Good day, and welcome to the Cheetah Mobile Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Helen Zhu. Please go ahead.

Thank you, operator. Welcome to Cheetah Mobile's second quarter 2024 earnings conference call. With us today, our Company's Chairman and CEO, Mr. Fu Sheng, and our Director and CFO, Mr. Thomas Ren. Following management's prepared remarks, we will conduct a Q&A session. Please note that the CEO script will be presented by an AI agent. Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our conference call today, as we will make forward-looking statements. At this time, we will now let the AI agent to speak on behalf of our CEO and Chairman, Fu Sheng.

Thank you for joining us today. In Q2, our total revenue accelerated with a year-over-year growth of 12.3%. AI and others accounted for about 40% of our total revenue. This growth was primarily driven by the sales of our wheeled service robotics in both domestic and international markets, showing our progress in becoming an enterprise-facing company. The acquisition of Beijing OrionStar has made service robotics a key pillar for Cheetah Mobile, contributing to solid revenue growth. Our service robots hold a dominant position in voice-based to use cases and are widely used in exhibition centers, museums, corporate receptions and other areas. Moreover, our delivery service robot ranks among the top three in restaurants and continues to gain market share from competitors. Customers choose us because of our best product experience and after sales services. Strong core AI capabilities, including far field voice recognition, our robots have benefited from LLM, being able to better understand end-to-end customers' inquiries and smartly respond to their requests versus previously. Customers can easily tailor make apps within our robots, thanks to our strong software ability that support customization. To further expand the revenue growth of our wheeled service robotics business, we are focusing on two key strategies. Firstly, we aim to broaden the use cases of our service robots through continuous product innovations with a focus on our core competencies, including voice interaction capabilities and enabling autonomous deliveries. For instance, in the factories and fulfillment centers, we have recently introduced robots designed for autonomous delivery for relatively low payloads. We offer overhead performance and pricing for our customers in both China and overseas with a focus on providing the most reliable robots in the market. We already started shipping robots to South Korea and have received orders from customers in Japan and Southern Europe. In…

Thank you, Fu Sheng. Hello, everyone, on the call. Please note that unless stated otherwise, all money amounts are in RMB terms. Cheetah Mobile delivered a solid performance this quarter. In Q2, total revenues grew by 12% year-over-year, reaching RMB187 million. Non-GAAP gross profit increased by 11%, coming in at RMB122 million. Our non-GAAP gross margin remains stable at 65% compared to the previous year. Despite our ongoing investments in AI, we successfully reduced our operating losses on a sequential basis. In Q2, our non-GAAP operating loss decreased by about RMB4 million quarter-over-quarter to RMB62 million. This improvement reflects our strategic decision to reallocate resources from our legacy internet business to our AI initiatives. Looking at our Internet business, excluding share-based compensation expense, the operating margin increased to 12.4%, up from 7.9% in the previous quarter, and 5.5% in Q2 of the prior year. Revenues from this segment remain relatively flat year-over-year with a 4% increase quarter-over-quarter. As we have indicated before, the year-over-year increase in operating losses was driven by our investments in AI, following our acquisition of a controlling stake in Beijing OrionStar. Specifically, these increased losses are attributable to higher headcount in R&D, sales and G&A as well as increased hardware-related costs for our service robots. As of June 30, 2024, we had approximately 870 employees compared to around 860 in the previous quarter and 730 year-ago. We are pleased to report that our AI investments are beginning to bear fruits. Our wheeled service robotics business has emerged as a key revenue driver. Additionally, through collaborations with leading companies on their large language model initiatives, we have gained valuable industry insights and are currently testing our LLM-based applications for enterprise use. One of the quarter's standout achievements is our cash generation capability. Despite continuing to incur losses, we generated almost RMB220 million in cash from operating activities in Q2 highlighting our strong cash management and generation capabilities. Finally, our balance sheet remains robust. As of June 30, 2024, we have approximately US$270 million in cash and cash equivalents, along with short-term investments and above US$119 million in long-term investments. This includes states well-known entities such as [indiscernible] Meta AIs also. With that, we'll open the call for questions.

Everyone, for today's call, management will answer questions in Chinese and AI agent will translate management's comments into English in another line. Please note that the translation is for convenience purposes only. In the case of any discrepancies, our management's statement in Chinese works well. If you are unable to hear the Chinese translation, a transcript in English will be available on our website within seven working days. Operator, we are now ready to take questions in Chinese. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

One, my question is about the product forms of robots. Nowadays, humanoid robots and embodied intelligence have been discussed a lot. Many people also define 2024 as the first year of the industrialization of humanoid robots. Cheetah focuses more on traditional wheeled robots. How do you think about the similarities, differences and obstacles of the implementation of wheeled robots and humanoid robots in different scenarios? How do you plan the forms of Cheetah's future robot products?

Yes. This wheeled machinery has become traditional human-related machinery. Actually, I think whether it's human-related or humanoid, the essence is to complete a certain type of work, right? Well, humanoid robots are more like humans and can attract more attention in terms of publicity. But in fact, most of our real robots complete point-to-point deliveries indoors or use robotic arms on the mobile robot bodies to complete some tasks. So I always believe that wheels can meet most of the mobile scenarios because today, whether it's in factories, restaurants, including hotels, actually, how to say this. The situation of steps is very rare. In many places, there are slopes and these wheels can be fully realized. Then the cost of the wheels themselves is much lower than that of bipedal ones. Anyway, it has a cost advantage. Thirdly, today, although embodied intelligence is very popular when it comes to whether bipedal or humanoid robots of embodied intelligence can be practical. It should be said that a particularly clear time point or a specific video cannot be seen, everyone just thinks there is an opportunity, mainly because Tesla made humanoid robots. So this industry has been driven. My view has always been that in most scenarios, there is wheels movement, but some lifting robotic arms can be added later to complete the same work. So for the form and product form of our robots, we will not pursue humanoid robot at present, especially bipedal ones. But we will, in terms of delivery and voice interaction of our machines, right, do something like putting robotic arms into complete some tasks, such as picking things up or doing some simple and small handling. I think this is within our plan. So I think maybe for a long time, we won't consider this bipedal thing. And I personally also think that in the entire industry for a considerable or a very long time, right, movement must be mainly wheels. It will take at least several years for bipedal ones to be commercialized.

Two, from the historical experience of SaaS, the willingness and ability of Chinese enterprises to pay are relatively low, which may affect the overall charging and profits of the large model industry. Based on practical experience, how do your clients consider the budget for large models? Where does the budget come from? In the current macro environment, do enterprises have any reduction in their investment in large models? How do you compare the monetization models and potential of different enterprise large model application? A, if it is to help enterprises save cost, how large can the budget of enterprises be? B, if it is to help enterprises increase revenue, is it possible to charge based on effects, commission, et cetera? Is the ceiling really very high?

For such software, in fact, I think there may be many historical factors. But today, in such an environment in China, enterprise's pursuit of efficiency is increasing. Another is that because the large model itself is very new, so it's not something that especially non-tech enterprises can do by recruiting a few people for SaaS itself. I think personally that it emerged relatively late in China. Before the division of labor was formed, there were already relatively few software talents in China. So many enterprises could do it themselves or some large companies did it and used it for free for everyone. But today, when it comes to the implementation of large models, as we have seen, it still requires a very deep integration with the actual scenarios of enterprises. It's not that you can take an API and have a few people do the application well. We are currently cooperating with several leading clients, and we have already seen such a trend. So professional teams are still needed to help them. Then to answer the two questions, if it helps enterprises save costs, we are currently discussing and negotiating the quotation plan with an enterprise, a large enterprise which is to take a part of the saved cost as its budget. This client is very willing. It can really help him save considerable amount of money. So taking a part of it as the budget is okay, including that we have also promoted for some clients, we can disclose. But for some clients, we can disclose. For example, we have developed an AI application for cloud management on the cloud, which can help you analyze the idle rate of your cloud system and how many machines can be saved. We have run the accounts of several enterprises and can…

Three, the company has sufficient cash reserves on its books and is still generating net cash. How does the management plan to use these funds? Is there a privatization plan? Or are there any plans for share buybacks or dividends?

The question was raised. Indeed, as you said, we currently do have sufficient cash reserves and also generated net cash this quarter. However, we believe that actually, in the current overall economic environment, which is quite uncertain, it is particularly important for the company to maintain sufficient cash reserves. So we will continue to maintain a relatively cautious financial strategy. This can ensure that the company has sufficient flexibility and risk resistance ability when facing market fluctuations. At present, the company has no privatization plan because we currently believe that as Cheetah maintaining the status of a listed company is helpful to enhance the company's transparency and governance level. At the same time, we can also provide better liquidity for shareholders. Currently, the company also has no specific plans for share buybacks and dividends. If the Board of Directors approves relevant plan, we will make an announcement to the market as soon as possible.

We have seen robot companies collaborating with large model companies using the most advanced large models to accelerate product implementation. How does Cheetah consider cooperation with large model manufacturers? Or is it more inclined towards the idea of end model integration?

At this stage, it is certain that we will cooperate with large model manufacturers and use the most powerful models to enhance the intelligence level of robots, which is what we need to do now because currently, in this entire AI industry, basically, it can be said that the supply of large models is excessive and the cost of tokens has also dropped sharply now. So this kind of cooperation is very advantageous for our cost and for our rapid implementation. Our idea is that through a period of exploration after making the product experience good, we will gradually see if it is necessary to train our own model for our end. In fact, we have already trained one, a RMB14 billion parameter model. We shall also release [MO7A] model next month. But I think, basically, at this stage, for now, we still need to enhance the product implementation and product intelligence first. After obtaining sufficient experience, then come back and better configure the model for our end. Maybe in the long-term, we will take the path of end model integration. That is for our [indiscernible] applications or robo application, we will better train a model that can be implemented on the end. But for now, we still carry out some in-depth cooperation with large model manufacturers. Thank you.

Five, we have seen many start-up projects that are very similar to Cheetah's robot product forms. How do you view Cheetah's competitive advantages in making robots? Where are the differences in the robot products?

I think our advantages mainly lie in three aspects. The first aspect is that we still have sufficient technological accumulation. We have accumulated in a field of service robots for six or seven years. So our intelligence level of the robot, that is our current robot, whether it's the ability of interactive dialogue or the ability of interactive dialogue or the autonomous navigation indoors, including the secondary development, the ability of this system that is our agents can take it and do very simple customization and development based on our system and super system. Currently, we are leading in the industry. This is already observable. And next, we will introduce our large model. That is we will launch the concept of a large model robot. Today, in the robot industry, there should be very few companies that have trained their own models. We are at least possibly the first one or maybe one of them, but our team is not only responsible for the design and manufacturing of the robot hardware but also for the software operating system now has the ability of large models. So our technological advantages are reflected in the just mentioned interaction ability, intelligence level and secondary development ability. The second one is that actually, as everyone can see, there are many such robots. Through several years, we have truly launched a so-called productized robot because the robot is a combination of many technologies such as navigation technology, various electronic circuit technologies and various mechanical structure technologies. So to make a sample, it might be relatively fast. But to really make the product quality stable enough to run in many scenarios and go through various quality inspections and user usage in terms of product capability, I think our current team’s efficiency in this aspect is already…

Sixth, in terms of data. After our robot products are exported overseas, how is the data generated attributed? Can we still use this data to continuously iterate the models and products?

In the process of going overseas, our general principle is to handle it accordingly based on the legal requirements of different regions and their laws and regulations. Then for the collection of this data, it is stored on the AWS server overseas and undergoes necessary storage encryption, security reviews and strict access. Control measures. We also completed the ISO 27001, the Information Security Management System Certification. 27701, privacy information management system certification and ISO 42001, Artificial Intelligence Management System Certification with reference to the ISO certification standards. We are the first company in Asia to obtain this artificial intelligence management certification. So the establishment of these systems ensures that our data usage complies with international standard security certifications. In this regard, because Cheetah went overseas early, we actually encountered this problem before. We also encountered these problems when our APPs went overseas earliest. Including the GDPR in Europe and other regulations, we attached great importance to such compliance and also have such experience inheritance. Then in terms of the usage principle you just asked about, we definitely follow the principle of necessity of use and minimization of data that is to ensure the analysis of machine operation problems. This does not involve nonessential personal information that basically, that is not in many places. For example, in some countries, we will turn off some functions just to achieve some basic function. So overall, we are very cautious in the usage of this data and comply with local laws and regulations. Well, another question is whether this data can be used in reverse to train the large model. Actually today, the capabilities of the real large language model like TI and those provided by foreign [indiscernible] are already very good. We do not need the training of this data for the time being. And for things like navigation, actually, it does not involve this, or most of them do not involve this part of AI data training. So in general, today, we attach great importance to overseas data security and are also very compliant. Thank you.

Eight. My question is about organizational capabilities because in the era of large models, starting a business is not only about technology and product entrepreneurship, but also requires organizational innovation. Especially when enterprises are developing products, many variables need to be considered, such as models, data, customers, end users, et cetera. In your opinion, since Orion was integrated into the listed company, during this period of more than half a year, what significant results has Cheetah Orion achieved in organizational innovation? How does Cheetah recruit the best talent? How much time do you spend on talent recruitment?

Okay. Let me start with this. Frankly speaking, our organizational innovation is not particularly innovative because the building of organizational capabilities is a long-term and routine work, especially, as you mentioned, after we acquired Orion, the entire Cheetah has done many things in organizational reform. In fact, today, Cheetah has gradually transformed into a company with a core focus on the 2B business, whether it's the sales of robots, our [indiscernible] or our international advertising agency businesses, right, they are all centered around to the sales. So in terms of organizational capabilities, the first thing is to strengthen training. I myself participated in training this year in various sales trainings organized by the company. We have put in a lot of effort and also spent quite a lot of money. Tomorrow, we still have training. The second is in sales management. This was an area where Cheetah was not good at before. But since 2017, I myself have started called the number one position in sales. So in the management of the sales system, we also learned from Huawei's 171 iron triangle approach and learned from many to be enterprises and made an important change in our organization. In the implementation of the 171 approach for the entire 2B sales team in AI, we first applied it to the management of our own 2B sales for various process management, daily reports management and weekly report management. In this regard, we should have done a lot of work. The reason why it's hard to say it's innovative is because I think 2B itself has a set of mature methodologies and some organizational references. We are learning from and implementing more advanced models. One obvious change is that today, for some so-called key accounts or CA customers, our ability to truly form…

Based on practical experience which model applications have better implementation effects and meet enterprise demand. At this stage, how far are these applications from being truly useful? Historical experience shows that Chinese companies are better at developing applications. But if the underlying large models in China cannot reach a particularly intelligent level, can the effects of the applications based on them be comparable to those overseas?

The first one is the application effect of today's 2B large models. In fact, the effect of the first wave of 2B large model usages like text to image, text to video. We have all seen that companies in this field have grown rapidly. It's actually because there's a large demand for creating graphics in writing text. This is the simplest application. Now I think it's entering a stage. For example, what we are doing with the client is an internal training system for them. All new employees need training, assessment and some practical scenarios. Previously, you could only read documents and answer questions. Now you can interact with an AI, right? This is a customer, and then conduct this aspect of training and assessment. Currently, the effect seems very good and users are also quite satisfied. So this is one type that is internal training, which is related to training and document content skills. This aspect has a considerable market within enterprises for the training and assessment of new employee skills. I think AI seems capable of achieving this at present and you said truly useful. Well, large models cannot be simply used to randomly as they are because large models have hallucinations and the understanding of the internal knowledge of enterprises, right, and the requirements of the enterprises themselves. It requires building a product system to make it truly useful. So this actually takes a lot of effort. So I think it will take some time to make the experience good enough for this progress. The second one is actually some data organization types, which are related to buy. That is the traditional buy when combined with AI effects will also be much better. Previously, for every buy requirement, a large amount of code had to be written,…

The last question. From the perspective of research and development, talk about Cheetah's competitive advantages and R&D plans?

Okay. Thank you for your question. Let me repeat. I think this way, when we started to invest in the AI strategy, we also experienced the first wave of AI, which was very hot at that time. Up to today's AI 2.0, my current thinking is more inclined to be more pragmatic and to advance the technological update step-by-step in a refined way instead of [indiscernible] eight products through a super technology and then somehow sweep the market. I now think that robots because it is a rather complex system, it is a more complex system than a mobile phone. So it involves the integration of various technologies such as hardware, software, artificial intelligence and they operate in different scenarios, right? The scenario is completely different from when a user takes out a mobile phone from their pocket. Sometimes it runs in a restaurant, in hotels, at the front desk or in a library. Whether it is your navigation, voice processing or the experience of the applications inside, they are all different. So I think today, the real advantage in promoting this research and development does not lie in a certain technical point, but in whether research and development can form an efficient linkage with the sales chain and end customers, this is what I really think today. That is to say today, everyone has different ideas about robots and some people are making humanoid ones, but our focus is on implementation. After we implement and run it in a scenario for the first batch, there will definitely be problems. After these problems occur or some problems are encountered we can enable the R&D team to respond quickly. Then when you saw one problem after another at this time, your engineering capability and the efficiency of your team are your…

Thank you all for joining our earnings conference call. This is Helen from the company’s IR team. This is the line for the translation purpose, and we will have the transcript in English being available as soon as we can. Thank you so much for participants. Bye.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.