Cheetah Mobile Q3 Earnings: Stable Results

Small cap China mobile Internet stock Cheetah Mobile Inc (NYSE: CMCM) reportedQ3 2017 earnings before the market opened Tuesday. Total revenues increased by 14.8% year over year and 0.9% quarter over quarter to RMB1,201.6 million (US$177.2 million) in the second quarter of 2017.Revenues from utility products and related services (which includes mobile utility applications, internet browsers and PC security software) decreased by 13.3% year over year while remaining relatively stable quarter over quarter at RMB820.3 million (US$121.0 million) in the second quarter. The year-over-year decrease was primarily due to a decrease in PC revenues as internet traffic in China continuously migrates from PC to mobile devices whilerevenues from the Company’s mobile utility products remained stable year over year.Revenues from the mobile entertainment business (which includes Live.me, News Republic and mobile games) increased by 270.5% year over year and 2.1% quarter over quarter to RMB371.0 million (US$54.7 million). The year-over-year increase was primarily driven by a rapid growth in Live.me’s broadcasting revenue and the Company’s enriched mobile game portfolio as a result of its continuous new mobile game introductions earlier this year while the quarter-over-quarter increase was primarily driven by the growth in the mobile game business. Net income attributable to Cheetah Mobile shareholders increased to RMB70.2 million (US$10.4 million) from a net loss attributable to Cheetah Mobile shareholders of RMB150.5 million.

The CEO commented:

“Our second quarter results remain stable and were in line with management expectations. We have been making adjustments to our utility products and realigning our cost structure. As a result, we continued to generate robust operating profit and cash flow from our utility product business during the second quarter of 2017. Also during the quarter, our mobile game business grew considerably on both top and bottom lines as we continued to expand our game portfolio with new mobile game introductions in early 2017. In addition, we further increased Live.me’s user engagement and user stickiness through continued product improvement and content enrichment. We are confident that we remain on track to build a sustainable growth model for the long term.”

The CFO added:

“We made a concerted effort in controlling our utility products’ cost and expenses in the second quarter of 2017. As a result, our operating profit and net cash generated from operating activities for the quarter grew significantly both year over year and quarter over quarter. For the second half of 2017, we have a clear strategy to maintain our utility products’ profitability and at the same time grow our Live.me and mobile game businesses.

Because our various business lines are in different phases of growth, in the first quarter of 2017, we reported our revenues according to business lines to help investors better understand our businesses. As we increasingly evaluate our utility products and related services separately from the rest of our business lines to assess their performance and allocate resources, in the second quarter of 2017, we will report our utility products and related services as one operating segment and consolidate our remaining businesses, including our content-driven products and mobile game businesses into one segment called the mobile entertainment business.”

From early September into early October 2014,Cheetah Mobiles shares plunged 39% with Bloomberg quoting Jun Zhang, the head of China equity research at Rosenblatt Securities Inc, as saying the shorts are betting the Companys bid to expand the use of its computer and smartphone security applications overseas and reduce its reliance on the domestic market would not succeed. What he said was:

Cheetahs fundamentals dont support its high valuation, and if we dont see it grow faster in the overseas market, its share price will drop further Investors should have made a lot of money by short selling the stock.

In March, wehad alsosuggested shorting the stock:

The Cheetah Mobile trade isn’t a tough one to figure out. It ran up, but even on the way up it was running out of gas (volume). Today, CMCM owners are paying the price with a pretty decisive outside day (bearish) reversal. What’s most interesting is that it only took a brush of the technically ceiling at $13.78 – where CMCM struggled last fall – to put the selloff in motion.

It’s only going to be a short-lived trade either way. But, it’s a high-odds prospect we can’t ignore.

A technical chart for Cheetah Mobile shows shares back above a key support or resistance level above the $10 level:

A long term performance chart shows Cheetah Mobile along withChinese mobile Internet peer NQ Mobile Inc (NYSE: NQ) both having big spikes a few years ago before falling off and then largely leveling off in recent years:

Finally, here is a quick recap of small cap Cheetah Mobiles recent earnings history along with EPS estimate trends from the Yahoo! Finance analyst estimates page going into the current earnings report:

Earnings History9/29/201612/30/20163/30/20176/29/2017
EPS Est. 0.02 0.06 0.03 0.08
EPS Actual 0.08 0.12 0.12 0.1
Difference 0.06 0.06 0.09 0.02
Surprise % 300.00% 100.00% 300.00% 25.00%
EPS TrendCurrent Qtr. (Sep 2017)Next Qtr. (Dec 2017)Current Year (2017)Next Year (2018)
Current Estimate 0.09 0.12 0.42 0.57
7 Days Ago 0.09 0.12 0.42 0.57
30 Days Ago 0.09 0.12 0.42 0.58
60 Days Ago 0.09 0.12 0.42 0.61
90 Days Ago 0.08 0.1 0.39 0.62

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