Hello, and welcome to the Cheetah Mobile 2Q 2017 Earnings Conference Call. [Operator Instructions] I now would like to turn the conference over to Helen Jing Zhu, IR Director of Cheetah Mobile. Please go ahead.

Thank you, operator. Welcome to Cheetah Mobile second Quarter 2017 earnings conference call. With us today are Mr. Fu Sheng, our CEO; and Mr. Vincent Jiang, our CFO. Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the Safe Harbor statements in our earnings release, which also applies to our conference call today as we will make forward-looking statements. At this time, I would now like to turn the conference over to our CEO, Mr. Fu Sheng. Please go ahead, Fu Sheng.

Our second quarter results came in-line with our previous guidance. Our total revenue grew by 15% year-over-year to RMB 1.2 billion. And our non-GAAP operating profit grew by 2.5 times year-over-year to RMB 90 million during Q2. Now I would like to share with you some operational details. I will start with our utility products business. We have continuously enhanced our product features to strengthen our leading position in the global utility app market. For example, our further improved, our Clean Master products by searching deeper into and covering a broader range of apps. Our user can effectively clean out unwanted junk file in all sorts of apps, including social apps, photo sharing apps and video sharing apps to free up more memory space. Also, we have launched a new functionality called SafeConnect in our Security Master product, which is an enhanced version of our CM Security product. SafeConnect is designed to provide secure data transmission so that our users can have a safe online environment. This is especially important for critical applications, such as banking, online shopping and instant messenger. In addition, we have been employing new way to satisfy user demand in our utility app business. For example, for our CM Launcher products, we have released a large number of personalizing products by creating third-party designers. We also launched new features with amazing 3D effects. As a result, our enhanced CM Launcher products has attracted many new users who are younger than our traditional user base. And both of its monthly and daily active user counts have grown substantially. According to FNE, CM Launcher has ranked as the top personalized app in the U.S. on Google Play since this May. We're seeing higher market potential of the CM Launcher app in the long run, while continuously improving our…

Okay, thank you, Mr. Fu Sheng. Hello, everyone. The second quarter results came in line with our previous guidance. Let me start off with our financial highlights. Please note that all financial numbers are in RMB unless otherwise noted. Our total revenues came in at RMB 1.2 billion, representing a 15% year-over-year increase. This was led by the growth in our Live.me and mobile game business. Breaking down our total revenues by platform. Our mobile revenues represented 86% of our total revenues in the second quarter of 2017, up from 74% in the same period last year. Although the number of our mobile MAUs decreased slightly to 581 million in June, we are glad to report that our mobile revenues continued to increase and achieved a record high during the quarter, which speaks well of our strategic shift of focus to the quality rather than the quantity of our user growth. Breaking down revenues by regions. Overseas revenues accounted for 70% of our total revenues, up from 54% in the same period last year. As a pioneer of overseas expansion among Chinese Internet companies, Cheetah Mobile is committed to taking Chinese mobile innovations abroad. We believe our initiatives in the overseas markets will continue to drive growth in our mobile and overseas revenues. Driven by our top line growth, our non-GAAP operating profit in the quarter increased by 254% year-over-year and 78% quarter-over-quarter to 90 million. This significant improvement was a result of our implementation of cost controls for our utility products, though it was partially offset by increased investments in our content products, namely Live.me and News Republic. In addition, we continued to generate strong free cash flow in the second quarter. Our free cash flow grew by 90% year-over-year to 185 million in the quarter this increase was…

Thank you. [Operator Instructions] Our first question today comes from David Sun with Morgan Stanley

[Foreign Language] So I will translate the question by myself. So the first question is regarding the Live.me. We see the user download gradually recover in the second quarter from the March level while the monetizations was relatively stable quarter-on-quarter after the strong momentum in the past two quarters. So can management share with us the development strategy, such as user acquisitions for Live.me? And also how should we look at the revenue contributions and the profitability of this business in the second half and probably 2018. And my second question is regarding the games. So we see that starting from July, a few mobile casual games from that show encouraging download ranking trend in the domestic market. So can management share with us what's the game strategy for the company in both domestic and oversea market? And how should we look at the monetization potential in different market for those kind of games and also the implication to the MAU? Thanks.

David, let me take on the first question about Live.me. Well actually, as you observed that we have a slight recovery in terms of user downloads and the revenue is still relatively stable right now. And as Mr. Fu Sheng just mentioned in his remarks, currently, our focus is still to improve the Live.me product itself. So we have taken a number of measures including, actually he just said we have the star plan to encourage user invite friends and share live videos, this is for promoting the user engagement. And we try to have more homegrown celebrity hosts, and we are trying to enrich the live video content. So those are all the product improvements and all the efforts we're making. But we are taking a long-term view towards Live.me product. So we're not in a hurry to monetize the existing users. So we are taking a more long- term approach. With that, for the second half of this quarter and even for the rest of the year, we'll still be focusing on the product itself. As you can see that we have some new players in the market and still growing the user base is still the most important concern we have now. Thank you, David.

[Foreign Language]

Okay, let me interpret. First of all, the increase of user in the domestic market have shown that we do have capability to develop our users, and not just in the U.S. market or international market, also in the domestic market as well. So we are a global company that can actually acquire user and promote our products. And secondly, because we have multiple products right now, they all are pretty popular, which has proven one thing, that we're not a one game, one app company. We have a very healthy matrix of game products and they all help our top line and that kind of reduce the risk of, what if one game kind of fails, what if we lost growth momentum.

[Foreign Language]

Okay, so there are several aspects to the game products. First of all, the ability to acquire users. We have not in the game business for long. And for mainly on the game products, we still don't have in-game purchase, that kind of features. So we don't have a lot of more heavily involved users for our games. We're all casual games. But if we can solve the problem that if we can develop more users that – develop – excuse me, if we can develop more, what we call, medium or heavy involved games and if we can increase the monetization efficiency, then we have a very good opportunity in game business.

[Foreign Language]

Okay. Well, in terms of the difference between domestic and overseas markets, actually, from our point of view, it's more that our – that the team's operating capability has been lifted to a new, higher level that they cannot only generate sufficient revenue and users in overseas market, and also they are capable of doing the same thing in the domestic market as well. Okay, I think that answer the questions.

[Foreign Language]

Thank you. And the next question comes from Tian Hou with T.H. Capital.

[Foreign Language] So the first question is related to the Q3 guidance. The guidance range between 2% to 7% year-on-year growth is really a wide range. So I wonder what is this one factor among your business caused such a big range? Second question is related to your operational expense. So the three items, that's marketing, R&D and G&A, all of them reduced from the level of Q1. So I wonder what are the some things led to such savings? And going forward, what are the trends for each of them?

[Foreign Language]

Okay. Tian, let me explain this. Okay, first of all, from the end of last year until early this year, Cheetah Mobile has done a lot of adjustment to the products and have improved the user engagement and user experience. So – and also it has changed its way of – on the one hand, it has kind of changed the way it promotes its products. Because in the past, it kind of highly relied on the promotion. We spent quite a lot of marketing expense to promote each product. But now a lot of the products were download by the user themselves, so there are not promotional expenses involved for the tool utility products. That's the first thing. And we do have some outside factors that's beyond our control. And for example, in the March 15, there's a consumer we call [Foreign Language]

[Foreign Language]

The Q2 product, they kind of reduced their – they reduced their recommendation for our PC products that kind of reduced our revenue. But now that revenue, we have already recovered from that point. And also in the third quarter, in the earliest part of the third quarter, Facebook and Google both decreased their eCPM. And that time, that caused an impact on our revenues in the early part of the third quarter. But now we have seen the recovery of the eCPMs. So that created a lot of – that created a certain uncertainty in terms of where the eCPM is going, what are the directions. Because as we said earlier, we have – in the early part of the quarter, we have seen some pressure to the revenue, but we have seen recovery in recent – a couple of weeks. So we kind of – so we cannot predict a more narrow range of forecast, as we did in the last several quarters. That's why we have a wider forecast range for this Q3. So Tian, I think that answers your question.

[Foreign Language]

Yes, one more thing. Actually, we have – in terms of – the second question, in terms of the expenses, the cost expenses, we have been – as part of the adjustment we mentioned earlier to the products, we are adjusting our organizational structure and our workforce. So that kind of improves the efficiency of the company's productivities. That's where you see the sales and R&D expenses were decreased in Q2. And we will still see some – a little more of those reduction in Q3. But after that, we expect that will remain relatively stable for the next – for the rest of the year.

[Foreign Language]

Thank you. And the next question comes from Wendy Huang with Macquarie.

[Foreign Language] I will translate the question myself. So my first question is about the Live.me. Can you disclose the valuation of the Live.me from the recent financing? And also is Live.me already profitable? And my second question is a high-level question for Fu Sheng. So when Cheetah was established several years ago, I think the China domestic market was quite saturated and also competitive, especially in the security software advertising and game business, so that's why Cheetah chose a different way to pursue the growth in the overseas market. However, looking back at the past 1.5 years, Cheetah actually had some setbacks in the overseas market due to the external factors that you just mentioned. At the same time, in China domestic market, we are actually seeing the advertising and gaming market actually rejuvenated growth with some new business models. So given these changes in China and overseas, will Fu Sheng or Cheetah reconsider your long-term strategy? Thank you.

Wendy, I'll take on the first question. In terms of the valuation for Live.me's early financing round, well, we cannot directly say the value because it's a private deal. But we do have enough information released in public that you may infer the pricing value of the financing round. As we have disclosed previously, the total investment of that round was US$60 million. And right now, Cheetah Mobile has about 70% ownership of Live.me. And within the 70 – excuse me, within the US$60 million investment, Cheetah has a very small portion in that. So with that kind of information, you may refer an approximate range of that valuation for that round. Okay, that's the first part. And for the second part, about the profitability of Live.me. So right now, in the mobile entertainment segment, it is at a loss. And for the mobile game part, it is profitable, although the profit margin is in the single digits. And so the main loss came from the content product, which is Live.me and News Republic. Between these two products, Live.me is slightly – well, it has not break-even yet, but its loss is not that significant. Most of the loss came from News Republic, okay.

[Foreign Language]

[Foreign Language]

[Foreign Language]

Okay, let me translate. For the Chinese…

[Foreign Language]

Right. So for Cheetah Mobile's global strategy – actually, this is not just Cheetah Mobile's strategy, for most of the Chinese Internet company, overseas strategy has become one of the most important strategy as well. So that's the big trend for Internet companies in China, to go abroad. And although Cheetah Mobile has – facing some outside uncertainties and we believe that we can overcome those obstacles and continue to grow in the overseas markets. And for the second part – although for the Chinese markets, although Cheetah Mobile is known for the first Chinese company to go to the overseas market, but Cheetah Mobile still has very significant domestic market shares, and it has enough users and revenues. For example, currently, Cheetah Mobile still has about 30% on revenue came from PRC markets. And the MAU in the PRC market is more than 100 million right now. And although we didn't disclose in the press release, but our mobile advertising income in the PRC market has still been increasing steadily over the last several quarters. So we believe that with that diverse directions – excuse me, diverse product matrix, and we have plenty of opportunities in China. For example, in advertising in-game in the new artificial intelligence, in all those directions, we're all prepared in exploring opportunities in those areas. Okay. Thank you.

Thank you.

Thank you. [Operator Instructions] And the next question comes from Joyce Ju with Citigroup.

[Foreign Language] I will translate my questions. My first question is related to the Live.me. I wonder like what's the current like MAU or like user base number we currently have at – in U.S. or like overseas for Live.me? And what's the next step like customer acquisition strategy for this product? And my second question is related to the News Republic. Cost of product is currently still in heavy loss. So I wonder if management can share that, how's the progress of the product development? And what's the like expected timing of official kickoff of monetization or like product launch? Thank you.

Okay, I'll take on this question. So first of all, about Live.me. Right now, because of competitive reasons, we don't incline to disclose the exact number of the operating metrics. But what we can say in that right now about Live.me is that its MAU is in the millions. We do see considerable growth in terms of the user metrics. And in terms of – right now, it is, we said earlier, it's not profitable yet. It's approaching breakeven. And for the remaining quarter and for the rest of the year, we will spend more efforts in terms of improve the product itself. So we will not do a significant amount of promotion by our users. That's the plan. So only main expenses will be on the product itself. Okay, for the second part of the question, the News Republic. Right now, News Republic is still a new business model in the overseas market and we are still – it is in the experimental stage, and we need some more time to see the results. In terms of the monetization, currently, we are using a very simplistic way to monetize the product. We just – we added SDK from the third-party advertising network to the News Republic. For example, if user clicks some news items then within the items, there may be an ad there, and that's how we generate revenue. So this is not a very efficient way. And so in terms of revenue from News Republic, it's not very significant right now. And we will not try to explore a lot of monetization opportunity at this stage yet. Again, we're still experimenting and trying to improve the product itself. Okay, thanks.

Thank you.

Thank you. And the next question comes from Robert Cowell with 86Research.

[Foreign Language] My question is about News Republic. I want to know if there have been – or if there are any recent updates on this product? Also, how much money approximately is it losing in 2017? And then finally, what are your key midterm KPIs for News Republic? Thank you.

[Foreign Language]

Okay, okay, I'll translate. For the News Republic product, if we look at the operating metrics in terms of the user time spent on the product and the number of articles a user will read every day and the number of users, and we have all seen steady growth over the past couple of quarters. And for the News Republic product, we are still in the early stage in term of investment and exploring the new ways to grow the product and grow the user base. And frankly, its growth has not approached our expectation right now. However, our investment in the News Republic product which had a lot of technologies including personalized recommendation, natural language processing and artificial intelligence-related technologies have significantly enriched Cheetah Mobile's technical capabilities. That's the beneficial part, at least, what we can see now. And we will still try to improve the product and to improve the user experience of the product. And before we are satisfied with that level of user satisfaction, we will not have additional or more investments in the product. We will be more stable or probably we'll decrease it a bit. Thank you.

Thank you. And as that's all the time we have for questions, I would like to return the call to management for any closing comments.

Thank you all for joining us today. If you have any further questions, please do not hesitate to contact us. Thank you. Bye.