iClick Interactive Asia Group Limited

Q3 2021 Earnings Conference Call

11/30/2021

spk08: Hello, ladies and gentlemen. Thank you for standing by for iClick Interactive Asia Group Limited third quarter 2021 financial results conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Lisa Lee, Investor Relations Director. Lisa, please go ahead.
spk06: Hello, everyone, and welcome to iClick's third quarter 2021 financial results conference call. The company's results were issued earlier today and are posted online. You can download the earnings test release and sign up for our distribution list by visiting the IR section of our website at ir.i-c-l-i-c-k.com. In addition, during the call, management will give their prepared remarks in English. During the Q&A session, we will take questions in both English and in Mandarin, and a third-party translator will provide consecutive translations. All translations are for convenience purpose only. In case of any translation discrepancy, management's statement in the original language shall prevail. Jian Tang, TJ Chairman of the Board, Chief Executive Officer and Co-Founder of iClick, will first provide a high-level review of the third quarter 2021 results and share his thoughts on our execution strategy ahead. Chief Financial Officer Terrence Lee will follow and give us additional insights on the financial results for the third quarter and provide guidance for full year of 2021. He will then turn the call back over to TJ for closing remarks before the call is opened for Q&A. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's 20-F, as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that ICLIC's earnings press release in this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. ICLIC's press release contains a reconciliation of the unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures. I will now turn the call over to our Chairman of the Board, Chief Executive Officer and Co-Founder, Jian Tang. TJ, please go ahead.
spk01: Thank you, Lisa, and welcome to the call, everyone. Our third quarter performance was marked by continued exceptional enterprise solutions growth and modest growth in our marketing solutions business. iCLIC's enterprise solutions business has achieved an impressive eighth consecutive quarter of record revenues, growing 131% year-over-year to 20 million. We are encouraged by this performance, which continues to demonstrate the consistently growing demand for private domain traffic and online and offline integrations. Our marketing solutions revenues for the quarter grew 11% year-over-year to $67 million, which was a declaration from prior quarters. I want to first emphasize that the challenges we faced in this third quarter in our marketing solutions business were not unique, as we have observed this as an industry-wide phenomenon with our key partners and peers having likewise reported similar performance and outlook due to impact from shifting regulations and the uncertain macroeconomic environment. Having said this, we remain confident in the long-term growth of China's digital advertising industry. and are evolving to adjust to the changing market conditions. During the quarter, we adopted a strategy to balance sales growth and profitability in order to maximize long-term client retention. With this, we believe that our robust and diverse client portfolio puts us in a strong position to benefit from the eventual market recovery. By contrast, the demand for private domain traffic remains solid, and we continue to capitalize on this trend through investment in our enterprise solutions business and the robust execution strategies. Our leading industry solutions, coupled with a growing loyal client base are driving healthy revenue growth while offsetting volatility in the advertising environment among our brand clients. The uncertain microenvironment may result in a wider impact across business sectors in China, and we expect our enterprise solutions will not be an exception. That said, we have continued to invest in sales and marketing and R&D to support our rentalists' devotion to developing innovative products and further expanding our market share within key account clients. In light of the demand from brand clients for fully integrated private domain traffic solutions that go beyond SaaS, we will also devote more resources to developing our enhanced SaaS Plus model, which we believe will prevail over pure SaaS solutions in China. The technology and the market dynamics have been changing rapidly in China. And thus, we believe our SaaS Plus model, which also covers intelligent industry methodology and the full channel operations services, is more suitable for helping brand clients to unlock the market potential in the region. We believe that these investments will yield high returns as the microenvironment recovers. While we cannot forecast the timing of the recovery, we are committed to our long-term strategy and will continue to work closely with our clients and our partners to leverage our leading industry solutions within enterprise solutions. I would now like to share with you two exciting client case studies that demonstrate the growth engines feeling our ongoing success in enterprise solutions. Our recent partnership with the renowned French beauty brand OC10, for iClick's ability to tailor cross-border smart retail solutions. We utilized our iSmartGo solution to launch a O2O-focused reach-admitting program called O210 Travel Buddy that enables travelers to connect with brick and mortar duty-free stores, thus providing them access to a wide range of products they otherwise would miss, and driving sales growth for cosmetics within China's growing domestic travel retail market. It also paves the way for OC10s to boost revenues from duty-free stores throughout the entire APEC region to serve Chinese outbound travelers as international travel restrictions are lifted. We also look forward to leveraging the modules we have developed for the tribal retail industry to provide customized solutions for additional clients in the region. In addition, iClick helped CN Logistics, a Hong Kong listed company, to launch its first mini program providing quality wine products and successfully helped them tap into the enormous market potential of cross-border e-commerce. In the future, we expect to generate further synergies with CN Logistics beyond the current collaboration, utilizing CN Logistics expertise in the global logistics solutions to add more value to our current integrated enterprising and marketing solutions. As you know, iClick has formed a number of partnerships that allow us to deliver valuable full-stack customer solutions for clients and also generate strong cross-selling opportunities with high-profile multinational brands. We will continue to leverage these valuable partnerships to capitalize on the digital revolution sweeping China. These impressive successes demonstrate our replicability, scalability, and flexibility in utilizing eye collectors of the SHIELD products and our experience in tailoring solutions to meet the individual needs of multinational clients to expand both online and offline market share in China across new and growing sectors. In addition, we are proud to report several awards received during the quarter that recognize iCLIC's outstanding accomplishments and strong efforts. Among the awards received are two, I believe, merit special mention, including an award for e-commerce retail in the 2021 Hong Kong Business Technology Excellence Awards, which honors outstanding companies that made exceptional contributions in pursuit of technological innovation. We also received the Best Buy Site Team Award, highly commended by the Grom Awards for Digital Advertising, APAC, which highlights the very best of digital media and technology that sit behind the world's most effective campaigns. just to name a few. We are very proud of this outstanding industry recognition and will work hard to continue driving excellence in all we do. Before I end my opening remarks, I want to reiterate that we are encouraged by the continued outstanding growth in our enterprise solutions and remain vigilant in preserving our market share in marketing solutions. We also continue to be encouraged by our iClickers' deep commitment, and we appreciate the continued support of our loyal shareholders. This concludes my opening remarks, and I would now like to turn the call over to our CFO, Terence Lee, to discuss the third quarter financials. Terence?
spk03: Thank you, TJ. Hello, everyone. I'm pleased to share with you our financial performances in the first quarter of 2021. Our first quarter financials include record results for enterprise solutions for the eight consecutive quarters. Let me briefly walk you through the key financial figures. Revenue for the first quarter of 2021, Grade 2, 86.8 million, up 26% from 68.9 million for the same period of the power year, attributable to the increase in contributions from marketing solutions and enterprise solutions. Revenue from marketing solutions went to 66.6 million for the third quarter of 2021, up 11% from 1 million for the third quarter of 2020. primarily as a result of growing market demand from specific action marketing campaigns. Revenue from enterprise solutions was 20.3 million for the third quarter of 2021, up approximately 131% from 8.8 million for the third quarter of 2020. primarily due to the increasing need for online and offline consumer behavior data integration and digital transformation. Cross-profit for the first quarter of 2021 was 21.7 million, representing 8% increase compared with 20.1 million for the first quarter of 2020, mainly due to contribution from higher margin enterprise solutions. As of September 30, 2021, the company had cash and cash equivalents, time deposits, and restricted cash of $96.7 million, compared with $94.5 million as of September 31, 2020. For the rest of my discussion, I will focus on our non-GAAP results, You can find the considerations of these non-GAAP results in the past release we posted earlier today, which can be accessed at our investor relations website. Adjust EBITDA for the third quarter of 2021 was $3.6 million, compared with $4.7 million for the third quarter of 2020. Adjusted net income for the third quarter of 2021 was $0.8 million, compared with an adjusted net income of $2.4 million in the third quarter of 2020. For a reconciliation of the company's adjusted EBITDA and adjusted net income from net loss, its most comparable GAAP measure, please refer to unordered reconciliation of GAAP and non-GAAP results. The spilling was $195.4 million for the first quarter of 2021, representing a 17% increase compared with $167.1 million for the first quarter of 2020. The increase was a result of increasing marketers' demand, especially from the fashion, food, and beverages, premium, and luxury sectors. Overall, the financial performance in the third quarters continues to be positive, despite the slower growth in our marketing solution sector, which, as TJ has indicated, is largely due to macro conditions in China and appears to be segment-wide. For further information, please see the detailed recap of other financial metrics in the past release we issued today. I would now like to conclude my remarks with our outlook for the full year of 2021. We have maintained our 2021 guidance and change with total revenue ranging from $318 million to $338 million, and revenue from enterprise solutions falling in the range of $62 million and $68 million. Please note that our outlook for revenue is based on current market conditions. and reflects our current gauge of the COVID-19 pandemic impact. These assumptions are subject to change. With that, I now turn the call back over to TJ for closing remarks.
spk01: Thank you, Terence. Our data-driven solutions are clearly driving scalability and sustainable growth. And the cross-selling opportunities we are seeing from our existing marketing solutions and through multiple partnerships continue to fuel strong growth opportunities despite the challenges of the microenvironment. We remain proud of our performance throughout 2021 and believe this growth will continue even if a at a slower rate than experienced in the first half of the year. We are confident that our core value proposition for brands and our innovative SaaS Plus approach will be among the cornerstones for our ongoing growth. We also remain optimistic for continued strong growth in our higher margin enterprise solution segment. We will continue to pursue a balanced approach to retaining clients until advertising demand rebounds in our marketing solutions segment. Always an eye toward continuing to improve the overall profitability of the company. I wish to thank all of our key stakeholders, partners, clients, and shareholders who see what we see in iClick. That is the promise for a very bright future. The promise of delivering true innovation against the backdrop of the digital transformation overtaking China. We remain focused on executing our clear strategies to weather these changing dynamics and are confident that We are pursuing the correct path. To all our devoted iClickers who help us to deliver excellence every day, I say thank you to each of you for it is with you that our success truly rests. Thank you for your continued support. This concludes our prepared remarks. Thank you for joining us on today's call. We will now open the call to questions. Operator, please go ahead.
spk08: Now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. For the benefit of all participants on today's call, if you are a Mandarin speaker, please raise your questions in Mandarin and then immediately repeat your questions in English. Please limit your question to only one each time. The first question is from Nelson Chung of Citi. Please go ahead.
spk04: Hello, TJ, Terrence, Lisa. Thank you for accepting my question. I want to ask you a question about marketing. It seems that many of you have the same type of advertising performance in this quarter. Maybe it's a bit soft. Then I would like to ask Guan Yicheng, do you think we will see this situation in the future quarter? And if it turns to 2022, what is our current outlook? And which three will perform better? I would like to quickly ask about the problem of Enterprise Solutions. First of all, congratulations on your very good performance in SaaS. The problem here is related to your financial situation. Because I have seen a lot of big companies recently, such as Tencent, Baidu, etc. They are also continuously promoting their own SaaS services, such as Tencent, TianHua, etc. So I would like to ask So let me translate myself. So thanks, management, for taking my question. My question is on marketing institutions. It's about your outlook into the fourth quarter and into 2022, whether you believe the worst situation is already behind us or we are going to face greater uncertainty in the future, and which protocols will be impacted next? more severely. And my second question is about the enterprise solution. I just wonder, given the rise of other big players like Tencent and Baidu on their SaaS development, what do you think about the latest competitive landscape in the market? Thank you.
spk01: Hi, I'm TJ. Thank you for your question, Nelson. Let me answer your first question. The first question, I understand, is about our marketing solution. In fact, it is also about some opinions about the advertising industry in China. I think first of all, in the short term, that is, in the next four seasons, or in the first two seasons of next year, we generally think that the entire advertising industry will be affected the overall macroeconomic impact, especially this year's continuous fall of these relatively strict monitoring measures, and the ongoing outbreak of this epidemic. We think this advertising business will still be under some pressure in the short term. So in the next few quarters, we think this advertising business will still uh uh In the advertising industry, we are more likely to serve a large number of customers. Therefore, the financial situation of these customers is relatively healthy and stable. Moreover, our marketing solution industry is also diversified and relatively scattered. Therefore, even in the case of a relatively challenging market environment, We still have some flexibility. We can make some adjustments in the marketing solution. We can make some balance in growth. With this balance, we may be able to make better choices in the short term. increase some profits or give up some profits to increase some market share. In this way, when we look forward to the return of the market, we can get a better return in the market. At the same time, we are also paying attention to some new the form of advertising and marketing, especially some KOL, short videos, and such methods. I guess this will also help our marketing solution in the future. So, of course, another thing is regarding the long term of the entire advertising market, that is, at least one or two years, or even longer, we are still optimistic This is TJ, thank you Nelson for asking questions. I'd like to take your first question about marketing solutions as well as the outlook of the entire advertising industry.
spk00: Short-term speaking, that is in Q4 this year and the first two quarters of next year, I believe the advertising industry will still be affected by macro economy, the tightening regulations in some industries, as well as the resurgence of the pandemic. Short-term speaking, the advertising industry will be put under some macro pressure. And therefore, in the next following quarters, the entire advertising industry will remain weak. And actually, our view is in line with the market players in this industry, as well as some of our media partners. And as to our advertising business, you know, our advertising business mainly targets key account clients who have very solid financial position. And in addition, our marketing solutions has clients diversified in different industries. Therefore, in the face of the challenging market environment, we will be resilient enough to adjust our client mix and strike a balance between growth and profitability. We can choose to increase profitability short-term or we can choose to sacrifice profitability to gain market share so that when the market rebounds, we will be able to actually make better returns. Then we will also continue to pay attention to new forms of advertising in the marketing solutions business, such as KOL and short-form videos, which I believe will help our marketing solution business in the future. As to the long-term outlook of the advertising industry, that is in the next one or two years or even longer, We are still optimistic about the digital advertising industry in China. We still believe that the digital advertising has a great potential here.
spk01: Okay, and then about this Nelson, your second question, I understand is about this enterprise solution, this market competition pattern. In this respect, This is how I see it. In fact, we think that the entire Chinese SaaS or enterprise service market is still in a relatively early stage of development. The entire market is still scattered. And different SaaS suppliers are also trying some different business pathways or exploring some different business models. Overall, we think that the entire enterprise solution market is very huge. How do we see this market? In fact, since 2019, we launched the enterprise solution and officially disclosed it in the report. We are more focused on some of the major customers of KA. We help these major customers of KA by providing them with some SaaS solutions. and help them to better use these SaaS solution operations services. We use this SaaS Plus model to help them, to help these big K companies to better adapt to China's new media ecosystem, to get a better growth in China's new media ecosystem. The so-called new media ecosystem, we mean, first of all, like this, WeChat, such social media. It also includes a lot of KOL-specific Internet celebrities. In these ecosystems, we use some SaaS solutions and some corresponding operation services to help these big brands to adapt better to China's new media ecosystem. In the new media ecosystem, to discover new business opportunities. So from this perspective, we actually chose a relatively clear customer group. And then we have our own whole idea of ES. And from the development of the past few years, I think the path we chose is still a market space, a particularly huge market. Because we see a lot of big brands, in fact, they are in the traditional platform e-commerce. Now the growth has actually encountered some difficulties. But in the new media ecosystem, for example, WeChat's privacy, KOL and some live e-commerce companies in the online ecosystem, these and some content strategies in some online ecosystems. The solutions and services needed by these enterprise solutions are very important for the growth of the brand in the future. So in such a SaaS market that we have chosen, we believe that iClick has accumulated some very good competitiveness. For example, we have gained some experience from deep-rooted customers for many years. Our insight in this market, our data analysis ability, and our insight into consumers in this market, We have both SaaS products and services. And we can provide customized solutions to some of our clients. And we have a large number of clients in Marketing Solutions. We can do cross-sell or up-sell. I think these are our advantages in this market. Then I recall what you just mentioned that there may be some giants in this market that will also launch some SaaS solutions, such as Tencent or Baidu. So I think in this, in fact, the entire enterprise solution market is actually very huge. The customer group that we cut, the service model, in fact, each has its own ideas. For example, many of our SaaS products are actually Tencent has a very deep collaboration relationship. For example, on Tencent Cloud, we have several products that have actually been selected for the Tencent Cloud sign-on plan. They are all deployed on Tencent Cloud, and also provide these SaaS products and services for many Tencent customers. So in this, I think especially for the large customer groups of KAA, what they need is not only Thank you.
spk00: Okay, as to your second question about the competitive dynamics in the enterprise solutions business, our view is that the SARS industry in China is still at its early stage of development and this market is still very decentralized. Different suppliers have been exploring different business models and the enterprise solutions business actually is a huge market. Since we've launched the enterprise solutions in 2019, we have been targeting key accounts clients. We have been helping them by providing them with the SaaS solutions as well as operation services. That is the SaaS plus model. And so as to help our clients adapt to the new media ecosystem in China. New media here refers to WeChat and other social media or the KOL and the other online celebrity ecosystems. And for key account clients or the big brands, by providing them with our solutions, operation services, we can help them to identify new opportunities in a new media environment. So I think that we have a clear target customers and we have well established our enterprise solutions strategies. And based on our years of development, we've found out that there are quite a lot of opportunities in the enterprise solutions market. And for the big brands, actually, it is very difficult for them to grow further on the e-commerce platform. But on the WeChat, on the KOL, or other live streaming platforms, they still have more opportunities to grow. And so by using the enterprise solutions, as well as the operation services, and the big brands will have a greater opportunity to grow in the future. And I think that our company has great competitive edge in this sector because we have years of experience serving key account clients, and we have great data analytics and consumer insights. We offer both SaaS products and operations services. And we also can customize solutions for key account clients. And we also have thousands of marketing solutions clients who we can cross-sell or upsell products to them. And so I think that you also mentioned that some tech giants, such as Tencent and Baidu, are also launching their SaaS solutions. Our view towards that is that the enterprise solution market is big enough, and we actually target different customers, and we use different service models. And many of our SaaS products are already included in the Tencent plan of Tencent and have been deployed on Tencent Cloud to serve the clients of Tencent. So for key account clients, what they need It's not only SaaS products, but also operational services. So in this regard, I think there are more opportunities for us to cooperate with Tencent and other tech giants than competing with them. So this is our position.
spk04: Thank you.
spk08: The next question is from Thomas Chong of Jefferies. Please go ahead.
spk07: So I will translate myself. My first question is, how do regulations on data privacy and the rules of PIPL will impact our advising business. And my second question is about the updates on cooperation with PAUSE.
spk01: Thank you. Thank you for your question. So my first question is about the Personal Information Protection Act, data security. In fact, in this regard, we feel that there is not much change from last quarter. Of course, the domestic monitoring of data is becoming more and more regular and stricter. In the long term, we believe that the entire domestic industry, whether it is a marketing solution or an enterprise solution, the development of the entire industry is actually more beneficial. It will promote a healthy development environment. Because we understand that this kind of monitoring is more for example, some gray or even black data transactions. Such a data transaction has caused a lot of damage to the entire market. Companies like ours have always been uh, data to personalize some advertising information. So it is very likely that in some time, some consumers may choose to turn off this thing. So, but this is actually an impact on the entire industry. In the short term, it is possible to reduce the accuracy of this advertisement. But we don't think that this will reduce the advertiser's the overall demand for online advertising. In other words, the entire advertising industry may be more accurate. In the short term, the accuracy of the entire advertising industry may decrease. However, the demand for the entire advertising industry is still there. So we think this may form a new balance. How to advertise, how to use data better, Maybe after a new round of balance, it will reach a new state of stability. And after a while, the consumer will find that he turned off that option does not mean he can stop watching ads. He will still watch ads. So some people may still open it again. Of course, this is not necessarily. Let's wait and see. So from the perspective of data security, I want to say that our company, whether it is marketing solution or enterprise solution, we are basically a 2B business model, not a 2C model. So we don't take data directly from consumers. We usually take data from media partners, or from our customers, advertisers, or some data partners. to collect some data. And especially in our marketing solution, we usually use PII data, which means we can't identify... We are all non-PII data, which means we can't identify the data of the consumer's personal identity information. So in this, More than that, it's just something that doesn't correspond at all to the personal, some of these, some of these digital virtual symbols. And then use these symbols as a benchmark to, according to some of the behaviors, to carry out widespread speculation. So in this respect, in fact, I think we see, we have also conducted a confrontation with this relevant law. So this is not, Okay, thank you for your question. And the first question is about the TIDL and the data security.
spk00: I think compared with the last quarter, there are no big changes. And China now is tightening the data regulation. And long-term speaking, I think it's good for the healthy development of the entire industry. And I think that the purpose for tightening regulation is to eliminate those gray or some illegal practices in data transactions, which actually has hurt the entire industry. And our company has always been compliant in collecting and using data. We have already received a level three certification in information security, which is the highest certification that can be given to non-bank institutions. And as to its impact on advertising industry, yes, the PIPL will have some impact on the advertising industry. It means that the media needed to provide options to consumers and let consumers to decide whether they agree to authorize the advertisers to use this information in their advertisements. And short-term speaking, it may affect the advertising precision. But long-term speaking, I don't think that it will actually affect the brand's demand for online advertising. And I think that it actually will lead to a new balance. And as long as people have figured out how to better use data. And in addition, sometimes when customers opt out this option, they found out that they still receive advertisements. So probably they will opt in later. So we need to wait and see. And as to the data security, both our marketing solutions and enterprise solutions targeting to be customers, not to see. So we don't directly collect data from customers. Instead, we collect mask data from advertisers, and the medias and the data partners. And for marketing solutions, the data we've collected is non-PII data. That is, data cannot identify the identity of consumers. We use some virtual symbols and use our algorithm to place advertisements. And we checked the current laws and regulations, and these are not actually forbidden or super-regulated according to the latest law.
spk01: Okay. I understand that your second question is about our cooperation with Baozun. Baozun is a very important partner of ours. We have mentioned this many times before. Our cooperation with Baozun is mainly based on WeChat ecosystem to help the brand build a private e-commerce system. Both sides use their advantages to create a private e-commerce solution for the whole chain. At present, our cooperation is still going on steadily. We have a specialized team between the two companies. We are also constantly treating some customers. There are also some customers who are promoting it. We actually published a collaboration case before, which is about QiaQia Food, QiaQia melon seeds. We actually combined iClick with a SaaS solution in private e-commerce. In addition, Baozhen provides logistics services on the back-end. So we help this customer, help him in the services provided, covering from the front to the back, from the front, the micro-channel privacy environment, and all the way to the back, the e-commerce delivery. We can actually help the customer to cover the entire chain. In fact, we still have some partners, but because some of the customers have larger brands, so their authorization is very strict. At present, it is not very convenient to talk about it. Of course, if we look at it as a whole, we think the market... Through the acquisition of an iPad-type product with HubSpot, we have some cooperation to help many overseas customers connect to this micro-economy solution. It also includes us and CN Logistics to establish this kind of cross-border e-commerce, and then borrow some of their international logistics solution capabilities to better provide some services to customers. Well, second question is about the cooperation with Baozun. As I mentioned previously, Baozun is an important partner of iClick.
spk00: And our cooperation lies with WeChat ecosystem that is to help brands to increase their private domain e-commerce. And both companies have leveraged our advantages in providing the omni-channel private domain solutions to clients. Currently, our cooperation is underway and we have dedicated teams on both sides to jointly serve customers. Previously, we've released a case that is charged here. We've actually, as well as Baozhen's warehousing and logistics capabilities in serving the entire life cycle of our customers, including the WeChat ecosystem to the delivery of e-commerce. And we are also jointly serving some other customers, but these customers are big, and they have very stringent authorization policies, so we cannot disclose now. But we think that there are great opportunities to cooperate with Baozun in serving key account clients. And also it takes some time for both companies to integrate technologies and services. And now we are working with other partners too. For example, through iPoly, an acquired product of us, we have been working with HubSpot to providing overseas customers with WeChat solutions. And we have been also building cross-border e-commerce for CN Logistics. We are, at the same time, using the cross-border logistic capabilities of CN Logistics in serving our customers. And also, there are some cross-selling between our marketing solutions and enterprise solutions customer base. And this kind of cross-selling has helped us to actually convert more customers into the enterprise solutions customers. So this is my answer to your question.
spk08: The next question is from Brian Kinslinger of Alliance Global Partners. Please go ahead.
spk02: Hey, great. Thanks for taking my question. Can you talk about the surprising gross margin pressure, especially with a much stronger mix of enterprise revenue, just the new baseline, and how long do you think it'll take to recover back to that 29% range? And then my second question is, you mentioned you are maximizing long-term retention. What are those steps you're taking, and what is the incremental expense and Will that increase, decrease, or flatten out going forward that spend? Thank you.
spk03: Hello, Brian. This is Terrence. So maybe let me get back to you on the gross margins, you know, the questions about that. So basically, as TJ has mentioned, during the quarters, we do face a lot of unusual situations. issues within the market and overall the sentiment and a lot of pressures coming from different verticals. We've been missing some of the major verticals like education and some of the, you know, clients from some of the gaming sector as well. So we've been trying to capture, you know, new demand and also trying to compete for new budgets. And I guess in this process, we're also trying to retain our long-term customers and we've been providing a little bit more distance towards these clients. And that's why it pressures much our margins. And at the same time, because the media's policy also has some changes, so we're also trying to capture more benefits. But it seems that the tension is there and that we're trying to strike for the balance between the profit and also the growth and the retention of clients. And it leads to a kind of job in terms of gross margin in the quarter. And it probably would last until next quarter, and maybe in the next year we will have more visibility. As TJ mentioned, I think this is only a short-term phenomenon that we are observing right now. And as you said, the enterprise solution size is still growing pretty much strong, and it's still maintaining very decent margins. overall. And so we've been forecasting or looking forward that going into the next year, probably when the enterprise revenues still keep going and that will be growing to right now is already hitting like 20% in the mix. And when going to next year is probably going to 30, 40% mix, then I think we'll be able to recover over the margin. And also the market solutions margin will also be improved. As TJ also mentions, the business is only relatively short term and that we've been able to recover when the market turn backs and getting some new clients and new business, also some new solutions as well. So regarding your second questions on how do we maximize the long-term retention and whether there will be incremental expenses going forward, And I think specifically that would be for the enterprise SaaS model. I think on the marketing solution model, we basically keep it gradually back in terms of how we manage overall the growth with the operating expenses. But in terms of the enterprise SaaS solutions, basically we still need to sink in relatively some incremental expenses, and not just for retentions, but also for growing the segment. and growing more, you know, trend-based as well, and still pretty much a key account strengthens at the point, and we're still pretty much trying to capture more demand from the market. So it's more abstract at this moment, and hopefully we'll be able to discuss more next. And here will be my answers, and Christine, if PJ has any things to add on, but these are for my remarks. Thanks.
spk08: The next question is from Colin Liu of China Renaissance. Please go ahead.
spk05: So I'll just translate for myself. Case management for the chancellor is asking the question. I only have one. If we look at gross margin for this quarter, it is actually declining on a two-on-two basis. I wonder what's the reason behind? Is it anything to do with the broad macro witness? Thank you.
spk01: Okay, let me answer your question. Terence, if you have anything to add, please go ahead. We are seeing a decline in net profit mainly because of the advertising industry. In Q3, including the second half of the year, we feel that the advertising industry and the market environment are facing a big challenge. From some of the major media, we can see that the advertising business is facing some challenges in the next few quarters. For the entire marketing industry, the short-term demand for software has led to some big competitions. So in this regard, our current strategy is actually to balance a sudden change in the market. We may aim to use a strategy like sacrificing some labor to better maintain a better connection with this customer. In this case, It's like spending time with the client to some extent. And then we hope that when the business warms up, we can have a better recovery. And then our own feeling is that with a change in this industry, because in our marketing solution, there are actually more customers in the industry. So we actually have a relatively large elasticity in it, which can have a better balance in terms of growth and GP margin. In addition, between our marketing solution and enterprise solution, there will actually be some more and more strong sanity in the future. Some of the work we are actually doing here is to create more and more marketing solutions can be linked to some of the data of Enterprise Solution, and can strengthen the co-efficiency in it. In this way, it may be helpful for us to improve the GP margin of Marketing Solution next year. These are the points we see now.
spk00: Okay, let me take your question first and then see whether Terrence has anything to add. You've mentioned about the declining gross profit margin, and I think that actually this is largely due to the entire sentiment in the advertising industry. You know, in Q3 and even in the second half of this year, the entire marketing advertising industry industry has faced very severe challenges. You can see that in the financial statements in the mainstream media. Due to the weak market sentiment, the weak demand actually has intensified the competition in this industry. Our strategy right now is to adapt to this changing environment. by sacrificing some gross profit margin so that we can maintain the long-term healthy relationship with our customers. We want to share the roles of customers so that we can recover in a healthy manner when the market rebounds. And in addition, as I've mentioned previously, our marketing solutions actually cover a wide variety of industries, so we are resilient enough to strike a balance between growth and gross profit margin. In addition, we are currently working to connect data of marketing solutions and enterprise solutions so that we can create more synergies from these two businesses. I believe that it will help improve the gross profit margin of our marketing solutions in the future. So this is my answer.
spk05: Thank you.
spk08: As there are no further questions, I'd like to turn the call back over to Lisa Lee for closing remarks.
spk06: Thank you once again for joining us today. If you have any further questions, please feel free to contact ICLIC's Investor Relations Department through the contact information provided on our website. See you next time. Thank you. Bye-bye.
spk08: This concludes the conference call. You may now disconnect your line. Thank you.
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