Kingsoft Cloud Holdings Limited
Q3 2020 Earnings Call Transcript

Published: 18 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Kingsoft Cloud Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Ms. Nicole Shan, Investor Relations Manager of Kingsoft Cloud. Thank you. Please go ahead.

[Nicole Shan:]

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud third quarter 2020 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on global newswire services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang; and CFO, Mr. Haijian He. Mr. Wang will review business operations and accompanying highlights, followed by Mr. He who will discuss financials and guidance. We will be available to answer your questions during the Q&A session that follows.

[Yulin Wang:]

Thank you all for joining our third quarter 2020 earnings call. We're pleased to report another solid quarter, as we effectively executed our strategy across our business segments. We generated RMB1.73 billion in net revenues, representing a 72.6% increase from the same quarter of last year, outpacing the industry average. Our enterprise cloud projects which have been delayed due to COVID-19 started to get back on track and to be delivered step by step. Our revenues from enterprise-class services increased by 275.3% year-over-year to RMB409.1 million. This contributed 23.7% of our total revenues, which was up from 11.4% in the same period last year. As we continue to capitalize our ongoing digitalization and the rapid adoption of multi-cloud strategy, will further penetrate into select verticals across the insight public services financial services, as well as healthcare sector we recently expanded into. First for public cloud business, we continue to execute our premium customer strategy. We are seeing rapidly increasing demand for multi-cloud services from current customers. During the third quarter, a meaningful portion of our new customers have already used multi-cloud operators. By leveraging our first-class technique, capabilities and strong enterprise service experience. We continue to expand our premium customer base including and certain top audio platform serving computing, storage, network, big data and other platform as service products.

[Yulin Wang:]

[Nicole Shan:]

Lastly, moving to our product and technology front, we continue to strengthen our cutting-edge technologies to empower our industry-specific solutions. To further improve our radio car capabilities we have been strengthening our proprietary coding technology. For example, we developed the coding technology KSC-265 in-house to ensure that our customers can deliver smooth video streaming, while reducing bandwidth costs.

[Haijian He:]

Thank you, Yulin, and Nicole. Hello, everyone. I will now discuss our financial performance of the third quarter. Please be reminded that, all the numbers quoted here are in RMB. Please also refer to our earnings release for our detailed financial results. To begin with, I would like to highlight the following points. First of all, our previous revenue guidance was from RMB1.67 billion to RMB1.74 billion. We are pleased to report that our total revenue of RMB1.73 billion of this quarter arrived at the top end of our guidance. More importantly, it represents acceleration of revenue growth at 72.6% on a year-over-year basis, which makes us one of the fastest-growing players in the cloud industry in China. Number two, enterprise cloud services remains as one of the key drivers of our top line growth. Our enterprise cloud services revenue this quarter was RMB409.1 million representing an increase of 257.3% year-over-year and 66.2% sequentially. It contributes 23.7% of the total revenue of this quarter compared with 11.4% in the same quarter last year. Number three, we are seeing continuous margin improvement. Our adjusted EBITDA margin has now improved for nine consecutive quarters, and our adjusted gross profit has been positive for five consecutive quarters. To be specific, our adjusted EBITDA margin increased to negative 1.5% this quarter from negative 10.2% in the same period last year, representing an improvement of 8.7 percentage points. Our net loss is also narrowed to RMB169.1 million this quarter from RMB241.9 million of Q3 last year.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session We have a first question from the line of Elsie Cheng from Goldman Sachs. Please go ahead.

[Elsie Cheng:]

Thank you, management and congratulations again for the strong results. I have three questions. And the first one is about the BI vertical performance in the public cloud services. For example, the video gaming and education vertical what kind of demand trend you are looking at into the second half 2020? And can we expect similar kind of Q-on-Q pickup versus last year into the fourth quarter? And second one is about the enterprise cloud. Will this quarter enterprise cloud contributing to 24% of the revenue? And can we expect some more kind of pickup in the contribution going forward for this segment of the business. Last one is just to understand a little bit more on the strong results in operating profit. We see actually fast ramp-up in operating margin in the quarter. And when we look into the details, it looks like we are actually spending a little bit more in COGS whereas in R&D. Just to understand a little bit more, is it more related to our enterprise cloud business development in terms of cost allocation into fourth quarter or next year, how can we look at the trend? Thank you. Thank you so much.

[Yulin Wang:]

[Nicole Shan:]

I'll first translate for Mr. Wang. In the corporate cloud sector, since June 2019 has been well controlled in China and the life returned to normal, our revenues still grow very healthy even on a sequential basis. The pandemic has people as more and more people call it used to online services for example we still use online conference and online education. We believe video cloud, gaming cloud and education cloud will keep growing in the future. The demand for cloud service has been growing before the COVID-19. With the strong demand, the price of public clouds is stable in the current stage. And due to the multi-cloud technology requirements major players including us all grow very healthy. And for the enterprise cloud, we have seen very strong demand in the market. As we mentioned earlier, we noticed projects have been delayed due to the COVID-19 and some of the projects had laid and delivered in the third quarter of to fourth quarter. We have also mentioned the healthcare big data project in Chibi , Hubei province and several big data project for the banks for example, the large scale banks and nationwide commercial banks. And in the healthcare sectors, we have seen that there are like state demand after the pandemic, we have one contract with CEC D-Commerce technology. And in the future, we will deliver more projects in this sector along with our partnerships.

[Haijian He:]

Thank you. And I'd be happy to take on the third question asking regarding the OP margin. So there are probably three or four points, I want to mention. First of all, definitely there's no change from allocation of cost perspective. And there's almost no impact regarding enterprise cloud revenue growth. However, I want to mention, the primary driver as you know our company strategy is a premium customer and also we stay very focused on the key verticals. And that actually can dramatically improve our efficiency to extend into our new technology. And as you know, because we have extended and penetrated the relationship to our major clients and we actually do understand what their needs and we can actually make more efficient regarding how we deploy our R&D resources. So I think the premium customer strategy and stay very focused on the key verticals and generating recurring revenue, the key reason you are seeing RNA costs become more efficient. And the third point as you probably remember, we did our IPO back in May and also did a fall out in September. So in early half of this year. So the R&D cost, as you know, we have over 60% of the personnel-related to RNA function. So there were actually part of SBC cost as a part of R&D expenses as reported. So these are the onetime impact. And after Q2 and Q3, it's more normalized trend that you're seeing a normalized level of R&D expenses. And the third reason, I'll mention is we are happy to see our enterprise cloud revenue increasing as a percentage of total revenue. And we do actually as we mentioned even we call it enterprise revenue, but we do leverage our public cloud-related fundamental technology to deploy it into a private environment of a client. So they do a great synergy across both segments to leverage relatively similar and online similar technology we already have. So I think these are the few things explaining our underlying driver of the improvement on op margins. So looking forward, as we mentioned, these are the fundamental drivers of -- and the nature of the business model. Hopefully assuming even stayed the same and the market environment is stable we are going to happy to see that the margin expansion is likely to improve going forward as well. Thank you, Elsie.

[Elsie Cheng:]

Got it. Thank you. Very clear. Thanks much.

[Operator:]

Thank you. We have our next question from the line of Kyna Wong from Credit Suisse. Please go ahead. Kyna Wong, your line is open. You may ask your question now. Thank you. Ms. Kyna Wong, your line is open from Credit Suisse. You may proceed with your question. Thank you.

[Nicole Shan:]

Operator, we may go to next one, and we will get back to Kyna. Thank you.

[Operator:]

Thank you. We have our next question from the line of Liping Zhao from CICC. Please go ahead.

[Liping Zhao:]

Good evening. Thanks for taking my questions. I have three questions for you. The first one is among the top three Internet high service providers, we noticed that KC achieved fastest growth. And we noticed that Kingsoft Cloud's 3Q revenue growth is relatively slow why there is such a difference? And how can we maintain the growth momentum for next quarters? And second question is about ByteDance. We noted ByteDance started their own cloud business and will this affect our revenue growth from back end? And third question is related to our investment. We noticed that the company invested in Oshu and what will be the other fields that we wanted to invest in the future? Thank you.

[Yulin Wang:]

[Nicole Shan:]

I'll first translate for your first question. We think we focus on the direct work codes and consistent on our premium customer strategies. We are highly efficient among other peers. And we have seen that in this year the premium customer has accelerated their deployment of public cloud services. And also as we talk about the multi-cloud strategy as this is a technology capability requirements, we think a leading neutral cloud provider services – cloud service provider more customers would like to select us to be their second vendors. And for your second question about ByteDance. To our knowledge, the cloud service provided by ByteDance is now the same from us run in the same field and we still keep a very close and healthy relationship with our customers. And we'll keep this relation in the future. And for the third question I will like Henry to answer you. Thank you.

[Haijian He:]

Thank you, Brenda . Happy to take on the last question. So, as you know, if you're seeing the history of the – all the major global cloud provider including Google Cloud, Amazon history, the organic growth and investment into R&D is important but also given the industry is growing very fast and we do want to capture all the necessary opportunity for us. So the external partnership, including minority investment, control investment and maybe the commercial partnership is very important for the cloud company like us so for us to grow rapidly and catch the market opportunity. That's why Oshu is only one example but also as we disclosed in the health care space, we also had a partnership with CEC to expanding the health care digital cloud. And we actively review all the potential opportunities from potential M&A and a minority investment perspective. And the second point regarding this name in particular, so what I tried to – what we can share is as you probably saw the financial services is actually a very important vertical. And we all actually really appreciate that – in that vertical these are the big 2B clients. They have a great quality and always pursue for the high and best-in-class technology. So we actually partner with our investment invested company to deliver a holistic solution for the major banks in China to certain projects. And as you know, we're already seeing this trend in more mature markets such as U.S. as you probably saw. Similar name like Snowflake is also working on enterprise level, our data warehouse technology as well. So we do think that is going to be a great opportunity in this direction that for us to capture the relationship and the potential revenue opportunity on a going basis. And many of that opportunity would be also recurring opportunity as well. The last point I want to mention, even though we look at opportunity actively, we want to remain very prudent in terms of how we spend cash and manage our capital expenditures. So we will not revise up and down regarding our capital expenditure plan but we also budget some part of the capital expenditure plan to capture the external investment opportunities. Thank you, Brenda.

[Liping Zhao:]

Thank you.

[Operator:]

Thank you. We have our next question coming from the line of Kyna Wong, Credit Suisse. Please go ahead.

[Kyna Wong:]

The first question is actually asking about the diversified Internet business that how much it will come for the public cloud business in the long run or going for any milestone or target we could expect? The second one is about the healthcare cloud, I think this is a -- we see that on the industry -- cloud actually established a very key competitive position in this area. How much we could expect this subset could drive the further growth in the enterprise cost?

[Yulin Wang:]

Thank you, Tina. For your first question, with education growth very healthy and we gained momentum in other non-video customers. We still think the video format is the mainstream in our customers including education and now office and e-commerce; they are still using video as a main format in your products. So, in general, we think the contribution from our video cloud will now largely decrease, especially in the future when 5G comes and the high-definition and load latency requirements of cloud video -- of video cloud we think the demand will still grow in the future. But for our enterprise cloud, it contributes from 1.2% in 2017 and increased to 23.7% in this quarter. Video is not a very commonly used format in traditional enterprises. So, for the total revenues, we think the revenues from video cloud will keep decreasing as a percentage of the total revenues. In this quarter, the percentage has decreased to below 50%. And for your second question, the healthcare sector is one of our key verticals and after the pandemic; we think people get to the new normal and started to plan for the new future. We have mentioned some projects in Chongqing and also our cooperation with CEC D-Commerce Technologies. We think we all make great prospects in these projects and we believe we will be a leading player in China in the healthcare sectors. Thank you.

[Operator:]

Thank you. We have our next question from the line of Alex Yao from JPMorgan. Please go ahead.

[Alex Yao:]

My first question is regarding 2021 revenue outlook. I understand you guys probably have not finished your 2021 financial budgets. But if you're able to talk about the qualitative outlook for 2020 -- qualitative outlook for 2021 for some of the key trends, so can you help us rationalize the 2021 trend? For example, if the COVID lead to the revenue high base in first half this year, which will make the first half difficult to grow for your public cloud business. Another example is, given the fact that you guys have made more progress into healthcare enterprise cloud market. To what extent will that help the hyper growth of the current enterprise cloud business? Thank you. And the second question is about industry pricing for both public cloud and the enterprise cloud. Can you talk about the year-to-date trends for these two markets in terms of pricing? Thank you.

[Yulin Wang:]

Thank you. For your first question. We are still working on the budget for next year. So it's still too early to comment on the outlook for 2020. But for the trends, I'd like to share some color. First, we expect our total revenues to maintain a higher growth rate compared with China's public cloud market in general. In the public cloud we're still seeing after the pandemic, public cloud usage are still increasing. Many of the habits have been kept after the dynamic and the video education and gaming sectors, they are all growing very healthy. And for the enterprise cloud sectors, not only the health care sector we also held public service sectors, financial service sectors, they all experienced high-growth in this year. And looking forward to 2020, we think how to fulfill strong demand from these markets are our first-class target. We think the enterprise cloud market is a very huge market. And there are still many opportunities lie ahead. And for your second question, we think the public cloud; the price is comparatively stable as we have a more stable market environment. And as we talk about the multi-cloud technology requirements, the demand for cloud service is increasing in this sector. And for the enterprise cloud, the market is much more larger than the public cloud services. So we haven't seen very fierce combination in this field than the price is competitively stable. Thank you, operator.

[Operator:]

Thank you. We have our next question from the line of Brian Gong from Citigroup. Please go ahead.

[Brian Gong:]

I will translate myself. My first question is regarding the margin. So our margin has improved recently this year. So I'm wondering can management elaborate your view, our margin improvement pace for 2021. Will it be significant for this year? And my second question is for the long-term revenue grade currency for 2024 or 2023, what the rental breakdown would look like for enterprise both delivery computing storage? And also what's your view for that CVM could contribute to the total revenue at that time? Thank you.

[Haijian He:]

Thank you, Brian. Happy to address your question. So first of all regarding the margin, I think you are definitely right. I think our nature of the business is in the benefit of economic scale has gradually unfolded and that reflects to our -- the fundamental nature of the reason for margin improvement. So as you know our adjusted margin especially the EBITDA margin is demonstrating upward trend in general right? And we also achieved continued improvement of the quarterly EBIT margin in the past nine quarters. We're basically expecting our EBITDA margin will continue to expand. And as you know there are fewer drivers, right? So in the short-term, it's really about the improvement of the operating efficiency and how we make sure the efficiency of the IT resources and R&D resources is deployed. And, however, for the long-term there are also more factors to be able to push our margin even further. For example, there will be a continuous increase of the number of the premium customers as we are adding the new premium customers every quarter. And also the scale effect to be carried out, and we're also expanding the value-adding product offerings. So the value-adding part will be even more as part of the total revenue. And also, we see a trend of the more recurring revenue streams coming from enterprise cloud clients that actually make effective of our margin. And the penetration of the financial service and health care also important, because those are high-quality clients that always carry and are less price sensitive. So I think because of the backdrop of the development of cloud industry in general, we're confident to ride on the trend of the long-term profit and margin improvement, along with other major cloud providers in China as well. So to your second question regarding the revenue mix, I think let's say, in 2023, or 2024, I think our view is as we see the increasing portion of the enterprise revenue, I think, we are likely to reach let's say around one-third of the revenue roughly speaking of the total revenue coming from enterprise cloud. And the remaining two-third will be the public cloud revenue. And out of the public cloud revenue by 2023 or 2024, we do think roughly speaking maybe less than 50% will be coming from the cloud delivery. And the remaining, let's say 30%, 40% will be coming from cloud computing related services. And the remaining piece will be the storage and other services. So one more example, I also want to mention as Yulin just mentioned as well. We don't call it video, because all the kind of value-adding part of the video cloud-related technology also charged and reported on the cloud delivery product segment. So that's also, including the recurring and value-adding product services to that extent. And we're also happy to report that approximately this quarter, the cloud delivery revenue and video-related services has already dropped below 50% of the total revenue, demonstrating the better mix of the revenue streams and also the better quality of the revenue as well. Thank you, Brian.

[Brian Gong:]

Thank you.

[Operator:]

Thank you. We have our next question from the line of Thompson Wu from UBS. Please go ahead.

[Thompson Wu:]

[Haijian He:]

Yeah. Thank you, Thompson. This is Henry. I think, I will take the first and second question and our CEO will explain on the last question regarding the 4Q guidance and color. So, first of all, regarding the projects, so as you definitely noticed that we do make the major milestone keep the momentum for the important projects as we mentioned in the prepared remarks. So, on the other hand, as also – you also know, we do apply a very conservative revenue recognition policy, which means we book full revenue at completion of the four projects. So some of the projects we mentioned in the prepared remarks we already did our work. And – but as CEO mentioned that, we definitely make efforts to deliver on time and will only be booking our revenue at full completion of the certain projects. So some of the projects we mentioned, we have been completed in Q3, and some of projects we make the enough efforts and will be on track to be delivered in the following the quarter to come. And it is actually pretty natural for most of the cloud company to keep track on the progress of the enterprise cloud projects. And that's actually one thing. And another thing, I want to mention that when we look at our backlog even though we have not disclosed that, but we do feel there's a strong demand from different kind of variety of the clients in the enterprise cloud space. And we have been already working on some of them even though we cannot disclose the names as you probably noticed that we cannot see all the name of clients. But we do have a strong backlog to support the potential revenue streams to come in the following quarters. And to the second question regarding share-based compensation or SBC cost AKA. So as you know typically for a company to prepare for the listing, the booking of the cost of SBC typically happened a quarter all on a quarter of the IPO. So that's why we do observe a relatively middle spike of SBC costs back in Q1 and Q2 this year before our IPO. And it's actually declined gradually in Q3. That actually reflects the underlying change of the expenses to our underlying operations on an ongoing basis. So we do not think that the SBC cost in Q1 and Q2 will be at the same level for the following quarters come and that actually is going to be one of the driver to continuous improvement of the adjusted EBITDA and OP margin going forward in the next few quarters. Thank you. And for the third question I will pass on to our CEO Yulin.

[Yulin Wang:]

Thank you. The last question, we think due to the COVID-19 some of our enterprise cloud projects have been delayed in the first two quarters. And we are improving our efficiency to deliver these projects in the second half for the Q4 guidance, we think most of the enterprise cloud they have already started to deliver in this quarter. So we can expect to complete in the next quarter. And the question is that on -- we can only book the revenue upon the completion of food delivery of those projects and sources. We think despite large uncertainties we are very confident on our guidance in the fourth quarter. Thank you, operator.

[Operator:]

Thank you. Ladies and gentlemen I would now like to hand the conference back to your presenters today. Please continue.

[Nicole Shan:]

Thank you, operator. Thank you once again for joining us today. If you have any further questions please feel free to contact us. We look forward to speaking with you again next quarter. Have a nice day. Thank you.

[Operator:]

Ladies and gentlemen this concludes the conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.