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spk01: Good day and thank you for standing by. Welcome to the Kingsoft Cloud second quarter of 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star and the number one on your telephone. And please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Now I'd like to hand the conference over to the first speaker for today, Ms. Nicole Shen. Thank you. Please go ahead.
spk10: Thank you, Annie. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.kisum.com, as well as on global newswire services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang, and the CFO, Mr. Haijian Hongrui He. Mr. Wang will review our business operations and company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer your 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 securities litigation reform of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, and they relate to events that involve known or unknown risks, uncertainties, and other factors. 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 these and other risks and certainties or factors are included in the company's filing with the US SEC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise except as required under applicable law. Finally, please note that, unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our CEO, Mr. Yu Linglong. Please go ahead.
spk07: Thank you, Nicole. Hello, everyone. Welcome to the 2nd quarter of 2021. The company's total revenue in the 2nd quarter reached RMB21.7 billion. The highest single-segment income in history increased by 41.6% in the same period. The increase in the same-segment rate increased by 30.4% in the first quarter. The net income of the public sector is 15.5 billion yuan. The increase in the same-segment rate in the first quarter is absolutely worth 1.6 billion yuan. It is the highest level in history. It is also the sixth consecutive quarter since the company was listed. The net income of the public sector increased by 6.2 billion yuan. The same-segment rate increased by 152.8%. Thank you, Nicole, and thank you all for joining our second quarter 2021 earnings call. In the second quarter, we generated RMB 2.17 billion in total revenues, which was a new record for us.
spk06: it was 41.6% increase year-over-year and also a significant acceleration from the 30.4% year-over-year increase in the first quarter. Our public cloud services revenues increased for the sixth consecutive quarter since our IPO and hit a record of RMB 1.55 billion, which is an increase of RMB 159 million over the first quarter. Our enterprise cloud services revenues reached RMB 622.1 million, representing an 152.8% increase over the same period of 2020 and an acceleration from the 131.3% year-over-year increase in the first quarter. Overall, we continue to effectively execute our premium customer strategy. As the largest independent cloud service provider in China, our neutral position helps us attract, develop, and maintain long-lasting, stable, in-depth, and multidimensional relationships with an expanding group of premium customers.
spk07: Next, I would like to introduce the performance of our main vertical industry. First of all, in terms of workers, although there is pressure in the market environment, but in this quarter, we have still achieved very solid performance. In terms of customers, the relationship between existing leading customers is stable, and the volume is stable. The expansion of new customers is effective, and the foundation of customers is further diversified. Today, we are very happy to announce that Jinshan Yun and Zijie Piao Dong's Huoshan Engine have signed a comprehensive partner framework agreement. and provide digital transformation services for companies to seize a huge opportunity in the cloud computing market. With the abundant sales resources and capabilities of Jinshan Yun, Jinshan Yun can help with fire engine, sales machine PaaS and SaaS products, and at the same time, promote customers to use Jinshan Yun's iSIM products. We will also work with partners to jointly expand the market. In addition, the company has provided cloud service insurance for the three major online events of the top social media platforms, including high-frequency key events and variety activities live broadcasts, In terms of new customer expansion, we have also made active progress. For example, our company is working with Meituan to provide public products and services. With a neutral positioning, leading product technology, and deep customer service experience, under the trend of extra deployment, we will be able to continue to contact and dig into the widest range of high-quality customer groups. This quarter, the company and Kuaishou jointly held corporate knowledge production salon activities, inviting more than 70 well-known Internet companies to participate.
spk06: Now let me walk you through our performance across our major verticals. I'll start off with public cloud. Despite a challenging marketing environment, we delivered solid progress during the quarter. On customer front, our existing customer base remained stable with a solid year-over-year increase in their usage while continued to make significant progress attracting a diverse group of new customers. Today, we are pleased to announce that Kingsoft Cloud had entered into a comprehensive partnership framework agreement with Volcano Engine under ByteDance in an effort to jointly provide services to enterprises' digitalization and seize the huge market opportunities from China's cloud computing market. Kingsoft Cloud, leveraging our rich sales resources and capabilities, will help Volcano Engine sell its PaaS and SaaS products, and at the same time, promote our IaaS products. We will also jointly work on business development as partners. In addition, we successfully supported a certain top social media company for its three key large-scale online events, including a gala and a live-streamed variety show that had a massive number of concurrent viewers. We also made great progress to engage new customers. For example, we started to provide Meituan with public cloud solutions. Leveraging on our neutrality, leading products and technology, and deep premium customer service experience, we're able to continuously engage the broadest premium customer base, established especially under the multi-cloud trend. Meanwhile, we jointly hosted Intellectual Property Protection Forum with Kuaishou, a top internet client of us, that brought together senior executives from over 70 leading internet companies, raising our profile among internet industries and interacting with our customers to advocate IP protection initiatives.
spk07: In terms of product records, while the company provides stable S-service to its clients, it is also based on the ability of the client to continuously forward pass requests. On product and technology front, we continue to enhance our past capabilities to meet our customers' needs, while also providing stable IaaS services to them.
spk06: In support of these efforts, we completed the acquisition of two past companies to optimize our services capabilities in real-time communication and edge computing. These allowed us to boost our public cloud revenue at the past level through cross-selling. As a symbol of recognition for our technology, during the quarter, we were proud to have received a national-level award, which is the highest award of its kind in China for our patented IS virtualization technology.
spk07: This season, many customer cases show our leading technical ability. The company's heavy-duty head customer 618 e-commerce activity is stable during high traffic, and the activity is completely without failure. In the video live business scene at the edge, we started to cooperate with large-scale video customers to successfully achieve the downfall. The network transmission speed and stability have been greatly improved. The unique Shanghai International Auto Show provides a 360-degree view, 4K VR, and a full process live broadcast to ensure stability and smoothness. In this quarter, many customer cases exemplify our leading technological prowess. We supported top customers' events during the June 18 online shopping festival, ensuring smooth and stable performance during periods of peak traffic with zero failures throughout.
spk06: We worked with large-scale video customers to apply edge computing to live streaming scenarios, significantly improving network transmission speed and stability. We were the exclusive vendor for AutoHome during the Shanghai International Auto Show, where we helped to deliver a stable and smooth experience with our 4K 360-degree virtual reality live streaming solutions. On gaming front, Following the success of our recent partnership with MiHoYo on the phenomenal game Genshin Impact, we entered into an agreement with Season Games for its blockbuster game JX Online 3, which was launched at the end of July on multiple terminals, thanks to our cloud gaming technology.
spk07: In terms of bottom-level resources, the company's data center in Tianjin was successfully closed on June 30. The project is divided into two phases, with more than 6,800 warehouses in total. Of which, a total of 3,400 warehouses will be delivered in the fourth quarter of this year. In terms of underlying infrastructure, our new data center in Tianjin was topped out on June 30. The project includes two phases, with a total of over 6,800 racks. Among that, Phase 1 includes over 3,400 racks, which is to be delivered in the fourth quarter and pre-sale expected within this year.
spk06: and Phase 2 to be delivered next year. Once in operation, the data center will enrich our computing resources in the Beijing neighborhood and support our public cloud revenue next year.
spk07: In addition, in the new 2020 China Cloud Market Research Year Report published by the Chinese Ministry of Industry, the market share increased to 7.1%.
spk06: In addition, according to the 2020 China Cloud Computing Market Annual Research Report just released by CCID Consulting, a direct affiliate of the Ministry of Industry and Information Technology of the PRC, we remain the third largest Internet cloud service provider with our market share rising to 7.1%. Going forward in public cloud space, the company will continue to strengthen our relationships and dig deeper into the needs of our existing customers, actively expand and diversify our customer base to maintain healthy and rapid business growth.
spk07: On the business side, the market demand continues to rise. The company continues to deepen the selection of vertical industries to accelerate development. In the financial service area, the company has served six of the top ten banks in China. Based on the success of customers with large state-owned banks, We will continue to provide expansion, upgrade, maintenance and other services, and greatly promote new customers and project signings. For example, this quarter, the company successfully expanded the large bank customers, and focused on the large shareholder bank, Xinyan Bank's big data and brand projects. The company will continue to deepen customer demand and provide stable and high-quality cloud services for customer digitalization development. The company also cooperated with Shandong Provincial Trade Center to build the Shandong Provincial Public Chain Financial Platform. Related products and service experience will be continuously promoted to other areas.
spk06: In enterprise cloud space, market demand continued to be strong, and we continued to cultivate the verticals selected to achieve accelerated growth. In the financial services sector, we have already been serving six out of the top ten banks in China. Building on our track record of successful cooperation with existing major state-owned bank customers, we continued to provide expansion, upgrade, and maintenance services while proactively engaged with new customers and projects. For example, we have successfully engaged with a new large-scale commercial bank, Industrial Bank, to build their big data cloud platform. From there, we will continue to dig into its demands and provide stable and premium cloud services, contributing to Bank-to-Bank's digitalization process. As another example, we partnered with Shandong Property Rights Exchange Center to build a supply chain financing platform for Shandong Province. The experience gained from this project is transferable into other regions.
spk07: In the medical health area, the company is in Wuyue, Danyi Zhongbiao, Hubei Province, a health medical data center project. The estimated contract amount of the project is about RMB 80 million, and the platform construction has already begun. The project is a national key project in the medical industry. As a benchmark for the industry, it has an important meaning for the company to accelerate the expansion of medical and health businesses. In addition, in recent IHE China's 2021 Medical System Information Exchange and Acquisition Test, the company is the first cloud manufacturer to receive all three types of certification from regional medical information platforms. IHE stands for Medical Equipment Information Exchange and Acquisition, In the healthcare sector, we want to build exclusively to build the healthcare big data cloud platform
spk06: of Hubei province with contract value of approximately RMB 80 million and have started development on the platform. This is a national key project in healthcare space and will be a sector benchmark which helps to accelerate our business expansion. In addition, during the recent IHE China 2021 annual testing conference, we passed all three IHE certifications for regional healthcare information platforms, which is a first for a cloud service provider. IHE is an abbreviation for Integrating Healthcare Enterprises. It was established in 1998 by Radiological Society of North America, also known as RSNA, and Healthcare Information and Management Systems Society, also known as HIMSS, and aims to improve the international standards for the connectivity and sharing of information among healthcare information systems. It provides healthcare certifications and set information system standards worldwide. The certifications from IHEC demonstrate the recognition we command among prestigious networks in healthcare information space. In the public services sector, we further strengthened our regional presence, engaged with the middle platform digitalization in regions such as Beijing, Hubei, Jiangsu, Gansu, and other provinces. Besides, leveraging our cutting-edge video cloud technologies, we successfully provided cloud delivery services to Meegoo, China Mobile, to broadcast the Euro 2020 and the Olympic Games.
spk07: As part of the enterprise cloud, the company announced the major strategic progress of the enterprise cloud in early August. By integrating the project delivery capabilities and resources of KLAIT, which covers the core of the country, including Beijing, Wuhan, Nanjing, Shanghai, etc., the company's enterprise cloud service project implementation speed is expected to be greatly improved, the cost will be lower, and the efficiency will be higher. At the same time, the company will introduce KLAIT's experienced high-level management team into the industry, its specialty, and long-term customer relations. The management team members will work with KLAIT for a long time, As part of our enterprise cloud business performance, the company in early August announced a major strategic move in our enterprise cloud services business.
spk06: By integrating Camelot's nationwide project execution capabilities and resources across major cities in China, including Beijing, Wuhan, Nanjing, Shanghai, among others, the company expects to further accelerate and enhance the implementation of enterprise cloud projects with lower costs and improved efficiency. By means of EquiHire, Camelot's senior management team will join us and bring along in-depth industry know-how and longstanding client relationships This group of senior personnel has worked for Camelot for a long period of time, ranging from 15 to 29 years. Prior to Camelot, they worked at IBM, BearingPoint, and other global leading companies. Leveraging Camelot's proprietary sector know-how and solutions, strong project implementation and maintenance capabilities, as well as a high-quality premium customer base that is highly complementary to our existing enterprise cloud business, we believe this will further cement our leadership in the enterprise cloud space. Overall, in the enterprise cloud segment, we maintained great relationships with our key customers and sequentially delivered a batch of flagship projects successfully. They laid a solid foundation for our further business expansion in terms of products and services, customer base, and market reputation.
spk07: We highly understand and pay attention to the data security and privacy of relevant parties Also take this opportunity to introduce to you the specific situation of our company First of all, we are focused on corporate customers, not individual developers Therefore, we neither collect nor have a large number of personal identification information Second, we only provide a computing environment, and the data in these environments belongs to the customer, not all of us Third, our enterprise and project are private deployment with physical isolation We fully appreciate stakeholders' concern on data security and privacy and would like to take this opportunity to share more color in this regard about our company.
spk06: we focus on corporate customers rather than individual developers. Hence, we do not collect nor own massive personal identifiable information. Second, we only offer computing environment and the legal titles of the data in such environment belong to the customers and not us. Third, our enterprise cloud projects are privately deployed with physical separation. Fourth, we have set up the general counsel and compliance office led by a very experienced general counsel and appoint a certified data protection officer. We will continue to strengthen our internal management, implement stringent compliance and risk control standards, and maintain continuous, effective, and timely communications with all stakeholders, including the regulators. I will now pass the call over to our CFO, Henry, to go over our financials for the quarter. Thank you.
spk09: Thank you, Yulin. Before diving into the details, I would like to offer a few highlights for the past quarter. Our total revenue of 2.17 billion RMB in Q2 sets a new quarterly revenue record for our history, representing approximately 42% year-over-year growth, which was an acceleration from the 30% year-over-year in the first quarter of 2021. Revenues from public cloud services was 1.55 billion RMB, a quarter-over-quarter increase of 158.9 million RMB, representing the sixth consecutive quarter's revenue increase since our IPO, as well as a decent step-up of incremental quarterly revenue. Revenues from Enterprise Cloud Services was 622.1 million RMB, representing approximately 153% year-on-year growth, another significant acceleration compared to the 131% year-on-year in Q1 2021. Our strong and accelerated top-line growth in Q2 is underpinned by the following factors, resulting from fundamental strategies and advantages. First of all, under the strategy of serving premium customers, we have established robust and a multidimensional relationship with our premium customers. Revenues from our top three customers achieved healthy year-on-year growth. Revenue from our largest customer achieved quarter-on-quarter growth as well. The cross-selling initiatives of our past-level products has been successfully executed. In the meantime, while the total revenue from our top 10 customers has increased in dollar value on a year-on-year basis, The percentage of the revenue contribution to the company in total has gradually and slowly decreased quarter by quarter, which we believe is a very good sign and trend for de-risk decline concentrations. Second, on our strategy of being a neutral and a pure play cloud service provider, we demonstrate strong customer acquisition capabilities under the multi-cloud deployment backdrop, driven by progressing vendor strategies being adopted by leading internet companies. For example, we have started to provide public cloud services to Meituan, a successful leading internet client. Lastly, we have always adopted a disciplined approach to select the right verticals. For example, we have very small exposures in sectors such as online education. As a result, the recent headwinds have limited impact to our business. We expect these underlying strategy and advantages will continue to support our healthy growth in the future. In addition, as our CEO Yulin mentioned earlier, the agreement with Camelot in early August will benefit our future deployment in enterprise cloud services. In 2020, Camelot served 213 premium customers and approximately 94% of total revenue were recurring with the backlog of 3.8 billion RMB as of July 31, 2021, coupled with fast revenue growth and a robust profitability. we expect a positive impact to our overall financials. In line with strong top-line growth, the cost of revenue grew 41.3 percent year-over-year to 2.06 billion RMB. IEC costs, the largest cost components, representing approximately 61.1 percent of total cost of revenue, grew 28.3 percent year-over-year to 1.26 billion RMB. As a percentage of the revenue, IDC cost decreased from 63.8 percent in Q2 last year to 57.8 percent in this quarter. Depreciation and amortization costs were 183.1 million RMB, representing approximately 8.4 percent of total revenues, also a decrease from the same period of last year. Overall, we are achieving greater economy of scale and improved operational efficiency. As a result, adjusted gross profit grew 45 percent from 83.8 million RMB in the same period of last year to 121.4 million RMB this quarter. Our adjusted growth margin for this quarter increased from 5.5 percent in the same period last year to 5.6 percent this quarter as we continue to scale up our business. Total operating expenses were 438.9 million RMB a 14.1% decrease from Q2 last year, mainly due to the one-time of share-based compensation expenses and the listing expenses related to our IPO in Q2 last year, partially offset by increase in personnel expenses resulting from the suspended favorable social tax policies. Excluding share-based compensation, adjusted R&D expenses were 213.6 million RMB, representing an increase of 13.4%. 13.5 percent year-over-year. Adjusted selling and marketing expenses were 86.6 million RMB. As a percentage of total revenue, it decreased from 5.1 percent in Q2 last year to 4 percent this quarter. Adjusted G&A expenses were 65.7 million RMB. As a percentage of revenue, it decreased from 4.8 percent in Q1 last year to 3.3 percent this quarter, among the lowest in peers. Accordingly, our adjusted EBITDA was negative 55.3 million RMB. Adjusted EBITDA margin improved from negative 2.7 percent in Q1 to negative 2.5 percent this quarter. Our net loss was 220.6 million RMB, with the net margin significantly improved from negative 27.4 percent in Q2 last year to negative 10.1 percent this quarter. The profitability improvement trajectory was mainly driven by enhanced operational efficiency, economy of scale, and partially offset by impact of suspended or favorable social tax policy. As of June 30, 2021, we had sufficient cash and a cash equivalence of 5.47 billion RMB. During this quarter, our total capital expenditures was 221.8 million RMB. Looking ahead, We expect our total revenue to be between 2.58 billion RMB and 2.7 billion RMB for the third quarter of 2021, representing a year-over-year increase of 49% to 56%. Such re-acceleration of growth is expected to be built on a few pillars, including solid, deepening, and a multi-dimensional relationship with existing top premium customers, willing new premium customers, cross-selling of new products and services, and a strong demand momentum for our enterprise cloud services. As usual, this is based on our current preliminary views on the market and operational conditions, which are subject to change. In terms of the ESG efforts, we do not have super-voting share class as opposed to dual-class share structure of most U.S.-listed China ADR companies. Each share of Kingsoft Cloud represents the same voting rights. Our main shareholders are Hong Kong-listed companies. Our principal shareholder structure is fully transparent and straightforward. Also, we have established our ESG Task Force in April 2021 to continuously discuss and implement best practices with consultants, investors, and other stakeholders, improving transparency and our corporate governance. Lastly, we are preparing Companies First Investor Day when we will invite our key business line executives, leaders from our customers, and renowned industry ecosystem partners to join us. We are targeting mid-October, but the time and format are subject to the change given the COVID situation. We are warmly welcoming investors and analysts to join either on-site or online. We are committed to improving our business transparency and bring sustainable value to our stakeholders. Thank you.
spk10: This concludes our prepared remarks. Thanks for your attention. We are now happy to take your questions. Please ask your question in Mandarin first and then in English if possible. Operator, please go ahead. Thank you.
spk01: Yes, thank you. As a reminder, to ask a question, you need to press star and the number one. on your telephone, and to withdraw your question, please press the pound and hash key. And please stand by while we compile the Q&A roster. Once again, please press star one on your telephones. Our first question is from the line of Xiaodan Zhang of Ryan Gong of Citigroup. Please go ahead.
spk08: Thank you. Hi, this is Yu Linzhong, Henry Clark Nichols. Thank you for accepting my question. First of all, congratulations on a very good performance in the second quarter. I have two questions. The first question is, how do we look at the increase in supply and demand in the second half of the year, especially considering that many Internet companies in the entire industry are under some pressure from the management side? How do we look at the increase in demand in the second half of the year? Yes. I will translate myself. Thanks for taking my questions. I have two questions. The first one is on the public cloud side. How should we see the segment growth in the second half, especially considering lots of regulatory headwinds toward the internet? And the second question is about the management giving more details about our cooperation with Douyin. Does that mean Douyin's cloud product will integrate our S products? and how will this cooperation contribute to our revenue over the long run? Thank you.
spk07: Okay, thank you. Let me answer this question. The first question is about the growth of Gong Youyun in the second half of the year. We can see in this data that our second quarter business has increased. The income of Gong Youyun has increased by about 1.6 billion yuan in the first quarter, which is the sixth consecutive increase since we started. And the amount of growth is also higher than the previous level of management. So in this way, we are relatively confident in the acceleration of growth in the second half of the year. Mainly because of several reasons. The first is that our old high-quality customers, especially the top customers, including themselves, have a very stable relationship with the top customers. It is also very stable in terms of usage, and this has built up a basic plate for our sustainable income. The second one is that at present, there is a strong policy supervision in China. For example, it will have a certain impact on the education industry, but the proportion of our income is very low. It is still lower than the level of this individual, so it does not have a particularly significant impact on our business. At the same time, this kind of The current situation of anti-corruption and forced supervision will be of great help for us to use our neutral position and diversified trend to expand our network of new and high-quality clients. For example, Meituan is a new client that we just proposed. So we are quite confident in the growth of the number of public services in the second half of the year. The second question you asked is a little bit... The point is that it is under self-management. Because the business of Douyin has been a very stable cooperation with us. We have a very deep cooperation base. And this time, the cooperation with Huoshan Engine is a new cooperation on a technical and product level. First of all, Huoshan has launched some services based on video, PaaS and SaaS. It will integrate with our S business on the product. It will integrate them into its product system. This is the first one. The second one is that we will actually expand new customers in the market together to provide a complete product series of services in the future. Then we still have to look at the situation of its business growth, because this cooperation has just begun. It's only been a month or two since we launched it. So we expect that the progress in the second half of this year will not be as obvious as we imagined. It may be more direct in the future. Thank you.
spk06: Okay, thank you for your question. So in relation to the first question about how we think about the growth of public cloud of business revenue in the second half of this year, there are a few points. First of all, we have already seen that the second quarter public cloud revenue has already increased around 160 million RMB quarter over quarter compared to the first quarter. This is not only the sixth consecutive growth of quarterly revenue growth for the public cloud segment. But also, significantly, the absolute dollar amount increase is also significantly higher than the past levels. And therefore, we are becoming more confident for the growth of the second half of our business of this year. In particular, there are several reasons that we are more confident about it. First is that we have managed to maintain a very stable relationship with top customers, including ByteDance, with usage of volume becoming also very stable. This forms a very sustainable revenue foundation for our public cloud service segment. And the second point is that under the heavy regulations, especially for the industries like online education, because we have maintained a very disciplined approach to vertical focus, the impact to our business is actually non-material. All of this sector exposure for online education It's in low single digits. And thirdly, the current regulatory backdrop is actually beneficiary to us because we can better leverage our neutrality positioning. And under the multi-cloud deployment, the general trend, we're able to penetrate further into the pan-internet customers and to make new revenues. The Meituan case, it just shows how we can further penetrate in this segment. And your second question about our relationship, about our cooperation with ByteDance. First of all, I would like to make a clarification. The cooperation is not with TikTok, but actually with ByteDance. Secondly, the way that we cooperate with them is that we will integrate our IaaS products and together with the PaaS and SaaS products from Volcano Engine to all together provide an integrated one-stop-shop solution for the potential customers. We will also exploit and do business development together with Volcano Engine to do potential marketing to new customers. And certainly, I think it's hard to quantify the potential revenue as of now because we have just started this framework of agreement. And even Volcano Engine has only started this for one or two months. So we currently do not expect the revenue contribution from this corporation to have material impact for the second half of this year. Thank you.
spk10: Thank you, Aubrey. Next question, please.
spk01: Thank you. Thank you. Our next question is from the line of Xiaodan Zhang of CICC. Please go ahead.
spk03: Hello. Thank you for accepting my question. I have two questions. The first question is about our latest acquisition. Can you please update us on the overall progress of Kimwater's acquisition? 那么从目前来看呢,我们认为我们还有哪些能力需要补足? 那么在未来我们的收购会主要关注哪些方面? 那我的第二个问题是关于我们未来EBITDA Margin的一个指引啊。 那我们看到我们二季度这个EBITDA Margin它是在持续环比改善的。 那么考虑到现在一个行业的环境呢,我们未来几个季度的这个EBITDA Margin的这个趋势会是怎么样的? 那我自己翻译一下。 So my first question is regarding our recent acquisition. So could you please update us on the consolidation progress of KMLOS and also in the longer term, what type of the targets will we look at for our acquisition in the future? So my second question is regarding our guidance on EBITDA margins in the upcoming quarters. Thank you.
spk09: Thank you, Sophie, for the question. I'm happy to address two of the questions. The first question is regarding our acquisition of Camelot. As we discussed in preparing the marks, it is our business, especially the implementation capabilities, will be significantly improved and enhanced by this acquisition. So it's a business and a strategy-driven deal, and also we're happy to see the four teams With over 20 years of experience, the management team will join us and will deliver their know-how in the space as well as their solid client relationship. So regarding the progress, as we announced the deal on the 2nd of August, and right now we are doing all the necessary regulatory approvals, internal approvals, before we close the deal. So we are hoping, you know, if everything goes well, which is we believe it will go with that direction, will be closed and by end of this year sometime will be in Q4. However, as you know, the timing will depend on the approval process and also the pacing of the closing for other mechanical process. But we believe there will be no major bottlenecks before we close the transaction. And once we close the transaction, the team and all the current process will be integrated into our business and the financials will be consolidated into Kings of Cloud. which we do think there will be a positive impact to the Kings of Cloud financials. Regarding the future investment, there are a few key themes that we will continue to explore and will enhance our capabilities from the following categories. First of all, we were looking into the innovative technology ventures to really enhance our matrix of the product offerings and the services. And that will be basically enhance and upgrade our cross-selling capabilities and extending our revenue opportunities with existing clients. So as you can see, our previous investment in the path-level technology has a proven track record to really push up our public cloud revenue in this quarter in particular. I think we'll follow that philosophy and continue to look at good assets in the market. Second, I think Camelot is also a good example that will expand our capabilities in both enterprise cloud and also the ecosystem partnership with other companies that will help us to reach out to more enterprise cloud clients in that direction. And I think given the past few cases, we have proven ourselves, which we can identify the right assets, execute those process efficiently, and close that efficiently. A third question regarding the e-data margin, I think we are also happy to see that there is a sequential improvement on the e-data margin. There are a few important factors. First of all, we do adopt a very efficient process to manage our expenses. So as you can see, while our company top line grow at around 40 plus percent, our expenses in terms of the absolute dollar value has keep relatively stable. So as our company continue to expand on the top line, I think that will naturally and mathematically convert it to a better margin bottom line going forward from the long-term perspective. However, we want to point out that, as you know, our business, especially from both public and enterprise cloud, there are certain, you know, seasonality factors for different quarters. So for the long term, we are confident our growth margin and EBITDA margin will be further improved in the long term. But we do, we will look into the details, especially in the market factors for certain factors that may affect our EBITDA margin as well. So speaking to the margins for the following few quarters, we still expect that our non-GAAP EBITDA margin will approach a breakeven by end of this year. And we're hoping that trend will carry on and continue going forward. Especially consider about the few things you mentioned. I think that fundamental support to improving efficiency of expenses and cost will be carried as the organic factors that will be improving our bottom line as well. Thank you, Sophie.
spk01: Thank you. Thank you. Our next question is from the line of Zoe Zhu of UBS. Please go ahead.
spk00: 感谢管理层。我是Wendy Zhang from UBS。 我的问题是还是关于我们收购这个Camelot的。 I just want to ask the management team, after we complete the acquisition of the company, what is the impact on our actual efficiency? Is there a framework? What kind of impact will it have on our growth margin? This is the first question. The second question is about data security. We have seen that the country has also issued a protection law for key infrastructure, as well as a data security law, and so on. I would like to ask, due to the law's issuance, will it probably cause a lot of expenses for us in the current period to come to an agreement? What kind of impact will this have on our growth margin? Let me translate it. So I have two questions. The first question is about our acquisition of Camelot. How do we think about its impact of a growth margin, given that this company can help us to improve our implementation efficiency? The second question is also about growth margin. So China has launched the critical infrastructure protection law and data security law. So how do we estimate the related costs to comply with these two policies.
spk07: Okay. Let me answer the second question about data security and supervision. This is also a question that investors are concerned about. As we all know, the cloud computing industry is actually a very important information industry. So its data security has always been a very important topic. As we mentioned before, consistent data supervision and the security of relevant laws and regulations may have some impact on the short-term market. We need to adjust and comply with this supervision. But in the long term, we think this kind of improvement is beneficial to the health development of the industry. So far, it has not directly affected our business, because the company has take very strict data security and compliance measures. For example, as we have just introduced, first, we focus on corporate clients and do not have a lot of personal user information, so the current personal user information security will not affect us. Second, the company provides the client with a computing environment, so the client has all the data rights, not the cloud company. Third, our corporate cloud business is mainly based on privacy. In fact, it has realized the physical isolation of data, which also meets the requirements of the previous relevant industry supervision and some legal requirements. The fourth company has already established our own data security and protection mechanism for the whole life cycle, established a data security and privacy committee, and established a legal and legal advisory office. So in this regard, our preparation is relatively perfect. In terms of data security related investment, human resources and financial resources, we will increase this, but it is expected that it will not have any obvious impact on our financial indicators. In addition, in fact, the security of data supervision also makes enterprise customers more likely to adopt this kind of multi-sphere and neutral deployment of partner integration. So this is actually beneficial for our past customers in the long term.
spk09: Thank you, Andy. I would like to offer the three perspectives regarding the cost impact of the acquisition. First of all, the company, Camelot, has over 16 delivery hubs around the nation in China. So their local team has been very experienced and very close to the clients, especially in those sophisticated projects. So those local teams will dramatically save, for example, the travel expenses and the local delivery costs. So that will be reflecting to the cost of the delivery projects. Point number two, over 94% of the current revenue of Camelot are recurring, which means two things. First of all, they do have their proprietary products, and some of them are standardized. So by adding into those components as the module within the enterprise car projects, that will be also improving our contribution margin. Second, given the company is growing at a double digit on a year-to-year basis, we do believe incremental revenue will be also receiving a better economic scale. even on a standalone basis. So the third point, Camelot currently has about 213 premium customers, which follow the same definition of Kingsoft Cloud of 2020. And we actually analyze the overlapping premium customer base of Camelot and Kingsoft Cloud. And the majority of the 213 premium customers, especially the top quanta of those customers, have great overlap with Kingsoft Cloud at this moment. which means we can leverage and cross-sell or up-sell our current projects, and we can enhance and deepen our multi-dimensional client relationships, including our top 10 clients, by leveraging the Camelot team as well. So that will also reduce our sales cost for the recurring projects and for the sales cost also for the new engagement of the new projects. So by combining the three factors I just mentioned, the contribution and the benefits of Camelot acquisition will be coming to contribution margin, the percentage of recurring revenue, sales marketing cost, and the local travel expenses. So those will be also reflecting to both gross margin and EBITDA margin of King's Hop Chop. Thank you.
spk06: And also allow me to translate what Mr. Yu-Ling Wang answered in relation to the regulations. of data security. So like we've always talked about, we believe that cloud computing is a very important constituent of information technology sector. And therefore, the regulation on information security and data security is very important. We do believe that a regular, orderly regulation is beneficial for the long-term and healthy development of an industry. So even though that short term regulation might impact some of the players or the industry and people would need to adapt to that, we still believe that in the mid to long term it's going to be beneficial for the growth of the company. And like we said in the prepared remarks, some of the points shows that both our business model and our methods and approach towards data security and privacy shows that we are very well prepared in this regard. Number one, we really focus on corporate science rather than serving a lot of individual developers, and therefore the personal data information security does not relate to us to that great extent. And secondly, what we provide is a computing environment, and the data that are stored or processed in that environment belong to the customers and not us. And thirdly, the majority of our enterprise cloud businesses of this project are deployed privately, and therefore there is physical separation, which enhances data security. And lastly, we really advocate the full lifecycle data security and protection mechanism with all the internal control methods, including the data security and privacy committee and the general counsel office, etc. So we do think that in light of this, we're pretty well prepared in facing the regulatory developments. And since you asked about the expenditure in this regard, we do believe that we will continue to build our capability in security, including human resources and spending financial resources on this. But we do not expect that this will cause any material financial impact for our financial results. And also I would like to mention that in light of these regulations, some of the clients may choose to adopt for private cloud or hybrid cloud, which we can provide as well. So this would also benefit for our customer acquisition efforts. Thank you.
spk01: Thank you. Our next question is from the line of Farmer Strong of Jefferies. Please go ahead. Okay.
spk04: Hi, management. Thanks for taking my question. Congratulations on the strong results, and I have two questions. My first question is regarding the acquisition of Camelot. So could you please share some details about the current net margin of Camelot? And will the financial results of Camelot be comfortably dated by QC since the first quarter next year? And my second question is, could you please provide some color about the revenue contribution from premium public cloud customers? And how should we think about competitive landscape of public cloud and enterprise cloud? And how do you think about the trending output? Thank you.
spk09: Thank you. I'm happy to take on the first two questions regarding the acquisition of Camelot. You know, I think all the necessary information has been disclosed in our previous announcement in the 6K form, but happy to share some additional color on this call. First of all, given Camelot's revenue, most of that are recurring, and also they do have their proprietary products. So I think at this moment, their growth margin or internal contribution margin at least are on the double-digit territory. Point number two, regarding the timing of the consolidation, we are hoping, as we mentioned, there's no major roadblocks for receiving the necessary regulatory approvals and internal approvals. We are hoping the deal will be closed sometime in Q4 this year. So I think the latest time of the financial consolidation will be Q1, but hopefully, We hope that timing can be moved and pushed a little bit ahead if everything goes well. We're happy to share the updates once the things are confirmed. So regarding the revenue contribution of the public cloud clients, as we mentioned in the prepared remarks, In a while, we are happy to see our top three clients are contributing on the year-over-year basis, have a higher dollar revenue contribution, and our largest customer has also sequentially, on the quarter-over-quarter, also seen revenue increase. But given our total revenue are increasing as improving at a faster pace, so mathematically, our top 10 clients are contributing a lower percentage of total revenue of Kingsoft Cloud, quarter-over-quarter, but on a gradually pacing. So I think that will de-risk our client concentration from that perspective. So speaking to your question, I think right now we have to say that there's no major client has been contributing a majority revenue of Kingsoft Cloud over 30%. And we do feel like the revenue contribution as a percentage perspective are healthy and moving to the right direction. And also, as you see from the total company revenue mix, our enterprise cloud this year it will be likely around 30% of the total revenue if we do follow that on track. So our total company's revenue mix will be also moving to a healthy combination. So that's actually the few things regarding the enterprise. Regarding the total revenue going forward, I think we are going to see the major breakthroughs of the previous backlog, as we discussed earlier, will be gradually booked into the revenue. as we are seeing the continuing implementation and also the delivery of those projects. So some of the announcements and the public information regarding some of the great bits of our enterprise projects has been currently implemented on track, and also the Camelot position will be helping going forward to accelerate those implementation schedules. Thank you.
spk01: Thank you. Thank you. Our next question is from the line of Joel Ying of Nomura. Please go ahead.
spk05: Thank you, Ms. Wang. I have a very simple question. It's still about the Klyte Camera. That is to say, because the camera is mainly focused on Enterprise Cloud, when we were in RGD, Enterprise Cloud reached about 29% to 30% of the total revenue. In the future, after the merger, in 2022, So I thought we are quite kind of which is focusing on the first call and you know as well now and Pascal our group public call and Already attribute 29% of total revenue for to be turning one. So what's our guidance? Are we going to mix going forward into 2022 and into long term? Thank you
spk09: Thank you, Joe. I'm happy to share some additional color as well. So as you can see, the three major fundamental driver of the revenue growth, number one is our public cloud, majorly from our new accounts as well as the solid base of existing accounts. Number two is our organic growth of enterprise cloud revenue. And number three is the gradual conversion of the backlog of 3.8 billion from Camelot going forward. But I want to mention that all three streams are actually all growing, obviously at a different pacing, but they are actually all growing. So it depends on the timing of closing the Camelot transaction. We're going to have final views regarding how the three different speeds can convert into a final mix. But I think that will be the natural results. But I think our focus from a management team perspective is to make sure that our public cloud, organic enterprise cloud, and the additional opportunities from Camelot can all grow. I think right now, frankly speaking, it's going to be a bit early to give a final view regarding the guidance of the mix because the timing of the closing has not been fixed yet. But hopefully, given that even the Camelot today's revenue is also growing at also a double digit in that perspective. So hopefully, after the consolidation, as late as Q1 next year, it will significantly add into the business opportunity to Kings of Cloud. And I think for next year, The percentage of enterprise cloud will be growing as well. However, our public cloud revenue in dollar value, we believe, will be also seeing a good growth for next year as well. Thank you.
spk05: Thank you very much.
spk01: Thank you. And that's the end of our question and answer session. And I'd like to hand the conference back to the management. Please continue.
spk10: Thank you, operator. 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. Thank you.
spk01: Thank you. And this concludes today's conference call. Thank you for participating. You're now all disconnected.
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