Kingsoft Cloud Holdings Limited

Q3 2021 Earnings Conference Call

11/24/2021

spk05: Good day. Thank you for standing by and welcome to the Kingsoft Cloud's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shen. I am a manager of Kingsoft Cloud. Thank you. Please go ahead.
spk03: Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on global newswire services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang, and CFO, Mr. Haixian, Henry He, Mr. Wong will review our business operations and company highlights, followed by Mr. Ho, who will discuss the financials and guidance. They will be available to answer your question during the Q&A session that follows. There will be consecutive interpretations. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in original language will prevail. Before we begin, I'd like to remember that this conference call contains forward-looking statements. within the meaning of Section 20E 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 current market and operating conditions, and relate to events that involve unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks and certainties or factors are included in the company's filing with the U.S. 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 call are denominated in RMB. It's now my pleasure to introduce our CEO. Mr. Yulin Wang, please go ahead.
spk10: Okay, thank you, Nicole. Hello, everyone. Welcome to the third quarter of 2021. In the third quarter, the company's total income reached RMB 24.1 billion, which is about 40% of the total growth. The total revenue of Gongyou Cloud is 16.9 billion yuan. The net profit of the previous quarter has reached 1.4 billion yuan. The net profit of the industry cloud has reached 7.3 billion yuan. The net profit of the industry cloud has increased by 78%. Since the beginning of 2021, the company has undergone rapid development in the context of a new normalization of the epidemic. As China's largest independent cloud service provider, the company will serve as a mission to create a digital future together with its most trusted cloud partners. Thank you, Nicole, and thank you all for joining our third quarter 2021 earnings call. In the third quarter, we generated RMB 2.41 billion in total revenues, which was an increase of 40% from the same quarter last year.
spk02: Our public cloud services revenues reached RMB 1.69 billion, an increase of RMB 140 million over the second quarter. Our enterprise cloud services revenues reached RMB 730 million, up 78% over the same period last year. Since the beginning of 2021, we continue to deliver rapid growth despite market headwinds, regulatory changes, and ongoing challenges as everyone adjusts to a new normal as the pandemic continues to evolve. As the largest independent cloud service provider in China, we will continue to execute our growth strategies, strive to become the most trusted cloud partner for our customers, and to create the digital future together. Our neutral position enables us to develop more in-depth and extensive collaborations with an expanding base of premium customers and further nurture our multidimensional ecosystem. We believe we will benefit from our long-term thinking and achieve continued and sustainable growth.
spk10: Next, I would like to introduce our performance in the main vertical field. First, in the public cloud, despite the pressure of the market environment, this quarter, we still achieved a fast-growing performance in the industry. With a neutral position, leading solution and deep quality customer service experience, under the trend of multiple deployment, The customer base of the company and the diversification of product service have been significantly improved. In the second quarter of the performance meeting, we introduced that China's leading local life service provider, Meituan, has become an important new customer of the company. The steady increase in the volume of the company's recent new customer groups will contribute to the growth of income. After the second quarter of cooperation with Meituan, this quarter we will once again expand the head of the new customer of the Internet. This quarter, we are very happy to see that one of China's largest e-commerce platforms, Pinduoduo, has also become our new customer. We believe that Zhihu, Meituan, Pinduoduo, and these new customer development trends will continue to help the growth of public transport. The travel industry is changing, but we are actively responding to changes, quickly exploring high-quality business opportunities, and actively cooperating with new high-end high-quality customers. As China's leading mobile travel platform, the first contract provides a complete set of public transport solution solutions. to provide computing resources, DevOps, and large-data PaaS products. In the field of Internet of Things, we will further promote the diversification of the industry in the field of non-video games. We will continue to provide public storage services for China's leading online travel platforms, and we will further deepen the cooperation relationship with many high-quality products such as containers, large-data, and metal. In the field of games, we will gain customer recognition by covering PaaS, SaaS, and iOS full-time services.
spk02: Now, let me walk you through our performance across our major verticals. I'll start off with public cloud. Despite the challenging market environment, we still achieved faster growth than the industry averaged this quarter. Leveraging our neutral position, getting solutions and premium customers experience We made significant progress expanding our customer base and diversifying our products and services portfolio, especially for multi-cloud deployments. As mentioned in our last earnings call, Meituan, China's leading local lifestyle service platform, has become our new premium customers for public cloud services. Together with other newly engaged premium customers, their steady usage increases contribute to our public cloud revenue growth. Following our success with Meituan in Q2, we continued to expand our customer base among top internet companies. We are proud to announce that Pinduoduo, one of the largest e-commerce platforms in China, has become our new customer in Q3. We believe such new customer engagement trend will continue and will drive our growth in public cloud services. We proved ourselves to be agile and move quickly to engage with emerging high-quality premium clients amidst the regulation changes. We engaged with Shouqi Car Hailing a leading player which has been rising amid the shifting competitive landscape. We delivered a full suite of hybrid cloud solutions, including computing resources, DevOps, and big data products at the path level. In the pan-internet space, we further diversified our offering beyond the video and gaming. We continue to provide public cloud storage services to Qunar.com, one of the leading online travel platforms in China. On top of this, we provided them with more products, such as containers, big data solutions, and bare-metal servers. On gaming front, we are highly recognized by customers for our full-stack cloud services, including IaaS, PaaS, and SaaS. We signed an agreement with IGE Games to support their proprietary blockbuster mobile game, The Clues 2. We helped them plan and design their cloud architecture to support game deployment, which resulted in a stable and smooth gaming experience. for tens of millions of concurrent players.
spk10: In terms of product technology, at the end of September, Shalivon, an international power analysis institution, officially released the 2020 China Financial and Distribution Database Market Report. Jinshan Yun's DragonBase database, with its advanced technical development, outstanding product capability, and excellent commercialization performance, is on the same page as the other two companies, and is on the same page as the leaders. This is also the reason why Jinshan Yun's big data cloud After China's data management solution proposal market report leader took the lead, our core PaaS products were once again recognized by industry authority institutions. At the same time, we also continued to increase in the front-end technology field. According to IDC data, there will be 50% of the data processed on the edge in 2023. This quarter, the company will improve the ability to store goods on the edge and complete the landing of the border storage node in Jiangsu in September, providing strong support for the edge scene.
spk02: On product and technology grounds, according to the 2020 China Financial Grade Distributed Database Market Report that was published in September by Frost & Sullivan, an internationally authoritative survey agency, our DragonBase database was placed in the leader's quadrant of their Frost radar. Along with other two leading competitors in China, our product was recognized for its visionary technology, excellent product performance, and outstanding monetization. This, once again, demonstrates the recognition our core path products come on in the industry, including among top global industry research firms. Earlier this year, our big data cloud products were also placed in the leaders' quadrant by Frost and Sullivan in their 2020 China Data Management Solutions Market Report. At the same time, we continue to ramp up our investments in cutting-edge technologies. According to IDC, 50% of data will be processed at the edge by 2023. During this quarter, we improved our edge storage capabilities and developed edge storage nodes in Jiangsu province in September, providing strong support for various edge applications.
spk10: Moving to the enterprise cloud segment,
spk02: Going digital has become essential for many businesses and industries to adapt to new norms.
spk10: to help customers implement the intelligent management of the underlying data of the business, which increased the efficiency of large data and development by 65%. In addition, in August, we announced that our strategic partner, Kreuter, has further developed its industry-oriented business. With the official addition of Kreuter, the company will cover 100% of the top 20 bank customers. We will fully integrate Kreuter in the solution of products and industries such as risk management, finance and regulation, return on investment, and so on, and have provided support to more than 240 financial companies.
spk02: In the financial services sector, we continue to expand our client base and deepen our collaboration with our customers. On the central bank level, we won the bid to build a big data cloud platform to support China's new digital RMB. After winning contracts from Huaxia Bank and China's Citic Bank in Q3, we furthered our cooperation with another top commercial bank and helped it migrate its middle office to the cloud. Our solution enables the smart management of their underlying business data and led to a 65% efficiency improvement in their big data capabilities and development. As we announced back in August, we agreed to acquire Camelot as a part of our efforts to build out our enterprise cloud services business. Now that we have officially joined hands with Camelot, we will be able to cover all the top 20 banks in China. We will fully consolidate Camelot's SaaS products and solutions into our product portfolio, especially in the risk management, financial compliance, and anti-money laundry areas, which have been offered to more than 240 financial institutions.
spk10: In the field of medical health, the company, Hangchi, is the leading industry leader in the medical cloud service platform in the province, creating a standard project in Jiangsu, Hubei, and other places. This quarter, we officially launched the construction and delivery of the Jiangsu province's imaging cloud project. This project will be the first in the country to realize a cloud platform for the distribution of video data in the province. It is planned to realize more than 30 hospitals at the end of the year. Video data gathering and cross-unit sharing. More importantly, after the project is completed, it is expected to save hundreds of billions of dollars in health insurance funds every year. We are proud of such a powerful social benefit. At the same time, we continue to steadily promote the delivery of health information platform projects in Hubei Province. We have also made another breakthrough in ecological construction. In the healthcare sector, we have been pioneering new light-house projects in Jiangsu and Hubei provinces, among other provinces. In Q3,
spk02: we kicked off the delivery of the Jiangsu Province Medical Imaging Cloud. This project will be the first to enable provincial-level medical image data sharing, expected to connect more than 30 hospitals by the end of this year. Once put into operation, it is estimated that the project will save billions of RMB in medical insurance each year. We're very proud to be able to create such positive social impact together with our customers. We're also making steady progress with our big data cloud project in Hubei province. Meanwhile, we also made significant progress in our healthcare ecosystem. In one case, we have been cooperating with a leading healthcare data solution provider. This corporation has already introduced us to many premium customers, including Ruijin Hospital, which is the fourth largest hospital in China and the largest in Shanghai. Building on this foundation, we plan to expand our collaboration and strengthen our branding, resources, and service capabilities with more hospitals in China. 公共服务领域公司入为北京政务云4期项目项目额8500万元这是公司连续5年服务北京政务云持续性收入会持续提升
spk10: In addition, the company will quickly copy the government cloud experience to other places, successfully target public services such as Anhui, Shandong, and other urban public services, and begin to deliver the work. As a single source, the company successfully targeted a city management cloud base project in Hubei Province for 36 million yuan, which fully plays an advantage in the field of cloud computing and big data, and promotes the transformation of urban public services from職能型向服务型。 In Shenzhen, under the policy support of the Data District Big Data Institute, In the public services sector, we were selected for Phase 4 of Beijing City Cloud Project.
spk02: The total contract value is approximately RMB 85 million. This marks the fifth year in a row that we provide services for the same project, exemplifying our ability to secure repeated revenues. In addition, we also quickly replicated our successful experience with public services clouds to other parts of China and won bids for projects from cities in Anhui Province and Shandong Province, to name a few, which are all in delivery phase. We won the bid to be the exclusive provider of an urban cloud infrastructure for city in Hubei province, with contract value around RMB 36 million. It will leverage our leading cloud computing and big data technologies and facilitate the intelligent transformation of the city's public service systems. We also started cooperating with the Shenzhen Big Data Research Institute. With strong policy support, the institute will integrate big data research resources in Shenzhen, the Greater Bay Area, and further across China, to facilitate the nationwide advancement of big data applications. Despite some disturbances from the pandemic and power shortages, we are steadily carrying out our project. We are also making progress with new bids, and our backlog continues to increase.
spk10: As part of the industry, the entire KLAIT process As we introduced in the second episode, KLEIT has a delivery center in key cities across the country. We are already in the first six cities as a company integrated delivery point area. In terms of finance, we are also introduced by KLEIT. In nearly 10 bank customers, we will start to connect customer resources. Our integrated free team will directly deliver and service. In the field of ecological cooperation, Xiaomi, Jinshan Group and Jinshan Office also began to cooperate with KLEIT in many ways. Within our Enterprise Cloud segment, the integration of Camelot is well underway. As we mentioned in Q2, Camelot has delivery centers in most major cities across China. We have selected six cities
spk02: to be initial pilot cities for integrated project delivery. In the finance services sector, we have started engaging with nearly 10 banks that Camelot has introduced to us. Our integrated team will provide delivery and services directly to these customers. In terms of ecosystem cooperation, Xiaomi, Kingsoft Group, and WTS have all started working with Camelot in various aspects. We will focus our efforts on the finance, healthcare, and public services sectors, and we have started with consulting and planning services in the hope of developing a fully integrated, one-stop suite of solutions.
spk10: We will continue to pay close attention to the direction of supervision, including the recent online data security management regulation application draft, and will begin to publicly appeal for opinions. Although the current draft has not been officially released, the specific implementation time is not yet determined. But as we have always emphasized, we will strictly follow the localization of judicial governance, continue to promote data security, privacy, and other environments, social and governance work. Different from other companies with millions of individual developers and user information, Jinshan Yun gathers high-quality enterprises to help customers, and the data classification and classification system that controls the requirements, data security and other requirements of the company are all under daily management.
spk02: In terms of regulatory backdrop, we have been paying close attention to all new regulations and policies, including the draft regulation on protecting Internet data security that was published by the Cyberspace Administration of China for public opinion. The regulation has yet to be finalized and the effective date is still uncertain. But as we have always emphasized, we manage our business operations in a localized approach within each jurisdiction and continue to deliver solid progress with data security, privacy, and ESG programs. Unlike companies that possess data of millions of individual users, we focus on serving enterprise customers. In addition, we have fully complied with regulatory requirements, including around data classification and data security. Till now, we have successfully obtained ISO 27001, ISO 27017, and ISO 27018, which are the worldwide recognized standards and certifications in terms of data security and personal information protection management systems. I will now pass the call over to our CFO Henry to go over our financials for the third quarter. Thank you.
spk09: Thank you, Yiling. Now I will walk you through our financial performance for the past quarter. Our total revenue reached 2.41 billion RMB in Q3, representing approximately 40% year-on-year growth. which is consistently higher than the growth of the major peers in mainland China. Revenues from public cloud services was 1.69 billion RMB, a quarter-over-quarter increase of 135.2 million RMB, representing the seventh consecutive quarter revenue increase since our IPO. There were a number of drivers. First, our existing client base remains stable, including our top three clients in particular. Our neutral position makes it possible to avoid any potential conflicts of interest with our customers. And we have been able to grow together with our customers. Second, we continue to engage with the new premium customers. In Q2 this year, Meituan, China's leading internet conglomerate, has become our new premium customers for public cloud services. With the trend continues, we are proud to announce that Pinduoduo, one of the leading largest e-commerce platform in China, has become our new premium customers in Q3. This new client case exemplifies two things. Number one, the multiple cloud strategy is gradually more accepted by the market. Number two, these efforts have to diversify our customer base and de-risk the top client concentration risk. And also, clients from non-video related vertical will also help grow our computing business and contribute to the public cloud incremental high quality revenue growth. Lastly, we were able to dig deeper into the needs of our clients. As Yulin mentioned earlier, we are providing a more diversified portfolio of products and technology through cross-selling, including containers, edge computing, and path solutions. Revenue from enterprise cloud services was 726.9 million RMB, representing approximately 78% year-over-year growth. We have seen a rapid growth in demand in enterprise cloud markets, As demand grew rapidly in the enterprise cloud market, we built more flagship projects in the financial services, healthcare, and public service sectors, and replicated our success to more customers. As a result, our client base continued to grow steadily. In the short term, however, delivery of our enterprise cloud projects in some regions in mainland China was affected by the recent wave of pandemic. Although we can deliver technology support of some projects remotely, our team has been unable to deliver on-site tasks at some of our client-owned data centers due to travel restrictions. In addition, in Q3, some of our projects were also delayed due to power shortages or limits by local authorities. As a common practice for Enterprise Cloud, we implement our public cloud technology to Enterprise Cloud private environments in their own IDC centers. Although our public IDC were not affected by power shortages, some of our customers saw temporary disruptions to their own private IDC center. This shortened the time available for our team to deliver projects on-site and caused certain delays. However, we're happy to see currently the situation has been improving in the process. In line with the strong top-line growth, cost of the revenue grew 44% year-over-year to 2.33 billion RMB. IDC costs, the largest cost component, representing approximately 60.7% of total cost of revenue, grew 33.1% year-over-year to 1.41 billion RMB. IDC costs consist of cabinets and bandwidth costs. The costs increased by 155.4 million RMB on a sequential basis, which is due to the preemptive shortage storage of underlying resources. Depreciation and amortization costs increased by 28% to 200 million RMB, representing approximately 8.6% of the total revenue. Adjusted gross profit was 92.2 million RMB, compared with 114.8 million RMB in the same period of last year. Our adjusted gross margin for this quarter was 3.8%, compared with 6.6% in the same period of We would like to offer a bit more color of this short-term volatility. To support the growth of the public cloud business, cloud companies typically purchase servers and lease data centers in advance based on the forecast of demand from our clients and the market in general in the beginning of every year. However, as many of the audience may have seen, starting from middle of this year, the IT demands from many internet clients in China are growing. but slower than previously market forecasts beginning of this year. Therefore, the underlying infrastructure resources has not been fully utilized as targeted, and incremental investment of resources made earlier this year may not be fully monetized in the short term towards by end of this year, which may impact our business. Due to this reason, for example, the increase of 155.4 million RMB in IDC costs this quarter impact our growth margin this quarter. Our business model and client base remain very robust, and we believe the utilization pattern will naturally be optimized as we see our public cloud demands continue to grow. Total non-GAAP operating expenses were 451.2 million RMB, representing a 50.3% increase from Q3 last year. mainly due to the ongoing investment into our business and remain our competitiveness. We have provided our core team with competitive compensation and therefore increased personnel expenses. Excluding share-based compensation, adjusted R&D expenses were 231.6 million RMB, representing an increase of 51.3% year-over-year. As a percentage of total revenue, it increased slightly from 8.9% in Q3 last year to 9.6% this quarter. Adjusted selling and marketing expenses increased by 37.4% to 114.3 million RMB. As a percentage of total revenues, it decreased a little bit from 4.8% in Q3 last year to 4.7% this quarter. Adjusted G&A expenses were 106.3 million RMB. As a percentage of revenue, it increased from 3.7% in Q3 last year to 4.4% this quarter, although the level among the lowest in the peers. Accordingly, our adjusted EBITDA loss was 140.7 million RMB. Adjusted EBITDA margin was negative 5.8% this quarter, compared with negative 2.5% last quarter. The quarter-over-quarter decrease was due to the decrease in gross profit, the increase in personnel expenses, and one time off related capital transaction expenses. Our adjusted net loss was 363.8 million RMB, with adjusted net margin at negative 15.1%. As of September 30, 2021, we had sufficient cash and cash equivalents amounting of approximately 6 billion RMB. During this quarter, capital expenditures was 96.6 million RMB. Since Q4 last year, 2020, anticipating supply chain pressures, we have purchased a sufficient service in advance to support our business growth. Based on our current operation and in pursuit of high operations efficiency, we will make a very disciplined approach with capital expenditures for the second half of this year. In addition, the server delivery and the payment cycle also led to a relatively low capex in Q3. However, we do think the fourth year capex will be at a similar level compared with last year. In addition, we have received great endorsement from regulators as evidenced by obtaining unconditional approval for the Camelot transaction from the National Anti-Monopoly Bureau, aka SAMR, State Administration for Market Regulation of China. The approval process was completed within about one month's time, which is significantly faster than the regular review timeframe, especially considering today's market regulation environment. In October, we submitted F3 filings regarding the registration of shares related to the transaction. We have now completed the transaction and began integration of the two teams. Camelot brings us over 500 premium customers and a wealth of industry know-how, especially in industries such as internet, financial services, consumer, retail, and manufacturing, among others. Camelot has delivery hubs in multiple key cities across China. Their local teams will deliver future enterprise cloud projects directly and improving our execution capabilities of the whole company. We believe significant synergies will be further unleashed into next year. Looking ahead, we expect our total revenue to be between 2.63 billion RMB and 2.83 billion RMB for the fourth quarter of 2021, representing a year-over-year increase of 37% to 47%. This is based on our current and our preliminary views on the market and operational conditions, which are subject to change. Lastly, we held our first Investor Day event after IPO on October 21st this year. Representatives from our key accounts, clients, ecosystem partners, industry sub-leaders joined our senior executives and discussed industry trends and our business developments, including senior executives and clients from National Health Commission, China Construction Bank, Kuaishou, Zhihu, ByteDance, Camelot, and among others, to share diverse perspectives. We are committed to improving our business transparency, bringing sustainable values to our stakeholders, and delivering long-term value to our shareholders.
spk03: This concludes our prepared remarks. Thanks for your attention. We are now happy to take our questions. Please ask your questions in both Mandarin and English, if possible. Operator, please go ahead. Thank you.
spk05: Thank you. As a reminder, if you wish to ask a question, Please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel the request, please press the pound or hash key. Your first question comes from Brian Gong from SIPI. Please ask your question.
spk08: Good evening, everyone. Thank you for accepting my question. My question is about the industry cloud. I understand that the industry cloud in the third quarter has been affected by the epidemic and the pandemic. Due to the current situation, the power line and the pandemic have basically been resolved. We don't know if we have seen the interaction of the project accelerate. I would like to ask, if we look at next year, will the revenue of our industry cloud return to a normal level? And if this normal increase level is next year, what kind of level will it be? I will translate myself. Good evening, management. Thanks for taking my questions. My question is regarding the enterprise cloud. I understand our enterprise cloud segment was impacted by power shortage and the pandemic. Given the pandemic is largely under control and the power shortage largely eased, have we seen any accelerating projects delivery? Should we see enterprise cloud revenue growth to go back to normalized level for next year? And what growth level we should expect? Thank you.
spk10: Okay. Let me answer your question. In terms of industry, Q3 and Q4 are mainly affected by two factors. One is the policy of electricity in Q3. We have a relatively high-quality and high-quality engine. In addition, we have a oil machine. So, the operation of the engine is relatively normal. It can ensure the normal operation of our oil. But the engine of the client in the industry is mostly private IDC. So, it's still a bit unpredictable. So, the influence of this limited power will be more serious. The current situation is that the issue of limited electricity has been resolved, but the progress of double carbon is still in progress. So in this regard, we are still carefully pushing forward, because there may be some related IBC policies in the future. We are also looking at it. But for now, the impact of electricity can basically be pushed forward normally in Q4. The main issue with Q4 is the pandemic. The pandemic in China has started to rebound in Q4. Many provinces, including Beijing, are under a lot of pressure from the epidemic prevention work. This has caused delays in the delivery of our projects. So the situation is that the demand for industry cloud is still very high. Our projects and orders are still growing at a high speed. Now we are mainly looking at the delivery situation. Our solution now is that On the one hand, we want to make the best use of our local service team to avoid going on a business trip. The second is to speed up the project as much as possible. We want to pursue the progress of some delayed projects. Okay, so the response from the CEO, Mr. Wang Yuning, is that as you rightly pointed out, there are two key factors affecting our industry cloud segment. One is the power shortage or curtailment. The other is the pandemic.
spk02: In terms of the power shortage, as you know that in Q3, that was the main factor. And in our two business segments, respectively, I'll talk about it. So in the public cloud segment, because the IGCs enjoying relatively high grade of protection and priority, and then most of them have a reserve or backup power generators. So those who are not effectively affected. But in terms of enterprise cloud or industrial cloud, because of the IDCs, in most cases, they're private IDCs which are designated by the customers. So it's generally case by case and have been affected by the power shortage. I have to agree with you that currently the power shortage situation has largely been alleviated. However, we do see that in the mid-term to long-term, the carbon emission control will continue, the pressure will continue to be there, and there might be more policies in relation to IDC construction and IDC power consumption. But in any case, the power shortage we expect in the short term has been alleviated, and then we're able to progress our delivery for Enterprise Cloud in Q4. The second factor about pandemic Obviously, it is still going on in some cities because of the very stringent measures the government takes, which causes the delay of our delivery. However, we do see that overall speaking, the demand in the industry of enterprise cloud remains very strong. Our backlog continues to grow. While there's impact to delivery, we also have proactively tried to find solutions to this impact. One is we have been proactively utilizing the Camelot's local teams, which are distributed across China to help with delivery and increase delivery efficiency. The second part is that we proactively manage our timetable of delivery and try to make up for some of the time that was lost because of the power shortage and pandemic control. But overall speaking, we do see the industry cloud to enjoy a very high growth rate coming from the demand. It's a very strong demand. Thank you.
spk08: Thank you. That's very helpful.
spk05: Our next question comes from Li Bingzhao from CICC. Please ask your question.
spk07: Good evening, Ms. Yulin. Good evening, Henry and Nicole. Thank you for accepting my question. I have three questions. First, from the whole industry's point of view, this year's supply and demand increase is still the trend is more obvious, including business. So what are our expectations for the future two to three-year market, that is, the growth of the public cloud market? And accordingly, how should we look at the growth goal and drive of the financial cloud itself? And the second question is about the margin. This year, we are investing in some resources, including a backslash of the overall market, the expectation of income, It's slower than we expected. So it's a pressure on the interest rate. How long will it take for us to see how much the resource control rate will be consumed in the future? Looking forward to next year, what is our plan on the infrastructure? And the last question is to ask about the progress of cooperating with the volcano engine. I'll translate it quickly. Good evening, management. I have three questions here. We've seen a cool-down in public cloud space this year. And so my first question is, what's your opinion in next two to three years' market growth and what will be companies' organic growth drivers and targets to achieve? And second question, this year our growth margin has seen some pressure caused by upfront infrastructure investment and our delay in revenue recognition. My question is, when is the utilization rate to catch up and what's your budget for next year's CapEx? And lastly, we do wonder how is the collaboration with ByteDance going so far? Thank you.
spk10: This year, as you can see, the growth rate of public cloud is slowing down. We think there are two main reasons. The first reason is that the global demand for public cloud has increased significantly due to the epidemic last year. So it is actually a high-speed growth period for public cloud. And this year, the growth of this demand was not as obvious as last year. So compared to the high growth of last year, there are some slowdowns this year. Then the other one is that this year in China, Q1, Q2, and Q3, including now, there are still some industry-related regulations and monitoring policies. This is for our customer cooperation in the entire industry. In fact, everyone needs to do this to be affected. It is more targeted to do some business processing to study these policies and monitoring. How to match it? This may indeed require a certain But we think this should be a short-term impact. As the policies of supervision and planning become clearer and clearer, and everyone completes this stage-based work, this impact will gradually disappear. From a long-term perspective, whether it is in entertainment, video, or games, everyone is now starting to build on new technologies and products more quickly. For example, what you see now is like the original universe, cloud games, and AR and VR related things, whether it's the delivery of hardware or the delivery of related technologies, are all very fast. With the maturity of 5G in China, the entire industry seems to be very optimistic. Because the Internet itself is periodic, so we think that in the next one or two years, it will be a new big cycle. This increase will actually exceed the average growth of this industry. For us, we actually have a lot of new customers this year. So, especially in terms of our neutral position, and in the current state of anti-monopoly in the country, when big customers are building up, we are actually almost their first choice of new partners. So, although our own business increases slowly, the number of customers The relationship between our customers and our partners is actually progressing very fast. The basic plan is very good. Then the industry movement is currently just talking about a very fast growing period. In fact, there are still a lot of needs. The digitalization of each industry and each industry is currently just needed. It's just that this year it's affected by limited power, the epidemic, and some big factors. Some projects may be delayed. But at present, I think in a long period of time, especially in the financial, medical, and public service areas that we focus on, This will be a very fast-growing area. Our ultimate advantage will also become stronger and stronger. This is the first one. Then the third one you just asked is the cooperation problem we have with Zijie. In fact, our long-term cooperation with Zijie is very long-term. We are the earliest partner We have been cooperating with our partners for so many years in the short video industry in China. So their core products, including Douyin, Xigua, and頭條, we should always be considered a trustworthy partner in their multi-service system. So our cooperation seems to be long-lasting and stable. The second one is in the exploration of the 2B business that Zijie did, we have been communicating and cooperating closely. In the non-book business they did before, we ourselves, including Xiaomi, are users and partners. When promoting, we are also providing customized cloud storage and encrypted service. When Huoshan was launched, we were also Huoshan's and signed a comprehensive partnership agreement. This is also the first time that Huoshan has signed such a comprehensive partnership. So, with their ability to make technical products, including our own very strong AIS capability, and the ability to operate all over the country, in fact, the two sides have been exploring the double-sale pattern of cooperation. And then, They now have some new products, such as the cooperation of Feilian. This is a new cooperation based on identity authority management. We are also working with the technical research and development personnel of Huochi Anjian to make adjustments and test together. We are now promoting it. So overall, it seems that our cooperation with Zijie's various businesses and various products is still very close, including Okay, I just quickly translate for the reference.
spk02: So in relation to a question about the growth prospects in public cloud and enterprise cloud, I started with public cloud. Obviously, we have noted that this year the public cloud demand has decelerated. And from our perspective, we think it's due to two reasons. One is that there was a high base. It was actually a high base for last year as a result of the pandemic. So the demand for cloud service has surged a lot and actually shifted to a great extent. But obviously that is not a new factor for this year. Now the second reason is like as you have all noticed that since the beginning of this year, actually even till now, new regulations have been coming out from the government to regulate a lot of the customers and industries that we engage with. And accordingly, our customers in such industries will need to comb through those new regulations. and to be compliant, which we believe takes some time. But we do think that this is going to be a short-term impact as the regulations become more and more clear and more feasible from the government perspective. But also looking at the long-term picture, we do see that these customers have already started to make new arrangements in new potential verticals or markets in the spaces of entertainment, video, and gaming. And this we have to see that this actually happened together with the further penetration of 5G technology and we're seeing the new concepts like metaverse and the Hardware in terms of those for those applications has been launching and increasing in volume the technology iteration has also been Accelerating we do think that the internet sector is a cyclical sector which we do think that in the future one to two years to come and we're entering into a new large cycle, which we'll reasonably expect to have a higher growth rate than average growth rate of the sector. As you think about ourselves, we actually have engaged a significant amount of new customers in this quarter and amid the market headwinds as mentioned before. And we believe those are really benefiting from our neutrality and also from the multi-cloud deployment trend whereby we have essentially become the top choice for our customers whenever they want to engage a new cloud vendor. And we think that our customer base in terms of volume and the depth of relationship remain robust. And then that serves as a very strong fundamental for the company. In terms of industry cloud, as I answered in the first question that was asked by Citi, the market demand remains very strong. We think the demand of digitalization is actually inelastic. And for a long time to come, we also expect this demand to remain strong. And also in the verticals that we have chosen to be focused on, we'll continue to have this benign cycle of gaining more customers and developing our advantages. And as a result of that, increasing our revenues. In terms of your third question of cooperation with ByteDance, we actually have a very long-term partnership and cooperation history with ByteDance, actually starting from basically the eruption, explosive growth of short video clips in China. That includes a lot of applications like Xigua, like Touqiao, and Douyin, which essentially made ByteDance, essentially made us a trusted partner of ByteDance. That is a very solid relationship with them. And as you have also seen that we have signed the comprehensive partnership agreement with Volcano Engine, which is under the ByteDance umbrella, where we are working to explore ways to combine our advantages in terms of ice capabilities and nationwide delivery capabilities with Volcano Engine to create a win-win situation. And more recently, the cooperation we have with a software that's called Fabian, which is identity authentication software, where we have been tweaking and trying to find ways to promote the application of this software. And beyond the two companies, if you look at a provider, zoom out into our ecosystem partners. There's also a cooperation between WPS and Kingsoft and ByteDance. So I would say that across our two ecosystems, we have always maintained multidimensional and strong relationships with ByteDance. Thank you.
spk09: Thank you, Reina. I will take on a second question very briefly. A few points. First of all, You probably also can observe this year the pricing environment, especially not only on the supply side, but also on the client side has been very stable. So when we look at our major products, our product level contribution margin or gross margin has been very stable. So that's actually not the reason that affecting our gross margin Q3. Point number two, if you also know that in most of the enterprise service or 2B industry in China, the procurement arrangements will be negotiated on an annual basis, which means that right now we're already in the Q4. So we're already getting into the process to negotiate the pricing, terms, volume, and quality, and all the key terms with our major suppliers. And we're right now in the process to collecting the IT budgeting inside information from our key accounts. That's why we do believe for next year we can do a good kind of analysis and matching the demand and the supply and further improving the utilization. So that's why I think the mismatch on the resource side can be gradually mitigated by the end of this year. So for next year, it's going to be a new annual contract for some of the key clients and also some of the key vendors as a supply. So the pricing and gross margin impact can be further mitigated. So it's going to be a short-term impact. Point number three, for next year, as you're asking about capex, even for the same dollar, we will definitely prioritize that into high quality potential revenue streams. So when we look at that dollar, when we consider to spend on the CDN service rather than the CPUs, the high-end CPUs, or the GPU will for next year prioritize that into the high quality procurement arrangement, and we believe that will indirectly and indirectly convert it into a potential of a high quality revenue stream going forward. And also if you remember in the recent investor day, Actually, Intel has been partnered with us to host the Investor Day event. That's actually also good information that we are partnered with the key vendors, and we're going to have a direct arrangement with the key vendors to secure the high-quality fundamental infrastructures. And the last point, I think for next year, we also will continue to build our own infrastructures. In the recent quarter, we have closed very successfully on time for the Tianjin Data Center for the first phase. For the second phase, for another 3,000 cabinets, we will basically plan for, starting to plan for next year, and then we're adding to a new revenue stream for the public cloud revenue opportunity. So as a summary, we are second in a row to see net incremental revenue over $100 million mitigate the impact of the mismatch of the IT resources, and it will gradually improve the gross margin going forward. Thank you.
spk05: Thank you. Your next question comes from Thomas Chong from Jefferies. Please ask your question.
spk04: Good evening. Thank you for accepting my question. My first question is to ask about our new customers this year. For example, Meituan and Pinduoduo. I would like to ask, in the next few years, in terms of our revenue, do we have a KPI or a general idea? Another question is to ask, 在这个大环境就是一个不确定的情况下, 对我们长期的对收入跟margin的看法, 会不会有一些改变, 就是从这个long-term margin target的实践, 我们大概会是什么时候, 然后再想问一个near-term一点的问题, 我们也提到北京的疫情, 我们也是 Thanks, management, for taking my questions. My first question is regarding our new customers for this year. We have added Meituan and Pinduoduo, the internet giants. I just want to get a sense about their revenue contribution over the next couple of years as they ramp up in things . And my second question is regarding our long-term assumptions in terms of the revenue and the margin as well as the mix between appropriate and enterprise car. And on the near-term side of the story, given that the Beijing pandemic affects a lot of the different business, I just want to get a sense about any color, about the contribution coming from Beijing, or any qualitative color would be great. Thank you.
spk10: OK, thank you. Let me answer your first two questions. You just mentioned some of the major Internet clients. We just mentioned such as Zhihu. These major Internet clients are building a lot of cloud services. Whether it is from their technology or their business, it is actually a necessary choice. In this process, as we mentioned before, Jinshan Cloud, as a focused and neutral cloud company, will definitely become This is an inevitable choice. So this is what we will have in the future. There will be more customers like this coming in. And then their current product and income growth is very stable. But specifically, for example, the budget or KPI, we don't have that yet. And then the second one is the change in the entire demand aspect. As I just mentioned, we think that this year is still just the industry. For example, some of the policies and supervision of public officials are still greatly affected. But we think it may be a short-term behavior. Once this adjustment is over, China's Internet and public cloud related development will still enter a big cycle. Then in the industry, the demand is actually very strong. In fact, it is mainly affected by this year's limited power and the epidemic. The current limited power impact has basically passed, and the epidemic situation is now in a slowdown. So we are now also accelerating the progress, including the local service and its local support team can try to avoid these unfavorable factors. Then you just mentioned the epidemic in Beijing. Indeed, during the Q3 and Q4, the epidemic in Beijing was still rebound. But this is just the impact of our business trip and implementation. The impact on local projects is rather good. Thank you very much for your question. I think, as you pointed out, the larger Internet names, like you mentioned, Meituan and Pinduoduo and Zhihu, the multi-cloud deployment for them is an inevitable choice.
spk02: both from a technology perspective and from a business or commercial perspective. And as mentioned, Kingsoft Cloud, as a professional and neutral cloud provider, we're also their inevitable and top choice. We do think, you know, currently the revenue and the growth of these customers have been very stable. And unfortunately, we don't have, like, detailed numbers as for, you know, a percentage of revenue, but we do see them to continue to grow very stable and on the good trend. Now, in terms of the macro environment uncertainty that you mentioned, I also split into a public cloud and enterprise cloud spaces and to discuss briefly respectively. In the public cloud space, as mentioned, I do think it's going to be a short-term impact. And once this is over, it is going to enter into a larger business cycle where we expect to see growth to accelerate. In the industry cloud space, the demand remains very strong. And two of the affecting factors, one is power shortage and the other is pandemic. The power shortage has already been largely been resolved. The pandemic impact has been alleviated. Our way to fight this negative impact are leveraging Camelot's local teams to try our best to catch up with the progress and to deliver revenue. Now, as I mentioned before, the impact on Beijing, actually because we're locally based in Beijing, so we do not really have any material impact in the Beijing projects due to the pandemic control measures. Thank you. And I'll leave the margin questions for Henry to answer.
spk09: Thank you. Thank you, William. Thank you, Clark. Very quickly on the margin. So first of all, I want to mention that we still keep the same intention to deliver improving margin profile for the long term. So both gross margin and the non-GAAP EBITDA margin are one of the priorities when we think about next year's budget. So that's why, as I just mentioned, when we think about the demand, think about the supply side, think about the pricing environment, and also how we optimize our personnel expenses, these are the key priorities for next year's budgeting process as we are doing today. So that's why we probably, at this moment, for this earning call, will not give a very clear guidance for the EBITDA margin breakeven timing. But as some of the audience may remember, we did have intention to have that margin improvement to be delivered in the near term. And this is the first point. The second point, I think, given the high quality revenue opportunities, is also our key areas to focus for next year. So when we think about capital expenditures, and how they are converted into the revenue opportunity and how they impact both on the gross margin and DNA expenses, we will do a very thorough analysis and looking at that impact for the margin improvement. So as a result, what we want to say at this moment is I think for next year, hopefully we will see on an annual basis both gross margin and non-GAAP EBITDA margin, we will see improvement compared with this year on an annual basis. I think we remain confident on that However, the timing and the scale of that hopefully we can communicate once we complete the prudent budgeting process for next year. Thank you.
spk04: Thank you.
spk05: We will take the final question from Kina Wong from Credit Suisse. Please ask your question.
spk06: Thank you for taking my question. 管理層,謝謝讓我提供最後一個問題。 那我有兩個小問題的。 第一個是因為公司也有一個全面, 就是跟火山引擎有一個全面的合作, 但是公司其實也一樣會加強自己的PaaS的一些方案, 像今年也是有一些賓購, 然後也增加了PaaS的一個, Capability. Capability. Capability. China, you know, offering the, the, the, the, the, the, the, the, the, The first question is actually we are looking for more visibility or idea from the company on the path and capability enhancement. in the future, I mean, even after our cooperations with Biden. And the second question is about what kind of, like, IDC policy change that may impact the public cloud, I would say the IDC surface from the render as well, or your own business, like enterprise clouds. So, thank you.
spk10: Okay, thank you. This is based on this path of this business. In fact, we have a lot of money this year. For example, in finance, in medicine, in big data management, I just mentioned that our products are actually more and more in the lead in China. And its income ratio and the improvement of our overall profits are also relatively obvious. Yes, so this is the cooperation between us and Huoshan. In fact, there is no conflict, so this is one. And then this year, we will continue to, for example, in these areas, especially in the industry. This is our focus. Secondly, regarding the IDC business, the choice and deployment of IDC will be higher and more standardized, including our own data center. No matter its power planning or its indicators, they all meet the national regulations. So, in fact, The impact of the public cloud business is relatively small. As for the industry cloud, it is mainly due to the sudden arrival of the new policy this year. So this will have a big impact on everyone. Now that we have new policy guidance, we can actually start to make rapid adjustments. So overall, for the development of the industry cloud, we think it is also a short-term impact. Everyone will also re-plan their deployment related to the data center.
spk02: So in terms of past capabilities, in fact, our past capability in terms of particular verticals, for example, financial services, healthcare, and big data capabilities, we have actually becoming more and more leading among our peers. And also we have seen increasing revenue percentage and the promotion of margins it has brought to us, to our business. Now, we do believe that we will continue to increase our investment and development of path capabilities in those areas, in those verticals that we choose to focus on. However, we don't think this is in any way in conflict with our cooperation with Volcano Engine or Bytes. In relation to your question about IDC policy, we do not really think any policy changes will have any material impact to the public cloud IDCs As explained earlier, we do think that the public cloud IDCs generally have relatively high standards, and they have been built according to the latest government policies and guidelines, including the IDCs that we built ourselves. And then we do not think they're going to be negatively affected. In terms of the IDCs for enterprise cloud customers, the impact mainly came because of the abruptness of the policy change from the government, i.e., the power shortage. And we do think that in the future, they will be able to adjust to any policy changes in that space as well. Thank you.
spk05: At this point, I will now to hand the call back to Nicole Shen for the closing remarks.
spk03: Thank you, Peter. And once again, thanks everyone for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Bye-bye.
spk05: Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.
Disclaimer

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Q3KC 2021

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