China's Cheetah Mobile Eyes Big Push Into More Markets

Can China's Cheetah Mobile hit pay dirt on the global mobile scene?

While the jury is still out on the answer, the potential for Cheetah Mobile ( CMCM ) to monetize its mobile business in a big way has sparked investor enthusiasm over the provider of Internet security and mobile tool applications.

Cheetah Mobile's shares have risen more than 40% since they debuted on the NYSE on May 8.

The company provides mobile and PC applications that offer security and anti-virus protection. It was spun off by Chinese software company Kingsoft.

Cheetah Mobile is the No. 2 Internet security software provider in China, with more than 362 million monthly active users as of March 2014, according to iResearch.

The company provides its applications free to users and generates most of its revenue from its legacy PC application business in China. The company does so through traffic referrals from its platform to e-commerce companies, by selling ads and by providing value-added services such as online games.

'Huge' User Base

Monetization of its mobile applications is still very early and small, says JG Capital analyst Henry Guo.

"The key to its future is the opportunity to monetize its mobile business internationally," he said. "The reason why investors love (the stock), we believe, is because of the potential on the mobile side over the next several years. The reason why investors see the potential is because it has a huge mobile user base."

During the first quarter, Cheetah's mobile monthly active users (MAUs) surged nearly five-fold from a year earlier to 222.5 million. About 63% of MAUs came from overseas markets, mostly the U.S and Europe.

With a "mature" desktop business, Cheetah has transitioned to a mobile focus over the last year or so, Guo says.

That's a good thing, says Renaissance Capital analyst Will Preston, because "the future is in mobile."

"The lure of this company is they have this huge user base and a very strong presence in mobile," Preston said.

He estimates that in three to four years Cheetah could have $1 billion in yearly revenue "because of the amount of their users and the potential they have with their monetization strategy."

To put that number in perspective, consider that Cheetah had only $123 million in revenue last year.

For now, however, mobile remains a pretty modest business for Cheetah, though a growing one. In the first quarter, mobile accounted for 17% of Cheetah's $50.8 million in total revenue. That was up from 1.6% the prior year and 11.6% during the fourth quarter of 2013.

The company's mobile lineup includes Clean Master, a junk file cleaning, memory boosting and privacy protection application. In March, Clean Master was the world's No. 1 mobile application in the Google Play app store tools category by monthly downloads, according to App Annie.

Another mobile application is Battery Doctor, used for power optimization. It was the No. 1 mobile utility application in China in terms of monthly active users in December 2013, according to iResearch.

Among the ways Cheetah can monetize its mobile business globally is with mobile games that it develops with local developers, Guo says. The idea would be to launch "localized" games that are attractive to users in key markets like Brazil, where Cheetah has a large user base.

Cheetah took a step toward monetizing its mobile business in June when it reached a deal to acquire HongKong Zoom Interactive Network Marketing Technology for up to $30 million, including $20 million in cash and about $4 million in Cheetah stock, payable upon the closing of the deal.

HongKong Zoom operates a mobile advertising business. It is an authorized reseller ofFacebook ( FB ) ads, one of the top resellers of Google ( GOOGL ) ads in Greater China, and a preferred partner for global mobile advertising networks such as InMobi and Millennial Media.

"With this addition, Cheetah will be able to further expand into the overseas market and explore new opportunities for promoting and monetizing our mobile products," Cheetah CEO Sheng Fu said in a statement announcing the deal.

Global Advantage

Analyst Guo says the key difference between Cheetah and other Chinese Internet companies is that Cheetah has strong international brand awareness and a large international user base.

That is a positive in terms of its potential to monetize its mobile business on a global scale.

But Guo has some concerns.

"The company has no proven record that it can monetize its huge international user base," he said.

What's more, Guo adds, no Chinese Internet company has been able to monetize its international user base before. It's not easy, given the amount of competition between international Internet companies.

"It's too early to make a call," said Guo, who has a "Neutral" rating on Cheetah. "I'm waiting on the sidelines to see if there's any traction on international monetization."

Financially, Cheetah is doing well enough with its current lineup of products. The company has delivered seven straight quarters of triple-digit revenue growth.

In the first quarter, revenue climbed 131% from the prior year to $50.8 million. Earnings came in at 4 cents per American Depositary Share. Analysts polled by Thomson Reuters see full-year earnings of 22 cents per ADS in 2014 and 65 cents in 2015.

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