Q4 2022 Kingsoft Cloud Holdings Ltd Earnings Call
Speaker 1: I.
Speaker 2: Good day and thank you for standing by. Welcome to the KingsoftCloud's 4th Quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speakers presentation, there'll be a question and answer session.
Speaker 2: 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 2: Please be advised today's conference is being recorded.
Speaker 2: I'd now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager. Please go ahead.
Speaker 3: 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, what is the tribute earlier today and is a little bit more ILS. IR.Kiazwaewins.com as well as on the global news world. So it is.
Speaker 3: On the call today from King's Club, we held our West Chairman and the CEO , Mr. Tau Sous, and a staffal Mr. Henry Hulb. Mr. Tau will reveal our business, strategy, operations, and company highlights. Followed by Mr. Hulb, we will discuss the financials and the guidance. There will be a well-built to enter our question during the Q&A session that follows.
Speaker 3: There will be consecutive integration or interpretation of FOIL components and reference programs only. In case of any descriptive 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 3: within the meaning of Section 21E of the Security Exchange Act of 1934 as amended and as defined in the U.S. private security litigation reform act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions.
Speaker 3: and relate to joint study while no known risk, uncertainties, and other factors.
Speaker 3: 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 3: So there are information regarding this and other risks, as certain needs, or factors, including in the common spirals with the US and DC. The company does not undertake any obligation to update any forwarding statement as a result of new information, future events, or otherwise.
Speaker 3: except as required and are actually below. Funnily, please know that unless otherwise they will be all financial figures mentioned during this conference call and in only making R&B. It's now my pleasure to introduce our one chairman, NCO, NCO, the principal head.
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Speaker 5: Hello everyone and thank you all for joining King's Hub Cloud's full course and fiscal year 2022 learning call.
Speaker 5: 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 5: 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 5: We have also implemented cost reduction and the efficiency initiative, which have resulted in steady improvement to our profitability.
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Speaker 5: I am pleased to highlight some of our notable results with it.
Speaker 5: In Q4, we saw a remarkable increase in our adjusted profit, reaching RMB 169 million.
Speaker 5: representing a forefold increase year over year.
Speaker 5: adjusted growth margin increased to 7.9% rising by a significant 6.7% from the center is lot bigger.
Speaker 5: Furthermore, our net operating cash inflow amounted to RMB 370 million, marking the third consecutive quarter of positive net operating cash flow in Q2 of last year.
Speaker 5: We also recorded a quarterly three cash inflow for the first time.
Speaker 5: which is an important milestone for us. These impressive results demonstrated our strong business resilience and provided a solid foundation for us to stabilize, resource, and emerge even stronger.
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Speaker 5: Now, I would like to provide some updates on our progress in three areas, namely public cloud, MFI cloud, and research and development.
Speaker 5: A start with public health service.
Speaker 5: In Q4 revenues from this business remain stable at RMB 1.35 billion.
Speaker 5: representing a flight increase from the third quarter. We find tuned our positioning and instrumented differentiated strategies for key account partners and mid-sized partners.
Speaker 5: With key account partners, 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 a full-text solution.
Speaker 5: 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 5: This approach allowed us to gradually reduce our dependence on key account customers while driving revenue growth and pocket enhancements in our public class with a business.
Speaker 5: During the past five years, we carried out a systematic review of more than 200 companies from above 10 industries and find more than 30 new mid-sized companies with high growth potential.
Speaker 5: Thanks to these strategies, the revenue contribution from our top three public cloud customers has been not a decline, while the revenue contribution from mid-class customers continues to increase steadily. As a result, we have improved our customer mix while maintaining stable revenue growth in the public cloud business. We have improved our customer mix while maintaining stable revenue growth in the public cloud business.
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Speaker 5: Revenue increased by 26.4% for their over-quarter to RMB 790 million in Q4.
Speaker 5: We remain steadfast in executing our high quality and sustainable growth strategy, and further clarified and institutionalized our project management best practices to fundamentally enhance our enterprise cloud business quality.
Speaker 5: This effort centered on 4 key initiatives.
Speaker 5: First, we focus on accumulating and enriching our core offering of proprietary products in solution capabilities. Second, we continue to enhance the revenue share of proprietary products in solutions of product projects.
Speaker 5: Third, with targeted industries and customers with high potential lifetime value catering to their evolving needs and grow with them.
Speaker 5: Lastly, we further enhance our project execution to improve customer experience and reduce costs.
Speaker 5: 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 5: Taking the public services sector, for example, we focus on the public service cloud model and develop a benchmark system consisting of cloud products, services, and operations. In Q4, we completed a smart city upgrade project for the public services and big data management bureau of shared-be-moving technology to the process, in which we deployed our core proprietary again-to-have-slaub solution, Galaxy Cloud.
Speaker 5: We are also carrying out a number of other projects, including the Beijing Water Authority Public Services Cloud and the Chibi Public Cloud, further sharpening our competitive advantages and business scale in public services.
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Speaker 5: In the healthcare sector, we continue to enhance our five major models, namely the original healthcare cloud model, medical image cloud model, integrated healthcare organization model, regional integrated model, and smart hospital model.
Speaker 5: During the quarter, we completed the second phase capacity expansion project for the health health cloud in the Sichuan-Tianfu New Area and the medical image cloud of the Chongqing Health Commission.
Speaker 5: This showcased our ability to provide continuous ongoing support for enterprise partners using our market-leading products, solutions, and services. In the financial services sector, we further deepen cooperation with state-owned banks and major commercial banks.
Speaker 5: by focusing on providing financial big data support and operational capabilities.
Speaker 5: In addition, while retaining a stable existing customer base, we strengthened our project deployment partnership with Camlo, particularly enhancing our synergies and cross-fouling in the banking sector.
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Speaker 5: In terms of technology, we continued to advance our core strategy of building success based on technology. Let me mention an example that this is one of the quick things to sieve out.
Speaker 5: In third quarter 2022, we developed the Beijing Wuhan dual research center strategy and we executed well in the fourth quarter.
Speaker 5: We aim to sustainably enhance our R&D capability while maintaining a different point R&D budget. We travel the number of R&D staff in the 100th century within just three months of its launch in December 2022. And we expect to grow the hat count there.
Speaker 5: to more than 1000 over the next three years, injecting momentum into our R&D initiatives and helping cement our industry leadership.
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Speaker 5: We strive to deliver the ultimate user experience across our core products and technology categories, including cloud hosts, cloud natives, enterprise cloud infrastructure, enterprise storage, and big data cloud platforms. We strive to deliver the ultimate user experience across our core products and technology categories, including cloud
Speaker 5: and we benchmark ourselves against the top tier players in the cloud industry. For example, we recently launched our Science Generation Cloudhost, as well as new versions of our container services and serverless cloud functions, delivering significant performance improvements.
Speaker 5: We added 79 key operating features, including various IAS, HAS solutions, and Operation Management functions to the upgraded version of Galaxy Cloud, significantly enhancing the competitiveness of our flagship enterprise cloud product.
Speaker 5: We also upgraded the data collection, data integration, and hybrid architecture deployment capabilities of our big data platforms and engine solutions.
Speaker 5: In addition, we significantly enhance our product compatibility with various operating systems, databases, and chips.
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Speaker 5: In the debut of GPG 3.5, we have been closely following its development and actively exploring relevant business opportunities.
Speaker 5: First, GPG 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.
Speaker 5: Through years of collaboration with leading AI companies, we have developed a market-tested solution that can be rapidly deployed on demand.
Speaker 5: 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 5: 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 reengineering, customized development.
Speaker 5: installation and deployment, and ongoing maintenance, 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 5: Overall, looking back at the challenges we faced in 2022, we were granted that our proactive strategic adjustment enabled 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
Speaker 5: everyone for joining the call. Before diving into the financial details, I will walk you through a quick summary for the fourth quarter of 2022.
Speaker 5: First of all, with our strong commitment to improve profitability, we have taken comprehensive measures from all perspectives.
Speaker 5: including proactive adjustments to our CDS services, strategic restructuring of cut and mix.
Speaker 5: Student 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 5: increasing from 1.2% in the fourth quarter in 2022 to 3.6% in the second quarter last year.
Speaker 5: 6.3% is the quarter and further to 7.9% is quarter.
Speaker 4: Adjusted growth profit increased by 408% year-over-year to 168.5 minute RMB per quarter.
Speaker 5: We have disposed certain underutilized servers based on the current customer demands and record loss on disposal of properties and equipment. However, we believe this is helpful for long-term development and growth margin expansion.
Speaker 5: non-GAAP EVDAR margin profit was negative 245.1 million RMB impacted by non-recurring Hong Kong IPO listing expenses of 94.9 million RMB.
Speaker 5: and a loss of the total of properties and equipment of 30, 28.8 million RMB. NGAM EBITDA margin was negative 11.5%. However, it's excluding the IPO expenses and a loss of this total of properties and equipment expenses.
Speaker 5: Our non-cap EBITDA margin could have been left at 5.7%.
Speaker 5: compared with an active 10.3% last quarter and an active 4.7% in the same period of 2021.
Speaker 5: Second, our operating cash flow has been positive for the past three quarters collectively.
Speaker 4: and we have achieved 370.4-meter RMP net operating cash gain flow this quarter. Thanks to our prudent control over capital expenditures, three cash flows have measured the net cash generated from operating activities, minus capital expenditures.
Speaker 5: was 259.6 million RMB, marking the first quarter of the positive free cash roll.
Speaker 5: demonstrating our strong commitment and a successful execution of our cash management.
Speaker 5: Third, our cash and cash decovidants and short-term investments.
Speaker 5: 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.
Speaker 4: walking through the challenge here and the provide flexibility to further up distance development.
Speaker 5: Lastly, our total revenue was 2,131 million RMB this quarter.
Speaker 5: Revenue from public health services was 1.34 billion RMB. Remain stable compared with last quarter.
Speaker 4: Revenue from Anemos Cloud was 785.9 million RMB, increased by 26.4% quarter over quarter.
Speaker 5: With a more balanced and healthy business mix, we believe we are well positioned to start a new journey for our sustainable long-term developments, being able to allocate more resources to expand our mid-to-long tail company basis and high quality non-internet companies.
Speaker 5: Now I will go through our financial in detail. 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.
Speaker 4: to 1,057.6 million RMB this quarter.
Speaker 5: Inflation and evaluation cost increased by 6.4% from 227.2 million RMB in the same period last year to 241.7 million RMB this quarter.
Speaker 5: Solution development at services cost decreased from 497.2 million RMB to 465.8 million RMB as part of the decrease was mainly due to synergies from overlapping headcount reduction within CanLok and IncoCloud on the COVID-19 impact and other synergy initiatives on the demand side in last design.
Speaker 4: the 8.5 million RMB, representing adjusted growth margin of 7.9%. The significant growth margin improvement was mailing due to the impact of cultural measures and strategic adjustments of our revenue mix.
Speaker 5: In terms of expenses, excluding share-based compensation, our total adjusted operational expenses was 729.7 million RMB. However, still impacted by Hong Kong IP Olic listing expenses of 94.4 million RMB. A disposal of fixed assets.
Speaker 4: of 0.8-0.8 mRMB. Within that, adjusted R&D expenses was 239.4 mRMB. It remained relatively stable compared with 231.6 mRMB from last quarter.
Speaker 4: Adjusted selling and marketing expenses was 118.4 million RMB compared with 125.5 million RMB last quarter.
Speaker 4: Excluding the listing expenses, a disposal of fixed assets of 123.7 mRMB adjusted GNA expenses increased slightly from 219.9 mRMB last quarter to 248.2 mRMB.
Speaker 4: We have taken various measures to cut down expenses.
Speaker 5: including but not limited to the following aspects. First of all, we review weekly the variable operational expenses, especially in marketing and administrative expenses.
Speaker 5: Second, we streamline headcount management within the firm and reveal our cost strategy and adjust employee fees and other structural personnel. Third, along with the scaling down of certain customer TPS services, we accordingly improve the efficiency of underlying resources.
Speaker 4: We also did pull a certain set of assets and scaling down bandwidth costs as well.
Speaker 4: Net loss margin was negative 24.5% this quarter and adjusting that net loss margin was negative 25.9%
Speaker 5: 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. As of December and 2022, our cash and cash equivalents and short-term investments haveAud innocent and
Speaker 5: was 4.7 billion RMB providing us sufficient liquidity for operations. OK.
Speaker 5: 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.
Speaker 5: In terms of share rate purchase, regarding our $100 million share rate purchase program within a 12-month period as approved by the Board of Directors announced in March 2022.
Speaker 5: Since the release of our second quarter results up to the year end of 2022, we bought a total of 12.3 minute ADR shifts.
Speaker 5: 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.
Speaker 5: These efforts fully demonstrate or and imagine strong commitments and are confident in the long-term business development of the company.
Finally, we have successfully finished the due primary listing on the main board of Hong Kong Stock Exchange. By the way of introduction on December 30, 2022.
In March 2023, we have been selected and included into the Hong Kong Composite Index.
Shanghai Hong Kong Stock Connect and Shenzhen Hong Kong Stock Connect at the same time. Privates 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 Stocknet.
have been communicating more frequently and broadly with domestic investors. And we have seen more active trading patterns since we joined Hong Kong Stocknet.
Although we are still implementing our strategic initiatives, including business repositioning and cost-conquering efforts on an ongoing basis, such adjustments have already yield positive preliminary results, as reflected in a clear improvement of profit margin into great future. 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 to 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 entire remarks and report of admission. We are now happy to take your questions. Please enter your 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 one and one again. Please stand by while we compile the Q&A roster. Thank you.
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see faster growth and how should we balance the revenue growth and the margin. The second question is about CHAT-JPT. Zongdong just mentioned as an 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 authorized users use their large language model, will those users have more intention to use those Internet giants cloud services?
Thank you.
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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 restrictions did have
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...
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 our operating margin.
and we expect to have significant improvement 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...
bring about profitability to the company, and 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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So we have announced in the sense of Kingsoft, Kingsoft and its affiliated company, that we will not be setting a lot of antigen resources or working the...
on the big language model ourselves. Because we have very clear value proposition, which is we're providing solutions to our 2D customers. And therefore, working on such model is not of significant strategic value to us. However, the platform companies, the platform internet companies, is.
They have the core capability and they have the relevant numbers and therefore are 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, have their only relative advantages of
we mentioned just now, but it does not necessarily mean that those models need to be developed, researched and developed by such a giant. OpenAI poses a good example, which is not a technology giant, however, generated the best in class session model. And then the second is that every design for Go? Business t an O
So, also actually, the start-in is in the prepared remarks because of our neutrality of all the venture teams that are in small companies because of the potential concept ventures with major internet giants. We also choose other services of us relevant those internet-based.
the internet giant 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, would develop to a level similar to that of the GPT 4.0 in the United States.
However, it does not necessarily mean that smaller models do not present real value and applications in the white industry in China. For example, we already seen a lot of small models with a parameter number among the six to ten billion, having very vivid and comfort 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 QPT 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 is...
about enterprise cloud, probably some of that information. 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 enterprise cloud from the three verticals in total. But I probably encourage you to look at it in two perspectives. Because in Q4
we deliver around 784 million revenue, which is actually on a net-to-net and on a Q-on-Q basis, is about 180 million RMB increase. And if you remember in December last year in Beijing, was everyone probably remember people on station and home and the city was basically affected by the COVID-19 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 proved a novel capability in a difficult time of acute deliver and a booking on the revenue on a enterprise cloud, which actually demonstrate our technology and the client relationship.
The second point I also want to mention is while on this quarter we didn't provide a 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 new signing on the contracts on the enterprise cloud revenue. But I'm happy to provide some color. We see the backlog at its moment, at its time.
The backlog we have today will fully cover our potential budget for the Anagraph Cloud in the year of 2023 for this year. And we are still in P1, so we are hoping we can increase the backlog this year and we do have the confidence that... Go Rocks!
We are going to move into the more balancing of the growth and 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 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. And also give us the pace that for next year and this year next year.
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We'll now take our next question. Please stand by. This is from the line of Tennessee South from Goldman Sachs. Please go ahead. That's all. Thank you for your attention. This is my question. Then I'll go ahead.
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Thank you, Maijin, for taking my question. I have two questions. First, could Maijin share your outlook on the public health demand in 2003? And between the big enterprise, big internal companies, and the small SMEs, which kind of company do you think have a bigger demand on public health for this year? And secondly, we saw that last year a company had very good sea space.
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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 has to do with papers and have 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 core demands 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 as their core demand. So that is a degenerative response I have for the first question. Thank you. I'll take on the second one. So before
And I don't think those are going to be the one time off impact because
Once you increase the utilization ratio for the assets and resources, those benefits on the gross 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 together...
to change the combination of the customer base. So right now as our CEO mentioned our mid-size 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 we are serving on a single client basis right. So that's going to be two benefits reduce the coloring concentration risk but also improving profit.
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 compensation, including cash follows so on so forth will be reflected in Q1, Q2 going forward.
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 of it relatively in the next two quarters.
Point number one. Point number two is given we control the expenses and variable costs, so hopefully we can be more visible and can be faster to reach the breakeven and profitability of the E-D-DOT 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 see the balance of the growth and we also need to...
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in a more kind of 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.
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So, what do we do in this presentation? Let me quickly translate my question. My question is regarding the CAPACS. We pre-invest in CAPACS in past few years, but due to all kinds of...
And we will take a more proactive approach or reactive approach in terms of AI related capex investing. Thank you. In this case, we will take a more proactive approach in terms of AI related capex investing.
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I think it's a good idea to have a good understanding of the world. But I think it's a good idea to have a good understanding of the world. I think it's a good idea to have a good understanding of the world. Thank you. Harry, I've got a couple of minutes.
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 attitudes as cautiously optimistic rather than blindly pursuing this potential opportunity. Because based on our experiences with the GPT,
There's also the more... which essentially means that the development and the 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. Thank you. Thank you, Alan. I'll probably put some additional comments as well. So if you remember on the year of IPO 2020, we spent about 1 billion RMB on the CapEx. So first of all, I'll mention the point is, as a company we do have capacity and experience to managing spending 1 billion RMB on whatever 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 at the Kinsop Group as well as Xiaomi to manage the complexity of buying those big chunk of assets at the reasonable price.
The first point. The second point is I think the question is coming from more about investments, not only about TEDx. If you look at investment, I'm putting 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.
those expenses is not a CapEx and expenses are booked on our P&L income statement and as you mentioned we spend over 1 billion R&D every year on 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 CapEx percentage which I want to say
will not consume King Kong cloud's own capital because they will build their own environment and providing their own computing capabilities. Ten->[Music and Ex Wanders
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, you know, 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 concerning ourselves.
and the teams of cloud, teams of office to build for the office software, to 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 seeing mentioned, the customers' cloud native technology will probably be 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. Check the menu 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, thanks everyone. This concludes our earnings call. Thanks again for joining us today. If you have any further questions, please feel free to come hang out.
So forward to speaking with you in that quarter. 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 Kingsoft Cloud'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 will 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 and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again.
Please be advised today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Nicole Shan, IR manager. Please go ahead. Thank you, operator. Hello, everyone, and thank you for joining us today. Since our cloud support quarter and the full year 2022 earnings release was distributed earlier today and is available on our IR website at IR.com.
to answer your question during the Q&A session that follows. There will be conductive integration or integration of FOIL components and reference programs only. In case of any descriptive 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 within the meaning of section 21E of the Security Exchange Act.
of 1934 as the mandate and as defined in the US private security litigation reform act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and they relate to UN's that involve no or unknown risk, uncertainties, and other factors.
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 maturely 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 CDC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or events.
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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...
You are welcome.
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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.
Adjustive 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 370 million, marking the third consecutive quarter of positively net operating cash flows since Q2 of last year.
We also recorded a quarterly free cash inflow for the first time, which is an important milestone for us. These impressive results demonstrated our strong business resilience and provided a solid foundation for us to stabilize, restart, and emerge even stronger.
Thank you for your attention.
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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'll start with public cloud services. Thank you both.
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-sized customers. With key account customers, we strive to maintain a balance between revenue and profitability while delivering the ultimate service experience established in superior word of mouth reputation for our full stack solutions.
We leveraged 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 year, we carried out a systematic review of more than 200 companies from above 10 industries.
and find more than 30 new mid-size customers with high growth potential. Thanks to these strategies, the revenue contribution from our top three public-class customers has been not defined, while the revenue contribution from mid-size customers continues to increase steadily. As a result, we have improved our customer mix while maintaining stable revenue growth in the public-class business. Thank you for your attention.
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We are committed to the success of our industry. We are committed to the success of our industry. We are committed to the success of our industry. We are committed to the success of our industry. Moving on to enterprise cloud services. Revenues increased by 26.4% quarter over quarter to RMB 790 million in Q4. We remain steadfast in executing our high quality and sustainable growth strategy.
and further clarified and institutionalized our project management best practices to fundamentally enhance 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 grow with them. Lastly, we further enhance 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.
The company already wanted to be able to be able to be able to be able to be
I hope you will enjoy this video. I hope you will enjoy this video. Please subscribe to my channel.
and the use of the public services sector. 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 the Smart CD Upgrade project.
for the Public Services and Big Data Management Bureau of Sharebim Municipality, is a project in which we deployed our 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 Chibi Public Cloud, further sharpening our competitive advantages and business scale in public services. We are also carrying out a number of other projects, including the Beijing Water Authority Public Services Cloud and the Chibi Public Cloud, further sharpening our competitive advantages and business scale in public services.
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In the healthcare sector, we continue to enhance our five major models, namely the original 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 healthcare 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 companies to children.
using our market-leading products, solutions, and services. In a financial services sector, 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 Camlo, particularly enhancing our synergies and cross-dials in the banking sector.
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We have a lot of questions. We will be able to answer them. We will be able to answer them in the next session. We will be able to answer them in the next session. Thank you very much.
In terms of technology, we continued to advance our core strategy of building success based on technology. In
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 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 over the next three years.
injecting momentum into our R&D initiatives and helping cement our industry leadership.
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We try 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. We try to deliver the ultimate user experience across our core products and technology categories 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. We added 79 key operating features including various IS, PAS 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 Platform and engine solutions. In addition, we significantly enhanced our product compatibility with various operating systems, databases, and ships.
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 compatibility with various operating systems, databases, and chips. So, bye.
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Since the debut of GPT 3.5, we have been closely following its development and actively exploring relevant business opportunities. First, 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 on the natural advantage that the market is beginning to recognize.
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. The GPT models provide 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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S from the CFO , Harry. We thank you for your support and for your time. Thank you.
Overall, looking back at the challenges we faced in 2022, we are gratified that our proactive strategic adjustments enabled 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 financials for the quarter and the full year 2022. Thank you. Thank you, Odo Zong, and welcome everyone for joining the call. Before diving into the financial details, I will walk you through a quick summary for the full 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 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 6.5% in the fourth quarter in 2022.
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 160.5 million RMB this quarter. Work is post certain underutilized servers 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 8028.8 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%.
From here we've netgipped 10.3% last quarter and the netgipped 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 proven control, we have expenditures.
Free cash flow has measured the net cash generated from operating activities minus capital expenditures with 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. Lastly, our total revenue was $2.5 million.
2,131 million RMB this quarter. Revenue from public health services was 1.34 billion RMB, remained 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 year.
to 1,969.1 million RMB. IDC costs decreased significantly by 20% a year from 1,321.9 million RMB to 1,057.6 million RMB this quarter. Depreciation and amylization costs increased by 6.4% from 227.2 million RMB in the same period last year to 241.7 million RMB this quarter. Solution development and services costs decreased from 497.2 million RMB.
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 share-based compensation, our total adjusted operational expenses was 729.7 million RMB. However, still impacted by Hong Kong IP O'Lixing expenses of 94.4 million RMB. The disposal of fixed assets of 28.8 million RMB. Within that, adjusted R&D expenses...
was 239.4 mRMB, remained relatively stable compared with 231.6 mRMB from last quarter. Adjusted selling and marketing expenses was 118.4 mRMB compared with 125.5 mRMB last quarter. Excluding the listing expenses and disposal of fixed assets.
of 123.7 mRMB adjusted GNA expenses increased slightly from 219.9 mRMB last quarter to 248.2 mRMB. We have taken various measures to cut down expenses, including but not limited to the following aspects. vertical piercings and freshmanocomquerque
We review weekly the variable operational expenses, especially in marketing and administrative expenses. Second, we streamline headcount management within the firm and review our cost strategy and adjust employees fees and other structural personnel.
Third, along with the scaling down of certain customer CVS services, we accordingly improve the efficiency of underlying resources. We also did poll certain fixed assets and scaling down bandwidth costs as well.
Net loss margin was negative 24.5% this quarter and adjusting that net loss margin was negative 25.9%. 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.
As of December and 2022, our cash and cash equivalents and short-term investments was $4.7 billion RMB, providing us sufficient liquidity for operations.
As of December 10, 2022, our cash and cash equivalents and the short-term investments was 4.7 billion RMB, providing us sufficient liquidity for operations. Thank you for watching, and see you next time.
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 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.
Looking 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 the way of introduction, on December 30, 2022, in March 2023,
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. Privates in Hong Kong have 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 stock market. 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 a clear improvement 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.
total revenue to be between 1.85 billion RMB and 2.05 billion RMB for the first 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 are looking at the
We firmly believe 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. This concludes our entire remarks and report of the mission. We are now happy to take our questions. Please ask your 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 one and one on your telephone and wait for your name to be announced.
and to withdraw your question you can press star one and one again. Please stand by while we compile the Q&A roster.
or your question, you can press star, one and one again. Please stand by while we compile the Q&A roster. Thank you. We'll now take our first question. fastball Massachusettsp kilogram at home
Please stand by. This is from the line of Brian Gong from City. Please go ahead. Hello, everyone. I'm Clark Nicole. I would like to thank you for your time today.
I will translate myself as management for taking my questions. I have two questions. The first question is regarding the enterprise cloud regarding the.
to develop large language models, they all have their own cloud service. So if the enterprise users use their large language model, will those users have more intention to use those Internet cloud services? Thank you.
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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. And admittedly last year, there had the COVID situation and relevant restrictions did have impact to our deployment and delivery of our enterprise cloud business. And some of the plans deployment.
that was originally planned to be completed in Q4 last year, were actually delayed to this year. But if we 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.
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 cloud business and whether that brings about profitability to us. In other words, if some of the customers are interested in the development of different projects, even if we evaluate them from a longer time period.
and it will 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. Okay. Hello, everybody. Thank you.
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on the big language model ourselves. Because we have a very clear value proposition, which is we're providing solutions to our 2D customers. And therefore, working on such a model is not of 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, are 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 giant, 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 such a model. And then the second is that also as we discussed in the prepared remarks, because of our neutrality, all these venture teams that are in small companies, because of the confidential concept 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...
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 QPG poses for us. One is the venture teams from smaller companies who work on those models. And then secondly is the application of such models and small models, which we might also call industry models.
their 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 , hello Brian . First question you're asking about enterprise cloud, probably some of that information. I think first of all if you look at our peer-on-peer growth, if you remember last quarter, we created about 600 million RMB revenue for enterprise cloud from the three verticals in total. But I probably encourage you to look at it into into the sectors because in Q4...
we deliver around 784 million revenue which is actually on a net-to-net and on a Q-on-Q basis is about 180 million RMB increase. And if you remember in December last year in Beijing, was everyone probably remember people on station and home and the city was basically affected by the COVID 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 for mummy.
to disclose more information, especially the backlog and new signing on the contracts on the enterprise cloud revenue. But I'm happy to provide some colors. If we see the backlog at this moment, at this time, the backlog we have today will fully cover our potential budget for the enterprise cloud in the year of 2023, for this year.
We're still in Q1, so we're hoping we can increase the backlog this year and we do have the confidence that we're going to move into the more balancing of the growth and 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 focused on the vertical 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 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 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 revenue customers going forward. We have that plan for the budgeting and closure process going forward. Hopefully it will be helpful. Thank you.
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 have been increasing quite a lot that also give us the base that for next year and this year next year we can have the attention for incremental revenue viewed on a quality 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 disclosure process going forward hopefully will be helpful i'll see that right thank you thank you
We'll now take our next question. Please stand by. This is from the line of Timothy Sow from Goldman Sachs. Please go ahead.
Q and A. Thank you, Ma Joon, for taking my question. I have two questions. First, could Ma Joon share your outlook on the public health demand in 2003 and between the big enterprise, big companies and the small as a medium, which kind of company in terms of bigger.
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 growth margin and E-beta margin. Thank you.
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Just quickly translate for to you all. 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 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 as 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 2023 target, I just want to lay out the three major reasons.
going to be the one time off impact because once you increase the utilization ratio for the assets and resources, those benefits on the gross margin will be gradually released over time. So that will build the first layer of the margin expansion for this year. Second of all is, given we, you know, as a team, we together to change the combination of customer base.
So right now, as our CEO mentioned, our mid-size client base has been increasing sequentially as a total revenue. And I would say that the pricing and the profitability from those buckets of the customer are definitely much better than we are serving on a single client basis. So that's going to be two benefits, reduce the current competition risk, but also improving profitability as a whole. And those benefits were built in the second layer on the gross margin for 2022.
And the third obviously is the variable expenses control as I mentioned in the prepared remarks. The very basic things, the tribal expenses, accommodation, how we pay people, how we change the mix of the incentives, the cash plus the stocks, and a lot of things we're 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 in terms of Q4 and hopefully those change on policy of expenses including the share-based compensation, including cash follows. So so forth will be reflected in Q1 and Q2 going forward in 2023, 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 you can see the expansion very stable. We will see it more 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 EPDOT margin.
Thank you, Madeline. Thank you. We'll now take our next question.
Please stand by. Now this is from Alan Lee from JP Morgan, please go ahead.
is also negatively impacting our margins. So looking to 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
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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 cautiously optimistic rather than blindly pursuing this potential opportunity. Because based on our experience with the larger generation of AI industry trajectory, we do think that currently the market tends to be or seems to be overheated and we expect it to actually crystallizetr gravy Number 1, take a look.
I'll probably put some additional comments as well. So if you remember on the year of IPO 2020, we spent about 1 billion RMB on CapEx. So first of all, on the mention point, as a company we do have capacity and experience to manage and expand 1 billion RMB.
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 physics.
If you look at investment, I'll put 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 are not a capex. And expenses are put on our P&L income statement. And as you mentioned, we spend over one billion R&D every year on 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 the capital expenditures, which I want to say.
Also going to have a different model because as our CEO Zou Zou 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 non-internet clients especially from traditional enterprises and those business model will not consume pink of cloud form capital.
because they will build their own environment and providing the home computing capabilities. And we call it the OPAC model. 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, you know, 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 on one side. 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 clock...
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 come hang out.
So forward to speaking with you in that 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.