Aurora Mobile Limited
Q2 2019 Earnings Call Transcript

Published: 16 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to Aurora Mobile Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your first speaker today, Mr. Tip Fleming. Thank you. Please go ahead.

[Tip Fleming:]

Thank you, operator. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR website at [e-mail]. On the call from Aurora, today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following the prepared remarks, all three will be available to answer questions during the Q&A session that follows.

[Weidong Luo:]

Thanks, operator. Good morning, and good evening to everyone on the call, and welcome to Aurora Mobile's second quarter 2019 ended earnings call. We have a few piece of exciting news to share with you today. First, we achieved our first ever quarterly profit on both an adjusted EBITDA and adjusted net income basis. This is a very important milestone and quite an accomplishment, particularly given the macro headwinds and demonstrates the strength of our business model, continue to top line growth coupled with the increasing operating leverage that we are experiencing as we scale the basis, drove the turning in our bottom line profitability. Second, we announced our strategic partnership with Tencent Cloud yesterday. Under this partnership, Aurora Mobile and Tencent Cloud will offer unified customer accounts to both of our customers. Once locked in, whether from the Tencent Cloud system or from Aurora Mobile system, the user will be able to access the complete set of product offering provided by both Aurora and Tencent Cloud, ensuring that the user experience will be very smooth and friendly. On Tencent Cloud's website, cloud.tencent.com, under the tab Developers on the menu page, all of Aurora's developer products will be displayed and ready for use by Tencent Cloud's customers. The concept is very much like on the WeChat, where the Food Delivery tab is dedicated to Meituan, driving significant traffic to their service. Similarly, our Aurora's website under the path Developer Services, Tencent Cloud's product offering will be displayed. The benefits to both parties are very clear. For us, we will be able to acquire incrementally more developers and increase our exposure to those developers covered by Tencent Cloud, but not yet by ours.

[Fei Chen:]

Thank you, Chris. The combined revenues from our other vertical data solutions, including Financial Risk Management, Market Intelligence and iZone, increased 55% from RMB18.9 million in the second quarter last year to RMB29.2 million.

[Shan-Nen Bong:]

Thanks, Fei. Since Chris and Fei has already talked about our top line numbers, I'll go through the some of the other P&L items. Gross margin for Q2 decreased slightly to 26.2% from 27.5% last quarter. The decrease was largely due to the mix shift towards the targeted marketing segment. Also within the targeted marketing, our ramp-up of new verticals also led to the slight margin decrease. In renminbi terms, our gross profit increased by 62% to RMB76 million. Total operating expenses increased by 39% year-over-year to RMB95 million. In particular, R&D expenses increased 47% to RMB46.3 million. This was mainly due to increases in staff costs, depreciation and amortization, and bandwidth costs. Selling and marketing expenses increased 41% to RMB30.6 million, mainly due to the increases in staff costs, marketing expenses and lease and office expenses. G&A expenses increased 19% to RMB18.3 million, mainly due to increases in staff costs and professional fees. However, OpEx as a percentage of revenue, continued to decrease both year-over-year and quarter-over-quarter. Our adjusted EBITDA went from negative RMB11.13 million in Q2 2018 to positive RMB12.54 million in Q2 '19.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Bill Yu from Goldman Sachs. Please ask your question.

[Bill Yu:]

Hello, Weidong, hello Fei, hello Shan-Nen. Thank you for taking the question, and also congratulations on your first profitable quarter. My question is about the business outlook. So if we look at the midpoint of your guidance of RMB300 million, so how should we think about this from a growth perspective because it's almost flattish on a Q-on-Q basis. So I wonder does that factor in our SaaS strategy, given that the - I mean the revenue may decline although the margin may increase for the SaaS portion of the revenue. So that's my first question. And my second question is on the Tencent Cloud collaboration. So I wonder, how would you consider the potential impact in terms of a paying customer going forward? So I saw we already have a healthy increase up to 2,200. So, is there any expectation that you have that the Tencent collaboration can bring more paying customer? Thank you.

[Fei Chen:]

Hi, Bill. This is Fei. Hi. So regarding the business outlook, actually, you are absolutely right. So, we have already incorporated our new strategy for target marketing to shift gradually to the SaaS-based model. And the main reason is because - as we ramp up -- as you know for our existing model, if you ramp up with the new vertical and then the new vertical if they grow too fast, then it's going to have a negative impact to the overall target marketing gross margin. And also with current headwind of the macro environment and -- if we continue to grow this business which will require significant amount of working capital, which is also not something we want to do, right? So, given that, if we switch the model from end-to-end performance-based advertisement service to a SaaS-based model, which can totally solve all these problems because it's a subscription based and the customers are required to pay in advance. And also in terms of the margins, absolute dollar term, it's not really go into effect much to our margin. So taking into consideration all these factors, that's why we purposely we do not want to 100% of focus on the existing model, but rather we want to switch to this. It's a very sticky SaaS-based target marketing business model. We are already actually currently rolling out -- trying out a few customers and already -- and the feedback has been pretty positive. So, with that, I think I will let Chris answer the second question.

[Weidong Luo:]

Yes. So for the strategic partnership with Tencent Cloud, so if you go to Tencent Cloud's website, cloud.tencent.com, you can see our advanced developer product is -- are displayed and ready for use under the tab new developers. So that's a pretty, very nice entry point on that menu page. So, we expect there's going to be very good incremental numbers of developers who can contribute to us. So as you know, most of Tencent Cloud's developer are paying customer, are not free. So we believe this corporation can bring us more paying customers of the developer services. So that's the answer for the second question.

[Shan-Nen Bong:]

Yeah. Bill. Actually let me give you a number. So in terms of number of developers, we currently sort of it's about 500,000, right, in the current quarter. But for the Tencent Cloud, actually they cover about 2 million developers. So that's the reason. Working with Tencent, we will have incremental more traffic driving to our platform. Okay.

[Bill Yu:]

Okay. Thank you. Congrats.

[Fei Chen:]

Yeah. Thank you.

[Operator:]

Your next question comes from the line of Tina Long from Credit Suisse. Please ask your question.

[Ivy Liu:]

Hi. Good evening, management. And thanks for taking my questions. Congratulations. This is Ivy Liu on behalf of Tina. So I have two questions here. The first one is, I noticed the R&D expense ratio to total revenue is slightly declined this quarter. So is it related to more prudent R&D decisions or like development cycles overall? What will be the trend of R&D expense be like for the rest of 2019? And my second question is - and you just mentioned that you are shifting towards more of a subscription-based model from traditional CPC model. So what's the strategy’s impact on cost lines you like such as media costs? Thanks.

[Shan-Nen Bong:]

Yeah. Hi. Regarding the R&D expense, so actually this quarter, we actually had a sort of -- like basically restructuring or optimizing of our R&D talent. So basically, we did not really have increased - much increased of R&D headcounts, right. So - but - going forward, we surely we will continue to invest in R&D as a percentage of the total revenue that will continue to decline. And the second question?

[Fei Chen:]

I guess the second question is impact on the cost in terms of us moving into the SaaS.

[Shan-Nen Bong:]

Yeah. So the impact to the cost of the goods sold, it will decline as a percentage of the total revenue.

[Shan-Nen Bong:]

Thank you.

[Operator:]

There are no further questions at this time. I'd like to hand the conference back to today's presenters. Please continue.

[Weidong Luo:]

Thank you, everyone for joining the call today. If you have any further questions, please don't hesitate to contact us or the Company directly. Thank you very much for joining. Good night.

[Operator:]

Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may now disconnect.