Kingsoft Cloud Holdings Limited
Q4 2020 Earnings Call Transcript

Published: 17 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Kingsoft Cloud Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. I would now like to turn the call over to your host today, Ms. Nicole Shan. Thank you. Please go ahead Nicole.

[Nicole Shan:]

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud fourth quarter and fiscal year 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 our 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, Nicole. And thank you all for joining our fourth quarter and fiscal year 2020 earnings call. We are pleased to have closed the year with solid performance and in the fourth quarter, we generated RMB1.92 billion in total revenues representing the 63.8% increase from the same quarter of 2019. For full year 2020, our net revenues reached RMB6.58 billion, an increase of 66.2% year-over-year. We grew faster than the industry average as a result of the continued successful execution of our strategy as leading dependent cloud service provider with our dedication to cloud business, we are able to avoid the potential conflict of the interest with our premium customers and enhance our mutual position, which in turn brings additional thrust for our customers. We continue to explore across strategically selecting vertical sectors, it include the insights of public services, financial services and healthcare sectors and we have improved to refund our key technologies and deeply delve into these sectors to meet the customer demands. Over the past year, we not only expanded our revenue from existing customers but also co-operated with many new premium customers. This includes inside the company such as the Zhihu, Agora, Huya, Bigo, Sogou, UE Digital and the others online education companies such as and others as well as financial institutions such as consumer finance company and as the backbone that supports the IT infrastructure development. Cloud’s computing has been growing rapidly, we would take some opportunity to further expand our business scale and enhance our market position as the first choice in terms of independent cloud service provider.

[Haijian He:]

Hello everyone, I will now discuss our financial performance for first quarter and the full year 2020. Please be reminded that all numbers recorded here are in RMB. Please also refer to our earnings release for detailed financial results. So to begin with, I would like to highlight several points. First of all, we are pleased to report that our total revenue of 2020 were RMB1.92 billion this quarter representing a year-over-year growth of 63.8%, total revenue of financial year 2020 were RMB6.58 billion up 66.2% from 2019, which was well above the growth of the cloud industry in China. Number two, the increasing demand for enterprise cloud services drive our revenue growth. Our enterprise cloud services revenue this quarter were RMB535.9 million, an increase of 143.1% year-over-year. Enterprise cloud services revenue of 2020 was RMB1.37 billion up 182.3% year-over-year and accounting for 20.9% of our total revenue compared with 12.3% last year. Number three, benefiting from our premium customer strategy, we are very pleased to see that many large customers have been making multi-year commitment with us. We are hearing the feedbacks of our shareholders and in order to let the market better understanding our project for, we are very happy to share our backlog with you. Even a large number of projects haven't started the bidding process on a client side or have not finalized agreement yet at the very beginning of each year. The amounts of our existing project orders of enterprise credit revenue already reached RMB2.8 billion including a certain part of orders from recurring revenues and we believe that existing orders will form a solid foundation of our revenue base in 2021.

[Nicole Shan:]

This concludes our preparation. Thanks for your attention. We are now happy to take your questions. Operator please go ahead. Thank you.

[Operator:]

Ladies and gentlemen we will now begin the question and answer session. Your first question comes from the line of Kyna Wong of Credit Suisse. Please ask your question.

[Kyna Wong:]

Thanks for taking my question. And congratulations for increasing especially the EBITDA margin and I wanted to tell if, I have two questions. First, it's about the first quarter guidance because we do see the revenue growth is actually like 40% year-over-year and somehow EBITDA certain like the impact on the Chinese New Year holiday and also some parts going to be pushed out. So can we like have more color on what kind of project that actually push out into maybe 2Q or sometime in the near term and is like, there's any like issue that is like caused by like competition and all the things will affect your original expectation? And my second question is actually related to the competition that’s got because we noted that the others like giant intellect cloud service provider they are also moving to the enterprise cloud I mean, aggressively and we do see that these are where we are quite fragmented, but maybe on the perfect side they will compete with you on certain premium customers offering better pricing and all things on the other hand the enterprise cloud will also see more competition in this area. So I think that's my two questions. Thanks.

[Haijian He:]

Thank you Kyna, I will take the first question and I will also address the second one. Kyna I think that probably it's going to be very important question and I definitely want to share more color in addition to the prepared remarks early. I think the first point, I just want to kind of recap on what happened back in Q1 2020. I think that will lay out assumption of my answer below. I think for 2020, there are three major factors that affect the pattern in 2020 which actually was an unique year. Obviously we all know that when COVID-19 happened in Q1 2020 that actually increased the base of the usage of public cloud side and that actually carried over for few quarters last year and also it carried over for this year. I think this is going to be a positive factor for the form base of the revenue. And also as we mentioned last year, the Chinese Lunar New Year holiday was pretty much early. That was actually didn't affect too much on Q1 in terms of patient and also typically the Q1 was also relatively low season for all the major public sector clients implementation of bidding process. And also to share some few numbers. In Q1 2020, if you remember, our total revenue is about 1.39 billion. So as a percentage of the total revenue in 2020 up 6.6 is roughly about 20% of Q1. And if you look at first half and the second half of the revenue split of the last year its worth around about 43% or 45% and the late part of second half is around 55% or around that range. So if you look at the guidance for this year, so assuming with due around the same target for this year the first half and the second half of the revenue split is actually very similar to the mathematical splits of last year, which is around first half about 40% to 43% and the second half is around 55% to 60%. So I think that's kind of laid out the comparison from an analytical perspective. However, as we mentioned for this year even right now, we just finished the two session meetings in Mainland, China and all the kind of major projects especially the bidding process is about to start. Even without considerations that current backlog as we shared of enterprise cloud revenue only excluding the public cloud revenue, we already have RMB2.8 billion of the backlog ahead. I think that will form our foundation for the revenue to carry out and sum of that backlog we already seeing in the recurring revenue nature especially from high quality accounts, example from healthcare and financial services and certain major cities of the public sector clients. So overall, we think that the revenue trend and the pattern across the quarters actually year-over-year is very similar and for Q1 it's carrying on the potential very same pattern and unique feature for this year given two factors we mentioned. Thank you Kyna and we will take the second question. Okay and also for the second question Kyna, I think for the major competitions, I think few things we haven't seen any changes. I think the premium customer strategy and our key focus on the neutrality will give us more revenue alternatives and we understand that in the market there may be -- other players are still making great efforts to getting to the market. As we know that the total addressable market rapidly and also we are seeing the trend and that the clients are actually willing to use more cloud bandwidths that actually also the same opportunities not only for us, but also for other peers in the market as well. So in some situations as we mentioned in few cases that we become important cloud vendor for our clients even though maybe other company may also have a wallet share, but I think that doesn’t prove enough to earning more dollar value from the same client because market itself is also growing. To give you more true data point as we mentioned, in the third party as per IDC stats that we are clearly ranked as number three of the internet public cloud vendors and also we are making the way progress especially for the key accounts in the clients who have a deep wallet and budget and spending and who have more concern and considerations when they want to select a mutual player, where they were more trusted, and who may -- never getting any financial -- with our client. Thank you Kyna.

[Kyna Wong:]

Thank you.

[Operator:]

Your next question comes from the line of Alexia Quadrani of JPMorgan. Please ask your question.

[Alexia Quadrani:]

So my first question is regarding 2021 revenue gross outlook. Would you be able to share with us your preliminary thoughts on the 2021 revenue gross outlook particularly what are the gross outlook for enterprise cloud as well as the public cloud? Secondly, I would like to ask what will be the key industry drivers to the public cloud business? Would you be able to share with us your revenue exposure from view based industries in 2020 including long form video, new form video, short form video and live streaming? And as you guys implement diversification strategy what are the other industries that potential become the new gross driver to your public cloud business in the next one to two years? Thank you.

[Yulin Wang:]

Thank you Alex. So for 2021, we already have a good start and compared with 2020, we also have good expectations for 2021, as Haijian has mentioned. We also have quite a big number of orders in hands and with regard to the cloud computing, I think from 2021 to 2022 that the still rapid development of growth in the cloud computing and we have a strong confidence in this. And with regard to the three sectors public services, financial services and medical healthcare services, we have developed for better period. So they are quite familiar with the clouds business and I think as a regulatory climate or regulatory measures are also maturing and so we can see the continued growth in these three sectors. And also with regards to the video business and the public cloud question, in 2021 we think the developments in the short videos that will be not a big change, but with regard to 2022 there will be probably further development in the HD business and also in the video business and the share of the video business in our public cloud segments is quite a stable. There is no big change based on our expectation and those are -- and with regards to the customers for example, the educational sectors, under the green sectors and also e-commerce sectors, we also start using some videos in their applications. So generously speaking, in the video business we do not expect any big change with granted to prospect for 2022. We still need to read and observe the further developments of the relevant technologies.

[Operator:]

Your next question comes from the line of Thompson Wu of UBS. Please ask your question.

[Thompson Wu:]

I’ve two sets of questions. The first is regarding fourth quarter results. Just the margin trend in fourth quarter a little bit of a decline sequentially. Can you walk us through the impact there? Also in fourth quarter G&A expense things have declined quite a bit year-on-year. How should we think about G&A expense going into 2021 and the other question is about just the healthcare cloud. This seems to be quite an important initiative for both China and also in my view the company. Can you just talk a little bit about the outlook for healthcare cloud and kickstarts opportunities there?

[Haijian He:]

Yes. Thank you Thomas. We are very happy to respond to questions. I will take the first one and our CEO Yulin Wang will answer the second question. Around the gross margin of Q4, the first point I want to mention that if you compare on annual basis from 2019, our gross margin was 0.4% and 2020 on annual basis our gross margin was 5.6%, which is actually already very significant improve on year-over-year basis. Also it's going to be a faster phase even compared with other major peers in the cloud industry in China. So I think that's kind of lay out first part. And especially for the company budgeting perspective internally, we actually need to look at how we expand our business into technology into the cloud, so if everyone remember for example in Q3 in September and October, we just entered as we mentioned the healthcare industry vertical and we find the partnership with CEC group and also in Q4, we made a few major breakthrough and also introduce a few new clients especially in the banking sector for example . So as you know, those are the new area of high quality clients who are willing to be seen in high quality technologies, but the initial especially the customer solutions we need to tailor into those clients as you know the healthcare and the financial services they require certain implementation of the cloud native technology. So that's why in Q4 we have incurred certain cost and kind of the investment into those new business areas that will actually incur the cost on the gross margin line affecting on that. So if you compare with absolute dollar number from Q3 to Q4, the number itself is actually not widened a lot. It's about RMB12 million - RMB13 million range and that's actually reflecting the dollar value we’re investing into those new areas. So for the long term, I would say my third point is for the long term, we do believe that our gross margins were improving in the long term, but obviously on the quarter basis maybe have a little bit kind of changes. But in the long term, it’s the fundamental forces support our continuous improvement on the gross margin going forward. And to your second question on the G&A expenses so the last year 2021, so we prepared for IPO and did our IPO in Q1 and Q2 and in Q3 we also completed our offerings. So that's why there was incurred some part of the transaction related external and internal expenses and for Q4 as you know, we are quite dedicated into our new business and we are kind of working with existing clients. The G&A expense is actually reflecting a reduced base down the line needs for those client relationships and the business. So going forward I think especially for 2021 as a percentage of the total revenue, I think last year's G&A expenses as the total revenue for last year will continue to decline on annual basis but again, because our quarter-over-quarter basis we will kind of relate for example for employee bonuses and certain incentive payments and certain projects on internal, external basis may have a little bit fluctuation, but we believe on a annual basis the percentage of G&A expenses from 2019 to 2020 to 2020 to 2021 will continue to decline. Thank you Thomas and now our CEO Yulin Wang will introduce in response to the second question.

[Yulin Wang:]

So thank you. Good evening. With regard to the healthcare sector, actually it is important sector one of the priorities for KC and we actually entered into the healthcare sector since four years ago and we also started our study up with the healthcare sector since four years ago. It's quite some complicated section actually both healthcare service itself is a government or public service it also involves the healthcare R&D and also some healthcare safeties and social security services. So basically it's quite a huge complex system and after 2020 or the big changes in the healthcare sector, the states has provided transport that shows digitalization of the healthcare sector. We have actually gained the advantages because we have pioneered in providing cloud services to the healthcare sector. As you know in September 2020, we signed partnership agreements with the CEC and we have provided services to clients or customers in Chongqing, and Sichuan we are actually the first class service provider that provides cloud services to the healthcare sector in China and for some projects we are already in Phase 2. For example, recently we also had one space for the integrated healthcare information system and we also gained the projects from other cities or counties, in province basically we have covered the whole spectrum from the province to city to county and even to medical institutions and I should say the healthcare sector is growing very quickly and I think in future it will still play an important role in contributing to our business growth as well as our revenue or income growth.

[Operator:]

Your next question comes from the line of Leping Huang of CICC. Please ask your question.

[Leping Huang:]

I have two questions for you. First one is related to the premium customers’ strategy. Can the management share the number of premium customer in 2020 and what's the dollar retention rate of these premium customers? And my second question is related to the CapEx claim as the company is going to give some more IDC intentions? Thank you.

[Haijian He:]

Yes. Thank you Huang, happy to take the question. So regarding the clients would you say that our execution quality is very much on track and in 2020, we have increased the number of the premium customers to 322 which is an improvement of 79 key accounts and also in addition to the increase of the total pool of the premium customers. The average revenue contribution aka ARPU of the premium customers has also increased from RMB15.9 million in 2019 to about RMB20 million in 2020, which is also a significant and a decent improvement and also as we mentioned that the diversification around and within the premium customer we have also seen that trend as well. I think these are the two kind of key indicators not only kind of indicating the universe of dollar premium customers but also quality and the diversification of that. So to your second question on CapEx. Our execution spending on the CapEx were well much on track and are being within the budget for 2020 as RMB1.5 billion and for 2021 I think relatively will keep on the same rate of the CapEx even though we will start and highly likely to complete our second data center in as mentioned. So I think our total CapEx for 2021 will be still around about 1.5 maybe kind of 1.5 -1.6 depending on how the pricing points move around. But overall, as you probably can notice that the CapEx as a percentage of total revenue has declined from over 50% few years ago to about 20% last year and will further go down as a percentage of revenue for this year. And the construction of the Chongqing data-center is still very out much on track. We may seek additional financing sources and potential leverage or leasing of the Chongqing data-center, which will not incur for our cash flow from that perspective. And the Chongqing data center will also serve an important IDC center for the region near Beijing and will continue to serve a better quality of services for the major cloud we have around the same region. Thank you Huang.

[Operator:]

Your next question comes from the line of Thomas Chong of Jeffries. Please ask your question.

[Thomas Chong:]

Can you comment about the impact to our business about the tension between China and U.S. and how it impacts our portfolio? Thank you.

[Yulin Wang:]

So up to now we have not seen the impact from the U.S. - China relationship on our sector. It doesn't matter whether it is cloud, computing or customer services that has no impact.

[Operator:]

Your next question comes from the line of Elsie Cheng of Goldman Sachs. Please ask your question.

[Elsie Cheng:]

I thank management for taking my questions. And I have a few follow-up questions. First one is on the public cloud side. Just now you mentioned that we actually have secured a lot of new customers from the internet companies and with the continued decline in November concentration. So here my question is more about so apart from the multi-cloud penetration as industry trend, can we share a little bit more on our new customers acquisition strategy and what is the competitive edge that we do have that has led to and expect the success in this? And then the second one is, following to the public cloud question. When we think about byproduct, so what are the some of the new products we're providing to the new customers and then looking into 2021 together with 5G and other opportunities in industry when we're looking at computing, storage and delivery will there actually be a change in the revenue mix here? And then the second question is more about the enterprise cloud, so can we have a little bit more understanding into what is the growth rate by enterprise and public cloud into the first quarter guidance? And then following up on the seasonality which is explained plus the 2.8 billion backlog into the second quarter or second half of 2021, can we actually expect an accelerated revenue growth trend? Thank you.

[Yulin Wang:]

So most of the public cloud premium businesses are from the internet sector and they are mostly like a video game, educational and e-commerce clients and the market is also already familiar with such customers and we have when the premium customers from the video and game sectors, actually we have most of them and now we can more about this as a customer satisfaction and also the retention, revenue retention rate from these existing premium customers and also the revenue from these customers. With regard to other sectors and with the deployment of the cloud and the sectors and also our efforts in sales, we believe there's also growth and we are also expanding our new large clients. And with regard to products mainly using the video products and they are being high growth and this will also include such as storage, computing and high speed network and I think, so the center of the video business might decrease, but generally the growth rate remains high. And further let me talk about the public cloud business as Haijian has mentioned in the first quarter, we have all ready win the worth RMB2.8 billion and I think the implementation of these projects could be affected by seasonal factors or COVID-19 pandemic. So we have considered the overall situation throughout the year and so looking forward to Q2, Q3 and Q4, we think that there will be rapid growth in the enterprise cloud business. The growth rate for the enterprise, the cloud business is higher than the growth rates of the public cloud as well as the industry average and also with regards to the new customers we have acquired a new customers such as Zhihu, Agora, Huya, Bigo, Sogou and also Citi Bank, Scotia Bank, consumer financial company.

[Operator:]

Your last question comes from the line of . Please ask your questions.

[Unidentified Analyst:]

Hi management and thank you for taking my question. This is Nathan on behalf of Brian Gong from Citi. So I have one quick follow-up question. How does management see the possibility of Tik Tok entering into the infrastructure cloud area considering the large consumption of CDN through strong accumulation of video cloud technologies. Thank you.

[Yulin Wang:]

Actually the last time that we have already answered the question with regard to purchase of the resources -- to our knowledge there are many uses for the internal IT team that is the user -- internal technology and product development so there is no impact on our business with that.

[Operator:]

As we are now approaching the end of the conference call, I will now turn the call over to Nicole Shan for the closing remarks.

[Nicole Shan:]

Thank you operators. Due to the interest of time we conclude our earnings for today. Thank you again for joining us today. If you have any further questions please feel free to contact. We look forward to speaking with you again next quarter. Have a nice day. Thank you.

[Yulin Wang:]

Thank you.

[Haijian He:]

Thank you everyone. Bye-bye.

[Operator:]

Ladies and gentlemen thank you for your participation in today's conference. You may now disconnect. Good day.