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spk03: Good day and thank you for standing by. Welcome to Kingsoft Cloud first quarter 2022 earnings conference call. At this time, all participants are in the 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 one on your telephone. Please be advised that today's conference is being recorded. And now I'd like to turn the conference over to Ms. Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.
spk02: Thank you, Operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on Global News Warehouse services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang, and a staffer, Mr. Henry Ho. Mr. Wong will review our business operations and company highlights, followed by Mr. Ho, 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 integration. All integrations 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 would like to remind you that this conference call contains forward-looking statements. within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions in relation to events that involve known or unknown risk, 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 filings 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 U.N.s are authorizing. 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 is now my pleasure to introduce our CEO, Mr. Yu Ding Wang. Please go ahead.
spk07: Thank you, Nicole. Hello, everyone. Welcome to the financial news conference of the first quarter of 2022. In the first quarter, the total revenue of the company reached RMB 21.7 billion, with an increase of about 20%. Thank you, Nicole, and thank you all for joining our 2022 first quarter earnings call. In the first quarter, we generated RMB 2.17 billion in total revenues, which was an increase of 20% year over year. And above the high end of our revenue guidance range,
spk06: Our public cloud services revenues reached RMB 1.38 billion, remaining stable year-over-year. And our enterprise cloud services revenues reached RMB 792.5 million, up 89% year-over-year.
spk07: Internet companies pay attention to high-quality development. In order to address the changes in the market, the company has initiated strategic adjustments since the fourth quarter of last year, actively reducing CDN services, and focusing more resources on core cloud businesses, including computing, storage, and aviation. We are pleased to see that the company has completed the strategic adjustment plan for this quarter, and its results have been initially reflected in financial performance. The balance sheet income of the core cloud service increased by 61.2% in the same ratio, exceeding the previous growth of the company. CDN's service scale was actively reduced according to the plan. The balance sheet income of this quarter decreased by 20.2% in the same ratio. In terms of profits, the company's downfall has led to gradual progress. After adjustment, the profit margin of the company increased from 1.2% in the previous quarter to 3.8% in this quarter. In the future, we will continue to dynamically adjust resource allocation, strengthen business agility, promote profit level,
spk06: As previously communicated, starting from the second half of 2021, the Internet sector faced pressures from market headwinds, new regulations, and the epidemic. For public cloud services, traffic-driven demand continued to grow, but at a pace slower than before, as Internet companies focused more on high-quality development. In response to the market change, we initiated our strategic adjustments in the fourth quarter last year, we have proactively downsized our CDN services and allocated more resources to core cloud services, including computing, storage, and enterprise cloud, facilitating their fast growth. We are pleased to say that we have completed the strategic adjustment plan for this quarter, which started to bear fruit. Growth billings from core cloud services increased 61.2% year over year and exceeded our guidance. The proactive downsizing adjustments of the CDN services is progressing in an orderly manner. In Q1, the gross billings for CDN services decreased 20.2% year over year. In terms of profitability, our initiatives to cut costs and improve efficiency have delivered substantial results, with our adjusted gross margin improving to 3.8% from 1.2% in the fourth quarter 2021. In future quarters, We expect to continuously evaluate and dynamically optimize resources allocation, enhancing business agility, and promoting gradual improvement of profitability.
spk07: Regarding the impact of the pandemic, the pandemic has been back and forth since March, and the epidemic prevention is very severe. It has had a significant impact on market demand and offline management. For the company's business, in order to continuously slow down the increase in traffic-based video business, the company took the initiative to regulate CDN services. But in the public cloud, the demand for cloud computing continues to grow strongly. In the first quarter, the net income achieved a growth of 45%. Overall, the public cloud business size remains stable. In the industry cloud, the market demand is huge, but the epidemic has led to the delay in the recruitment, delivery, and construction of projects. In terms of customers, we have an excellent customer strategy, and the self-management of our customers. We maintain a stable cooperation relationship with our customers, and at the same time strengthen the leading enterprises in the segment area. In this quarter, under the cooperation of Euclid, the company and the retail industry are leading in fast-selling products. The company Yuanqi Forest is the first to cooperate. Overall, in the short term, we are still facing challenges in the red-light environment. We will focus on this year's development to maintain stable development and increase the level of profitability. The focus is on the core hammer industry. In the long term, we believe that the digitalization of the hammer industry will still be the main trend through the cloud.
spk06: Since the beginning of March, the COVID resurgence across China and the corresponding prevention measures adopted significantly slowed down market demand and severely interrupted offline business operations. For us, in response to the continuous slowdown of the traffic-driven demands in the Internet sector, we proactively scaled down CDN services, while the growth of computing services among public cloud services remained strong. as growth feelings of computing achieved 45% year-over-year growth. As a result, our public cloud services remain stable as a whole. In terms of our enterprise cloud services, the market demand potential remains enormous. However, the epidemic did cause delays in bidding, delivery, and acceptance check of cloud projects. On customer fronts, Benefiting from our premium customer strategy and the robust business operations such customers enjoy, we're able to maintain stable relationships with our existing premium customers while strengthening our efforts to expand our customer base with industry vertical leaders. For example, in the first quarter, we teamed up with Camelot to sign our first partnership agreement with Genki Forest, a fast-growing beverage brand in China. Overall, in the short term, we still face challenges from the macro environment. For this year, we plan to focus on quality growth, margin improvements, and core industry verticals. In the long run, we believe that the ongoing trend for digital transformation, where enterprises increase cloud adoption to drive efficiency and save costs, remains intact and will keep driving massive demand for our business.
spk07: Now onto our public cloud services. Internet companies have been transferring more non-traffic driven business operations
spk06: from their internal on-premise environment onto cloud services. Therefore, computing services growth remains strong. We'd also like to mention that on the gaming front, with the recent release of several gaming licenses, we're actively engaging with our gaming customers on their incremental cloud service needs and are making progress in our cooperation with CSUN Game, along with another top gaming company, to support the launch of their new games.
spk07: In the field of industry cloud, companies and institutions will use cloud as an important way to reduce cost of IT, accelerate digitalization, and enjoy the high efficiency and low cost of cloud computing. However, due to the pandemic, project uncertainty has increased, and there are fluctuations in project promotion and payment costs. For this reason, the company is more strict with the quality and profit requirements of the project. In this quarter, in the public service field, the company assists Guiyang's production control industry the construction of a digitalized city operation management platform that will ensure the safety of residential housing in all scenarios, and meet the requirements of users for the operation, management, and supervision of the safety residential housing business. As a cloud service company with core technical capabilities, we continue to participate in the project of East Tree Calculation in depth, including the display center project of the national digital network, national bookkeeping node, and Gansu Qingyang. We are also approaching the opportunity of East Tree Calculation, big data, and digital network project.
spk06: Moving to enterprise cloud services, enterprises and institutions across the board have been increasingly turning to cloud as the natural choice of digital transformation. However, the epidemic has disrupted the pace of such demand, causing delays to project timelines and increases in delivery costs. To mitigate the impact, we are implementing higher project quality standards and margin thresholds. In the public services sector, We won the bid to build a one-stop rental housing e-platform for Guiyang Industrial Development Holdings Park. The platform allows users of various roles to operate, manage, and supervise the affordable rental housing services for the city. As a leading cloud company with core technology capabilities, we continue to take part in the national project, transporting data from eastern regions to western regions for storage and calculation, or in Chinese, Besides the pilot project for the Qingyang Cluster in Gansu Computing Hub, which is one of the 10 national clusters, we expect to seize more opportunities in big data and computing projects.
spk07: In the financial field, the company continues to dig deeper into the cloud service needs of top customers in many scenarios, building industry benchmark cases, and constantly improving financial solutions. With the addition of Client, the coverage rate of top customers in the company has been further improved. In the financial services sector,
spk06: we continued to dive deeper into top customers' needs for cloud services in multiple scenarios, deliver industry-lighthouse projects, and keep perfecting our solutions offering. With Camelot joining us, we further expanded our coverage of top financial services customers. We now serve 90% of China's top 20 banks and have been continuously adding cooperation dimensions. Take some of our key account projects, for example. During this quarter, In banking space, we want BIT to provide data management and cloud infrastructure products to ICBC technology to jointly build a unified financial service and management platform. In insurance space, we will provide public cloud services to China Life Insurance, a leading insurance company in China. This represents an important landmark project as it pioneers insurance companies transitioning from on-premise deployment to hybrid cloud environments by improving their recognition of public cloud.
spk07: In the medical industry, since the outbreak, the level of medical digitalization has become an important issue for medical institutions, regional health systems, and smart health cities. The medical industry has a vast and complex data, high demand for image data storage, uneven regional digitalization development, and many other industry characteristics. Steadfast and stable digital infrastructure is the basis for driving data value. The cloud company has become a must-have in the medical digitization process. Since March, the epidemic prevention and control of Shanghai and Jiangsu regions has been severe. The company responded quickly and urgently adjusted the team and cloud basic resources to assist local communities in combating the epidemic. Among them, the cloud base was built in Kunshan, Suzhou for epidemic prevention and control, and collected, gathered, managed, analyzed, integrated and shared business data, providing high-quality and stable data support services to improve medical digitization. In Hubei Province, In the healthcare sector, digitalization upgrade has become a key topic for medical institutions, regional healthcare networks, and smart health cities since COVID started.
spk06: Healthcare cloud solutions need to address several challenges including the magnitude of data size, complicated structure, high storage requirements for image data, and varying digitalization levels among regions. A robust and stable digital cloud infrastructure provides the foundation for the value maximization of data assets. And cloud service companies like us have proved to be an essential component of the digital upgrade for the healthcare industry. As the epidemic research in Shanghai and Jiangsu province since March, we took quick action and urgently deployed our teams together with cloud infrastructure resources to support local containment efforts. We set up a cloud infrastructure dedicated to Kunshan of Suzhou city for academic containment. The infrastructure enabled data collection, aggregation, governance, analysis, integration, and sharing. providing high-quality and stable data support. In Hubei Province, following our success with the healthcare project in Hubei Province and Wuhan City, we want another project to build an information system for special disease prevention and control, where we will be building a middle platform. 总体而言,今年复杂的经济形势和反复的疫情带来短期增长压力,
spk07: In conclusion, the complex economic environment and epidemic resurgence this year have put pressure on the short term growth
spk06: But thanks to the strategic adjustments since Q4 last year, we have laid solid foundation for mid- to long-term revenue expansion and margin improvement. Cloud computing carries long-term potentials. Looking ahead, we will adhere to our strategic direction and pursue steady and high-quality development while improving our business stability and profitability. We will fully leverage our technological strengths to provide stable and efficient cloud services to our premium customer base. I will now pass the call over to our CFO Henry to go over our financials for the first quarter.
spk08: Thank you. Thank you, Yulin, and I welcome everyone for joining the call. Before diving into the financial details, I would like to walk you through the following highlights for the past quarter. First of all, our total revenue reached 2.17 billion RMB in Q1, above the high end of our guidance, which ranged from 2.05 to 2.15 billion RMB. It represents a growth of 20% year over year. Within that, our core cloud services, including computing, storage, and enterprise cloud services, increased by 61.2% year over year this quarter. We are pleased to see that we have been making significant progress in our cost control strategy execution. The adjusted growth profit for this quarter increased by 152% quarter over quarter to 83.6 million RMB. Adjusted growth margin increased largely from 1.2% in previous quarter to 3.8% this quarter. Adjusted EBITDA margin narrowed from negative 10.5% in the previous quarter to negative 7.1% this quarter. As we introduced in last quarter, as the new technology budgets from internet sector clients in general have been increasing at a slower pace than expected. Starting from second half of last year, the demand to us has been softened and affect our resource efficiency connected to the bottom line. In response to the market change, Since Q4 last year, we proactively downsized our CDN services and allocated more resources to our core cloud services. We have taken active cost control measures and improved overall operational efficiency. Even though we are still facing the challenging microeconomic environment, we believe we are on track to achieve quarterly adjusted EBITDA margin break-even in Q4 2022. Third, As of March 31, 2022, we had cash and cash equivalents and short-term investments amounting to 5.6 billion RMB, providing us sufficient liquidity for operations. The capex for this quarter was 622.4 million RMB. The increase was primarily due to the procurement of high-performance servers which catering to our increasing demands from our core computing services, as well as the cash payment for the servers we ordered last quarter. For the full year 2022, we expect to keep our total capital expenditure plan in the range of 1 billion RMB to 1.5 billion RMB. We firmly executed our high quality development targets and allocated online server resources prudently to our core cloud service growth. Last, our board of directors has recently authorized the company to repurchase up to $100 million of our ordinary shares in the form of American depository shares during a 12-month period. Today, we are pleased to announce that we have entered into a share repurchase program, which is demonstrating our strong confidence in the company growth and a commitment to generating long-term value to our shareholders. I will now go through our financials in detail. Revenues from public cloud remain stable year-over-year at 1.38 billion RMB this quarter. It was primarily due to 45.1% year-over-year growth of our computing services and offset by 20.2% year-over-year decrease of our CDM business, which proactively narrowed down. In terms of enterprise cloud services, Even though the COVID-19 has disrupted delivery of certain offline products, market demands from traditional enterprises and organizations remain strong. Our enterprise cloud services achieved a solid increase of 89% year-over-year to 792.5 million RMB. In terms of cost control and optimization, we have achieved effectiveness this quarter. Total cost of revenues decreased by 20% quarter-over-quarter to 2.09 billion RMB. The IDC cost decreased by 221.6 million RMB from last quarter to 1.11 billion RMB this quarter. It remained consistent of bandwidth and cabinet cost, and a decreased trend was in line with our adjustment of CDM business. Solution development and services cost decreased by 8% quarter-over-quarter to 476.0 million RMB. It consists of payments to our solution design, development, and services personnel. Differentiation and amortization cost increased by 10% quarter-over-quarter to 246.1 million RMB. Fulfillment costs were 184.5 million RMB this quarter and it represents the cost of purchasing technologies, products, and services from third party to fulfillment the demands of our solutions. Other costs were 76.9 million RMB this quarter. In terms of expenses, we have completed the preliminary organizational optimization and efficiency improvement. Resulting personnel expenses decreased compared with Q4 last year, excluding share-based compensation and DNA. Total adjusted operation expenses were 532.2 million RMB decreased sequentially by 9.6% from 578.7 million RMB in Q4 last year. Within that, adjusted R&D expenses were 221.7 million RMB compared with 246.2 million RMB last quarter. Adjusted selling and marketing expenses for 127.6 million RMB, compared with 161.2 million RMB last quarter. Adjusted G&A expenses remain stable at 174.0 million RMB. As of March 31, 2022, we had a sufficient cash and cash equivalents and short-term deposits of 5.6 billion RMB. During this quarter, capital expenditures were 622.4 4 million RMB. The increase was mainly due to the increasing purchase of high-end performance services to meet the incremental demand from strategic core services of computing and storage. We expect our four-year capex will range from 1 to 1.5 billion RMB, which will be prudently allocated to meet the demand from our core cloud services. Meanwhile, We have released our ESG environmental, social, and governance report for 2021, along with our annual report in early May. We would like to highlight that the nominating the corporate governance committee of the board were primarily responsible for overseeing ESG initiatives at a board level. And the company has appointed the first independent female board directors, enhancing gender diversity and workplace inclusivity. Looking ahead, we keep focusing on the balance between revenue expansion and the margin improvement. We expect our total revenue to be between 2 billion RMB and 2.2 billion RMB for the second quarter of 2022, representing a year-over-year increase of about negative 8% to positive 1.2%. It is mainly due to the offline fulfillment delay of enterprise cloud business in the middle of the short-term COVID-19 resurgence. we will continue to embrace opportunities post-pandemic. We are also in the view that our profitability will keep an upward trend. The adjusted growth margin will continue to be higher in the second quarter compared with Q1. Under the stable market condition assumptions, we believe we are on track to achieve quarterly adjusted EBITDA margin break-even by Q4 2022. All these forecasts and comments above are based on our current and preliminary views of the market and operational conditions, which are subject to change. In addition, based on the capital market condition, we have already a common share repurchase program, which was authorized by the board in March to purchase up $100 million of the shares during a 12-month period. We were closely hearing from the feedback from shareholders and deliver long-term value to our shareholders. Finally, we are moving forward with our Hong Kong stock exchange listing plan, and we are on track with this progress. We seek to maintain independent listing status in both Hong Kong and the U.S. to maximize protection of our shareholders. Given the recent positive progress in the negotiation on the Sino-U.S. auditing cooperation combined with fluctuation in the global capital markets, We will carefully monitor and proactively adjust our execution timeline to safeguard the interests of our existing shareholders. We will closely monitor the market and the regulatory dynamics and proceed prudently at the right time. The final listening decision and timeline are subject to both regulatory approvals and market conditions. Thank you.
spk02: Thank you. This concludes our prepared remarks. Thanks for your attention, and we are now happy to take your questions. Please answer our questions in both Mandarin and English if possible. Operator, please go ahead. Thank you.
spk03: Thank you. As a reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. Please stand by while we compile the question and answer roster. So once again, if you wish to ask a question, please press star 1 on your telephone. This question comes from the line of Tom Strong from Jefferies. Please ask a question.
spk01: 晚上好,谢谢管理层接受我的提问。 我的问题主要是关于我们Q2的guidance的。 管理层可不可以 分享一下, 如果是按每个月的情况来看, 应该怎么看四五六月每个月我们的 My question is about the Q2 revenue guidance. Can management comment about the monthly trend that we are seeing in April, May, and June respectively? And given right now we have already passed the first week of June, just want to get a sense about our confidence level in terms of the guidance. Under what scenario would we be hitting the low end and the high end? Because I think the low end we are talking about negative growth. So just want to get some color about our thoughts at this point. Thank you.
spk07: Thank you. This is a question about Q2. In fact, the main situation of Q2 is still affected by the epidemic. There are about two parts. The first part is that the impact of public-private related businesses is still very limited. The only thing is that we are in Huadong and Huabei The increase in the number of data centers Some restrictions on entering the epidemic may be affected But overall The impact of this business is still relatively small Then the industry cloud is in Q2 The impact is relatively large In fact, although Q1 has already been in Huanan There is already this epidemic situation But because we are still doing some preparation But the epidemic of Q2 This situation and the extent of the outbreak are still beyond expectations. Another one is that the scope and time of control is longer than expected. So in this way, the recruitment and implementation of our industry cloud projects has been greatly affected. In this way, because now, but by the end of last week, I think with the outbreak in Shanghai and Beijing, Some of the projects and customers have already started again, so there is still about a month left. We are now trying to use this month's time to make the implementation of these projects in the previous years. The implementation and delivery of these projects can chase this progress back a little bit. So what we see at the moment is the situation of the QR that Henry just gave to everyone. And then the specific situation is at the end of this month. We are now working hard with customers. Thank you.
spk06: So thank you very much for your question. So essentially, the second quarter is mainly impacted by the COVID situation. And as you can see, I just elaborate according to the two services. In terms of public cloud services, we think the impact is limited. There is some small impact for the increased amount in our data centers in the eastern China and northern China. for their increasing business operations, but it's not any material impact. The impact, on the other hand, on the enterprise cloud side is relatively large, especially in Q2, because basically the control measure in terms of the scope and the timing that it spans have exceeded our expectations. And that situation has impacted the bidding, the implementation, the deployment, and the delivery of our enterprise cloud projects. But as far as we can see, since the end of last week, some of the projects that are ongoing, we have already started to resume some of those projects that have been impacted. And we're still having several weeks towards the end of June, so we are trying to catch up with the time to meet the progress target as much as possible. So that leads us to the guidance that Henry has provided towards the end of the prepared remarks. Thank you.
spk03: Thank you. Our next question comes from the line of Sophie Zhang from CICC. Please go ahead.
spk12: This is Sophie from CICC, and thanks, management, for taking my questions. So we've heard about the news of headcount cutting across many top-tier Internet companies. I just wonder, like, many of which are KCST customers, so do we expect any change in their demands? And how will the dollar value of those core customers change? And accordingly, shall we expect any headcount adjustments within KC? 那这些核心客户的这个 dollar value是呈现一个怎样的趋势? And then my second question is about our internal own personnel adjustment plan. Thank you. Thank you.
spk04: I think we still have to divide the head customers into two parts.
spk07: Because everyone is paying attention to the fact that there may be more head customers on the Internet now. I just mentioned the cost and personnel optimization issue. It should also refer to the head customer on the Internet. In fact, this change includes customers, including us. It was basically in the plan last year. So when we were in Q4 last year, we have taken the initiative to make adjustments to our business this year. So the current situation from Q1, including part of what Q2 is doing now, is basically consistent with our expectations. The first one is the relevant entire industry and customers. Most of them are doing it for policy, for their own business, So what we can see now, for example, the first CDN business, in fact, the overall traffic still has a particularly large fluctuation. This is what we expected before. So we actively adjusted the supply of CDN business. The current situation is the same as our expectation. The second client is currently making business adjustments, and especially when there is a demand to reduce costs, it actually encourages Most of the customers started to wash some of their original business to the cloud, because this is beneficial to the cost. So this can be seen as saying that the amount of non-CDN of our large customers is actually still in progress. In addition, there are many new Internet customers. Currently, the progress of Q1 and Q2 has been good. Then the top customers of the industry cloud, including big clients, are still affected by the pandemic. This may not be the question you just asked. This is the first one. The second one is our own high-con question. Last year, from Q3 last year, we did a comprehensive analysis of the industry and optimized the development of the entire product, so our own organizational structure personnel adjustment is basically Thank you very much for your question. So in terms of public cloud, we know that the market is predominantly focusing on the internet conglomerates.
spk06: which some of them are our customers. So for the changes and adjustments that you mentioned, actually we had already expected that, and what we see that's happening in this quarter are exactly unfolding according to what we had expected. And as mentioned, in expectation of those changes, we had proactively downsized our CDN business due to the increased volatility of the CDN business. Now, by adjusting downwards the CDN supply, we're able to command a more profitable business, which, again, is consistent with our expectations. And another part of the non-CDN business for those customers of ours is that when they're focusing on reduction of their cost, it is also an incentive for them to increase the cloud adoption, which is good for their cost savings. And therefore, we are observing increased amounts for non-CDN business cloud usage. And thirdly, we also have made progress in the first quarter in terms of new customers for public cloud services. In the enterprise cloud space, I know you didn't particularly ask that, but as we discussed earlier, it's mostly impacted by the COVID situation and control measures. And for the second question you asked about the KC half-time adjustments, Since the completion of acquisition of Camelot last year, we have started the integration with Camelot, which includes the integration of the employees, which has largely been completed by the end of last year. So as of now, we have a combined headcount of roughly 10,000 people for KC and Camelot combined together, and we expect that number to remain relatively stable, or with a small decline throughout this year, but largely stable. Thank you.
spk03: Thank you. Our next question comes from Kina Wong from Credit Suisse. Please ask your question.
spk11: Thank you. Thank you for letting me ask the question. There is a question related to Thomas' question. The operator has mentioned the impact of the iron ore. I would like to ask another question. This is due to the impact of the pandemic on the first and second quarter, and now we are gradually catching up with the progress of the project. However, from the perspective of the whole year, some projects may not be able to complete the progress before the end of the year, and some projects may be affected by This is an impact of budget adjustment. Because we also understand that some of the biotech or government projects are also adjusting the budget. So I also want to know what the situation is from the perspective of the whole industry. Is it still able to maintain some of the original goals? The second question is a change in the entire industry of public cloud. Because we also see I don't know. to improve their ability, and so on. So I want to know more about the changes in the public cloud market this year and future trends. Let me translate myself. The first question is actually a follow-up question that wanted to take on more detail about the impact on the enterprise cloud because perhaps some project cannot be completed by the end of this year due to the pandemic impact in the first quarter and second quarter. Or some is actually impacted by the adjusted budget from the government or like public service projects. And the second question is about the public cloud industry trend because I do see some landscape change here. And I wanted to hear the sharing from the management. Thank you.
spk07: Thank you. The first question is about the epidemic. You mentioned it earlier. The impact of the pandemic on public cloud is actually not big, and it looks like it's almost the same as last year. Because of the impact of the epidemic, the use of public cloud even has some increases in the short term, which is similar to the situation last year and the previous year. Now the main problem is the industry cloud. Currently, we see that the situation of EQ is basically controllable, because our EQ is almost After the Spring Festival, it was affected again from Huanan. The situation in Q2 has been relatively severe since April and May. The current situation we see is that the project is currently in a delay, including the delay in implementation and interaction of the project in progress. Secondly, there are some delays in the recruitment and progress of some new projects that were originally planned to be implemented in Q2. As for the delay in the progress of the project, because it is only May now, we think we can still catch up with it all year round. Even if we can't catch up with Q2, Q3 and Q4 still have time. As for the project, such as the bidding or future project, we are currently in the process of communicating with the client. China China China China China China China China China China In terms of business, since Q4 last year, we have been making adjustments to our business on the Internet. Our communication with customers is relatively smooth, so there are no sudden changes. From our performance, we can see the growth of our existing customers and the growth of new customers and new businesses. In fact, in the data we just published in Q1, there are still very, very fast In the past, the trend has been quite obvious throughout the year. In terms of competition, the industries that we focus on, such as the Internet, finance, medical and public services, are still at the threshold of technology and customer service. After so many years of continuous management, in these areas, we believe that our advantage So yeah, thank you very much for your question. And I think to answer the first question about the COVID impact,
spk06: Essentially, the impact is pretty much concentrated on the enterprise cloud side. For the public cloud side, the impact does not have any material. The COVID situation does not have any material impact to our business. Especially, we do think maybe there is actually some short-term uplifting of the public cloud usage just for that COVID factor per se. For the enterprise cloud side, for the first quarter, actually, the impact is limited because It's mainly after the Chinese Spring Festival that the impact has started to show the resurgence of the COVID situation started to take place. But the second quarter impact was almost covering the full quarter, so it's relatively severe. So there are two kinds of situations. One is that some of the projects that's already in process, and we're essentially seeing delays on those projects. And for those sort of projects, because we're currently still in June, in the early June, we think if you take a look on a full year perspective, we do think there's still time to catch up with the time that's lost during the quarter due to the control measures. And for the second type, which is essentially the bidding process that's got delayed, during the control measure, we think that according to our communication with prospective customers, there's no material change in that respect. Especially in terms of public service customers and healthcare customers, we think the risk of missing the full year guidance currently, as we can see it, is not material. So we think, generally speaking, the basis, we're still on track to deliver the full year guidance right now. We don't think of any necessity to adjust for that guidance for the enterprise cloud business. Now for the public cloud side, our communication with our key premium customers, those internet customers included, has been very smooth and we have a very open and smooth channel for communicating with them. So despite all the changes and challenges that you mentioned, those are things that's not outside of our expectation. For both the, as you can see, and also evidenced by the numbers that we just disclosed in the first quarter, for both existing customers and new customers, there has been relatively fast growth for the usage of the non-traffic driven demand. So that's something nice to know. And also in terms of competitive dynamics, we think that for the industry verticals that we focus in, namely the financial services, the internet, the public services and healthcare, the barrier to entry in those particular verticals actually are relatively high. And we think after this many years of operation, our competitive edge has been reinforcing. So we think we do not see really material change in the enterprise cloud compared to that dynamic.
spk08: Thank you. Yeah, Keenan, if I may, I'm also happy to offer a few more data points to help and triangulate this. First of all, if you remember, In the recent disclosed annual report, our dollar retention rate for the public cloud clients for last year was around 114%. So even consider the active decrease of the CDN revenue contribution. This number, if you are doing a rolling basis into the Q1 this year, we still believe is above 100%. So that's actually have a base of the growth of the revenue opportunities for across the board of the public cloud. One point is, if you look at our previous mix of the revenue of the CDM versus the computing business, in Q1, our computing business itself actually delivered a very solid growth, around 40% on a year-over-year basis. I think this number is also above the industry average in Q1, especially in the very difficult market conditions. So if you're putting the two numbers together, you may see a relatively flat number, but the fundamental demand of the computing demand from our internet client base is actually pretty okay. And if you cross-check that number with our capital expenditures in Q1 this year, we spent about 600 million RMB. You can tell that the money we spent, basically the servers and the high-end infrastructures, already started to producing revenue in Q1 immediately. So if there's a lot of risk and issues regarding the demand of the client, then our capital expenditure will not be converted into the revenue so quickly and efficiently in Q1, especially for the storage and computing business. I think these are the few numbers you probably can help and form a foundation of the growth, especially from computing and storage and the relatively high-end business from our public cloud clients. Thank you.
spk11: Got you. Thanks. Very helpful. Thank you.
spk03: thank you our next question comes from joel ying from nomura please go ahead uh
spk10: So my first question, I have two questions. My first question is about CDN business. Can we... release the CVM business percentage of total public cloud for 1Q22. The second one is for short-term because of the public cloud market situation. Maybe we're focused on enterprise cloud, but into a long-term, I guess we are still based on the two-wheel strategy. We'll focus on both public and enterprise cloud and put the R&D into both sectors to deliver business. Am I understanding correct? Thank you.
spk08: Yeah, sure, Joe. I'm happy to take on the first question. There are a few important considerations when we think about planning and budgeting. We want to use the opportunity to balance not only the CD and revenue contribution, but also the top client concentration risk as well. So there are a few important dimensions we'll track on an annual basis. First of all, for 2022, we are assuming no single client will contribute more than 20% of the total revenue of Kingsoft Cloud. And point number two is we want to assume around 25% or around that range of the CDN business as a total revenue of Kingsoft Cloud of financial year 2022. So when we look at that strategy in Q1, I think we're happy to see that the CDN revenue as a contribution of total revenue of Kingsoft Cloud has decreased from historically in historical years to around 30% already, below 30% in Q1. So the trend is very clear. And in the following quarters, I think the absolute dollar value of the CDN revenue will remain relatively stable because it will affect our total efficiency of the networking and the infrastructure. But as a percentage of total revenue, we'll see it gradually coming down in the next few quarters. But I think the two important dimension numbers, as I mentioned in the beginning, will be important guidance for when we think about the whole year next of the combination. Thank you.
spk03: Thank you. Our next question comes from Alex Yao from J.P. Morgan. Please ask your question.
spk09: Thank you, Yulin, Henry. I would like to follow up on the question about the corporate cloud. We now see that the budget for the corporate cloud is relatively tight. Companies must now promote digital transformation, regardless of whether there is an epidemic, regardless of how much its business is affected by the economy. It must be done, or it is relatively flexible. If there is an epidemic, if there is an economic delay, this can be put aside. I think this question may be further related to whether they can see the effect of the discounting effect after they go to the cloud. Or do they also need to touch the rock to cross the river, and after having this cloud equipment, they have to slowly think about how to deploy their business to the cloud, and how to achieve a process of discounting effect. Then I will translate it myself. So my question is to follow up the enterprise cloud demand in this year. Based on your observation, is the budget allocation to adopt enterprise clouds very strong demand from the corporate with or without the COVID impact, with or without the economic slowdown impact, they will be very strongly committed to the adoption of the cloud or put another way, digitization of their own business? Or do they have more flexibility on cloud adoption? And if the top line is facing pressure from macro, from COVID impact, they are likely to slow down the budget allocation to adopt those cloud solutions. And I guess the answer has a lot to do, will they be able to see immediate efficiency improvements or more monetization right after their adoption of these cloud solutions? Or are they still in the trying to narrow stage to figure out how to use the cloud solution to make their operations more efficient? Thank you.
spk07: OK, thank you. I think there is another question. The first one is about our public cloud and industry cloud. Will it be a double-wheel drive problem for our growth? I think this answer is confirmed. The first one is from the public cloud field. Currently, whether it is from the customer's own demand for more cloud or its demand for stable performance, and the progress of our own business, the current situation and future trends are all The public cloud will also maintain a very strong growth. As for the industry cloud, there are still some differences between the different industries. You just asked about the problem. The three things we are focused on, for example, the financial industry. After so many years of development in the financial industry, we have just mentioned that the coverage rate of our clients in the financial industry is constantly increasing, and there is continuous progress on large clients and large benchmark projects. The demand for the cloud in the financial industry is indeed urgent. It is the demand for technology and business development at this stage. So, in fact, we can see that the impact of the epidemic in the financial industry is very small, because it is the demand for business development and business technology. In this area, it is not the demand for a steady increase in efficiency, but the demand for business emergency. Then in the medical field, in fact, the demand for the medical field to be affected by the epidemic has increased. This can be understood by everyone. On the one hand, there are a lot of projects that have been added because of the epidemic. The second is that during the entire epidemic process, it also found that the clarity of the original demand and business will be higher. So in fact, the medical-related demand has not changed, but has been improved. So,
spk06: Just to add on one of the prior questions, which was about whether we continue to do the two-wheel kind of driven business model going forward, and the answer is for sure, certainly. And for the public cloud side, we see that the demand continues to be actually very strong, being it driven by the cost reduction incentive of those customers or driven by the multi-cloud demand. So we continue to be committed to this type of business. And for the enterprise side, it actually differs across the verticals that we specialize in. For example, in financial services sector, although the sector has been developing for many years, and we have, as just mentioned in the prepared remarks, have been covering 90% of the top banks, top 20 banks in China. there is actually continued to be inelastic demand from those customers. And that demand comes from the demand and requirements for technology and for their business. It's not even related to their budgeting. So this is inelastic demand. And we can also evidence by the fact that the COVID doesn't have any impact to this kind of project. And the second one is healthcare industry, As you can understand, the COVID situation actually increased the demand for healthcare projects. And that also increased the granularity of a lot of the healthcare institutions and government agencies' management process, and thereby driving more projects as well. For the public services side, from our communication with the potential customers, we haven't really heard about the insufficiency of budgeting and therefore changing or cancellation of those projects. So that's basically the situation. Thank you.
spk03: All right. Thank you. Our next question comes from from UBS. Please ask your question.
spk05: Good evening, everyone. Thank you for giving me a chance to ask a question. I have two questions. The first one is based on Alex's question, it is very similar. Now, the domestic Chinese market is too stable. More investors are curious about the factor in the share market. Will this affect the share market's penetration rate or use rate for two to three years? What are the benefits? This is the first question. The second question is for an investor on the line. He wants to know what guidance the company is giving this year. In addition to the 4Q adjusted net profit breakeven, what guidance is the company giving this year? My first question is in relationship with what Alex just asked about. A lot of investors are asking how China's macro situation will impact enterprise and cloud adoption over the long term, if there is any impact. And if so, what vertical specifically? And then the second question is asking on behalf of an investor on the call, he slash she would like to know What full-year guidance the company has given beyond reaching an adjusted EBITDA break-even point in the fourth quarter? Has the company given full-year 2022 guidance? Thank you. Okay. Thank you.
spk07: Let me answer the first question. Everyone is paying attention to the current situation of the public relations economy. Our public relations related part, in fact, the main client is still the Internet business. Internet companies and corporate customers. From the current situation, we don't think it will be affected too much. If there is no big change in the policy of the country, the current situation is that the development of the business is still very stable and strong. So this will not be affected too much. Then the part of the industry, although we just also have this It is always mentioned that this will have an impact. What we see now is that the customer side does not have any improvement on the project and budget at present. Then we also saw that the government has a lot of new policies and opportunities for economic development in the second half of the year. So we ourselves think that there may be a wave of new increases in the original. We think that we understand that people in the market really care about the macroeconomic situation in China.
spk06: From our experience, for our company, in the public cloud services side, our customers are mainly internet sector customers. We feel like it's not going to be materially impacted as long as the general policy of the government remains stable. From what we can experience, our business for the public cloud side remains robust and with strong growth. So we're relatively optimistic with that. And on the enterprise side, as mentioned just now, there hasn't been any significant sign of potential customers canceling a project or canceling or changing materially their budget. And we also see that the government has some incentive macroeconomic policies for the second half of the year. And we expect there might also be a wave of opportunities for us to see So admittedly, the COVID control measures in the second quarter have had some impact, but those impacts are mainly about the pace and uncertainty for that particular period of time. And we don't think that, so overall speaking, for enterprise cloud part of the business, we remain optimistic.
spk08: Thank you, Thomas. And on the second question, on the buckets of the profitability, you're right. I think we're expecting to hit the quarterly break-even of the non-GAAP EBITDA margin in Q4 2022. And as we also mentioned, given we are already in week one of June, so in Q2, I think our growth margin will be likely higher than Q1 2022, and hopefully we can keep an upward trend in general of the growth margin. of work on the cost control mix and the diversification of the clients. So hopefully our core cloud services, including computing, storage, and enterprise cloud as a whole, the total revenue of that bucket will be generally grow at a higher pace compared with the industry average and the major peers. And the third, while we are not providing official guidance for the four-year total revenue, but as CEO Yuting mentioned, I think we're executing on track of our total budget internally. And while there is a one-time and quarterly impact in Q1 given COVID-19, but hopefully on the four-year basis will remain the same in terms of the total target internally. And we're executing that based on that. And there's no change. of the total budget. Thank you.
spk03: Great. Thank you. Our final question comes from Timothy Zhao from Goldman Sachs. Please ask your question.
spk00: Okay. Thank you. Good evening. Thank you for accepting my question. I have a question about the cost. We see that the cost of the first quarter IDC has dropped significantly. I would like to ask about the cost of the second quarter and the cost of IDC this year. Thank you for taking my question. My question is on the cost control side. It's actually as we see in the first quarter, there was a big decline in IDC cost. How much further decline can we expect from IDC cost for Q2 and Q3 year? And what other cost control initiatives are we going to implement for the rest of this year? Thank you.
spk08: Yeah, thanks again. Very quickly on this, as Samson pointed out, I think we do, even in a very short period of time, we do see a great and a solid trend on the results. So you're right. We're approximately saving about 200 million RMB on IDC costs. As you know, within the IDC cost item, there are the leasing expenses we paid to rent the cabinets, and there are the bandwidth costs, which are a majority of the portion under the IDC cost. So the major reason was our adjustment of the CDM business strategy since Q4 last year. But going forward, we are still assuming there are a few things we are working on. We will have further leverage to decrease the IDC costs. including there are better planning of rental of the IEC locations, including our budgeting and more advanced technology to saving the energies, including a few initiatives we're taking to optimize the downloading upstreaming of the bandwidth capacities, and there are a few people working on that. I frankly don't think the DNA cost will go down, because as you know, we're spending the capex to buying high-performance GPUs and infrastructures. I think assuming that is a good capex that will drive the good revenues. So the DNA expenses I don't think were affecting a lot. And that mathematically were not affecting the EBITDA margin, as you understand, because the DNA expenses was adding back. The fulfillment cost and the development of the solutions, those two items, I think, giving the further integration with the Camelot, where it may have further room to reduce we're also converting into a higher margin. As we're seeing, there are a few important clients, especially in the financial services and healthcare, who are doing already the phase two and phase three. So the initial fulfillment and R&D expenses will be reduced, given the scalability and the recurring basis of those revenue. Regarding the R&D, I think we may have some potential room to see a dollar value decrease going forward. while we continue to spend time and resources on core strategy and technologies. The sales and the marketing and the GNA I think will remain relatively flat, but I think the GNA will also have some flexibility to adjust on that. So we have a very strict, prudent internal approach to navigate and prioritize a few different initiatives, but I think those things will be unfolded in the next few quarters. But majority of the work has been completed and already in place. Thank you.
spk03: Great. Thank you very much for all your questions. So I'll now turn the call back to Nicole for closing remarks.
spk02: Thank you, Amber, and thank you once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you.
spk03: Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.
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