totaled RMB2,354.8 million at year-end |
| Total assets / total liabilities | RMB7,011.7 million / RMB2,017.2 million | RMB8,292.6 million / RMB2,010.2 million | Assets declined; liabilities were broadly stable |
The company reported that it had fully repaid its bank loans by December 31, 2019. Year-end operating lease liabilities were RMB180.1 million. Cash-flow totals also included restricted cash; cash, cash equivalents and restricted cash ended the year at RMB985.6 million.
Revenue mix and material changes
- Utility products and related services: RMB1,573.0 million, down 49.6% year over year; 43.8% of total revenue. Overseas mobile utility revenue fell 60.4%, domestic mobile utility revenue fell 50.8%, and PC-related revenue fell 19.0%. Advertising generated approximately 85.4% of this segment’s 2019 revenue.
- Mobile entertainment: RMB1,871.5 million, up 5.2%; 52.2% of total revenue. Mobile-game revenue rose 26.8% to RMB1,172.9 million, primarily reflecting Bricks n Balls. Content-driven product revenue fell 18.2% to RMB698.6 million, primarily due to Live.me’s deconsolidation.
- AI and others: RMB143.1 million, up from RMB83.4 million, primarily from hardware sales; this remained a small share of revenue at 4.0%.
- Overseas revenue was RMB2,199.6 million, down from RMB3,010.6 million. The filing says overseas revenue represented 61.4% of total revenue.
- Five largest customers contributed 35.0% of revenue, compared with 41.3% in 2018. Google represented 13.8% of revenue from advertising and 8.1% from user purchases of virtual items through Google in 2019; the filing elsewhere states Google contributed 21.9% when these sources are combined.
Profitability, cash flow and unusual items
- Revenue fell faster than cost of revenue, but gross margin still declined. Operating expenses increased 16.2% to RMB3,456.7 million, including a RMB545.7 million goodwill impairment charge. The filing attributes higher R&D costs to staffing for games and AI, while selling and marketing costs decreased 18.4% and general and administrative expenses increased 36.4%.
- Other income, net, was RMB635.2 million. It included a RMB839.8 million gain from deconsolidating Live.me, a significant non-recurring item. Without that gain, the reported loss would have been higher.
- Operating cash outflow reflected the net loss and working-capital movements, including increased prepayments and other current assets. The cash-flow statement also included substantial non-cash impairment charges and gains related to subsidiary deconsolidation.
- Investing activities used RMB1,085.2 million, including purchases of short-term and long-term investments; financing activities used RMB485.1 million, mainly due to RMB500.6 million of dividends paid.
- The company paid a special cash dividend of approximately US$72 million in 2019. Management said it did not plan to pay dividends in the near future.
Outlook, risks and contingencies
- Management expected 2020 Q1 revenue to decline year over year and said it could not guarantee revenue growth or maintenance of comparable levels in the following three quarters. It planned prudent cost-saving measures in mobile while continuing investment in AI. Robotics demand had increased, including for hospital deployments, but management did not expect robotics to produce significant near-term revenue.
- Google disabled Cheetah’s Google Play Store, AdMob and AdManager accounts on February 20, 2020, citing policy noncompliance and invalid traffic. The filing says Google later declined to reinstate the accounts after reviewing the company’s appeal. The disruption could affect user acquisition and monetization.
- Facebook had suspended advertising collaboration with Cheetah in December 2018 and had not resumed it by the filing date. Cheetah also disclosed user complaints related primarily to privacy settings and third-party website promotion, alongside broader privacy, data-security and regulatory risks.
- COVID-19 was identified as a material uncertainty for 2020, with potential effects on advertising demand, customer collections, investment valuations and robotics supply and delivery. The filing said the financial impact could not be reasonably estimated.
- The company faces a putative U.S. securities class action; a motion to dismiss the second amended complaint was pending. The company said it could not estimate a possible loss or range of loss. CEO Sheng Fu also faced a separate Hong Kong lawsuit brought by Qihoo; the company was not named as a defendant in that case.
- PRC regulatory uncertainty around the VIE structure, foreign-investment restrictions, licenses, privacy rules, foreign-exchange controls and the new Foreign Investment Law could affect operations and the ability to move cash. The company relies on contractual arrangements, rather than direct ownership, to control certain PRC operating entities.
- The filing states management and the auditor concluded internal control over financial reporting was effective as of year-end. It also describes risks associated with PCAOB inspection access to the China-based auditor.
Important facts for investors to verify
- Whether Google account access or monetization was restored after the filing, and the resulting revenue, user and cash-flow effects.
- Current utility-product user trends, advertising yields, customer concentration and any continuing impact from Facebook’s suspension.
- How much of reported 2019 other income and net results depended on the Live.me deconsolidation gain, and the fair value and outlook for the retained Live.me investment.
- The quality and recoverability of receivables and advertiser-related prepayments, investment valuations, and remaining impairment exposure.
- Cash availability by location and currency, restrictions on transfers from PRC entities, and the company’s ability to sustain operating cash needs without renewed borrowing.
- Updates on the shareholder litigation, relevant operating licenses, and the enforceability and regulatory status of the VIE arrangements.