Q4 2022 Kingsoft Cloud Holdings Ltd Earnings Call
Speaker 1: Good day and thank you for standing by. Welcome to the Kingsoft Clouds fourth quarter and full year 2022 earnings conference call. At this time all participants are in a listen only mode. After the speakers presentation there will be a question and answer session.
Speaker 1: To ask a question during the session, you'll need to press star, one and one on your telephone and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star, one and one again.
Speaker 1: Please be advised today's conference is being recorded.
Speaker 1: I'd now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager. Please go ahead.
Speaker 2: Thank you all for your hard work. Hello everyone and thank you for joining us today. From Southquiles, both Quotor and the Fouille year 2022 onion 3D, it's tribute to earlier today and it is a little bit more on our IRL and IR about Kia Zwei, you and calm as well as on the global news where so is it. Thank you all for your hard work.
Speaker 2: On the call today from King Soklau, we held our West Tremont and the CEO , Newstird Household, and as therefore, Mr. Marie-Hole. Newstird Household will reveal our business, strategy, operations, and company highlights. Follow by Mr. Hole, who will discuss the financials and the guidance.
Speaker 2: There will be a well-built to answer our questions during the Q&A session that follows. There will be contact new integration, our integration and our FOIL coming in and the reference progress only. In case of why I need this quick statement, management statement in the original language will prevail. Before we begin, I would like to remind you that this conference call contains forward looking statements.
Speaker 2: Within the meeting of Section 21, the Security Exchange Act of 1934 as amended and as defined in the US proud security litigation reform act of 1995. This forward looking statements of its upon management's current expectations and current market and operating conditions.
Speaker 2: and relate to joint study while no known risk, uncertainties, and other factors.
Speaker 2: of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forwarded statements.
Speaker 2: Other information regarding this and other risks, as certain needs, or factors, including in the common spreadings with the US and DC. The company does not undertake any obligation to update any forwarding treatment as a result of new information, future events, or otherwise, except as required and are actually below.
Speaker 2: Finally, we know that unless otherwise they call financial figures mentioned during this conference call and nominating our army, it's now my pleasure to introduce our One
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Speaker 6: Hello everyone and thank you all for joining King's sub-cloud full course and this will be your 2022 learning call.
Speaker 6: 2022 was an extraordinary year in many ways and we're pleased to have successfully navigated the various challenges we saved in the complex and dynamic environment.
Speaker 6: As I took on the CEO role, we have remained committed to our strategy for high quality sustainable growth, while continuing to building success based on technology.
Speaker 6: We have also implemented cost reduction and efficient initiative, which have resulted in steady improvements to our profitability.
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Speaker 6: I am pleased to highlight some of our notable results with you.
Speaker 6: In Q4, we saw a remarkable increase in our adjusted growth profit, reaching RMB 169 million.
Speaker 6: Representing a four-fold increase year over year.
Speaker 6: A justly gross margin increased to 7.9%, rising by a significant 6.7% from the center is locked here.
Speaker 6: Furthermore, our net operating cash inflow amounted to R&D 370 million, marking the third consecutive quarter of positive net operating cash flow in Q2 last year.
Speaker 6: We also recorded a quarterly free cash inflow for the first time.
Speaker 6: which is an important milestone for us. These impressive results demonstrated our strong business resilience and provided its solid foundation for us to stabilize, restart and emerge even stronger.
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Speaker 6: Now, I would like to provide some updates on our progress in three areas, namely public cloud, MFI cloud, and research and development.
Speaker 6: I'll start with public hospitalizations.
Speaker 6: In Q4, revenues from this business remain stable at RMB 1.35 billion.
Speaker 6: representing a slight increase from the third quarter. We find tuned our positioning and incentive differentiated strategies of CHIA account partners and mid-sized partners.
Speaker 6: With key account partners, we strive to maintain a balance between revenue and profitability. While delivering the ultimate service experience, establish its superior word of mouth reputation for a full-text solution.
Speaker 6: We leverage this strong reputation and the scalable core capabilities we have developed. It serves key account customers to expand our cost business opportunities with mid-sized customers.
Speaker 6: This approach allowed us to gradually reduce our dependence on key account customers while driving revenue growth and pocket enhancements in our public class because business.
Speaker 6: During the past half year, we carried out a systematic review of more than 200 companies from about 10 industries and find more than 30 new meets by companies with high growth potential.
Speaker 6: Thanks to these strategies, the revenue contribution from our top three public partners has been not a decline, while the revenue contribution from mid-sized partners continues to increase going through a realised revenue extension. Many financial sponsors are kilograms of bread and other working days and weeks ahead of
Speaker 6: As a result, we have improved our partner mix while maintaining stable rappnant growth in the public public business.
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Speaker 6: Moving on to enterprise cloud services. Revenue increased by 26.4% total over 40 to RMB 790 million in Q4.
Speaker 6: We remain step-step in executing our high quality and sustainable growth strategy. And further clarified and institutionalized our project management best practices, we will fundamentally enhance our enterprise-powered business quality.
Speaker 6: This effort centered on 4 key initiatives.
Speaker 6: First, we focus on accumulating and enriching our core offering of proprietary products and solutions capabilities.
Speaker 6: Second, we continue to enhance the revenue share of a proprietary product and solution of cross-out projects.
Speaker 6: Third, with targeted industries and customers with high potential life-per-m value catering to their evolving needs and grow with them.
Speaker 6: Lastly, we further enhance our project execution to improve customer experience and reduce costs.
Speaker 6: These initiatives not only generated a relatively high estimated margin or enterprise cloud project in the current financial period, but we also drive sustainable margin expansion in the long run.
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Speaker 6: Taking the public services sector, for example, we focus on the public services cloud model and developed a benchmark system consisting of cloud products, services and operations.
Speaker 6: In Q4, we completed a smart CD upgrade project for the Public Services and Big Data Management Bureau of SharePoint Municipality, Google progress.
Speaker 6: In which we deployed our corporate proprietary enterprise cloud solution Galaxy cloud.
Speaker 6: We're also carrying out a number of other projects, including the Beijing Water Authority public services cloud and the Chubi public cloud. Through the sharpening our competitive advantages and business scale in public services.
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Speaker 6: We continue to enhance our five major models, namely the original healthcare cloud model, medical image cloud model, integrated healthcare organization model, original integrated model, and smart hospital model.
Speaker 6: During the quarter, we completed the second phase capacity expansion project for the healthcare cloud in the Sichuan-Tianfue new area and the medical image cloud of the Chongqing Health Commission.
Speaker 6: This showcased our ability to provide continuous ongoing support for enterprise cloud customers using our marketing products, solutions and services. In a financial service sector, we further deepen cooperation with state-owned banks and major commercial banks by focusing on providing financial big data support and operational keeping.
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Speaker 6: In terms of technology, we continue to advance our core strategy of building success based on technology.
Speaker 6: In third quarter 2022, we developed the Beijing-Wuhan dual research center strategy and we executed well in the fourth quarter.
Speaker 6: We aim to sustainably enhance our R&D capabilities while maintaining a disciplined R&D budget.
Speaker 6: We doubled the number of R&D staff in the Wuhan Research Center within just three months of its launch in December 2022. And we expect to grow the hat count there to more than 1000 over the next three years.
Speaker 6: injecting momentum into our R&D initiatives, and helping cement our industry leadership.
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Speaker 6: We strive to deliver the ultimate user experience across our core products and technology categories, including cloud hosts, cloud native, enterprise cloud infrastructure.
Speaker 6: enterprise storage, and big data cloud platforms. And we benchmark ourselves against the top tier players in the cloud industry.
Speaker 6: For example, we recently launched our Summit's generation Cloudhost as well as new versions of our container services and serverless Cloud functions, delivering significant performance improvements.
Speaker 6: We added 79 key operating features, including various IaaS, PaaS solutions, and operation management functions to the upgraded version of Galaxy Cloud, significantly enhancing the competitiveness of our flagship enterprise cloud product.
Speaker 6: We also upgraded the data collection, data integration, and hybrid architecture deployment capabilities of our Big Data Cloud Platform and engine solutions.
Speaker 6: In addition, we significantly enhanced our product compatibility with various operating systems and data-weighted m-ships.
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Speaker 6: Since the debut of GPG 3.5, we have been closely following its development and actively exploring relevant business opportunities.
Speaker 6: First, GPT models require massive computing power and vast growth of data, making cloud computing a natural fit for this technology and essential enabler for use cases, including both training AI models and applying them to various scenarios.
Speaker 6: Through years of collaboration with leading AI companies, we have developed a market-tested solution that can be rapidly deployed on demand.
Speaker 6: Second, major internet cloud service providers generally are developing their own GPT businesses, whereas we remain a neutral player. This means we can serve a wider range of partners on the natural advantage that the market is beginning to recognize.
Speaker 6: Third, the application of GPT models, especially in traditional industries with relatively underdeveloped IT capabilities, will require extensive preparation work unique to each company, including consulting and planning, process re-engineering, customized development, installation and deployment, and ongoing maintenance.
Speaker 6: Our strong and wide-ranging IT support and deployment capabilities will enable us to capitalize on such huge opportunities in this market.
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Speaker 6: Overall, looking back at the challenges we face in 2022, we are gratified that our proactive strategic adjustments enable us to achieve positive initial results.
Speaker 6: and strengthening our conviction that we are on the right track. Looking ahead, in the face of new challenges and opportunities, we will pursue high quality and sustainable development no matter how the environment changes and roll up our sleeves to create sustainable value for our customers, shareholders, employees, and the society. I will now pass the call over to our CFO Henry to go over our financials for the quarter and the full year 2022. Thank you.
Speaker 6: Thank you, Ozo-Zong, and welcome everyone to join the call. Before diving into the financial details, I will walk you through a quick summary for the fourth quarter of 2022.
Speaker 6: First of all, with our strong commitment to improve profitability, we have taken comprehensive measures from all perspectives.
Speaker 6: including proactive adjustments to our CDS services.
Speaker 4: strategic restructuring of carbon mix.
Speaker 6: Food and enterprise cloud selection and strict control for fixed assets and operational expenses.
Speaker 4: Since the third quarter of 2022, our adjusted growth margin has been increased for five consecutive quarters.
Speaker 6: Increasing from 1.2% in the fourth quarter in 2022 to 6.3.6% in the second quarter last year.
Speaker 6: 6.3% is our quarter and further to 7.9% is quarter.
Speaker 4: Adjusted growth profit increased by 408% year-over-year to 168.5 minute RMB reported.
Speaker 6: We have disposed certain underutilized servers based on the current customer demands and record loss on disposal of properties and implements.
Speaker 4: However, we believe this is helpful for long-term developments and growth margin expansion.
Speaker 6: Non-gap EVDAR margin profit was negative 245.1 million RMB impacted by non-recurring Hong Kong IPO listing expenses of 94.9 million RMB.
Speaker 6: and a log of disposal of properties and equipment of 8028.8 milliRMB.
Speaker 6: non-GAAP EBITDA margin was negative 11.5%. However, excluding the IPO expenses and the loss of disposal of properties and equipment expenses, our non-GAAP EBITDA margin could have been negative 5.7%.
Speaker 6: On par with NACCIP 10.3% last quarter and NACCIP 4.7% in the same period of 2021.
Speaker 6: Second, our operating cash flow has been positive for the past three quarters collectively.
Speaker 4: And we have achieved 370.4 million RMB net operating hash inflow this quarter.
Speaker 4: Thanks to our prudent control over capital expenditures, pre-catch flow has measured the net cash generated from operating activities minus capital expenditures with 259.6 million RMB.
Speaker 6: marking the first quarter of the positive free cash flow, demonstrating our strong commitment and a successful execution of our cash management.
Speaker 6: Third, our cash and cash equivalents and short-term investments
Speaker 6: was 4.7 billion R.D. by December and 2022.
Speaker 6: Considering the improvement of our profitability, our scaling down of capital expenditures and cash inflow of operating cash flow, our cash reserve is well positioned and sufficient to support us walking through the challenge here and provide flexibility to further business development.
Speaker 6: Lastly, our total revenue was
Speaker 6: 2,131 million RMB this quarter. Groundew from public health services was 1.34 billion RMB. Remain stable compared with last quarter.
Speaker 4: Revenue from Annemons Cloud was 785.9 million RMB, increased by 26.4% of all orders.
Speaker 6: With a more balanced and healthy business mix, we believe we are well positioned to start a new journey for our sustainable long-term development, being able to allocate more resources to expand our mid- to long-tail customer basis and high-quality non-internet copies. Now I will go through our financial in detail.
Speaker 6: Our total cost of revenue decreased by 25.2% year-over-year to 1,969.1 million RMB. IDC costs decreased significantly by 20% year-over-year from 1,321.9 million RMB to 1,057.6 million RMB this quarter.
Speaker 4: Depreciation and evaluation costs increased by 6.4% from 227.2 million RMB in the same year last year to 241.7 million RMB this quarter. So, return development at services cost decreased from 497.2 million RMB.
Speaker 4: to 465.8 million RMB of storage. The decrease was mainly due to synergies from overlapping headcount reduction within Canvas and Intel Cloud on the COVID-19 impact and alloscepthology initiatives on the demand side in last December .
Speaker 4: Fulfillment costs and other costs were 155.6 milliRMB.
Speaker 4: and 48.3 minute RMP this quarter.
Speaker 4: The adjusted growth profit of this quarter increased by 408% to 168.5 million RMB, representing adjusted growth margin of 7.9%.
Speaker 4: The significant growth margin improvement was mainly due to the impact of cost control measures and the strategic adjustments of our revenue mix.
Speaker 4: The significant growth margin improvement was mainly due to the impact of cost control measures and the strategic adjustments of our revenue mix. In terms of expenses... yesterday in April ...
Speaker 4: excluding share-based compensation. Our total address operational expenses was 729.7 million RMB. However, still impacted by Hong Kong IT Olic-SING expenses of 94.4 million RMB.
Speaker 4: This total of fixed assets of 0.8-0.8 mRMB within that, but just the R&D expenses was 239.4 mRMB.
Speaker 4: Remain the relatively stable compared with 231.6 million RMB from last quarter.
Speaker 4: Adjusted selling and marketing expenses was 118.4 million RMB.
Speaker 4: compared with 125.5-minute RMB last quarter. Excluding the listing expenses and disposal of fixed assets of 123.7-minute RMB, adjusted GNA expenses increased slightly from 219.9-minute RMB last quarter.
Speaker 4: 248.2 minute RMB.
Speaker 4: We have taken various measures to cut down expenses.
Speaker 4: including but not limited to the following aspects. First of all,
Speaker 4: We review weekly the variable operational expenses, especially in marketing and administrative expenses.
Speaker 4: Second, we streamline headcount management within the firm and reveal our cost strategy and adjust employee fees and other structural personnel.
Speaker 4: Third, along with the scaling down of certain customer CVS services, we accordingly improve the efficiency of underlying resources.
Speaker 4: We also did poll 3rd and 6th assets and scaling down bandwidth costs as well. That last margin was an active 24.5%.
Speaker 4: this quarter and adjusting that net loss margin was negative 25.9 percent.
Speaker 4: The adjustment was mainly due to the foreign exchange gain of 132.3 million RMB, caused by a fluctuation of US dollar RMB exchange rates, which is a non-cash impact.
Speaker 4: As of December and 2022, our cash and cash equivalents and short-term investments
Speaker 4: was 4.7 billion RMB, providing us sufficient liquidity for operations.
Speaker 4: During the fourth quarter, we have repaid certain loans within the group and the banks to reduce our interest cost.
Speaker 4: The capital expenditure for this water was 110.8 million RMB, which primarily consists of payments for service.
Speaker 4: In terms of share repurchase, regarding our $100 million share repurchase program within the fall month period as approved by the board of directors announced in March 2022.
Speaker 4: Since the release of our second quarter results up to the year end of 2022, we bought a total of 12.3 minutes ADR shifts.
Speaker 4: for the cost of roughly 29.2 million US dollars. Going forward, we still have authorization from the board of directors and the flexibility to continue execution from time to time as we wait for the main data in the purchase program.
Speaker 4: These efforts fully demonstrate our board and management's strong commitment and confidence in the long-term business development of the company.
Speaker 4: Finally, we have successfully finished the due primary listing on the main board of Hong KongSal500.
Speaker 4: by the way of introduction on December 30, 2022.
Speaker 4: In March 2023, we have been selected and included into the Hong Kong composite index.
Speaker 4: Shanghai Hong Kong Stock Connect and Shenzhen Hong Kong Stock Connect at the same time.
Speaker 4: Primary listing in Hong Kong has helped us broaden our investor base and open up new investment channels. Our teams have been communicating more frequently and broadly with domestic investors.
Speaker 4: And we have seen more active trading patterns since we joined Hong Kong Stockland. Looking ahead, although we are still implementing our strategic initiatives, including business repositioning and cross-cultural efforts on an ongoing basis, we are still implementing
Speaker 4: Such adjustments have already yielded positive preliminary results as reflected in the clear improvements of profit margin into GRANDQ4. We expect our total revenue to be between 1.85 billion RMB and 2.05 billion RMB.
Speaker 4: for the fourth quarter of 2023. While these forecasts and the comments above are based on our current and preliminary views on the market and operational conditions.
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Speaker 4: that, given time, our potential positive impact of our ongoing strategic initiatives will continue to amplify and reflect our financial in the mid to long term. Thank you.
Speaker 1: This concludes our remarks and report of admission. We are now happy to take our questions. Please answer our questions in both Mandarin and English if possible. Operator, please go ahead. Thank you. So to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced.
Speaker 1: and to withdraw your question you can press star one and one again.
Speaker 8: Please stand by while we compile the Q&A roster. You will now take our first question.
while we compile the Q&A roster. Thank you. We'll now take our first question. Please stand by.
This is from the line of Brian Gong from City. Please go ahead. Hello, everyone. Clark, Nicole.
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I will translate myself as management for taking my question. I have two questions. First is regarding the enterprise cloud, regarding the three verticals, how do we see the demand this year? I wanted to the courage for the web, the technology for growing desktop.
Last year, the delivery was impacted by COVID. So, this year, we see faster growth and the household wave balance, the revenue growth, and the margin. The second question is about CHAT-JPT. The total transformation as independent cloud provider.
we have some advantages in China. But in China, for those internet giants who have the capability to develop large language models, they all have their own cloud service. So if the enterprise uses the use.
their large language model will have more intention to use those Internet giant cloud services. Thank you.
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If you have a lot of questions, please raise your hand. We will be happy to answer them. If you have questions, please raise your hand. We will be happy to answer them. We will be happy to answer them. We will be happy to answer them.
So as you rightly pointed out, we're noticing that right now we are going through the opening up phase after the COVID period and the country is also reverting back to the model of business development. And admittedly, last year, there had the COVID situation and relevant restrictions did have changed and it really is a reality changing situation.
impacts to our deployment and delivery of our enterprise cloud business. And some of the planned deployment that was originally planned to be completed in Q4 last year were actually delayed to this year. But if you look at the situation now, although we haven't disclosed...
the particulars and the concrete numbers of the specific three verticals that you mentioned, we do remain highly confident about our operating metrics in enterprise cloud, including revenue, including gross profit, and including operating margin. And we expect to have significant improvements in those metrics.
Secondly, I would like to clarify our pursuit of high quality and sustainable growth does not necessarily mean that we do not pursue growth. For every customer and for every project, what we do is to evaluate whether that customer and that project is centered around the core cause of business and whether that brings about profitability to us.
In another word, if some of the customers and projects, even if we give value to them from a longer time period, and would not bring about profitability to the company, then this is actually not a high quality project and not high quality development.
So the point I would like to mention and I would like to highlight is that in the past we have been overly emphasizing the growth and now what we need to do is to replace that overly emphasis on growth to high quality and sustainable growth which is of strategic value to us.
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is the first point. Let it be said. When you are doing MOI, we'll correct the demands of these loin, with both our own intention and feature. They'll say that if we fail to implement many small elements in this way, if we fail to implement many small elements, I am just referring to our current goal.
How about? Just a brief example of CO. So we have announced, in the sense of Kingsoft, Kingsoft and its affiliated company, that we will not be spending a lot of energy and resources on working on the big language model ourselves.
Because we have very clear medical position, which is we're providing solutions to our 2D customers. And therefore, working on such models is not a significant strategic value to us. However, the platform companies, the platform internet companies, they have the core capability and they have the relevant numbers. And therefore, a more suitable field of such big models.
to be developed, research and developed by such giants. Open AI pose is a good example, which is not a technology giant, however, generated the best in class at such a model. And then the second is that also actually is happening in the prepared remarks.
And then the second proposition I would like to say is that although in the short period of time, we do think that it is unlikely that the big language model, the GPD in China, was developed to a level similar to that of the GPD 4.0 in the United States. However, it does not necessarily mean that smaller models that do not.
do not present real value and applications in the white industries in China. For example, we're already seeing a lot of small models with parameter number amounting to six to ten billion having very vivid and confident applications in various industries.
And for those application scenarios are basically also our potential business opportunities. So to sum up, two of the potential business opportunities that is the current wave activity both as far as one is the venture teams from smaller companies will work on those models and the second is the application of such.
I think first of all if you look at our Q on Q growth, if you remember last quarter, we created about 600 million RMB revenue for the enterprise stock from the street verticals in total. But I probably encourage you to look at it into the perspective because the...
affected by the COVID and the pandemic in December last year.
So if you put that into contact you will see that given that we have a solid relationship with our customers and even we have a lot of constraints from operational perspective, I was still increasing on a quarterly basis. That actually proven our capability in a difficult time of execute, deliver and working on the revenue on enterprise cloud which actually demonstrate our technology and client relationship.
But I'm happy to provide some color. If we see the backlog at this moment at this time, the backlog we have today will fully cover our potential budget for the aircraft cloud in the year of 2023 for this year. And we are still in Q1, so we're hoping we can increase the backlog this year and we do have the capacity to do so.
and the customers, the percentage of the repeating customers in Q4 and Q3 last year has been increasing quite a lot, which means that even though you see about $700 million revenue on a quarterly basis, but the percentage of that number coming from the same customer but on different phases of projects has been increasing quite a lot. That also gives us a base that for next year and this year and next year, we can have the potential incremental revenue.
Thank you.
Thank you. We'll now take our next question.
Please stand by. This is from the line of Timothy Sall from Goldman Sachs. Please go ahead.
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I think you might be thinking about my question. I have two questions. First, could you share your outlook on the public health demand in 2003 and between the big enterprise, big internal companies and more as a means, which kind of companies think of a bigger demand on public health projects here? Secondly, we saw that last year, our company has developed an institution on public health, we will go.
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I'm just quickly trying to play for CEO . So that's really to a good question. Given that I think that public cloud services and products are really just, you know, centered around some of the core components including computing storage and net network. So I do not necessarily think that the men.
company customers with their of course demand coming from our CDN and storage business.
customers, for example, like in the AI industry, that would really demand the computing as their core demand.
So that is the general response I have for the first question. Thank you. I'll take on the second one. So before I go in there, about the 2020 great target, I just want to lay it out with three major reasons for 2022. First of all, for the PPNE with book on the batteries, we did try our efforts to reduce
redundancy and other misallocation of the revenue and the resources. So that's actually the effort has been taken for our two or three quarters since the middle of 2022. And I don't think those are going to be the one time of impact because once you increase the utilization ratio for the assets and resources.
those benefits on the growth margin will be gradually released over time. So that will build first layer of the market expansion for this year. Second of all is given we as a team we together to change the combination of the customer base. So right now as our CEO mentioned our MIT
client base has been increasing sequentially as a total revenue and I would say that the pricing and the profitability of from those buckets of the customer are definitely much better than the third on a single client basis. So that's going to be two benefits reduce the current competition risk, but also improve profit as a whole.
how we pay people, how we change the mix of the incentives, the cash plus the stocks, and a lot of things we are doing in the past year. And I would say that only part of the benefits has been reflected in the Q4 number, because we see a lot of things determined in Q4, and hopefully those change on policy of expenses, including the share-based competition, including cash follows.
so on and so forth will be reflected in Q1 and Q2 going forward in 2023 in the new year. So as a result our operating expenses and operating margin will be better than last year the reason is both margins are lifted and the variable cost is reduced. So while I'm sorry I cannot give you a very clear numerical target of the EDI margin and operating margin.
profits, but I would say two things. First of all, we are hoping to increase our growth margin percentage on the sequential basis quarter on quarter. So hopefully we can see the expansion very stable. Very stable relatively in the next two quarters. Point number one. Point number two is given we control the expenses and available costs, so hopefully we can be...
more visible and can be faster to reach the breakeven profitability of the EBITDA margin for this year. I think these are the two major objectives for us. But if you ask about operational margin and breakeven net margin side, I think we will obviously see the balance of the growth and we also need to be very nimble to make investments.
the boat to get into the point that our image is a breakthrough and in sending a more kind of foreseeable future.
artist Thank you.
Thank you, Madeline. Thank you. We'll now take our next question. Please stand by. And this is from Alan Lee from JP Morgan. Please go ahead. Thank you, Madeline.
In the past few months, we saw we achieved a certain level worth of funds that we definitely have zero Pepsi. Next, come because this banking environment could impact the simplebrook layer thanks to that aeteami layer led by the.? Now, this AI is Big protentional opportunity. What do we????? mogelijk at thisakatality for now? Let's see if we can possibly see how that works.
Let me quickly translate my question. My question is regarding the CapEx. We pre-invest in CapEx in past few years, but due to all kinds of micro-hailings, our overall utilization rate seems not very high.
and it also negatively impact our margins. So looking into this year, given the potentially huge opportunity generated by AI industries, so how should we think about our capex plan in 2023? And we will take a more proactive approach or reactive approach in terms of
Ai related the CapEx in nothingest. Thank you to So. So it will see big. The pace se generend certain, but a scene day. They hergies the above up the way. I take the.
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So, I really think that with the new generation AI technology, namely the GPT directional different from we have had actually ready for EMQ actions in terms of reserving both technology and visual justice.
However, I would summarize our attitude as cautiously optimistic rather than blindly pursuing this potential opportunity because based on our experience with the larger generation of AI industry trajectories, we do think that currently the market is...
tends to be or seems to be overheated and we expect it to actually end up in a more sustainable but slower growth kind of mode. What we will continue to do in this, we will adopt a kind of approach that's run with small steps and with quick iterations. I also want to point out that
In terms of the hardware, there's also the more... more thing we have, which essentially means that the development and the development and upgrade of such hardware will actually go into effect. So we do not think it makes a lot of sense to massively afford the last generation.
Therefore, on mentioned point, as a company, we do have capacity and experience to managing and expanding 1 billion RMB.
whatever good purpose and we do have a very experienced human team and we do know the supply chain and also we have a good partnership with our ecosystem partner including our shareholders in the group as well as Xiaomi to managing the complexity of buying those big chunk of assets at the reasonable price given the past experience. That's the first point. The second point is I think the question is coming from more about investments.
not only about capex. If you look at investment, I'm putting it into two buckets. The team, the technology R&D team, which our senior people as a team managing today, we have quite a lot of very experienced engineers and programmers. And those expenses is not a capex. And expenses are both on a P&L income.
And as you mentioned, we spent over one billion R&D every year, all those expenses and R&D investment. So I think we do not hesitate to invest into R&D products. So I think that's very clear. However, if you are looking to the cash flow item on a couple expenditures, which I want to say, also, if you have a different model, because as our CEO , so you mentioned, we see the great potential opportunities will coming from both.
So I think we are not going to waste to see those good business opportunities, but we will balance out. We need to spend money ourselves, clean our own IDC or we build a computing environment and help our enterprise cloud clients to use the AI capability and using their money to create a revenue block. I think those are the two choices we both have on hand and it's not costuring ourselves.
office to build for the office software, Xiaomi for the EV cars, we will go 100% to make investment in the spare capex. However, for the company and the customers which do not fall into the criteria that I will mention.
customers cloud native technology will probably will be step back a little bit. So I think this question about who is that money for is also very important. And hopefully it's helpful for you. Thank you. Yeah sure. Thanks Manuel for the answer. Yeah, it's very helpful. Thank you.
Thank you. And at this point, I would now hand back to Nicole Shan for closing remarks. Thank you, operator. Thanks everyone. This concludes our earnings call. Thanks again for joining us today. If you have any further questions, please feel free to contact us. So forward to speaking with you in the next quarter. Have a nice day. Bye bye.
Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.
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Good day and thank you for standing by. Welcome to the KingsoftCloud's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one and one on your telephone.
Thank you, operator. Hello, everyone, and thank you for joining us today. King's South Cloud sports quarter and full year 2022 earnings release was distributed earlier today, and it is available on our IR website at IR.ksu.com, as well as on the global news awareness services. On the call today from King's South Cloud, we have our vice chairman and the CEO , Mr. Tao Dao, and, as therefore, Mr. Corey Ho.
In this article, we will review our business strategy, operations, and company highlights. Followed by Mr. Ho, we will discuss the financials and the guidance. There will be available to answer your questions during the Q&A session that follows. There will be consecutive integration of the integration of oil companies and the reference purpose only. In case of any discrepancies, management statement in the original language will prevail. Before we begin, I would like to remind you that this conference call contains four.
of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statement.
Further information regarding this and other risks, uncertainties, or factors are included in the company's filings with the US SEC. The 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 Act 2.0 law. Finally, please note that, as otherwise stated, all financial figures mentioned during this conference call are denominating RMB.
It's now my pleasure to introduce our Vice Chairman and CEO , Mr. Zou. Please go ahead.
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Hello everyone and thank you all for joining King's Hub Cloud's fourth quarter and fiscal year 2022 earnings call. 2022 was an extraordinary year in many ways and we're pleased to have successfully navigated the various challenges we face in the complex and dynamic environment. As I took on the CEO role, we have remained committed to our strategy for high quality sustainable growth.
while continuing to build success based on technology. We have also implemented cost reduction and efficiency initiatives, which have resulted in steady improvements to our profitability.
Thank you for your attention.
Thank you for your attention.
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I am pleased to highlight some of our notable results with you. In Q4, we saw a remarkable increase in our adjusted profit, reaching RMB 169 million, representing a fourfold increase year over year. Adjusted gross margin increased to 7.9%.
rising by a significant 6.7% from the same period last year. Furthermore, our net operating cash inflow amounted to RMB $317 million, marking the third consecutive quarter of positive net operating cash flow since Q2 of last year. We also recorded a quarterly free cash inflow for the first quarter of this year.
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Now, I would like to provide some updates on our program in three areas, namely public cloud, enterprise cloud, and research and development.
I would like to provide some updates on our program in three areas, namely public cloud, enterprise cloud, and research and development. I'll start with public cloud services.
In Q4, revenues from this business remain stable at RMB 1.35 billion.
representing a slight increase from the third quarter. We fine-tuned our positioning and implemented differentiated strategies for key account customers and mid-size customers.
With key account customers, we strive to maintain a balance between revenue and profitability while delivering the ultimate service experience to establish its superior word-of-mouth reputation for our full stack solutions. We leverage this strong reputation and the scalable core capabilities we have developed to serve key account customers.
to expand our business opportunities with mid-sized customers. This approach allowed us to gradually reduce our dependence on key account customers while driving revenue growth and profit enhancement in our public cloud service business.
During the past half years, we carried out a systematic review of more than 200 companies from above 10 industries and signed more than 30 new mid-size customers with high growth potential.
Thanks to these strategies, the revenue contribution from our top three public health partners has been non-defined, while the revenue contribution from mid-life companies continues to increase steadily.
As a result, we have improved our customer mix while maintaining stable revenue growth in the public cloud business.
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Revenues increased by 26.4% quarter over quarter to RMB 790 million in Q4. We remained steadfast in executing our high quality and sustainable growth strategy and further clarified and institutionalized our project management best practices which fundamentally enhanced our enterprise cloud business quality.
This effort centered on four key initiatives. First, we focused on accumulating and enriching our core offering of proprietary products and solution capabilities. Second, we continued to enhance the revenue share of our proprietary products and solutions across our projects.
Third, we targeted industries and customers with high potential lifetime value, catering to their evolving needs and growth with them. Lastly, we further enhanced our project execution to improve customer experience and reduce costs.
These initiatives not only generated a relatively high estimated margin for enterprise cloud projects in the current financial period, but will also drive sustainable margin expansion in the long run.
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Taking the public services sector, for example, we focused on the public services cloud model and developed a benchmark system consisting of cloud products, services, and operations.
In Q4, we completed a smart CD upgrade project for the Public Services and Big Data Management Bureau of Sherby Municipality, Google province, in which we deployed our core proprietary enterprise cloud solution, Galaxy Cloud.
We are also carrying out a number of other projects, including the Beijing Water Authority Public Services Cloud and the Chibit Public Cloud, further sharpening our competitive advantages and distance scale in public services.
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In the healthcare sector, we continued to enhance our five major models, namely the regional healthcare cloud model, medical image cloud model, integrated healthcare organization model, regional integrated model, and smart hospital model. During the quarter, we completed the second phase capacity expansion project.
for the Health Cloud Cloud in the Sichuan-Tianfeng new area and the Medical Image Cloud of the Chongqing Health Commission. This showcased our ability to provide continuous ongoing support for enterprise cloud partners using our market-leading products, solutions, and services. In the financial services sector, their communities served with Department of Health's African American Health System. Thank you for joining us and have a wonderful rest of the second session. At this time, I think we're appears to be
We further deepen cooperation with state-owned banks and major commercial banks by focusing on providing financial big data support and operational capabilities. In addition, while retaining a stable existing customer base, we strengthen our project deployment partnership with CAMLOT, particularly enhancing our synergies and cross-dials in the banking sector. We head-p Kiss Ali Wa-S Debated on the
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In terms of technology, we continued to advance our core strategy of building success based on technology. In third quarter 2022, we developed the Beijing Wuhan dual research center strategy and we executed well in the fourth quarter. We aim to sustainably enhance our R&D capabilities while maintaining a disciplined R&D budget. We also work to facilitate our role tomitt overcome the problem with creating a more diverse Hyper- questioning world. An app that enables users to represent andVO mor you can then add extra capacity to the next level. The concentrate is, we work with whoever is responsible salaries to determine who the? combined employee alternatives might be.
We doubled the number of RMB sites in the Wuhan Research Center within just three months of its launch in December 2022, and we expect to grow the headcount there to more than 1,000 people in the world in the next three years.
injecting momentum into our R&D initiatives and helping cement our industry leadership.
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We strive to deliver the ultimate user experience across our core products and technology categories, including cloud hosts, cloud native, enterprise cloud infrastructure, enterprise storage, and big data cloud platforms.
And we benchmark ourselves against the top tier players in the cloud industry. For example, we recently launched our seventh generation cloud host, as well as new versions of our container services and serverless cloud functions, delivering significant performance improvements. All the images that come with being a SRE application, including your domain, are now
We added 79 key operating features, including various IS, paths, solutions, and operation management functions to the upgraded version of Galaxy Cloud, significantly enhancing the competitiveness of our flagship enterprise cloud product. We also upgraded the data collection, data integration, and hybrid architecture deployment capabilities.
of our big data cloud platforms and engine solutions. In addition, we significantly enhance our product's compatibility with various operating systems, databases, and chips.
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Since the debut of TPT 3.5, we have been closely following its development and actively exploring relevant business opportunities. First, we will discuss the development of TPT 3.5.
GPT models require massive computing power and vast growth of data, making cloud computing a natural fit for this technology and an essential enabler for use cases including both training AI models and applying them to various scenarios.
Through years of collaboration with leading AI companies, we have developed a market-tested solution that can be rapidly deployed on demand.
Second, major internet cloud service providers generally are developing their own GPT businesses, whereas we remain a neutral player. This means we can serve a wider range of partners at a natural advantage that the market is beginning to recognize. Third, the application of GPT models...
especially in traditional industries, which relatively underdeveloped IT capabilities, will require extensive preparation work unique to each company, including consulting and planning, process re-engineering, customized development, installation and deployment, and ongoing maintenance. Our strong and wide-ranging IT support and deployment capabilities will enable us to capitalize on such huge opportunity in this market.
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and the overall overall overall overall overall looking back at the challenges we face in 2022 we are gratified that our proactive strategic adjustments enable us to achieve positive initial results and strengthening our conviction that we are on the right track.
Looking ahead, in the face of new challenges and opportunities, we will pursue high quality and sustainable development no matter how the environment changes and roll up our sleeves to create sustainable value for our customers, shareholders, employees, and the society. I will now pass the call over to our CFO Henry to go over our credentials for the quarter and the full year 2022. Thank you. Please find me.
Thank you, Zou Zou, and welcome everyone for joining the call. Before diving into the financial details, I will walk you through a quick summary for fourth quarter of 2022. First of all, with our strong commitment to improve profitability, we have taken comprehensive measures from all perspectives.
including proactive adjustments to our CDS services, strategic restructuring of custom mix, prudent enterprise cloud selection, and a strict control for fixed assets and operational expenses. Since the third quarter of 2022, our adjusted growth margin has been increased for five consecutive quarters.
increasing from 1.2% in the fourth quarter in 2022 to 3.6% in the second quarter last year. 6.3% sub-quarter and further to 7.9% this quarter. Adjusted growth profit increased by 408% year-over-year to 168.5% RMB this quarter. RFP is post certain underutilized service based on the current customer demands.
and record loss on disposal of properties and equipment. However, we believe this is helpful for long-term developments and growth margin expansion. Non-gap EVDAR margin profit was negative 245.1 million RMB, impacted by non-recurring Hong Kong IPO listing expenses of 94.9 million RMB, and a loss of disposal of properties and equipment of 30.8.8 million RMB.
non-GAAP EBITDA margin was negative 11.5%. However, excluding the IPO expenses and the loss of disposal of properties and equipment expenses, our non-GAAP EBITDA margin could have been negative 5.7%.
Compared with net-gift 10.3% last quarter and the net-gift 4.7% in the same period of 2021. Second, our operating cash flow has been positive for the past three quarters collectively and we have achieved 370.4 million RMB net operating cash inflow this quarter.
Thanks to our prudent control over capital expenditures, free cash flow as measured by the net cash generated from operating activities minus capital expenditures was 259.6 million RMB.
marking the first quarter of the positive free cash flow, demonstrating our strong commitment and a successful execution of our cash management. Third, our cash and cash equivalents and short-term investments.
was 4.7 billion RMB by December end 2022. Considering the improvement of our profitability, our scaling down of capital expenditures and cash inflow of operating cash flow, our cash reserve is well positioned and sufficient to support us walking through the challenge here and provide flexibility to further business development.
was 4.7 billion RMB by December end, 2022. Considering the improvement of our profitability, our scaling down of capital expenditures and the cash inflow of operating cash flow, our cash reserve is well positioned and sufficient to support us walking through the challenge year and provide flexibility to further business development. Lastly, our total revenue was
2131 million RMB this quarter. Revenue from public health services was 1.34 billion RMB, remains stable compared with last quarter. Revenue from Animes Cloud was 785.9 million RMB, increased by 26.4% quarter over quarter.
With a more balanced and healthy business mix, we believe we are well positioned to start a new journey for sustainable long-term developments, being able to allocate more resources to expand our mid to long tail customer basis, and high quality non-internet customers. Now I will go through our financial in detail. Our total cost of revenue decreased by 25.2% over the years.
0.2 million RMB in the same period last year to 241.7 million RMB this quarter. Solution development and services cost decreased from 497.2 million RMB to 465.8 million RMB this quarter. The decrease was mainly due to synergies.
from overlapping headcount reductions within Kellogg and Intel Cloud on the COVID-19 impact and other synergy initiatives on the demand side in last December . Fulfillment costs and other costs were 155.6 million RMB.
and 48.3 million RMB this quarter. The adjusted growth profit of this quarter increased by 408% to 168.5 million RMB, representing an adjusted growth margin of 7.9%. The significant growth margin improvement was mainly due to the impact of cost control measures and strategic adjustments.
our revenue mix. In terms of expenses, excluding sharebase compensation, our total is just operational expenses for 729.7 million RMB. However, still impacted by Hong Kong IPO listing expenses of 94.4 million RMB. This is a total of 6 SS.
of 0.8-0.8 mRMB. Within that, adjusted RMB expenses was 239.4 mRMB. It remained relatively stable compared with 231.6 mRMB from last quarter.
Adjusted selling and marketing expenses was 118.4 million RMB compared with 125.5 million RMB last quarter. Excluding the listing expenses and disposal of fixed assets of 123.7 million RMB, adjusted G&A expenses increased slightly from 219.9 million RMB last quarter to 248.2 million RMB.
We have taken various measures to cut down expenses, including but not limited to the following aspects.
We have taken various measures to cut down expenses, including but not limited to the following aspects. First of all, we have to be careful not to cut down expenses. We have to be careful not to cut down expenses.
We review weekly the variable operational expenses, especially in marketing and administrative expenses. Second, we streamline headcount management within the firm and reveal our cost strategy and adjusting fees and other structural personnel.
Third, along with the scaling down of certain customer CVS services, we accordingly improved the efficiency of underlying resources. We also did pull certain fixed assets and scaling down the bandwidth costs as well. Net loss margin was negative 24.5% this quarter and adjusting that net loss margin was negative 25.9%.
The adjustment was mainly due to the foreign exchange gain of 132.3 million RMB caused by fluctuations of US dollar RMB exchange rates, which is a non-cash impact. On the 10th of December , 2022, our cash and cash equivalents and the short-term investments...
was 4.7 billion RMB providing us sufficient liquidity for operations. During the fourth quarter, we have repaid certain loans within the group and the banks to reduce our interest cost. The capital expenditure for this quarter was 110.8 million RMB, which primarily consists of payments for service. In terms of share repurchase,
Regarding our 100 million US dollar share repurchase program within a 12-month period as approved by the Board of Directors announced in March 2022. Since the release of our second quarter results up to the year end of 2022, we bought a total of 12.3 million ADR shares for the cost of roughly 29.2 million US dollars.
Going forward, we still have authorization from the board of directors and the flexibility to continue execution from time to time as weight to the mandated repurchase program. These efforts fully demonstrate our board and management's strong commitment and confidence in the long-term business development of the company.
Finally, we have successfully finished the still primary listing on the main board of Hong Kong Stock Exchange by way of introduction on December 30, 2022. This date includes some historical How did you do this?
We have been selected and included into a Hong Kong composite index. Shanghai Hong Kong stock next and Shenzhen Hong Kong stock next at the same time.
Primary listing in Hong Kong has helped us broaden our investor base and open up new investment channels. Our teams have been communicating more frequently and broadly with domestic investors.
And we have seen more active trading patterns since we joined Hong Kong Stockland. Looking ahead, although we are still implementing our strategic initiatives, including business repositioning and cost control efforts on an ongoing basis, such adjustments have already yielded positive preliminary results.
as reflected in the clear improvements of profit margin in Q3 and Q4. We expect our total revenue to be between 1.85 billion RMB and 2.05 billion RMB for the fourth quarter of 2023.
While these forecasts and comments above are based on our current and preliminary views on the market and operational conditions which are subject to change, we firmly believe that giving time, our potential positive impact of our ongoing strategic initiatives will continue to amplify and reflect our financial in the mid to long term. Thank you.
This concludes our remarks and report of admission. We are now happy to take our questions. Please answer our questions in both language and English if possible. Operator, please go ahead. Thank you. So to ask a question, you will need to press star, 1, and 1 on your telephone and wait for your name to be announced. And to withdraw your question, you can press star, 1, and 1 again.
Please stand by while we compile the Q and A roster. Thank you. We'll now take our first question. Please stand by. This is from the line of Brian .
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I will translate myself as management for taking my question. I have two questions. The first is regarding the enterprise cloud, regarding the three verticals, how should we see the amount of...
provider, we have some advantages in China. But in China, for those international giants who have capability to develop large language models, they all have their own cloud service. So if the authorized users use their large language model, will those users have more intention to use those internet drives?
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So as you rightly pointed out, we're noticing that right now we are going through the opening up phase after the COVID period and the country is also reverting back to the model of business development. Admittedly, last year there had been a COVID situation and relevant...
But if we look at the situation now, although we haven't disposed the particulars and the concrete numbers of the specific three verticals that you mentioned, we do remain highly confident about our operating metrics in enterprise cloud.
including revenue, including gross profit, and including operating margin. And we expect to have significant improvements in those metrics. And secondly, I would like to clarify, our pursuit of high quality and sustainable growth does not necessarily mean that we do not pursue growth. For every customer and for every project, what we do is to evaluate whether that customer and that project are the same.
The point I would like to mention and I would like to highlight is that in the past, we have been overly emphasizing the growth. And now what we need to do is to replace that overly emphasis on growth to high quality and sustainable growth, which is of strategic value to us. Okay. Anh wha tain Owen do you see though can I offer?
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I hope you will enjoy this video. If you have any questions, please leave them in the comments. I hope you will enjoy it. Thank you for watching.
How about? Just to briefly hand-play for the CEO . So we have announced, in the sense of Kingsoft, Kingsoft is a affiliated company that we will not be sending a lot of technology and resources on working on the deep language model ourselves.
Because we have very clear medical position, which is we're providing solutions to our 2D customers. And therefore, working on such a model is not of a significant strategic value to us. However, the platform companies, the platform internet companies, they have the core capability, and they have the relevant numbers, and therefore, a more suitable to develop such big models. However, in relation to a question of who would use our service and products, I have two main things.
One is that although the larger technology companies, the technology giants, we have their relative advantages, as we mentioned just now, but it does not necessarily mean that those models need to be developed, the research and development by such giants. OpenAI poses a good example, which is not a technology giant, however, generated the best in class, et cetera, model. And then the second is that...
So as we discussed in the prepared remarks, because of our neutrality, all these venture teams that are in small companies, because of the substantial conflict of interest with major Internet giants, we also choose the service of us rather than those Internet giants based across service providers. And then the second proposition I would like to say is that although in the short period of time, we do think that it is unlikely that the big language model, the GPT in China, was developed to a level similar to that of the GPT 4.0 in the United States, it is not
However, it does not necessarily mean that smaller models do not present real value in applications in the wire industries in China. For example, we're already seeing a lot of small models with parameter number amounting to $6 to $10 billion having very vivid and confident applications in various industries.
And for those application scenarios are basically also our potential business opportunities. So to sum up, two of the potential business opportunities that this current wave of TBT poses for us. One is the venture teams from smaller companies who work on those models. And secondly is the application of such models and small models which we might also call industry models.
application into the traditional companies with relatively underdeveloped IT capabilities which will help them to apply such models in their day-to-day operations. Brian , now, Hello Brian , for the first question you're asking about enterprise cloud, probably some of the management information. I think first of all, if you look at our Q&A growth, if you remember last quarter, we created about 600 million RMB revenue for enterprise cloud from the three verticals in total.
That we have a solid relationship with our customers and even we have a lot of constraints from operational perspective but we're still increasing on a quarterly basis. That actually proves enough capability in a difficult time of execute, deliver and booking on the revenue on the enterprise cloud which actually demonstrates our technology and client relationship. The second point I also want to mention is while on this quarter we didn't provide our color on the backlog and I appreciate you asking that question, but we're hoping that going forward we'll disclose more information, especially the backlog and news.
quality model but the potential and the capability of the growth we do have that confidence at hand. And the third point, we also didn't mention that in the prepared remarks, is given we focus on the vertical and the customers, the repeating, the percentage of the repeating customers in Q4 and Q3 last year has been increasing quite a lot.
which means that even though you see about 700 million revenue on a quality basis, but you know the percentage of that number coming from the same customer, but other different phases of projects increasing quite a lot, that also give us the base that for next year and this year next year we can have the potential incremental revenue build on a solid basis. And hopefully for the next next time in a quality earning course we can help to provide some color on the backlog, as well as the percentage on the routine customers going forward. We have that plan for the budgeting and closure process going forward. Hopefully it will be helpful. I'll see you, bye.
even though you see about 700 million revenue on a quality basis, but you know the percentage of that number coming from the same customer, but on the different phases of projects increasing quite a lot, that also give us the base that for next year and this year next year we can have the incremental revenue viewed on a quality basis. And hopefully for the next time in a quality earning course we can help to provide some color on the backlog as well as the percentage on the routine customers going forward. We have that plan for the budget and the closure process going forward. Hopefully it will be helpful. Good job, right? Bye. See you soon.
Thank you. We'll now take our next question. Please stand by. This is from the line of Timothy from Goldman Sachs. Please go ahead.
Thank you for taking my question. I have two questions. First, could you share your outlook on the public health demand in 2003 and between the big enterprise, big companies and small SMEs, which kind of companies do you think have alsoirens?
demand on public health for this year. And secondly, we saw that last year a company has a very good execution on probability in both gross margin and EBITDA margin. Could Madam Vice Chair, you updated our look for the gross margin and EBITDA margin for tonight's date. Thank you.
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We are studying other issues as well. You cannot give permission to there after living express realised andsie you will not cannot explain half of the problem you already have You are correct. If the sense is strong among youono win the children follow Just quickly translate for to you. So in relation to the first question, I think that public cloud services and products are really just centered around some of the core components including computing, storage, and network.
So I do not necessarily think that demand differs and has to do with the size of the enterprise that we serve. So everything really depends on the particular application scenario and the business situation of our customer enterprise. So for example, we would have our video company customers with their poor demand coming from our CDN and storage business. And we would also have customers, for example, like in the AI industry, that would really demand the computing at their poor demand.
So that is the general response I have for the first question. Thank you. I'll take on the second one. So before I go in there about the 2020 Great Target, I just want to lay out the three major reasons for 2022. First of all, for the PPE, we broke down the balance sheets. We did try our efforts to reduce redundancy and other misallocation of the revenue and resources. So that's actually the efforts has been taken for our two or three quarters since the middle of 2022.
And I don't think those are going to be the one time of impact because once you increase the utilization ratio for the assets and resources, those benefits on the growth margin will be gradually released over time. So that will build the first layer of the market expansion for this year. Second of all is given that we as a team, we're together to change the combination of the customer base. So right now, as our CEO mentioned, our mid-sized client base has been increasing sequentially as a total revenue. I would say that the pricing and the profitability are from those buckets of the customer.
of the benefits has been reflected in the Q4 number because we see a lot of things in terms of Q4 and hopefully those change on policy of expenses including the share base composition including cash follows so on so forth will be reflected in Q1 and Q2 going forward in 2023 in the new year. So as a result our operating expenses and operating margin will be better than last year the reason is both margins are lifted.
and the variable cost is reduced. So while I'm sorry I cannot give you a very clear numerical target of the EPDOT margin and operating profits, but I will say two things. First of all, we are hoping to increase our growth margin percentage on the sequential basis quarter-on-quarter. So hopefully we can see the expansion very stable, I'll say stable relatively in the next two quarters. Point number one. Point number two is given we control the expenses and the variable cost, so hopefully we can be...
more visible and can be faster to reach the breakeven profitability of the EBITDA margin for this year. I think these are the two major objectives for us. But if you're asking about operational margin and breakeven net margin side, obviously we'll see the balance of the growth and we also need to be very nimble to make investments on our capex and also on the growth side to make money and put our investment to serve our high quality customers. So to not prevent that opportunity to give us a little flexibility to balancing on the operational margin and the EBITDA margin. But hopefully we can be more visible to get into the point that our EBITDA margin will be breakeven in a more foreseeable future. Thank you.
then it can be faster to reach the breakeven profitability of the EBITDA margin for this year. I think these are the two major objectives for us. But if you're asking about operational margin and breakeven net margin side, I think we'll obviously see the balance of the growth. And we also need to be very nimble to make investments on our capex and also on the growth side to make money and put our investment to serve our high quality customers so we do not prevent the opportunities to give us a little bit of flexibility to balancing on the operational margin and the EBITDA margin. But hopefully we can be more visible to getting to the point that our EBITDA margin will be breakeven in a more foreseeable future. Thank you. Thank you, Madeline.
Thank you. We'll now take our next question. Please stand by. And this is from Alan Lee from JP Morgan. Please go ahead. Good afternoon. Hi, incidence This is a little bit organization research this morning. Let me quickly translate my question. My question is regarding the capex. We pretty invest in capex in past few years, but due to all kinds of micro-harrowings, overall utilization rate seems not very high.
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Harry, I'm a technical. yes So just a quick way to translate. So as Riley pointed out, with the new generation AI technology, namely the GPT eruption or disruption, we have had actually already preemptive actions in terms of reserving both technology and resources. However, I would summarize our attitude as a cost.
and the development and upgrade of such hardware will actually go into the past. So we do not think it makes a lot of sense to massively afford the last generation of such chips and servers.
with purpose and we do have a very experienced team and we do know the supply chain and also we have a good partnership with our ecosystem partner including our shareholders, so Kim and I have been working with the group as well as Xiaomi to manage the complexity of buying those big chunk of assets at the reasonable price in the past.
The first point. The second point is I think the question is coming from more about investments, not only about capex. If you look at investment, I'm putting it into two buckets. The team, the technology R&D team, which our senior people as a team managing today, we have quite a lot of very experienced engineers and programmers. And those expenses is not a capex. And expenses are book on P&L income statement. And as you mentioned, we spent over 1 billion.
R&D every year, all those expenses and R&D investment. So I think we do not hesitate to invest into R&D products. So I think that's very clear. However, if you are looking into the cash flow item on a couple of expenditures, which I want to say, also going to have a different model because as our CEO Zozo mentioned, we see the great potential opportunities will coming from both internet clients as well as implementation and application of the user cases from a lot of diversified and not-internet clients, especially from traditional enterprises.
And those business models will not consume King's of Cloud's own capital because they will build their own environment and providing their own computing capabilities. And we call it as an OPAC model. So I think we're not going to waste to see those good business opportunities, but we will balance out we need to spend money ourselves, our own IDC, or we build a computing environment and help our enterprise cloud clients to use the AI capability and using their money to create a revenue block. I think those are the two choices we both have on hand and it's not costing ourselves our own fact.
And the last point I would put away is, I think the question is not really about whether to spend or not, it's about who we spend for. So I think selecting the right client is also very important. I think it's our ecosystem partner including our shareholders, for example Xiaomi and the Kinsop Cloud, Kinsop's office to build for the office software, Xiaomi for the EV cars.
we will go 100% to make investment and spend cutbacks. However, for the company and the customers, which do not fall into the criteria that I was mentioning, the customers' cloud-native technology will probably step back a little bit. So I think this question about who we spend money for is also very important. And hopefully it's helpful for you. Thank you. Yeah, sure. Text manual for the outside. Yeah, it's very helpful. Thank you. Thank you.
And at this point, I would now hand back to Nicole Shan for closing remarks. Thank you, operator. Thanks everyone. This concludes our earnings conference again for joining us today. If you have any further questions, please feel free to contact us. So forward to speaking with you in the next quarter. Have a nice day. Bye bye. Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.