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Operator: Good day, and thank you for standing by. Welcome to Kingsoft Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Ms. Yinan Li, IR Director of Kingsoft. Please go ahead.
Yinan Li: Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2025 third quarter earnings call. I'm Li Yinan, 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 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 earnings call, the management will deliver prepared remarks in both Chinese and English. A third-party interpreter will provide consecutive interpretation into English. During the Q&A session, we will accept questions in both English and Chinese with alternating interpretation provided by the third-party interpreter. On-site translation is solely to facilitate communication during the conference call. In case of any discrepancy between the original remarks and the translation, the statements made by the management will prevail. Having said that, please allow me to introduce our management team who joined us today: Mr. Zou Tao, our Executive Director and CEO; and Ms. Li Yi, our acting CFO. Now I'm turning the call to Mr. Zou Tao.
Tao Zou: [Interpreted] Hello, everyone, and thank you for joining Kingsoft's 2025 Third Quarter Earnings Call. This quarter, we continued to prioritize strengthening our core businesses with AI collaboration and internationalization as its strategical priorities. Kingsoft Office Group continued to deepen AI application scenarios and strengthen its brand and ecosystem development. Our online games business advanced general experience and extended its global reach, notably with the global launch of the sci-fi game, Mecha BREAK. In the third quarter, Kingsoft's total revenue reached RMB 2.419 billion, representing a year-on-year decrease of 17% and a quarter-on-quarter increase of 5%. Specifically, our office software and services business maintained a steady growth momentum. This growth was supported by robust momentum in WPS software business, rapid growth of WPS 365 business and steady growth in the WPS individual business. Revenue from online games and other business decreased primarily due to low revenue contributions from certain existing games and because the new game is still in its early development phase and gradually build its market influence. Now I will walk you through the business highlights of the third quarter 2025. In the third quarter, Kingsoft Office Group demonstrated overall improvement in its financial indicators with continuously optimized profitability and a significant acceleration in revenue compared to the previous 2 quarters. For WPS individual business, the rollout and promotion of new AI-powered products together with refined operations in both domestic and international markets drove a steady increase in WPS AI monthly active users, paying subscribers and user value. Revenue reached RMB 899 million, up 11% year-on-year. As of 13th September 2025, WPS Office global monthly active devices reached 669 million, an increase of 9% year-on-year. Specifically, WPS Office PC version monthly active devices grew by 14% to 316 million, while the mobile version monthly active devices increased by 5% to 353 million. WPS 365 business, we continuously enhanced our collaboration and AI product offerings, achieving significant progress in expanding our customer base among private enterprises and local state-owned enterprises and strengthen our product competitiveness and industry influence. This segment continued its high-growth trend with revenue reached RMB 201 million, a significant increase of 72% year-on-year. WPS software business saw acceleration progress in localization projects. Our AI-enabled products for government scenarios continue to integrate and deploy across government agencies, supporting the digital and intelligent transformation of localization customers. Revenue for this segment reached RMB 391 million, up 51% year-on-year. In the third quarter, for our online games business, our flagship game, JX3 Online celebrated its 16th anniversary in August, followed by the launch of its annual expansion pack in October, which delivered innovative new game player. The anime shooter game, Snowbreak: Containment Zone maintained its core user base through long-term content updates and user operations. Sci-fi mech game Mecha BREAK has been continuously optimizing its gameplay and operations to enhance the player experience. Additionally, to international IP games, Goose Goose Duck and Angry Bird are expected to launch this and next year in China, respectively. Looking ahead, Kingsoft Office Group will stay committed to its core strategy of AI collaboration and internationalization, meeting the scenario needs from individual user to enterprises through its core product portfolio. The online games business will focus on developing high-quality content and expanding global publishing, enhancing the long-term vitality of its classic franchises while driving the growth and the sustainable development of new genres.
Yi Li: Thank you, Tao Zou and Yinan. Good evening, and good morning, everyone. I will now discuss the third quarter operational and financial results using RMB as currency. Revenue decreased by 17% year-over-year and increased by 5% quarter-over-quarter to RMB 2,419 million. The revenue split was 33% for office software and services business and 37% for online games and others business. Revenue from the office software and services business increased by 26% year-over-year and 12% quarter-over-quarter to RMB 1,521 million. The increases were mainly attributable to the growth of WPS software, WPS 365 and WPS individual business of Kingsoft Office Group. The remarkable increase of WPS software business was primarily driven by the robust orders of localization projects. The rapid growth of WPS 365 business was mainly due to our continuous improvement in collaboration and AI products as well as expansion of our customer base among private and local state-owned enterprises. The steady growth of WPS individual business was primarily attributable to increased number of paying subscribers, supported by our active promotion of AI features and refined operations. Revenue from the online games and others business decreased by 47% year-over-year and 6% quarter-over-quarter to RMB 898 million. The decreases primarily reflected lower revenue from certain existing games, partially offset by the revenue contribution from newly launched games. Cost of revenue increased by 3% year-over-year and 5% quarter-over-quarter to RMB 475 million. The year-over-year increase was primarily due to higher server and bandwidth costs, greater channel costs as well as increased service costs of institutional clients, along with the business growth of Kingsoft Office Group, partially offset by the lower channel cost of online games business. The quarter-over-quarter increase was primarily due to higher channel costs and increased server and bandwidth costs, both associated with online games business. Gross profit decreased by 21% year-over-year and increased by 5% quarter-over-quarter to RMB 1,944 million. Gross profit margin decreased by 4 percentage points year-over-year and kept flat quarter-over-quarter to 80%. The year-over-year decrease was mainly due to the decline in the revenue contribution from certain self-development high-margin games. Research and development costs increased by 4% year-over-year and 5% quarter-over-quarter to RMB 900 million. The year-over-year increase was mainly attributable to higher investments in AI and collaboration products, partially offset by lower accrued performance-based bonus. The quarter-over-quarter increase was mainly driven by the increased headcount and AI-related expenses of Kingsoft Office Group. Selling and distribution expenses increased by 55% year-over-year and 33% quarter-over-quarter to RMB 564 million. The increases primarily reflected higher promotional and advertising expenditures associated with online games business. Administrative expenses increased by 7% year-over-year and 2% quarter-over-quarter to RMB 178 million. The year-over-year increase was mainly due to higher personnel-related expenses and increased depreciation arising from the completion and operation of our Wuhan campus, which was constructed to support the Group's long-term development. Share-based compensation costs increased by 37% year-over-year and 13% quarter-over-quarter to RMB 80 million. The increases were mainly due to the grant of awarded shares to the selected employees of certain subsidiaries of the company. Operating profit before share-based compensation costs decreased by 70% year-over-year and 21% quarter-over-quarter to RMB 357 million. Net other gains were RMB 13 million for this quarter compared with losses of RMB 63 million and gains of RMB 443 million for the third quarter of 2024 and the second quarter of 2025, respectively. Share of profits of associates of RMB 5 million were recorded for this quarter compared with losses of RMB 428 million and RMB 170 million for the third quarter of 2024 and the second quarter of 2025. Income tax expense was RMB 66 million for this quarter compared with income tax expense of RMB 31 million and RMB 104 million for the third quarter of 2024 and the second quarter of 2025, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 213 million for this quarter compared with profit of RMB 413 million and RMB 532 million for the third quarter of 2024 and the second quarter of 2025. Profit attributable to owners of the parent, excluding share-based compensation costs was RMB 277 million for this quarter compared with profit of RMB 453 million and RMB 570 million for the third quarter of 2024 and the second quarter of 2025, respectively. The net profit margin, excluding share-based compensation cost, was 11%, 16% and 25% for this quarter, the third quarter of 2024 and the second quarter of 2025. The Group had a strong cash position towards the end of the reporting period. As at 30th September 2025, the group had cash resources of RMB 26 billion. Net cash generated from operating activities was RMB 494 million, RMB 1,387 million and RMB 767 million for this quarter, the third quarter of 2024 and the second quarter of 2025. Capital expenditure was RMB 72 million, RMB 109 million and RMB 81 million for this quarter, the third quarter of 2024 and the second quarter of 2025. That's all for the introduction of our operational and financial results. Thank you all. Now we are ready for the Q&A section. Thank you.
Operator: [Operator Instructions] We will now take our first question from the line of Xiaodan Zhang from CICC.
Xiaodan Zhang: [Interpreted] And my first question is regarding the gaming business. Games revenue for the quarter is down both year-on-year and quarter-on-quarter. So could management elaborate on the operational strategies for existing games as well as the new game pipelines? And also, could you share some color on the updated progress of Mecha BREAK? And regarding the office business, what are the main drivers behind the accelerated growth in Q3? And will this momentum be sustainable?
Tao Zou: [Interpreted] So firstly is regarding the question for the games. We have discussed previously for the future and future strategy of the different versions. And so we currently have already obtained the version numbers, and we're going to be launching different games, including like Mecha BREAK and Goose Goose Duck and also the other products. But for the old games, we mainly focusing on the like the Fate of Sword and also the Snowbreak: Containment Zone, and we're going to have like the target for the customer, for the operation service. We're going to have the long-term like upgrading the generations, including the new play way, including new content, we're going to continue to upgrade that. This is the regular way. And target for the technology and operation, we're going to have some new improvement, so this is relevant to the strategy of the game. And for the Mecha BREAK, because it just launched for 1 season roughly and the target for this game for the play way, for the operation and also the rich content, we are still doing the operation and improvement. We think that we need longer time to give the answer. So actually, regarding the growth factors, we think that we could take a look from 3 perspectives. What I can say is that basically, they are all good, but I would like to separate into like personnel for the enterprise and also the information innovation, 3 aspects to the introduction. For the personnel, actually, the growth rate of the members is -- we have the basic number and including like the payment for the up value. And for their PC growth rate is actually out of -- exceeded our expectations. So this is going to be the key thing, which is the members. The secondly is the AI. Once we have released the 3.0 version, so through the AI, we have this monthly activity. Members compared with last year is going to increase 20%, especially launch 3.0 version. So compared with the first half year, we have realized doubled. And this is the second point. Another thing is that from the basic for the membership grows, so we can see that the feedback from the users are quite good. So we can see that basically it's exceeded than what we expected. It means that more and more enterprises customers, they started to accept us. And also for our product and service are quite satisfied. That is why we have increased like the industry's competitiveness. And third is about the software and information, the information innovation. So regarding this part is that we can see that since Q3 is quite smooth, and it has increased like 51%, no matter for the personnel or information innovation. So basically, it's going to be a very, very positive situation. So the growth element, whether we could be sustainable development, we would like to talk through 3 perspectives: personnel, enterprise and information innovation. And firstly, for the information innovation, that is kind of policy-oriented. So basically, we can realize more than 90% of the growth rate. This is from the short-term perspective. We can see that like Q4 is quite good, probably because we're going to complete in 2027, but the acceleration is quite good. Unless we have the big policy direction is going to have some adjustment. Otherwise, we have the confidence that we could realize this much growth constantly. For the personal business, regarding the growth rate for these 3 business, we have realized like more than 10% increase. So from the increasement of the membership and secondly is the payment like conversion rate and also the UP value. So up till now, we can see is that the users membership growth is quite good. And especially for the AI members is growth rapidly. So generally speaking, we have confidence. And -- but of course, it's a little bit lower than the expectation and then the enterprise membership growth. So from the enterprise perspective, my personal judgment is that if we could realize the delivery, if the delivery is on time in the future, we have a pretty big space to improve. So in the next 2 years, we're going to have -- we believe that we have more and more enterprise members to use our product. So we can see is that our productivity is quite good and our service is going to have a reputation. For our team, we need to strengthen their internal and external cooperation to strengthen our delivery ability. We believe that this has a certain pressure for us. But generally speaking, so from this report, we can see a lot of data was renewed, including our R&D and our staff percentage and also the investment of the R&D could reach to 35%, 36%. Previously, it was 32% to 33%. So we can see that we continue to do a further bigger investment for the R&D. This is -- we believe that it is going to be the very basic reason we could have such increase, especially like Wuhan Industrial Center and started the construction work in 2018 and up to now it's become the largest industrial base for Kingsoft. And this is going to be a very solid foundation for us.
Operator: We will now take our next question from the line of Wenting Yu from CLSA.
Wenting Yu: [Interpreted] So my first question is, how does the company view the opportunities for WPS Office and 365 in international markets, and which countries or regions will be the strategic priorities? And how does management assess the competitive dynamics overseas, particularly against the Microsoft Office? And the second question is about the online game. So over the next 2 years on top of the 2 IP titles mentioned in our pipeline, which game genres will be the main focus in the company's pipeline? And how does management view the opportunities for games to expand into the overseas market?
Tao Zou: [Interpreted] So regarding the first question, this is actually a very good question from the strategic perspective. Since last year, we have reached the concept that AI collaboration plus overseas. So from the business perspective, the growth rate overseas is quite good from the users, members' perspective and also the other perspectives. So since -- started from this year, we have increased the overseas R&D investment. We actively did a lot of preparations for to go overseas. So from my perspective, especially when we talk about the competition with Microsoft because our main competitors is Microsoft. So our competition strategy overseas is that I think I would need to separate it from 2B and 2C, 2 perspectives. So for WPS in domestic market, we have actually go through with the competition with Microsoft for almost 30 years up to now is a long term. So several key points. The first is that from the edit tool to the content service platform, we have did this transformation because everybody really know that if they're going to use our product, we're going to provide a module. So our members target for the content and to have this PDF content transformation and also to like search the content information, et cetera. So this is actually very early stage, we did this. And except for very early stage, we have the document edit tool. We also have provided the content, the document content service to convert it into a platform. So actually, this is the first point. And secondly, is that since 2013, we started the like mobile end. So this is actually early -- 2 years earlier than Microsoft. So actually, for us, it's just an app would be solve all of the problems. But for Microsoft, it's going to be more complex. And so our -- that our -- like their package, the installation package is smaller for the mobile end. So that is why in overseas, a lot of customers, they actually know about us through the mobile end. Then we have the mobile end, we have these advantages. And in the past 10 years, we have collected a pretty good foundation. And then from the technical perspective, from the mobile end, we have some certain advanced than Microsoft. This is going to be the core things. And this time, we have the AI and especially we have released 3.0 version since 2023. After 2 years optimization, our sales together with our users, they're going to give us the feedback and we constantly do the practice, and we have a very good like both parties both end interaction. So we think that from the AI's perspective, target for the content application, we are stronger than Microsoft. So this is actually from the 2C's perspective. And we are actually a platform to do -- to provide the content and also the service, not just a simple document edit tool. And also from the mobile end, we have advantages together with our technology, we have the correct way. So we have the difference from the technical route. So for the 2B's perspective, I think we have a bigger advantage. And actually, all the domestic members are all clear, especially we have this -- the first package released to the market. Our WPS 365 is not just a content treatment platform. This is actually an office platform, especially we have the AI edit. And so not just -- we are not just like document treatment set compared with Microsoft. We are actually the whole office platform. And this platform in our company internally, we have used for 2 years. And in domestic market, we also have a lot of enterprises. They are seeing they actually could -- this software could have a very perfect integration with the enterprise OA system. This actually are significant advantages. So we can see that at least for our Office platform and to compete with Microsoft, this is actually very early stage. We have this module. We're going to have different components. So we have different module. It's very flexible and also the layout are also quite flexible. This is from the 2B's perspective. So this is actually -- we make a conclusion is that we have 2 perspective from 2C and 2B. And in the past few years, especially for the mobile end has been released. In the past 10 years, we have a very good like public members foundation through the mobile end. So on the other hand, they would like to actively download the PC end to remake the promotion and layout. So -- and secondly is from the national perspective, and we have a lot of Chinese friends, they would like to do the promotion and development. So I think that this is the core thing. So the second is regarding the games. Actually, we have a pretty good like foundation. Currently, we have some of the games already obtained their version numbers and including the JX4 and Angry Birds and Goose Goose Duck, and also the Snowbreak: Containment Zone. And we also have some games, which didn't get their certification yet, but probably we're going to launch it next year. So we think that from the overseas, the overseas opportunity is quite good. So including when we did start the -- launched the game in the -- for the Snowbreak: Containment zone and also the Mecha BREAK, we tried several times, especially for the mobile end. So we realized that in domestic market, some of the companies, they did a pretty good performances overseas. So we believe that this direction is correct. So we're going to continue to optimize our product, our technical ability, operation ability.
Operator: We will now take our next question from the line of Linlin Yang from Guangfa Securities.
Linlin Yang: I have 2 questions. The first question is could you share us the progress of our AI business? How do you think about its commercialization pace and market potential? My second question is the expenses. We see sales and marketing expenses was relatively high in the short term. As the business stabilized, will it return to normal by next quarter or Q1 in 2026?
Tao Zou: [Interpreted] So I would like to answer the first question, and Li Yi is going to answer the second question. So regarding the AI business improvement progress, actually, since April this year, when we found the [indiscernible] to collaborate with Kingsoft Cloud target for the enterprises and different application services from the strategic way we're going to do the support and actually, including Zhuhai, we have local big model, and we have the feasibility report regarding the transportation, we have different projects delivery and also in different industries like the low industries, et cetera, with different regions, we all started all of the development. And so for the more details, it's not convenient for us to disclose at this moment. But why we would like to set up an AI product center because we strongly believe that the whole industry, when we do this practice for the big module, it's going to get into the specific application for different industries. So simplified -- make it simplified is that we think that in the future, different industries is going to have like restructured system for the big module, including the internally of the enterprises, for the organizations way is going to have some change. So the main job of this year is to this part. And we -- for Kingsoft Cloud, we have some progress. So at this moment, at this stage, the business is still in a very early stage. So because of a comprehensive reason, it is not convenient to disclose too much details at this moment.
Yi Li: [Interpreted] So regarding the second question for the expenses for the marketing actually when we promoted into -- launched it into market, and we believe that for the long-term perspective, it's going to get back to a normal situation. When we have promoted the launch of different products, and we think that the cost is going to -- different season is going to have slightly changed. And the previous season, it was 15% to 16% and also this season is going to reach to 20% and more than 20%. So from the whole year's perspective, this is going to get -- we think that's going to be a reasonable level because we need to have all of the cost for the R&D, especially for the AI in the -- specifically in the early stage, we need to have more investments, but that is for the long-term sustainable development. So we believe that in the long term, we're going to control the rate, the investment rate and finally get a reasonable profit level.
Operator: I am showing no further questions. Thank you all very much for your questions. And with that, we conclude our conference call for today. Thank you for participating. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]