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spk01: Good day and thank you for standing by. Welcome to KingstuffCloud's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. And now I'd like to hand the conference over to Ms. Nicole Shon, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.
spk00: Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud second quarter 2022 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 ,, we have our Vice Chairman and the CEO, Mr. Tao Zou. Mr. Zou will review our business strategy, operations, and the company highlights, followed by Mr. Huo, who will discuss the financials and the guidance. He will be available to answer your question during the Q&A session that follows. There will be consecutive interpretation. All interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in the original language will prevail. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and the current market and operating conditions, and relate to U.N. studies on known risk, uncertainties, and other factors. which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or factors are included in the company's filings with the US SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise. except as required under applicable law. Finally, please note that, unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and the CEO, Mr. Zhou. Please go ahead.
spk02: Hello, everyone. Welcome to the second quarter of the 2022 Financial Report Conference. I am very happy to communicate with you at the conference. For a long time, As the vice president of Jinshan Yun, I have a deeper understanding of the company's strategy, business and team situation. Since I took over as CEO of Jinshan Yun in early August this year, I have closely communicated with the board of directors and the management team to discuss the company's development strategy. Under the current new form, we will re-evaluate the business strategy Hello, everyone. Thank you all for joining Kingsoft Cloud second quarter earnings call.
spk04: and it is my great pleasure to be with you today. For a long time, I have been involved in the overall management of the company as vice chairman, and that experience has given me in-depth understanding of the company's strategy, business, and team. Since taking over as CEO in August, I have been in close communication with the board of directors, the management, and the core teams to discuss our development strategy and conduct a strategic evaluation of our business under the current new circumstances. At the same time, I have also performed a deep dive into our frontline business operations and made visits to our customers and partners. I am delighted to report that the senior management team remains stable and committed, and our day-to-day business operates as usual. Now, I would like to share some thoughts on our business before briefly taking you through our performance for the second quarter.
spk02: Since the establishment of the company, several core strategies have been formed in continuous development, including the first focus on the field of Internet, finance, medical and public services, etc., which has a huge potential to grow, to create a solution for industry benchmark cases and segmentation areas. Second, through product technology, long-term service to customers, help customers grow. Third, stick to the neutral positioning in the multi-cloud competition pattern, provide customers with long-term reliable cloud services. Fourth, strengthen professional solutions and interaction implementation capabilities, collaborate with clients and social resources, provide customers with one-stop digital transformation services. Through the implementation of these strategies, the company was able to quickly develop and achieve nearly one billion in sales, and become the top tier cloud service provider.
spk04: Since Kingsoft Clouds Incorporation, we have established several core strategies as our business developed. The first one is to focus on and explore core industry verticals with great potential, including the internet, finance, healthcare, and public services sectors. and develop landmark projects and industry-specific solutions. The second one is to further advance our products and technologies, enhance long-term relationships with customers through superior services, and help our customers grow. Third, we firmly adhere to our neutral position to provide customers with long-term trusted cloud services amid multi-cloud landscape. Fourth, we seek to enhance our professional solution, and project deployment capabilities, including integrating with the resources from Camelot and the wider ecosystem to provide customers with one-stop digital transformation services. Through the implementation of these strategies, we have been able to achieve rapid growth, generate annual revenues close to RMB 10 billion, and strive to become a first-tier cloud service provider.
spk02: Although the second half of 2021 China's cloud computing market has become the second largest global market in the United States. The public cloud market will grow from US$3.2 billion in 2021 to US$3.2 billion in 2025. 900 billion dollars. Plan 14.5 also explicitly proposes to build a new digital economy, strengthen the integration of cloud computing systems and software core technologies, and accelerate the development of smart healthcare, smart public services, and other application scenarios. In addition, the demand of industry cloud customers for end-to-end cloud solutions and services continues to grow. These are all powerful driving forces for long-term development in the cloud market.
spk04: Despite the challenging external operating environment since the second half of 2021, we have also seen clear medium to long-term opportunities brought about by digital transformation across industries. According to a recent McKinsey report, China has the second largest cloud computing market in the world, behind only the United States. China's public cloud market is expected to grow to USD 90 billion in 2025 from USD 32 billion in 2021. The 40th five-year plan has also made a clear call to build digital economy advantages and holistically strengthen the research and development of cloud computing systems and core software technologies, particularly in smart healthcare and public services. In addition, There has been a growing demand for the end-to-end cloud solutions and services from enterprise cloud customers. All of these serve as powerful drivers for the long-term development of the cloud service market.
spk02: At this stage, we face these challenges head-on. We insist on technology. By improving technology, we drive improvement in products. Improvement in products drives improvement in sales. and ultimately form a business competitiveness. If we do well in core technology and products, we will be able to win in multiple market environments and achieve long-term sustainable development of the company, creating greater value for our customers, shareholders, and employees. In the future, we will focus more on computing, storage, network, big data, and other core product technology fields
spk04: At this stage, we are facing the challenges head-on. As we do so, we will keep our original aspiration of building business led by technology firmly in mind. Technology strength leads to product strength, which will in turn drive our sales capabilities and establish overall competitiveness. As long as we excel at our core technologies and products, we will be able to hold our ground amid the highly dynamic environment, thereby achieving the long-term sustainable development of the company and creating greater value for our customers, shareholders, and employees. Going forward, we will focus more on core technology areas, including computing, storage, networks, and big data, enhance our product trends, and focus more on scalable and replicable products that deliver the ultimate customer experience.
spk02: In terms of business development, we will continue to dig deeper into the vertical industry and explore new fields at the same time. On the one hand, Internet, finance, healthcare, and public services are the core of the company's current business and have a deep collection. We will continue to delve to explore these industries, and to develop scalable products and services, to balance scale and profits. On the other hand, we will not give up on exploring new fields. Based on the advantages of Xiaomi and Jinshan Ecotourism, the needs of cloud computing in different fields, as well as sustainable product technology, we will carefully make strategic judgments on the industries you enter, and steadily expand new growth spaces.
spk04: In terms of business development, we will continue to focus on penetrating selected industry verticals while cautiously exploring new areas. On one hand, the internet, finance, healthcare, and public service sectors are the pillars of our business, where we have accumulated in-depth expertise and experience. We will continue to focus on these industries, refine our replicable products and services, and managing the balance between scale and profit. On the other hand, we won't give up exploring new areas. We will capitalize on the advantages of the Xiaomi and Kingsoft ecosystems, as well as our replicable technologies and products, to steadily open up new space for growth after prudent strategic analysis of potential new verticals prospects for cloud computing.
spk02: In terms of sales, we are committed to creating a sales model for the entire solution project. Unlike the mature cloud market in the United States, China's wide range of traditional industry and business scenarios are complex, and digitalization is nearing its end. The cloud computing industry ecosystem is also in a perfect age, so customers cannot meet the needs of business development by simply purchasing and combining cloud products. For this general pain point, we emphasize In terms of sales, we are committed to engaging with customers through a model driven by integrated solutions.
spk04: Unlike in mature markets, such as the United States, many of the traditional industries in China have complex business scenarios and are late starters in digitalization. The cloud computing ecosystem still has a long way to develop. As a result, customers cannot satisfy their business needs by simply purchasing and combining cloud products. To address this common pain point, we adapt to the Chinese customer's point of view. In other words, Instead of being product-driven, we adopt a turnkey solution-driven approach by integrating our own proprietary products and technologies, our partners' products and technologies, as well as Camelot's deployment capabilities, delivering one-stop solution with readily accessible and tangible value to our customers.
spk02: Finally, and a very important point, we want to strengthen strategic shareholders and companies in digitalizing in the development process. Jinshan Cloud, as an important shareholder company of Xiaomi and Jinshan Group, has always provided high-quality cloud services to strategic shareholders, and has also received a lot of support from strategic shareholders. In the future, we will fully coordinate cooperation in digitalization, research and development, sales, and other multi-dimensional cooperation to promote the growth and cooperation and cooperation of Jinshan Xiaomi Ecotourism.
spk04: Lastly, and very importantly, we will ramp up collaboration with our strategic shareholders as we all embrace the digitalization trend. As an important Xiaomi and King Software Group portfolio company, we have always offered quality cloud services to, and in turn, received strong support from these two strategic shareholders. Going forward, we will explore collaboration opportunities across various dimensions, including digitalization, research and development, and sales to promote thriving Kingsoft and Xiaomi ecosystems in a win-win manner.
spk02: These are our thoughts on the strategy. In the process of implementation, we will continue to improve the strategy and actively communicate with everyone. At this point, the company is very grateful to the customers, shareholders, employees, and ecological partners who have supported the company's development all the way.
spk04: These are our thoughts on strategy. We will continue to make improvements and maintain active communication with all stakeholders as we implement our business strategy. On behalf of the company, I would like to thank all our customers, shareholders, employees, and ecosystem partners for their steadfast support at every stage of our journey. We will remain focused on development and committed to delivering long-term value to our stakeholders.
spk02: 接下来,我将回顾第二季度的业绩情况。 二季度总收入为人民币19.1亿元, 公有云为12.9亿元。 其中,公司主动调整了CDN的服务规模, 而除CDN以外的计算存储业务, with an increase of about 5.3%. The net income of the industry is 6.2 billion yuan, which is equal but lower than expected, mainly due to the impact of the pandemic on the national scale between April and June, which led to the delay of the project. After the adjustment of this quarter, the net profit was 6841 million yuan, and the net profit was adjusted to 3.6%. After adjustment, EBITDA profit rate is negative 7.7%. Profit level decline is mainly due to income affected by the impact of the epidemic and other factors, which makes the company's expectations more serious. Although the company achieves results in controlling costs, but income is not as expected, which affects the profit rate level. Although the company's short-term performance is under obvious pressure,
spk04: Now, let me walk you through our performance in the second quarter. Our total revenues were RMB 1.9 billion in the second quarter. Revenues from public cloud were RMB 1.3 billion, primarily due to the company's proactively scaling down of CDN services. excluding CDN services, computing and storage services increased by 5.3% year over year. Revenues from enterprise cloud amounted to RMB 620 million in Q2, largely stable from the same period last year, but lower than our expectation. This was primarily due to the resurgence of COVID between April and June, which slowed down project deployment process. Our adjusted gross profit this quarter was RMB 68.4 million, representing an adjusted gross margin of 3.6%. Adjusted EBITDA margin was negative 7.7% this quarter. The decrease in margin was mainly due to the impact on revenue from COVID resurgence, among other factors, which were more material than our previous estimate. Although our cost saving measures yielded remarkable results, our profit margin decreased due to the lower-than-expected revenues. Despite the significant short-term results pressures, our board and management team are committed to long-term development, actively managing our operations to face current challenges.
spk02: In terms of business, in the Internet field, our company provides full-size services for C3G, including computing, database, distribution, etc. to ensure the smooth gaming experience of the players. In this quarter, WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. WTS has implemented WTS multi-library center construction in Tianjin, Tianjin ITC. On business front, in the internet sector, we provided exclusive and a full spectrum of cloud services for JX3 Origin, CSUN Games' blockbuster MMORPG, including
spk04: computing power, database, and delivery, enabling a smooth gaming experience for players. We also deployed multi-active architecture for WPS at our proprietary data center in Tianjin, ensuring business continuity with highly available and highly reliable cloud services. In addition, in this quarter, we entered into an agreement with Benlai, a Chinese e-grocery platform, to provide a full suite of cloud migration services. We also signed into a partnership with NAPINFO, a Chinese smart mobility company, providing reliable cloud computing services and jointly developing a one-stop solution, integrating IaaS, PaaS, and SaaS layers for the automobile industry.
spk02: In terms of industry, the company is one of the eight best-performing companies in the East China Sea. to build a data-faceted support platform, to build a wide-ranging data circulation support platform facing the bend, to provide data cleaning, comprehensive management, data quality assessment, pre-treatment, and safe integration and data sharing capabilities through the platform. In the other vertical node, Gansu, we have built a integrated algorithm and Qingyang Procurement Resource Regulatory Center. Foreign and provincial customers are provided with interoperable joint accounting services, and local customers in Gansu are provided with accounting support. In the field of public service, we have invested in high-performance service devices, cloud host, cabinets, and storage resources for HaiDian Education Cloud, to ensure that students do not stop school during the epidemic, In the financial field, we continue to work on the capital bank project to export large data and storage products such as Galaxy Cloud. For example, with a certain capital share bank data lake project, using the data lake to help customers achieve historical storage and integrated computing of data, support the upload and download of large-scale non-structural documents with high frequency. At the same time, The smart system provides independent analysis and data mining services to data analysts throughout the industry. It significantly improves the efficiency of data response. In the medical field, we have five models around the benchmarking project. They are the provincial health cloud model, which is the benchmark for the health cloud in Hubei Province, the provincial health cloud model, which is the benchmark for the provincial image cloud in Jiangsu, Moving to the enterprise cloud business. As part of the Dongshu Xisuan project, which entails transporting data from different parts of China to the western regions for storage and computation,
spk04: We took the lead in constructing an underlying data platform for the Guangdong, Hong Kong, Macau, Greater Bay Area, which is one of the eight national computing power hubs. The platform will serve as the underlying infrastructure for broad entities' data processing and analytics needs in the area. The platform is equipped with a number of functions, empowering data cleaning, comprehensive data governance, data quality assessment, pre-processing, and compliant and secure data sharing. At another national hub in Gansu province, we developed the integrated computing power scheduling platform and the Qingyang Computing Resource Scheduling Center. The project will coordinate computing power between the east and the west regions to enterprises outside of Gansu province, while providing computing power for local businesses within the province. In public services space, we deployed high-performance servers, cloud hosts, server cabinets, and storage resources for the Haidian Education Cloud, ensuring uninterrupted learning during COVID-related school suspension. In the financial services sector, we continued to deepen cooperation with top banks by offering additional products such as Galaxy Cloud, Big Data, and storage. Taking the Data Lake project of a leading commercial bank as an example, the Data Lake helps our customer carry out historical data storage and integrated computing, and supports high concurrency, large-scale upload and download of unstructured files. In the meantime, we built an intelligent system to provide all the bank's data analysts with self-service data analytics and data mining services. significantly improving data response efficiency. In the healthcare sector, we continued to promote five models through our successful Lighthouse projects. Namely, the province-level healthcare cloud model demonstrated in the Hubei Healthcare Cloud. The province-level medical image cloud model demonstrated in the Jiangsu Image Cloud. The municipality-level regional integrated model demonstrated in the city in Jiangsu the city-county integrated healthcare organization model demonstrated in Shibi, and the hospital-level model in Grade A tertiary hospitals in Wuhan and Jiangsu.
spk02: Overall, due to the complex external environment this year, the company's short-term performance is under pressure. But we believe that cloud computing is the basis that drives digital transformation.
spk04: Overall, the complex external environment has put our short-term performance under pressure. Despite the headwinds, we firmly believe that cloud computing is the foundation that drives digital transformation. we will remain committed to our all-in cloud strategy and stay positive about our leading position in the cloud service industry.
spk00: I will now pass the call over to our sample who are ready to go for our financials for the quarter. Thank you.
spk06: Thank you everyone and welcome everyone for joining the call today. Now I will walk you through the financial results for the past quarter. Our total revenue was 1.91 billion RMB in Q2. Within that, revenues from public cloud were 1.29 billion RMB. The changes were primarily due to the company's proactive scaling down our CDM business, with its growth billing decreasing by 30% on a YY basis, while the growth billing from computing and storage increased by 5% year-over-year. Revenues from Enterprise Cloud was 616.6 million RMB. We managed to deliver stable revenues from Enterprise Cloud year-over-year as we navigated through difficult operating environment of COVID-19 resurgence across the country, which slowed down the bidding and project deployment process. The COVID-19 impact on our business between April and June was more serious than our previous estimates. as new buildings and the deployment process for enterprise cloud projects both slowed. Meanwhile, some of the internet customers paused their IT spending, and the dialogues with the new customers' leads were also affected this quarter, temporarily, impacting our revenue growth. Nonetheless, our cost saving measures yield expected results, leading to a quarter over quarter decrease of 252.6 million RMB in total cost savings and 8.7 million RMB in non-GAAP R&D and self-marketing expenses. Our profit margin decreased slightly, sequentially, due to the slower than expected revenues, and we expect such impact to be largely reflected in Q2 and Q3 this year. With the overall market environment returning to normal, we believe that our business will gradually begin to stabilize in Q4 and onwards. In terms of cost, total cost of revenue decreased by 12.1% quarter-to-quarter to 1.84 billion RMB. The IDC cost decreased by 81.3 million RMB from last quarter to 1.03 billion RMB this quarter. It mainly consists of bandwidth and cabinet cost, and a decreased trend was in line with our adjusted obsidian services. Solution development and service costs increased slightly quarter-to-quarter, to 489.8 million RMB. It consists of payments to our solution design, development, and services personnel. Depreciation and amortization costs remain stable at 249.1 million. Fulfillment costs were 24.7 million RMB this quarter, which was in line with the trend of enterprise car services revenue. Due to the impact from COVID lockdown, offline deployment has been saddened. Fulfillment cost presents the costs of purchasing technologies, products, and services from third party to fulfill the demands of our solutions. Other costs were $48.6 million this quarter. The adjusted gross profit of this quarter was $68.4 million RMB, representing adjusted gross margin of 3.6% this quarter. Adjusted EBITDA margin was negative 7.7% this quarter, The decrease of margin was mainly due to the impact of revenue from COVID resurgence, among other factors, than our previous estimates. In terms of expenses, excluding share-based compensation, total adjusted operating expenses were 507.0 million RMB, decreasing by 3.1% from 523.2 million RMB in Q1. Within that, adjusted R&D expenses was 190.8 million RMB, compared with 221.7 million RMB last quarter. Adjusted selling and marketing expenses were 120.1 million RMB compared with 127.6 million RMB last quarter. Adjusted G&A expenses increased slightly from 174.0 million RMB last quarter to 196.1 million RMB, which was primarily due to the one-time off compensation expenses for personnel adjustment. As of June 30, 2022, we had cash and cash equivalents and short-term investments amounting to 5.4 billion RMB, providing us sufficient liquidity for operations. The capital expenditure for this quarter was 450.9 million RMB, which primarily consists of cash payments for the servers we ordered previously. For the full year of 2022, we expect to keep our total CapEx plan in the range within 1.5 billion RMB. In terms of the share repurchase program, we are pleased to announce that we intend to adopt a share repurchase agreement with potential size no more than 30 million US dollar during a 90 days window, subject to agreements to be finalized with the repurchase agent. This action is persuade to and a part of the 100 million US dollar repurchase program authorized by the board and announced earlier in March 2022. As usual, the timing, structure, and the dollar amount of repurchase program will be subject to, among others, the market conditions, terms to be agreed with relevant repurchase agents, the trading prices of ADS, and the relevant securities rules and regulations. We believe this demonstrates our continued and unwavering efforts to align share price with long-term value of the business. Finally, we are on track with our Hong Kong Stock Exchange Listing Plan and submitted the prospectus and A1 filing on July 27. Despite recent positive progress in the negotiations on the Sino-US auditing corporations, we continue to seek dual primary listing status in both Hong Kong and the US to proactively manage potential risks. We will closely monitor the market dynamics and proceed prudently at the right time. The final listing decision and timeline are subject to both regulatory approvals and market conditions. Looking ahead, we expect our total revenue to be between 1.95 billion RMB and 2.15 billion RMB for the third quarter of 2022, representing a quarter-to-quarter increase of 2.3%. to positive 12.8%. 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. Thank you.
spk00: This concludes our prepared remarks. Thanks for your attention. And we are now happy to take your questions. Please ask your questions in both Mandarin and English, if possible. Operator, please go ahead. Thank you.
spk01: Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Please stand by while we compile the Q&A roster. Once again, the star 11 for questions. Our first question comes from the line of Brian Gong from Citi. Please ask your question.
spk05: Hi, Mr. Zou, Ms. Hongrui, Claire, Nicole, good evening. Thank you for accepting my question. I have two questions. The first one is, We just mentioned 3Q Revenue Guidance. What about the income scale of Public Cloud Revenue Growth and Enterprise Cloud? What are the two assumptions? And the other one we mentioned just now is that Enterprise Cloud's bidding speed seems to be a little slower. I want to ask what we have seen in the past two months and what we expect I will translate myself. Thanks management for taking my questions. I have two questions. First is that regarding our third quarter revenue guidance, can management give the assumption of the revenue scale of public cloud and also the enterprise cloud? And secondly, Matt just mentioned that you see the slower bidding process of enterprise cloud projects. How is the latest trend in recent months and how do you expect the tendering pace in the rest of the year and how would that impact your revenue ahead? Thank you.
spk06: Thank you, Brian. I'm happy to take on the first question. So to start with, as we explained, I think the Q2, especially the COVID impact in the city of Beijing, affect quite a lot of the business deployment process. So looking to 3Q, I think there are something unchanged. There are something that we executed on track, and there are something still with some uncertainties. I will kind of elaborate one by one. First of all, I think our plan to keep a relatively scaling down size of the CDN, this plan has no change, which was communicated earlier this year. So if you look at the dollar value and the total size of the business, I think in Q3, our CDN business will keep a relatively stable, but on a Y-to-Y basis will be still around about 30%, or about 25% to 30% Y-to-Y decline for the CDM business. And for the core part of the public cloud, which actually we're providing services on storage and computing to the key internet clients, as well as some diversified non-internet clients while using our public cloud, which also we're seeing that as a very positive sign. I think for that part, we are going to see a sequential increase of the public cloud usage on cloud computing and storage in Q3. I think that we'll see some trends actually picking up. On enterprise, we keep relatively prudent and cautious in Q3, as you probably understand, the enterprise cloud will need to have some phases to be deployed and finally executed. So when we look at our backlog, still very strong and robust, and the core part of the backlog for this year, given the timing and the pacing, I think the majority of that important projects will be completed in Q4 for this year. But even with that, I think in Q3, our enterprise cloud will have gradually a sequential increase compared with Q2 for the enterprise cloud. So that's actually formed the basis of a sequential increase of the total revenue compared with Q2. The mix of the revenue will keep relatively stable. The CDM will be relatively lower. The enterprise cloud will bust on the backlog and most of them will be delivered in Q4. So I think execution is still on track and the revenue conversion will take some time for this year. Thank you, Brian. The second question is about the situation of the entire corporate cloud this year, including the implementation of the second quarter.
spk02: Please introduce it to everyone. As you said, and as we introduced it, this year, especially from April to June, The impact of this pandemic, especially the two core cities, Beijing and Shanghai, has caused the whole of Hanyuan to be in a slump, and some new projects have been delayed. So from what we have observed so far, the activity of the whole business must be recovering. China China China China China China China China The overall impact of the epidemic today, including the global economy, should be said to be not so good. How much impact will it have on the entire aviation industry? In fact, QR must have affected us. How much impact does it have on us from an investor's point of view? I still want to make a responsible statement that it is difficult for us to make a more comprehensive estimate. At least from the data of the last half of the year, we can see that among our existing Internet customer groups, we have undergone a lot of challenges. In addition to the fact that CDN has our active conditions, in fact, we have not reached the expected number. This is also under the influence of the big environment. Under the influence of this big environment, our own customers, the business itself also has a lot of pressure. Because we are providing service support to other companies. In other words, our customers are good, we are good. This should be said to be one of our services. It's a development model that can't be missed. That is to say, we grow with the growth of our customers. So, for the whole epidemic, how much will it affect the overall economy in the future? I can only say that I'm not very sure at the moment. I can only say that from what we've seen so far, from what our customers have seen in July and August, this kind of pressure will continue within a certain period of time. Okay? So I will simply answer these two questions.
spk04: Okay, thank you, Mr. Huang. So just to briefly translate for me, Cecil, so as you rightly pointed out, and as we reported in the prepared remarks, the COVID impact between April and June especially the lockdown in the core and top cities in Beijing and Shanghai, has inevitably created a delay of our enterprise cloud bidding and deployment activities in the process. Currently, we can see for sure that commercial and business activities has improved. This is something that we can see. So I would say that for the third quarter and the fourth quarter, with the absence of other major top cities' lockdown measures, we would say that recovery speed is something that we can be expected. However, it is still rather difficult to have a comprehensive estimate about the ongoing and lasting impact of COVID situation. especially under the backdrop that the global macroeconomy continues to be very weak and remain uncertain. As the nature of our business is a 2B business, if our customers' performance are under challenges under the overall macroeconomic conditions, it is hard for us to deliver a much better result. And therefore, I would say that at least from what we can see from business activities, in July and August, the pressure, to be quite honestly, we expect that pressure will be continuing for a period of time stretching into the future. Thank you.
spk01: Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Thomas, please ask your question.
spk03: Good evening. Thank you, Manager Chong, for accepting my question. I have a few questions. The first one is about Is there any change in the current competitive structure of the entire industry, the enterprise and the public sector? The second question is about the uncertainty of the epidemic that we just mentioned. The global economy is not clear. Maybe it will make our business uncertain for the next period of time. I would like to ask When we do the budget, when do we estimate that we can go back to the level before the pandemic? And then, is this impact from the spending of the customer's AAP? Or is it from the impact of the customer's income? The third question is about Thanks management for taking my questions. My first question is about the competitive landscape in the public and the enterprise cloud side. Do we see any changes in terms of the competitive landscape? For example, we are seeing more new entrants. And my second question It's about the pandemic outbreak and the global headwinds that we are facing. We have just talked about that the macro situation globally is still very challenging. So I just want to get some thoughts from management. Qualitatively speaking, when should we expect business back to the pre-COVID level and back to normal situations? Any color would be great. And is that really impacting the R pool or the number of customers? And my final question is about the timing that we should expect adjusted EBITDA to reach a break-even. Thank you.
spk02: This is a good question. uh uh uh uh uh From this point of view, my own understanding is that there is no fundamental change. It's all... How to say it? It's all a mess. Yes. From the scale of the entire company, or in all aspects, in a short period of time, there is no way to compare it with us. Actually, I have said it many times before. But in the past ten years, can go to today, and in some fields, including medical, financial, including in some Internet video fields, we can have our own place, and even in some of these fields, compared to my competitors, there is a certain advantage. In fact, I have talked about it many times at today's conference. I said that the root is that it is very difficult for a 2B business to be a 2B business. This is a good horse circle. Others have 20 horses, even 30 horses. But I have three, three, five horses. So, uh, you, uh, this, this is actually from the current ten years of competition. It's actually the same. It's possible that my competitors will be in ten, ten, twenty industries. He has it all, he has it all. But what about me? I said, I think we are in our own three or five industries. We are deep and detailed. We are the same. To be honest, it developed very quickly and steadily So I want to describe it in this way Thomas may be the most concise Because otherwise it would be very complicated to talk about it Just to put it bluntly, the rabbit market is very big This industry, we just talked about it In my speech, I talked about the difficulty of Chinese enterprises To be honest, it's not too late, the speed is low He is absolutely not relying on a single product sales. He needs a complete solution from ice to pass. So it means that you need to enter any one of these fields. To be honest, it's not that simple to send a sales sales standard. It's not that simple. You need to go in deeply and do it in detail with your clients. In fact, it's really called doing it together. In fact, it's really called working together. From project co-creation to implementation to delivery, it's actually all co-created with customers. This is the decision. To be honest, what I just said is that no other company can do all the industries. So in the face of such a huge market, we are still in an era of horse-riding. There are more horses than others, and I have fewer horses. But looking at my business alone, the facts prove that we are very good. Especially in the past few years, in the field of medical finance, We, through our own practice, have confirmed my point of view. In fact, even in the medical field, we believe that we are already in the lead. It's not just about getting rid of the opponent. Even the opponent has basically given up. Yes, so we will continue in the future. In my opinion, we will also talk about the past. This kind of experience in the industry, including products, This model service model we will carry out training In the future, we will continue to focus on this focus This way to advance one by one This this industry or field is good Uh, the second question Anyway, it seems that this kind of big economic environment is uncertain. When can we get back to the one before the epidemic Uh, to be honest, it's Uh, the epidemic actually changed a lot in my opinion I believe that everyone can feel the changes that have been brought to us from the first wave. Including the changes in the international situation. So, Mr. Tao, I personally think that if you just talk about income, or what it is, when will it return to that? This, this, this, this, we are relatively good at it, but if you want to say that this is fully back to the beginning, and our customers, our customer group, including this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, I also want to answer, in fact, the epidemic has brought the biggest change to the whole cloud industry, not only Tianshan Cloud, but I should say the whole, including Ali, including Tang Xue. In fact, it is from the past, from this income, the pursuit of high income, or the pursuit of high income growth, To a process of pursuit of this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, This this this of course the competition is still very very very very intense So so the development strategy of each company is not the same All are making this kind of adjustment Especially this year we observed This one, this one, Ali, or Tengxun This is some of the adjustments on the cloud business This itself, our Jinshan Cloud will also On this big development strategy This one, I'm in my head I also talked about our scale and profits We will also find a kind of balance We we we will Will no longer be as simple as the past Pursuing this one, one, one income of high growth Yes, so from this change point of view, it is It's me, it's me, it's me, it's hard for me to answer you When can we get back to before the epidemic Because I just talked about our development The whole idea is changing We are no longer pursuing simple income We pursue more sustainable development Pursue the company more Become a more positive mode of development Of course, that's also the one that makes our investors So let me briefly translate for Mr. Zou.
spk04: So in terms of competitive landscape, my brief answer is that from my perspective during the past 10 years since our inception, we believe fundamentally there's no material change in terms of competition. because as we started out, we were competing with Alibaba and Tencent Cloud Business. And more recently, there's the players joining the game, including giants like Huawei, but ultimately all of them are giant companies, whereby in any short period of time, it is not likely that our scale can actually match with theirs. However, the fact that we have developed and grown rapidly in the past 10 years has shown that we have considerable comparable advantages even in this market in playing with the giants. The one key reason is that the nature of the 2B service industry. Because the nature of this industry is that the selling single product does not really deliver value to the enterprise customers. But the company has to jointly develop solutions together with the customer to really develop and deliver value to that customer. And therefore, it is never a winner-takes-it-all market for the 2B service companies. So a metaphor would be a horse race whereby our competitor might have 20 to 30 horses, while we focus deeply on the three to five horses which can race really well. I think in the past, especially five years, the growth of our businesses, in particular in financial services and in healthcare, has been demonstrating this point. In particular, in the healthcare space, we believe our solutions and products are actually leading the game. So I think in the future, we will continue to focus on a limited number of verticals and to deliver our value to the customers. And to answer your second question, it's actually very difficult for me to answer when or if we are ever going to be able to revert to our status before the pandemic. It is quite apparent that the COVID has changed a lot of things, prevailing from our daily life to larger geopolitical struggles. However, if you only refer to the revenue and financial aspect of it, I would say that the largest impact of the COVID situation to the cloud service industry in China is that the players in the market are shifting swiftly from the rather aggressive pursuit of top-line growth to pursuit of more balanced growth and profitability. We have observed our competitors, for example, AliCloud and Tencent Cloud, to adopt such adjustments And we have also reported in the prepared remarks that we are also adjusting to a more balanced growth rather than emphasizing revenue only. We believe that this also gives more comfort to investors and other stakeholders as we are, by doing so, switching to a more sustainable development model. Thank you.
spk06: I'll take on the third question regarding the profitability path. So we understand earlier this year when we think about this year's total budget and the pacing of improving profit margin before the April and May of the COVID impact, our initial intention has two things. We want to actually improving the efficiency and cutting loss on certain nodes and regions, especially from the CDN business. Those are two major drivers that we were set earlier to seeing improving sequential improvement of the both growth margin and EBITDA margin. And we budgeted for by Q4 on a single quarter basis, hopefully our non-GAAP EBITDA margin will turn profit. However, the COVID happening this quarter obviously affected the pacing of implementing certain measures and also the market environment also reduced certain demands for certain high quality products demands from certain customers. So I think at this moment we're seeing a flat, especially on the gross margin side for this quarter. Hopefully, I think we are seeing improving on growth margin hopefully for the next two quarters. And we understand that actually very important for ourselves, but also for the shareholders and the market to see our results quarter over quarter to improving growth margin that reflect the quality of the products and the value of our technology. However, I also want to put aside that given our strategy today, as we discussed earlier by Mr. Zhou, that we will continue and especially more focus on the investment into the R&D and the R&D personnel. So I think we will make some adjustments in terms of our internal budgets on some high-quality products investment and the people investment in the next two quarters. that may affect certain R&D expenses and related expenses in those two items on a marginal basis. So I think the expenses, the budgets, always follow the strategy and the business demands and the visions. And I think we explained earlier in the remarks today, we've laid out very clearly regarding the priorities we want to pursue in the next two quarters. So as a result, I think I will have two attentions as a summary. We will try our best to improve the gross margin on a quarter-over-quarter basis. This is no change. And point number two, we will make necessary investment into the R&D for the next two quarters, and especially for high-quality products. So if that will have some impact, I think the timing of the EBITDA margin may be delayed or earlier or later. But again, I think it's only about the timing. And I think if we make the right investment on the products and the customers, Our EBITDA module will turn break even sooner or later. Thank you.
spk01: Thank you very much for all your questions. We have now reached the end of the question and answer session. I'll now turn the conference back to Ms. Nicole Shen for closing remarks.
spk00: Thank you, Operator. 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 time.
spk06: necessary investment into the R&D.
spk01: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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