Q1 2023 Kingsoft Cloud Holdings Limited Earnings Call
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Ladies and gentlemen, thank you for standing by and work out the Kinks of cloud first quarter 'twenty to 'twenty three earnings conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there's going to be a question and answer session.
If you wish to ask a question. Please press star one from your telephone.
I would now like turn the conference.
Conference over to the E. R manager nickel Shang. Please go ahead ma'am.
Thank you operator, Hello, everyone and thank you for joining us today can sell cloud first quarter. Three earnings release was distributed earlier today and is available on our IR website at IR adult he asks why you and they'll come as well as on global Newswire services.
On the call today from yourself cloud, we have our chairman and.
Seal is heard Joe talk and all worked out well you talked a lot yet Mr. Joel will review, our business strategies operation and the company highlights followed.
Mr Ho, who will discuss our financial guidance.
It will be available to answer all questions during the Q&A session that follows.
Because that's your integration all integration Oh boy I'll reference purposes, only in Pennsylvania describes the managements derma in the original language will parallel before we begin I'd like to remind you that this conference call contains forward looking statements within the meaning of section one of the security.
Jack of 1930 pool as the money and as defined in the U S. Private Securities Litigation Reform Act of 1995. These forward looking statements are based upon management's coordinate validation and current market and operating conditions.
To you once that well known or unknown risks uncertainties and other factors all of which are difficult to predict and many of Lee choppy all of the company's control, which may cause the company's actual results performance or achievements to differ materially from those in the forward looking statements further information regarding these.
And other risks uncertainties or factors are included in the company's filings with the U S. S E C.
<unk> does not undertake any obligation to update any forward looking statements as a result of new information or otherwise, except as required under applicable law.
Finally, please note that unless otherwise stated all financial figures mentioned during this conference call.
It's now my pleasure to introduce your host our watch and buy on the steel makers out. Please go ahead. Thank you.
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Hello, everyone and thank you all for joining <unk> first quarter 2023 earnings call.
We continued to uphold the principle of high quality and sustainable development.
Build success based on technology and innovation.
George our reputation throughout the entire business process.
Customer centricity.
And in house, our business and operations management.
During the quarter our profitability further improved revenue reached RMB 186 billion.
In line with our guidance.
Adjusted gross margin increased to 10, 4% a historical high and a six six percentage points higher than the same period last year.
This is also the fourth consecutive quarter that we have recorded a sequential improvement in adjusted gross margin.
Adjusted gross profit reached RMB $194 4 million at historical high and up 133% year over year.
Normalized adjusted EBITDA margin was negative five.
Five 9%, which is a significant improvement of four two percentage points higher than the last quarter.
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He will provide some updates on our progress across four key areas public cloud enterprise class product and technology and latest the business operates.
I'll start with public cloud services revenue was RMB, one 5 billion with a gross margin of two 1%.
<unk> higher than the negative three 4% gross margin in the same period of 2022.
Upholding the overall strategy, we emphasized the three main goals for public cloud services, namely.
Namely supporting the Xiaomi <unk> ecosystems.
Optimizing our cost structure, and improving our cost and efficiency profile.
On the first point, we are committed to our original vision and fundamental are firmly supporting the xiaomi and kings of ecosystems with first class products and technologies.
Drive sustainable revenue profit and reputation.
In this quarter revenue from the Xiaomi in terms of ecosystems increased year over year represented an increasing portion of our total revenue and with a healthy margin.
To ensure that we maintain a respected reputation.
Proactively reached out to customers to better understand how we can improve services experiences and adjust our services accordingly.
Second optimizing.
Optimizing our capital structure is a critical component of our strategy to build a differentiated business approach and boost profitability.
We have focused on expanding our customer base among medium sized businesses strategically withdrawing from loss, making projects are larger customers.
During the quarter, we negotiated or signed deals with dozens of medium sized customers.
<unk> growth factor companies, such as EV vehicles at everything also known as <unk> Technology service provider for example novel Black Stephanie.
Third we implemented strong cost reduction and efficiency improvement initiatives and enhanced supply chain management.
During the quarter, we increased our resource utilization rate by eliminating redundancies, reducing richard minimum bandwidth commitments and relocating and consolidating <unk>.
We also leveraged our diverse channels to build a computing power resource pool that relies on a combination of directly owned and leased assets.
Enabling us to nimbly match, the demand elasticity of different clients, while protecting our profitability.
These initiatives provided a strong foundation for improving the financial performance of our public cloud business for this quarter.
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Revenue was RMB $710 million with a gross margin of 24% a significant improvement from 16% in the same period last year.
We continued to implement strict project management measures in terms of customer quality business sustainability accumulation and reuse our core capabilities and profit margins.
Our public services cloud businesses expanded further during.
During the quarter, we renewed the contract for the Beijing Public service, a cloud for the ninth year and expanded our footprint to Shandong Michelle ha in other regions.
After years of development, we have rapidly built a mature business model of public services cloud that generate healthy and sustainable margins.
The opportunity for value added data projects.
In digital health, we are strengthening the five business models with deployment, namely.
The regional health care cloud model for medical imaging cloud model, the integrated health care organization model, the original integrated model and the Smart Hospital model.
These models allow us to tap into new market opportunities with differentiated approach accumulate and reuse our capabilities.
During the quarter, we made milestone progress in our gas also known as data as a service product portfolio.
On a trailing the hospital market through our data management platform adapting to made in China systems, and leading a major national R&D project on biology and inflammation integration.
Looking ahead, we expect to leverage such technical and product strengths in our business our endeavors in the healthcare space.
In the finance sector, we completed and delivered big data platforms for major financial institutions, such as industrial bank, and the Citic and China Citic Bank exist.
Existing clients.
Challenges and focused on technical areas, where we have unique advantages such as big gas.
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In terms of product innovation will live up to our model of building our success based on technology and innovation.
Constantly and rapidly iterating, our products and providing a best in class customer experience across our core offerings.
In cloud computing, our container instances officially started to support the elastic scaling of container clusters hosted and customers own data centers.
Enabling unified management.
And off cloud resources, ensuring a smooth scaling into the cloud during spikes in usage.
This solution.
And benefit cost by around 80%.
So such achievements in cost performance and efficiency. It is honored as one of <unk> top 10 cloud native innovation and solutions.
In cloud storage, our object storage product is gaining more and more recognition from the market jumping into fourth place in the fourth quarter of 2022 of China's software defined storage report published by IDC research with its market share doubling compared with 2021.
We also launched an all flash array object storage product, which doubled read and write performance, particularly.
Particularly well suited to application scenarios, such as Aig's fee and the separation of computation and storage in big data, providing tiered storage solutions with top of the line performance at a high cost efficiency.
In the enterprise class space, we upgraded galaxy stack to soft cloud usage and management and pain points for enterprise customers.
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In particular I would like to address the recent developments in China's AI sector, which has continued to be heated since the debut of GPT three five in the first quarter.
We have kept a close eye on this space.
Proactively deployed resources to.
How quickly respond to market trends.
First as the only cloud platform in the Xiaomi and Kings ecosystems.
We approach AI strategically with Xiaomi and pass off to cloud ecosystems companies in a strategic and a coordinated manner.
Providing support for key programs, including <unk> offices WPS AI.
Second we stand strictly neutral in large language models space. This position enables us to retain the full trust and preference.
Many independent AI companies that use our platform.
Third with a combination of directly owned and leased assets, we're able to offer sufficient GPU server resources to meet our customers' needs.
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In summary, our results over the past few quarters demonstrate that our strategy is yielding results.
As we prepare to meet future opportunities and challenges head on.
Nimbly executed on this strategy to create value for our customers shareholders employees and society.
<unk> CFO Harry.
Our ECP.
Yes.
I will now pass the call over to our CFO Henry to go over our financials for the first quarter 2020. Thank you.
Thank you.
And welcome everyone for joining the call.
Now I will walk you through our financial results for the first quarter of 2800.
Guided by our high quality and sustainable development strategy. We are pleased to see that our profitability further improved slightly in the first quarter.
Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved record high of $194 4 million RMB.
Increased by 133%.
Year over year, representing adjusted gross margin of 10, 4%.
Along with our strict expense control our normalized adjusted EBITDA margin improved from negative six 6% in the same period last year and in that camp 10, 2% in the last quarter to a negative five 9% this quarter.
Our total revenue were at $1864.
And then RMB this quarter.
Which were in line with our previous outlook within that revenue from public cloud services was $1153 7 million RMB compared with $1388 8 million RMB in the same period of last year.
The decrease was mainly due to our proactive adjustments on CDM business as well as the impact from our clients structure adjustments.
Revenue from Enterprise cloud was 710 million RMB.
Compared with $792 5 million RMB in the same period of last year.
The decrease was mainly due to the January infection of COVID-19.
Seasonality impact and probably their quality control.
We continue to enhance our cost control measures.
<unk> revenue decreased by 22% year over year to $1670 2 million RMB.
How do you see cost decreased significantly by 21, 4% year over year from 1000 to $110 3 million RMB, two $872 4 million RMB this quarter.
Depreciation and amortization costs decreased by eight 7% from $246 1 million RMB in the same period of last year to $224 6 million RMB this quarter.
Solution develop banana servicing costs decreased by 11% from 476 million RMB.
Two $423 6 million RMB this quarter.
Fulfillment costs and other costs.
$122 7 million RMB, and a $26 9 million.
RMB this quarter.
Our adjusted gross profit third quarter increased by 133% to $194 4 million RMB, representing adjusted gross margin of 10, 4%.
Some have a three 8% in the same period of last year.
A significant amount of improvement demonstrate the success of our strategic adjustments of our revenue mix.
<unk> enterprise comp product selection and efficient cost control measures.
And the reason for our strong commitment to improving our profitability and delivering high quantity and a sustainable development.
So half the market and investors better understand our business and our path to profitability, we separately disclose the gross margin.
Gross profit for public cloud and enterprise cloud in order to better reflect our business nature.
Within our business lines gross profit public cloud services.
$24 8 million RMB.
Significantly improved from the gross loss.
$47 2 million RMB in the same period of last year.
Gross margin on private car services were two 1% compared with negative three 4% in the same period of last year.
<unk> was mainly due to the proactive scaling down our CDN services and adjustments of our cost structure.
Gross profit Enterprise services was 169 million RMB compared with $127 4 million RMB in the same period of last year.
Gross margin on the enterprise Cloud services was 23, 8% improved from 16, 1% in same period last year.
The improvement was mainly due to our more stringent enterprise comp product selection strategy.
In terms of expenses, excluding share based compensation and impairment of long lived assets.
Our total adjusted operating expenses.
$595 8 million RMB decreasing by 18, 3%.
$729 6 million RMB last quarter.
Within that adjusted R&D expenses was 200 zero $2 6 million RMB decreasing by 15, 4% from last quarter.
Adjusted selling and marketing expenses.
There are $4 2 million RMB compared with $118 4 million RMB last quarter.
Adjusted SG&A expenses decreased largely by 22, 3% from $371 9 million last quarter to $289 1 million RMB.
As of March.
2021 2023 our cash and cash equivalents and short term investments amounted to $4 5 billion RMB, providing us with significant and sufficient liquidity for operations.
Net capital expenditures for this quarter was $44 6 million RMB, which primarily consists of payments for service.
We have been taking control of our procurement of traditional service such as the ones being used for CTX business.
While for high performance service, especially in the recent popular ait's areas, where I think actively operating cooperating with our supplier numerous ways to access the resources needed.
Including but not limited to capital expenditure model. We also in operational leasing which was payments will not be included in our capex amount that we're being opex model. Meanwhile, due to the payment schedule certain cash payments for purchases, including the service will be used for the AI GC business.
Which were order earlier this year will be gradually reflected sequentially in the following quarters.
Lastly.
Recently, we released our ESG report for 2022, who presents a very in depth review.
Of the company's progress in the last year in ESG practices.
We've also noticed that recognition from rating agencies and scaling up the company increased from certain well Noah ESD agencies.
We have taken great pride in Panama, getting the highest ESG standards.
We are continuing to strengthen our ESG covenants and engage with our partners to amplify our positive impact in the cloud industry and our society.
Thereby delivering long term value for our shareholders.
Looking ahead, we will continue to pursue a high quality development strategies and unlock synergies within the Xiaomi and <unk> group ecosystem.
While staying Adrian to capture new opportunities.
New era of AI technology advantage.
We expect our total revenue to be between $1 85 billion RMB to too.
<unk> zero billion RMB for the second quarter are plenty of 23.
While this forecast a commitment comments above are based on our current and preliminary views on the market and operational conditions, which.
<unk> are subject to change.
Which we firmly believe that given the time the effect of our ongoing strategy initiatives and the new business opportunities, especially in the ITC areas, while continuing to amplify and they reflect our financial results in the mid to long term. Thank you.
Thank you and this concludes our prepared remarks, thanks for your attention and we are now happy to take all questions. Please ask your question in boats Chinese memory in the English as possible. Operator. Please go ahead. Thank you.
Ladies and gentlemen, well now begin the question and answer session.
If you wish to ask a question. Please press star one on your telephone.
We are now taking the first question.
And our first question from <unk> Zhang from CA CEC. Yes go ahead. Your line is open.
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We noticed that several cloud service providers.
You try to catch on their products being Apache model. So could you. Please share your views on the price.
And are we going to make adjustments from our pricing strategy accordingly.
A quick question as our GP margins, we have seen a meaningful sequential improvement in the gross profit margin for the first quarter. So it does.
Hurricane sustainable and what is our expectation for the segmental gross profit margins in the mid to long term. Thank you.
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So indeed, we have all noticed all care players so call it large scale price cut and we have analyzed it carefully.
In terms of conclusion.
I'll say that.
Its impact to our current products and services.
<unk> limited and there is actually no material impact to our current offerings of products and services now as to in the future. What do we have anything similar in terms of our pricing strategy.
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So our feeling is that this action is more.
Geared towards PR purposes. Thank you.
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Sure.
I think it was okay.
How do you take on the second question regarding the gross profit.
As Joe mentioned, we are very happy to see that especially starting from the second half of last year.
The company has adopted a quite a important initiatives to expand our gross profits, which you probably can see in our recent results have.
Achieved very positive.
Our results, but also I want to put that data into our contacts in the past second quarter sexually.
If you remember.
The lowest of points on the gross margin. It was back in Q4 of 2021 at that time, if you remember our gross margin on a company level was only about a one 2%.
And in the past six quarters, especially the second half of last year, we sequentially, increasing our gross margin to today's about 10, 2%, which is actually almost 7% to 8% 7% to eight times higher.
The Q4 project on your one.
Reflecting a combination of a.
A few important reasons and the drivers first is really.
A better mix of the products, including our efforts to cutting back certain low profit margin products.
And also increasing the diversification of the top clients.
And medium sized clients as well, which asset giving kings of cloud are better positioning in terms of the pricing power and in terms of the commercial terms, we negotiated with our customers.
And the second is our efforts to cutting back certain resources from serve us the.
Boneless and lower utilized cabinets as well so all of those efforts coming as the combination of those impact to our gross margin, but more importantly is really our internal strategy I'd imagine quality in terms of how we control our deliver execute the enterprise cloud.
And how we make sure in terms of the.
The PMO office can actually speaking of adequate Roes and managing the cost and the efficiency of enterprise clients. So that's why this quarter first time to separate the gross margin of enterprise cloud and.
Protocols as you can see both business lines as I'm, making a positive.
Gross margin and we're happy to see that trend going forward on a second point of your asking.
I think that the key try to we're trying to see US sorry, Steve first of all on a combined basis were happy to see and hopefully.
The gross margin of Kings of cloud as a company, we are improving sequentially on a quarter to quarter basis. So I think.
We are confident to see that the trend going forward, giving the few things we already see the quarter results and continue to do that.
I think the potential of the gross margin expansion of the public cloud will be.
More.
Per pound compared with enterprise cloud, so we're going to make sure that the potential of the margin expansion on public count.
We're taking a more August roles in terms of our margin expansion at the company, but also on the same time, we want to make sure. The gross margin of enterprise Todd will keep a sustainable basis.
Spend on a relatively rational pacing as well so by doing two things hopefully we can keep the growth market with a company level will continue to grow as well.
The last point I think we will also take a very very careful view regarding the growth versus the profitability. So it doesn't say that margin is the only one factor we're trying to keep a focus but also our rebalancing of growth opportunities in terms of for example, the recent opportunities.
Sure we have enough resources to invest and on a same time, we are going to make sure our gross margin to improve and our total mentioned.
We will make a very rational decision and I'm not going to follow any.
Rationale trying to take pricing.
Pricing cuts and other things that are reflecting the potential risk of our gross margin. Thank you.
Sure.
Thank you for your question.
We are now taking the next question.
And the next question from Brian Gong from Citi. Please go ahead.
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So why don't we do that Qi Hello.
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Okay.
So I'm going to answer a question on separately since you mentioned it for both our public cloud and the enterprise cloud in a public cloud space. As you know, we mainly serve internet customers of <unk> Internet customers and as you also mentioned in the in the second question. The current wave of Aig's CEO AI is it in itself are very good.
Wave of opportunities for us as we have commented on will continue to leverage our neutrality positioning which is well manifested in the fact that we're able to engage with a.
A large number of independent AI.
Developers.
And also the effect of our coordinated and strategic approach with King South and Xiaomi ecosystem is also very good.
So this is about our public cloud opportunities in terms of enterprise cloud because we have our three basically different main major verticals, namely a public cloud a public services.
Our house and finances, I'm going to answer to you separately. So in the first part is the public services cloud.
Our overall strategy in this line of business is to actually shrink and to focus a little bit in terms of geographical locations best So in terms of project number you might see it in a number of projects decreasing but the profitability will be increasing and we will be focusing on the core of the core regions for example, Beijing and <unk>.
Bear provinces.
We believe that in the lump in the medium to long term such approach, which namely is too.
Shrink and to enhance our technology capabilities and services.
First and then to expand.
It is a healthier way of growth and secondly in terms of digital health as we commented in the prepared remarks.
Enhancing.
And we're pushing forward the five models.
Models of digital health business.
It's accelerating not only in terms of profitability, but also in terms of revenue scale.
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101 element shifts as a T cell.
It also uses.
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So as you saw that's April how long to show any longer.
As to your second question as to how many.
And I'll ask Hank with module providers.
Our companies are running on our platform.
I have to say that I apologize we cannot answer your question.
In the house and this is due to the fact that first of all the confidentiality consideration of our customers and secondly.
Currently we still have a lot of months.
Such companies that were in the negotiating stage.
<unk> transactions okay.
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Those are the most weight on it.
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Paul.
The cohort.
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Don't see that.
So you can pay me sorry, Bob.
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So we know what incentives Congo.
So it's really in our songs.
Jim will this all along.
Two months all of them are cohort I think that's it.
That's useful.
Specialty sounds from which all of them.
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Our cohort.
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Lance.
Paul.
Women may with Susan <unk>.
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Those assets within the funds to 10 kilometers on the coda future Hello.
As to your third question about our GPU chips reserve.
The short answer and our conclusion is it's definitely good to have more.
We have been seeing great enthusiasm from such customers and expecting to expand the AI related business.
I do know that in the market.
100 has been essentially banned.
<unk> by the U S side, and we also see very tight supply on a 800 a market.
But as I commented earlier, we are adopting a flexible and combined channels to satisfy cash needs and that will include first of all directly owning such ships, our Tpa service and secondly.
In terms of leasing such assets.
Can say is that we definitely try our best to meet such need them to satisfy.
Our existing and potential customers.
Regardless.
Hi, Brian Thanks for the question Justin.
Only two points first of all.
Today, we are publishing our QLED results as you remember back in Q1 Aig's at hub airports emerge actually.
Early part of April so that would be not in the current quarter's results and we actually keep.
Quite positive regarding the growth prospect.
Kevin in Q1, as you'll know the part of the China was affected in Covid and many of the bidding process given the two sessions. If you remember back in March was affected as well on the timing.
So as we actually promised probably one or two quarters earlier, so on this quarter with the first step.
Separately separate date is close our gross margin hydrocodone enterprise cloud and as a second step hopefully in the coming quarters will go into also disclose our backlog numbers and other things. So I think we are going to see some growth potential and the timing and the pace of those.
Both opportunities in the coming quarter, as well, which are going to be a combination of aig's the opportunities and the money, we spend and how we.
Actually control the balance of the growth in profits the second point is.
Maybe some of you also notice that in Q1 on the Capex number was 11 low I think thats also.
<unk> and.
Implication on our growth in terms of the spending because.
On the cash flow.
A category, we actually Havent.
Order to February but the timing of those payments has not had accounts on the cash flow items in Q1, and many of the new opportunities are coming in April in EMEA actually about working on those opportunities as well. So I think these are the two.
Hopefully it can be helpful for you for.
So in our next quarter hopefully, we can give you more color regarding the backlog and you can see the growth opportunities in a more kind of quantitatively coming forward. Thank you.
Thank you that's very helpful.
Thank you for your question.
There are no further question I will hand back the conference to Nikko Sharma for closing remarks.
Thank you operator, thank you lesser Gainesville, joining us today, if you how long you. Further question. Please feel free to come hang US look forward to speaking with you again next quarter. Thank you have a nice day.
That concludes my background so today.
Thank you for participating you may hold disconnect.
Right.
Okay.
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