Cheetah Mobile Inc. — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a quarterly report; the provided filing text does not provide a clear standalone Q4 2015 results breakdown. Financial amounts below are in RMB unless stated otherwise. The company reports under U.S. GAAP.
Business context
Cheetah Mobile operates mobile and PC applications, including Clean Master, CM Security and Battery Doctor, and provides online advertising and game-publishing services. Its strategy centered on growing and monetizing its mobile platform and expanding internationally. Mobile monthly active users reached 635.5 million in December 2015; 78.6% of mobile MAUs were overseas. Mobile products generated 66.0% of revenue, while overseas markets generated 50.0% of total revenue.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | RMB3,684.4 million | RMB1,763.6 million |
| Gross profit / gross margin | RMB2,749.3 million / 74.6% | RMB1,360.2 million / 77.1% |
| Operating profit / operating margin | RMB206.9 million / 5.6% | RMB82.7 million / 4.7% |
| Net income attributable to Cheetah Mobile shareholders | RMB176.6 million | RMB67.9 million |
| Net cash from operating activities | RMB937.0 million | RMB361.4 million |
| Cash and cash equivalents at year-end | RMB1,809.3 million | RMB1,093.3 million |
- Revenue grew 108.9%. Online marketing services rose 145.3% to RMB3,244.1 million and represented 88.0% of revenue; mobile advertising revenue increased 621.5% to RMB2,243.1 million.
- IVAS revenue declined 1.3% to RMB395.3 million. Internet security services and other revenue rose 11.6% to RMB45.0 million.
- Gross margin fell 2.5 percentage points, principally because third-party advertising traffic acquisition carried lower margins. Operating expenses rose 99.0% to RMB2,542.3 million, with selling and marketing expenses up 154.8% to RMB1,479.4 million.
- Operating cash flow improved to RMB937.0 million. It included substantial noncash expenses and a RMB636.7 million increase in accrued expenses and other current liabilities; accounts receivable also increased RMB316.2 million.
- Year-end current assets were RMB3,041.6 million and current liabilities RMB1,708.7 million. Cash, restricted cash and short-term investments totaled about RMB1,994.7 million. Debt included RMB130.3 million of short-term loans and RMB10.5 million of long-term loans.
- Capital expenditures were RMB95.7 million. Net cash used in investing activities was RMB340.6 million, including acquisitions and investments; net cash from financing activities was RMB81.6 million.
Material changes and unusual items
- Revenue mix shifted sharply toward mobile and overseas markets; overseas revenue increased to RMB1,841.5 million from RMB221.9 million.
- Online lottery operations were suspended in March 2015 amid regulatory uncertainty. FY2015 included RMB49.9 million of goodwill and intangible-asset impairment, including impairment associated with the lottery business and licensed games.
- The company recorded RMB34.7 million of investment impairment and RMB97.5 million of other operating income, primarily government grants, subsidies and incentives.
- Share-based compensation increased to RMB315.4 million from RMB173.3 million. MobPartner, acquired in April 2015, contributed RMB155.1 million in revenue and RMB40.3 million in net loss after acquisition.
- The five largest customers accounted for 59.1% of revenue; one customer represented approximately 29%.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expected 2016 operating expenses to increase, including marketing and investment in mobile products, data analytics and global advertising capabilities, while pursuing a more balanced approach to user acquisition and revenue growth.
- Key risks include dependence on online advertising and a small number of customers; sustaining user growth and mobile monetization; competition and platform-distribution dependence; privacy, security and regulatory requirements; currency and cash-repatriation limits; and the legal and enforceability risks of the PRC VIE structure. The filing also describes uncertainty around proposed PRC foreign-investment rules.
- CEO Sheng Fu remained a defendant in Qihoo’s Hong Kong lawsuit alleging breach of confidentiality and other obligations; he disputed the allegations. Cheetah Mobile also brought a 2015 U.S. lawsuit against APUS Group. Management said other proceedings were not expected to have a material adverse effect, but the filing notes uncertainty in some litigation matters.
- The company said cash and anticipated operating cash flow should cover expected needs for the next 12 months, while noting possible additional needs for changing conditions, investments or acquisitions. It did not expect to pay dividends in the foreseeable future.
- The financial statements received an unqualified audit opinion. Management and the auditor reported effective internal control over financial reporting as of year-end, but the assessment and audit excluded MobPartner, which represented RMB155.1 million of revenue and RMB299.1 million of net assets at year-end.
Important facts for investors to verify
- Whether mobile advertising growth and overseas monetization can continue, and how acquisition and traffic costs affect gross margin and profitability.
- Customer concentration and the company’s exposure to its largest advertisers and advertising-network partners.
- Cash-flow quality, including accrued liabilities, receivables, restricted cash, acquisition commitments and the short-term loan’s terms.
- Progress and financial impact of the lottery suspension, related impairments, and any remaining regulatory or legal exposure.
- MobPartner’s post-acquisition performance and the scope of the internal-control audit exclusion.
- Developments in the VIE structure, PRC regulation, the Qihoo and APUS proceedings, and the company’s ability to move cash from China.