Q4 2023 Kingsoft Cloud Holdings Ltd Earnings Call

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Operator: Good day, and thank you for standing by. Welcome to Kingsoft Cloud's fourth quarter and fiscal year 2023 earnings conference call webcast. At this time, all participants are in listen-only mode.

Good day, and thank you for standing by welcome to the King self clouds fourth quarter and fiscal year 'twenty 'twenty Free earnings conference call and webcast.

This time, all participants are in listen only mode.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press stars 1 and 1 on your telephone. You will then hear an automated message advising that your hand is raised.

After the Speakers' presentation there'll be a question answer session to ask a question. During this session. Please press star one Ed why don't you tell it fine.

He said he had automated message advising you had is raised to withdraw your question. Please press star wanted one again.

Operator: To withdraw your question, please press star 1 and 1 again. Please note that today's conference is being recorded. I would now like to turn the conference over to Nicole Shan. I am a manager of Kingsoft Cloud. Please go ahead.

Please note that today's conference being recorded.

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Nicole Shan: Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter and fiscal year 2023 launch release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as our global newsware services. On the call today from Kingsoft Cloud, we have our Vice-Chairman and CEO, Mr. Zhao Tao, and CFO, Mr. Hongren He. Mr. Zhao will review our business strategies, operations, and company highlights. Followed by Mr.

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Our business strategy operations and company highlights followed by Mr. Hull will discuss the financials and guidance.

Nicole Shan: He will discuss the financial data guidance, and they will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretations.

To answer your question during the Q&A session that follows.

Nicole Shan: Our interpretations are for your convenience and reference purposes only. In case of any discrepancies, management statements 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 Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995.

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Before we begin I'd like to remind you that this conference call contains forward looking statements within the meaning of section 21 E of the Securities Exchange Act.

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In the U S Securities law.

Nicole Shan: These forward-looking statements are based on management's current expectations and current market and operating conditions and relate to U.S. standing on known or unknown risks, uncertainties, and other factors, many 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 statements. Further information regarding this and other risks, uncertainties, or factors is included in the company's filings with the USFDC. The company does not have any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law.

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We're looking statements further information regarding these and other risks uncertainties or factors are included in the company's filings with the U S.

The company does not undertake any obligation to update any forward looking statement as a result, new information future events or otherwise except fault.

Nicole Shan: Finally, please note that, as otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It is now my pleasure to introduce our Vice Chairman and CEO, Mr. Zhao. Please go ahead.

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Tao Zou: Hello, everyone. Welcome to the 4th quarter of 2023 and the Annual Industrial Change Conference. 2023 is a year in which Kingsoft Cloud has fully implemented the principles of high-quality sustainable development and achieved great results. 202312.2% 5.4% in 2022, a significant increase of 6.8% After adjustment, Maoli'e took RMB8.6 billion. $4.5 billion in comparison to 2022, almost double.

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Tao Zou: -3.4% 20228.9% Unknown Executive, Xiaodan Zhang, Kingsoft Cloud,, AI 2024 Hello, everyone, and thank you all for joining Kingsoft Cloud's fourth quarter and fiscal year 2023 earnings call. In 2023, we continued to uphold the principle of high quality and sustainable development and accomplished significant achievements. For the full year of 2023, the adjusted growth margin was 12.2%, a significant increase of 6.8 percentage points, up from 5.4% in 2022.

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Hello, everyone and thank you all for joining our fourth quarter and fiscal year 2023 earnings call.

Three we continue to uphold the principle of high quality and sustainable development.

Accomplished significant achievements.

For the full year of 2023, adjusted gross margin was 12, 2% a significant increase of six eight percentage points up from five 4% in 2022.

Tao Zou: Adjusted growth profit was RMB860 million, almost doubling the amount of RMB445 million in 2022. Normalized adjusted EBITDA was negative 3.4%, another significant improvement from negative 8.9% in 2022. During the year, we started building our success based on technology and innovations, forging our reputation throughout the entire business process, enhancing our operations management, and building inner strength. We have been strategically adjusting our business mix and proactively embracing the new AI era, therefore laying solid foundations for long-term sustainable development in 2024 and beyond. Next, I would like to focus on the performance of the 4th quarter of 2023. This quarter, Kingsoft Cloud achieved double growth in revenue scale and profitability. 8,17.2; Huanbi increased by 6%. 15.2% Shangjiao shangjitou bafu tisheng 3.1 ge baiheng dian [inaudible] After adjustment, the 2.6 grew 55.8% in the same period last year.

Gross profit was RMB 860 million almost doubling the amount of RMB 445 million in 2022.

Normalized adjusted EBITDA was negative three 4% another significant improvement from negative eight 9% in 2022.

During the year, we started building our success based on technology and ideas.

Innovations forging our reputation throughout the entire process in housing our operations management and building in Australia.

Strategically adjusting our business mix and are proactively embracing the new AI era, therefore, laying solid foundation for long term sustainable development in 2020.

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Tao Zou: [inaudible] Now, I will walk you through the business highlights of the fourth quarter of 2023. This quarter, we achieved dual improvement in both our revenue and profitability measures. In particular, total revenues reached RMB 1.72 billion, increasing 6.0% quarter over quarter. Adjusted gross margin also recorded a major increase of 3.1 percentage points quarter over quarter to 15.2%, marking the sixth consecutive quarter of consecutive improvement. Adjusted gross profits reached RMB 262 million, increasing 55.8% year-over-year.

Now I will walk you through the business highlights.

2023.

This quarter, we achieved improvement in both our revenue and profitability metrics.

In particular total revenue reached RMB 172 billion, increasing 66.0% quarter over quarter.

Adjusted gross margin recorded a major increase of three one percentage points quarter over quarter to 15, 2%, marking the sixth quarter of consecutive improvement.

Did gross profit reached RMB 206, 2 million, increasing 55, 8% year over year.

Tao Zou: Normalized adjusted EBITDA margin was negative 1.6%, representing a significant improvement of 8.5 percentage points year over year. In terms of Gong Youyun, this quarter's revenue was 10.5 billion yuan, and the growth rate was 3.5%. CDN11.8% We are making progress in all three areas of Xiaomi, Jinshan Ecology, AI business, and CDN strategy adjustment. First of all, as the only cloud platform for Xiaomi Jinshan Ecology, , In WCS AI scenarios, there is a high level of visibility and a wide range of training and reasoning requirements.

Normalized adjusted EBITDA margin was negative one 6% representing a significant improvement of eight five percentage points year over year.

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Tao Zou: ,, 16% [inaudible] Shih Tzu, We will continue to develop our AI business vigorously and actively respond to changes in the industry. In addition to the advanced AI business opportunities in Xiaomi Jinshan Ecology, we fully cover the leading independent AI companies in China., AI 8% Huanbi increased by 82%. So what?

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In terms of public cloud services.

Revenues were RMB 1.05 billion, representing an increase of three 5% quarter over quarter.

Excluding the CDN business public cloud revenue increased by 11, 8% quarter over quarter with efforts on our three priorities for public cloud services, namely the Xiaomi and kicks off the ecosystem AI business and the city on the strategic adjustments.

Tao Zou: , 15 Xiaodan Zhang, Kingsoft Cloud [inaudible] We will continue to promote CDN business strategy adjustments., CDN 10% 23% CDN 12% [inaudible] In terms of public cloud services, revenues were RMB 1.05 billion, representing an increase of 3.5% quarter over quarter. Excluding CDN business, public cloud revenue increased by 11.

First of all episodes strategic cloud level within the Xiaomi and Gamestop ecosystem, we continue to serve the demand in the ecosystem.

Especially with respect to the highly visible and tangible demand in training and inference from Xiaomi, EV and WPS AI seasonal opportunities in structural industry trends.

This quarter revenue was contributed by Xiaomi ecosystem reached 16%, representing an increase of five percentage points year over year.

Secondly, we vigorously developed our AI business with remarkable agility to emergent venous retrans. Besides the AI opportunities from the Xiaomi ecosystem, we have been fully penetrating leading independent AI companies in China, providing long term secure high performance computing power, which is <unk>.

Tao Zou: We are bearing fruits on our three priorities for public cloud services, namely, the Xiaomi and Kingsoft ecosystem, AI business, and CDN strategic adjustment. First of all, as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we continue to serve the demands in the ecosystem well, especially with respect to the highly visible and tangible demands in training and inference from Xiaomi EV and WPS AI, seizing opportunities in structural industry trends. This quarter, revenues contributed by Xiaomi and the Kingsoft ecosystem reached 16%, representing an increase of 5 percentage points year-over-year.

Really sought after in the market our AI. This represented approximately 8% to our public cloud revenues or an increase of 82% quarter over quarter.

Besides we have signed a loan facility agreement with King Yourself, a corporation obtaining a credit line of RMB, One 5 billion dedicated to the development of AI business.

Certainly we continued to push forward, our strategic adjustments of CDM business. This quarter CDN revenue decreased by nearly 10% compared to last quarter and CDN revenue as a proportion of total revenue has decreased to approximately 20% to 23%.

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Tao Zou: Secondly, we vigorously developed our AI business with remarkable agility to emerging industry trends. Besides the AI opportunities from the Xiaomi and Kingsoft ecosystems, we have been fully penetrating leading independent AI companies in China, providing long-term, secure, high-performance computing power, which is highly sought after in the market. Our AI business represented approximately 8% of our public cloud revenues, or an increase of 82% quarter over quarter. In addition, we have signed a loan facility agreement with Kingsoft Corporation, obtaining a credit line of RMB 1.5 billion dedicated to the development of our AI business. Thirdly, we continued to push forward our strategic adjustments in the CDN business. This quarter, CDN revenue decreased by nearly 10% compared to last quarter, and CDN revenue as a proportion of total revenue decreased to approximately 23%.

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Tao Zou: The revenue share of our largest CDN customer was 12% in this quarter. Top customer concentration has fundamentally been alleviated. How are you?

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Tao Zou: I'm here. 6.7 10.2% , [inaudible] Yi Da Mo Xing Da Shu Ju Xie Zuo Ban Gong Wei Di Zuo, We use Beijing, Wuhan, and Zhuhai as our bases. ,, to support the digitalization of local state-owned enterprises. In the field of digital health, we will continue to promote the five major models to achieve new breakthroughs. Unknown Executive, Xiaodan Zhang, Kingsoft Cloud,, Wuhan University Central Hospital, China Medical Science Institute, and so on. In this area, we continue to deepen our business cooperation with large-scale state-owned banks and continue to improve our large-scale data products and services. , Ping Tai Xiang Meng. Goodbye.

Other revenues were RMB $617 million, increasing by 10, 2% quarter over quarter.

In public service space, we actively seek opportunities of public services cloud and stuff that could cloud.

We implemented standardized operation and maintenance with core components, such as large language motto big data and workspace collaboration.

Getting used cases in public service and enterprise application domains.

With Beijing, Wuhan and drew hi, as our basis, we have built benchmark project radiating two other large and medium sized cities.

This quarter, we successfully join hands with Shenzhen state owned assets cloud to pause it for to facilitate that digitalization and intelligence evolution of local state owned enterprises.

In healthcare, we continued to promote the five visit models and make new breakthroughs.

Inheriting and developing experience from the cooperation with Shanghai, raising hospital, we've replicated and scaled our medical digital capability to more right now in hospitals, including Wuhan Union Hospital drawn on hospital affiliated to Wuhan University and fly Hospital affiliated Chinese Academy.

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In the financial services space, we continue to deepen our business cooperation with large state owned banks, improving our big data product and service capabilities and we can debate of big data platform projects, leading the state owned Bank and trust.

Turning to come up during the quarter Kellogg exhibited stable and healthy revenue and profitability planning up important new customers, while maintaining robust relationships with existing major clients.

Tao Zou: Cliqe's income and profit levels are healthy and stable. On the basis of maintaining the stable cooperation of existing large customers, four well-known customers will be newly signed this quarter. Moving on to Enterprise Cloud Services, total revenues were RMB670 million, increasing by 10.2% quarter over quarter.

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Tao Zou: In the public service space, we actively seized opportunities of the Public Services Cloud and SESAX Cloud. We implemented standardized operation and maintenance with core components such as large language models, big data, and workspace collaboration, targeting use cases in the public service and enterprise application domains. With Beijing, Wuhan, and Zhuhai as our bases, we have built benchmark projects radiating to other large and medium-sized cities. This quarter, we successfully joined hands with Shenzhen State-Owned Assets Cloud to facilitate the digitalization and intelligence evolution of local state-owned enterprises. In the healthcare space, we continued to promote the five business models and make new breakthroughs. Inheriting and developing experience from the cooperation with Shanghai Ruijin Hospital, we replicated and scaled our medical digital capabilities to more renowned hospitals, including Wuhan Union Hospital, Zhongnan Hospital affiliated to Wuhan University, and Fuwai Hospital affiliated to the Chinese Academy of Medical Sciences. In the financial services space, we continued to deepen our business cooperation with large state-owned banks, improving our big data products and service capabilities, and winning the bids for big data platform projects for leading state-owned banks and trusts. Now, turning to Temeloft.

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Tao Zou: During the quarter, Temeloft exhibited stable and healthy revenue and profitability, signing up four new customers while maintaining robust relationships with existing major clients. [inaudible] Unknown Executive, Xiaodan Zhang, Kingsoft Cloud, She's just a girl. We will continue to upgrade core products. [inaudible],EP-CX7 The performance of computing, memory, network, and storage is significantly improved. [inaudible] To better satisfy high-performance data processing scenarios, such as memory separation, AI, and animal radiation, we have launched an object-based fast storage solution.

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In terms of product and technology, we uphold our principle of building successful based on technology and innovation delivering best in class customer experience across our core product offerings.

In computing space, we continued to upgrade our core products and focusing on improving the stability and domestic environment compatibility.

This quarter, we launched our electric battery metal compute product EPC Ax, seven with significantly improved computing memory network and storage performance.

Yes storage space to better serve high performance use cases, such as decoupling of computing and storage AI computer graphics rendering.

We have released the extreme version.

Tao Zou: [inaudible] Unknown Executive, Xiaodan Zhang, Kingsoft Cloud, can better support autonomous driving, AI, data models, and other scenarios. [inaudible] Cloud Platform, in a research report published by SIDI, listed the market for private clouds and the market leaders of private cloud system platforms. This is a great recognition of the cloud platform products and services. In terms of AI, Kingsoft Cloud's MaaS mutual-reliance reasoning specialization program won the award for the most innovative AI solution program of the 2023 China Internet Economic Forum. Our AI product center has also reached deep development cooperation with Kingshan Office to strengthen model development capabilities for corporate services and business scenarios. In terms of product and technology, we uphold our principle of building success based on technology and innovation, delivering best-in-class customer experiences across our four product offerings.

Storage service equipped with high performing dynamic scaling and out of the box features.

In big data space, we upgraded our cloud native lighthouse platform with maximum throughput improvement by full time for batch processing tasks.

That is supporting use cases of autonomous driving AI and data models.

In enterprise cloud space, our Galaxy Dot Cleveland rents in the market leader quadrant of both the private cloud market and the private cloud system platform market in the research report released by <unk> consulting a great recognition of the products and services capabilities.

This quarter Galaxy stack platform released another update version, adding six cloud products and the more than 100 functions perfecting the comprehensive enterprise cloud system, which powers our end to end service cloud building cloud migration cloud usage and cloud management.

In terms of AI, our mass mutual trust dedicated solution was awarded the most innovative AI solution by China Internet economy for 2023.

Our AI product Center deepened research cooperation with King's office to strengthen motto research capability.

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Tao Zou: In computing space, we continue to upgrade our core products, focusing on improving stability and domestic environment compatibility. This quarter, we launched our elastic bare metal compute product, EPC-X7, with significantly improved computing, memory, network, and storage performance in storage space, to better serve high-performance use cases, such as decoupling of computing and storage, AI, and computer graphic rendering. We have released the Extreme version of Object Storage Service, equipped with high-performance, dynamic scaling, and out-of-the-box features. In the big data space, we upgraded our cloud-native Lakehouse platform with maximum throughput improvement by four times for batch processing tasks, better supporting use cases of autonomous driving, AI, and data models.

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Current research center have been quickly expanded.

By the end of 2023 total employees exceed.

Tao Zou: In the enterprise cloud space, our Galaxy Stack platform ranks in the market leader quadrant of both the private cloud market and the private cloud system platform market. This is a great recognition of the products and services capabilities. This quarter, the Galaxy Stack platform released another updated version, adding 6 cloud products and more than 100 functions, perfecting the comprehensive enterprise cloud system which powers our end-to-end service of cloud building, cloud migration, cloud usage, and cloud management.

Exceeded 500 accounted for one third of total R&D teams and half of them post graduate degrees.

Our Beijing, Wuhan do R&D center strategy attracts talent for our long term development and ensures R&D intensity as we stick to our build success based on technology and innovation as principal while managing R&D expenses effectively.

In summary, we have achieved a great milestones in executing high quality and sustainable development strategy without profitability measures improving continuously.

Tao Zou: In terms of AI, our mass mutual trust dedicated zone solution was awarded the most innovative AI solution by the China Internet Economy Forum 2023. Meanwhile, our AI product center deepened research cooperation with Kingsoft's office to strengthen model research capabilities and serve enterprise use cases. , Wuhan R&D Center and more than 500 people from the Wuhan R&D Center at the end of 2023 will account for about one-third of the company's overall R&D team, accounting for 50% of the company's revenue. [inaudible] Geely, In 2023, our high-quality sustainable development strategy will work. ,,, AI,,,,,, Next, let's welcome CFO Henry to introduce the four-year and full-year financial results. Thank you.

Looking forward, we will keep our original aspiration and long term strategy to create value to our customers and society through our business services embrace AI opportunity and continue to improve our profitability.

Leading with increasing management efficiency, we will keep implementing strict cost and expense control in house talent training and especially the Hunter Research Center and further improve the company's operating efficiently.

I will now pass the call over to our CFO Henry to go over our financials for the fourth quarter and fiscal year 2023. Thank you.

Thank you and welcome everyone for joining our call.

Now I will walk you through the financial results for the fourth quarter and a physical year 2023.

Upholding the strategy of a high quality sustainable development. We are pleased to have closed yet on that on your three with meaningful milestones.

It's meant around their quality margin expansion and operating efficiency.

For the fourth quarter will deliver another quarter of steady profitability improvement.

Our adjusted gross profit continue to grow for the sixth consecutive quarter and achieved 262.5 mid at RMB.

Increased by 55, 8% year over year.

Representing adjusted gross margin of 15, 2%.

It's a record high for the company and a significantly improved three one percentage point.

Powell with last quarter.

Our normalized adjusted EBITDA narrowed from negative $216 3 million RMB.

In the same period last year.

And then actually a 44.1 million RMB in the last quarter.

Two an active $27 7 million RMB this quarter.

Tao Zou: Moving on to talent strategy, Wuhan Research Center has been quickly expanding. By the end of 2023, total employees in Wuhan exceeded 500, accounting for one third of the total R&D teams, and half of them hold graduate degrees.

As a result normalized adjusted EBITDA margin further narrowed from that kept 10.2 in the same period last year and a negative two 7% in the same in the last quarter to a negative one 6% this quarter.

Our total revenue or 1000 722.5 million RMB this quarter.

Haijian He: Our Beijing-Wuhan Dual R&D Center Strategy attracts talent for our long-term development and ensures R&D intensity as we stick to our Build Success Based on Technology and Innovations principle, while managing R&D expenses effectively. In summary, we have achieved great milestones in executing high quality and sustainable development strategies, with our profitability measures improving continuously. Looking forward, we will keep our original aspiration and long-term strategy to create value for our customers and society through our business services, embrace AI opportunities, and continue to improve our profitability. Leading with increasing management efficiency, we will keep imposing strict cost and expense control, enhance talent training, and expansion of Wuhan Research Center, and further improve the company's operating efficiency. I would now pass the call over to our CFO, Henry, to go over our financials for Thank you.

Increased by 6% sequentially.

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Representing an increase of 3.5% compared with $1016 6 million RMB in the last quarter.

The increase was primarily due to the expansion from AI related revenues and partially offset by our strategic scaling down of our stadium business.

Approximately 10% quarter over quarter.

Contributing around 23% of total revenues.

Revenue from Enterprise Cloud services, whereas seven were 678 3 million RMB, representing an increase of 10, 2%.

From 600 085 million RMB in the last quarter.

As more projects are scheduled for delivery at the end of the year.

We're continuing to enhance our cost control measures, especially.

Especially in Q4, we refined the procurement process of CDM business.

Total cost of revenues decreased by 25, 4% year over year to $1469 3 million RMB.

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Haijian He: Xièxiè zu zu, thank you, and welcome everyone for joining the call. Now I will walk you through the financial results for the fourth quarter and the physical year 2023. Upholding the strategy of high quality and sustainable development, we are pleased to close the year 2023 with meaningful milestones on enhancement of revenue quality, margin expansion, and operating efficiency. For the fourth quarter, we'll deliver another quarter of steady profitability improvement. Our adjusted growth profit continued to grow for the sixth consecutive quarter and achieved 262.5 million RMB, increased by 55.8% year over year, representing an adjusted growth margin of 15.2%, which is a record high for the company and a significantly improved 3.1 percentage points compared with last quarter. Our normalized adjusted EBITDA narrowed from negative 216.3 milli-RMB in the same period of last year and an active 44.1 million RMB in the last quarter Normalized adjusted EBITDA margin further narrowed from negative 10.2 in the same period last year and a negative 2.7 percent in the same period last quarter to a negative 1.6 percent this quarter.

4 million RMB this quarter that decrease was in line with our adjustments where CDN services.

Depreciation and amortization costs decreased by 39, 2% from 241 7 million RMB.

Two $146 9 million RMB.

The decrease was mainly due to a previous impairment of long lived assets.

Solution development 10 of services cost increased by 8%.

From $465 8 million RMB, two $502 9 million RMB this quarter.

This increase was mainly due to business expansion of Camelot.

Fulfillment costs and other costs were $9 4 million RMB $69 7 million RMB this quarter, which are in line with our enterprise cloud project quality cultural strategy.

Adjusted gross profit this quarter increased by 55, 8% year over year to $262 5 million RMB, representing an adjusted gross margin of 15, 2% this quarter compared with seven 9% in the same period of last year.

And 12, 1% last quarter, making another record high.

While our sixth consecutive quarter of steady margin improvement.

In terms of expenses.

Excluding share based compensation and impairment of long lived assets.

Our total adjusted operating expenses were $494 8 million RMB decreased by 32, 2% year over year and at one point up et cetera from last quarter.

Haijian He: Our total revenue was 1,722.5 million RMB this quarter, an increase of 6% sequentially, of which revenues from public cloud services were 1,052 million RMB, representing an increase of 3.5% compared with 1,016.6 million RMB in the last quarter. The increase was primarily due to the expansion from AI-related revenues, and partially offset by our strategic scaling down of our CDM business by approximately 10% quarter over quarter, contributing around 23% of total revenue. Revenues from enterprise cloud services were 670.3 million RMB, representing an increase of 10.2% from 608.5 million RMB in the last quarter, as more projects are scheduled for delivery towards the end of the year.

Of which our adjusted R&D expenses were 162.5 mid at RMB.

Decreased by 13, 2% from last quarter.

As we continue to focus on utilizing our Beijing Wuhan deal Research Center and a welcome new graduate campus recruiting employees.

Adjusted selling and marketing expenses were 106.7 million RMB.

Representing a decrease of six 5%.

From 114.1 that I'd be last quarter.

Adjusted SG&A expenses increased by 11, 1%.

$203 1 million on the last quarter to $225 6 million RMB.

The increase was mainly due to a year and a payment to vendors.

As of December 31.

Plenty of 'twenty three.

Our cash and cash equivalents and the long term investments amounted to $2 3 billion RMB, providing us sufficient liquidity for operations.

We have entered into a loan facility agreement with.

<unk> Corporation with a cap of 1.5 bid at RMB.

They do a dedicated support our AI business development.

Demonstrates our confidence and commitment of our Eagle system embracing the future of Iraq.

Haijian He: We continue to enhance our cost control measures. Especially in Q4, we refined the procurement process for the CDM business. Total cost of revenues decreased by 25.4% year-over-year to 1,469.3 million RMB. IDC costs decreased significantly by 30% year-over-year from $1,000 to 57.6 million RMB to 740.4 million RMB this quarter. The decrease was in line with our adjustments with CDN services. Depreciation and amortization cost decreased by 39.2% from 241.7 million RMB to 146.9 milliampere.

The capital expenditure for this quarter was 1000.

$415 8 million RMB.

As we invested in our infrastructure to build a sustainable AI business.

Our operating cash flow once again recorded in that inflow returned $16 8 million RMB.

Since the second quarter this year.

We have been generating net inflow for three consecutive quarters.

It resulted from our market improvements as well as our enhanced internal cash management.

For the full year 2023, our total revenue were $7047 5 million RMB.

non-GAAP gross profit increased to $859 9 million RMB in 'twenty or 'twenty three.

Haijian He: The decrease was mainly due to previous impairments of our long-lived assets. However, solution development and services cost increased by 8%, from 465.8 milliampere to 502.9 million RMB this quarter. This increase was mainly due to business expansion of Camelot. Fulfillment costs and other costs were 9.4 million RMB and 69.7 million RMB this quarter, which are in line with our enterprise cloud project quality control strategy. Adjusted growth profits of this quarter increased by 55.8% year-over-year to 262.5 million RMB, representing an adjusted growth margin of 15.2% this quarter, compared with 7.9% in the same period of last year and 12.1% last quarter, making another record high, as well as a sixth consecutive quarter of steady margin improvement. In terms of expenses, excluding share-based compensation and impairment of long-lived asset, our total adjusted operating expenses were 494.8 Adjusted selling and marketing expenses were 106.7 million RMB, representing a decrease of 6.5% from 114.1 million RMB last quarter. Adjusted GNA expenses increased by 11.1% from 203.1 million RMB last quarter to 225.6 million RMB.

Almost doubled from $445 2 million RMB and quantify the suit.

non-GAAP gross margin increased to 12, 2% in 2023 from five 4% in 'twenty or 'twenty two.

Such increase this was primarily because of a combination of revenue mix and our effective cost controls.

Testing behind the success of our high quality and a sustainable development the strategy.

non-GAAP EBITDA.

Negative $242 1 million.

Compared with negative $726 2 million RMB in California too.

non-GAAP EBITDA margin was negative three 4% compared with negative eight 9% in 'twenty or 'twenty two.

Looking ahead with.

The positive trend in profitability it will persist as we continue to pursue a high quality and a sustainable development strategy and unlock synergies within the Xiaomi and I can't talk group ecosystems.

As well as integrate our AI technology, and Eagle system, and a new era second.

This concludes our prepared remarks.

We are now happy to take out.

In those matter any English please.

Please go ahead. Thank you.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced until we've until your question. Please press star one and one again once again, please press star one on your telephone and wait for your name to Vietnam.

Thank you.

We are now going to see me that want to ask a question.

Okay.

And that question comes from the line of Sheldon Zhang from C. ICC. Please ask your question. Your line is open.

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Haijian He: The increase was mainly due to the year-end payment to vendors. As of December 31, 2023, Our cash and cash equivalents and the long-term investments amounted to 2.3 billion RMB, providing us sufficient liquidity for operations. We have entered into a non-facility agreement with Kingsoft Corporation with a cap of 1.5 billion RMB. It will dedicatedly support our AI business development, and it will demonstrate the confidence and commitment of our ecosystem to the future of AI. The capital expenditure for this quarter was $1,000.

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Haijian He: 415.8 milliamps, as we invested in our infrastructure to build a sustainable AI business. Our operating cash flow once again recorded a net inflow reaching 16.8 million RMB since the second quarter this year. We have been generating net inflow for three consecutive quarters, which resulted from our margin improvements, as well as our enhanced internal cash management. For the full year 2023, our total revenue was 7,047.5 million RMB; non-gap growth profit increased to 859.9 million RMB in 2023, almost doubled from 445.2 million RMB in 2022; non-gap growth margin increased to 12.2% in 2023 from 5.4% Such increases were primarily because of the combination of the revenue mix and our effective cost controls, testifying to the success of our high quality and sustainable development strategy.

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Hi, Jonathan.

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Oh, a question what are things all at once.

Thanks management for taking my questions and my first question is regarding the AI strategy. So the company has been actively investing in AI for the past year. So could management give us some color on the market competency up your AI related products and solutions.

I'll ask on this year's Capex plan on the revenue expectation.

And my second question is on gross margin.

So Casey has achieved significant gross margin improvement last year, partially extra but I'll tell you what that change you are wrapping index. So azure CDN business, such as Mad as a person and what do you think of the gross margin Kirkman pace going all right. Thank you.

Haijian He: Nangab Ipitha was negative 242.1 million RMB compared with negative 726.2 million RMB in 2022; non-gap EBITDA margin was negative 3.4%, compared with negative 8.9% in 2022. Looking ahead, we believe the positive trend in profitability will persist as we continue to pursue a high-quality and sustainable development strategy and unlock synergies within the Xiaomi and Kingsoft Group ecosystem, as well as integrate our AI technology and ecosystem into Thank you.

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Nicole Shan: This concludes our prepared remarks. Thank you for your attention, and we are now happy to take your questions. Please ask your question in both Mandarin and English, if possible. Operator, please go ahead. Thank you. As a reminder, to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again.

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Operator: Once again, please press star 1 and 1 on your telephone and wait for your name to be announced. Thank you. We are now going to proceed with our first question. The questions come from the line of Xiaodan Zhang from CICC. Please ask your question. Your line is open.

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Xiaodan Zhang: Good evening, Chairman Zhou, Chairman Henry, and Nicole. Thank you for accepting my question. I have two questions to ask. The first question is about AI. We saw that in the past year, the company has been very active in planning the strategic direction of AI. I would like to ask the management team to share the current market competitiveness of some of our related products, including solutions. What is the expectation of the company's investment plan and revenue in the field of AI this year? My second question is about our profit margin. In fact, the company's profit margin has increased significantly in the past year. In fact, part of it is due to the optimization of our income structure, which is the continuous decline of the CDM ratio.

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And frankly, we saw that I think in terms of the margin expansion.

There are three fundamental drivers for the margins I think as I pointed out correctly. The first one obviously.

It's the continuous mix change of the CDM business versus others. So you'll see that the CDM business itself actually going through a cycle, but right. Now we are in a kind of more stable period that we are going to see a potential stability.

Video revenue contribution as well as the client usage patterns that will contribute to naturally to a margin expansion I think that's contributed one third of the of the margin improvement.

Xiaodan Zhang: Given that this year's CDM business optimization has reached its peak, I would like to ask the management team how they view our overall profit margin optimization rhythm and space. Now, I will quickly translate the question. So, thanks, management, for taking my questions. And my first question is regarding the AI strategy. The company has been actively investing in AI for the past year. So, could management give us some color on the market competitiveness of your AI-related products and solutions, as well as on this year's capex plan and revenue expectation? And my second question is on gross margin.

The second thing I also want to mention probably I didn't notice a little on a plant outage. So our measure us and the new management initiatives for example, including renegotiation.

Supply chain contracts with our suppliers to cutting down the cost basis that actually is not happening a one day or single month of the year. As you can expect it actually spent over for example at a four year from last year right and those contracts on the repricing on a cost basis would be <unk>.

Active on a rolling basis right from January to December of last year, and you actually extrapolate those trends towards 2020 for those.

Tao Zou: So KC achieved significant gross margin improvement last year, partially attributable to the change in your revenue mix. So as your CDM business adjustment is approaching the end, what do you think of the gross margin improvement pace going forward? Thank you. Xiaodan, I'll answer the first question, and then Harry will answer the second one.

Good benefits and the positive impact from the trade negotiation and the lower the cost basis will actually carry the continuous benefits to our margin or cost into 'twenty 'twenty four I think that Powell contributing the second one third of the margin expansion.

The third is also they probably didn't know that it's really about we actually I suppose on mentioning the prepared remarks is getting the better quality of the projects not only about the cloud part of yourself, but also on the enterprise side as well as those of vertical including the financial services health care and so.

Tao Zou: Chenglong, you said that we did make a comprehensive layout for the whole AI business last year, and the results are also good. So the key question you just asked is how competitive our AI products are in the market. I can't say that we are stronger than others; I can only say that because of our special neutral position, we have gained the market's trust. Yes, we talked about this in the past Q&A sessions.

And the high quality of public cloud projects as well and those projects as we signed a contract some of them I was doing about backlogs and that won't be unleashed in the dealer body.

Tao Zou: Because of the competition for big models, we don't make big models ourselves, but as an independent cloud provider, we still have a clear advantage in this round of competition. In fact, looking at the results, these leading AI companies are basically our customers. So I can't just say that our market competitiveness is better or worse than others. I can only say that our market is special.

And in our history.

Tree, especially in 'twenty, three and we actually are seeing a good experience and a good trends that those enterprise called projects. The single level contract revenue contribution has expanded from let's say.

Single digits in the history, a few years ago to double digits and right. Now we are seeing those trends actually a contributor to be improved so the enterprise cloud margin expansion high quality initiatives and our strategy was set since 2022, that's already see some quota adults. So this products are contributing the last one third of the.

Tao Zou: As for the investment, we will follow the pace of AI development based on our customers' existing and new AI customers, and we will invest accordingly. It is not convenient to disclose the specific investment rhythm and amount yet.

Our marketing expansion so to conclude.

I think we do see a positive trend, even though I understand the shutdown costs. There may be in Q4, you do see a very good Q on Q jump off the margin about three percentage points, but I think we're in a very.

Haijian He: I think in terms of the margin expansion, I think there are three fundamental drivers for the margins. As you point out correctly, the first one obviously is the continuous mixed change of the CDM business versus others. So as you'll see, the CDM business itself is actually going through a cycle, but right now, we are in a kind of more stable period that we are going to see potential stability of the CDM revenue contribution as well as client usage patterns that will contribute naturally to a margin expansion. I think that's contributed one third of the margin improvement. The second thing I also want to mention, probably you didn't notice, I want to point out that our measures and the new management initiatives, for example, including renegotiation of the supply chain contracts with our suppliers to cut down the cost basis, that actually is not happening on one day or a single month of the year, as you can expect. It actually happens over, for example, the full year from last year.

Good momentum.

Confident away at that in Q1 going forward given the three reasons I just mentioned our gross margin will continue to be a seeing a good results going forward.

Hum.

So allow me to also translate it for him.

Uh huh.

Our first question.

His question is about the competitiveness.

Our C&I products.

That's helpful.

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And last year, we have comprehensive way.

One of the very hard.

Our AI business. However, it would be harder for me to directly comment on the competitiveness of our product versus other of our peers. However, I would say that because of our unique positioning all of our new trial again independent we have.

Got it from the result, we have become a preferred choice.

Cloud service provider biologic among all independent AI.

Lost language model.

And that exactly because if we don't do our lifetime, which model and do all the time.

We model ourselves and therefore it is around the opportunities we have seen as a result, we are already covering a significant number of independents.

Haijian He: And those contracts and the repricing on the cost basis will be effective on a rolling basis from January to December of last year. And you're actually traveling those trends toward 2024. Good benefits and a positive impact from the renegotiation and the lower the cost basis will actually carry continuous benefits to our margin and cost into 2020. I think that part will contribute to the second one-third of the margin expansion. The third is, also, you probably didn't notice, is really about, as Tao Zou mentioned in the prepared remarks, getting better quality of projects, not only for the cloud project itself but also on the enterprise side, as well as those verticals, including financial services, healthcare, and certain high-quality public cloud projects as well.

It would be called me all customers and you also asked about the future investment in terms of Capex I would say that the rule of thumb.

As we will be continuing to investing based on the demand and the pipeline.

The customers we have.

The specifics.

Regards to the specific amount and a specific dollar amount and the temple of.

Such investments.

Is.

It's relatively difficult for me to comment at this stage.

Yes.

Operator, Please go ahead.

Thank you.

We are not going to proceed with our next question.

Okay.

And the question comes from the line of Daily Life from Bank of America Securities. Please ask your question. Your line is open.

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Haijian He: And in history, especially in 2023, we actually have seen a good experience and a good trend that those enterprise cloud projects, the single level contract revenue contribution has expanded from, let's say, single digits in history a few years ago to double digits. And right now, we are seeing those trends actually continue to be improved. So the enterprise cloud margin expansion and high quality initiatives and the strategy we set for 2022 have already seen some good results. So this part is actually contributing the last one third of the margin expansion.

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Haijian He: So to conclude, I think we do see a positive trend, even though I understand, Xiaodan, your concern may be in Q4, you do see a very good Q on Q jump of the margin by about three percentage points. But I think we are on a very good momentum and confidently believe that in Q1 and going forward, given the three reasons I just mentioned, our growth margin will continue, and we will see a good result going forward. So, allow me to also translate it. My first question is about the competitiveness of our AI products. We did in the lab, and we worked very hard on extending our AI. However, it would be hard at last, right?

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And gentlemen, it sounds management for taking my question two questions first of all he has found the es business.

Could you share some color about the supply and demand trends recently.

How do we see the growth drivers for the AI.

Davidson.

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How do you call excuse me is going forward and the key drivers.

Anthony.

And my second question about the margin trends looking.

Haijian He: Power BI product of our peers. However, I would say that because of our, We have, if you look at it from the results, we have become a preferred choice of cloud service provider by a large amount of independent AI, a large language model AI providers. And that is exactly because we don't do our large-language model and build our large-language model ourselves.

Two two.

It was on the need for them.

And how do we see the margins such as the adjusted EBIT margin and constant lack of share based compensation cost change. Thank you.

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Haijian He: And therefore, in this round of opportunities, As a result, we are already working with a significant number of independent AI companies that are becoming our customers. And you also asked about future investment in terms of CapEx. I would say that the rule of thumb is we will continue to be investing based on the demand and the pipeline of the customers we have. However, as regards the specific amount and specific dollar amount and the tempo of such investment, it's relatively difficult for me to comment at this time. Thank you.

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Operator: We are now going to proceed with our next question, and the questions come from the line of Daily Life from Bank of America Securities. Please ask your question. Your line is open. Good evening, everyone.

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Unknown Executive: Thank you for accepting my question. I have two questions. The first one is about AI. As we mentioned before, demand is far greater than supply. What is the current situation with demand and supply? If supply is short now, how will our corresponding chips solve the problem of domestic and overseas purchases? And where will the future growth of AI-assisted business occur?

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Unknown Executive: Will it be new customers, or will some customers meet the demand? The second question is about our profit margin. For example, in the next 24 years, what are the directional values of EBITDA, Adjusted EBITDA, or some costs, such as FPC costs? Thank you.

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Unknown Executive: I will simply translate it here. Thank management for taking my question. I have two questions.

Certainly.

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Tao Zou: The first one is about the AI business. Could you share some color about the supply and demand trend recently and how we see the growth drivers for the AI data center, and AI public cloud business going forward, and the key drivers? And secondly, my second question about the margin trend. Looking into 2004, how do we see the margins, such as the adjusted EBITDA margin and some costs, like a share-based composition cost trend? Thank you. OK, I'll answer the first question first. Liu Dadao, let's see if you have any questions.

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Tao Zou: Indeed, as I said before, the demand for AI for chips is greater than supply. This is a result of the whole year last year. Yes, in fact, we all know that there were some changes in the entire external environment last year. So this gap has not fundamentally changed. In fact, to some extent, it is still deteriorating.

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Tao Zou: Of course, on the other hand, I also talked about the rapid rise of the domestic economy last year. In fact, we have been paying attention to it since the day before yesterday. In fact, to some extent, it has also played a certain part in resolving the situation. But overall, the market is still... [inaudible] As the number of model parameters is increasing, the number of nodes is also increasing. From our point of view, the demand in the market is still too high. It is not completely solved, and our judgment is that this may be a long-term problem. As long as the trend continues to develop, my judgment will not change.?? So, in order to deal with this situation, we have a few different strategies. On the one hand, we have always predicted this situation, so we have been actively cooperating with domestic computing companies to build a domestic computing zone.,... [inaudible] Okay?

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Haijian He: Yes, this is the current situation. Anyway, the conclusion is that the development demand for AI is still very high, but there is still a lot of pressure on supply and demand. So we will try our best to satisfy our clients in all possible channels. When it comes to AI growth factors, I will talk about it first, and then Tao can add to it.

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Haijian He: What I see is that the older users, [inaudible] To put it simply, the demand for the expansion of old customers and the demand for the expansion of new customers who are ready to give the model to the business to re-enable are all there. But at present, the proportion of old customers is getting higher and higher. In my personal opinion, as AI is getting deeper and deeper into people's hearts, it is getting more and more recognized and accepted by everyone. Maybe there is still a lot of room for the growth of new customers in the future. Anyway, I am more convinced of this. I'd like to add a little bit of information about the growth chain.

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Haijian He: As Mr. Zou just said, old customers and new customers are very important. (inaudible) Okay, cut...

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Haijian He: Yes, you mentioned the situation of demand for GPU chips, more than supply, which has been the key theme for last year. And that is why, during the past year, we have also been trying our best to meet the clients', our customers', demand. Well, the situation this year, there are some changes, right? On the one hand, the production of some made-in-China chips has been alleviating, to some extent, the issue. However, we have also seen other factors, especially geographic tension factors, deteriorating the situation.

Yes, you mentioned that the situation of demand for our CPU chips.

More than supply.

As has been the key theme for last year.

And that is why during the half year. We have also been trying our best to meet.

Our customers demand.

While the situation this year, there's no changes right.

What happened.

Production mainly.

Maybe in China.

Have been alleviating.

On the issue.

However, we have also seen other factors, especially the geographics of tension.

Turning to factors.

Haijian He: So, overall speaking, we see that since the AI market is still booming and demand continues to increase, the overall theme of the demand and supply balance is still that demand is largely exceeding that of supply. And we do not expect that kind of relationship to have any material change in the near future. Now, in terms of our response strategy to this situation, on the one hand, we're working with some of the firms that have computing power within China to build dedicated computing power zones together. And the second thing that we do is to follow up with new products that are within compliant premises. They're allowed to supply in the Chinese market.

Deteriorating situation so overall speaking.

We see that offset the AI market is still booming and demand continues to increase the overall theme of the demand and supply balance is still the demand largely if not exceeding that.

And we do not expect that kind of relationship to have any material change.

In the near term future.

Now in terms of our responses a strategy.

To this situation.

And is that we're working with.

Some of the firms that have computing power.

Within China to building a dedicated computing Howard on them together.

And the second thing that we do it to a whole lot with new products that are winning on the compliance premises, they're allowed to supply in China market.

Haijian He: And in terms of growth drivers, there are basically two types of growth drivers. One is old comers, the existing, or let's say old customers, which are mainly characterized by the independent AI, large language model customers that we have been serving recently. And the second type is new customers, which are typically not independent AI and large language model companies. However, those companies that are ready to leverage the capability of large language models to empower their existing business, for example, EV customers. Currently, we see that the growth driver coming from existing customers takes a higher proportion. However, we do expect that in the future, the potential for new customers demand will have higher growth potential. And Mr. Liu Tao, our SVP, also added that there are several types of growth drivers. One is the internet companies training their own models and using their in-house models, and by using the inference capability of computer power to use their in-house models.

And in terms of growth drivers there are basically two types of.

Gross drivers one is a whole number.

Well, let's say old customers, which are mainly characterized by the independent AI US language model customer that we have been serving recently and the second type is new customers.

Which are typically not the independent AI lost language model companies. However are those companies that are ready to leverage that capability up last language model to empower their existing business.

For example, EV customers currently.

Currently we see that the bus driver coming from existing customers, who are taking a high proportion of however, we do expect that in the future the potential for new customers demand has higher.

Our gross financial and Mr. Tao our SPT also added that there are several types of growth drivers. One is the internet companies training their own models and using their in house models and by using the inference capability of the computing power to use are there any hot models.

Haijian He: And secondly, the progress and the launch of Sora that is leading to a wave of demand coming from the video side of things. And the third part would be the new companies, like Mr. Toto mentioned, of the EV autonomous driving kind of demand. Yeah, thank you.

And secondly is the the advent and the launch of Sarah that leading to a wave of demand coming from the video side of things and the third part would be the new companies like Lyft adult Hal mentioned of EV and autonomous driving kind of a demand. Thank you.

Haijian He: So I will take on the second question. I appreciate your notice on the expansion on the margin side. So I think there are a few kind of major directions we're trying to achieve going forward at the same time. First of all, we're aiming to keep a kill-on-kill expansion on the growth margin. Right, so this actually is driven by cost cutting on the supply chains and the better optimization on the resources we have, and cutting certain loss-making Computing Regions and certain disposal of certain equipment that we don't think are fitting to today's client requirements. So all the combination of actions are contributing to the much expansion of the growth model.

Yes. Thank you.

So I'm going to take on a second question a pressure you'll notice on the expansion on the modern side.

So I think there.

There are a few kind of major directions, who are trying to achieve going forward at the same time first of all its route to aiming to keep a Q on Q expansion on the gross margin side right. So this actually is driven by the cost cutting on the supply channels and better off.

Nation on the resources, we have.

And the cutting of certain lossmaking.

Computing reagents and a certain disposal for certain equipments that we don't think we're fitting to today's client requirements. So all the combination of actions were contributing to the margin expansion for gross margin and <unk>.

Haijian He: And as I explained to the first question, those efforts are already in place, and we're going to see that impact gradually delivered going forward next year's quarter as well. So the first, as I mentioned, is really about expansion on a queue-on-queue basis on a gross basis. So the second part is really about narrowing and better managing the expenses and operation expenses, including, for example, the better management of the human capital costs, including the internal efficiency and the streaming line, all the internal management initiatives that were actually well contributing to the expansion of the EPWM. So, as you can see, our expenses between the line of the gross margin and the EBITDA margin continue to optimize and reduce as well in the past few quarters. So that has proven the management team has already got some good experience and practiced those skills pretty well, and we think we can carry on that in the next few quarters.

And as I explained to the first question.

Those efforts have already in place and then we're going to see those impact will be gradually deliver going forward in next few quarters as well. So the first is a must.

It's really about expansion.

Q on Q basis or on a gross margin. So the second part is really about narrow and better managing the expenses and the operation.

<unk> expenses, including for example are the better management of the the human capital costs, including the internal efficiency and streaming line all the internal management initiatives that are actually contributing for the expansion of the EBITDA margin. So as you can see our expenses between rely after.

Gross margin and EBITDA margin continue to optimize that and the reduced as well in the past few quarters, so that a proven management team.

Has already got some good experience in our practice to those skills pretty well and we think we can carry on that in next few quarters. So our second aim is to.

Haijian He: So our second aim is to improve the EBITDA margin on a continual basis. So we are confident that as we make our efforts, our AP data margin will be approaching the breakeven in the short term. And the third is we're also adding to another KPI for ourselves in terms of internal management. We're trying to not only make the EPI margin breakeven, but we're also trying to make the company with a better quality of revenue and a continuous optimized revenue mix and picking the right ones, and also expanding the AI exposure, will be in a very good position to have the possibility to see a good trend of OP margin expansion as well. So I think these are the three goals we are trying to achieve in 2024.

Improved the EBITDA margin on a computer basis. So we are confident to see as we make our efforts our EBITDA margin will be getting to approaching the breakeven of short term of time.

And the third is we are also adding to another kpis for ourself in terms of internal management, we're trying to not only making the EBITA margin breakeven by the way also trying to making the company with a better quality of revenue and a continuous opt in milestone revenue mix and picking the right clients and also expanding our exposures.

We'll be in a very good position to have the possibility to see a good trends of op margin expansion as well. So I think these are the three goals who are trying to achieve in 'twenty than before while we are not in a position today to give a clear guidance about the timing of the EBITDA margin breakeven as well as.

Haijian He: While we are not in a position today to give clear guidance about the timing of the EBITDA margin breakeven, as well as the profitability on the OP margin side, we are confident to say that all the initiatives in place will see good results going forward in the next few quarters. Probably, we can observe. And to a question about the SBC cost. One thing I want to note is that, based on the accounting rules, the SBC cost was booked based on the share price at the time when the ESOP and the shares were granted to the employees, not on the vesting period of time.

Profitability on O P module side.

We are confident to say that all the initiatives in place where I see that in good results going forward.

Next few quarters, probably we can all observe and two a question with the SBC cost.

One thing I want to notice that based on accounting rules. The SPC Cosworth book based on the share price at the time when the Aesop and the shares was granted to the employees not on the vesting period of time, so when the share price. It was high those costs will be booked at the amortizing next few years.

Haijian He: So when the share price was high, those costs would have been booked and amortized in the next few years. So I don't think given the volatility of the capital markets for many of the shares today, the SBC line is reflecting the true value, i.e., the market value of the ESOP value we granted to the employees. So those values need to be revisited and recalculated if you want to do a model.

So I don't think given the volatility of the cabinet market for many of the shares today. The SBC line is reflecting the true value I E. The market value of the of the of the Aesop value with granted to the employees. So those battery will be need to be revisited and recalculate. If you wanted to do a model, but putting all the.

Haijian He: But putting all things together, the company has adopted a very prudent way of granting and investing the shares, as you may see from the announcement. And also, we're extending third investing schedules to keep the company employee working a bit longer and with better. So, as you can see, from 2022 to 2023, our SBC cost declined from roughly 360 million RMB in 2022 to drop about half to 180 million RMB in 2023.

All things together the company has adopted a very prudent way of granting and divesting. The chefs as you may see from the announcements and also we're extending a third investing schedules to keep the company employee walking at the longer end it with a better incentive.

So as you can see from 'twenty to 'twenty two two times at under three <unk> SBC cost has declined from roughly 316 million RMB in 2022.

To drop about half to one 8 million RMB in 2023. So I think we are with a prudent attitude from issuing granting of divesting that yourself and I think going forward youre going to see a better and a narrower line between the GAAP and non-GAAP margin as well.

Haijian He: So I think we are taking a prudent attitude from issuing, granting, and investing the ESOP. And I think going forward, you're going to see a better and narrower line between the gap and non-gap margin as well.

Thanks.

And then last question.

Operator: Operator will be in line at the last minute. Thank you. We are now going to proceed with our last question, and the questions come from Zolana Vienes-Liu from Goldman Sachs. Please ask your question.

Thank you we are now going to proceed with our last question.

Yeah.

And the question comes from the line of Ian is you from Goldman Sachs. Please ask your question.

This also has.

No additional or if you want and what she calls on the Union.

Unknown Executive: Thank you, Mr. Feng, Mr. Harris, and Mr. Clark, for accepting my questions. I'm Unis from Kaohsiung, and I'd like to ask Timothy Zhao a question on behalf of the analysts. First of all, congratulations on the company's strong performance. I have two questions.

Sure Yeah, I think Alex you one last one.

So you're going from California.

<unk> Merrill.

Merrill Lynch from quantifying that.

Is that kind of thing.

And Chanel no John.

It all comes on that hits the Honeywell.

Unknown Executive: The first one is about the industry cloud. I'd like to know what kind of strategic planning you have for the industry cloud in 2024 and if you see any good business development trends in this industry. The second question is about some news about public cloud price competition. I'd like to know how you see the company's business advantages, the competition environment, and how to deal with the competition in this industry. I will quickly translate myself.

Yeah, that's yeah, Oh, Columbia, when we're kind of going on.

Hey, John.

Your line is now open.

Consequently, Sean Yeah.

We honestly.

Yeah.

Yes, I was hoping John Okay.

Okay.

So could management talk about the strategic planning for enterprise called in 2024.

The question was we have seen some near peer competition, probably call in early 2024, and managing on task with all the latest competitive landscape and all.

Tao Zou: Could management talk about the strategic planning for enterprise cloud in 2024? And the second question is, we have seen some news of peer price competition in public cloud in early 2024, and could management tell us more about the latest competitive landscape and also look for the cloud's competitive advantages? Thank you. Okay, I'll answer first. The first one, Han Yun, you wrote it very well.

Looking for cost comparative wound ticket. Thank you.

Sure.

Okay.

Uh huh.

Hmm.

So you're going to high and that there could be hard to say.

Women women.

Switching a heck I'm going to call out.

What's the scenario to use your question to <unk>.

Currently you're going to take a person assumes flat because we pay down yet.

So these would have gone through that.

The hoods efficiencies sooner than before.

She says it's better for the quarter, starting with <unk>. This asking between your question.

Lulu shoot.

The content that they don't hurt either way, it's yourself this year, when especially with you in person what's.

Tao Zou: Actually, we just finished the seminar recently. I think there are a few new opportunities. ,, [inaudible], Media, Lulu Xuxu.

Was it about union that was there any hydrocooling products equally so that took a few quick ones.

Two the Huntington's disease, a boomer yet.

To go through the financials of yours have you assumed.

She was on tourism and if I go to the army.

So would you be.

For the year on year.

Got it.

I got to know should probably take the program with popular because when you look out at the time.

We don't think there is Susan.

Tao Zou: I've introduced some of them at the conference just now. I think this is an opportunity. But I think there is a bigger opportunity this year. Recently, we had several consultations with Hanyun's department. 2024, [inaudible] We have been in close communication with the Shanghai Plastic Institute on this matter.

Figure out to the ballroom since you can switch also sometimes with all sorts of good.

We don't think that's what it was in the vehicle by which you can see the bogo.

She has been behind it there's always a global trend.

So when I think of kind of depending on how to do it.

So that's actually think of turnovers, okay. Here's a question a woman one they do so because silicon as a part of it.

So the ease of use.

So Canadian Valley.

So if highway lights on good.

As far as sandwiches to pursue.

You're with us or not.

That's actually there should've been and shallow.

Sure.

How does it somehow.

Joe We don't go to the dose.

Do you think that those are probably using some of them.

Tao Zou: We have also been in close communication with other provinces in China. (Inaudible) But what does this have to do with the cloud? Our idea is that the tree must be on top of the cloud. It must be a cluster of clouds. It can't be locked on a hard disk.

Saying that Theres, a big physical woman limit.

How many of that you've assumed that even though you've got products.

We don't think we'll have meetings like HIFU.

So it's always a glimmer of hope would you.

Since you.

South Asia.

So we don't think about how it was again.

Tao Zou: So in the future, of course, we have to make it clear on the roadmap. What does this mean? To put it simply, this number becomes money. If the tree is rich, it will have opportunities to produce, flow, trade, and so on.

To support Tennessee woman.

Got it.

Apparently the Shaw beyond that.

It sounds good.

So I'll have to turn the corner.

Morning.

So this year, you'll see that.

Within the store Oh here, we go.

Tao Zou: And we believe that all of this will be on the cloud. Yes, so this is a new opportunity for the industry. Of course, we are already working on this.

Right.

Yes.

Yeah.

Just.

Just wondering behind you to go through the <unk>.

Tao Zou: [inaudible] ????????????????????,???????,?????,???? [inaudible] ??????? The second thing is to lower the price, Let's start with the first one. So, I think this is a very good question, and we have been conducting internal discussions around exactly the question you raised. So a few opportunities I would like to share with you.

We will conduct a yugo.

Toledo City of hope she says.

The mill can do for duty hanging somewhere I'm not sure.

<unk> been the Choctaw prevention.

So just just to finish out because you haven't got.

At a high high in front of me.

Yeah, John John.

So.

We think that is a I think this is a very good question.

We have been.

Conducting internal discussions around exactly the question you raised so a few opportunities I would like to share with you. The first one is you might have noted that recently a large number of digital asset companies across China has been established and that basically ladder to a wave of state owned asset companies.

Tao Zou: The first one is, you might have noted that recently a large number of digital asset companies across China have been established, and that basically led to a wave of state-owned asset companies migrating onto the cloud and using more cloud. And the second, which I think is probably a larger opportunity that is happening this year, is the measure of digital assets showing on the balance sheet. And we should call this year of 2024 the first year of this opportunity because of the government policy recently promulgated. We have also been communicating with the Shanghai Digital Asset Exchange and also with professional parties, for example, like auditing firms.

Migrating onto cloud and using more cloud and a second which I think is probably a larger opportunity that is happening. This year is the.

The measure of digital assets are showing on the balance sheet and we should call. This year, a plenty of 24 to be the first year of.

This opportunity because of the government policy recently promulgated.

Have also been making communications with the Shanghai digital asset exchange.

Exchange and also with our professional parties for example, like auditing firms we.

Tao Zou: We do think that it represents a significant opportunity for cloud service companies and for us because all of these digital assets will be running on the cloud infrastructure, and digital assets and those data assets cannot run by themselves. So in other words, it's the integration of cloud services and digital assets. So this whole chain of data production, of data transactions, etc., etc., are going to be supported by the cloud, and therefore, all of this represents opportunities for us. So it's not an opportunity with respect to any particular industry, but a general, but probably a larger, opportunity that we can expect to see. [inaudible] OK, I'll talk about the second one first. Let's see if there are any...

We do think that.

It represents a significant opportunity for our cloud service companies and what they cost us additional assets, we'll be running on the cloud infrastructure and digital asset and all of those data assets cannot run by itself. So in other words, if the integration of cloud service and digital asset.

So all this whole chain of data production of data transactions et cetera are going to be supported by the cloud and therefore all of these represent opportunities for us. So it's not opportunity with respect to any particular industry, but a general but.

Probably the large opportunity that we can expect to see.

Yes.

Okay Thiago was in Washington.

Tao Zou: Unknown Executive, Xiaodan Zhang, Kingsoft Cloud,,, The first one is that the price is going down year after year, and it's not this year. This is starting with our cloud. In the past two years, we have seen various discounts; this year, this price, tomorrow that price. In fact, there were many discounts last year and the year before. Anyway, my point is that there are discounts every year. In the end, the development of the entire industry did not change much.

Thank you.

Excuse me.

Several questions here.

When you do your question Julio.

What are you going to do good to catch up.

Yes, you are pushing your luck.

I think its home assortment in cash.

It's going to happen.

To the extent that goes on with Dr. John <unk>.

Arlington editor she said.

Yes.

To go to go to China, and Youll find out what my friend.

Jonathan.

So you hope to see some pizza.

Pizza.

Okay.

Hi, Bob.

So thats one one this is something that there's a final document.

Tao Zou: From our own development perspective, we have been increasing our profitability for six consecutive quarters. The business is getting more and more stable. This is the result. So we believe that this will not have a substantial impact on the industry.

People don't want to deal with.

You're doing a moment so every year when does it when you need to leave it here.

Yes.

So this is Giovanni so search we should attempt to go so you want me to pick up.

Okay.

Yeah.

Thank you Bill.

What would be the Guangdong and Youll see some of them that union.

Tao Zou: From my own point of view, especially last year, when we focused on improving the quality, customers were satisfied. After a lot of work, customers were satisfied.?????? You say, no matter how cheap it is, if the service is not good, or the product is bad, it is meaningless. So, I want to express that price is the key, but not the key element.

All of them.

So the season.

Kumar into shops will move with the hope to cool.

You guys sold the cohort.

The easier part.

Okay.

Thank you Tassos here hi, so congrats Susan.

And you don't need it.

K to global food and not.

So it seemed that there was a one time job.

Sure Doug.

Russell.

Yes.

Cool.

Sufficient near the front end.

So we are kind of are you going to start having an annual penalties are female.

Tao Zou: At least from my client's point of view. Many of its customers are lower than this discount. So maybe it's for some new customers, right? So in the end, I said that the price is more of a marketing method. Anyway, I mentioned this last year. It's a marketing method. In fact, this is for existing customers. Anyway, I also had this view last year. Anyway, there is not much profit. [inaudible] Let's see if Liu Tao has anything to add.

Yeah.

Assuming you Michelle Jonathan I kind of agree with Hello, So even if you just start where the whole thing that's all of them for sure, but I'll give it a shot just so to start with.

You do have a target that's gonna November <unk>.

It sounds like.

Jonathan So these are the pendulum swung Jonah.

Pension do you think that do you think things I think that's I'll call. It. So he can answer so you should assume shoot for cohort B right.

I'm, sorry, if it turns out computer system human cells.

To get there too.

So as you can tell us what it does do something to go to the ER.

Yoga Kohona.

Kind of what's your name.

Tao Zou: I'll just add one thing. You mentioned the pricing strategy, because there's been a lot of news about it. The other party's way of pricing is actually based on annual payment. Based on the traditional discount system, it gives an additional discount. So it's targeted at small-scale annual payment customers. This customer group is actually not related to Kingsoft Cloud's customer group.

The mirror kind of what you can say hello.

No.

Okay.

We'll get to the <unk>.

It turns out that they go through.

He went on to do with Humana.

Two upon the turns out a function that sees a sedan.

It will show up that funnel is that what you're trying to your logo, whether it's been the truthful answer is I can do this so.

Yeah, you from further cool and then took a poultry institute of guns user during the quarter in Q2.

Tao Zou: So until now, we haven't seen any impact on our clients. So the second question relates to price competition in the market. So I would like to share with you two of my core views. The first one is that we have actually been experiencing price pressure since the day of our founding.

And what's going.

Well I mean, you guys know cannot do that hopefully we're going to do so.

Yeah.

So the second question relates to the price competition in the market.

So I would like to share with you our two of my core views. The first one is we have actually been.

Parenting.

Price pressure since the day of our founding on every year, we have been seeing different kind of.

Tao Zou: Every year, we have been seeing different kinds of price pressure coming from various of our peers in different kinds of products. However, at the end of the day, we do not really see any of those price cuts by our peers have any material or significant impact on the market. And from our own performance results, we have also achieved six consecutive quarters of profitability improvement. Now, I would like to say that we think the reason for that is that pricing is obviously one important factor for customers to consider. However, it is far from the most important factor.

Price pressure coming from.

There is a players.

In a different kind of product. However at the end of the day, we do not really see any of those price cuts are by our peers have any material or significant.

Impacts to the market and from our own.

Performance results, we have also achieved for six consecutive quarters of profitable profitability improvement.

Now I'd like to say that we think the reason for that is our pricing. Obviously is one important factor for customers to consider however, it is far from the most important factor and from our own experience and also evidenced by our achievements in the past six quarters.

Tao Zou: And from our own experience, and also as evidenced by our achievements in the past six quarters, focusing on the satisfaction of customers is actually the most important thing. And I would also like to say that my view about this kind of large amount of price cuts by peers is more towards the end of marketing and PR measures. In fact, some of these price cuts are based on the catalog price.

Focusing on the satisfaction of customers is actually the most important thing.

And I would like to also like to say that my my view about this kind of large amount of price cut by peers.

Is more towards the end of marketing and PR.

Our measures in fact, some of this cross cut price cut based on catalog price. However, a lot of the transaction price that cloud service providers have agreed with potential customers are already deeply discounted and already are way below the price cut level that.

Tao Zou: However, a lot of the transaction prices that cloud service providers have agreed with potential customers are already deeply discounted and already way below the price cut level that we are seeing today. And our SVP, Liu Tao, also added that this round of price cuts from our peers mainly focuses on customers that are relatively small in scale and are paying their cloud usage fees on an annual basis. And this group of customers actually does not overlap with the customers that PingSoft Cloud serves.

We are seeing today.

And also our S&P they'll tell also added that.

This round of price cuts from.

Come up here.

Mainly focuses on the customers, which are relatively small in scale and they are paying their cloud usage fees.

Annual basis, and this group of <unk>.

Customers actually do not overlap with the customers that picked up a cloud enjoying and therefore, it does not have any material impact to our pricing strategy or our business performance. Thank you.

Tao Zou: And therefore, it does not have any material impact on our pricing strategy or our business. Thank you for having me. We have no further questions at this time. I would like to hand it back to Nicole Shan for closing remarks. Thank you once again for joining us today. If you have any further questions, please feel free to contact us. I look forward to speaking with you again next quarter. Have a nice day. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you, and have a good day.

Thank you.

Yeah.

Yeah.

Yeah.

We have no further questions I'll describe our law I'd like to hand back to Nikos <unk> for closing remarks.

Thank you once again for joining us today, if you highlight any further questions. Please feel free to.

Look forward to speaking with you again next quarter, they're telling us today. Thank you.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect. Your lines. Thank you and have a good day.

Nicole Shan: It's been a while since I played this song. I'm going to play it for you. I'm going to play it for you. I'm going to play it for you. I'm going to play it for you. I'm going to play it for you.

Okay.

[music].

Okay.

[music].

Okay.

Okay.

[music].