Cheetah Mobile Inc. — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; the filing text does not provide a clear set of Q4-only financial results. Financial statements are prepared under U.S. GAAP. Comparative 2014–2015 figures were retrospectively adjusted for the common-control consolidation of Kingsoft Japan.
Business context
Cheetah operates mobile and PC utility and content applications, including Clean Master, CM Security, Live.me and News Republic, and monetizes its user base primarily through online marketing and advertising. Mobile revenue was 77.3% of FY2016 revenue, while overseas revenue was 60.2%. Mobile monthly active users were 622.9 million in December 2016, down from 635.5 million a year earlier; about 81% were overseas users.
Key financial metrics
Amounts below are RMB millions unless otherwise stated; U.S. dollar equivalents are provided where disclosed.
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Revenue | 4,564.7 (US$657.4) | 3,773.9 | Up 21.0% |
| Online marketing revenue | 3,950.9 | 3,283.4 | Up 20.3%; 86.6% of revenue |
| Internet value-added services revenue | 501.0 | 395.3 | Up 26.7%, mainly initial Live.me monetization |
| Gross profit / margin | 3,020.8 / 66.2% | 2,817.5 / 74.7% | Profit up 7.2%; margin down 8.5 percentage points |
| Operating income (loss) / margin | (12.4) / (0.3%) | 216.9 / 5.7% | Returned to operating loss |
| Net income (loss) | (56.7) | 174.6 | Consolidated net loss |
| Net income (loss) attributable to Cheetah shareholders | (80.5) (US$11.6) | 176.3 | Basic and diluted loss per ADS: RMB0.5805 (US$0.0836) |
| Operating cash flow | 397.6 (US$57.3) | 948.5 | Down 58.1% |
| Investing cash flow | (982.8) | (341.4) | Included investment purchases and business acquisitions |
| Financing cash flow | 103.5 | 81.6 | Borrowings partly offset by share repurchases |
| Cash and cash equivalents, year-end | 1,411.0 (US$203.2) | 1,843.2 | Down 432.2 |
| Short-term investments, year-end | 361.5 | 29.2 | Cash plus short-term investments: 1,772.5 |
| Total assets / liabilities, year-end | 5,541.1 / 2,340.0 | 4,926.6 / 1,912.1 | Total equity: 3,201.2 |
| Bank loans, year-end | 498.3 | 140.8 | 379.5 current; 118.8 non-current |
Current assets were RMB3,172.2 million against current liabilities of RMB2,066.2 million. Restricted cash was RMB167.8 million. The company said cash and anticipated operating cash flow should cover expected needs for the next 12 months, while noting it could seek additional equity or debt financing if needed. Contractual obligations totaled RMB412.9 million, including RMB261.4 million of operating leases and RMB151.5 million of long-term debt principal.
Material changes versus prior comparable period
- Revenue growth slowed to 21.0% from 103.1% in 2015. Mobile revenue rose 42.7% to RMB3,530.4 million and mobile advertising revenue rose 39.5% to RMB3,169.0 million.
- Cost of revenue increased 61.4% to RMB1,543.8 million, outpacing revenue growth; management attributed this to content investment, traffic acquisition, bandwidth and data-center costs. Gross margin fell to 66.2% from 74.7%.
- Operating expenses rose 16.6% to RMB3,033.3 million. R&D expense increased 30.3% to RMB905.9 million; selling and marketing rose 9.6% to RMB1,650.6 million; general and administrative expense rose 25.4% to RMB561.8 million.
- Impairment of investments was RMB141.1 million, versus RMB34.7 million in 2015, including RMB129.6 million related to cost-method investments. The company also recorded a RMB28.1 million gain on disposal of its online lottery subsidiary.
- Operating cash flow fell from RMB948.5 million to RMB397.6 million, while cash and cash equivalents declined. Cash use reflected investment and acquisition spending, including RMB644.0 million paid for investments and acquisitions during 2016.
Outlook, commentary, risks and unusual items
- Outlook: No numerical 2017 guidance was given. Management expected operating expenses to rise in absolute terms, with further investment in content products, marketing, R&D, data analytics, artificial intelligence and machine learning. It identified overseas monetization and content-driven applications as expected growth drivers, while targeting a sustainable, profitable model over the longer term.
- Users and monetization: Mobile MAUs declined slightly year over year, and the company expected PC application users to continue declining. Management noted uncertainty around user engagement, content strategy execution and mobile monetization.
- Revenue concentration: The five largest customers contributed 47.9% of revenue; Facebook alone contributed 19.9%, Baidu 12% and Google 6%. The company cited pressure on overseas advertising eCPM earlier in 2016.
- Regulatory and structural risks: China operations rely in part on contractual VIE arrangements whose enforceability and regulatory treatment are uncertain. The company was applying for an Internet Publishing License for games; some partner games had not completed required filings. Its Computer Information System Security Products Sales License expired in November 2016 and renewal was pending. The filing also highlights potential PRC restrictions affecting Live.me and News Republic access or services.
- Legal and compliance: CEO Sheng Fu remained a defendant in a long-running Qihoo lawsuit alleging breaches of confidentiality and other obligations; management stated the claims were without merit, and the outcome was uncertain. The company said it knew of no current proceedings likely to have a material adverse effect. Auditors issued unqualified opinions on the financial statements and internal controls; however, management’s internal-control assessment excluded News Republic and Kingsoft Japan, acquired or consolidated in 2016.
- Other notable items: Share-based compensation was RMB306.1 million. The 2016 share repurchase program bought 2,536,808 ADSs for RMB179.0 million and expired in March 2017. No dividend was expected in the foreseeable future. The RMB depreciated against the U.S. dollar; the company reported no foreign-exchange hedging transactions.
Important facts for investors to verify
- Whether the 2016 revenue growth and Live.me monetization can continue as user numbers, engagement and advertising economics evolve.
- The drivers and recoverability of investment impairments, the quality of receivables and prepayments, and the decline in operating cash flow.
- Customer and advertising-network concentration, including ongoing revenue dependence on Facebook and other major platforms.
- Status of required PRC licenses and game filings, and any regulatory developments affecting the VIE structure, Live.me, News Republic or online advertising.
- Debt drawdowns, maturity and refinancing needs, cash availability across jurisdictions, and restrictions on moving funds from PRC entities.
- Outcome and potential financial or operational impact of the Qihoo litigation and any other contingencies; the filing does not quantify a reasonably possible loss range.
- Effects of acquired businesses on reported results and controls, including the Kingsoft Japan retrospective adjustment and the internal-control assessment exclusions.