Q3 2022 Kingsoft Cloud Holdings Ltd Earnings Call
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Thank you for standing by and welcome to the Q sauce Cloud Holdings third quarter 2022 earnings Conference call.
Participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the Starkey I'll, let by the number one on your telephone keypad.
I'd now like to hand, the contract over the next as close to him IR manager. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today can sell cloud so called hurt when you're trying to eat your earnings release was distributed earlier today and is available on our IR website at IR adult T. That's why you wouldn't bill com as well as on global Newswire services on the <unk>.
Today from piece Oakwell, we how our west Chairman and the CEO you start household and the CFO , Mr. Jorge well, Mr. Joel will review our business strategy operations and the company highlights followed by Mr. <unk>, who will discuss the financials and the guidance it will be available to answer your question during the Q&A session.
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All predictions as loyal Cohen and reference purposes, only in kids, but I needed script management statement in Orange, though language Whirlpool will before we begin I'd like to remind you that this conference call contains forward looking statements within the meaning of section 20, you want E of the security Exchange Act or 19.
People at the money and as you find in the U S probably security litigation as well my 19, that's about it.
Forward looking statements are based upon management's current expectations and current market and operating conditions related to U S well known or unknown risks uncertainties and other factors all of which we are difficult to predict and many of them. When you shop you on the company's control, which may cause the company's actual results performance.
As all of two minutes to due for maturity from those in the forward looking statements further information regarding these and other risks uncertainties or factors are included in the Companys filings with the U S. S E C.
Company does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise, except as required under applicable law.
Please note that unless otherwise stated all financial figures mentioned during this conference call are denominated in RMB.
My pleasure to introduce our less Sharma on appeal towards those help. Please go ahead. Thank you.
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Hello, everyone.
Thank you all for joining Kingstone clouds third quarter 2022 earnings call.
Who's taking on the CEO role in August I have been leading the company through a systematic review of our strategy business and financials.
And during the quarter, we continued to implement various initiatives in a solid and a down to earth minutes.
First we continued to invest in technology focus on our core businesses and revised our original vision for cloud services.
Second we continued to review and evaluate our customer base and project portfolio.
Strengthened cost control.
Achieve a better balance between revenue growth and profitability.
At the same time, we continue to strengthen our ecosystem synergy explore high value business opportunities and pursue a path of high quality development.
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We achieved solid financial performance in the corner.
Our total revenues were RMB 197 billion in line with our guidance.
Adjusted gross margin improved significantly to six 3% from three 6% in the second quarter.
And our operating cash flow has been positive for two consecutive quarters.
Indicating that our business adjustments and cost control efforts are starting to yield initial results.
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In terms of business.
We adhere to the conviction of building success based on technology.
Continued to focus on building key product capabilities on the Ias and Paas layer.
These efforts were recognized by Frost <unk> Sullivan lead Leo Institute, and it's China data management solutions market reports published in the third quarter. This year.
Which kicks off the cloud data management solutions ranks among the leaders of the market.
Our innovation competency and the growth performance.
Meanwhile, Idc's latest addition of China's software defined storage trucker, 20th wanted to first half hour.
Our enterprise level storage solution King storage.
Top score in China software defined object storage market.
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In terms of ecosystem collaboration.
We stepped up our technological cooperation with King's off the office you achieved in house cloud document processing, including authentication encryption and proof reading.
Leveraging our cloud computing capabilities, we help the king soft office strengthen the business logic layer for cloud document processing, and therefore, and thereby further improved their end user experience.
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In terms of different business scenarios, we continue to focus on our core industry verticals.
Replicating our successful lighthouse projects and apply to customers in their respective sectors.
In public services space, we built it's smart cloud solution for a municipality leveraging our hybrid cloud and distributed cloud storage technology among others.
Naval and facilitate the management of economic affairs in a coordinated and integrated manner.
In financial services sector, we validated our data governance services capabilities, particularly in data Lake in a matter of data management and various project for a major commercial banks.
We will continue to replicate such success with more clients in the industry.
In the health care sector, we're about to complete the capacity expansion projects for the medical image crowds in region, including Sichuan and Chongqing, a testament of our ongoing support and the monetization to address our customers' needs to expand and upgrade their existing projects.
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Overall speaking, we will continue to invest in technology focus on core businesses and in house, The foundation and the structure, which enables sustainable high quality development.
Under the backdrop of the wave of digitalization, we aspire to penetrate deep in verticals up strategic choice and offer our customers safe robust and efficient cloud computing services.
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I will now pass the call over to our CFO Henry to rollover, our financials for the quarter. Thank you.
Thank you.
And welcome everyone for joining the call.
Now I will walk you through the financial results for the third quarter 'twenty to 'twenty two.
We are actively taking measures to improve.
We shouldn't see demonstrating our strong commitment to pave the path for profitability.
This quarter, our adjusted gross margin has improved considerably on a continuously.
From the lowest point of one 2% in the fourth quarter of 'twenty to 'twenty two to three 6% in the second quarter. This year and a further two of six 3% during the third quarter.
Our operating cash flow has been positive for the past two quarters consecutively and we have achieved 100.9 million RMB net operating cash flow this quarter.
Our total revenue was 1906 to $8 8 million RMB in Q3 within that revenue with some public cloud services was 1000 349.0 million RMB.
While increased by four 4% compared with Q2.
It represents a 22% decrease compared to the same period in 2021.
The change was primarily due to the company's proactive scaling down our CDN business, where there's a gross billing decreasing by about 28% on a Y O y basis.
Revenue from Enterprise Cloud services was 622.0 million RMB.
Which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China.
While proactively applying a more selective criteria to a project screening to strive for better profitability and cash flow.
Our cost saving measures are well on track with our plan total cost of revenues decreased by 26% year over year and it remains stable quarter to quarter.
$1846 4 million RMB.
How do you see costs decrease significantly by 23, 6% year over year for $1410 9 million RMB, two $1087 3 million RMB this quarter.
Depreciation and amortization cost increased by 26, 9% from 200 million RMB in the same period of last year to $253 7 million RMB, while remain stable compared to last quarter. It is in line with our revenue mix adjustments absolutely moderated the procurement process.
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So those are in development on the services cost increase from 160 million RMB, two $443 1 million at M. D. This quarter.
The increase was mainly due to the consolidation of Camelot since September last year.
Fulfillment costs and other costs was $31 9 million RMB $39 3 million of R&D this quarter.
The adjusted gross profit of this quarter was $124 7 million RMB, representing adjusted gross margin of six 3% a significant gross margin improvement was mainly due to the effect of I'll call cultural measures and our strategic adjustments of our revenue mix.
In terms of expenses, excluding share based compensation total adjusted operating expenses was 570 377 million RMB, where things that adjusted R&D expenses was 231.6 million inquiries from 198 million RMB, if a lost quarter absolutely.
The main focus of our technology development adjusted.
Adjusted selling and marketing expenses was $125 5 million RMB compared with 121 million RMB last quarter.
G&A expenses increased slightly from 196.0 million RMB last quarter to $219 9 million RMB, which is partially due to the one time off expenses of a Hong Kong listing project.
Net loss margin was 47% this quarter.
Adjusted net loss margin was 24, 8% Digest.
The adjustment was mainly due to the foreign exchange loss of $218 9 million RMB caused by that's like it isn't fluctuation of U S. Dollar RMB exchange rate, which is totally a noncash item and the impact on the P&L items.
As of September 30th plenty of funding to our cash and cash equivalents and short term investments.
Amounted to $5 3 billion RMB, providing us with significant sufficient liquidity for operations.
Capital expenditure for this quarter. It was $253 3 million RMB, which primarily consists of payments plus of us, which we are all there previously.
The decrease off of Capex was in line with our proactively escaping dollar CDM business.
We expect to keep our total capex within 1.5 billion RMB for the full year of plenty of money to.
In terms of share repurchase program regarding of our 100 million in U S. Dollar a share repurchase program, where they got four months' period as approved by the board and announced in March this year.
What I have been duly executing.
Since the release of our Q2 earnings result up to November 18th we have bought a total of 10 points.
Four 1 million.
80 S chest for roughly about 20 392 million U S dollar.
Going forward supported by our ample cash reserve.
Of about $5 3 billion RMB, we expect will continue to execute from time to time, but it's way to mandate it repurchase program is.
This FX 40th demonstrates our board and the management of shrunk Amendment and have full confidence in the long term business prospects of the company, that's what thrive to reward our shareholders for their support.
We believe our share price will eventually reflect company true value.
Finally, we submitted the application for Hong Kong due primary lifting on July 27, 22 has always the listing at a potential timing is subject to regulatory approvals.
Looking ahead, although we are still implementing our strategy initiatives, including repositioning and cost control efforts are ongoing basis.
Adjustments have already yielded positive preliminary results actually reflected in a clear improvement of the profit margin in Q3.
We expect our total revenue to be between 2 billion RMB, two 2 billion RMB for the fourth quarter of plenty of thought here too.
Representing a quarter over quarter increases of one 6% to 11, 7%.
Why are these forecast and comments above a base of all current and the preliminary views of the market and operational environments, which are subject to change we firmly believe that a given at time.
The effects of our ongoing strategic initiatives will continue to amplify and it reflects our financial in a mid to long term. Thank you.
Thank you. This concludes our prepared remarks sounds probably all attention and we are now happy to take all questions. Please ask your question in both Chinese memory in English. It's a hospital operator. Please go ahead. Thank you.
Thank you if you wish to ask a question. Please press Star then one on your telephone and wait for your name to be announced.
We wish to cancel your request. Please press Star then two if you are honest speaker phone. Please pick up your handset to ask your question.
Your first question today comes from Thomas Kim with Jefferies. Please go ahead.
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Thomas out so on the second question regarding the Q4, so actually I mentioned.
We do see a first point that we do see a relatively expected recovery curve on the top line starting from last quarter and a carrier from this quarter and Oh Q4 sequentially.
So that total revenue will be.
Improving trend in Q4 and in terms of the mix given we have.
Almost complete.
The initiatives on the CDN business adjustments on the priorities in terms of investments and the client mix.
I think that provides us with a relatively stable base to project the public all the revenue in Q4, so because of that I think in Q4 all of our public cloud.
As a total we will see a sequential margin improvement on the topline, but the profitability on the line off the public cloud will continue to see a positive contribution for the company's total gross margin in Q4.
And on the enterprise side as we mentioned I think if you really looking back from Q1 Q2 ended this quarter and as total mentioned part of the Q2 due to the Covid measures.
In Beijing City, that's preventing us from some of the project bidding and deployments and execution in Q2, which was around about April and May and to some time impartial July or June July .
We do actually tried our best in Q3, this time to accelerate the deployment of execution. So hopefully.
Some of the flagship projects, including a few important projects that we discussed and disclosed earlier for example, some of the provision level household cloud hopefully we can be.
Lloyd and fulfill the execution in Q4 and that will carry with it a revenue booking in Q4.
So with that I think our enterprise, but you may see a relatively a little step up of the revenue.
Enterprise cloud in Q4 as part of the total revenue contribution. So overall my feeling is right now I think the sequential improvement on both topline and gross margin and Worldview two important priorities for our management team, while we will need to continue to make sure that all cost control measures of expense.
Its life will carry forward.
Hopefully it will be have some benefits in Q4 and Q1, starting from next year as well. So it will take some time, but I think some of the initiatives. We already implemented in places just need to have the time clock and see the see the benefits going forward. Thank you.
Thank you and I think it's just the translation of what Miss Adult responded to the first question. So that the Covid situation has been going on for years and honestly speaking it has been impacting the overall success.
The overall society significantly across all verticals, including us.
And like you rightly pointed out we are also observing and Ah you know trying to see what the next step might be as you might be aware our investment.
In recent days and weeks that situation in Beijing is becoming more severe to abide by government doors, we have only 20% of the workbook workforce currently working in the office and as you know there has been one that situations like that is backing.
April and May so, it's really difficult to predict and also common situation and what we can do it to abide by the rules promulgated by the government. However, I think from a strategy perspective.
In light of the uncertainty in potential uncertainty in future years from a strategy perspective, what we can do is to maintain a robot them relatively defensive approach and what I mean by that is exactly what we commented in the prepared remarks, which is no longer blindly pursuing top line growth and.
But to switch to a suite of sustainability and path to profitability and as you have seen the gross margin in the third quarter has already improved quite a lot from three 6% to 6.3%.
So we believe that by abiding by that relatively conservative and vote by the strategy, we will be able to navigate through the potential uncertainties in the years to come add to your question of our budgeting. We're currently going through the process of making a comprehensive budgeting.
Currently going through the first round up review and and compiling of numbers are we expected to have a more clarity towards the end of December or the beginning of January . So Unfortunately, we don't have much more data to share at this stage. Thank you.
Thank you.
Your next question comes from Zagging thing, let's see I think a.
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Yeah No question.
So my first question is regarding our non-GAAP each at the margin.
Which dropped slightly quarter on quarter in Q3, I'm, sorry, just one year or two we expect a delay in terms of the timing for non-GAAP EBITDA margin breakeven and secondly, what is your Capex plans for the next two to three years and are there any foreseeable plan to further extend the useful lives of the servers.
Some of the overseas peers ex extended that from four to six years. Thank you.
Thank you. This is Henry how did you take on those three questions.
Our financial related Madhouse.
The first question is regarding the EBITDA breakeven.
We do acknowledge that.
But the the EBITDA on a sequential basis, we actually job I think of it.
Marginally.
We noted that there are a few things on the line first of all if you look at the.
But the total expenses on a dollar value actually our sales marketing and R&D expenses actually was quite stable.
Stable, so that no major changes all of that.
However, the booking of search and G&A expenses.
Due to for example, the Hong Kong fuel primary lifting projects that we actually need to pay.
Certain fees.
And that actually also eating up the bill as well.
And also given this year, we do have certain cost cutting for example, the optimization of human capital.
The company will need to pay certain compensations for the people or they may choose other career tracks for things like that.
We get a batch of that arrangement in Q3.
So, especially towards the end of Q3, so the savings on the salary has not been reflected on the expenses in Q3.
While we need to pay even more for the compensation for the people that they choose other career tracks. So he got out you'll see actually it's a fluctuation in that.
Increasing also to an expensive items, but I think these are the right thing to do for the company.
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The benefits on the.
Cost of savings on expenses will be gradually released.
In Q3, and I think for sometime starting from Q1 next year.
So that's actually quite clear on the underlying reasons. So we don't worry too much about that but little fluctuation, but the online or the normal and EIS operation expenses in Q3 already kind of decline.
So giving that as you probably know that our priority at this moment.
Moving the gross margin as we mentioned the gross margin has been improving from almost of only 1% last Q3 Q4 last year.
To about six 3% this quarter that actually a meaningful improvement and if you look at our growth prop.
Profit on a dollar value almost double it.
From Q2 to Q3 from about six.
60 million RMB to about one point, a 120 million RMB for this quarter. So.
So we do believe that improving on our gross margin will be up first.
Of the driver of improving EBITDA, and the Eva and break even EBIT tiny so given all that we see.
Think sometime next year, we'll do hoping the EBITA margin, improving a little bit faster pace compared with a gross margin sometime a point of next year.
And on the other side and we do hope that after we complete all the necessary capital market transactions or expenses ratio will be further come down as well.
So that's the first point the second part regarding the Capex plan I think this year, we're running relatively well.
Towards the low end of the capital budget for 2022.
While we print the same level of the of the revenue target I think which is a good sign for the next two to three years I think we may keep a relatively same level at around about a 1 billion RMB each year.
And you May remember, we discussed that are remaining to hit a certain software replacement cycles.
Some time around like 25, 26, but I think so far we're off to a comfortable regarding about 1 billion RMB on our capital expenditures, but given that we do have about 5 billion in cash and right now we have multiple access to the capital not only from the stock market. For example, the long term financing and.
The cheap leasing arrangements et cetera. So we do hope over 90% of the capital expenditures were may find other ways to fund those capital expenditures outlay, rather than passing through our own net cash balance I think that that's going to be a good point on the capital structure and we don't need it.
Too much cash on hand.
The third question regarding the service I think are right. We do notice that the major U S Cloud company.
Dubai DNA policy from four yes, two five years last year and some of them are discussions, they're shifting up to six years, which absolutely reflecting the nature of the technology that they walk because.
Most of the new server starting from this two years for example, some of the expensive ones.
Actually you know that.
The cost with the <unk>.
My point is high but they actually can use for example, two times our price points, but they can utilize three or four times of the lifecycle. So I think that makes sense for the U S peers to extend that.
Given we do adopt a very conservative financial policy, we do not have any plan at this moment to extend our DNA policy, even though we understand extending from four years to five or even six here, we will have a relatively.
Good impact on our gross margin because we have a lower G&A expenses, but at this moment, we do not.
We plan to revise that a policy to we May reserve that if we see other Chinese players have changed our policy is going to be uplift to our gross margin and reduce the DNA expenses.
Okay.
Yeah.
Thank you that's very helpful.
Yeah.
Once again, if you wish to ask a question. Please press Star then one on your telephone and wait till now.
Our next question comes from Joel <unk>. Please.
Please go ahead.
Alright.
What are you going to kind of all of them, let's say good stewardship excuse me module.
No one knows how long and sort of keeping margins.
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So regarding to the margin improvement.
Can you talk about saturation.
Where I come from a public call enterprise caller and Oh it as.
Sustainable into the first quarter and going forward. Thank you.
Hi.
Thank you Joe.
On the GP margin.
You touched upon a few things the improvement the breakdown.
The root causes and the sustainability.
It's a very broad scope actually so I think I think I'll start with the with the with the reasons first.
So that there are a few things we actually.
Stock workhouse, even with Q4 last year, so it's not actually happening only this quarter. There are a few things involved as you may remember first of all yes.
For cutting.
Some losses for certain loss, making clients.
Number two.
We optimize.
The product mix right so tried to make.
The computing.
The storage some of the.
Big data solutions and <unk>.
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More high value added products and our more profitable products.
We invest at the more right. So I think these are the second reason, we started to do that from a Q1 this year.
And the third reason is the improvement and screening of the products. So as total mentioned in our CEO remarks.
We actually starting from this quarter.
Have adopted a very comprehensive approach to analyze the.
Our return on each project and a different ratings internally for different clients et cetera. So we can prioritize and select the right projects that we're working on and some of that has already yielded good results for this quarter.
As well and.
Sure.
And the last reason is actually if you remember last year, we do a kind of learn our experience in the lessons.
We bought a little bit too much of the service and we ordered a bit too much of the bandwidth and cannot be returned.
Eating up on the gross margin last year.
Especially the second half so this year, we have a change our price.
Process to evaluate the procurement process.
To make sure of that.
We do not go over ordered.
And if we can't use them wisely.
So I think these are the kind of four different things that helped the gross margin can improve for this quarter.
So to see the results.
So even though it did something last year, but it's going to be a good time to see the results.
Speaking about the mix.
Seem to both public cloud and the enterprise cloud has contributed to the incremental $60 million of that margin improvement.
Because as you know given the base of the public cloud and enterprise cloud is actually quite balanced, but we cannot lose any of that so it's both important and honest infinity.
The.
The first three reasons as I mentioned.
We will carry a long way so it's going to be you'll see hopefully we can see a better margin in Q4 and some timing.
Over to next year as well.
And search in enterprise cloud projects as you'll know we are booking the revenue only out of completion, but some of the cost of the order book. So hopefully in Q4 at the peak time of enterprise cloud delivery, you will see additional step up on enterprise cloud contribution. So if you if you want to break down the reason for Q4, let's say going forward I think the enterprise cloud.
Relatively more important.
Comparable public cloud in Q4, given the timing of delivery on that thank.
Thank you Joe.
Thank you.
Yeah.
Yeah.
The next question comes from Timothy <unk> with Goldman Sachs. Please go ahead.
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Thank you management for taking my question My question will be about the outlook for phase three as we understand this theory is to transition year in terms of opinions adjustment.
So our impact from the macro environment as well as Covid.
And share some thoughts on how we should cut the.
The demand all the horrible car industry in China and also for our revenue growth when should we see a inflection point in terms of call revenue year on year growth into two main street. Thank you.
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Hi, Jim.
So that's one quarter, you can get by Samsung and LG.
The highest of which you couldn't shop pick up too.
Switching to a cold right now holding a clip.
Sundar.
<unk> syndrome types of pathways it shouldn't.
We still need to achieve.
Okay.
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Yeah.
Yeah.
Okay, just a very quickly responding to your question on the first point is as I commented previously we're currently undergoing the first round of budgeting for the next year and.
And we currently do not have a comprehensive picture, which we will be able to happen towards the end of this year to share more color to the market and to the investors now the second thing is although our that means that I think I can share with you some of my thoughts and what the macro situation and our strategy.
In response it out the first day at.
The given the pandemic situation.
Control measures already in China.
We have been changing the guiding principle that commentary from revenue from the pursuit of revenue growth to profitability, which is also a change that we have been increasingly observing within the sectors.
The second point being the there still remains significant uncertainty to the Colgate control measures.
That will come and also including the uncertainty of what that the country's overall economic plenty. After the two sessions in 'twenty three it's right it's going to be.
So we generally adopted a conservative and defensive approach and this approach including some.
Some of the folding measures are number one we will activate some of the projects and the customers and transactions that has not been profitable for a long time, but the long term and secondly, we have been looking at our customer base and adjust the customer based structure.
Particular in the past with some of the largest customers have been commanding.
A large share of.
Revenue contribution and how the impact to our financial performance.
And they might decrease at that revenue contribution and increased the revenue contribution coming from the waistband shoulder level kind of customers.
And certainly in terms of enterprise cloud services will continue to dig deeper into the strategically selected verticals.
I've done in the past, but also cautiously explore new verticals that are highly hum.
The beneficial for the cloud industry for example, the electric vehicle industry.
Some of the thoughts that I can share with you on how to make high level. Thank you.
Okay.
Yes. Thank you second time as he also at.
At one point as well while we are.
Follow the Mark has on a client demands calculate.
And while we are looking for as you do us well for the next kind of acceleration or the reshaped acceleration of the demand from clients.
We have a capacity.
On the cash reserve.
As well so as you can see that we already deliver a net positive operating cash flow of five.
This quarter and hopefully for next quarter and going forward. We can continue to do that so we remain relatively robust cash balance in a while we're investing carefully on the potential new verticals that will carry a relatively faster growth as total mentioned for example, the new energy <unk>.
Cars and other verticals as well so I think we do not worry too much about the timing because we have enough cash and we can wait for the market to come back and work with the right clients. So I think that's actually one more point I just wanted to say as well. Thank you.
Okay.
Thank you that's very helpful.
There are no further questions at this time I will now hand, the call back to Michelle <unk> for any closing remarks.
Thank you operator, thank you all once again for joining US today. If you have any further questions. Please feel free to contact us and look forward to speaking with you again next quarter Goodbye.
Yeah.
This does conclude our conference for today. Thank you for participating you may now.
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Thank you for standing by and welcome to the Kinks off Cloud Holdings third quarter 2022 earnings Conference call.
All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the Starkey.
The number one on your telephone keypad.
I would like to hand, the conference over connecting close to him IR manager. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today can sell cloud. So called her time you tend to eat your earnings release.
It should be able to hit earlier today and is available on our IR website at IR.
And they'll come as well as on global Newswire services on the call today from can you sell cloud, we how our west chairman and CEO , He's heard household and the sample.
Well, Mr. Joe will review, our business strategies operation and the company highlights followed by Mr Hall.
Discuss the financials and guidance they will be available to answer your question during the Q&A session that follows.
They'll be coming back.
I'll eat my presentation I'll somebody will come in as a reference purposes only in case of any did Scripps fleet management segment in Orange No language, we have wholesale before we begin I'd like to remind you that this conference call contains forward looking statements within the meaning of section 21 E of the Securities Exchange Act of 19, sorry.
People at the money and as you find in the U S Securities Litigation Reform Act of 19 five its forward looking statements are based upon management's current expectations and current market and operating conditions and relate to you instead.
Unknown risks uncertainties and other factors all of which are difficult to predict and many of them reach out beyond the company's control, which may cause the company's actual results performance achievements to differ materially from dosing in the forward looking statements further information regarding these and other risks uncertainties or factors.
Included in the Companys filings with the U S. S E T. The company does not undertake any obligation to update any forward looking statement as a result of new information future events or otherwise except as required under applicable law. Finally, please note that unless otherwise stated all financial figures mentioned during this.
Conference call.
It's now my pleasure to introduce our less Sharma in a deal you towards those how please go ahead. Thank you.
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<unk>.
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I would answer that.
Hello, everyone.
Thank you all for joining <unk> third quarter of 2022 earnings call.
Since taking on the CEO role in August I have been leading the company through a systematic review of our strategy fitness and financials and.
During the quarter, we continued to implement various initiatives in a solid and a down to earth a minute.
First we continued to invest in technology.
Our core businesses and revised our original vision for cloud services.
Second we continued to review and evaluate our customer base and project portfolio.
Strengthened cost control here.
Achieve a better balance between revenue growth and profitability.
At the same time, we continued to strengthen our ecosystem synergy explore high value business opportunities and pursue a path of high quality development.
<unk> two <unk> agenda.
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Yes.
Let's move on to.
Yes.
We achieved solid financial performance in the corner.
Our total revenues were RMB 197 billion in line with our guidance.
Adjusted gross margin improved significantly to six 3% from three 6% in the second quarter.
And our operating cash flow has been positive for two consecutive quarters.
Indicating that our business adjustments and cost control efforts are starting to see initial results.
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In terms of business we.
We adhere to the conviction built.
Building success based on technology.
Continue to focus on building key product capabilities on the Ias and Paas layer.
These efforts were recognized by Frost <unk> Sullivan lead institutes, and it's China data management solutions market reports published in the third quarter. This year.
In which kicks off the cloud data management solutions ranks among the leaders of the market.
For innovation competency and growth performance.
Meanwhile, Idc's latest edition of China's software defined storage tracker 2022 first half ranked our enterprise level storage solution King storage.
<unk> four in China software defined object storage market.
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In terms of ecosystem collaboration.
We stepped up our technological cooperation with King's off the office.
You achieved in house cloud document processing, including authentication encryption and proof reading.
Leveraging our cloud computing capabilities, we help to King soft office strengthen the business logic layer for cloud document processing, and therefore, and thereby further improved their end user experience.
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In terms of different different scenarios, we continue to focus on our core industry verticals.
Replicating our successful lighthouse projects and apply to customers in their respective sectors.
In public services face, we built a modern cloud solution for a municipality.
Bridging our hybrid cloud and district, but he'd cloud storage technology among others.
<unk> and facilitate the management of economic affairs in a coordinated and integrated manner.
In financial services sector, we validated our data governance services capability, particularly in data Lake and amount of data management and various project for a major commercial banks.
We will continue to replicate such success with more clients in the industry.
In the health care sector, we're about to complete the capacity expansion projects for the medical image crowds ingredients, including Sichuan and Chongqing attachment.
I'm going to support and the monetization to address our customers' needs to expand and upgrade their existing projects.
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Overall speaking, we will continue to invest in technology focus on core businesses.
And in House, the foundation, and the structure, which enables sustainable high quality development.
Under the backdrop of the wave of digitalization, we aspire to penetrate deep in vertical was a strategic choice and offer our customers safe robust and efficient cloud computing services.
Yeah.
As I mentioned.
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Sure.
King.
Sure Jeff O'hara.
Hi.
Yeah.
I will now pass the call over to our CFO .
Oh pardon me he's all over our financials for the quarter. Thank you.
Thank you and welcome everyone for joining our call now I will walk you through our financial results for the third quarter 'twenty to 'twenty two.
We have actively taken measures to improve efficiency, demonstrating our strong commitment to pave the path for profitability there.
This quarter, our adjusted gross margin has improved considerably on a continuously from the lowest point of one 2% in the fourth quarter of 2022 to three 6% in the second quarter. This year and a further two of six 3% in the third quarter.
Our operating cash flow has been positive for the past two quarters consecutively.
We have achieved 100.9 million RMB net operating cash flow this quarter.
Our total revenue was 1906 to $8 8 million RMB in Q3 within that revenue with some public cloud services was 1000 349.0 million RMB.
<unk> increased by four 4% compared with Q2.
It represents a 22% decrease compared to the same period in 2021.
The change was primarily due to the company's proactive scaling down our CDN business with its gross billing decreasing by about 28% on a Y O y basis.
Revenue from Enterprise Cloud services was 622.0 met at RMB.
Which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China.
While proactively applying a more selective criteria to a project screening to strive for better profitability and cash flow.
Our cost saving measures are well on track with our plan total cost of revenues decreased by 26% year over year and it remains stable quarter to quarter at $1846 4 million RMB.
Do you see costs decrease significantly by 23, 6% year over year for $1410 9 million RMB, two $1087 3 million RMB this quarter.
Depreciation and amortization cost increased by 26, 9% from 200 million RMB in the same period last year to $253 7 million RMB.
While remained stable compared to last quarter and is in line with our revenue mix adjustments as we have moderated the procurement process.
A public cloud.
So those are in development on the services cost increase 160 million RMB, two $443 1 million this quarter.
The increase was mainly due to the consolidation of Camelot since September last year.
Fulfillment costs and other costs was $31 9 million RMB and $39 3 million of R&D This quarter.
Our adjusted gross profit of this quarter was $124 7 million RMB, representing adjusted gross margin of six 3%.
The significant gross margin improvement was mainly due to the effect of cost control measures and our strategic adjustments of our revenue mix.
In terms of expenses, excluding share based compensation total adjusted operating expenses was 570 377 million RMB.
Well it seems that adjusted R&D expenses was 231.6 million inquiries from 198 million RMB, if a last quarter as we remain focused on our technology development adjusted selling and marketing expenses was $125 5 million RMB.
121 day or the last quarter.
Adjusted G&A expenses increased slightly from 196.0 million RMB last quarter to $219 9 million RMB, which is partially due to the onetime off extended all the Hong Kong listing product.
Net loss margin was 47% this quarter.
And adjusted net loss margin was 24, 8% that Jeff.
It was mainly due to the foreign exchange loss of $218 9 billion RMB.
That's like it isn't a proliferation of U S. Dollar RMB exchange rates, which is totally a noncash item the impact on the P&L items.
As of September 30th plenty of money to our cash and cash equivalents and short term investments.
Amounted to $5 3 billion RMB, providing us with significant sufficient liquidity if operators.
That kind of expenditure for this quarter. It was $253 3 million RMB, which primarily consists of payments plus of us, which we ordered previously.
That equates that Capex was in line with our proactively scaling dollars video business.
We expect to keep our total capex within 1.5 billion RMB for the full year of quantifying it too.
In terms of share repurchase program regarding of our 100 million in U S. Dollar a share repurchase program, where they have fallen off here that is approved by the board and announced in March This year, we're having beauty executing.
Since the release of our Q2 earnings.
Up to November 18th we bought a total of 10 point.
Four 1 million.
S chest for roughly about 23.92 million U S dollar.
Going forward supported by our ample cash reserve.
About $5 3 billion RMB, we expect will continue to execute from time to time, but the way to make their purchase is fully demonstrate our board and the management of strong commitment and.
The full confidence in our long term business prospects of the company, that's what thrive to reward our shareholders for their support and we believe our share price will eventually reflect copper alley.
Finally, we submitted the application for Hong Kong you primary listing on July 27, two.
Always the lifting at a particular timing is subject to regulatory approval.
Looking ahead, although we are still implementing our strategy initiatives, including repositioning.
Repositioning and cost control efforts are ongoing basis.
Okay definitely.
Already at yield positive preliminary results actually reflected in a clear improvement.
Profit margin in Q3.
We expect our total revenue to be between 2 billion RMB, two 2 billion for the fourth quarter plenty of other two representing a quarter over quarter increases of one 6% to 11 points out on defense.
Why are these forecast and comments above are based on our current and the preliminary views of the market and operational environment, which are subject to change we firmly believe that a given at time.
The effects of our ongoing strategic initiatives will continue to amplify and it reflects our financial in a mid to long term. Thank you.
Yeah.
Thank you this concludes.
The prepared remarks sounds probably all attention and we are now happy to take another question. Please.
In both Chinese memory.
Operator. Please go ahead. Thank you.
Okay.
Thank you if you wish to ask a question. Please press Star then one on your telephone and wait for your name to be announced.
If you wish to cancel your request. Please press Star then two if you're on a speakerphone. Please pick up your handset asking your question.
Your first question today comes from Thomas Kim with Jefferies. Please go ahead.
But as I said, one is home to show that to you and we wouldn't see who else is taking each of them.
Trading things I hope one day.
Oh just go for it.
<unk> told you the project issue Ho, who you have some other colleagues Michael Hodge.
So that's the new guidance.
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Yes.
So it didn't make a comment.
Oh, okay.
Hi, Thanks management for taking my questions. My first question is about the recent outbreak cough.
The COVID-19 uncertainties of the macro environment and how should we think about the leads for them as well as Chinese <unk> outlook, Let me a bunch of thing what was that and number two is about Q4 revenue guidance.
Richmond comments about the trend.
And enterprise comp during the quarter. Thank you.
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And this other woman that's what it is.
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She has.
I'd like to comment on so instead.
Instead of a question regarding the Q4, so actually you mentioned.
We do see a first point that we do see a relatively are.
Expected recovery curve on the top line.
Starting from last quarter and a carry from this quarter and Oh Q4 sequentially.
So that total revenue will be improving.
Improving trend in Q4 and in terms of the mix given we have.
Almost complete the initiatives on our CDN business adjustments on the priorities in terms of investments and the client mix. So.
So I think that provides us with a relatively stable base to project the public call. The revenue in Q4, so because of that I think in Q4, our public cloud.
That's a total we will see a sequential margin improvement on the topline, but the profitability on a line off the public cloud, we're continuing to see a positive contribution to the company's total gross margin in Q4 and on NFS thought that as we mentioned I think if you really looking back from Q1 Q2 and the best.
And as those I imagine part of the Q2 due to the Covid measures.
In Beijing City, that's preventing us from some of the project bidding and deployments and execution in Q2 was worth around about April and May and somehow an impartial July or June or July .
We do actually tried out past Q3, this time too.
Salaries that they put in execution.
So hopefully.
Some of the flagship products, including a few important projects that we discussed and disclosed earlier for example, some of the provision level, how can I call hopefully, we can be deployed and fulfill the execution in Q4 and that will carry with it a revenue bookings in Q4 so.
Is that I think our enterprise talk you may see a relatively a little step up of the revenue enterprise cloud in Q4 as part of the thought around the contribution. So overall my feeling right now I've seen a sequential improvement on both topline and gross margin and Worldview two important parties for management team.
While we will need to continue to make sure that all cost control measures on expenses light will carryforward hopefully it will be have some benefits in Q4 and Q1, starting from next year as well. So it will take some time, but I think some of the initiatives we already internet in place, we just need to have the time clock and.
And to see the benefits going forward. Thanks.
Yeah.
Thank you.
Translation of walking with adult responded to the first question. So the Covid situation has been going on for years and honestly speaking it has been impacting the overall success.
Overall society significantly across all verticals, including us.
And like you rightly pointed out we are also observing and trying to see whether or not that might be as you might be aware.
Even in the days and weeks that situation in Beijing is becoming more severe to abide by government.
Only 12% of the workforce currently working in the office.
And as you know there has been one that situation like that is back in April and May.
Really difficult to predict and also common situation and what we can do it to abide by the rules promulgated by the government.
However, I think from a strategy perspective in light of the uncertainty and potential uncertainty in future years from a strategy perspective, what we can do is to maintain a robot that relatively defensive approach and what I mean by that is exactly what we commented in the prepared remarks, which is no longer blindly pursuing.
Top line growth and about to switch to a suite of sustainability and our path to profitability and as you have seen the gross margin in the third quarter has already improved.
Quite a lot from three 6% to 6.3%.
So we believe that down by abiding by that relatively conservative and wrote off the strategy will be able to navigate through the potential uncertainties in the years to come add to your question of our budgeting. We're currently going through the process of making a comprehensive budgeting currently going through.
For the first round up review and and compiling of numbers are we expected to have a more clarity towards the end of December .
Beginning of January .
So unfortunately, we don't have a much more data to share at this at this stage. Thank you.
Thank you.
Your next question comes from Todd and saying, let's see yeah.
Please go ahead.
Telephone hearing all kinds of sensors.
I don't know.
He said my Orange, even though.
EBITDA margin.
I am and I'll send you to a G E.
Yeah.
I know you don't have one country.
Archie I'm trying to finish it.
Okay.
Thank you Adam and Kishore, you a man Oh man I don't know.
And then your Capex.
And then just don't come out either.
Sean.
Okay all right.
Well sure.
She doesn't yet.
No.
Sure.
Which you can see here.
No question.
So my first question is regarding our non-GAAP each other margin.
Which dropped slightly quarter on quarter in Q3.
So I just wonder to what extent jokingly in terms of the timing for now.
Can breakeven.
And secondly, what is your Capex plan for the next two to three years.
Any foreseeable plan to further extend the useful lives of the servers.
Okay overseas peers actually extended that sounds odd years. Thank you.
Thank you Hi. This is Henry are happy to take all of those three questions.
Financial related matters.
The first question is regarding the EBITDA breakeven.
Yeah, we do acknowledge that.
But the.
The EBITDA on a sequential basis, we actually dropped a little bit.
Marginally.
We noted that there are a few things on the line first of all.
If you look at the.
But the total expenses on a dollar value actually our sales marketing and R&D expenses actually are quite stable.
Stable, so that no major changes all of that.
However, the booking of search and G&A expenses.
For example, the Hong Kong to you'll probably lifting project that we actually need to pay.
Certain fees.
And that actually also eating up the beeler <unk> well and also given this year would do have search and Oh cutting for example, the optimization of the capital of the company, we need to pay certain compensations for the people they may choose other career tracks.
Like that.
We did a batch of that arrangement in Q3, so, especially towards the end of Q3. So the savings on the salary has not been reflected on the expenses in Q3.
We need to pay even more for the compensation for the people that they choose other career tracks so in and out.
You'll see actually at the fluctuation and even increasing certain expenses items, but I think these are the right thing to do for the company.
And.
On the.
Cost of savings on expenses will be gradually released.
Q3, and I think for some time starting from Q1 next year.
So that's actually quite clear on the underlying reasons. So we don't worry too much about that but it'll all saturation, but the online or the normal nice operation expense I think you will see already kind of decline.
So giving that as you probably know that our priority at this moment, it's improving gross margin as we mentioned.
When a market has been improving from almost of only 1% last Q3 Q4 last year or.
To about six 3% this quarter that actually a meaningful improvement and if you look at our gross.
Profit on a dollar value almost doubling.
From Q2 to Q3 from about six a six minute R&D to about one point, a 120 million RMB for this quarter.
We do believe that improving on our gross margin will be our first level of the driver of improving EBITDA and that you know.
And break even though EBITDA tiny so forgive me on that.
I think sometime next year, we'll do hoping that you'd be the marketing kind of improving a little bit faster pace compared with the fourth module sometime appoint up next year.
And on the other side and we do hope that after we complete all the necessary capital market transactions or expense ratio will come down as well.
So that's the first point the second point of cutting the Capex plan I think this year was on me that you'll be well.
Towards the low end of the capital budget for 2022.
While we print the same level of the of the revenue target I think it is a good sign for the next two to three years I think we may keep relatively same level at around about a 1 billion each year and you may remember, we just caught that Romania to hit a certain software replacement cycles.
Sometime around like 25, 26, but I think so far we're off to a comfortable regarding about 1 billion RMB on our capital expenditures, but given that we do have all five band cash and right now we have more people access to the capital not only from the stock market for example, long term financing and leasing.
Our regimen et cetera, So we do hope over 90% of the capital expenditures were may find other ways to fund those couple of Petrus outlay, rather than passing to our own net cash balance I think that that's going to be a quick point on a couple of capital structure, and we don't need to burn too much cash on hand.
And the third question regarding the service I think our rights are with you notice that the major U S Cloud company.
The bias at D&A policy from four yes, two five years last year and some of them are discussing the shifting up to six years, which absolutely reflecting the nature of the technology that they walk because most of the new server starting from this two years for example, some of the expenses.
Oh absolutely.
The price point is high but they actually can use that whole two times off the price points that they can do it like three or four times of the lifecycle. So I think that makes sense for the U S. P S too.
Extend out but.
Given we do adopt a very conservative financial policy, we do not have any plan at this moment to extend our DNA policy, even though we understand extending from four years to five six year, we will have a relatively.
Good impact on the gross margin because were able to lower the inexpensive but at this moment, we do not.
Plan to revise that.
Our policy to we May reserve that if we see other Chinese players or change the policy is going to be uplift to our gross margin and reduced SG&A expenses.
Thank you.
Thank you that's very helpful.
Yeah.
Once again, if you wish to ask a question. Please press Star then one on your telephone and wait.
The next question comes from Phil <unk> with them. Please go ahead.
Oh go ahead go ahead Tom.
Because like you said kind of elements like what's your thoughts you go. So you can imagine we've got the golf course.
Thanks, John .
It's just a quality issue.
Sure.
I don't think it's just something I thought you.
Hum.
She calls me as much as I was telling me he gets to go out and I'm going to I'm sorry, Yeah. That's.
How about Oh chest about myself.
So regarding to the margin improvement that I didn't talk about any of those situations.
So where I come from a public call into Pascal and.
As such thing going into the first quarter and going forward. Thank you.
Hi.
Thank you Joe.
On the TV marketing.
Touch upon a few things the improvement.
Breakdown.
Root causes and the sustainability.
It's a very broad.
Actually so I I think I think I'll start with the with the with the reasons.
First.
There are a few things we actually stopped.
Stopped work on them since Q4 last year. So it's not actually happened only this quarter are there are a few things involved.
First of all yes, we can.
A cutting.
Some losses for certain loss, making clients.
Number two are we.
Optimized.
The product mix right so tried to make.
The computing.
The storage some of the.
Big data solutions, and our search and.
High value added products and a more profitable products, we must at the more right. So I think these are.
The second reason, we started to do that from a Q1 this year.
And the third reason is the improvement and the screening of the products. So as a total mentioned in our CEO remarks.
We actually starting from this quarter.
Has adopted a very comprehensive approach to analyze the return of each project.
And ratings internally for different clients et cetera, So we can prioritize and select the right projects, while walking on and some of that has already a year of good results for this quarter.
As well and the third.
And the last season is actually if you remember last year, we do a kind of learn all experience and the lessons.
We bought into it too much of the service and we ordered a bit too much of the bandwidth and the Columbia turned so theyre eating up all of the growth.
During last year.
Actually the second half so this year, we haven't changed our.
Process should evaluate the procurement process to make sure that we do not go over ordered and we can use them wisely.
So I think these are the kind of four different things that helped our gross margin can improve for this quarter.
To see the adults.
So even though was there something last year, but it's going to be a good time to see the results.
Speaking about the mix.
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Speaker 2: Okay, just very quickly responding to your question. The first point is, as I commented previously, we're currently undergoing the first round of budgeting for the next year, and we currently do not have a comprehensive picture, which we will be able to have towards the end of this year to share more color.
Speaker 2: to the market and to the investors. Now the second thing is, although that being said, I think I can share with you some of my thoughts towards the May crawl situation and our strategy in response to that. The first is, given the pandemic situation and the control measures within China, we have been changing the guiding principle, as I commented, from the pandemic situation.
Speaker 2: the uncertainties of what the country's overall economic planning after the two sessions in 2023 is going to be. So we generally adopt a conservative and defensive approach. And this approach, including some of the following measures. Number one, we will exit some of the projects and the customers and transactions that have not been profitable for a long time.
Speaker 2: for the long term. And secondly, we'll be looking at our customer base and adjust the customer base structure. In particular, in the past, some of the largest customers have been commanding a large share of revenue contribution and have impacted to our financial performance. And we might decrease that revenue contribution and increase the revenue contribution coming from the waist and shoulder.
Speaker 2: That's some of the thoughts that I can share with you at a macro level. Thank you.
Speaker 2: Thank you Timothy. Also at one point as well, while we are following the market and the client demand carefully and while we are looking for as you do as well for the next kind of acceleration or the v-shaped acceleration of the demand from client.
Speaker 3: we have a capacity on the cash reserve as well. So as you can see that we already deliver a net.
Speaker 3: positive on operating cash flow side this quarter and hopefully for next quarter and going forward we can continue to do that. So we remain relatively robust on the cash balance and while we're investing carefully on the potential new verticals that will carry relatively fast growth as those will mention for example the new energy cars and other verticals as well.
Speaker 3: So I think we do not worry too much about the timing because we have enough cash and we can wait for the market to come back and work with the right clients. So I think that's actually one more point I just want to say as well. Thank you.
Speaker 4: Thank you.
Speaker 5: Thank you, that's very helpful.
Speaker 6: There are no further questions at this time. I will now hand the call back to Ms. Chan for any closing remarks.
Speaker 7: Thank you all once again for joining us today. If you have any further questions, please feel free to contact us. We look forward to speaking with you again next quarter. Have a nice day. Goodbye.
Speaker 6: This does conclude our conference for today. Thank you for participating....