Kingsoft Office Group reports robust growth in 2023 By biedexmarkets.com

Kingsoft Office Group (3888.HK) has announced a significant increase in their financial performance for the fourth quarter and full year of 2023. The group’s total revenue for the year reached RMB 8,534 million, marking a 12% year-on-year growth.

The Office Software and Service business experienced a substantial 17% increase in revenue, while online games and other businesses grew by 6%. Notably, the group’s operating profit soared by 90% to RMB 2,227 million. Kingsoft Office Group also highlighted the successful release of WPS AI, an advanced office application, and their plans to launch JX3 Ultimate in 2024.

Key Takeaways

• Kingsoft Office Group’s total revenue increased by 12% year-on-year to RMB 8,534 million.
• Office Software and Service business revenue grew by 17%, driven by subscription growth.
• The group’s operating profit surged by 90% to RMB 2,227 million.
• WPS AI, an intelligent office application, was released, enhancing their product suite.
• The gaming segment saw strong performance, particularly from JX3 Online, with plans to release JX3 Ultimate in 2024.
• The company maintains a robust cash position with RMB 24 billion in cash resources.

Company Outlook

• The company will continue to invest in AI and collaboration to provide high-quality products and services.
• Plans to deepen presence in the digital office and Wuxia Game field in 2024.
• Aims to leverage technology advancements and pursue sustainable development.
• Intends to provide dividends and buybacks to shareholders.

Bearish Highlights

• The company did not highlight any specific challenges or setbacks during the call.

Bullish Highlights

• Kingsoft Office Group’s growth in paying users is attributed to the strong brand appeal of WPS Office.
• Positive changes in the cloud business are expected due to increased industry demand.
• The development of AI and data assets is anticipated to benefit the company’s overall business.

Misses

• There were no specific financial misses reported during the earnings call.

Q&A Highlights

• The company discussed the adoption of principles uniting cloud and data, expressing optimism about the domestic market.
• Plans to increase prices in operational and cloud businesses due to added value.
• The company is confident that AI and data assets will benefit the card-related sectors and their personal business.
• Growth in monthly active devices suggests a positive reception to AI integration and improved office software experiences.

In conclusion, Kingsoft Office Group’s earnings call underscored a year of strong financial performance and strategic advancements. The company’s focus on AI, cloud services, and enhanced user experiences positions them for continued growth in the technology sector. With a robust cash position and promising developments in their product offerings, Kingsoft Office Group is poised to further its market presence in the coming year.

Full transcript – Kingsoft Corp Ltd (3888) Q4 2023:

Operator: Good day, and thank you for standing by. Welcome to the 2023 Fourth Quarter and Annual Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Yinan Li. Please go ahead.

Yinan Li: Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2023 fourth quarter and annual results earnings call. I’m Yinan Li, the IR Director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our own information and information from other sources, which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors, which may affect our business and operations. Additionally, in today’s call the management will be deliver prepared remarks in both Chinese and English. A third party in operator will provide consecutive interpretation into English. During the Q&A session, we will address your question in both English and Chinese with automating interpretation provided by the third party in operator. On that translation is solely to facilitate the communication during the conference call. In case of any discrepancies between the original remarks and the translation, the statements made by the management will prove well. Having said that, please allow me to introduce our management team who joined us today. Mr. Tao Zou, our Executive Director and CEO, and Ms. Yi Li, our acting CFO. Now I’m turning the call to Mr. Zou.

Tao Zou: Hello, everyone. In the year 2023, the Group’s overall performance maintained solid growth despite challenges, we actually promoted our co-business to lead a solid foundation for sustainable development in the future. Focusing on the strategy of multiscreen, cloud, content, collaboration, and AI, Kingsoft Office Group continued to invest in R&D of AI and collaboration and strengthen the competitiveness of our product through technological innovation, product integration, performance enhancement, and other initiatives. In terms of online games business, we adhere to the original intention of creating prime games and insisted on long-term operation. As developing Wuxia Games, we are also making incremental progress in exploring new game genres. In 2023, the Group’s business demonstrated a growth resilience with a group total revenue of RMB 8, 534 million, representing a year-on-year increase of 12%. The Office Software and Service business maintained solid operation with annual revenue of the RMB 4, 557 million, representing a year-on-year increase of 17% driven by the growth of domestic individual and institutional subscription businesses. Revenue from online games and other business amounted to RMB 3, 977 million representing year-on- year increase 6%, mainly driven by the strong growth of a JX3 Online. Operation profit of the group amounted to RMB 2, 227 million in 2023, increasing by 90% year-on-year. These results reflected our efforts to adhere to the technological driven businesses, continuously involved in product and technology, and adhere user experience. Now, I’m going to turn the call to Ms. Yi Li.

Yi Li: Thank you. Good evening and good morning, everyone. Kingsoft Office Group has released WPS AI, an intelligent office application powered by large language models, focusing on the development of three strategic directions. AI-generated content, co-pilot, and insight. WPS AI officially launched public beta testing in the Chinese Mainland line in the fourth quarter, laying a solid foundation for further commercialization. We have also upgraded the WPS Office to improve user experience. In addition, we continue to improve the end-to-cloud integration experience and enhanced user activity in the cloud. While adhering to long-term membership strategy, we have upgraded the membership benefits structure, launched the super membership system to meet the needs of different users through a flexible combination of benefits. For institutional customers, we have upgraded WPS 365, new productive forces in office, to provide content creation, office collaboration, open ecosystem and digital asset management capabilities. We continued to promote the end-to-cloud integration and collaboration process, and focused on the business scenarios of government and premium customers of state-owned and private enterprises. We deepened our product capabilities to serve industries such as finance, transportation, energy, publishing, healthcare, consumer retail, high-end manufacturing and the Internet, incubated secure and efficient solutions that can be applied across the industry, and continued to replicate typical cases for widespread adoption. Meanwhile, we have been continuously collaborating with premium customers to explore feasible solutions for the implementation of WPS AI in government and enterprise office scenarios to advance its application in various industries and office settings. In the field of public cloud service, we encouraged customers to use cloud and collaboration applications, enabling them to manage their digital assets, and expanded market reach with channel partners. By highlighting the features of our products, we attracted enterprise customers and increased their user engagement and payment retention. We have closely monitored the localization industry policy changes and customer demand, and taken the initiative to tap local government market in advance. And to localization industry, starting from the replacement needs of the customers such as finance, energy and operators, we promoted the adoption of the new license mode and deepened their cloud and collaboration office process. We put users first and officially shut down domestic third-party advertising business in December 2023. In terms of overseas business, based on our solid foundation in the mobile sector, we continued to cultivate our user base on desktop platforms. Looking ahead, Kingsoft Office Group will continue to focus on AI and collaboration, further polishing the products, and provide high-quality AI collaborative office products and services to individual and institutional users In 2023, the online games business saw steady growth. The flagship game JX3 Online demonstrated resilience and strong vitality. It has been in operation for 14 years and achieved a record high in annual revenue. JX3 Online continued to iterate and release new expansion packs with upgraded graphics, providing players with more diverse and enriched gaming experience. World of Sword Origin was successively launched in Vietnam and Chinese Mainland, attracting dedicated players with its classic gameplay and nostalgic appeal, while also contributed to the global reach of traditional Chinese culture. The global release of the anime shooter game, Snowbreak: Containment Zone, expanded the user base of anime and overseas markets. The sci-fi mech game Mecha BREAK made its debut at The Game Awards at the end of the year, gaining widespread attention from the international market for its art design and innovative gameplay, eagerly awaited by global players. Looking forward to 2024, the release of JX3 Ultimate will offer players brand new experience across multiple platforms. We will continue to expand into new genres, refine sci-fi mech game Mecha BREAK and continuously optimize anime game Snowbreak: Containment Zone. As for the financial results, I’m starting from Q4, use RMB as the currency. Revenue increased to 9% year-on-year and 12% quarter-on-quarter to RMB 2, 310.1 million. The revenue split was 56% for office software and services and 44% for online games and others. Revenue from the office software and service business increased 80% year-on-year and 70% quarter-on-quarter to RMB 1, 286 million. The increases were mainly due to the growth of both domestic individual office subscription business and institutional subscription business of Kingsoft Office Group. The growth of domestic individual office subscription business was mainly attributable to the increases in both the paying ratio and average revenue per paying user, resulting from enriched membership benefits and upgraded membership system. The growth of institutional subscription business mainly benefited from the increase in cost reduction, efficiency, improvement, and digital transformation needs of government and enterprises, as well as our optimization of products and services to improve the intelligent office experience and accelerate [inaudible]. Revenue from the online game and other business kept flat year-on-year and increased to 7% quarter-on-quarter to RMB 1, 024 million. The quarter-on-quarter increase was primarily driven by the revenue contribution from World of Sword Origin released in Chinese Mainland in September, partially offset by decreased revenue from certain existing games. Cost of revenue increased 11% year-on-year and 8% quarter-on-quarter to RMB 440 million. The increases were mainly due to higher server and bandwidth costs, along with the business expansion. of the Kingsoft Office Group. Group profit increased 9% year-on-year and 13% quarter-on-quarter to RMB 1, 896 million. Group profit margin came to flat year-on-year and increased by 1 percentage point quarter-on-quarter to 82%. Research and development costs increased 4% year-on-year and 2% quarter-on-quarter to RMB 685 million. The increases were mainly due to increased headcount and personal related expenses of Kingsoft Office Group, reflecting our continuous efforts to improve products and services. Sale and distribution expenses increased to 30% year-on-year and decreased to 40% quarter-on-quarter to RMB 377 million. The fluctuations mainly resulted from changes in promotion spending on online games business in corresponding quarters. Administrative expenses increased 5% year-on-year and decreased to 9% quarter-on-quarter to RMB 171 million. The quarter-on-quarter decrease was mainly due to decreased personal-related expenses. Share-based compensation cost increased to 28% year-on-year and 6% quarter-on-quarter to RMB 77 million. Operating profit before share-based compensation cost increased to 70% year-on-year and 76% quarter-on-quarter to RMB 792 million. Net other gains for the fourth quarter of 2023 were RMB 8 million, compared with losses of RMB 42 million for the fourth quarter of 2022 and gains of RMB 18 million for the third quarter of 2023 respectively. Share of losses of associates were RMB 286 million for the fourth quarter of 2023, compared with losses of RMB 256 million and RMB 307 million for the fourth quarter of 2022 and third quarter of 2023 respectively. Income tax expense decreased 13% year-on-year and increased 187% quarter-on-quarter to RMB 126 million. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 205 million for the fourth court of 2023, compared with profit of RMB 48 million and RMB 28 million for the fourth quarter of 2022 and third quarter of 2023 respectively. Profit attributable to owners of the parent excluding share-based compensation costs was RMB 257 million for the fourth quarter of 2023, compared with profit of RMB 83 million and RMB 69 million for the fourth court of 2022 and third quarter of 2023 respectively. The net profit margin excluding share-based compensation cost was 11%, 4% and 3% for this quarter, the fourth quarter of 2022 and third quarter of 2023 respectively. Now, on year 2023, revenue increased 12% year-on-year to RMB 8, 534 million, office software and services made up 53% increase to 70% year-on-year to RMB 4, 557 million. Online games and others made up 47% and increased to 6% year-on-year to RMB 3, 977 million. Gross profit margin increased by 1 percentage point year-on-year to 82%. Operating profit before share-based compensation cost increased to 19% year -on -year to RMB 2, 541 million. Profit to owners of the parent was RMB 483 million for the year of 2023, compared with a loss of RMB 6, 049 million for the last year. The Group had a strong cash position towards the end of 2023. As of 31st December 2023, the Group had cash resources of RMB 24 billion. This cash generated for operating activities was RMB 3,489 million and RMB 2, 574 million for the year ended 31st of December 2023 and 31st of December 2022 respectively. Capital expenditure was RMB 474 million and RMB 509 million for the year ended 31st December 2023 and the 31st December 2022 respectively. In 2023, our core business has steadily advanced. In 2024, Kingsoft Office Group reaffirmed the state opportunities of digital economic development and continuously explore the business alternatives of digital office services. We will continue to carry out product innovation and user experience optimization around multiscreen, cloud, content and collaboration AI to continuously improve service quality and provide individual and institutional users with more efficient and intelligent office solutions. At the same time, we will deepen our presence in the field of Wuxia Game and make progress in the new [inaudible] of sci-fin mech game bring players all new game experience. Looking ahead, we will continue to leverage technology, embrace AI and these new opportunities to pursue high quality and sustainable development. Thank you all. With that, let’s go to the Q&A session.

Yinan Li: Hi operator, we’re ready for the Q &A session.

Operator: [Operator Instructions] And your first question comes from the line of Xiaodan Zhang from CICC.

Xiaodan Zhang: Thank you. So thanks management for taking my question. And my first question is on the gaming business. So JX3 Online delivered a strong record in 2023, so what is your expectation for its performance this year and could you please share with us your latest full year guidance for the King segment. And secondly, could you please give some color on your plans for cash usage and shareholder returns for 2024. Thank you.

Tao Zou: So I’m going to take the first question and also, I’m going to answer a part of the second question. Thank you so much for the question. I think in the first quarter of this year we are having a really stable outlook since majorly contributed by the JX3 and since we have prioritized and truly all of our effort in the JX3 origins and all of our team are welcoming the birth or the release of the JX3 origins. And if we are going to take outlook of this year’s priority, I would say our priority release is going to be focusing on the releases in the fourth quarter of this year, where we are going to see the release of the mecha games and also the games including the [creation of gold and also the shadow of moon].And if we are taking an outlook here, we might not be having a quite clear conclusion since the major focus of this year is going to be concentrated on the performance of the fourth quarter and the performance of the game. We can only do on a quite clear conclusion of the performance of the game after one month of the release.

Yi Li: Thank you so much. let me take the second question about the cash on our account. Currently, our cash is affluent in terms of the whole operation in the Kingsoft Office Group, but we have kept a proportional cash in our account. Since we are facing a rapid development of the artificial intelligence, we are not going to exclude the possible opportunities where probably in the first half of this year, we might be investing in a potential AI-related business, especially in the field of AI-empowered 2B sites and after the first half of this year, we might have a favor concluded in that part. Now let me introduce you the performance of the cash figures or index that we have in the year 2023. The year 2023 have witnessed a very stable while solid growth in terms of our revenues, which is growing by 10% while we have already registered 19% in terms of our profit and the profit increase, we show by it has been growing from 24% to 26% year by year. And our cash flow has increased by 36%. And in terms of the dividend as well as the buyback, which is our commitment to our shareholders, let me talk about the dividend first. We have paid a very stable and solid dividend to our shareholders. And we have always provided a very stable cash dividend to the shareholders. In the field of the buybacks, this year, we have planned for RMB 300 million buybacks, where RMB 250 million goes to the shareholders and RMB 5 million goes to the employees as an incentive to the employees. And in terms of the dividend and buybacks this year, we are going to count the number according to the performance of the market, as well as the cash is in our account. And currently, what I have at my hand is the first branch of the dividend. We are planning to have RMB 1 billion dividend. But the comfort figure is going to be decided by the actual situation in the market. And we are going to disclose the number at that time. Thank you so much for your question.

Operator: The next question comes from the line of Linlin Yang from GF Securities.

Linlin Yang: My first question is about the OP margin. We saw the operating margin recovered to more than 30% in Q4. How should its performance should we expect for 2024? The second question is about WPS AI. How is the testing performance? And I saw the growth rate of paying users has increased in the last quarter. What are the main drivers? And how should we expect this growth in 2024? The third question is about cloud, what positive change there in the cloud business recently and has there been an improvement in industry demand? How should we expect the bottom line in next year? Thank you.

Yi Li: Let me take the first question from you about what the operational margin, you can see from the previous record in the Q2 and Q4 of the year 2023, we have registered the operational margin more than 30%, while the Q3 of 2023 have witnessed the lowest point across the year. And because in year, that is to say, by the year 2023, the two business sectors of our group, the gaming sector and the office sector has kept a very good momentum. Well, in the year 2024, we are seeing that we have focused on the artificial intelligence related field is still at a boarding stage, where we’re going to focus on the investment opportunities, both in our office software sector and also in out gaming sectors. And this is going have an impact in terms of the operational margins, where we are going to see in the short term the operational margin is going to be shrunk while in a long term, the optional margin is going to be benefited from the current investment. In the year 2024, the operating margin is going be developed and a very healthy and reasonable manner. It might not be as high as over 30%.

Tao Zou: Let me take you to the second question, which is about the WPS AI. What I can tell you about the WPS AI is that we finished testing, internal testing of the WPS AI and remember in 2023 last year and we have discovered the problems and the issues and we have improved in terms of different variants. Our engineers are working on improving the user experience in the field of WPS AI, but in term of these functions, that all the product improvement and the final release variant, I’m not going to introduce it with such a very simple matter, and I cannot introduce with one sentence or two sentences on this phone call. I believe tomorrow our colleagues in the office sector; they are also going have a roadshow where you can attend and you can also have more understanding towards this field. So, what I can tell you about the WPS AI is that we have concluded the testing and we have continuously improved the user experience. The testing improvement of the user experience has matched up our expectations and our target that we set up before. And this is what we want to see about WPS AI in terms of reasons for the input of subscribed users. We are also seeing an increase of the subscribed users in the previous while, but what is the reason behind it? It might be because AI has created some of our highlights on the software related sectors, but we have not released the AI membership. There might be some other reasons that artificial intelligence might have shifted the focus of the public to us, and that’s why we want to pay for our software. But these might not be the mainstream reasons for the increase of our users. Currently, I think the increases of users might be majorly because the brand appeal of WPS Office. Some of these users, they are office workers who enjoy our product and they like it and recommend it to their friends and colleagues. That’s the reason why our 9.7% year-on-year groups in our PC usage. Let me answer the third question, which is a question about the cloud-based sectors. I believe the artificial intelligence is going to keep its momentum in the year 2024, especially after the spring first quarter. We are seeing the release of the four more models which is also delighted the whole industry and provided us more confidence. I have a very optimistic outlook towards this field. The second part of my answer is about the changes in the year 2024. We have seen the Ministry of Finance recently published important governmental documents relating to the procurement of the data and of the computer-related sectors. This has given us very important business opportunities where we can provide our data-related and cloud-related services to the state-owned enterprises. And I also believe moving into the future, data is going to be the future cash. And this has provided us very important business opportunities. Once again, our company has adopted the principles where we find the unity between the cloud and the data. And I also take a very optimistic outlook towards the domestic market. The third part of my answer is about the operational thing. And this is what we recall, I believe that at the end of last year, this part of the factors has, I would say some of the competitors decreased their price while this year, according to what I have understand from our competitors and from the inside of the industries, that we are all planning to increase our prices because there is more value added to the operational business. And it’s also affecting our cloud business. This is my personal take of the development momentum of our industry. So generally speaking, to wrap it up, I would say that the artificial intelligence and also the data assets is going to evolve quite well for the card related sectors. I have once again illustrated that in the different scenarios that the development of artificial intelligence and these data related business models is also going be very beneficial for our personal business. What I already repeated is that it has opened up the limits for development of the card sectors, and tomorrow we are going to have the early course of the Kingsoft Club where you can get more information from their operation. I’m now going elaborate here. Thank you.

Operator: Your next question comes from the line of Daley Li from Bank of America.

Daley Li: Thank you, management, for taking my question. I have two questions. Number one is about the monthly active devices. We see the number is getting better during the 4Q last year and I know if the key driver is from the AI products launching in 4Q. My second question is about the AI development strategy mentioned in our last earnings call you mentioned, we prioritized the number of the monthly active devices and the paying user in the output. So how is our strategy right now? Do we make any adjustments after we have done some testing about product and consumer feedback? Thank you.

Tao Zou: Let me answer your question about the interest of the numbers of large active devices. I am not going — to answer the question of whether our growth is related to artificial intelligence, my friend Toh said that I don’t know whether it’s because of artificial intelligence or for the other reasons, we are seeing the rapid growth. But I definitely believe the office, we are benefiting from this field. These large language modules with empowered in the AI field definitely going to bring us more excess experiences in the field. But the increase of the numbers might be due to very comprehensive reasons, including we are providing better office software experiences for the users and spread by month to month, the user number increased. But AI definitely empowers the field of office-related software and this is also one of the important reasons for the growth. And for the strategies that we have adopted in the office software, obviously all of our strategies, first and foremost, is designed to satisfy our end users, providing the satisfying product to our end users is the most path we are going to take in order to increase the user numbers. And we have always focused on increasing the numbers of the subscribed users, increasing the op values. This strategy continues. I have mentioned about the strategy in last year’s call. And this year, we are also going to increase the op values. And artificial intelligence definitely brings us to the new field where we are going to empower our product with large language models. This year, we are going to continue our strategy and focusing on satisfying the user’s effort. By improving the user experience, we are going to harvest more subscribed users. That is my answer to your question.

Yinan Li: Hi, thank you for joining us today. This will conclude our presentation for the 2023 fourth quarter and annual result earnings call. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

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