Cloopen Group Holding Limited
Q2 2021 Earnings Call Transcript

Published: 11 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Cloopen’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host today, Yilin Dai, Cloopen’s Investor Relations Representative. Please go ahead.

[Yilin Dai:]

Hello, everyone and thank you for joining Cloopen’s second quarter 2021 earnings conference call. The company’s financial and operating results were issued in a press release via Newswire Services earlier today and are posted online. You can download the earnings press release and sign up for our distribution list by visiting our IR website. Participants on today’s call will be Mr. Changxun Sun, our Founder and Chief Executive Officer and Mr. Steven Li, Chief Financial Officer. Management will begin with prepared remarks and the call will conclude with a Q&A session. Before I hand it over to the management, I would like to remind you of Cloopen’s Safe Harbor statement in relation to today’s call. Except for the historical information contained herein, certain matters discussed in this conference call are forward-looking statements. These statements are based on current trends, estimates and projections and therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission. With that, I am now very pleased to turn the call over to our CEO, Changxun Sun. Please go ahead.

[Changxun Sun:]

Hello, everyone and thank you for joining Cloopen’s second quarter earnings call today. We are excited to see strong performance in the second quarter with revenues coming in at RMB273.9 million representing a 47.9% year-over-year increase and meeting guidance once again. Our second quarter gross margins remained robust at 43.1%. Most importantly our non-GAAP net loss now rose to RMB26.4 million reflecting a significant 58.4% quarter-over-quarter decrease. Our dollar base and our customer retention rate remained steady at approximately 110% in the three months ended June 30, 2021. In the second quarter of 2021 our high margin contact center and unified communications businesses contributed more than 50% of total revenue for the first time with CC revenue more than doubling on a year-over-year basis. We noticed a recent announcement made by Zoom to acquire Five9, an industry leading provider of CC services in the United States for approximately US$14.7 billion consideration. While Cloopen, a leading industry player in China providing CPaaS solutions to large enterprise customers from banking, insurance, automotive and other industries, Five9 provides CPaaS solutions to large enterprise customers in the U.S. This transaction is a clear signal that Cloopen's strategic trends heavily focused on CC business is on the right track. We are excited to be expanding our footprint in this fast growing market with huge opportunities evidenced by the year-over-year doubling of our CC business revenues this quarter. This jump was primarily driven by CPaaS solutions provided to a number of large enterprise customers. We believe our CC business will deliver even greater value going forward. Cloopen will continue to develop its CPaaS business targeting large enterprise customers of key growth drivers for sustainable revenue. We also focused heavily on product development as we empower clients with communication tools, we also add value with the product strategy of providing SaaS solutions to assist companies featured with B2C business model and new marketing. We aim to look at this from our client's perspective by developing products that can help execute throughout low marketing scenarios, including customer acquisition, sales conversion, user operations, sales management, efficient marketing and the key purchasing as well as physician aiding. Data security has become a hot topic of discussion and we are aware of the general public's growing concern regarding data security. Cloopen's the security of its clients' data and provides multiple security solutions including specialize of private cloud and local deployment to satisfy different data security needs. For large enterprise customers we mainly provide services through private cloud web data to which Cloopen does not have access. So clients served through public cloud we desensitize conversation methods and text messages compliance with operators requirements and clients . But we do not collect or use personally identifiable information. In addition, we utilize high quality data encryption and strictly control data access and our service contracts contain clear personal data protection disclaimer products. In the long run we have continued to enhance our data security practices, ensuring our ability to provide best-in-class data security solutions and solidifying our leading position in the SaaS sector. While we have achieved solid progress in products and services, as well as technology enhancements, our business is also growing steadily through strategic operations with leading enterprises, such as Tencent with whom we have a partnership on Tencent Cloud, Tencent Qidian, which is Tencent Cloud's SCRM platform and WeCom. Our CC products are now available on Tencent Cloud's joint development products platform. We have begun receiving orders for UC products through a partnership with Tencent Cloud for a wide range of industries including manufacturing, energy, and social governance. Furthermore, our 7Moor Cloud will connect with WeCom's customer service interface, for which new products are expected to be officially launched in the third quarter. As our collaboration with industry peer products, our market position will be further enhanced. That concludes Changxun's prepared remarks. Thank you all for joining our call. Now we would like to turn the call over to Steven for further view of our integration with Elite and our second quarter financials.

[Steven Li:]

Thank you Changxun, and Yilin. Hello everyone and thank you for joining our call today. We are delighted with our robust results this quarter. Revenues displayed higher quality, with our high margin businesses including our cloud based contact center solutions and cloud based unified communications and collaborations solutions business, now contributing about 57.4% of the total revenue. Our dollar based net customer retention rate remains solid at approximately 110% in the three months ended June 30, 2021. Our integration with EliteCRM yielded remarkable results including a stronger product pipeline and more large enterprise customers. As we enrich and refine our products, expand our customer base, and bolster profitability, we are confident in our ability to deliver stable long-term growth and consistently create value for our shareholders. First, I would like to talk about our integration with EliteCRM. We completed integration with EliteCRM on a product level and more in-depth level in the second quarter. The strategic synergies of the EliteCRM acquisition began to materialize as manifested by roughly RMB13.7 million revenue attributable to the integration during the second quarter. The EliteCRM's solid industry figures and vast technological capabilities in CRM and CC, strings in the application layer of our cloud communications infrastructure, complementing our existing business portfolio. Next, let’s look at our financial metrics for the second quarter. We recorded impressive results this quarter, beating our productions with revenues totally RMB273.9 million, a 47.9% year-over-year increase. The increase was mainly driven by the strong performance our CC business, which were all significantly at 105.1% year-over-year, and contributed around 40% to our revenues. Our CC business has been thriving, thanks to our diverse enterprise customers, and especially increasing number of large enterprise customers. We have approximately 13,000 active customers as of June 30, 2021 and most of which are small and medium sized companies. However, our roster of large enterprise customers is growing steadily with 205 customers at the end of the second quarter. Our customer concentration rate is very low, enhancing our overall stability. Cost of revenues increased by 36.8% to RMB155.8 million in the second quarter of 2021 on a year-over-year basis, primarily due to increased telecommunications resource costs, outsourcing costs, and the stock costs, as the company continues to scale its business. Gross profit increased by, 65.4% year-over-year to RMB118.1 million and the gross margin remained stable, at 43.1% during the quarter. Now moving on to operation expenses, in the second quarter of 2021, operating expenses were RMB214.5 million representing a 65.6% increase from RMB129.5 million in the second quarter of 2020. R&D expenses increased by 69.1% to RMB62 million in the second quarter of 2021, compared with RMB36.6 million in the second quarter of 2020 due to an increase in share-based compensation expenses of RMB3.2 million an increase in R&D staff expenses for development of core features and functions in cloud-based CC solutions and cloud-based UC&C solutions and an increase in technology service expenses paid to the outsourcing service providers for the development of certain non-core features and functions in cloud-based UC&C solutions. Selling and marketing expenses increased by 56.2% to RMB72.8 million in the second quarter of 2021 from RMB46.6 million in the second quarter of 2020, primarily due to an increase in share-based compensation expenses of RMB6.6 million, an increase in staff expenses as the company continues to scale its business and reach a wider customer base. G&A expenses increased by 72.3% to RMB79.7 million in the second quarter of 2021 from RMB46.2 million in the second quarter of 2020, primarily due to an increase in share-based compensation expenses of RMB28.4 million, primarily relating to share options granted to eligible employees and directors and the restricted ordinary shares issued to management employees for business acquisition, and an increase in social insurance premiums as the company benefited from social insurance premiums deduction in 2020, according to the government's relief policies during COVID-19 outbreak. Net loss for the second quarter of 2021 was RMB105.6 million, compared with RMB52.2 (ph) million in the second quarter of 2020, with the increases primarily driven by increases in non-cash items of RMB53.8 million, including the increases in share-based compensation of RMB38.1 million and impairment loss of long-term investments of RMB15.7 million. For the third quarter of 2021, Cloopen currently expects revenues to be between RMB275 million and RMB278 million, representing an increase of 43.8% to 45.3% year-over-year. The above outlook is based on the current market conditions and reflects the company's current preliminary estimates of market, and operating conditions, and customer demand, all of which are subject to substantial uncertainty. With that, I'd like to open up the call to questions. Operator please?

[Operator:]

The first question comes from Mark Li with Citi. Please go ahead.

[Mark Li:]

Hi, this is Mark Li from Citi. Congratulations on strong results. I want to ask advantage for the CC business this quarter, the growth has been quite strong. Could you share about the performance of UC&C and Tmall and also if we exclude the EliteCRM contribution what could be the organic comp growth? And also could you share about like the new clients that are you getting in Q2 of that industry? Thank you.

[Steven Li:]

Okay, this is Steven. For the revenue increase between 7moor and UC&C like we mentioned before, UC&C is increasing much faster compared to 7moor. I think for so this quarter the UC&C investment increasing much bigger than 100% for the second quarter, and as for 7moor, I think the increase for 7moor is roughly around 40% to 50% for this quarter. Just one reminder, and this is actually also for your second question, the revenue for UC&C included about $30 million revenue generated from EliteCRM. So if we take the revenue from EliteCRM out then the increase for our CC business for the second quarter is still over 80%. Well, as for the number of or the some example of new customers added for this quarter, I will pass this question to our CEO.

[Mark Li:]

Sure, thank you very much management and congrats again.

[Changxun Sun:]

I will translate it in brief. Our growth in CC mainly relies on two factors, one is our superior sales and marketing team, and another is our continuously enriching products and functional models. Our target is to improve the customer acquisition and efficiency and retention rates for its clients. So, we currently provide all the services, including customer acquisition and sales conversion and efficient marketing. The new customers in Q2 are mainly customers from banking, brokers and other financial situations. The specific names are not very convenient to reveal at this time. We can go on and take the next question.

[Operator:]

Thank you. The next question comes from Mira Lee with CICC. Please go ahead.

[Mira Lee:]

I'm going to translate myself quickly. The first one is regarding future business. We see a strong growth of future business in the second quarter. So could you update more information about the progress of CRM and SCRM business? And my second question is regarding the online education sector, which has experienced some fluctuations recently. So what is the impact of the online education industry on our business? And the third question is, we noticed that the number of active customers has decreased slightly compared to the first quarter. So could you share more information about the number of customers by products, such as CPaaS, UC&C and two more? And my last question is, could you give us your breakdown of gross margin in terms of the three segments? Thank you

[Changxun Sun:]

The integration of in SCRM was industrial digital division is very smooth currently. The strong company main clarity between products and customers has begun to emerge and CRM contributed over RMB13 million revenue in the second quarter. We believe that later on the synergy and this business will become more apparent. Our SCRM business of Cloopen is still in its initial phase, and we are both doing SCRM and the new marketing services division, which named before 7moor and in our industrial digital division. For 7moor, it is true SCRM has already established its first version in the second quarter and began to have some revenue in this quarter. And UC&C will focus on insurance, automotive and banks, these three industries, and we target to establish its first demo in the third quarter.

[Steven Li:]

Was there a follow up?

[Mira Lee:]

And the second question for of CICC analyst…?

[Steven Li:]

Okay. Yes, I'll answer the other three questions. The second question is regarding the recent policies of the education sector, what's the impact for our business? As of now, the impact is really not there yet. So for our CC business we have been operating as normal. But we expect there will be some minor impacts for our CC business probably during the second half of the year. As we mentioned during the call, we focus on a lot of different industries. We don't rely on certain industries. The revenues from education sector account for about 8% of our total revenues. So we would expect there will be some minor impact about this. We have been doing very good in other industries. So our target for this year is still the same as the beginning of the year. The third question is regarding the small decrease in terms of our total active customers. While actually the reason for this very small decrease is because we took out some very small customers in terms of ROI, who are really not worse for the company investing a lot of resources into those very small customers. But like we mentioned during the call, the number of large enterprise customers, who are the major revenue contributor, have been increasing for the past several quarters and we expect this trend will continue into the future. And the very last question is regarding the gross margin for each of our business lines. The gross margin for our CPaaS business for Q2 of 2021 is roughly 27%. And the gross margin for the CC business is around 55%, 56%. And the gross margin for our UC&C business is actually higher compared to previous quarters is about 52% for the second quarter of 2021.

[Mira Lee:]

Okay, thank you.

[Operator:]

Okay, thank you. The next question comes from Tina Hou with Goldman Sachs. Please go ahead.

[Tina Hou:]

[Steven Li:]

Okay, I will answer the first three questions and I think for your last question, we need to let me take a look. Yes. So the first question is regarding the CC really especially with the UC&C revenue. Yes, like I mentioned the main reason for the increase of our CC business is due to the large enterprise customers due to the UC&C business. And in terms of recurring revenue or the licensing and the product revenue, right now, it's about half and half. And to be honest, the -- as of now most of the large enterprise customers are still much more preferred to have a tailor made, a private cloud-based solutions compared to public cloud based solutions, especially considering the recent policies regarding the data security issued by our governments. So I think for us, we will continue to come up with solutions that are most suitable for -- to meet the demands of our large enterprise customers to protect their data security and at the same time, we will to get as much revenue as possible from the public cloud recurring model. The second question is regarding the breakeven timetable. As we have been mentioning this for -- since our IPO I think right now considering the market conditions and the development stage of our -- of China's cloud based meditation business, the number one priority for the company is still to get more market share. So in terms of the breakeven point, I think we are most concerned of is the improvement of our productivity. I think that's the -- evidenced by the -- our financial results for the second quarter, you can probably see our products, our operating efficiency and productivity have been improving very significantly. So as a result, we expect our breakeven point will come probably sooner than what we mentioned during the call, but we can't give a very clear timetable in terms of where we can get to the breakeven point on a quarterly basis. The third question is, what is the third question? Oh surpluses regarding the G&A expenses, well I think there are two reasons on the -- in terms of why these general expenses as a percentage of total revenue decreased a lot for the second quarter. I mean first of all, as we, as the company gets to a certain level we will continue to invest in sales and marketing to expand our sales team in order to get more customers and also we need to continue to invest in the RMB prospective, you know continue to add more features to our products in terms of G&A functions. I think we'll be very stable in the next two to three years. And I think another reason is there are some one-time costs, either related to the acquisition of some minority holdings or in terms of our related to the IPOs are not happening for this quarter. So I think those are the two reasons why the G&A expenses percentage of total revenues decreased for this quarter. And the very last question, Yilin will answer the very last question.

[Yilin Dai:]

Yes, the increase and number of shares outstanding is mainly because of two reasons. The first one is up because EPS is calculated on a weighted average of outstanding shares based on a time basis. So because we got lifted in February, so we issued 46 million new shares on February the 9, and also on that day we lifted our preferred shares are turned into common shares and the preferred shares are not calculated in EPS before, so it led to a huge increase in number of outstanding shares in the second quarter. And our fully diluted number of shares should be around 350 million, it will be just a little higher than 320 million in the second quarter.

[Operator:]

Did that conclude the answer to the question?

[Tina Hou:]

Yes.

[Operator:]

Thank you. Showing no further questions, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Yilin, Investor relations for any closing remarks.

[Yilin Dai:]

Once again, thank you everyone for joining today's call. We look forward to speaking with you again soon. Good day and good night.