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spk04: Ladies and gentlemen, thank you for standing by and welcome to the Aurora Mobile Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After speaker's presentation, there will be a question and answer session. To ask questions during the session, you will need to press star 1 on your telephone. Please be advised that today's conference has been recorded. I would now like to end the conference with your host for today, Mr. René Van Gistein. Thank you. Please go ahead, sir.
spk01: Thank you, AJ. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call today are Mr. Wei Dongluo, Chairman and Chief Executive Officer, Mr. Fei Chen, President, and Mr. Shannon Bong, Chief Financial Officer. Following their prepared remarks, all three will be available to answer your questions during the Q&A session that will follow. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, which are difficult to predict and may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, and or factors are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. With that, I'd now like to turn the conference over to Mr. Luo Please go ahead.
spk00: Thanks, Omar. Good morning and good evening to everyone on the call. Welcome to Arora Mobile's first quarter 2020 earnings call. Before I proceed, I would like to take this opportunity to remind everyone that we have uploaded a quarterly earnings stack on our IR webpage for your reference. You may refer to the deck as we proceed with the quarter day as it contains useful financial information in addition to those we have in the press release. As we begin our review with highlights of our key operating and financial performance for the third quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installation. reached 1.65 million as of September 30, 2020, from approximately 1.39 million a year ago. An average of 7,000 new apps came on board every month during the third quarter. Quarter of quarter, we still see the great number of mobile app developers joining us, and we are truly humbled yet encouraged by this trend. The number of monthly ITV unit mobile devices recovered continued to increase, reaching $1.39 billion in September 2020 from $1.34 billion in September 2019. Lastly, in the third quarter of 2020, we saw the number of paying customers increase to 2,405 from 2,300 to well a year ago. On to the Q3 2020 financial numbers. Please refer to our presentation deck. Upload it to our IR web page for the key financial highlights. I would like to begin with the discussion of SaaS business, which includes only the developer services and vertical applications business, because it's appropriate, relevant, and helpful for investors to understand how the underlying SaaS business are performing now. As beginning with the quarter ending March 31st, 2021, we will only have this SaaS business. Our SaaS business continues to record impressive results in this quarter with revenue of RMB 65.6 million, an 18 growth year-over-year, and gross profit of RMB 49 million, a 16% growth year-over-year. On SaaS business basis, the total revenue grew 18% year-over-year, mainly due to the strong 99% growth in developer services, partially offset by the decline in vertical applications, which have been impacted by COVID-19. It's worth noting that customer demand for vertical applications has gradually recovered from the second quarter of this year, and revenues from vertical applications have been sequential growth for two consecutive quarters. On a quarter-of-quarter basis, revenue remained relatively stable at RMB 66 million. On a sub-business basis, gross profit has also shown solid growth of 16% year-over-year to RMB 49 million for the quarter ended September 30, 2020. Due to the same reasons as what happened to the revenue trend, Also, on SaaS basis, growth margin for this quarter was 75%, stable year-over-year, and quarter-over-quarter. We expect pro forma growth margin to maintain at about 60% range going forward. In the third quarter, we continue to extensively explore various industry verticals, focusing on helping mobile app developers with operations, growth, and monetization by leveraging our professional, efficient, secure, and stable services and great operational analytics capabilities. During the quarter, we launched a one-stop operational platform for app developers, helping them to improve user engagement, retention, and conversion, as well as achieve great efficiency leverage on intelligent user acquisition tools to further refine their operations. Recently, we also started strategic cooperation agreements with leading platforms across a greater variety of industry verticals, such as finance, insurance, weather internet tools, gaming, fresh food, e-commerce, and online education to drive user growth and traffic and improve user experience. For example, we have already started agreements with Ping An Bank, Data Center of China Life, MoziWeather, Wi-Fi Master Key, Nidhi Scan, Miss Fresh, and 17 Joyeux, and other well-known companies. Now, I will turn it over to Fei, who will discuss the Q3 performance in great detail.
spk03: Thanks, Chris. Let me start the discussion of different revenue streams within the SaaS business. Since the first quarter of 2020, Developer Services was once again the star performer for the third consecutive quarter. For the quarter ended September 30, 2020, we recorded RMB 43.7 million in revenue for developer services, which represented a 99% growth on a year-over-year basis. The significant revenue growth in developer services was fueled by the 26% and the 58% growth in custom number and R pool, respectively. For subscription services, we continue to see more customers signing up to our suite of developer services. New and the renewal of customers include, among others, McDonald's, China Mobile, Hunan Province, Tainan, and Ohio. Subscription services revenue was RMB 30.2 million, a significant increase of 38% year over year, primarily driven by the increases in both the number of customers by 23% and Apple by 12%. Value-added services, which include revenues from JG Alliance services and App Appointment SaaS, have also recorded another strong quarter. While our subscription services satisfy app developers' operational needs, our JG Alliance services help app developers with their user traffic monetization needs. As the app market becomes incrementally competitive and the user growth becomes stagnant and costly, there's urgent need for app developers to monetize existing user base in order to survive. Our JG Alliance services come to the market at the very right time to exactly serve this monetization purpose. We expect tremendous growth potential in this business. The revenue from value-added services was RMB 13.5 million in this quarter, compared to zero revenue from the same quarter a year ago. On the supply side, recently we have signed up a few hero apps with over 10 million DAUs in China, such as Wi-Fi Master Key and others joining our JG Alliance traffic network. The total number of DAUs within our network has already exceeded $100 million in the third quarter, reaching a major milestone since we launched the service less than a year ago. The endorsement of these hero apps has proven the great value and the market acceptance of our JG Alliance products to help the mobile apps to further monetize their app traffic. On the demand side, many program developers have become the largest traffic consumer of JG Alliance. With the increasing expansion of the mini program ecosystem, mini program developers are no longer satisfied with limited traffic supply, such as those within WeChat, and they urgently need additional external traffic to meet their huge user acquisition needs. Our JJ Alliance, massive traffic resource, and innovative advertising format can effectively meet their user acquisition needs. Therefore, Whether it is from the supply side or the demand side, JD Alliance gives us full confidence that this business will become a growth engine to drive our overall growth in the foreseeable future. Here, I would like to provide a brief update on the legacy targeted marketing business. In the third quarter of 2020, targeted marketing business continued to wind down according to plan. It only contributed a 40% of revenue, down from 49% of revenue in the second quarter of 2020, and a 4% of total growth profit, down from 5% of total growth profit in the second quarter of 2020. As previously mentioned, we will wind down this business by end of this year. Therefore, starting from first quarter of 2021, the revenue book will be 100% SaaS business. which include only developer services and vertical applications. Now let's move on to the discussion of vertical applications. The combined revenues from vertical applications, including market intelligence, financial risk management, and iZone, increased by 6% from RMB 20.7 million in the second quarter of this year to RMB 21.9 million. Revenues from our market intelligence products remain relatively stable between the quarters. The revenue this quarter was again equally contributed by both the investment fund and the corporate client. New corporates include the Ping An Bank, Huawei, Kaishou, and SoftBank. For the financial risk management segment, revenue increased by 6% quarter over quarter as this business continues to recover from the impact of COVID-19. We are seeing quarter-over-quarter increased demand for our products in the financial sector, mainly by banks and licensed financial institutions, with a particularly strong ARPU growth of 17%. And lastly, our iZone business has shown solid growth of 29% quarter-over-quarter, driven by a 60% improvement in ARPU. As China recovers from COVID-19, we do see increased demand for our location-based intelligence products across different industry verticals. With that, I now pass the call to Shannon.
spk02: Thanks, Fei. Since Chris and Fei already talked about our top line numbers for this quarter, I'll go through some of the other P&L and balance sheet items. We are very pleased that the increased contribution percentage-wide year-over-year and quarter-over-quarter by developer service and vertical application has pushed our gross margin for this quarter to an all-time high. This historic high gross margin of 47% in Q3 2020 is a result of our commitment and success in investing, growing, and executing well on both the developer service and vertical application business. Onto the operating expenses. Total operating expenses decreased by 14% year-over-year to RMB 96.2 million. In particular, R&D expenses increased by 5% to RMB 45.6 million, mainly due to increased depreciation and technical expenses. Selling and marketing expenses decreased by 8% to RMB 28 million, mainly due to reduction in energy costs as a result of lower headcount. and less marketing expenses due to COVID-19 pandemic restrictions. G&A expenses decreased by 36% to maybe $24.1 million, mainly due to reduction in FedEx provision, where we made specific provision for one customer last year. No such material provision was needed for this quarter. I believe the healthy gross margin trajectory along with the good control of over-operating expenses will continue into the next quarter and beyond. This will lay a solid foundation for us to further improve our financial performance in the future. On to the balance sheet items. These solid operating and financial results mentioned above are also reflected on our balance sheet. With our stringent credit quality and collection efforts, accounts' residual turnover days have decreased significantly from 84 days in Q3 2019 to 45 days in Q3 2020. The deferred revenue balance, which represents cash collected in advance from customers, has increased by 29% year-over-year to 110 million RMB as of September 30, 2020. Our operating cash flow has now been positive for two consecutive quarters, with cash inflow this quarter of more than RMB 30 million. In addition, our cash and cash equivalent restricted cash and short-term investment balance was at a healthy level of RMB 437 million as of September 30, 2020. Thus, we believe we are in a very solid financial position to further invest in and expand our high-margin SaaS business going forward. Total assets were RMB 805.59 million as of September 30, This includes cash and cash equivalent of $437 million mentioned above, account receivables of RMB $42 million, prepayments of $40 million, fixed assets of $90 million RMB, long-term investment of $210 million RMB. Total current liabilities were $453 million as of September 30th. This includes accounts payable of $16 million, deferred revenue of $110 million, accrued liabilities of $95 million and convertible notes of $232 million. Beginning from this quarter, we will start providing the quarterly SaaS business revenue guidance. For the fourth quarter of 2020, the company expects the SaaS business revenue to be between $74 million to $78 million, representing quarter-over-quarter growth of approximately 13% to 19%. This Q4-star business revenue outlook is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demands, which are all subject to change. Before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended September 30, 2020, we did not repurchase any shares. As of September 30, 2020, cumulatively, We have repurchased a total of 921,000 ADS since the start of our program. And this concludes management prepared remarks. We're happy to take a question now. Operator, please proceed.
spk04: Certainly. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press pound or hash key. Once again, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Thank you. We have the first question from the line of Ryan Roberts. Please go ahead.
spk05: Good evening. Thanks for taking the question. And congratulations on kind of building up the SaaS, the continued progress. That's great to see. And also, thank you very much for the improved transparency. I'd like to applaud that. I think that's very meaningful and helpful for the market to understand more what's going on with the business. Thank you for that. So my question really actually, of course, is going to be on the SaaS business. One of the things we think about and talk about in the past is kind of the growth trajectory. And as we get more to a pure SaaS business kind of in Q1, of next year, I just wanted to kind of maybe get a bit more discussion on kind of, I guess, the growth trajectory. So I look at the SaaS business kind of sequentially. The revenues look kind of, you know, kind of flattish. I realize year over year, obviously, it's pretty significant. But looking at the sequential, it looks less so through Q3. And I want to get a sense of looking, you know, kind of into Q4 and maybe, you know, obviously, you're looking for some growth there, but maybe kind of a bigger picture view into 21, what should we be looking for as kind of the growth drivers? I mean, it sounds like the push alliance is definitely an interesting area, but I also want to kind of get your sense of what you're looking to see, to tap as the growth driver for the year ahead.
spk03: Hey Ryan, this is Fei. Regarding the SaaS business performance in the second quarter, you are seeing a flat-ish performance sequentially. The major reason is actually when you compare the value-added service, actually there's a slightly, a little bit decline in the third quarter compared to the second quarter, right? So in the earnings deck, actually on the page two, I explained what is the reason behind it. It's mainly because in the second quarter, you know, we benefit from, you know, a couple of customers who had a strong e-commerce kind of like, you know, demand due to a 618 promotion activities. And so e-commerce was particularly strong. And also in the In the second quarter, because we just started the business at the end of last year, right? So like the second quarter is still in the process of ramping up. So basically the customers, the advertising customers, actually they are not a very diversified customer base, right? So we have limited customers. So if we're a single customer who outperforms, it might, you know, skew the performance a little bit. So that's why you are seeing, you know, actually the second quarter was seemingly, you know, has a better performance than the third quarter. But since the third quarter, actually, we have diversified our customer base and diversification is still going on in the fourth quarter. So you also notice our guidance for the fourth quarter, right? That starts business. You are going to see a sequential growth of 13% to 19%. That actually reflects our expectation for the value-added service, which will have a strong quarter-over-quarter growth momentum. Because of that, we are able to guide this sequential growth. I hope that can address your questions.
spk05: Maybe if we could draw out, and I take on board, maybe it's a little early, but just because we're thinking about the transition away from target marketing, which is going to be done at the end of this year. And then we're looking kind of at a pure SaaS model next year. Should we be looking for the growth driver there? Is that more the VAS segment, which is effectively, I guess, kind of the push alliance? Is that kind of where we should be seeing kind of a lot of growth? Is that picks up? Or alternatively, you know, maybe if you could just share some thoughts on, again, where you see kind of the explosive growth flowing through the next year would be great.
spk03: Yeah, so actually we had a number of discussions before. So actually the growth driver surely will be the value added service because of the nature of the supply and the demand. It's mainly on the supply side. As long as we get enough supply, we have more apps joining our traffic and network. generate more DAU for us, then we will be able to drive the revenue growth rapidly. So internally, we also have a very high expectation for the growth trajectory for next year for this business, and we believe it will achieve you know, triple-digit growth compared to this year. So this year in total for this business line, it's roughly about, you know, somewhere between 50 million to 60 million. But next year we are looking at, you know, our triple-digit growth for this business. It's mainly we have a very strong pipeline. of the traffic, of the app who is going to join our network. And we just recently announced actually the addition of Wi-Fi Master Key, right? So Wi-Fi Master Key is currently in the initial stage of ramping up. It hasn't been included in the 100 million DAU we announced in the prepared remarks. So Wi-Fi Master Key, as you know, itself alone generates close to 100 million DAU. So that actually, all these kind of like the supply, the pipeline, gives us a very strong confidence that we are able to deliver triple digital growth for next year for this business. For the other SaaS business, like subscription, it's going to, as I mentioned before, it's going to follow traditional SaaS growth trajectory, 30 to 40%-ish growth, mainly driven by the increasing number of customers, as well as we are introducing new functionalities of our product offerings, which can help the R pool as well. So basically that's the function of both these improvements. And for the vertical applications, actually you've already seen the sequential recovery in the second quarter and the third quarter compared to the first quarter, right? First quarter we hit the bottom, but now we are recovering from the bottom. So on a sequential basis, you will continue to see the growth from this business. But going back to the same level as we experienced last year, it may take a couple more quarters, a couple more quarters. So that's the overall SaaS business, the three major business lines, the trends, the trend that we are seeing and the color we are able to offer. Okay, thank you.
spk05: That's helpful. And then just one kind of housekeeping thing. I think in the prepared remarks, we were discussing GPM. You expect that to stay around 60%. Is that right? Is that what you said? So, Ryan, can you repeat?
spk02: We didn't get you.
spk05: Sorry, yeah. During your prepared remarks, I think we were discussing the gross profit margin, and you said kind of on a normalized basis. I think you said 60%, 6-0. Did I get that correctly?
spk03: Yeah, Ryan. Actually, if you see the performer, you know, the gross margin, meaning just looking at the SaaS business, right? So over the past years, actually, it's always very stable between 70% to 80%. It's like bouncing around 75%, right? So since the start of next year, the first quarter, because we no longer have target marketing, so our corporate growth margin will be, we are basically coming 100% from the SaaS business, right? So you can expect the growth margin to be above 70% since the beginning of next year.
spk05: Gotcha. Yeah, that was going to be my question, the delta there between 75, SaaS, and kind of the lower number of followers. And maybe kind of one last thing, just kind of to box it all in. So if we think about, obviously, the revenue growth we're talking about with SaaS, it obviously sounds very attractive, and the stronger growth margin additionally points to kind of a more explosive kind of growth profile. But then if we look at OPEX, I noticed that you guys have kept that pretty tight, and kudos for doing that during this year, especially as challenging as conditions have been. I'm wondering, once you transition into Q1 2021, should we be looking for a change in the cost structure as you become more of a straight SaaS business? Or maybe how should we be thinking about those costs, which ultimately obviously drive profitability? to move into 21?
spk03: Yeah, so in terms of cost structure, actually we are not going to dramatically change the cost structure next year compared to this year, right? We will have a slight increase as normal because every year the employee is expecting a certain amount of salary increase, right? So we will keep keeps the increase within that range. But certainly we are also trying to continuously hire better talent and try to basically optimize current workforce to remove some non-performer. So in my model actually I would expect only about 10% to 15% increase of OPEX compared to this year in 2021.
spk05: Okay, that's very helpful. Okay, I think that's all from my side. Actually, maybe I can sneak in one last one. On the balance sheet, it looks like, again, the receivables, what you guys had been talking about last year when you began the transition of less working capital, that looks like that's definitely playing out as we see AR come down. I'm just kind of curious, again, as we move into the SaaS, more into the SaaS era, I suppose, should we be expecting some of that to continue to change? I suspect, you mentioned before, deferred revenues are a lot that's going to be paid up front. kind of business, sorry, deposit up front. So I'm just kind of curious how we should be looking at the balance sheet as it continues to kind of evolve with the new model. Maybe that's Shannon, maybe that's one for you.
spk02: Yes, Rodney. We do not see any deterioration of the balance sheet condition once we switch to SaaS business. Probably as you know, majority of our SaaS business customers are in the prepaid mode. So we do not expect to see a huge increase in AR because we switched from the old business to new business. On the contrary, we do expect to see different revenue to increase, which we have demonstrated for the past two quarters, has been increasing quarter over quarter simply because of the fact that under SaaS business, we do collect money in advance from customers. So I do not expect us to have any AR issue going forward.
spk03: Yeah, so currently the AR calculation, we still have the target marketing business involved, right? So once the target marketing business is completely gone, as you know, target marketing has longer AR. So once that business is gone, for our 45 days of AR we achieved in the third quarter of 2020, we think that there's still room for improvement. So we are aiming to, you know, get anywhere between 30 to 40. I think, you know, that's a good AR that we are trying to manage. Okay, so that's our target.
spk05: Gotcha, yeah. Sorry, I didn't mean to indicate that there's a deterioration. That's all the AR is coming.
spk03: It's not deterioration.
spk05: Actually, we are continuing to improve.
spk00: Gotcha, yeah.
spk05: It makes a lot of sense. Okay, so that's all from me, guys. Thanks. Appreciate the call. Thanks again.
spk04: Yeah, thank you, Ryan. Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel a request, please press star or hash key. It's star followed by 1 to ask a question. Thank you. Once again, if you wish to ask a question, please restart one on your telephone keypad and wait for your name to be announced. If there are no further questions, I would like to hand the call. Sorry, we have a follow-up again from Ryan Roberts. Please go ahead.
spk05: Sorry, guys, just maybe one more on the buyback. I noticed kind of in the release you mentioned there had been no buyback activity kind of in Q3. I'm wondering if you can maybe give us an update kind of maybe post-Q3. And additionally, maybe give us a sense of how you're looking at kind of capital allocation maybe as you get some of the, I guess, balance sheet kind of hurdles and the convert effectively taken care of at some point soon. how you're thinking about the capital allocation as you kind of enter the more cash generative SAS kind of model.
spk04: Just a second.
spk03: Yeah, so Ryan, so actually, you know, with our business, you are right, right? We are collecting more cash day by day and, you know, quickly we might reach the, you know, break-even point. And once we have enough cash, actually, we certainly, you know, besides the organic growth, we would think about, you know, the non-organic acquisition, right, to acquire some, you know, some... you know, the upcoming or kind of like a proven product in the marketplace, right, with a small team, but they have a good product. But for those SaaS players, what they are missing is they don't have a sales force, they don't have the customer base. So we have a very robust sales infrastructure, we have the system to deliver those innovative products into the market. So I think we should actively leverage our advantage and to to basically look for optimistically such kind of opportunities. By doing so, we can accelerate our growth trajectory.
spk05: Thanks. Any kind of color discussion maybe on the buyback strategy? Buyback.
spk02: No, I don't think there's any immediate plan to buy back as much because as you say, we're trying to get more expansion in terms of the growth of SaaS business. So there's no immediate plan to repurchase right now.
spk05: Okay. Thanks a lot, guys. Thank you.
spk02: Thank you.
spk04: Thank you. If there are no further questions, I would like to hand the call back to Rene.
spk01: Thank you, AJ. Thank you, everyone, for joining our call tonight. If you have any further questions and comments, please don't hesitate to reach out to the IR team. This concludes the call. Have a good night and thank you again. Goodbye.
spk04: Bye. Thank you. Ladies and gentlemen, that concludes the conference for today. Thank you for participating. You may all disconnect.
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