Kingsoft Cloud Holdings Limited

Good morning, ladies and gentlemen, and thank you for standing by for Kingsoft Cloud's first quarter 2021 earnings conference call. At this time, all participants are listed on the note. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I will now turn it over to your host for today's call, Mr. Cole Shantz, Investment Relations Manager of Kingsoft Cloud. Please proceed, Nicole.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.kyu.com, as well as on global newsware services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang, and our CFO, Mr. Haijian Hongrihe. Mr. Wang will review our business operations and company highlights followed by Mr. He, who will discuss the financials and the guidance. You will be available to answer a question during the Q&A session that follows. There will be consecutive interpretations. All interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in the 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 Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and the 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 statement. Further information regarding this and other risks, uncertainties, or factors are included in the company's filings with the US SEC. The company doesn't undertake any obligation to update any forward-looking statement as a result of new information, future events, or other risks, except as required under applicable law. No doubt unless otherwise stated all financial figures mentioned during this conference call as denominated in RMB It's now my pleasure to introduce our CEO, Mr. Yulin Long. Please go ahead.

Thank you, Nicole, and welcome you all for joining our first quarter 2021 earnings call. In this quarter, we generated RMB 1.81 billion in total revenues,

among which public cloud and enterprise cloud accounted for RMB 1.39 billion and RMB 420 million, respectively. In addition to successfully executing our strategy of serving premium customers, we continue to improve our large-scale, highly stable, and high-performance enterprise-level products and solutions that cater to growing demand across verticals, including the Internet, healthcare, financial services, and public services sectors.

In terms of public cloud, the company has been providing smooth, high-definition, and interactive viewing experience for customers for many years by means of a safe, stable, and comprehensive solution. The service range of the project covers live broadcast, live broadcast, and red envelope activities. The company's extreme high-definition, HLA-5 coding technology, and other upgraded product services have fully played a role in the project. In terms of the expansion of new customers, the company focused on a mobile Internet exclusive sales enterprise, large-scale data business, and mixed cloud projects to provide customers with metal services and other product services, to reduce the burden of customer operation, to achieve flexible expansion, to increase the number of mixed cloud deployment, and to further reduce the cost of IT for customers. In this quarter, we have clearly cooperated with many large Internet customers to establish a solid foundation for the long-term income growth of the company. In addition, in terms of games, we are very happy to see that cloud games are beginning to contribute income,

In terms of public cloud, for many years, we have offered secure, stable, and comprehensive solutions to safeguard our customers' Spring Festival gala campaigns, providing the massive viewership globally with smooth, high-definition, and interactive experience. We offered solutions including live streaming, on-demand streaming, and electronic rep packet campaigns, where our value-added products such as SmartHD and KSC265 encoder were fully utilized. On new customer acquisition front, we want a big data hybrid cloud project for a certain mobile internet unicorn company, providing the customer with products and services, including bandwidth of service. It alleviates the customer's burden on operation and maintenance, achieves elastic capacity expansion, as well as multi-server-room hybrid cloud deployment, and further reduces IT costs. In this quarter, we also signed letters of intent with several large-scale Internet companies, which laid a solid foundation to our medium- to long-term revenue growth. In addition, on the gaming front, we are pleased to see revenue generation from cloud gaming. We signed an agreement with MiHoYo to provide a path-level cloud gaming platform for the blockbuster game Genshin Impact. Together with MiHoYo, we are dedicated to providing brand-new cloud gaming experience to gamers.

In addition, the company released a full-screen image and two container products. so that customers don't have to consider the underlying resources, and fully play out the flexibility and distribution advantages of the cloud platform. At the same time, the company officially launched the public cloud unified big data platform, COBRAVE, to help customers significantly improve data accuracy, significantly reduce the cost of development and operation, and combine other big data parts products to help customers build data ecosystem. We will also continue to strengthen the company's ability to increase service products, including video, edge computing,

We also published our cloud-native product portfolio and launched two containers that enable customers to fully leverage the advantages of elastic and distributed cloud platforms, free from underlying resources concerns. In addition, we officially launched Kubrix, a unified data platform for the public cloud. It helps customers significantly improve data agility, reduce development and maintenance costs, and build a data ecosystem in combination with other big data products Meanwhile, we have been strengthening our value-added product capabilities, including audio and video, edge computing, and other cloud-native technologies.

In the field of entrepreneurs, market demand continues to rise. The company is in the middle of a long-term business scene, and has formed an excellent industry solution. Despite the fact that entrepreneurs serve as a project, but we are active in building long-term cooperation with customers, and continue to gain new business opportunities. In the medical industry, the company's single source success focus is on the smart medical second stage project. We will continue to provide services based on the first stage of the project, expand and upgrade the cloud platform, ensure the technical continuity, consistency, and platform stability of the project, and further enhance the regional medical information level. In addition, the company efficiently delivered the second stage of Sichuan Tianfu Health Cloud and Changzhou Wisdom Health Cloud, completed the adjustment and adjustment of the Silver River Cloud Platform, and expanded the cloud platform, etc., to start the business of Tianfu Health Cloud Platform, and provide critical protection for the construction of video cloud in Jiangsu Province.

Moving to enterprise cloud, market demand remains strong. We continue to dig deeper into select verticals and develop outstanding industry solutions. While much of enterprise cloud services is project-based, we proactively seek to build and maintain long-term cooperation and continue to obtain business opportunities. In the healthcare sector, during the quarter, we were selected to be the exclusive supplier for phase two of the Xiantao Municipality Smart Healthcare Project. We will continue to provide services based on phase one conduct capacity expansion and function upgrade, while in the meantime ensuring technical continuity, consistency, and stability, all of which will help to further improve the digital healthcare capabilities of the region. In addition, we efficiently delivered Sichuan Tianfo Healthcare Cloud and the second phase of the Changzhou Healthcare Cloud, which include deploying and testing of our Galaxy platform, as well as expanding the capacity of their existing cloud platforms. These offer critical guarantee to the official launch of TEM for healthcare cloud business and the construction of Jiangsu Province Image Cloud.

In the financial field, the company continues to strengthen its data management and solution plan capability. According to the 2020 China Data Management and Solucion Plan Market Report published by the Third-Hand Industry Research Institute, the main participants in the market include a global top-tier computing company, Xishen, the first leader of the line. As the financial industry focuses more and more on data security and stability, as a leading medium-sized cloud service provider, we actively grasp the opportunities. This quarter, we provide data access, data standardization, and data call, and other comprehensive data services for the pension data application project of a large bank in a country. We have also successfully entered the public cloud business of a large Internet financial platform to provide customers with cloud distribution and cloud security services to reduce the burden on customers' operations.

In the financial services sector, we continue to strengthen our data management solutions capabilities. According to the 2020 China Data Management Solutions Market Report published by third-party industry research institute, Frost & Sullivan, among key market players, we are positioned in the first quadrant, leaders quadrant, together with top tier global cloud computing competitors. As financial services companies increasingly focus on data security and stability, we proactively seized market opportunities, leveraging our position as the leading neutral cloud service provider. During this quarter, we provided comprehensive cloud-based data services to the pension fund system of one of China's major state-owned banks. The project consists of data ingestion, standardization, retrieval, and processing. At the same time, we also successfully engaged with a leading Chinese internet financial platform company, where we provide cloud delivery and security services to help reduce IT operating and maintenance costs.

In the field of public service, the standard effect is prominent, and the scope of cooperation is constantly expanding. So far, Jinshan Yun has signed a strategic cooperation agreement with 35 regions to accelerate the digitalization process in the area. This quarter, we completed the government-run project inspection of the Beijing-based housing and township construction innovation center to help customers improve their innovation level and achieve safe and stable operation of the business system. In addition, the company successfully targeted the construction project of the large data center in Jiangsu Province. In the public services sector, our flagship projects are helping us attract more business. As of latest, we have signed strategic cooperation agreements with 35 regions

to facilitate their digitalization process. During the first quarter, we successfully completed a cloud project for the information center of the Beijing Municipal Commission of Housing and Urban Rural Development, helping the customer improve their digital capabilities and achieve secure and stable operation of their systems. We also won the bid for Jiangsu Province's Big Data Cloud Project, which aims to realize integrated management capabilities across multiple cloud platforms, including big data cloud, as well as provincial and municipal level government cloud. In addition, we also want to build a cloud platform for the Chengdu Industrial Internet Public Service System. The system will provide a full range of smart cloud services to industrial enterprises in Chengdu and the surrounding areas.

Finally, in April, we published the first annual report and environmental, social, and governance report after the company's launch. As a leading medium-sized cloud service provider, the company pays great attention to company governance, takes environmental and social responsibility, and pays attention to sustainable development. Although the U.S. Stock Exchange did not force the request for disclosure, Finally, in April, we published both our first annual report and our first ESG report post our IPO. As the leading neutral cloud service provider, we attach great importance to corporate governance,

our environmental and social responsibilities, as well as our sustainable development. We took the initiative to disclose our ESG progress in less than a year after we went public, even though it is not a mandatory disclosure requirement in the US. The report focuses on topics such as corporate governance, privacy and data security, human capital, and other progress we made throughout 2020 on our path to address the sustainable development of our business. This speaks to our commitment to integrate ESG practices into our day-to-day business operations and to constantly improve the management of our business. Next, I will now pass over to our CFO Henry to go through our financial performances for the first quarter. Thank you.

Thank you, Yulin. Thank you, everyone. I will now discuss our financial performance for the first quarter of 2021. Please be reminded that all numbers quoted here are in RMB. Please also refer to our earnings release for detailed financial results. To begin with, I would like to highlight the following points. First of all, our total revenue were 1.81 billion RMB this quarter. Revenue from public cloud services were 1.39 billion RMB. Due to our high-quality services and robust relationships with our premium customers, revenue from public cloud services has been increasing for five consecutive quarters. Our enterprise cloud revenue were 420 million RMB representing an increase of 131.3% year-over-year. Second, we achieved record high quarterly adjusted growth profit of 122 million RMB in Q1. Our adjusted growth margin for this quarter increased from 4.9% last quarter to 6.7% this quarter. The margin improvement was mainly due to the benefits received from investments into major enterprises' cloud verticals last quarter, such as healthcare, financial services, and stable contributions of public cloud revenue and margin. Third, we expect our total revenue to be between 2.13 billion RMB and 2.23 billion RMB for the second quarter of 2021. representing a year-over-year increase of 39% to 45%, implying a re-acceleration in Q2 2021. It reflects our success at engaging new customers and expanding our scope of services with existing customers. By December last year, our backlog of enterprise cloud revenue was $2.8 billion, with the advancing of customers' procurement process after Chinese New Year holidays our backlog number keeps increasing. Certain new projects, such as projects in healthcare, financial services, have been additions to the backlog number mentioned above. Lastly, our business is sufficiently funded at this moment. As of March 31, 2021, our cash position was 5.46 billion RMB. Now I will go through the financial results in greater detail. Our public cloud services revenue reached 1.39 billion RMB. Due to our high-quality services and robust relationships with our premium customers, the usage of our premium customers has been increasing steadily, and the revenues from public cloud services have been increasing for five concept quarters. During the first quarter, compared with the faster growth rate in the same period of last year, when daily internet usage jumped significantly during the COVID-19 outbreak last year, We saw a moderate year-over-year increase of Internet usage in the industry in general. In addition, the recent headwinds in the Internet industry in mainland China in general, particularly in streaming education, e-commerce, and other verticals, and many of those companies are taking a cautious stand on promotional efforts than the previous industry expectations and tightening regulations, weighing on our growth in the public cloud segments in Q1. During the quarter, enterprise cloud revenue increased by 131.3% to 420 million RMB, mainly reflecting the rapid growth in demand for our enterprise cloud services and partially offset by the impact of Chinese New Year holiday season in this year and also the late timing of procurement timetable compared with the previous year. Cost of revenue increased by 28.5% year-over-year to 1.7 billion RMB. IDC costs increased by 21% year-over-year to 1.11 billion RMB. As a percentage of total revenues, IDC costs decreased from 66.2% in Q1 last year to 61.4% in this quarter. Overall, we are achieving greater economic scale and improving resource efficiency. Depreciation and amortization costs were 174.8 million RMB Other costs consist of third-party software purchases and outsourcing costs associated with both public cloud and enterprise cloud, as well as other equipment costs related to our enterprise services. Other costs were 394.0 million RMB, and the staffing costs were 15 million RMB. We achieved a record high quarterly adjusted gross profit in Q1. It increased by 64.4% from 2017 74.2 million RMB in the same period of last year, to 122 million RMB this quarter. Our adjusted growth margin for this quarter increased from 4.9% last quarter to 6.7% this quarter. The margin improvement was mainly attributed to the benefits received from investment into other major enterprise cloud verticals, such as healthcare, financial services last quarter, and the stable contribution of public cloud revenue and margin. Total operating expenses were 468.6 million RMB, up 30.3% from Q1 last year, mainly due to increase in share-based compensation, staffing salary adjustments, and fading of adjustments of social insurance, favorable policy, and expenses of hiring talent. Excluding share-based compensation, adjusted RMB expenses were 202.0 million RMB. As a percent of revenue, R&D expenses decreased from 13.3% in Q1 last year to 11.1% this quarter. Adjusted selling and marketing expenses were 83.5 million RMB. As a percentage of revenue, adjusted selling and marketing expenses decreased from 5.6% in Q1 last year to 4.6% this quarter. G&A expenses were 65.6 million RMB. As a percentage revenue, they decreased from 4.2% in Q1 last year to 3.6% this quarter. Our adjusted net loss was 218.4 million RMB compared with an adjusted net loss of 243.4 million in Q1 last year. Adjusted net margin improved from negative 17.5% in Q1 last year to negative 12% this quarter. Our adjusted EBITDA was negative 48.6 million RMB compared with negative 39.4 million RMB in Q1 last year. Adjusted EBITDA margin slightly improved from negative 2.8% in Q1 last year to negative 2.7% this quarter. As of March 31, 2021, we had cash and cash equivalents at 5.46 billion RMB. During this quarter, capital expenditure were 213.4 million RMB. CapEx as a percentage of total revenue decreased from 30.3% in Q1 last year to 11.8% this quarter. Moving to the outlook, as we mentioned earlier, for the second quarter of 2021, 2021, we expect our total revenue to be between 2.13 billion RMB and 2.23 billion RMB, representing a re-acceleration on the year-to-year basis of 39% to 45%, compared with the first quarter. This is based on our current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. Thanks for your attention. We are now happy to take your questions. Please answer your questions in both Mandarin and English, if possible. Operator, please go ahead. Thank you.

Thank you. Yes, ladies and gentlemen, we'll now begin the question and answer session. If you wish to ask a question, please press R1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pounder hash key. And yes, please ask your questions in both Mandarin and English if possible. Once again, please press star one for your question. Thank you. Our first question comes from the line of Brian John of Citigroup. Your line is open. Please go ahead.

Sex Management for taking my question. My first question is regarding the public cloud. So the growth seems to slow down in first quarter. And I understand last year was a high base and that there was some regulatory issue in first quarter this year. But does Metsman think that the whole public cloud industry is slowing down? And for us, I just heard that we have partnered, we have just signed some contracts or partnership with some big internet companies, Merino, what verticals are those new customers are in and this is my first question and my second question is that can management share the backlog order amount for our enterprise cloud and do you think you know with slowdown on public cloud industry our competitors could become more aggressive in underpriced underpriced cloud sector Thank you for answering my question. I have two questions. The first question is about the supply chain. We know that last year there was a high base, and our customers also had some regulatory impact. But I want to ask if our management team has seen that the supply chain market is slowing down. And just now the management team also mentioned that we have some cooperation with some large Internet companies. Uh, uh, Thank you. Okay, thank you. Let's look at the first question, which is in terms of supply and demand.

In terms of supply and demand, compared to last year's Q1, because of the pandemic, we had a very high base. So this year's increase compared to the same period last year, it doesn't look that fast. But our head client's capacity is still very stable. And as I just mentioned, there are many new Internet clients who are already in the process of this project. So when we look at our supply and demand, in fact, in the last five consecutive seasons, it is still continuing to increase. As for the short-term increase, there is still one this year. the impact of domestic supervision. Especially in video customers, they strengthen the review and education industry in terms of content. They also conduct business promotion and expansion of new products more carefully. This leads to a short-term fluctuation of Q1. Now this fluctuation has passed, so we can see that from Q2, the growth of the business has begun to accelerate. The competition between us and competitors is actually more in terms of business capability and practicality, not in terms of the competition between customers. In fact, the competition in this area is not as intense as we thought it would be. So, including our hand-to-hand orders, the project is actually still in the process of continuing to advance, including because it has a high-precision process. It's all going forward now. The hand-to-hand orders we announced before should be going smoothly so far. In addition, in Q1, we have newly added some projects. For example, the medical project in Hubei is close to 70 million. It is not in the previous order. So, what we see now is the progress of the public and corporate cloud in 2021. The management is still very optimistic and the increase is very obvious.

Thank you, Yiling. So thank you, Brian, for your question. So on the first question, you're probably right. You're right that the high base of the public cloud revenue last year was probably one of the reasons when you look at the year-over-year growth of the public cloud revenue Q1 this year. However, what we want to highlight is that our revenue from our core base of our premium customers, especially our top premium customers, has been very solid and robust. In addition, we also made some good progress in engaging with new customers in our public cloud segments. That's why, as a result, our public cloud revenue has expanded and grown sequentially for five consecutive quarters, as we mentioned. However, as you probably also noticed that in industry in general, in mainland China, The regulatory environment, especially in Q1, has been quite volatile and has certain impact to the revenue in the public cloud segments, especially a few examples. For example, the content review of certain mechanics from a regulatory perspective has some impact to our streaming. clients, which actually indirectly will affect the usage of public resources. And also, as you know, the policies in the online education verticals also made many of our customers pretty much very cautious and prudent in adopting new promotional efforts, which actually should have increased our demand from an user perspective. But we do believe those impacts will be short-term, and we do see there's a signal that in Q2, for our public cloud revenue and usage, we'll see kind of acceleration in Q2 coming forward as many of the factors we mentioned were short-term and kind of seasonal impact. And speaking about enterprise cloud, so in Q1 we delivered over 130% on the year-over-year growth, which we do believe is kind of highest level even compared with the peers in the industry. The demand from the digital vision across different verticals has been kind of solid and very strong, you know, including the public services, healthcare, and financial services. I think speaking about competitive strength and a unique kind of strength and a value add from our Kings of Car perspective, it's about client engagement, about our capability of deliver, deployment, and implementation. It's not really about a sales context, not really about the pricing, competitions, especially in the enterprise cloud segments. So that's why, given the demand is very robust, and we don't think that the competition has been head-to-head in the enterprise cloud segments. And as you know, by December last year, we have 2.8 billion backlog in the enterprise cloud alone. And this number has not included any new engagement and the biddings we have won in Q1 this year. For example, as we mentioned in the bigger healthcare cloud projects in Hubei province, Hubei for that project alone, based on the public data, which we kind of saw the public announcement recently, that project alone will deliver over 70 million RMB revenue alone, which has not been included in the background number. However, we want to say that on a quality basis, going forward, we will not disclose a detailed background number, given the sensitivity around the pipeline and the client competition. But I think we can show that our backlog has been growing, and also the ongoing implementation of the existing backlog has been well on track. I think that concludes a few colors, so hopefully helpful. Thank you, Brad.

Thank you. It's very helpful.

Thank you. Our next question is from the line of Xiaodan Zhang of CICC. The line is open. Please go ahead.

Thank you for accepting my question. I have three questions for you. The first question is about the public domain. In the first quarter, due to the supervision of the public domain, some of the major customers of the public domain Internet have been affected. I don't know if we are doing some of the product diversification here, and then help us with some of the future customers of this large Internet client. And then the second question is on the side of the corporate cloud, because in fact we see that the growth of the corporate cloud in the first quarter is still very strong. In the future, it will also be an example of the growth of our entire business. So how do we look at the potential of the future growth of these three channels of the corporate cloud? My first question is regarding the public cloud business. So as we can see that the acquisition of new customers in the first quarter was undergone the headwinds from the regulatory in the Internet industry. So what will be our major focus for product diversification for the public cloud business? My second cloud is regarding the enterprise cloud business. So the enterprise cloud business recorded a solid growth in the first quarter. So what do we think of the growth potentials for the three main segments for Enterprise Cloud, i.e., the healthcare, financial services, and public sector? And what will be an ideal business structure and growth margin profile for the three segments? And my third question is regarding the growth margin. So what will be our expectation for the growth margin going onwards for the next few quarters? Thank you.

Thank you. Let me answer your previous questions. First of all, in the public sector, Q1 has a short-term monitoring fluctuation, so our current situation is that the customers are not affected. Our customers, especially the new customers, the speed of access is still as expected. The main thing is that when our customers are promoting and expanding their business, they still have some more stable strategies. It may be affected by the speed of the original business. But at the same time, as you said, we also see that in terms of diversification of products, in fact, our progress is still very smooth. More customers are starting to create more businesses, such as more live broadcasts, more red envelope interactions, and so on, including during the Spring Festival. For example, a customer can do 50,000 live broadcasts at the same time. In this way, the services and products that we can provide are greatly improved than before. This is the first step in the public cloud. Secondly, in terms of the growth of the industrial cloud, the first one is the demand for the market. China's industrial digitalization should be the largest market in the world. There are some differences between the three channels that we work with. For example, in the financial sector, we are expanding our business with the advantage of technology. Our financial big data platform currently has a relatively strong technical advantage in the industry. Therefore, we are now, and big data is also the largest In the field of healthcare, our current domestic advantage is relatively obvious, especially in the public health sector of domestic medical platforms. Actually, Hubei Province is now the country's benchmark. So actually, from the city clouds in Wuhan to all the public platforms in Hubei Province, including the Hubei province clouds that we just spotted recently. So in fact, we have established a whole set of capabilities that can serve the public. With this capability, we will expand in other parts of the country. So we just saw that we are For example, in Chongqing and Jiangsu, some of the projects are already in the second phase. In the public service part of the government, our strategy is focused on key areas, such as Beijing, Hubei, Jiangsu, Anhui, and Gansu. We mainly focus on several key projects. We are currently developing our product capability and implementation capability. Because for this market, the domestic demand is the biggest. But if we want to do it well, there is still a certain difficulty. So in fact, this strategy, we are mainly around the layout of our key areas. The projects that have been in progress can be made into domestic leading such a standard project. So it's probably such a situation. These enterprises, we just mentioned these projects, Thank you, Yiling. Thank you, Sophia, for the three questions. I'll translate for the first two and then I'll take on the last one.

And the first one regarding the public cloud, I think you probably already mentioned that there was seasonal regulatory impact on the Q1, but we want to highlight that our engagement and progress to the new customers, even some of them starting with a low and small volume, but they are actually strategically important for our new customer strategy. We are making those progress on track in Q1, even though, as we mentioned, the initial first phase of the testing or the initial trial version, the volume has been small, but we are seeing the great progress in connecting with the new and important customer with us. So speaking about the diversification of the product lines and the services, you know, I just want to use a few examples, right? For example, in Chinese New Year live show performance events, as you know, it does not only capture the live show video contents, but also there's a lot more interaction components in those events, such as, you know, the Red Pockets events and such as kind of massive and scalable multi-line connections, direct connections, you know, in the Chinese New Year events, i.e., in the maximum peak time, we do see over 15,000 lines of direct connections in those video services. And those end user scenarios has helped us to diversify our product services because these are the end demand from our customers. So to add one more data point as addition, as you know, our cloud delivery revenue last year, the first two quarters last year, was over 50%. And we do see as a percent of total revenue, our cloud delivery revenue has dropped below 50%. And we do see that trend will further trending down, which was actually going to be a positive factor to have better diversification across delivery, computing, and storage. And speaking about the second point on the enterprise cloud, I'll go one by one. On the financial services vertical, it is all about the technology. So by extending our know-how and experience in certain core technology capabilities to the major banks in China, it helps us to strengthen our forte in those areas. For example, for those major banks, the data analytical platform based on the cloud native technology has been very important for them, and it is a must-have technology for those big banks in China. And by our proven experience in those areas by delivering the capabilities to the clients, we can engage in and also enjoy incremental demand and revenue opportunity from those clients. So it's all technology and a demand-driven business. Second, on the healthcare. As you know, we do believe that we do have a first-mover advantage in healthcare, and given our real experience in many important cases and important areas, such as the city-level and provincial-level healthcare cloud in Wuhan and also in Hubei Province, we do have accumulated enough resources and capability and first-hand experience in those areas. And by pioneering those experiences in healthcare, one or two areas and extending that into other provinces in China, such as Chongqing and Jiangsu provinces, we can replicate our experience and see great benefits at economic scale and have recurring revenue from those plants, given the solution itself is highly leverageable. And the third part on the public sector, and as you know, we do focus a few areas such as Beijing, Hubei, Jiangsu, Gansu, and those provinces. kind of strategy and the play card or the playbook for the business over there is we do want to establish and complete and deploy a high quality project for the client and make sure in those important areas and the important client, we can be the pioneer, also the top tier vendor for them who can be trusted to deliver high quality projects and execution capabilities. So for the mid-to-long term, I think we feel confident that those experience and execution quality of Kingshark Cloud carrying our over 30 years of 2B DNA will gain enough and further trust from client and expanding more business over there. And Sophia is right that the growth margin from NFS Cloud has been a very positive factor to improving the company's growth margin overall. And we do see the repeating and recurring revenues and also high-quality solutions. We are having a service out of time that also can serve a big positive factor for us as well. So on the third point regarding the gross margin, I think you're right. As we discussed in Q4 last year, our strategic investment and front-end certain costs in Q4 was the reason. But we do see the positive results. As you see that we successfully win a bit of a few major projects. I think our Investment and upfront cost last year was worthwhile in doing that and have seen improving also the skills that we're picking the right client to work on. Even the first stage, we always carry with a certain testing version and front-end services. As a result, I think we do keep the same and unchanged views regarding this year's gross margin on the company level overall. And I think over the next few quarters, maybe on a quarterly basis, the growth margin either on the percentage point or the value dollar perspective, we'll have certain more utilities. But over on the four-year basis, we do believe, hopefully, we can improve 5% to 6% of the growth margin compared with last year, compared 2021 to 2020. And I think for the long term, the growth margin is reflecting our fundamental efficiency and improving product diversification and client diversification as well. Thank you, Sophie.

Thank you, very clear.

Thank you. Next question is from the line of Joe Wang Ying of Nomura. The line is open. Thank you, Ms.

Wang. I have three small questions. First of all, I would like to ask, in the first quarter, the three largest customers in the public sector, what is the share price ratio or the overall share price ratio? And what is the share price ratio of CDN? Because this year, my understanding is that this year, the business of the Chinese market is a bit slow. In addition to the impact of COVID-19, there may be the whole business, including the Internet side, including the overall 4G, 5G, the middle of this chaos period, there may not be too many new applications, so I think it will be a bit slow. So what measures can we take to help us speed up the public business? Because the first quarter has special reasons, but in general, the whole year, 我担心整个市场都会有些偏慢, 那我们有没有一些具体措施, 会不会未来会调向更多的computing, storage的业务? So my first question is, what is current contribution from the three biggest customers from our public cloud sector, and what about the CDN contribution for our company in 1Q? And because we think the overall Chinese cloud market is going to slow down a little bit, for 2021, so any potential changes or structure strategy we have to help us to gain better growth from public cloud, especially in 2021. 然后我第二个问题肯定想问一下, adjusted EBITDA margin, 我看到 adjusted EBITDA margin 还是一个负数。 我的理解,我在猜是不是可能跟我们的 So my second question is about the adjusted EBIT margin. I think the adjusted EBIT margin has been broken even in one month, maybe December in 2020. But it still goes negative for 1Q21. So I guess is that about like bonus or something related to personnel expenses? And what should we expect for full year and for second quarter 2021? So my third question is about the market competition dynamics. I think Huawei moved up quickly in public cloud market last year in China, gaining market share. So does the company think that will be a major competitor or major threat to the cloud market, to the public cloud market, or to enterprise cloud market as well for Huawei, considering Huawei as a major competitor or threat to the peers? Thank you.

Okay, thank you. Let me summarize. The first question is about Gong Youyun's previous head-to-head question. In fact, in Q1, we see that the volume and increase of our top customers are still relatively stable. But with the overall increase of our new customers, so in fact, the ratio of our top customers in Q1, the ratio of the entire company is still a little bit down. It's like the back customers are catching up, but the ratio gap between customers is getting smaller. The same is true for CDN. With more and more customers, more and more products are diversifying, and more and more CDN businesses are making more and more profit. The profit ratio of the entire company is also slowing down. This is the first problem. In terms of business development, we can see that there are actually more and more high-quality customers joining in. So as some of the seasonal fluctuations in our Q1 are eliminated, we can see that the increase in our business continues to increase from Q2. And then we still have a lot of new customers and new projects moving forward. In this case, in fact, we are still This is the first one. As for the second question, it's a big one. In a moment, our CFO Harry will answer it for you. Then I will talk about the competition pattern. You just mentioned that there is a situation where competitive competitors are entering. First of all, the first one is the market of cloud computing in China. Especially in digitalization, the increase is still very fast. So in fact, now everyone's competition is not about competing with customers. is still the ability of the cloud company, including the ability to solve the problem, the ability to implement the delivery, and the ability to maintain the service in the later stage. So in fact, this is the main thing of the cloud company's competition in this market. In addition, especially in our layout, we can see that in finance and medical, It's a very professional track. It's not a simple track that says, for example, I have a very good experience as a corporate client. It's simple enough to say that I'm very strong in this. It actually has a lot of dependence on your technical ability and understanding of this industry. So in this, our own ability is still very strong. Thank you, Joe, for the question. I'll go through the first two questions and translate for you.

take the question on the EBITDA margin. So for the top tier customers, as we mentioned, the usage of our top premium customers has been stable in Q1. Given our public cloud revenue, sequentially you see some growth. So as a percentage of the total revenue of public cloud, those top premium customers as a percentage will see slowly decline as a percentage point. So on the CDN perspective, and as you know, more and more customers are actually diversifying their demand across different business lines, including storage computing and delivery. And the CDN revenue as a percentage of total revenue is also seeing gradually decline as well. So I think that's one data point I want to highlight is from Q1 last year to Q1 this year, the CDN revenue as a percentage of total revenue has declined around about 8% to 10% on the percentage point. Second point on the growth. So as you know, we are making progress of the new customers and we're engaging with them. And given the value of independency and neutrality, we are engaging with new customers that actually who value our position as independent cloud provider. And for Q2, we are seeing confidence that those conversations and initial engagement with the new customers will gradually monetize and gradually become a revenue in the public cloud sector. And I think these are the major efforts that we are making in Q1 and will carry for the results for the following quarters. And the third point regarding the competitive landscape, I think the key line we want to mention is it's really about kind of strengthening and improving the capability not only from our technology solutions, but also about implementation, execution, and services and maintenance for our enterprise cloud business. And there's no doubt that the digitalization market in China across all traditional sectors has been very strong and sane. And the key play part is really improving our capability. And especially in the financial service and healthcare, these are the two verticals required industry know-how and will require specialized experience and the first-hand experiences. So that's why you probably can understand that have a good client-sales relationship doesn't always equal to a motivation of the client revenue. And the know-how and understanding about client demands and knowing their challenges and can help them resolve real questions would be more important to engaging with a trusted client relationship with them. And for the public sector services, as we mentioned, we do have some great advantage in a few areas and provinces and cities, as we mentioned. But the key is to really deliver kind of place by place and face by face of the projects we already have on hand. And I think the execution and implementation are the keys for all the enterprise cloud peers, including us and other peers as well. But I think on those areas, we remain confident that given we are already working with them and some of the clients are already working on phase two or phase three, I think we do have a robust pipeline for not only the backlog, but also an implementation timetable. All right, so for the last question regarding EBITDA, I think I want to highlight three or four major reasons. The first reason is regarding certain adjustments regarding the social tax and in Chinese AKA policy in China. So as you probably know, in COVID-19 last year in Q1, governments in certain cities have at that time announced they will make either full return or partial favorable policy on social security taxes for 2020 and 2021 for certain industry and certain companies. However, for Q1 this year, given the new policy actually revised back to the normal status, so basically we'll have certain impact that have to pay a normal rate of certain social tax and certain revised back to the normal tax policy. So those will have around about 1.5 to 2% of the total revenue will have additional impact on the cost of the human capital. And the second reason is, as you know, as we are extending our revenue base and extending the core of our client base, we are engaging and hiring more talents across different product lines, especially for the important strategic verticals. And the new hiring talents, many of them are the good and the most experienced people, and those who are reflecting who are higher compensation level for certain employees so as a result the human capital related costs were adding to the impact that you mentioned sequentially seeing a drop on the EBITDA margin but those impact will be on a one-time basis which means that as we are seeing a higher revenue base going forward and the more dollar value of the profitability will have the better impact to our EBITDA margin so I think it's really about a timing impact and We stay the same unchanged that hopefully for 2021 on a four-year basis, our non-GAAP EBITDA margin will be profitable, but it's all about the timing when they will get there. So hopefully, as we are seeing better and high-quality projects to be implemented and executed, and our EBITDA margin will turn positive in certain quarter in this year. Thank you, Joe. Thank you very much for all of my questions.

Thank you. Next question is from the line of Kina Wong of Credit Suisse. Please go ahead. Thank you.

Thank you, Colleen. I have three small questions. I think a lot of analysts have not asked me about this. The first one is, what kind of standard is there in the EG2 Perfect Cloud market in China? Because the company used to be an outgrowth peer, compared to the same industry 那市场还是有一个更快速的增长。 那ED2的这个Perfect Cloud, 这个公有云的部分增长是在15个点左右。 所以还是想了解说这个产业还有这个有, 就是整个行业的其他的这个Payer, 其他的这个云的服务产生, 他们看到的一个增速怎么样。 那另外一个问题是在整个就是Internet的Customer上面, 就是这个互联网的这个客户上面, 因为... 我们也都看到他们的一些momentum 那想说在一季度里面 有什么样的一些新的客户是加进去的 然后第三个是想说 As the Internet industry is affected by the regulation, I would like to ask if the company will be affected by the regulation of the industry in the next two or three years. Do you think this industry is like this? Let me ask you these three questions. The first one is that she wanted to look at the overall China product growth in the first quarter, and given that the company has been outgrowing their peers, major peers in the market, just wanted to see if this trend or this performance will continue in the first quarter. The second question is about the new customer scan in the first quarter, given the company has been shared with us about some new customer names, and so we could track the momentum on a new customer contribution. And the third thing is about, because given the regulatory tightening in the Internet sector in China, if there's any impact to the long-term investment for the company, especially in the CAPAS side.

First of all, you just mentioned the public cloud market of Q1. As far as we know, the overall rhythm of the public cloud market of Q1 is similar to the overall situation of our company. Compared to Q1 last year, it still has a seasonal adjustment. So we ourselves think that in the public cloud area, our growth rate should still be leading in the big market. This is the first one. The second one is the Internet customer that you just mentioned. We are actually still in Q1, including the follow-up, there are still many new customers coming in. If there is no list of names, it may be that some projects are in progress, and another is that it is due to the confidentiality of the customer itself. It can be simply revealed that it actually covers almost all Internet industries, from video to education to e-commerce to local services. In fact, there are still many very good customers joining in. The third one is in terms of TAPS investment. Actually, it seems that there is not much change. As Henry mentioned, the TAPS investment of Q1 is a bit low because we did some hardware procurement and deployment in advance of Q3 and Q4 last year. So this is almost the same as our annual situation. We probably do the next year's So this year is the same. So relatively speaking, Q1, because of the holiday, there are various reasons, so it is actually not a normal high-speed construction period. So it's actually normal. We expect that this year's entire開發走路 will be the same as before. There should be no changes.

Thank you, Kinna, for those three questions you just asked. On the first one, I think you are right. We have been growing faster compared with the peers in the public cloud segments. For Q1, given the reasons we already mentioned, we think that our business progression has been in line with the industry of the public cloud market in China in general. And I think for certain peers, I think we are even to one. I think we are still growing marginally faster than them. And looking forward, I think we still want to position ourselves as one of the players in the public cloud market. We can grow relatively faster than the selected peers as well. So for the second question, it's related to this point as well. Probably you can understand for certain confidentiality and sensitive reasons, we may not disclose the names. But certain new accounts we are talking to have spanning from the live streaming video, the localized services, e-commerce, and education. and we are making certain progress with that, even though the revenue opportunity and usage in Q1, given those clients are relatively prudent and cautious, so it has not fully converted into a full revenue opportunity. But given we already have the client and commercial relationships, and for some of them we already have the technology testing completed, hopefully for the following quarters, you will see a re-acceleration of the public cloud revenue going forward. On the third question regarding the capex, you probably noticed that in Q1, on the dollar value perspective, our capex was lower than Q4 last year. That was our pre-judgment about certain impacts in Q1, including the holiday seasons, but also including potentially about logistic and supply chain issues. We have the pre- judgmental call that we actually purchased enough and sufficient hardware equipment service back in Q4, primarily last year. So that's why if you remember in Q4 last year, our capex was above $4 billion. So that will be basically prepared for enough inventory for this year's public cloud infrastructure and for the leading sales opportunities of the public cloud clients as well. So these are actually reflecting together. And for the plan for this year's CapEx, we think that there's also the same level as we previously communicated. We think around 1.5 billion CapEx will be a reasonable level to expect for this year. Thank you.

Thank you.

Thank you. The next question is from the line of Samson Wu of UBS. Please go ahead. Your line is open.

Thank you, Mr. Kwong. Good evening, everyone. I have three questions. The first one is for Mr. Kwong's online question. In your RQ guidance, can you give us a specific number of growth in the community and in the industry? The first question is, in your 2Q guidance, can you give us a firmer range for the growth in your premium and enterprise cloud revenue growth? 第二个提问就是,上个星期好像哪里也有说明到他们在国际这个公司里面有一些大客户离开他们的这个ecosystem. 那我就是想问一下这个会对公司在国内这边 hopefully have some influence. Last week, Ali talked about a large customer loss in their public cloud business, in their international markets. Is there any impact for Kingsoft Cloud in your domestic public cloud business? 第三个提问就是, 最近有听说到有更多一些公司 开始做一些转播CDM的业务, The third question is, there's been recent developments in China's reseller or system integration or distribution of CDN business. Can you talk about Kingsoft Cloud's ICE capabilities from a competitive perspective? Thank you.

Thank you. As for the expectation of Q2, Henry will answer it later. Let's see what advice we can give. First, let's talk about the international business. We also noticed that Alimin mentioned that his international business was affected by this client. Our own international business layout is actually very... We actually made a lot of preparations for our international business layout. But first, we still have a very, very low income ratio. Second, in 2019, we have actually noticed the complexity of the international situation. So when we were doing the budget for this year, we did not consider this part of the business as a particularly large proportion in our budget. So we originally considered that it might change. So the current situation, In the case of international business, the impact of these complex situations on our budget this year is actually not great. But at the same time, we can also pay attention to the fact that when we just talked about the fluctuation of QE, in addition to the domestic structure problem, in fact, some of the international impact also makes some domestic customers, especially the top customers, when they are doing business growth, including when they are using some new technologies, they are also more cautious. So in fact, this may be It may have some impact on the subsequent business and product growth, but we ourselves expect that it will not have a big impact on our revenue. We will all take a look at the internationalization of this step. The third question, I didn't hear it very clearly, is that you mentioned this CDN. In fact, the market is becoming more and more clear. The share is basically becoming more and more like the companies of our leaders. This trend should not have changed much this year. So basically, the companies of our leaders have provided a complete Thank you, Jonathan. I'll translate for the first two questions for you and also answer the question regarding the guidance and the breakdown. So for the international business, as you probably know that even back in late part of 2019,

we had some views even at that time that there will be certain volatility in terms of the global geopolitical situation. So that's why we made a very prudent approach regarding our internal budgeting, regarding the way we're engaging with our customers, et cetera. So that's why even though we already in early time have certain planning for certain regional business exposures and footprints for Kings of Cloud, but the actual revenue for our international business has been very, very small at this moment. So that's why those geopolitical impacts to our international revenue and the total company revenue will be very, very limited. And to your question, we also noticed that for our peers, they were affected by their major customers for their global business, But as you probably know, to add on one more point, as you know, that the ice level and infrastructure resources for the international business and domestic business in China has two different setup and a different network, different capacity, and different licenses requirements. So that's why the redundancy or the idle resources from the global infrastructure will not be translated directly into the kind of oversupply. of any potential kind of capacity for the mainland China business from a cloud player perspective, if it is a question or a concern you may want to ask. So for the second question, in our view, I think we are seeing the trend that given the cloud is a scalable business and there's a nature for the benefits of a kind of scale, the concentration of the top tier players still keep the same trends. and there's no major changes. And for the top tier cloud provider, and given people providing the full stack of the services covering from both ICE, TAS, and SAS capabilities, we don't think this trend will be reversed. And by positioning ourselves as one of the major top tier cloud provider in China, I think we can enjoy that benefit as well. So on the last question regarding the breakdown, as you know, we probably can only provide a verbal guidance on the earning call given we have almost about one and more than one and a half months towards the end of this quarter. And as we mentioned, we also have a good engagement with a certain internet public cloud client. So probably we will not be able to give a very precious guidance to have a breakdown. But what we can mention is I think for the public cloud revenue and enterprise revenue, you will see both as a decent sequential quarter-over-quarter growth and on a year-over-year basis. And going forward for Q3 and Q4, especially the second half of this year, you will see probably it is likely that our year-over-year growth rate for the remaining three quarters of this year, hopefully you will see an acceleration quarter-over-quarter as well. As a bottom line, I think for the Q2 public cloud, the revenue will be at least in line or above our major peers in Q2 as well. I think that probably gives certain comfort that for the public cloud, we may see a good kind of acceleration in Q2 for those businesses. And we do have certain contracts and opportunities and real opportunities of the revenue that are kind of sitting aside, and hopefully it can be delivered by the end of this quarter. Thank you, Thomas. Thank you.

Thank you. Our last question comes from the line of L.C. Chang, Goldman Sachs. The line is open. Please go ahead.

Good evening, Mr. Chairman. Thank you for accepting my question. I have a quick question. In the answers from the two analysts, Ms. Henry mentioned that in the next half of the year, we should expect a growth trend of income growth. So I just have a small block question here on the public cloud growth into the second half as well as the sort of the directional color on the full year. We do see some of the headwinds into the first half of the public cloud space. Just wondering if we can provide some of the additional color into the second half, and how should we think about the fundamental drivers as well as some of the directional expectations on the number? Thank you.

Okay. The first one is in the public cloud space. The first one is that our current top customers' usage is still stable and growing. Then because the second one of our customers are core high-end customers So these customers still maintain an average increase in speed in the industry And they actually did it after the first one It's still actively expanding new business and new product models So this is our first of all, this is our storage business increase In fact, we are not very worried about the second one. We are also with other high-end and key Internet companies. Some of the business and technology are currently in contact with each other. So a lot of This new project and client is currently in progress. We expect that some of the Q2, Q3 and Q4 projects will be implemented one after another. So this will be our new driving force for growth. The third one is about some new products and technical capabilities. He just answered that there are some new products and new businesses that will drive some of our larger use cases. For example, the cloud game we just mentioned. Yeah, thank you, Azzy. A very quick follow-up on this question. There are three major reasons, or the major drivers. First of all is, for our top tier premium customers, their existing usage has seen a trend of growing.

historically and for this year we not only focus on new customers but also the existing premium customers their usage and their revenue has been increasing that actually form a solid base for our total public cloud services revenue for this year and given those are the premium customers so they are actually making the investment to their own business for example adding the new features and the new product lines, and the new applications for their business. So their demand and their growth and investment into their own business and user scenarios were basically the foundation for our growth opportunity from those existing premium customers. The second point is regarding the new customer expansion. So I think from both commercial sales relationships and technology-compatible testing and also those engagements, I think, as you mentioned, we are making certain progress and taking certain kind of initiatives to engaging with the new customers. That's actually going to be the second driver. And many of those areas and efforts will be basically monetized and gradually expanded push down to the kind of revenue and realize the revenue opportunity. And the third part is really about the new product feature and the requirement. So that means that not only for the new, but also existing customers, there's a new area of the usage, such as the cloud gaming, as we mentioned in the prepared remarks, that starting from Q1, as a leading pioneer in the cloud gaming areas and in gaming industry in general, We are seeing a good traction that some of the leading gaming companies are already deploying their gaming products through the cloud companies. And those are already bringing us a meaningful level of the cloud gaming revenue in Q1. And we think that those revenues will see a good level of expansion for the remaining month to go for this year. I think this is only one of the examples. I think in the area of VRAR and other IoT or 5G related areas will be also the important areas you will see the new demand and new technology can generate and translate to the revenue opportunity. Thank you, Elsie.

Thank you. Thank you. All right, and I'd like to hand the conference back to the presenters. Please continue.

Thank you, over here. Thank you once again for joining us today. If you have any further questions, please feel free to come ahead. Look forward to speaking with you again next quarter. Have a nice day. Thank you.

Thank you. This concludes today's conference call, and thank you for participating.