Kingsoft Cloud Holdings Limited

Ladies and gentlemen, thank you for standing by and welcome to Kingsoft Cloud fourth quarter and fiscal year 2020 earnings conference call. I would now like to turn the call over to your host today, Ms. Nicole Shen. Thank you. Please go ahead, Nicole.

Thank you, operator. Hello, everyone, and thank you for joining us today. King South Cloud's first quarter and fiscal year 2020 earnings release was distributed earlier today and is available on our IR website at ir.kyun.com, as well as on global newsware services. On the call today from King South Cloud, we have our CEO, Mr. Yulin Wang, and CFO, Mr. Hai Jianhe. Mr. Wong will review our business operations and company highlights, followed by Mr. He, who will discuss the financials and guidance. He will be available to answer your questions during the Q&A session that follows. There will be a third-party translator who will provide consecutive translations. All translations are for convenience purposes only. In case of any discrepancy, management statements in our original language will prevail. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control. which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks are included in the company's filing with the U.S. SEC. The company doesn't undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. It's now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

Thank you, Nicole. Thank you for participating in the 4th quarter of 2020 and the year-round phone call. This quarter, we performed well with solid performance. The total revenue of the 4th quarter reached RMB19.2 billion, with an increase of 63.8% In 2020, the total annual income reached 65.8 billion RMB, with a growth of 66.2%. In the past year, we have achieved a rapid growth in revenue in the industry. This is due to the company's insistence on implementing a set strategy to deepen the development opportunities of the Internet, public service, financial and medical vertical industries, in the area of focus, polishing core technology, and deepening industry understanding. In the past year, we not only maintained the growth of revenue contribution of existing customers, At the same time, we have served many new high-quality customers, including Zhihu, ShengWang, HuYa, Eagle, Sogo, YouYi互通 and other Internet companies, Xindongfang, VIPKID and other education companies, as well as ZhongXin Bank, Huaxia Bank, MaShang Consumption Finance, ZhongBang Bank and other financial institutions. As the leading medium-sized cloud service provider in China, we are focused on cloud service, which makes it possible for us to avoid the potential business conflict with high-quality customers and further strengthen the loyalty of the company. Thank you, Nicole. And thank you all for joining our fourth quarter and fiscal year 2020 earnings call. We are pleased to have closed the year with a solid performance.

And in the fourth quarter, we generated 1.92 billion Chinese yuan in total revenues, representing a 63.8% increase from the same quarter of 2019. For the full year 2020, our net revenues reached 6.58 billion Chinese yuan, an increase of 66.2% year over year. We grew faster than the industry average as a result of the continued successful execution of our strategy. As a leading independent cloud service provider, with our dedication to cloud business, we are able to avoid potential conflicts of interest with our premium customers and enhance our neutral position, which in turn gains additional trust from our customers. We continue to explore growth opportunities across strategically selected vertical sectors, including the internet, public services, financial services, and healthcare sectors. And we have improved and refined our key technologies and deeply dug into these sectors to meet customer demands. Over the past year, we not only expanded our revenue from existing customers, but also cooperated with companies many new premium customers. This includes internet companies such as Zhihu, Agra, Huaya, Huya, Beagle, Circle, UE Digital, and others, online education companies such as New Oriental, We Educate, and others, as well as financial institutions such as CITIC Bank, Huaxia Bank, Masang Consumer Finance Company, and Zhongbang Z Bank. As a backbone that supports the IT infrastructure development, cloud computing has been growing rapidly. We will take the opportunity to further expand our business scale and enhance our market position as the first choice in terms of independent cloud service provider.

根据IDC发布的中国公有云服务市场2020 Q3跟踪的报告, The company is one of the top three internet service providers in China. The company is committed to serving high-quality customers with safety, stability, comprehensive product and technology services, and protecting customer-centered projects. For example, a large short-video platform in China and the annual victory of the joint construction of local micro-channels, we have designed a perfect business support system and emergency resource allocation program for customers to respond quickly to customer needs and ensure live viewing experience. In addition, we have also served Bilibili and Yang's new media platform, Yang Shiping joint held the cross-year evening party project. The live broadcast of the evening party has reached 250 million viewers. Jinshan Cloud has communicated with customers in advance for a month about the resource expansion and security protection mechanism, providing customers with stable cloud distribution, network security and other services to ensure that the entire evening party will be held smoothly. In terms of new customer expansion, the company is communicating and connecting with many large Internet companies for business needs, deeply digging into customer needs to drive the growth of new customer revenue.

Firstly, let me talk about the public cloud. According to IDC's China Quarterly Public Cloud Services Track Report for the third quarter of 2020, we again ranked among the top three for the internet cloud service providers in China. We continued to focus on serving our premium customers with safe, stable, and comprehensive products and technical services. And the half quarter's report calls their key projects For example, for a must-watch live annual gala, which is jointly organized by a leading short video platform and a regional TV station, we have developed a complete support system and emergency resource scheduling plan to quickly respond to changes in customers' needs and ensure a great live streaming experience. We also provided services to Chinese New Year's Eve party, jointly organized by Bilibili and Yang Shiping, that is a new media platform for China's top TV station, CCTV. The peak number of concurrent users of the live broadcasting party reached 250, meaning we worked with a customer one month ahead of the event to confirm security measures, resource scaling, and redundancy to provide stable cloud delivery and network security services to ensure the smooth operation of the party. In terms of new customers, we are engaging some internet conglomerates to further explore their cloud demand. By deeply digging into and understanding customers' needs, we have laid a solid foundation for reliable revenue growth this year.

In terms of product upgrades, the company has completed the Yunyuesheng product array. The company has released a new metal server to further provide high-performance infrastructure services, which will be completed in December. All online business will be moved to the Jishan Yun container service group. The node size is thousands of new metal servers. It is one of the largest Kubernetes groups in the domestic public cloud industry. It has a standard meaning. In addition, the company continues to upgrade storage services, realize standardized delivery of large customer projects of 100 pb, and launch high-performance file storage. In terms of coding, we continue to take advantage of the technology. In December 2020, Jinshan Yun KAV1 video coding product won the top spot in the annual world video coding competition UTC, which is well-known in the industry, and proved the team's technical strength and innovation potential. In the future, we will continue to fully play the advantage of the cloud-based system, strengthen software capabilities, and provide customers with high stability, high performance, and easy expansion of cloud services.

Now let's move to product upgrades. We continue to improve our cloud-native product portfolio. We launched a bare-metal service to provide high-performance infrastructure services to customers. For example, in December, knowledge-sharing platform Zhihu completed the migration of its entire online business to our cloud. This included the deployment of thousands of bare-metal servers, which makes it one of the largest Kubernetes that is, the clusters in China. In addition, we continued to upgrade our storage services. We are able to deliver hundreds of petabytes of cloud storage as a standard service. We also launched a high-performance storage product, including file storage, archive storage, and others. In terms of coding and encoding technology developments, we continue to enhance our technical advantages. In December 2020, our KAV1 video encoder technology ranked number one in the UGC video category as the leading global video algorithm comparison. Demonstrating our team's technical strength and innovation, looking forward, we will continue to leverage the advantages of our cloud-native products portfolio, strengthening our software capabilities and provide our customers with high-performance, secure, stable, and scalable cloud services.

In terms of enterprises, the Chinese market is in a state of rapid development. In the public service sector, the company has signed a smart city project with 22 regions, covering more than 10 provinces. This includes the official launch of the first 10-point project in Gansu, Dongshu, and Xishuang, which helps to break through the internal circulation of the east and west power demand and the west power supply. Now let me talk about the enterprise cloud business.

China's enterprise cloud service market is growing rapidly. In the public service sector, we signed smart seed projects with 22 regions across more than 10 provinces in China. For example, we kicked off Gansu's first pilot project named Dongshu Xishun. That means conduct the computing in the west of China and for the data from the eastern China, which is a national program that intends to balance the computing resources between the eastern and the western regions of China. In addition, we also run a project for Northern Health Medical Big Data Technology Company Limited to help them build a cloud platform for scientific research and testing.

In the field of financial services, more and more business users are gradually turning to cloud distributed database products. The cloud deployment model is gradually surpassing the traditional deployment model and becoming a market trend. The company's DragonBase upgraded version 2.0 supports distributed business, distributed computing, high usability, flexible expansion, security audit, and many other core capabilities to cooperate with many financial customers. In addition, this quarter, the company cooperated with the Central Bank to provide data lake construction services, For the financial services sector, more enterprises are gradually turning to distributed databases on the cloud.

Moreover, cloud deployment models are currently better received than the traditional or conventional deployment models. The company has upgraded its Dragon-based system to v2.0, and this supports distributed transactions, distributed computing, and it features high availability, flexible scalability, security audits, and many other important capabilities. We have already started cooperating with many customers in the sector. For example, we have signed an agreement with China's CITIC Bank to build a cutting-edge data lake which will help them store and process a massive amount of data and empower the next generation of efficient and intelligent digital financial services. We also provide highly stable and easily scalable public cloud services to a large state-owned bank and help them connect their network services to cloud servers and deploy public cloud storage.

The first is to help the Wuhan City Health and Welfare Commission to build a medical service monitoring system to strengthen service capability and quality supervision and management. The second is to build regional imaging centers, new power centers, etc. to share local advantageous medical resources to improve overall medical service capability. The third is to build a fully unified electronic signage system in the Wuhan City health and health industry. The fourth is to carry out emergency system information construction for 60 city hospitals. In addition, our cooperation with Zhongdian is also going smoothly.

For the healthcare sector, we officially kicked off a new project for the Wuhan Municipal Health Commission to help build an integrated public health information platform. As an important city in fighting against the COVID-19 pandemic, Wuhan has received the official support in terms of state treasury bonds. Given that Wuhan has played such a pivotal role in the early fight against COVID-19 epidemic and its health care infrastructure was backed by this, we believe that our project will be an especially flagship infrastructure benchmark. And we will have a commission with four key tasks. The first is to help build a medical service supervision system and to strengthen service quality. The second is to build a regional data center for ECG authority and the medical impact to share resources and improve overall medical service capabilities. The third is to develop a citywide healthcare related electronic certificate system. The fourth is to build a digital emergency system in 60 pilots' hospitals. In the meantime, our cooperation with the CEC is well on the track, and so we are jointly promoting the second phase for picture archiving and communication system, or PCS, projects in Chongqing and other cities.

In the future, the company will continue to implement a certain strategy to focus on the Internet, public services, financial services, and medical services. Going forward, we will continue to execute our proven strategy and focus on the three verticals that I just walked you through. In addition to digging deeper into customer needs, we will actively broaden

our customers' base, prudent expense into Southeast Asian markets and for other investments opportunities. And so we will also improve our overall technical capabilities to capture the huge growth opportunities and the midst of the current wave of digital transformation.

Finally, about the company's environment, society, and management progress, we continue to pay attention to company governance, talent training, data security, environmental protection, and other social responsibilities. The company is preparing ESG-related work and is expected to release its first ESG report soon.

Lastly, I'd like to very briefly touch on our ESG efforts. We keep focusing on corporate governance, human capital, data security, environmental protection, and other social responsibilities. We are working on our internal ESG initiatives and expect to publish the first ESG report in the near future.

I will now pass the call over to Henry to go over our financials of the quarter.

Thank you.

Thank you, Yulin. Hello, everyone. I will now discuss our financial performance for the first quarter and the full year 2020. Please be reminded that all numbers quoted here are in RMB. Please also refer to our earnings list for detailed financial results. So to begin with, I would like to highlight a couple of points. First of all, we are pleased to report that our total revenue of 2020 were 1.92 billion RMB this quarter, representing a year-over-year growth of 63.8%. Total revenue of financial year 2020 were 6.58 billion RMB, up 66.2% from 2019, which was well above the growth of the cloud industry in China. Number two, the increasing demand for enterprise cloud services drive our revenue growth. Our enterprise cloud services revenue this quarter were 535.9 million RMB, an increase of 143.1% year-over-year. Enterprise cloud services revenue of 2020 was 1.37 billion RMB, up 182.3% year-over-year, and accounting for 20.9% of our total revenue compared with 12.3% last year. Number three, benefiting from our premium customer strategy, we are very pleased to see that many large customers have been making multi-year commitments with us. We are hearing the feedback of our shareholders, and in order to let the market better understand our project pools, we are very happy to share our backlog with you. Even a large number of projects haven't started the bidding process on the client side or have not finalized agreement yet at the very beginning of each year, the amount of our existing project orders of enterprise cloud revenue already reached 2.8 billion RMB, including a certain part of orders from recurring revenues. And we believe that existing orders will form a solid foundation of our revenue base in 2021. Number four. Our customer diversification and revenue mix have been improving continuously. For example, revenue from our top 10 premium customers contributed around 65% of total revenue this quarter, compared with 73% in the same period last year. We are seeing the trend of diversification across our major premium customers. In addition, our cloud delivery services, which include Value-adding services, such as coding, encoding, and image enhancement functions, etc., contributed below 50% of our total revenue for two straight quarters last year. The contribution of the cloud computing services has also increased. Number five, our adjusted EBITDA margin was also approaching single-month break-even in this quarter. Adjusted EBITDA margin for the fourth quarter was negative 0.9% compared with negative 7.6% in the same period of last year, representing an improvement of 6.7 percentage points. Adjusted EBITDA margin also had been seen improvement for 10 consecutive quarters. Net loss margin also narrowed to negative 5.5% this quarter, which was a significant improvement from negative 20.4% in the same period last year. Our earnings per share, aka EPS, this quarter was negative 3 cents per share, improving significantly from negative 32 cents in the same period of last year. Number six, our business is sufficiently funded at this moment as of December end 2020. Our cash position was 6.12 billion RMB. Lastly, we were included in two major indices at the end of last year. the MSCI China in November, and FTSE Russell Global Large Cap Index in December, respectively. Now I will go through the details of our financial results. Our public cloud services revenue increased by 44.1% year-over-year to 1.36 billion RMB. We are committed to our premium customer strategy. The net dollar retention rate of our premium customers in 2020 was 147%. Meanwhile, we are engaging with certain internet conglomerates to further explore new opportunities. During the first quarter, enterprise cloud revenue increased by 143.1% to 535.9 million RMB. Our total number of premium customers in 2020 reached 322, up 79 accounts. The R pool of premium customers also increased 15.9 million RMB in 2019 to 20 million RMB in 2020. Cost of revenue increased by 63.5 percent year-over-year to 1.83 billion RMB. IDC cost increased by 49.6 percent year-over-year to 1.1 billion RMB. As a percentage of total revenue decreased from 62.7 percent in Q4 last year to 57.2 percent in this quarter. We are achieving great economic scale and improving resource efficiency. Depreciation and amortization costs remain relatively stable at around 167.5 million RMB. Other costs consist of third-party software purchases or sourcing costs and channel costs associated with both public and enterprise cloud, as well as other equipment costs related to enterprise cloud services. Other costs were 552.3 million RMB and the staffing costs were 10.3 million RMB. Adjusted gross profit was 94.9 million RMB increased from 56.7 million in Q4 last year. The adjusted gross margin was 4.9% this quarter. Our adjusted gross margin benefit from our continued leverage on economy scale and cost savings. by the investment into new business opportunities of strategic verticals, such as healthcare, financial services, and incurred costs for ongoing projects. Total operating expenses decreased to 337.9 million RMB, down 5.4% from Q4 last year. Excluding share-based compensation, adjusted R&D expenses were 161.3 million RMB As a percentage of total revenue decreased from 13.6% in Q4 last year to 8.4% this quarter. Adjusted selling and marketing expenses as a percentage of revenue decreased from 7.3% in Q4 last year to 5.6% this quarter. Adjusted G&A expenses as a percentage of revenue decreased from 6.4% in Q4 last year to 0.8% this quarter. Our adjusted EBITDA were RMB negative 70.5 million RMB compared with negative 89.3 million RMB in Q3 last year. Adjusted EBITDA margin was also approaching single month breakeven and was negative 0.9% for the fourth quarter. As of December end 2020, we had a cash and cash equivalence of 6.11 billion RMB during this quarter. Capital expenditures was 404.7 million RMB. Thanks to the common scale and improving of IT efficiency, capex as a percentage of total revenue decreased from 26.6% in 2019 to 21% in 2020. Moving to the outlook. For the first quarter of 2021, the company expects the total revenue to be between 1.83 billion RMB and 1.93 billion RMB. It is based on the company's current and preliminary views of the market and operation conditions, which are subject to change. To add, the forecast reflects the relatively late timing of Chinese Lunar New Year holiday in the first quarter of 2021 compared with last year, and also the typical pattern of the procurement and implementation process of major enterprises and public sector clients in mainland China in the first quarter of each year.

Meanwhile, we believe our public cloud revenue will also expect to continue to grow sequentially.

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the bound or hash key. Once again, if you wish to ask a question, it's star and the number one on your telephone keypad. Your first question comes from the line of Kyna Wong of Credit Suisse. Please ask your question.

Thanks for taking my questions. And congratulations for improving Excel, especially the editor. margin of poaching of the infant. And I wanted to chat, it's like two questions. First is about the first quarter guidance, because we do see the revenue growth is actually like, you know, 40% year-over-year, and somehow it affects certain, like, the impact on the Chinese New Year's holiday, and also some projects may be pushed out. But can we, like, have more color or what kind of project that actually push out into maybe 2Q or sometime in the near term? And if, like, there's any issue that is caused by competition and all the things will affect your original expectation. And because my second question is actually related to the competition and this gap because we noted that the others like giant intellect cloud service provider, they're also moving to the enterprise cloud aggressively. And we do see that these are rare areas, quite fragment, Maybe on the purpose side, they will compete with you on certain minimum customer offering better pricing and all things. On the other hand, the enterprise cloud will also see more competition in this area. So I think that's my two questions. Thanks.

In beta, The second question is, what kind of projects will be seen in the second quarter? Some Internet companies are now moving towards middle-end products and providing middle-end services. They may also provide some trading services. Will this also affect our competition?

Thank you, Kina. I will take the first question and our CEO will answer the second one. Thank you, Kina. I think it's probably going to be a very important question and I definitely want to share more color in addition to the prepared remarks early. I think the first point, I just want to kind of recap on what happened back in Q1 2020. I think that will lay out the assumption of my answer below. I think for 2020, there are three major factors that affect the pattern in 2020, which actually was a unique year. Obviously, we all know there was a COVID-19 happening in Q1 2020 that actually increased the base of the usage on the public cloud side. And that actually carried over for a few quarters last year and also will carry over for this year. I think this is going to be a positive factor for the form of base of the revenue. And also, as we mentioned last year, The Chinese New Year holiday was pretty much early. That actually didn't affect too much on the Q1 of implementation. And also typically the Q1 was also a relatively low season for all the major public sector clients' implementation and bidding processes. And also to share a few numbers, in Q1 2020, if you remember, our total revenue is about $1.39 billion. So as a percentage of the total revenue in 2020 of 6.6 is roughly about 20% of Q1. And if you look at the first half and the second half of the revenue split of the last year, it was around about 43% or 45%. And the late part of the second half is around 55% or around that range. So if you look at the guidance for this year, so assuming we're still around the same target for this year, the first half and the second half of the revenue split is actually very similar to the mathematical difference of last year, which is around first half about 40% to 43%, and the second half is around 55% to 60%. So I think that's kind of laid out the comparison from an analytical perspective. However, as we mentioned for this year, Even right now as they just finished the two sessions of the meetings in mainland China and all the kind of major projects, especially the bidding process is about to start, even without those considerations, the current backlog as we shared of the enterprise cloud revenue only excluding the public cloud revenue, we already have 2.8 billion RMB of the backlog on hand. I think that will form our foundation for the revenue to carry on. And some of that backlog, we've already seen the recurrent revenue nature, especially from high-quality accounts, for example, from healthcare and financial services in certain major cities of the public sector clients. So overall, we think that the revenue trend and the pattern across the quarters actually will be very similar. And for Q1, it carries on the potential very same pattern and unique feature for this year, given the two factors we mentioned. Thank you, Kina, and we'll take the second question. Okay, and also for the second question, Kina, I think for the major competitions, you know, I think a few things we haven't seen any changes. I think the premium customer strategy and our key focus on the neutrality will give us more revenue opportunities, and we understand that. in the market, there are maybe other players are still thinking, still making great efforts to get into the market. But as we know that the total addressable market of the China cloud market is still very rapidly. And also we are seeing a trend that the clients are actually willing to use more cloud vendors that actually also the same opportunity is not only for us, but also for other peers in the market as well. So in some situations, as we mentioned in a few cases, that we become an important multi-cloud vendor for our clients, even though maybe other company may also have a wallet share, but I think that doesn't prevent us to earning more dollar value from the same client, because the market itself is also growing. To give you more two data points, as we mentioned, in the third-party expert IDC stats that we are clearly ranked as the number three of the internet public cloud vendors, And also, you know, we are making a great progress, especially for the key accounts and clients who have a deep wallet and budget and spending and who have more concerns and considerations when they want to select a neutral player who they will more trust it and who may never get into any potential conflict of interest with our clients. Thank you, Gina. Thanks.

Your next question comes from the line of Alex Yao of J.P. Morgan. Please ask your question.

晚上好,玉玲,Henry. This is to share some initial judgment on the growth trend of the two sides of the public cloud and the corporate cloud. And then the second question is about the driving force of the industry. Can you share the whole year of 2020? If we look at the public cloud side, it comes from the wide video, including long video, medium video, short video, and live video. How much of the public cloud can the related industry account for? And then So my first question is regarding 2021 revenue growth outlook. Would you be able to share with us your preliminary thoughts on the 2021 revenue growth outlook, particularly what are the growth outlooks for enterprise cloud as well as the public cloud. Secondly, I would like to ask what will be the key industry drivers to the public cloud business. Would you be able to share with us your revenue exposure from video-based industries in 2020, including long-form video, mid-form video, short-form video, and live streaming? And then as you guys implement diversification strategy, what are the other industries that could potentially become the new growth driver to your public cloud business in the next one to two years? Thank you.

Thank you, Alex. The first question is, since 2021 has already started, according to our last year's situation and this year's business expectations, we think that the growth of China's cloud computing market from this year to next year will still be very promising. We are also very confident in our own business. First of all, it is the increase in several industries, such as the public services, finance, and healthcare that we are concerned about. These three industries have been developing in China for a period of time. So now these industries are more familiar with the technical capabilities of the use of cloud. More importantly, some of the relevant industry policies and monitoring measures are becoming more and more mature. So the increase in these industries will be very rapid in the future. So just now, Henry also introduced and disclosed a number of our first hand orders this year. What we currently see is that the total number of existing customers and projects that have been obtained is very large. This is the first one. The second one, the question you just asked is in the field of public cloud, specifically in the field of public cloud. In 2021, we believe that China's video industry, whether it is long-term or short-term, I personally think it is still a year of regular growth. There should not be much change, but by 2022, there may be some changes in the application of higher-end or advanced video, and the ratio of video-related products, I don't think there will be too much change in the supply chain. Because more customers in the industry and more new customers will join. Although the proportion of video industry will be reduced, the application of those customers in the video industry will also be a very large application. For example, in addition to video industry, we now see education, games, and e-commerce industry. The number of our customers is increasing. But they are becoming more and more video-oriented in terms of the trend of using products. So in general, in addition to video, there will be new industries joining the industry. But in terms of product ratio, video-based products will be reduced, but there will be no significant changes. We think 2021 to 2022 may be a little different. We have to take a look at some of the new technology applications. Thank you.

Thank you, Alex. So for 2021, we already have a good start. And compared with 2020, we also have good expectations for 2021. As Henry has mentioned, we also have quite a big number of orders in hand. And with regard to the cloud computing, I think from 2021 to 2022, there's still rapid developments or growth in the cloud computing. And we have strong confidence in this. And with regard to the three sectors, public services, financial services, and medical, healthcare services that they have developed for quite a period. So they are quite familiar with the cloud business. And I think the regulatory climate or regulatory measures are also maturing. And so we can see the continued growth in these three sectors. And also with regard to the video business and the public cloud question, in 2021, we think there's still good developments in the source videos. There'll be not a big change, but with regard to There will be probably further development in the HD business and also in the immersion video business. And the share of video business in our public cloud segments is quite stable. There's no big change based on our expectations. And with regard to the customers, for example, the educational sectors, the game sectors, and also e-commerce sectors, they also start using some videos in their applications. So, generally speaking, The video business, we do not expect any big change. With regard to the prospect for 2022, we still need to wait and observe the further developments of the relevant technologies.

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

晚上好,王总跟Henry. 今天晚上有两个问题。 第一个就是关于四季度这个毛利,就是quarter on quarter的这个变现。 可以多说明一下就是这个seasonality的影响。 This is the first question. The second question is about in 4Q, the cost of G&A is actually lower year-on-year. Now, how do we measure the cost of G&A in this year, 2022? The second question is about the medical sector. This development in this year, 2022, from the industry perspective and the company's I have two sets of questions. The first is regarding fourth quarter results, just the margin trend in fourth quarter, a little bit of a decline sequentially. Can you walk us through the impact there? Also on the fourth quarter, G&A expense seems to have declined quite a bit year on year. How should we think about G&A expense going into 2021? And the other question is about just the healthcare cloud. This seems to be quite an important initiative for both China and also, in my view, the company. Can you just talk a little bit about the outlook for healthcare cloud Thank you, Thomas.

I'm very happy to respond to questions. I will take the first one, and our CEO, Yiling, will answer the second question. For around the growth margin for Q4, I think the first point I want to mention is that if you compare on an annual basis from 2019 to 2020, the growth margin for Q4 is Our gross margin was 0.4%, and 2020, on an annual basis, our gross margin was 5.6%, which is actually already a very significant improvement on a year-over-year basis. And also, it's going to be a faster pacing, even compared with other major peers in the cloud industry in China. So I think that kind of laid out the first part. And especially for the company budgeting perspective internally, we actually need to look at how we invest into our business, into technology, into the clients. So if everyone remembers, for example, in Q3 in September and October, you know, we just entered, as you mentioned, the healthcare industry and vertical, and we signed a partnership with CEC Group. And also in Q4, we make a few major breakthroughs, and also we introduce a few new clients, especially in the banking sector, for example, CITIC and Hua Shao. So as you know, those are the new area of high-quality clients who are willing to receive our high-quality technologies. But the initial, especially the bespoke and some of the customer solutions, we need to tailor into those clients. As you know, on the healthcare and the financial services, they require certain customized implementation of the cloud-native technology. So that's why in Q4 we have incurred certain costs and kind of the investment into those new business areas that will actually incur the cost on the gross margin line that affecting on that. So if you compare with absolute dollar number from Q3 to Q4, the number itself is actually not widened a lot. It's about 20, 30 million RMB in that range and that actually reflecting the dollar value we invest into those new areas. So for the long term, I would say my third point is for the long term, we still believe that our gross margin will improving in the long term. Obviously, on a quarter basis, maybe you have a little bit kind of changes. But in the long term, the fundamental forces support our continuous improvement of the gross margin going forward. And to a second question on the G&A expenses, so the last year, 2021, so we prepared for our IPO, and they did our IPO in Q1 and Q2. also completed follow-up offerings. So that's why there was incurred some part of the transaction-related external and internal expenses. And for Q4, as you know, we are quite dedicated into our new business, and we're kind of working with our existing clients. So the journey expenses actually reflecting a reduced base of down-the-line needs for those client relationships and the business. So going forward, I think especially for 2021, as a percentage of the total revenue, I think last year's GNA expenses as a total revenue for last year will continue to decline on an annual basis. But again, because of the quarter-over-quarter basis will kind of relate, for example, for the employee bonuses and the certain incentive payments and the certain projects on an internal and external basis may have a little bit of fluctuation, but we believe on an annual basis the percentage of GNN expenses from 19 to 20 to 20 to 21 will continue to decline gradually. Thank you, Thomas. And now our CEO, Yulin, will introduce and respond to the second question.

Hi, Thomas. Hello. Let me talk about the medical industry. For Jishan Yun, the medical industry is a very important industry that we are very concerned about. Actually, we started to study this industry about four years ago. But we all know that medical industry is actually a It is a very complex industry. It is the public service of the government, as well as the professional treatment and research service, as well as the financial service related to social security and medical insurance. It is a relatively large system. The medical industry has had a very big development in China since the epidemic in 2020. From the needs of customers to the relevant industry policies, there has been a big change. and support for some of the key projects and funds. Currently, we believe that we have taken the lead in the field of medical cloud. First of all, in September last year, we signed a cooperation agreement with China Telecom to expand the medical industry. Currently, in Chongqing, Sichuan, and Jiangsu, etc., we have done some large-scale medical projects, and they are all in China. It should be considered the first time. We are currently in the second phase. At the same time, we also targeted Wuhan's medical health cloud project. In addition, we have other projects in Hubei. So currently, we have completed the whole medical cloud service system from provincial level to municipal level to county level, including medical institutions. So thank you. Good evening.

With regard to the healthcare sector, actually it is an important sector, one of the priorities for KC. And we actually entered into the healthcare sector since four years ago. And we also started our study with the healthcare sector since four years ago. It's quite a complicated sector, actually. Of course, healthcare service itself is government to public service. It also involves the healthcare R&D and also the healthcare services and social security services. So basically, it's quite a huge, complex system. And after 2020, there's big changes in the healthcare sector. the state has provided strong support to the digitalization of the healthcare sector. We have actually gained the advantages because we have pioneered in providing cloud services to the healthcare sector. As you know, in September 2020, we signed a partnership agreement with the CEC, and we have provided services to clients or customers in Chongqing, Jiangsu, and Sichuan. We are actually the first cloud service provider that provides such services to the healthcare sector in China. And for some projects, we are already in phase two. For example, recently, we also have one space for the Wuhan integrated healthcare healthcare information system. And we have also been to the projects from other cities or counties in Hubei province. Basically, we have covered the whole spectrum from the province to city to county, and even to medical institutions. And I should say, The healthcare sector is growing very quickly and I think in the future it will play an important role in contributing to our business growth as well as our revenue or income growth.

Your next question comes from the line of Li Dingzhao of CICC. Please ask your question.

玉玲总,Henry,Nicole, 晚上好。 我这边有两个小问题。 第一个是关于我们光有云的这个幼稚客户的。 我想知道2020全年这个幼稚客户的 个数增长的情况, 或者说现在的总数是多少。 然后另外想知道这个dollar retention rate 这些幼稚客户的 Good evening. I have two questions here. First one is related to the premium customer strategy. Can the management share the number of premium customers in 2020? And what's the dollar retention rate of these premium customers? And my second question is related to the CapEx plan as the company are going to build a new IDC in Tianjin. Thank you.

Thank you, Bernd. I'm happy to take on this question. So regarding the clients, we do see that our execution quality is very much on track. And in 2020, we have increased the number of the premium customers to 322, which is an improvement of 79 key accounts. And also in addition to the increase of the total pool of the premium customers, The average revenue contribution, aka our pool, of the premium customers has also increased from 15.9 million RMB in 2019 to about 20 million RMB in 2020, which is also a significant and a decent improvement. And also, as we mentioned, that the diversification around and within the premium customer, we have also seen that trend as well. I think these are the two kind of key indicators, not only indicating the universe of our premium customers, but also the quality and the diversification of that. So to your second question on the CapEx, our execution and spending on the CapEx were well much on track and have been within the budget for 2020 at about 1.5 billion RMB. And for 2021, I think we relatively will keep on the same rate of the CapEx even though we will start and highly likely complete our second data center in Tianjin, as I mentioned. So I think our total capex for 2021 will be still around about 1.5, maybe kind of 1.5, 1.6, depends on how the pricing points move around. But overall, as you probably can notice that the capex as a percentage of total revenue has declined from about 50% a few years ago to about 20% last year, and it will further go down as a percentage of revenue for this year. And the construction of the changing data center is still where we are much on track. We may seek additional financing sources and potential leverage or leasing of the changing data center, which will not incur for our cash flow from that perspective. And the Tianjin Data Center will also serve important IDC center for the region near Beijing and will continue to serve a better quality of services for the major client we have around the same region. Thank you, Brenda.

Thank you, Brenda. Operator, next question, please. Thank you.

Your next question comes from the line of Thomas Chong of Jefferies.

Please ask your question. Can you comment about the impact to our business about the tension between China and U.S. and how it impacts our procurement? Thank you.

So up to now, we have not seen the impact from the US-China relationship. Our sector, it doesn't matter whether it's cloud computing or our customer services, there's no impact.

Next question, please. Thank you.

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

Hi, President Yulin, President Harry, and Nicole, good evening. Thank you very much for accepting my question. I have a few small follow-up questions. The first one is about the public cloud business. Just now, the management level has also seen a lot of new Internet customers and a decline in customer retention. So I want to know, in addition to the fact that the multi-cloud deployment of the industry is a big trend, This is the first one. The second one is to understand the expectations of different enterprises and civil servants in the leadership of the first quarter. Just now, Chairman Harris also shared some seasonal changes. Then, in addition to the 2.8 billion backlog just mentioned, can we expect a trend of income growth to increase in the second quarter or the second half of the year? I will translate it myself. I thank your management for taking my questions, and I have a few follow-up questions. First one is on the public cloud side. Just now we mentioned that we actually have secured a lot of new customers from the Internet companies, and with the continued decline in revenue concentration, So here my question is more about apart from the multi-cloud penetration as industry trend, can we share a little bit more on our new customer acquisition strategy and what is the competitive edge that we do have that has led and expect the success in this. And then the second one is following to the public cloud question. When we think about byproduct, product, so what are some of the new products we're providing to the new customers? And then looking into 2021 together with 5G and other opportunities in industry, when we're looking at computing, storage, and delivery, will there actually be a change in the revenue mix here? And then the second question is more about the enterprise cloud. So can we have a little bit more understanding into what is the growth rate by enterprise and public cloud into the first quarter guidance? And then following up on the seasonality, which is explained, plus the 2.8 billion backlog into the second quarter or second half of 2021, can we actually expect an accelerated revenue growth trend? Thank you.

Okay, let's first look at the first question, which is about the quality customers of Gong Youyun. In fact, most of the quality customers of Gong Youyun in China are still concentrated in the Internet industry. So these companies and these customers are basically familiar with these areas. For example, video games, education, and e-commerce. Most of our high-quality customers are already our customers in the field of video and video games, so we value these customers' satisfaction with our services, their income growth and storage, and their use of more products. In addition, other customers in the industry, as they use more and more, and their multiple deployment trends, In addition, our own product power and our sales efforts, so we are also expanding to more new customers. As I just mentioned, we have now also increased such as Zhihu, Beagle, Sogo, including Xindongfang, VIPKID. These are probably the customers in these areas. Then there are some new large customers that we are expanding. Then from the scope of the product, because no matter which industry it is, we have been emphasizing that in fact, They are more and more inclined to use video performance forms. In this case, video-based products should still grow at a high speed in the future. There are also some auxiliary products that match them, such as storage, such as computing, such as high-speed network, which will also increase with time. So in our product This is the ratio used in this ratio, then the ratio of the video cloud will be reduced in volume, but overall it should still remain in a relatively high-speed growth. This is the first question. The second question you mentioned is about the situation of the corporate cloud and the public cloud in Q2 and Q3. This time, in fact, just now Harry disclosed that the number of our pre-order orders is about 280 million. This is only in Q1. But because the implementation period of Enterprise Cloud itself is relatively long, it will be more affected by the season, including the epidemic. Therefore, the whole-year situation that we have disclosed ourselves, we think it may be more able to reflect the concept of the industry's development for the company. If there is no accident, we believe that in the future, in Q2, Q3 or Q4, the increase in corporate clouds will be faster and faster. This is also related to the overall development situation in China. The increase in corporate clouds is still very abundant. It is also much higher than the average increase in public cloud and industry. Thank you.

So most of the public cloud premium businesses are from the Internet sector, and they are mostly like video game, educational, and e-commerce clients. And the market is also, for me, is already familiar with such customers, and we have premium customers from the video and game sectors. Actually, we have won most of them, and now we care more about the customer satisfaction and also the retention, revenue retention rate from these existing premium customers, and also the growth in the revenue from these customers. With regard to other sectors, with the deployment of the cloud into the sectors and also our efforts in sales. We believe there's also growth and we are also expanding our new large clients. And with regard to the products, many using the video products and there will be a high growth and this will also include such as storage, computing, and high-speed network. And I think the share for the video business might decrease, but generally the growth rate remains high. And third, let me talk about the public cloud business. As Henry has mentioned, in the first quarter we have already I think the implementation of these projects could be affected by seasonal factors or the COVID-19 pandemic. We have considered the overall situation throughout the year. Looking forward to Q2, Q3, and Q4, we think there will be rapid growth in the enterprise cloud business. The growth rate for the enterprise cloud business is higher than the growth rates of the public cloud, as well as the industry average, and also with regard to The new customers we have are quite new customers, such as Jihu, Agra, Bigo, Sego, and also Citibank, Hwasa Bank, Chodou Bank, and Marshall Consumer Financial Company.

Next question, please. Thank you.

Your last question comes from the line of Nelson Chung of Citi. Please ask your question.

Hi, management. Thank you for taking my question. This is Nelson asking on behalf of Brian Gong from Citi. So I have one quick follow-up question. How does management see the possibility of TikTok entering into the infrastructure cloud area considering the large consumption on CDN as well as strong accumulation of video cloud technologies? Thank you.

Hello. This question was asked by a pilot last time. According to what we know now, the resources used are still for their own internal IT use, including their own technology and product development. So according to what we know now and our own judgment, this should not have any impact on our business. Thank you.

So actually, last time, our analysts have already asked the questions with regard to the purchase of the resources by back-ends. To our knowledge, they are mainly used for their internal IT team that is used for their internal technology and product development. So there's no impact on our business with back-ends.

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

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

Thank you. Thank you, everyone.

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