Q2 2023 Kingsoft Cloud Holdings Limited Earnings Call
In summary, the continuous and rapid improvement in our profitability over the past few consecutive several years and the
Good day and thank you for standing by. Welcome to Kingsoft Cloud's second quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speakers presentation there will be a question and answer session. To ask a question during the session you will need to press star 11.
uphold the principle of high quality and sustainable development and focus on technology, reputation and management to drive progress, thereby creating 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 second quarter 2023. Thank you.
Thank you, Mr. Zhou, and I welcome everyone for joining the call. Now I will walk you through the financial results for the second quarter of 2023.
We are pleased to deliver another quarter of the steady profitability improvement.
The Kinsa Cloud second quarter on each release was distributed earlier today and is available on our IR website at IR.PS by UNI.com, as well as on global news about services. On the call today from Kinsa Cloud, we have our vice chairman and CEO , Mr. Tom Zou, and Mr. J equitable still.
Mr. Zou will review our business strategy, operations, and company highlights, followed by Mr. Hou, who will discuss the financial data guidance. They will be available to answer our questions during the Q&A session that follows. There will be contact to our interpretation of oil convenience and reference purpose only.
in case of any discrepancy management statement in the original language of the bill. 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 amended and as defined in the U.S. Private Security Dissecation Reform Act of 1995.
These forward-looking statements are based upon management's current expectations and current market and operating conditions, and relate to UN studies involving known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control.
which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statement. Further information regarding this and other risks and certain result factors are included in the company's plans for the U.S. SEC.
The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or other ways, except as a request under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in Rb.
It's now my pleasure to introduce our vice chairman and CEO , Mr. Zou.
introduce our West Chairman and CEO , Mr. Zou.
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Thank you for your attention.
Thank you for your attention.
Hello everyone and thank you all for joining Kings of Cloud's second quarter 2023 earnings call.
During the quarter, we continued to uphold the principle of high quality and sustainable development.
build success based on technology and innovation, and forge our reputation throughout the entire business process with customer centricity.
We have enhanced our operations management and proactively embraced the new AI era.
This quarter, our profitability further improved. Total revenues reached RMB 1.84 billion.
Adjusted gross margin increased steadily for the fourth consecutive quarter to a new record high of 11.3%.
Adjusted gross profit reached RMB 207 million, more than three times the amount for the same quarter last year.
Normalized adjusted EBITDA margin was negative 3.3%, which represents a significant improvement of 5.3 percentage points from the same quarter last year and 2.6 percentage points from the previous quarter.
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In terms of public cloud services, revenues were RMB 1.16 billion with a growth margin of 5.2%, significantly higher than and turning positive from the negative 2.4% growth margin in the same quarter last year.
We continued to focus on three priorities for public cloud services.
namely the Xiaomi and Kingsoft ecosystem.
customer mix, and cost reduction. First of all, we continued to serve Xiaomi and Kingsoft ecosystem well. In particular, total revenues from Kingsoft Group increased by approximately 15% year-over-year. Second, we continued to serve Xiaomi and Kingsoft Group well.
we continued to optimize our customer mix. The revenue share of our largest customer dropped further to around 16%, while signing up more than 20 new medium-sized customers.
Meanwhile, we also resolutely withdrew from long-term loss-making projects and customers, achieving a more balanced and healthier revenue mix.
Third, we have made cost reduction and efficiency improvement an ongoing initiative.
We established a dedicated cost optimization team to tackle redundancy, including the cancellation, relocation, consolidation, reuse, and disposal of such resources and assets, yielding remarkable results.
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Moving on to Enterprise Cloud Services. Total revenues will be $675 million, with a gross margin of 21.7%.
a significant improvement from 15.3% in the same quarter last year.
In public services space, we opted to focus on core areas of public service cloud and state-owned assets cloud. Executing a differentiated approach, we not only build cloud for customers, but also develop an end-to-end cloud service model covering cloud migration, cloud usage, and cloud management.
We have forged our core competitiveness of standardized public services cloud operation capabilities, applicable to both public service cloud and state-owned access cloud.
For example, we have been the partner for the Beijing Public Service Cloud for nine consecutive years, winning a strong reputation to deliver secure, reliable, and easy-to-use systems and services.
resulting in a virtuous cycle of increased cloud adoption by more than 50 public services departments.
In digital health space, we have maintained a steady and sure approach, first consolidating our strengths, then expanding in scale. Our proven capabilities and leadership in super large, ultra complex landmark cloud projects have provided a solid foundation for further growth. On one hand,
we are horizontally replicating our regional healthcare cloud model to more regions. Our model features an innovative architecture recognized by China's National Health Commission and Industry Associations and has been promoted to more than a dozen provinces as an industry reference framework, allowing us the opportunity to engage more deeply in the construction of the National Public Health System.
and medical digitalization platforms, producing remarkable economic and social benefits. For example, we completed the first phase of the Jiangsu Medical Image Cloud Project, integrating image data from over 1,300 hospitals across the province with estimated annual savings of RMB 2.4 billion from reduction of duplicated medical images.
Building upon our successful experience of this landmark project, we have replicated our imaging cloud project in Chongqing Province. Meanwhile, we're working on the plan for the second phase of Jiangsu Imaging Cloud Project, which upon completion, it's expected to connect all the public hospitals across the province to the cloud platform.
On the other hand, we also vertically penetrating our business to a hospital level. We are partnering with a number of top-tier hospitals to facilitate cloud-based next-generation digital transformation.
Our solution addresses a number of pain points, including high maintenance costs, server instability, and low response to user requests.
For example, we helped the drone nan hospital of Wuhan University, a grade A tertiary hospital, transform its modular system with microservice architecture, developed an innovative data structure for DAS in the hospital, creating a loosely coupled, horizontally integrated architecture for its platforms and applications.
enabling business process optimization and unified data management. In the financial services space, we completed and delivered a batch of big data projects for leading financial institutions, as well as the second phase of China Construction Bank's Cloud Infrastructure Development project.
We're now in the process of deploying the third phase of this project. Turning to Kamlott, during the quarter, Kamlott achieved solid business performance, signing up six new customers while maintaining robust relationship with the existing major clients.
its profitability remains at a healthy and stable level.
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In terms of products and technology, we uphold our principle of building success based on technology and innovation by delivering vast in-class customer experience across our core product offerings.
In storage space, we launched a deep ultra-code data archive product, particularly well-suited for data management use cases, including medical imaging, financial documents, and compliance archives.
In big data space, our big data product were recognized for its overall strengths and ranked among the top three leading Chinese companies by IDC, a premier international institution, in its Data Lakehouse Platform Technology Assessment Report 2023, in terms of its comprehensive capabilities such as data management, storage, and data management.
development, and security. In database space, we enter into strategic partnership with Pinca, leveraging our respective strengths to jointly provide fully managed distributed cloud database services.
In Enterprise Cloud space, we upgraded our Galaxy Stack Management system, a unified platform facing operation and maintenance personnel, and a cloud user facing cloud manager, adding dozens of new features to solve cloud management and usage pain points for Enterprise Cloud customers.
In 2023, Trusted Cloud Summit, an authoritative and prestigious event that promotes the best practice of cloud industry standards in China, and hosted by China Academy of Information and Communications Technology and China Communications Standards Association, our Galaxy stack won two milestone awards.
namely best practice awards for technology and best practice awards for public services cloud, validating our outstanding technical strengths in the domain of dedicated cloud.
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In the new AI era, we are beginning to see results from our rapid response to and comprehensive embrace of AIGC.
Leveraging our neutral positioning, we have gained the preference of independent AI companies and signed a dozen of new AI customers.
as the sole strategic cloud platform in the Xiaomi and Kingsoft ecosystems.
We're working closely with KingSoft Office on WPS AI, enabling model training and inference business deployment.
Partnering with industry leading large language model and vector database providers, we launched our mass neutral trust dedicated zone solution to bridge the trust gap in AI2B use cases.
We also carried out AI-targeted upgrades to our container and storage products to support InfiniBand technology and multimedia processing in AIGC use cases.
In addition, we are collaborating with the Xiaomi and Kingsop ecosystem to purchase or lease AI services from various channels, conducting tests and evaluations of the Mastic GPUs, and alternative contingency plans.
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The structural adjustment we have been conducting in the public cloud services segment and this can be break it down into two parts. One is the CDN business and the other is the other public cloud service business now for the CDN part actually it since I took the role of CEO last year, we have communicated with the market and I would have to say that.
In general the development for this adjustment of this business has been in line with what I have communicated.
In the past quarters, but due to the changes in the overall market situation to speed has been a little bit faster than what we had expected however in general.
Pes and the direction. It is consistent we would expect the adjustment for the CDN business to continue for a while and we expect to complete to complete that within half a year to one year and for the non CDN business part of the public cloud services business.
Business adjustment has been going through rather smoothly and we have done an excellent job in terms of cost reduction as can be shown in our financial performance is the gross margin for the public cloud services business has improved from 92% to 4% in the second quarter of 2022 to positive five two per.
In this quarter with which we are reporting. So this also relates to the second question that you asked about the AI business. We expect that this roundup AI opportunity has a potential opportunity to bring us more growth or to the public cloud services business.
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So to answer your question, we do believe that this round of new AI opportunities will bring a lot of opportunity for us.
As you can see after the Chinese Spring festival. The GBT concept started to explosive growth grow the demand for AIG have been particularly strong and as mentioned our neutral positioning has enabled us to win the favor of the vast majority of venture AI companies in China.
And we are in the process of signing up contracts with dozens of such companies and so this is about the.
In terms of supporting their computing power.
In addition.
As mentioned, we are also providing companies.
With mass a modest our service business. We're also making progress in the upfront for example, we have launched the mass mutual trust dedicated solution and we're also collaborating very closely with Xiaomi and <unk>. So in general.
Basically what we have been seeing is on the demand side. The demand is particularly strong. However on the supply side. There is significant bottleneck in particular in terms of Nvidia supply chain to supply of GPU chips, and we believe that bottleneck is relatively.
Difficult to resolve within the short period of time, so in short the supply far exceeds the demand far exceeds the supply in the market and that is not the situation for as one company as the general situation for the industry.
As a result of that.
Had originally expected the revenue from AI can be shown in our financials in the third quarter and that is likely to be delayed due to the shortage of supply of GPU servers to the fourth quarter or even the first quarter of 2024.
However, I would say in terms of overall deployment in response to this new era of AI Casey.
<unk> that we have achieved including the contract that we have signed including the model. The solutions that we have launched a quite successful.
In the longer in the even longer term. We believe this will become the embracing the AI wholeheartedly will actually become the most core direction for it kicks off the cloud and can support.
Operator next question please.
Thank you, we'll now move onto our next question.
Our next question comes from the line of Timothy <unk> from Goldman Sachs. Please go ahead.
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Thank you management for taking my questions I have two questions. One is regarding the gross profit margin.
Gross margin of the cloud enterprise cloud has been upward trend over the past few quarters any especially.
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<unk> above 20% for the past two quarters.
Could management further elaborate on.
Driver subsequent sparkman behind that and what is our updated view on the gross margin target for this year any nanometer.
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The enterprise cloud and the question is rocket disregarding AR revenue SSC.
The revenue has been.
Declining mode slightly in the second quarter, just wondering if there's any specific reason behind that and how should we look at the revenue trend into the second half this year. Thank you.
Thank you Ken This is Harry I'm happy to take on the first question and our CEO Mr. <unk> will take on the second one.
So.
Actually I'll acknowledge the improvement of the gross margin.
First class business actually there are few things, we actually discussed this earlier, but you.
Eventually see that trend actually kept very stable NFC that improvement expansion a few things first of all as well.
Talk about this the right client selection process. So I think that's actually the first and the beginning point that to do the right business with right people.
And if you do look at our average revenue mix from address cloud we used to have some kind of heavy weights on the top clients with over 30 30 or.
40 million RMB per contract, but right now we're focused on the sweet spot around like $808 million to about.
10 million RMB per contract so working on that range of the right Clive.
Since we have a better ability to control the costs and to make sure that all of the receivables.
Cost control measures actually finally deliver asking thats. The first point the second was really about the repeating sales for the more standardized products. So we're working very closely with our sales team and our R&D team as well and we will make sure that we not only work with one client or one product <unk>.
Working with the different clients with the same product. So I think that percentage, obviously, we didn't disclose the number from last year to this year. The standardization of the products services and solutions has been a very important driver.
The second part.
And the third one is really about.
I appreciate all the comments from the research analysts and our shareholders. We actually are moving up from the ice two Pos level after services and in some cases, we're actually working with client out some soft level products, especially given the AI drivers seven.
A phenomenon hopefully we can actually go up a little bit obviously, it depends on different verticals on the right penetration of the Paas and SaaS and our product, which actually narrow carry with some higher margin.
So as a conclusion Tim.
We do believe we have a capacity and the willingness to keep gross margin above 20% of the enterprise cloud services, including both kicks off and come out as well and given the right incentive.
For our solution delivery team to control their own cost, which you actually embed it into their own budgeting and our bonus calculation. We hopefully have more internal measures to make sure. This pressure has been moving down the channel to make sure I mean, we're working things out cloud actually attention on our bottom line.
So going forward hopefully, we can keep above 20% of our gross margin of enterprise cloud as well as we are hoping.
After the AI eventually unfold it our enterprise cloud module from even a higher hopefully can above the three handles.
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So before I answered.
Do you want to answer the details of your question I would like to give you an overview of how we think about the enterprise cloud business.
Route thinking is that.
We have been.
In becoming more focused on high quality products high quality products in terms of selecting high quality projects and.
And also for the projects that are more sustainable for us.
No.
In terms of our project quality in terms of reputation input in terms of.
Deployment capabilities and services, we offer to customers who have been working very hard on those fronts and that is why you have been seeing in the consecutive quarters, we have been experiencing improving profitability levels and now as to your question of why the slight decrease for the revenue of enterprise cloud.
For the second quarter versus the first quarter. The answer is really just the seasonality because.
The revenue recognition for enterprise cloud projects.
The general delay from Intel from the time of the signing of those projects to the revenue recognition for some for several quarters to one year and in some other cases can be as long as two years and therefore.
The financial results you see in one single quarter.
The added if the combined.
Result of different projects, signing at different time time points and different delays in the overall.
Revenue recognition cycle and therefore.
I wouldn't say that the slight decrease for the financial for the revenue for enterprise cloud for the second quarter versus the first quarter is a reflection of the of our business performance for the enterprise cloud on the contrary, we feel that the fundamentals of the enterprise business has been going quite well and in some future quarter for example in the fall.
Quarter it might be also seeing a sudden surge of our enterprise cloud revenue, however, does not necessarily reflect.
Equivalent search of the business fundamentals.
That's the general idea I would like to I'd like to give you in fact that we have also been in communication with the auditors and hoping to find a matrix that would.
That will provide a real time reflection of our fundamental business situation.
The alignment with that of the financial performance.
Still exploring that we hope to find out metrics. Thank you.
Okay.
Richard Thank you that's helpful.
Thank you, we'll now move on to our next question.
Okay.
Our next question comes from the line of Allen Lee from Jpmorgan. Please go ahead.
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So you call it a pause for Sofia, two shacks in Georgia quantities, and nimble and Joshua Horowitz hung as you kind of how we're going to take a pause casassa yeah, well then China. One particular Corrine did you guys saw with regard to software welcome her financial.
Secondly, you management for taking my question and I'll have a follow up question gross margin. So for public cloud services. So if we exclude CDM business whats the gross margin trend for core computing and storage.
In past few quarters, and how do we think about China into the second half and also how are you. Just mentioned you have increasing revenue contribution from higher margin thoughts in our past services and could management share. Some color how should we think about our long term revenue contribution from these two business. Thank you.
Okay.
Thank you Alan this hiring.
Happy to share some color.
So first of all again, while we're talking about a structure change at our client and revenue mix CDM versus non CDN, but I want to point out that.
The stadium business itself is not really a problematic business the partners.
Concentration risk.
Gather with a CGM product to certain clients that really.
High risk flag for us So that's why we see some changes in the past few quarters.
But putting that aside as you mentioned there are choosing within <unk>, while we havent disclosing in detail on that.
Numbers first of all.
The margin of the CDM business does have certain fluctuations depending on the season depends on mix and a one hour cutting down certain client penetration and the client concentration that we do need to switch and reallocate our resources, especially on the DNA and the bandwidth we need to change and cancel.
The new <unk> those actions will take off some fluctuations.
But I will say that.
In the old days, let's say last year or year before as you mentioned there are certain quarters, our CDN business gross margins, which are regions that are notes, but right. Now we do have relatively stable positive gross margin at the CDN business, where it's really not as high as a as a public cloud products the second hardest.
Gross margin of the cloud public cloud services, including computing and network and.
Storage.
Higher in certain products are much higher than that.
Alex in terms of the gross margin.
And we are trying to improving the percentage of that revenue from that product.
So if you're putting that everything together I think in the few quarters when we looking ahead.
Given that we do have a lot of efforts on the resource management and cost control hopefully the spread between the computing and storage versus ADL will be extended.
And the computing and storage database and the network products will deliver even higher gross margin going forward given the changes we have.
So I don't want to provide a detailed guidance on our gross margin by product as I mentioned is really a dynamic and really.
Kind of a fluid situation, but overall I can I can I can tell you that from management's perspective, we're aiming for a relatively expansion for the public cloud gross margin as a whole and I will try to manage on that and one more point is.
You don't have to split that out because.
One client that will use multiple product lines and one IDC centers were made it over different products and resources, we are trying to co share and providing more utilization as well. So it's not really from every single straightforward.
Alliance calculation, so hopefully cannot stand.
On the second point.
I think the earlier question from Tien was really regarding enterprise call. It's not really about a parcel of SaaS within the public cloud really two different animals I put this way.
So the enterprise class side, as I mentioned, our Paas and SaaS level packaging with the solution that our services and we do see that service to convert to a higher margin.
On the public cloud I don't want to provide a detailed guidance because as I mentioned at west Ai's coming or the business new models changing when we're talking about the math of the other things you mentioned, we don't want to kind of develop and divided by the.
Traditional concept of iPhone and the highest product, but we are aiming for the mass products and services as a whole package and as a whole I think the margin will be much higher than a traditional ice in the computing services going forward. Thank you Adam.
Okay. Thank you.
Yeah.
Yeah.
Okay.
Thanks Jay.
Due to time.
Constraints. This concludes our question and answer session. So I will hand, the call back to you for closing remarks.
Thank you operator, thank you all once again for joining us today, how any further questions. Please feel free to contact us.
We look forward to speaking with you again next quarter.
Yes.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect speakers. Please standby.
Okay.
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Okay.
Yes.
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Thanks.