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spk08: Ladies and gentlemen, thank you for standing by, and welcome to Kingsoft Cloud first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there's going to be a question and answer session. If you wish to ask a question, please press start 1-1 from your telephone. I would now like to hand the conference over to the AR manager, Nicole Shan. Please go ahead, Ma.
spk10: Thank you, operator.
spk11: Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2023 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on Global Newswire's services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Zhou Tao, and our CFO, Mr. He Haijian. Mr. Zhou will review our business strategies, operations, and company highlights, followed by Mr. He, who will discuss the financials as a guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretations. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in 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 demanded and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, and relate to U.N. standing while 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 maturely 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 is now my pleasure to introduce our Vice Chairman and CEO, Mr. Zou. Please go ahead. Thank you.
spk18: Hello, everyone. Welcome to the first quarter of 2023,
spk02: We continue to adhere to the principle of high-quality sustainable development, insist on technical business, and focus on customers to build up the whole process of reputation and strengthen business management. This quarter, Jinxiaoyun has achieved further improvement in profitability. Revenue reached RMB 18.6 billion, which is in line with our guidance. After adjustment, 10.4% higher than the first quarter. The same increase of 6.6% compared to the first quarter. The same increase of 6.6% compared to the first quarter. The same increase of 6.6% compared to the first quarter. The same increase of 6.6% compared to the first quarter. The same increase of 6.6% compared to the first quarter. The same increase of 6.6% compared to the first quarter. The same increase of 6.6% compared to the first quarter. After normalization, EBITDA profit rate is negative 5.9%, which is 4.2% higher than last quarter.
spk03: Hello, everyone, and thank you all for joining Kingsoft Cloud's first quarter 2023 earnings call. We continued to uphold the principle of high quality and sustainable development, build success based on technology and innovation. forge our reputation throughout the entire business process with customer centricity, and enhance our business and operations management. During the quarter, our profitability further improved. Revenue reached RMB 1.86 billion, in line with our guidance. Adjusted gross margin increased to 10.4%, a historical high and 6.6 percentage points higher than the same period last year. This is also the fourth consecutive quarter that we have recorded a sequential improvement in adjusted gross margin. Adjusted gross profit reached RMB 194.4 million, a historical high and up 133% year over year. Normalized adjusted EBITDA margin was negative 5.9% which is a significant improvement of 4.2 percentage points higher than the last quarter.
spk02: which is 3.4% lower than the same period last year. Under the general strategy guidance of the company, we are working hard on three aspects, such as Xiaomi Jinshan Ecology, customer structure adjustment, and sales performance. First of all, Xiaomi Jinshan Ecology is the initial and basic plan of our public cloud business. We strive to serve Xiaomi Jinshan Ecosystem with the first-class product technology to obtain the income, profits, and reputation that are compatible with our contribution values. This season, the income level from Xiaomi Jinshan Ecosystem is growing at the same rate, and the profit rate is healthy. We have also actively implemented customers' real-time reputation survey. Based on the survey results, we seriously analyze and revise to continuously improve service reputation. Second, adjustment of customer structure is an inevitable choice to diversify the way of playing and improve profitability. We strive to continue to develop and support customers around core capabilities, and strategically the loss of large customers. This quarter, we have signed and negotiated business opportunities with dozens of sub-departmental customers. Among them, there are new fields, such as smart road-hailing cooperation scenarios for customers in the field of e-commerce support, social media, and黑芝麻. The third is to reduce the cost-effectiveness and strengthen supply chain management. This quarter, we have put a lot of effort into We also use the channel advantage to build a resource pool in different forms, such as combining materials and pigments, to carefully match the needs and flexibility of different customers, and enhance profitability and resilience.
spk03: Next, I will provide some updates on our progress across four key areas, public clouds, enterprise clouds, product and technology, and latest business updates. I'll start with public cloud services. Revenue was RMB 1.15 billion with a gross margin of 2.1%. significantly higher than the negative 3.4% gross margin in the same period of 2022. Upholding the overall strategy, we emphasize the three main goals for public cloud services, namely supporting the Xiaomi and Kingsoft ecosystems, optimizing our customer structure, and improving our cost and efficiency profile. On the first point, We are committed to our original vision and fundamental of firmly supporting the Xiaomi and Kingsoft ecosystems with first-class products and technologies that help drive sustainable revenue, profit, and reputation. In this quarter, revenue from the Xiaomi and Kingsoft ecosystems increased year over year, represented an increasing portion of our total revenues and with a healthy margin. To ensure that we maintain our respected reputation, we proactively reached out to customers to better understand how we can improve services experiences and adjust our services accordingly. Second, optimizing our customer structure is a critical component of our strategy to build differentiated business approach and boost profitability. we have focused on expanding our customer base among medium-sized businesses, strategically withdrawing from loss-making projects for larger customers. During the quarter, we negotiated or signed deals with dozens of medium-sized customers, including growth-factor companies such as EV Vehicle to Everything, also known as V2X Technology Service Provider, for example, Naviunful Black Sesame. Third, We implemented strong cost reduction and efficiency improvement initiatives and enhanced supply chain management. During the quarter, we increased our resource utilization rate by eliminating redundancies, reducing rigid minimum bandwidth commitments, and relocating and consolidating IDC RECs. We also leveraged our diverse channels to build a computing power resource pool that relies on a combination of directly owned and leased assets, enabling us to nimbly match the demand elasticity of different clients while protecting our profitability. These initiatives provided a strong foundation for improving the financial performance of our public cloud business for this quarter.
spk02: In terms of the industry, this quarter we achieved a revenue of 7.1 billion yuan, The net profit rate is 24%, which is 16% higher than the same period last year. We continue to focus on customer quality, sustainable business, core capacity, supply and demand, and profit rate. In the field of public service, we continue to expand our government and state-owned business. In this quarter, we will continue to sign the Beijing Government Union in the ninth year. and in Shandong, Shanghai, and other places to develop state-owned cloud and government cloud projects. After many years of development, Xinshan Cloud has made its business model clear and mature, its profitability is healthy and sustainable, and it offers a lot of high-value data-based project opportunities. In the field of digital health, we fully adopt five major models, namely the regional health cloud model, image cloud mode, univision mode, regional univision mode, and smart hospital mode, to open up the market with a differentiated approach, and the ability to supply and supply. In this quarter, we have made significant progress in the product governance, data center, and cutting-edge scene and internationalization of data in the data service. We have also launched the China's key research and development project, the focus of which is the integration of biology and information. In the future, we will use the technology and product power of the digital health field to drive the five major modes of deep promotion. In the financial field, we will complete the big data platform construction project of the big data platform construction projects such as Xinyan Bank, Zhongxin Bank, and other large-scale shares banks, and deeply expand the needs of customers and customers. Zhanzu Jinshan Yun.
spk03: Moving on to enterprise cloud services. Revenue was RMB 710 million with a gross margin of 24%, a significant improvement from 16% in the same period last year. We continued to implement strict project management measures in terms of customer quality, business sustainability, accumulation and reuse of core capabilities and profit margins. Our public services cloud businesses expanded further. During the quarter, we renewed the contract for the Beijing public services cloud for the ninth year and expanded our footprint to Shandong, Shanghai, and other regions. After years of development, we have gradually built a mature business model of public services cloud that generates healthy and sustainable margins and a wealth of opportunities for value-added data projects. In digital health, we are strengthening the five business models we deploy, namely the regional healthcare cloud model, the medical image cloud model, the integrated healthcare organization model, the regional integrated model, and the smart hospital model. These models allow us to tap into market opportunities with differentiated approach. accumulate and reuse our capabilities. During the quarter, we made milestone progress in our DAS, also known as Data as a Service product portfolio, penetrating the hospital market through our data management platform, adapting to made-in-China systems, and leading a major national R&D project on biology and information integration. Looking ahead, we expect to leverage such technical and product strengths in our business or endeavors in the healthcare space. In the finance sector, we completed and delivered big data platforms for major financial institutions such as industrial banks and China's Citic Bank, helped existing clients solve new challenges, and focused on technical areas where we have unique advantages such as big data.
spk02: In terms of product technology, we continue to maintain the technology continue to quickly replace products, and create the first-class customer experience of core products. In the cloud computing field, Rongqi's strength is officially supported by the flexible expansion of the ITC self-made Rongqi group of customers. Cloud-on-cloud resource unification management, while realizing the sudden peak of business, smooth up and down, cloud-on-cloud Internet bandwidth, to reduce by about 80%. With the excellent performance of steady growth, with InfoQ's Ten Big Cloud Revival Innovative Technology Project, cloud storage industry, target storage products, market recognition significantly improved. In the ITC's latest release in 2022, the fourth quarter of China's software definition storage report, Jinshan Yun's target storage ranking rose to the fourth place. The market share is three times higher than in 2021. We also released a target storage product based on full flash storage ring. The reading performance has been increased by about 100%, which is particularly suitable for high-performance and high-performance storage capabilities for large data storage separation, AIGC, and other scenarios. In the field of industry cloud, for the pain points of corporate customer cloud management, we upgraded the Galaxy Cloud as a platform, and launched a more unified, convenient and rich resource management system based on multi-use areas to significantly improve the experience of corporate customer cloud in terms of usability, security, and intelligentization.
spk03: In terms of product innovation, we live up to our model of building success based on technology and innovation by constantly and rapidly iterating on our products and providing a best-in-class customer experience across our core offerings. In cloud computing, our container instances officially started to support the elastic scaling of container clusters, hosting customers' own data centers enabling unified management of on and off cloud resources, ensuring a smooth scaling into the cloud during spikes in usage. This solution can reduce on and off cloud bandwidth costs by around 80%. For such achievements in cost performance and efficiency, it is honored as one of InfoQ's top 10 cloud-native innovation solutions. In cloud storage, our object storage products is gaining more and more recognition from the market. Jumping to fourth place, in the fourth quarter of 2022, China's software-defined storage report published by IDC Research, with its market share doubling compared with 2021. We also launched an all-flash-array object storage product, which doubles read and write performance, particularly well-suited to application scenarios such as AIGC and the separation of computation and storage in big data, providing tiered storage solutions with top-of-the-line performance at a high cost efficiency. In the enterprise cloud space, we upgraded Galaxy Stack to solve cloud usage and management pain points for enterprise customers. The result is a more unified, convenient, and enriched resource management view across multiple availability zones that provides a better customer experience in terms of usability, safety, and intelligence.
spk02: Since the first quarter of this year, China's AI field has been active since the release of GPT-3.5. We are actively working on a comprehensive layout. First of all, as the only cloud platform for Xiaomi Jinshan Ecology, we have a strategic layout of AI with Xiaomi Jinshan Ecology. In particular,
spk03: I would like to address the recent developments in China's AI sector, which has continued to be heated since the debut of GPT-3.5 in the first quarter. We have kept a close eye on this space and have proactively deployed resources to comprehensively respond to market trends. First, as the only cloud platform in the Xiaomi and KingFox ecosystems, We approach AI strategically with Xiaomi and Kingsoft Cloud Ecosystems companies in a strategic and coordinated manner, providing support for key programs, including Kingsoft Office's WPS AI. Second, we stand strictly neutral in large language model space. This position enables us to retain the full trust and preference of the many independent AI companies that use our platform. Third, with a combination of directly owned and leased assets, we are able to offer sufficient GPU server resources to meet our customers' needs.
spk02: Overall, the results of the past few seasons have left us with strategic vitality. Looking forward to the opportunities and challenges in the future, we will continue to shape these strategic directions. In practice, we will use the strategy well,
spk03: In summary, our results over the past few quarters demonstrate that our strategy is yielding results. As we prepare to meet future opportunities and challenges head on, we will nimbly execute on this strategy to create value for our customers, shareholders, employees, and society. I will now pass the call over to our CFO, Henry, to go over our financials for the first quarter of 2022. Thank you.
spk16: Thank you, Zouzou, and welcome everyone for joining the call. Now I will walk you through the financial results for the first quarter of 2023. Guided by the high-quality and sustainable development strategy We are pleased to see that our profitability has further improved steadily in the first quarter. Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved record high of 194.4 million RMB, increased by 133% year-over-year, representing adjusted gross margin of 10.4%. Along with our strict expenses control, Our normalized adjusted EBITDA margin improved from negative 6.6% in the same period last year and a negative 10.2% in the last quarter to a negative 5.9% this quarter. Our total revenue were 1,864.4 million RMB this quarter, which were in line with our previous outlook. Within that, revenue from public cloud services was 1,153.7 million RMB, compared with 1,380.8 million RMB in the same period of last year. The decrease was mainly due to our proactive adjustments of CDM business, as well as impact from our client structure adjustments. Revenue from Enterprise Cloud was 710 million RMB, compared with 792.5 million RMB in the same period of last year. The decrease was mainly due to the general infection of COVID-19, seasonality impact, and project quality control. We continue to enhance our cost control measures. Total cost of revenue decreased by 20.2% year-over-year to 1,670.2 million RMB. IDC costs decreased significantly by 21.4% year-over-year from 1,110.3 million RMB to 872.4 million RMB this quarter. Depreciation and amortization costs decreased by 8.7% from 246.1 million RMB in the same period of last year to 224.6 million RMB this quarter. Solution development and services costs decreased by 11% from 476 million RMB to 423.6 million RMB this quarter. Fulfillment costs and other costs were 122.7 million RMB and 26.9 million RMB this quarter. Adjusted gross profit of this quarter increased by 133% to 194.4 million RMB, representing adjusted gross margin of 10.4%, compared with 3.8% in the same period of last year. The significant margin improvement demonstrates the success of our strategic adjustments of our revenue mix, optimized enterprise cloud project selection, and efficient cost control measures, and reaffirm our strong commitment to improving our profitability and delivering high quality and sustainable development. To help the market and investors better understand our business and our path to profitability, we separately disclose the growth margin and gross profit for public cloud and enterprise cloud in order to better reflect our business nature. Within our business life, gross profit of public cloud services was 24.8 million RMB, which was significantly improved from the gross loss of 47.2 million RMB in the same period of last year. Gross margin of public cloud services were 2.1%, compared with negative 3.4% in the same period of last year. The improvement was mainly due to the proactive scaling down of CDN services and adjustments of our client structure. First profit of enterprise cloud services was 169 million RMB, compared with 127.4 million RMB in the same period of last year. First margin of enterprise cloud services was 23.8%, improved from 16.1% in the same period of last year. The improvement was mainly due to our more stringent enterprise cloud product selection strategy. In terms of expenses, excluding share-based compensation and impairments of long-lived assets, our total adjusted operating expenses were 595.8 million RMB, decreasing by 18.3% from 729.6 million RMB last quarter, Within that, adjusted R&D expenses was 202.6 million RMB, decreasing by 15.4% from last quarter. Adjusted selling and market expenses was 104.2 million RMB, compared with 118.4 million RMB last quarter. Adjusted G&A expenses decreased largely by 22.3%, from 371.9 million last quarter to 289.1 million RMB. As of March 21st, 2023, our cash and cash equivalent and short-term investments amounted to 4.5 billion RMB, providing us with significant and sufficient liquidity for operations. The capital expenditures for this quarter was 44.6 million RMB, which primarily consists of payments for servers. We have been taking control over our procurement of traditional servers, such as the ones being used for CDN's business, while for high-performance servers, especially in the recent popular AIGC areas, we have been actively cooperating with our suppliers in various ways to access the resources needed, including but not limited to capital expenditure model, We also, in operational leasing, which was payments, will not be included in our CapEx, but amounted will be in OPEX model. Meanwhile, due to the payment schedule, certain cash payments for server purchases, including the servers, will be used for AIGC business, which we ordered earlier this year. We'll be gradually reflecting sequentially in the following quarters. Lastly, we have recently released our ESG report for 2022 to present a very in-depth review of the company's progress in the last year in ESG practice. We've also noticed that recognition from rating agencies and scoring of the company increased from certain well-known ESG agencies. We have taken great pride in advocating the highest ESG standards. We will continuously strengthen our ESG governance and engage with our partners to amplify our positive impact in the cloud industry and the society. thereby delivering long-term value for our shareholders. Looking ahead, we will continue to pursue our high-quality development strategy and unlock synergies within the Xiaomi and Kingsoft Group ecosystem, while staying agent to capture new opportunities in the new era of AI technology advances. We expect our total revenue to be between 1.85 billion RMB to $2 0.0 billion RMB for the second quarter of 2023. Why are these forecasted comments above based on our current and preliminary views on the market and operational conditions, which are subject to change? Which we firmly believe that given the time, the effect of ongoing strategy initiatives and the new business opportunities, especially in the EITC areas, will continue to amplify and reflect our financial results in the mid to long term. Thank you.
spk11: Thank you. This concludes our prepared remarks. Thanks for your attention. And we are now happy to take our questions. Please ask your question in both Chinese Mandarin and English if possible. Operator, please go ahead. Thank you.
spk07: Ladies and gentlemen, we now begin the question and answer session.
spk08: If you wish to ask a question, please press star 1 1 on your telephone. We are now taking the first question. And the first question from Xiao Dan Zhang from CIC. Please go ahead. Your line is open.
spk15: Hi, Mr. Guan. Thank you for accepting my question. I have two questions. The first is, we have seen that since this year, in fact, a lot of cloud manufacturers have been making some price adjustments to this product. I would like to ask Mr. Guan, how do you see the pricing trend of this industry, and will our future price strategy be adjusted accordingly? So my first question is on our pricing strategies. We noticed that several cloud service providers have announced their price cuts on their products in the past few months. So could you please share your views on the price trend going onwards? And are we going to make adjustments to our pricing strategies accordingly? And my second question is on our GDP margin. We have seen a meaningful sequential improvement in the gross profit margin for the first quarter. So is this improvement sustainable? And what is our expectation for the segmental about growth profit margins in the mid to long term. Thank you.
spk02: From the result, we believe that there is no real impact on our existing product and service in all aspects. Yes. Will there be something similar in the future? Anyway, from our own analysis results, There is no practical meaning for the so-called list price reduction for the whole industry. We also pay attention to it. Our point of view is that it will not have a real practical impact, okay? Because I won't go into the details. What are the areas in which there is a reduction in the price for different customer types? In fact, if you do a little analysis, you can get my conclusion. So more of us, our point of view, more of us think that this may be a kind of market sales behavior. Yes, yes, it is not a kind of practical price reduction behavior. So we will not go to this simple and easy to push out similar price strategies, OK?
spk03: Okay, so indeed we have noticed our peer players' so-called large-scale price cut and we have analyzed it carefully. In terms of conclusion, I would say that its impact to our current products and services are limited and there's actually no material impact to our current offerings of products and services. Now as to in the future whether we will have anything similar in terms of pricing strategy. We should say that the peer players catalog price cut is actually limited. If we just take a close look at the specific products that are included in this action. And we also do not think that it has any material impact to the industry as of now. So our feeling is that this action is more geared towards PR purposes. Thank you.
spk16: Thank you, Sophia. I'm happy to take on the second question regarding the gross profit. As you mentioned, we are very happy to see that, especially starting from the second half of last year, the company has adopted quite important initiatives to expanding our gross profits, which you probably can see in the recent results have achieved very positive results. But also, I want to put the data into the context in the past six quarters, actually. If you remember, the lowest point on the gross margin was back in Q4 of 2021. At that time, if you remember, our gross margin on a company level was only about 1.2%. And in the past six quarters, especially the second half of last year, We're sequentially increasing the gross margin to today's about 10.2%, which is actually almost 7 to 8 times higher than the Q4 2021. It's reflecting a combination of a few important reasons and the drivers. First, it's really a better mix of the products, including our efforts to cutting back certain low-profit margin products. and also increasing the diversification of the top clients and the media size clients as well, which actually giving Kingsoft Cloud a better positioning in terms of the pricing power and the terms and the commercial terms we negotiated with our customers. And second is our efforts to cutting back certain resources from servers, the bandwidth, and the lower utilized cabinets as well. All those efforts are the combination of those impact to our gross margin. But more importantly, it's really our internal strategy and management quality in terms of how we control, how we deliver, how we execute the enterprise cloud projects, and how we make sure in terms of the PMO office can actually take a very good role in managing the cost and the efficiency of enterprise cloud. That's why, on this quarter, we're the first time to separate the growth margin of enterprise cloud and public cloud. As you can see, both business lines are making a positive growth margin, and we're happy to see that trend going forward. On the second point you're asking, I think the key trend we're trying to see is three things. First of all, on a combined basis, we're happy to see, and hopefully, the growth margin of Kingsoft Cloud as a company will improving sequentially on a quarter to over quarter basis. So I think we are confident to see that the trend going forward, given the few things we already see the good results, will continue to do that. Second, I think the potential of the gross margin expansion of the public cloud will be more propelled compared with enterprise cloud. So we're going to make sure the potential of the margin expansion on public cloud we're taking a more obvious role in terms of margin expansion of the company, but also on the same time, we want to make sure the growth margin of enterprise cloud will keep a sustainable basis and will expand on the relatively rational pacing as well. So by doing two things, hopefully we can keep the growth margin on the company level will continue to grow as well. And the last point, I think we'll also take a very, very careful view regarding the growth versus the profitability. So it doesn't say that only one factor we're trying to keep a focus, but also balancing the growth opportunities in terms of, for example, the recent AI opportunities where we'll make sure we have enough resources to invest. And at the same time, we're going to make sure our growth margins continue to improve. And our CEOs also mentioned we will make a very rational decision and are not going to follow any unrational trends in terms of pricing cuts and other things that are reflecting the potential risk of our growth margins. Thank you.
spk05: Thank you for your question.
spk08: We are now taking the next question. And the next question from Brian Gong from CT. Please go ahead.
spk17: Hello, everyone. Good evening. I have a follow-up question. You mentioned that we need to balance growth versus profitability. So I would like to ask, when can we see this public cloud and industry cloud speed up again? When is this time point? And then, in addition, President Zhou also mentioned the impact of AI on us. Then there are two small problems. The first one is that there is already a third-party model running on our side. It seems that it has already run on our side. I want to ask this. the number of third-party big models we have seen so far. Secondly, is the storage capacity of our GPU chips sufficient to meet the future demand? I will translate myself. Thanks, management, for taking my question. Just a follow-up to Henry's point that Kingsoft Cloud will balance growth versus profitability ahead. When should we see public cloud and enterprise cloud growth accelerate again in the future? And also, Zhouzong just mentioned the impact from AI on case of cloud? Can management elaborate? Have we seen any, you know, large language model from third party already on our cloud? And also, do we have enough GPU, those chips, to meet the demand in the future? Thank you.
spk02: Let me answer. I'll let Harry add to that. The first question is, you asked about when the supply and demand can rise. I want to answer this separately. As you all know, the public sector is mainly used to serve these major Internet or Fan clients. I personally think that this AI wave is a very good opportunity for us. Actually, you also asked the second and third questions. They are all similar. So we also think that this time, anyway, we have said this many times, this time, the positioning of this Zhongli Yun factory, in fact, is also very obvious this time. In fact, in addition, in fact, this time, the overall co-operation of the entire AI wave, Xiaomi, Jinshan, Shunwei, is also very effective. So, I think the opportunity has come to Gong Yun, it has come, okay? I will answer your second and third questions later, and I will also expand. Yes. In the case of Hanyun, mainly, our internal capital is 3 yuan. They are slightly different. As for this part, in fact, in general, we are focusing on the original model first. So, currently, the area we lock is also fully open and gradually locked to Beijing and Hubei. to be the base. In fact, we are in these two areas. This one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, In the short term, this may be the opposite of the previous one. You will find that it may become less in stages. But in fact, the profitability of these projects has increased. So for the long term, we think that if we collect it first and use it as a technology service, and then spread it out, the future will only get better and better. Then the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, Okay.
spk03: So I'm going to answer a question separately, since you mentioned for both public cloud and the enterprise cloud. In the public cloud space, as you know, we mainly serve internet customers or quality internet customers. And as you also mentioned in the second question, the current wave of AIGC or AI is in itself a very good wave of opportunities for us. As we have commented, we'll continue to leverage our neutrality positioning, which is well manifested in the fact that we're able to engage with a large number of independent AI developers. And also the effect. of our coordinated and strategic approach with Kingsoft and the Xiaomi ecosystem is also very good. So this is about our public cloud opportunities. In terms of enterprise cloud, because we have three basically different major verticals, namely public services, digital health, and finances, I'm going to answer to you separately. So in the first part is the public services cloud. Our overall strategy in this line of business is to actually shrink and to focus a little bit in terms of geographical locations first. So in terms of project number, you might see the number of projects decreasing, but the profitability will be increasing and we'll be focusing on some of the core regions, for example, Beijing and Hubei provinces. We believe that in the medium to long term, such approach, which namely is to shrink and to enhance our technology capabilities and services first and then to expand is a healthier way of growth. And secondly, in terms of digital health, as we commented in the prepared remarks, we're enhancing and we're pushing forward the five models of digital health business. We see it's accelerating, not only in terms of profitability, but also in terms of revenue scale. So that's basically about the enterprise cloud side. OK.
spk02: The second one you just asked is that as a Chinese cloud manufacturer, there are now many other third parties, not the third party, but some other large-scale AI companies. How many of them are running here? To be honest, I really can't give you a specific answer. Because first of all, it involves the privacy of the customer itself. Secondly, in fact, we have many projects that are also As to your second question, as to how many large language model providers or companies are running on our platform,
spk03: I have to say that I apologize, we cannot answer your question in detail. And this is due to the fact that, first of all, the confidentiality consideration for our customers, and secondly, currently we still have a large amount of such companies that we are in the negotiating stage for potential transactions.
spk19: Okay. The third question, you asked if we have enough chip technical resources.
spk02: I'm thinking about how to answer you. The conclusion is that we are definitely not enough now. Because why? To be honest, this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of this wave of Like the A800, it is true that the overall supply and demand is also under pressure. Yes. So, in the early stage, we have done our best to meet the growth needs of our customers. Yes. But in fact, from our current... Why did I use our customers' intense enthusiasm just now? This is really... That's your third question about our GPU chips reserve. The short answer and the conclusion is it's definitely good to have more.
spk03: We have been seeing great enthusiasm from such customers and expecting to expand the AI-related business. As you know that in the market, A100 has been essentially banned by the US side. And we also see a very tight supply on A800 market. But as I commented earlier, we are adopting flexible and combined channels to satisfy such needs. And that includes, first of all, directly owning such chips or GPU servers. and secondly, in terms of leasing such assets. So what we can say is that we definitely try our best to meet such needs and to satisfy our existing and potential customers' needs in that regard.
spk16: Thank you, Zouzong. Brian, thanks for the question. Just to add only two points. First of all, today we are publishing our Q&A results. As you remember, back in Q1, the AIGC topic was emerged actually in the early part of April. definitely not in the current quarter's results. And we actually keep quite positive regarding the growth prospect, given in Q1, as you know, part of the China was affected in COVID and many of the bidding process, given the two sessions, if you remember back in March, was affected as well on the timing. So as we actually promised probably one or two quarters earlier, so on this quarter, the first step, we'll separately disclose our growth margin on the public cloud and the enterprise cloud. And as a second step, hopefully in the coming quarters, we're going to also disclose our backlog numbers and other things. So I think we are going to see some growth potential and the timing and the pacing of those growth opportunities in the coming quarter as well, which are going to be a combination of the AIGC opportunities and the money we spend and how we actually control the balance of the growth and profits. The second point is, maybe some of you I also noticed that in Q1, our capex number was a little bit low. I think that's also not a reflecting implication on our growth in terms of the spending because on the cash flow category, we actually haven't ordered the servers, but the timing of those payments has not hit accounts on the cash flow items in Q1. And many of the new opportunities are coming in April and May. Actually, I'm working on those opportunities as well. So I think these are the two points, hopefully, can be helpful for you. For the next quarter, hopefully, we can give you more color regarding the backlog, and you can see the growth opportunities in a more kind of quantitative way are coming forward. Thank you.
spk04: Thank you. That's very helpful.
spk06: Thank you for your question.
spk08: There are no further questions. I will hand back the conference to Nico Sean for closing remarks.
spk09: Thank you, operator.
spk11: 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. Thank you. Have a nice day.
spk08: That concludes the conference for today. Thank you for participating. You may all disconnect. Hello. you Bye.
spk12: Bye. Bye.
spk08: Ladies and gentlemen, thank you for standing by and welcome to Kingsoft Cloud first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there's going to be a question and answer session. If you wish to ask a question, please press star 11 from your telephone. I would now like to hand the conference over to the AR manager, Nicole Shan. Please go ahead, Ma.
spk10: Thank you, operator.
spk11: Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2023 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on Global Newswire's services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Zhou Tao, and our CFO, Mr. He Haijian. Mr. Zhou will review our business strategies, operations, and company highlights, followed by Mr. He, who will discuss the financials as a guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretations. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in 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 demanded and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, and relate to U.N.s that involve known or unknown risks uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ maturely 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 is now my pleasure to introduce our Vice Chairman and CEO, Mr. Zou. Please go ahead. Thank you.
spk18: Hello, everyone. Welcome to the first quarter of 2023,
spk02: We continue to adhere to the principle of high-quality sustainable development, insist on technical success, and focus on customers to build up the whole process, and strengthen financial management. This quarter, Jinxiaoyun has achieved further improvement in profitability. Revenue reached RMB 18.6 billion, which is in line with our guidance. After adjustment, the interest rate reached 10.4% higher than the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. The same increase of 6.6% compared to the first quarter of the year. Hello everyone, and thank you all for joining Kingsoft Cloud's first quarter 2023 earnings call.
spk03: We continued to uphold the principle of high quality and sustainable development. Build success based on technology and innovation. forge our reputation throughout the entire business process with customer centricity, and enhance our business and operations management. During the quarter, our profitability further improved. Revenue reached RMB 1.86 billion, in line with our guidance. Adjusted gross margin increased to 10.4%, a historical high and 6.6 percentage points higher than the same period last year. This is also the fourth consecutive quarter that we have recorded a sequential improvement in adjusted gross margin. Adjusted gross profit reached RMB 194.4 million, a historical high and up 133% year over year. Normalized adjusted EBITDA margin was negative 5.9%, which is a significant improvement of 4.2 percentage points higher than the last quarter.
spk02: to 3.4% in the same period as last year. Under the general strategy guidance of the company, we are working on three aspects. First of all, Xiaomi Jinshan Ecosystem is the original and basic platform of our public cloud business. We strive to serve Xiaomi Jinshan Ecosystem with the first-class product technology to obtain the income, profit and reputation that matches our contribution value. This quarter, the income level from Xiaomi Jinshan Ecosystem is growing at the same rate, and the profit rate is healthy. We also actively carry out customers' real-time reputation survey. Based on the survey results, we seriously analyze and revise to continuously improve service reputation. Second, adjustment of customer structure is an inevitable choice for differentiating tactics and improving profitability. We strive to continue to develop and support customers around core capabilities, and strategically eliminate the loss of large clients. This quarter, we have signed and negotiated with dozens of clients in the shoulder department. Among them, there are new fields, such as the smart vehicle road cooperation scene of clients in the field of e-commerce support, think tanks, black sesame, and so on. Thirdly, we have made an effort to reduce the cost-effectiveness and strengthen supply chain management. This quarter, we have put a lot of effort into We also use the channel advantage to build a resource pool in different forms, such as combining paper and bamboo, to carefully match the needs and flexibility of different customers, and enhance profitability and resilience. The above three measures have made it possible to ensure the performance of public users this quarter.
spk03: Next, I will provide some updates on our progress across four key areas, public clouds, enterprise clouds, product and technology, and latest business updates. I'll start with public cloud services. Revenue was RMB 1.15 billion with a gross margin of 2.1%. significantly higher than the negative 3.4% gross margin in the same period of 2022. Upholding the overall strategy, we emphasize the three main goals for public cloud services, namely supporting the Xiaomi and Kingsoft ecosystems, optimizing our customer structure, and improving our cost and efficiency profile. On the first point, We are committed to our original vision and fundamental of firmly supporting the Xiaomi and Kingsoft ecosystems with first-class products and technologies that help drive sustainable revenue, profit, and reputation. In this quarter, revenue from the Xiaomi and Kingsoft ecosystems increased year over year, represented an increasing portion of our total revenues and with a healthy margin. To ensure that we maintain our respected reputation, we proactively reached out to customers to better understand how we can improve services experiences and adjust our services accordingly. Second, optimizing our customer structure is a critical component of our strategy to build differentiated business approach and boost profitability. we have focused on expanding our customer base among medium-sized businesses, strategically withdrawing from loss-making projects for larger customers. During the quarter, we negotiated or signed deals with dozens of medium-sized customers, including growth-factor companies such as EV Vehicle to Everything, also known as V2X Technology Service Provider, for example, Naviunful Black Sesame. Third, We implemented strong cost reduction and efficiency improvement initiatives and enhanced supply chain management. During the quarter, we increased our resource utilization rate by eliminating redundancies, reducing rigid minimum bandwidth commitments, and relocating and consolidating IDC RECs. We also leveraged our diverse channels to build a computing power resource pool that relies on a combination of directly owned and leased assets, enabling us to nimbly match the demand elasticity of different clients while protecting our profitability. These initiatives provided a strong foundation for improving the financial performance of our public cloud business for this quarter.
spk02: In terms of industry, this quarter, we achieved a revenue of 7.1 billion yuan. The net profit is 24%, which is 16% higher than the same period last year. We continue to focus on customer quality, sustainable business, core capacity, supply and demand, and the four dimensions of profitability. In the public service sector, we continue to expand the government and state cloud business. In this quarter, we will continue to sign the Beijing government cloud in the ninth year. and in Shandong, Shanghai, and other places to develop state-owned cloud and government cloud projects. After many years of development, Xinshan Cloud is clearly mature in the model of this type of business. The profitability is healthy and sustainable, and it offers a lot of high-value data-based project opportunities. In the field of digital health, we fully adopt the five major models, namely the regional health cloud model, video cloud mode, univision mode, regional univision mode, and smart hospital mode. By differentiating the way of playing, we can open up the market, generate electricity, and use it. In this quarter, we have made significant progress in the product organization, data center, and cutting-edge scene and nationalization. We have also launched The key focus of the national research and development project is the integration of biology and information. In the future, we will use the technology and product power of the digital health field to drive the five major models into deep promotion. In the financial field, we will complete the big data platform construction project of big data platforms such as the New Leaf Bank, Central Bank, etc. Moving on to Enterprise Cloud Services. Revenue was RMB 710 million with a gross margin of 24%, a significant improvement from 16% in the same period last year. We continued to implement strict project management measures
spk03: in terms of customer quality, business sustainability, accumulation and reuse of core capabilities, and profit margins. Our public services cloud businesses expanded further. During the quarter, we renewed the contract for the Beijing public services cloud for the ninth year, and expanded our footprint to Shandong, Shanghai, and other regions. After years of development, we have gradually built a mature business model of public services cloud that generates healthy and sustainable margins, and a wealth of opportunities for value-added data projects. In digital health, we are strengthening the five business models we deploy, namely the regional healthcare cloud model, the medical image cloud model, the integrated healthcare organization model, the regional integrated model, and the smart hospital model. These models allow us to tap into market opportunities with differentiated approach, accumulate and reuse our capabilities. During the quarter, we made milestone progress in our DAS, also known as data as a service product portfolio, penetrating the hospital market through our data management platform, adapting to made in China systems, and leading a major national R&D project on biology and information integration. Looking ahead, We expect to leverage such technical and product strengths in our business endeavors in the healthcare space. In the finance sector, we completed and delivered big data platforms for major financial institutions such as industrial banks and China Citic Bank, helped existing clients solve new challenges and focused on technical areas where we have unique advantages such as big data.
spk02: In terms of product technology, We continue to maintain technical success, continue to quickly replace products, and create the first-class customer experience of core products. In the cloud computing field, the capacity of the container to support customers' ITC self-developed containers and group flexibility expansion, cloud-on-cloud resource unification management, while achieving high-end business and smooth cloud, the Internet bandwidth between cloud and cloud is reduced by about 80%. With the excellent performance of steady growth, with InfoQ's ten major cloud-initiated innovation technology solutions, cloud storage area, target storage products, market recognition significantly increased. In the latest release of IDC, in the fourth quarter of 2022, In China's software definition storage report, Xinshanyun's target storage ranking rose to the fourth place. The market share is more than three times that of 2021. We also released a target storage product based on full flash storage ring. Read and write performance increased by about 100%, which is particularly suitable for large data storage separation, AIGC and other scenarios, providing high performance and high performance the ability to divide and store. In the field of industry cloud, for the pain points of corporate customer use and management cloud, we upgraded the Galaxy Cloud as a platform, and launched a more unified, convenient and rich resource management system based on multi-use areas to significantly improve the experience of corporate customer use and management
spk03: In terms of product innovation, we live up to our model of building success based on technology and innovation by constantly and rapidly iterating on our products and providing a best-in-class customer experience across our core offerings. In cloud computing, our container instances officially started to support the elastic scaling of container clusters hosting customers' own data centers enabling unified management of on and off cloud resources, ensuring a smooth scaling into the cloud during spikes in usage. This solution can reduce on and off cloud bandwidth costs by around 80%. For such achievements in cost performance and efficiency, it is honored as one of InfoQ's top 10 cloud-native innovation solutions. In cloud storage, our object storage products is gaining more and more recognition from the market. Jumping to fourth place, in the fourth quarter of 2022, China's software-defined storage report published by IDC Research, with its market share doubling compared with 2021. We also launched an all-flash-array object storage product, which doubles read and write performance, particularly well-suited to application scenarios such as AIGC and the separation of computation and storage in big data, providing tiered storage solutions with top-of-the-line performance at a high cost efficiency. In the enterprise cloud space, we upgraded Galaxy Stack to solve cloud usage and management pain points for enterprise customers. The result is a more unified, convenient, and enriched resource management view across multiple availability zones that provides a better customer experience in terms of usability, safety, and intelligence.
spk02: Especially since the first quarter, China's AI field has continued to heat up after the release of GPT-3.5. We are actively fully deployed. First of all, as the only cloud platform for Xiaomi Jinshan Ecology, we and Xiaomi Jinshan Ecology have a strategic deployment of AI. In particular,
spk03: I would like to address the recent developments in China's AI sector, which has continued to be heated since the debut of GPT-3.5 in the first quarter. We have kept a close eye on this space and have proactively deployed resources to comprehensively respond to market trends. First, as the only cloud platform in the Xiaomi and Kingsoft ecosystems, We approach AI strategically with Xiaomi and Kingsoft Cloud Ecosystems companies in a strategic and coordinated manner, providing support for key programs, including Kingsoft Office's WPS AI. Second, we stand strictly neutral in large language model space. This position enables us to retain the full trust and preference of the many independent AI companies that use our platform. Third, with a combination of directly owned and leased assets, we are able to offer sufficient GPU server resources to meet our customers' needs.
spk02: Overall, the results of the past few seasons have left us with the vitality of our strategy. Looking forward to the opportunities and challenges in the future, we will continue to shape these strategic directions. In practice, we will use the strategy well,
spk03: In summary, our results over the past few quarters demonstrate that our strategy is yielding results. As we prepare to meet future opportunities and challenges head on, we will nimbly execute on this strategy to create value for our customers, shareholders, employees, and society. I will now pass the call over to our CFO, Henry, to go over our financials for the first quarter of 2023. Thank you.
spk16: Thank you, Zouzou, and welcome everyone for joining the call. Now I will walk you through the financial results for the first quarter of 2023. Guided by the high-quality and sustainable development strategy We are pleased to see that our profitability has further improved steadily in the first quarter. Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved record high of 194.4 million RMB, increased by 133% year-over-year, representing adjusted gross margin of 10.4%. Along with our strict expenses control, Our normalized adjusted EBITDA margin improved from negative 6.6% in the same period last year and a negative 10.2% in the last quarter to a negative 5.9% this quarter. Our total revenue were 1,864.4 million RMB this quarter, which were in line with our previous outlook. Within that, revenue from public cloud services was 1,153.7 million RMB, compared with 1,380.8 million RMB in the same period of last year. The decrease was mainly due to our proactive adjustments of CDM business, as well as impact from our client structure adjustments. Revenue from Enterprise Cloud was 710 million RMB, compared with 792.5 million RMB in the same period of last year. The decrease was mainly due to the general infection of COVID-19, seasonality impact, and project quality control. We continue to enhance our cost control measures. Total cost of revenue decreased by 20.2% year-over-year to 1,670.2 million RMB. IDC costs decreased significantly by 21.4% year-over-year from 1,110.3 million RMB to 872.4 million RMB this quarter. Depreciation and amortization costs decreased by 8.7% from 246.1 million RMB in the same period of last year to 224.6 million RMB this quarter. Solution development and services costs decreased by 11% from 476 million RMB to 423.6 million RMB this quarter. Fulfillment costs and other costs were 122.7 million RMB and 26.9 million RMB this quarter. Adjusted gross profit of this quarter increased by 133% to 194.4 million RMB, representing adjusted gross margin of 10.4%, compared with 3.8% in the same period of last year. The significant margin improvement demonstrates the success of our strategic adjustments of our revenue mix, optimized enterprise cloud project selection, and efficient cost control measures, and reaffirm our strong commitment to improving our profitability and delivering high quality and sustainable development. To help the market and investors better understand our business and our path to profitability, we separately disclose the growth margin and gross profit for public cloud and enterprise cloud in order to better reflect our business nature. Within our business life, gross profit of public cloud services was 24.8 million RMB, which was significantly improved from the gross loss of 47.2 million RMB in the same period of last year. Gross margin of public cloud services were 2.1%, compared with an active 3.4% in the same period of last year. The improvement was mainly due to the proactive scaling down of CDN services and adjustments of our client structure. First profit of enterprise cloud services was 169 million RMB, compared with 127.4 million RMB in the same period of last year. First margin of enterprise cloud services was 23.8%, improved from 16.1% in the same period last year. The improvement was mainly due to our more stringent enterprise cloud product selection strategy. In terms of expenses, excluding share-based compensation and impairments of long-lived assets, our total adjusted operating expenses were 595.8 million RMB, decreasing by 18.3% from 729.6 million RMB last quarter, Within that, adjusted R&D expenses was 202.6 million RMB, decreasing by 15.4% from last quarter. Adjusted selling and market expenses was 104.2 million RMB, compared with 118.4 million RMB last quarter. Adjusted G&A expenses decreased largely by 22.3%, from 371.9 million last quarter to 289.1 million RMB. As of March 21st, 2023, our cash and cash equivalent and short-term investments amounted to 4.5 billion RMB, providing us with significant and sufficient liquidity for operations. The capital expenditures for this quarter was 44.6 million RMB, which primarily consists of payments for service. We have been taking control over our procurement of traditional service, such as the ones being used for CDN's business, while for high-performance service, especially in the recent popular AIGC areas, we have been actively cooperating with our suppliers in various ways to access the resources needed, including but not limited to capital expenditure model, We also, in operational leasing, which was payments, will not be included in our CapEx, but amounted will be in OPEX model. Meanwhile, due to the payment schedule, certain cash payments for server purchases, including the servers, will be used for AIGC business, which we ordered earlier this year. We will be gradually reflecting sequentially in the following quarters. Lastly, we have recently released our ESG report for 2022 to present a very in-depth review of the company's progress in the last year in ESG practice. We've also noticed that recognition from rating agencies and scoring of the company increased from certain well-known ESG agencies. We have taken great pride in advocating the highest ESG standards. We will continuously strengthen our ESG governance and engage with our partners to amplify our positive impact in the cloud industry and the society. thereby delivering long-term value for our shareholders. Looking ahead, we will continue to pursue our high-quality development strategy and unlock synergies within the Xiaomi and Kingsoft Group ecosystem, while staying agent to capture new opportunities in the new era of AI technology advances. We expect our total revenue to be between 1.85 billion RMB to $2 point zero billion RMB for the second quarter of 2023. Why are these forecasted comments above are based on our current and preliminary views on the market and operational conditions, which are subject to change, with which we firmly believe that given the time, the effect of ongoing strategy initiatives and the new business opportunities, especially in the EITC areas, will continue to amplify and reflect our financial results in the mid to long term. Thank you.
spk11: Thank you. This concludes our prepared remarks. Thanks for your attention. And we are now happy to take our questions. Please ask your question in both Chinese Mandarin and English if possible. Operator, please go ahead. Thank you.
spk07: Ladies and gentlemen, we now begin the question and answer session.
spk08: If you wish to ask a question, please press star 1 1 on your telephone. We are now taking the first question. And the first question from Xiaodanzang from CIC. Please go ahead. Your line is open.
spk15: So my first question is on our pricing strategies. We noticed that several cloud service providers have announced their price cuts on their products in the past few months. So could you please share your views on the price trend going onwards? And are we going to make adjustments to our pricing strategies accordingly? And my second question is on our GDP margin. We have seen a meaningful sequential improvement in the gross profit margin for the first quarter. So is this improvement sustainable? And what is our expectation for the segmental growth profit margins in the mid to long term? Thank you.
spk02: Let me answer the first question first. Indeed, we are also concerned about the market. It should be said that there is a business that issued a statement about the so-called large-scale adjustment of price. So we also carefully analyzed it. From the result, we believe that it has no real impact on our existing product and service in all aspects. Yes. To be specific, in the future, will there be something similar? Anyway, from our own analysis results, There is no practical meaning for the so-called list price reduction for the whole industry. We also pay attention to it. Our point of view is that it will not have a real practical impact, okay? Because I won't go into the details. What are the areas in which there is a reduction in the price for different customer types? In fact, if you do a little analysis, you can get my conclusion. OK, so more of us, more of our views think that this may be a kind of market sales behavior. Yes, yes, it is not a kind of practical price reduction behavior. OK, so we will not go to this simple and easy to to to to to to to to to to to to to to to to to to to to to to to to to
spk03: Okay, so indeed we have noticed our peer players' so-called large-scale price cut and we have analyzed it carefully. In terms of conclusion, I would say that its impact to our current products and services are limited and there's actually no material impact to our current offerings of products and services. Now as to in the future whether we we have anything similar in terms of pricing strategy. We should say that the tier players catalog price cut is actually limited. If we just take a close look at the specific products that are included in this action. And we also do not think that it has any material impact to the industry as of now. So our feeling is that this action is more geared towards PR purposes.
spk16: Thank you. Thank you, Sophia. I'm happy to take on the second question regarding the gross profit. As you mentioned, we are very happy to see that, especially starting from the second half of last year, the company has adopted quite an important initiative to expand our gross profit, which you probably can see in the recent results have achieved very positive results. But also, I want to put the data into the context in the past six quarters, actually. If you remember, the lowest point on the gross margin was back in Q4 of 2021. At that time, if you remember, our gross margin on a company level was only about 1.2%. And in the past six quarters, especially the second half of last year, We're sequentially increasing the gross margin to today's about 10.2%, which is actually almost 7 to 8 times higher than the Q4 2021. It's reflecting a combination of a few important reasons and the drivers. First, it's really a better mix of the products, including our efforts to cutting back certain low-profit margin products. And also increasing the diversification of the top clients and the media size clients as well, which actually giving Kingsoft Cloud a better positioning in terms of the pricing power and the terms and the commercial terms we negotiated with our customers. And second is our efforts to cutting back certain resources from servers, the bandwidth, and the lower utilized cabinets as well. All those efforts are the combination of those impact to our gross margin. But more importantly, it's really our internal strategy and management quality in terms of how we control, how we deliver, how we execute the enterprise cloud projects, and how we make sure in terms of the PMO office can actually take a very good role in managing the cost and the efficiency of enterprise cloud. That's why, on this quarter, we're first time to separate the growth margin of enterprise cloud and public cloud. As you can see, both business lines are making a positive growth margin, and we're happy to see that trend more going forward. On the second point you're asking, I think the key trend we're trying to see is three things. First of all, on a combined basis, we're happy to see, and hopefully, the growth margin of Kingsoft Cloud as a company will improving sequentially on a quarter to over quarter basis. So I think we are confident to see that the trend going forward, given the few things we already see the good results, will continue to do that. Second, I think the potential of the growth margin expansion of the public cloud will be more propelled compared with enterprise cloud. So we're going to make sure the potential of the margin expansion on public cloud we're taking a more obvious role in terms of margin expansion of the company, but also on the same time, we want to make sure the growth margin of enterprise cloud will keep a sustainable basis and will expand on a relatively rational pacing as well. So by doing two things, hopefully we can keep the growth margin of the company level will continue to grow as well. And the last point, I think we'll also take a very, very careful view regarding the growth versus the profitability. So it doesn't say that margins the only one factor we're trying to keep a focus but also also balancing the growth opportunities in terms of example the recent AI opportunities where we'll make sure we have enough resources to invest and on the same time we're going to make sure our growth margins continue to improve and our CEOs also mentioned we will make a very rational decision and not going to follow any unrational trends in terms of pricing cuts and other things that are reflecting the potential risk of our growth margin. Thank you.
spk05: Thank you for your question.
spk08: We are now taking the next question. And the next question from Brian Gong from CT. Please go ahead.
spk17: Hello, everyone. Good evening. I have a follow-up question. You mentioned that we need to balance growth versus profitability. So I would like to ask, when can we see the supply and industry clouds rising again? When is this time? And then, in addition, President Zhou also mentioned the impact of AI on us. Then there are two small problems. The first one is that there is already a third-party model running on our side. It seems that it has already run on our side. I want to ask this. uh uh I will translate myself. Thanks, management, for taking my question. Just a follow-up to Henry's point that Kingsoft Cloud will balance growth versus profitability ahead. When should we see public cloud and enterprise cloud growth accelerate again in the future? And also, Zhouzong just mentioned the impact from AI In case of cloud, can management elaborate? Have we seen any, you know, large language model from third party already on our cloud? And also, do we have enough GPU, those chips, to meet the demand in the future? Thank you.
spk02: Let me answer. I'll let Harry add to that. The first question is, you asked when the supply and demand can rise. This is my separate answer to you. As you all know, the public sector is mainly served by these major Internet or Fan clients. I personally think that this wave of AI is a very good opportunity for us. Actually, you also asked the second and third questions. They are all similar. So, we also think that this time, anyway, we have said this many times, this time, the positioning of this Zhongli Yun factory, in fact, is also very obvious this time. In fact, in addition, in fact, this time, the overall co-operation of the entire AI wave, Xiaomi, Jinshan, Shunwei, is also very effective. So, I think the opportunity has come to Gong Yun, it has come, okay? I will answer your second and third questions later, and I will expand. Yes, the Korean language is mainly our own internal Chinese and English three pieces, uh, that one is slightly different. Uh, since, uh, this part of the system, in fact, we, we, in general, are focusing on the original mode first. So, at present, uh, the area we lock is also fully open before. It is gradually locked in Beijing and Hubei. to be the base. In fact, we are in these two areas. This one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, In the short term, this may be the opposite of what you saw before. You will find that there may be fewer stages, but in fact, the profitability of these projects has increased. So for the long term, we think that if we collect it first and use it as a technology service, and then spread it out, the future will only get better and better. Then the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, the medical, Okay.
spk03: So I'm going to answer a question separately, since you mentioned for both public cloud and the enterprise cloud. In the public cloud space, as you know, we mainly serve internet customers or quality internet customers. And as you also mentioned in the second question, the current wave of AIGC or AI is in itself a very good wave of opportunities for us. As we have commented, we'll continue to leverage our neutrality positioning, which is well manifested in the fact that we're able to engage with a large number of independent AI developers. And also the effect. of our coordinated and strategic approach with Kingsoft and the Xiaomi ecosystem is also very good. So this is about our public cloud opportunities. In terms of enterprise cloud, because we have three basically different major verticals, namely public services, digital health, and finances, I'm going to answer to you separately. So in the first part is the public services cloud. Our overall strategy in this line of business is to actually shrink and to focus a little bit in terms of geographical locations first. So in terms of project number, you might see the number of projects decreasing, but the profitability will be increasing and we'll be focusing on some of the core regions, for example, Beijing and Hubei provinces. We believe that in the medium to long term, such approach, which namely is to shrink and to enhance our technology capabilities and services first and then to expand is a healthier way of growth. And secondly, in terms of digital health, as we commented in the prepared remarks, we're enhancing and we're pushing forward the five models of digital health business. We see it's accelerating, not only in terms of profitability, but also in terms of revenue scale. So that's basically about the enterprise cloud side. Okay.
spk02: The second one you just asked is as a Chinese cloud manufacturer, there are now many other third parties, not the third party, but some other large-scale AI companies. How many of them are running here? To be honest, I really can't give you a specific answer. Because first of all, it involves the privacy of the client itself. Secondly, in fact, we have many projects that are also As to your second question, as to how many large language model providers or companies are running on our platform,
spk03: I have to say that I apologize, we cannot answer your question in detail. And this is due to the fact that, first of all, the confidentiality consideration for our customers, and secondly, currently we still have a large amount of such companies that we are in the negotiating stage for potential transactions.
spk19: Okay. The third question, you asked if we have enough chip technical resources.
spk02: I'm thinking about how to answer you. The conclusion is that we are definitely not enough now. Because why? To be honest, this wave of AI's hot潮, I think with hot潮, our customers, to be honest, are very eager for this. Yes, very fierce. You also know that the overall A100 has been banned by the United States. Like the A800, it is true that the overall supply and demand of A800 is also under pressure. Yes. So, in the early stage, we have done our best to meet the growth needs of our customers. Yes. But in fact, from our current... Why did I use our customers' enthusiasm just now? It's really... That's your third question about our GPU chips reserved. The short answer and the conclusion is it's definitely good to have more.
spk03: We have been seeing great enthusiasm from such customers and expecting to expand the AI-related business. As you know that in the market, A100 has been essentially banned by the US side. And we also see very tight supply on A800 market. But as I commented earlier, we are adopting flexible and combined channels to satisfy such needs. And that includes, first of all, directly owning such chips or GPU servers. and secondly, in terms of leasing such assets. So what we can say is that we definitely try our best to meet such needs and to satisfy our existing and potential customers' needs in that regard.
spk16: Thank you, Zouzong. Brian, thanks for the question. Just to add only two points. First of all, today we are publishing our Q&A results. As you remember, back in Q1, the AIGC topic was emerged actually in the early part of April. definitely not in the current quarter's results. And we actually keep quite positive regarding the growth prospect, given in Q1, as you know, part of the China was affected in COVID and many of the bidding process, given the two sessions, if you remember back in March, was affected as well on the timing. So as we actually promised probably one or two quarters earlier, so on this quarter, the first step, we'll separately disclose our growth margin on the public cloud and the enterprise cloud. And as a second step, hopefully in the coming quarters, we're going to also disclose our backlog numbers and other things. So I think we are going to see some growth potential and the timing and the pacing of those growth opportunities in the coming quarter as well, which are going to be a combination of the AIGC opportunities and the money we spend and how we actually control the balance of the growth and profits. The second point is, maybe some of you I also noticed that in Q1, our CapEx number was a little bit low. I think that's also not a reflecting implication on our growth in terms of the spending because on the cash flow category, we actually haven't ordered the servers, but the timing of those payments has not hit accounts on the cash flow items in Q1. And many of the new opportunities are coming in April and in May. Actually, I'm working on those opportunities as well. So I think these are the two hopefully can be helpful for you. For the next quarter, hopefully we can give you more color regarding the backlog and you can see the growth opportunities in a more kind of quantitative way are coming forward. Thank you. Thank you. That's very helpful.
spk06: Thank you for your question.
spk08: There are no further questions. I will hand back the conference to Nico Sean for closing remarks.
spk09: Thank you, operator.
spk11: 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. Thank you. Have a nice day.
spk08: That concludes the conference for today. Thank you for participating. You may hold this connect.
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