Kingsoft Cloud Holdings Limited

Good day and thank you for standing by. Welcome to Kingsoft Cloud's second quarter 2023 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Shan, IR Manager. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingstop Cloud's second quarter of news release was distributed earlier today and is available on our IR website at ir.psu.com, as well as on global newswire services. On the call today from Kinsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou, and the CFO, Mr. Henry He. Mr. Zou will review our business strategy, operations, and company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer a question during the Q&A session that follows. There will be consecutive for your convenience and the reference purpose only. In case of any discrepancy, management statement in the original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions. and relate to events that involve known or unknown risks, uncertainties, and other factors, of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or factors are included in the company's filing with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RFP. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zhou. Hello, everyone.

Welcome to the 2nd quarter of the business phone conference of Jinshan Yun. The company continues to uphold the principle of high-quality sustainable development, insist on technical success, and build the whole process of reputation with the customer as the center, strengthen business management, and actively embrace the new era of AI. This quarter, Jinshan Yun has achieved a further improvement in profitability, with a revenue of 18.4 billion yuan, and a net profit of 11.3% after adjustment. It has achieved a steady increase of 4 consecutive seasons, creating a new height in history. After adjustment, the net profit reached RMB2.07 billion, which is more than three times that of the same period last year. The EBITDA rate after regularization is negative 3.3%, which is roughly 5.3% as of the same period last year, and 2.6% as of the previous season.

Hello everyone and thank you all for joining Kings of Cloud's second quarter 2023 earnings call. During the quarter, we continued to uphold the principle of high quality and sustainable development, build success based on technology and innovation, and forge our reputation throughout the entire business process with customer centricity. We have enhanced our operations management and proactively embraced the new AI era. This quarter, our profitability further improved. Total revenues reached RMB 1.84 billion. Adjusted gross margin increased steadily for the fourth consecutive quarter to a new record high of 11.3%. Adjusted gross profit reached RMB 207 million, more than three times the amount for the same quarter last year. Normalized adjusted EBITDA margin was negative 3.3%. which represents a significant improvement of 5.3 percentage points from the same quarter last year and 2.6 percentage points from the previous quarter. 公有云方面,本季度实现收入11.6亿元, 毛利率5.2%,较去年同期的-2.4%, 显著提升,扭亏为盈。 我们继续着力围绕三方面下功夫,

and Xiaomi Jinshan Ecology's customer structure is steadily improving. First, we will continue to serve Xiaomi Jinshan Ecology, especially the overall revenue of the Jinshan Group this quarter, which is over 15% in comparison. Second, we will further optimize the customer structure. The first-largest customer's revenue ratio will further reduce to about 16%. The first-class customer has more than 20 new customers, In terms of public cloud services,

Revenues were RMB $1.16 billion, with a growth margin of 5.2%, significantly higher than and turning positive from the negative 2.4% growth margin in the same quarter last year. We continued to focus on three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, customer mix, and cost reduction. First of all, we continued to serve Xiaomi and Kingsoft ecosystem well. In particular, total revenues from Kingsoft group increased by approximately 15% year over year. Second, we continued to optimize our customer mix. The revenue share of our largest customer dropped further to around 16% while signing up more than 20 new medium-sized customers. Meanwhile, we also resolutely withdrew from long-term loss-making projects and customers, achieving a more balanced and healthier revenue mix. Third, we have made cost reduction and efficiency improvement an ongoing initiative. We established a dedicated cost optimization team to tackle redundancies, including the cancellation, relocation, consolidation, reuse, and disposal of such resources and assets. yielding remarkable results.

In terms of industry cloud, this quarter, we achieved a revenue of 6.75 billion yuan, with a profit rate of 21.7%, which was significantly improved by 15.3% in the same period last year. In the public service sector, we chose to focus on the core sectors such as government cloud, state cloud, and so on, in order to make a difference. We not only built a cloud for our customers, but also focused on from the top cloud, the user cloud, to the whole chain management mode of the cloud. The standardization and operation capability of the cloud is the core competitiveness of the cloud and state cloud products. For example, we have served the Beijing cloud for nine consecutive years. Security, reliability, and ease of use are highly recognized. The number of cloud units has grown to more than 50, and has formed a positive cycle. In the field of digital health, We are steady, strong and big. We have the ability of a large-scale, ultra-high complexity industry standard project to be verified by the market. Based on this, we aim to grow. On the one hand, we are a horizontal copy of the regional health cloud platform. The structure and priority of the project is recognized by the National Commission for Industry and Industry Association and is promoted to more than a dozen provinces nationwide as an industry reference structure. to further promote the national public health system and the construction of a national health information system to achieve good economic and social benefits. For example, we completed the first phase of the construction of the Jiangsu Medical Imaging Cloud, which achieved the collection of more than 1,300 hospital imaging data in Jiangsu province. The estimated annual cost of saving medical imaging is about 240 million yuan. We are committed to the standard effect of the Jiangsu 17 imaging cloud project. We are working on project experience in Chongqing. At the same time, we are deepening the project planning of Jiangsu Aqi imaging cloud. The plan is to expose all public health institutions in the province. On the other hand, we will expand our business to the hospital. With the cooperation of a number of top hospitals and cloud, the new generation hospital digital transformation. Solving high system maintenance costs Low service stability Difficult to quickly respond to user needs and other pain points For example, in the three hospitals Wuhan University Central Hospital We carry out modularized micro-service transformation of the system Innovative new hospital data construction model Promote platform and application ease and horizontal integrated discussion price model Achieve business process optimization and unified data management Financial field Moving on to enterprise cloud services.

Total revenues were RMB $675 million, with a gross margin of 21.7%, a significant improvement from 15.3% in the same quarter last year. In public services space, we opted to focus on core areas of public service cloud and state-owned asset cloud, executing a differentiated approach with not only build cloud for customers, but also develop an end-to-end cloud service model covering cloud migration, cloud usage, and cloud management. We have forged our core competitiveness of standardized public services cloud operation capabilities, applicable to both public service cloud and state-owned asset cloud. For example, we have been the partner for the Beijing Public Service Cloud for nine consecutive years, winning a strong reputation to deliver secure, reliable, and easy-to-use systems and services, resulting in a virtuous cycle of increased cloud adoption by more than 50 public services departments. In digital health space, we have maintained a steady and sure approach, first consolidating our strengths, then expanding in scale. Our proven capabilities and leadership in super large, ultra-complex landmark cloud projects have provided a solid foundation for further growth. On one hand, we are horizontally replicating our regional healthcare cloud model to more regions. Our model features an innovative architecture recognized by China's National Health Commission and industry associations and has been promoted to more than a dozen provinces as an industry reference framework, allowing us the opportunity to engage more deeply in the construction of the national public health systems and medical digitalization platforms, producing remarkable economic and social benefits. For example, we completed the first phase of the Jiangsu Medical Image Cloud project, integrating image data from over 1,300 hospitals across the province, with estimated annual savings of RMB 2.4 billion from reduction of duplicated medical images. Building upon our successful experience of this landmark project, we have replicated our imaging cloud project in Chongqing province. Meanwhile, we're working on the plan for the second phase of Jiangsu imaging cloud project, which, upon completion, is expected to connect all the public hospitals across the province to the cloud platform. On the other hand, we're also vertically penetrating our business to hospital level. We are partnering with a number of top-tier hospitals to facilitate cloud-based next-generation digital transformation. Our solution addresses a number of pain points, including high maintenance costs, server instability, and slow response to user requests. For example, we helped the Zhongnan Hospital of Wuhan University, a grade A tertiary hospital, transform its modular system with microservice architecture, developed an innovative data structure for Daxing Hospital, creating a loosely coupled, horizontally integrated architecture for its platforms and applications enabling business process optimization and unified data management. In the financial services space, we completed and delivered a batch of big data projects for leading financial institutions, as well as the second phase of China Construction Bank's cloud infrastructure development project. We're now in the process of deploying the third phase of this project. Turning to Camelot, During the quarter, Camelot achieved a solid business performance, signing up six new customers while maintaining robust relationship with the existing major clients. Its profitability remained at a healthy and stable level.

In terms of product technology, we continue to uphold the first-class customer experience of technology and legal core products. In terms of storage, we launched a deep and cold-coated product, which is particularly suitable for medical imaging, financial receipts, and the collection of data. In the field of big data, our big data products are globally recognized by ITC. In its Data Platform Technology Ability Evaluation Report 2023, data management, storage, development, security, and other comprehensive capabilities are ranked top three in domestic leading manufacturers. In the field of database, we carried out strategic cooperation with Pingkai and Xingcheng to provide comprehensive distribution of cloud data storage services and complement each other. In the field of industry cloud, we upgraded the Galaxy Cloud Unified Cloud Platform GMS and the Cloud Manager for face-to-face cloud users to add a number of functionalities to the pain points of cloud users and customers in the industry cloud. As a domestic In terms of product and technology,

We uphold our principle of building success based on technology and innovation by delivering best-in-class customer experience across our core product offerings. In storage space, we launched a deep ultra-cold data archive product, particularly well-suited for data management use cases, including medical imaging, financial documents, and compliance archives. In big data space, our big data product was recognized for its overall strength and ranked among the top three leading Chinese companies by IDC, a premier international institution, in its Data Lakehouse Platform Technology Assessment Report 2023, in terms of its comprehensive capabilities, such as data management, storage, development, and security. In database space, we entered into strategic partnership with PINCAP, leveraging our respective strengths to jointly provide fully managed distributed cloud database services. In enterprise cloud space, we upgraded our Galaxy Stack Management System, a unified platform facing operation and maintenance personnel, and the cloud user facing cloud manager, adding dozens of new features to solve cloud management and usage pain points for enterprise cloud customers. In 2023, Trusted Cloud Summit, an authoritative and prestigious event that promotes the best practice of cloud industry standards in China, and hosted by China Academy of Information and Communications Technology and China Communications Standards Association, our Galaxy stack won two milestone awards, namely Best Practice Awards for Technology and Best Practice Awards for Public Services Cloud, validating our outstanding technical strength in the domain of dedicated cloud.

Welcome to the new era of AI. We are very grateful to you to collaborate with major model and mass database partners in the industry, to launch model and service, mutual trust reasoning specialization program, targeted upgrade container storage products, to support multi-media processing needs under the context of wireless loan technology and AIGC, to coordinate Xiaomi Jinshan Ecosystem multi-channel purchase and supply server to test and connect domestic GPU storage backup program,

Ushering in the new AI era, we're beginning to see results from our rapid response to and comprehensive embrace of AIGC. Leveraging our neutral positioning, we have gained the preference of independent AI companies and signed a dozen of new AI customers. As the sole strategic cloud platform in the Xiaomi and Kingsoft ecosystem, we're working closely with Kingsoft Office on WPS AI, enabling model training and inference business deployment. Partnering with industry-leading large language model and vector database providers, we launched our mass mutual trust dedicated zone solution to bridge the trust gap in AI2B use cases. We also carried out AI-targeted upgrades to our container and storage products to support InfiniBand technologies and multimedia processing in AIGC use cases. In addition, we are collaborating with the Xiaomi and Kingsoft ecosystem to purchase or lease AI service from various channels, conducting tests and evaluations of domestic GPUs for alternative contingency plans. 建设和壮大武汉研发中心为公司中长期技术研发纳入新鲜血液

is Jin Xiangyun's major strategic deployment. Since the opening of Wuhan Research and Development Center in October last year, in less than a year, through the voluntary mobilization and localization of core components, Wuhan Center has reached a scale of about 400 people, exceeding one-third of the total number of the entire company's research and development headquarters, of which 50% is the key. To develop and grow our Wuhan R&D Center is our significant strategic initiative, which will help us nurture new talents for maintaining our technological leadership in the medium to long run.

In less than a year since its inception in last October, through voluntary relocation of key R&D staff from Beijing and Wuhan local recruitment, our Wuhan team has quickly grown to approximately 400 people, accounting for more than one-third of our total R&D team. And 50% of the Wuhan team hold a master's degree. We also organized a STAR training camp at Wuhan Center to provide aspiring university graduates with a fast track to transition from campus to workplace, and attract talents from Wuhan's top universities by fostering a sense of belongingness in our corporate family.

Overall, in the past few consecutive seasons, the company's sustainability has been rapidly improved, making us more confident in the strategy and tactics we have chosen. Looking forward to the future, we will continue to uphold the principles of sustainable high-quality development, In summary, the continuous and rapid improvement in our profitability over the past few consecutive quarters

has strengthened our belief in the strategies and the directions we have chosen. Looking ahead, we will nimbly uphold the principle of high quality and sustainable development and focus on technology, reputation, and management to drive progress, thereby creating value for our customers, shareholders, employees, and the society. I will now pass the call over to our CFO, Henry, to go over our financials for the second quarter of 2023. Thank you.

Thank you, Ms. Zhou, and I welcome everyone for joining the call. Now I will walk you through the financial results for the second quarter of 2023. Uphold a strategy of high quality and sustainable development. We are pleased to deliver another quarter of a steady profitability improvement. Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved a record high of 206.8 million RMB, increased by 202% year-over-year, representing adjusted growth margin of 11.3%. Along with our strict expense control, our normalized adjusted EBITDA narrowed from negative 163.7 million RMB in the same period of last year to negative 59.9 million RMB this quarter. As a result, normalized adjusted EBITDA margin further narrowed from negative 8.6% in the same period of last year and a negative 5.9% in the last quarter to a negative 3.3% this quarter. Thanks to the operational efficiency improvement, the quarter-over-quarter narrowing of normalized adjusted EBITDA margin outpaced the increase of adjusted gross margin. Our total revenue were 1,835.4 million RMB this quarter, of which revenue from public cloud services were 1,159.5 million RMB, representing a decrease of 10.1% compared with 1,289.1 million RMB in the same period of last year. As we steadily adjusted our revenue mix and proactively scaling down services to our top CDN clients. Revenue from enterprise cloud services were 675.2 million RMB, representing an increase of 9.5%. from 616.6 million RMB in the same period of last year. The year-over-year increase was mainly driven by our continued focus on selective verticals and quality projects, recovery from COVID-19 impact, our investment into flagship projects bearing fruits, enhancing our capabilities to replicate solutions and services to different regional customers. We continue to enhance our cost control measures Total cost of revenue decreased by 11.5% year-over-year to 1,628.8 million RMB. IDC cost decreased significantly by 16.4% year-over-year from 1,029.1 million RMB to 860.7 million RMB this quarter. Depreciation and amortization costs decreased by 18.8% from 249.1 million RMB in the same period of last year to 202.1 million RMB this quarter. Solution development and services costs decreased by 7.4% from 489.1 million RMB to 452.9 million RMB this quarter. Fulfillment costs and other costs were 71.7 million RMB and 41.3 million RMB this quarter, respectively. Adjusted gross profit of this quarter increased by 202% to 200.6.8 million RMB, representing adjusted gross margin of 11.3% this quarter, compared with 6.6% in the same period of last year. The significant margin improvement testified to be the effectiveness of strategic adjustments of revenue mix, improvement of our infrastructure efficiency, phase-out of loss-making customers, and optimized enterprise cloud project selections and efficient cost-control measures, demonstrating our strong commitment to improve our profitability and delivering high-quality and sustainable development. Each of our business lines achieve large improvements. Growth profit of public cloud services was 59.7 million RMB, which was significantly improved from the growth loss of 30.7 million RMB in the same period of last year. Growth margin of public cloud services was 5.2% compared with negative 2.4% in the same period of last year. The improvement was mainly due to a proactive scaling down of CDN services and adjustment of our climax. Growth profit of enterprise cloud services was 146.7 million RMB compared with 94.6 million RMB in the same period of last year. Growth margin of enterprise cloud services was 21.7%, improved from 15.3% in the same period of last year. The improvement was mainly due to our rigorous enterprise cloud project selection. In terms of expenses, excluding share-based compensation and impairments of long-lived assets, Our total adjustment operational expenses were 538.1 million RMB, decreased by 9.7% from 595.8 million last quarter, of which our adjusted R&D expenses were 182.3% million RMB, decreased by 10% from last quarter. Adjusted selling and marketing expenses was 128.3 million RMB, compared with 104.2 million RMB last quarter Adjusted G&A expenses decreased largely by 21.3%, from 289.1 million RMB last quarter to 227.5 million RMB. We have been taking strict expense control over the period, such as reduction of several expenses and screening of other discretionary expenses and others. As of June 30, 2023, our cash and cash equivalents and short-term expenses investment amounted to 4.3 billion RMB, providing us with sufficient working capitals and liquidity for operations. The capital expenditures for this quarter was 89.0 million RMB, which primarily consists of payments for service. We have been taking prudent control of our procurement of traditional CPU service, such as the once useful CDM business. We have been saving our funds for high-performance AI service, and we are working very closely with the top leading global GPU service provider and their OEM partners to fulfill the orders. We expect the capital expenditures may increase in the second half of this year, but subject to a timeline of server delivery. Our operating cash flow once again recorded net inflow after last quarter fluctuation, reached 65.2 million RMB. It resulted from our margin improvements as well as our internal cash control enhancements. Lastly, we are honored to see that we have been listed in the first edition of the Sustainable Yearbook China by S&P Global. The selection assessed almost 1,600 Chinese companies, and out of those, 88 outstanding companies across 44 industries are included in the 2023 Sustainability Yearbook China of S&P Global. We would like to send S&P Global recognition of our ESG efforts. We will continue our commitment to improve our governance, decreasing our footprint of carbon emissions, and making positive impact to the whole industry and society. Looking ahead, we will continue to pursue our high-quality and sustainable development strategy and unlock synergies within the Xiaomi and the Kingsoft Group ecosystems, while staying agile to capture new opportunities in a new era of AI technology. Thank you.

This concludes our remarks. Thanks for your attention, and we are now happy to take our questions. Please ask your questions in both Chinese, Mandarin, and English if possible. Operators, please go ahead. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Please stand by while we compile the Q&A queue. Our first question comes from the line of Xiaodan Shang from CICC. Please go ahead.

Good evening. Thank you for accepting my question. I'm Zhang Xiaodan, an analyst at Zhongjing. I have two questions. The first one is, we have seen that within the past year, the company has been making some improvements and designations for the Dragonfish CDN node. The management has expected that the structural improvement of our public cloud business will be completed at what time. Does the public cloud business hope to return to a consistent growth in the next few weeks? The second question is related to AI. So thanks management for taking my questions and I got two questions here. First of all, the company has been proactively scaling down the CDM business in the past year or two. So when do you expect the structural optimization for your public cloud business to be completed? And is there any chance that your public cloud segment will return to positive growth in the upcoming quarters? And secondly, what do management think of the prospects of incremental revenue contributions from large language models and generated AI-related business? Thank you.

I'll answer first, and then the other colleagues will add. The first question you mentioned is about the structural adjustment of our public domain. You mentioned it very well. Actually, I'll guess it. In fact, it's mainly divided into CDN and others. Uh, the focus is actually what we adjusted is actually the time this this this this this this block uh, this piece, in fact, since I took over, I have communicated with the market. In fact, the overall development trend is consistent with the previous prediction. Uh, this is just influenced by some factors outside the market. The whole adjustment rhythm will be a little faster than I expected. But in general, it is expected. This adjustment will continue for a while. In fact, we have also made some positive steps for some changes in the external environment this year. It may try to complete the entire adjustment within half a year to a year. OK, this is the first one. The second one is to achieve the whole coin growth. In fact, if we get rid of the impact of CDN itself, I think that in the past year, the growth of the business, the adjustment of the structure, and the several dimensions of the cost reduction have done a great job. So I just talked about the profit and loss of the entire shareholder. Since last year, it has been negative 2.4, and now it is positive 5.2. So I think this is a good explanation. To respond to your question, you mentioned the structural adjustment we have been conducting in the public cloud services segment.

And this can be broken down into two parts. One is the CDM business, and the other is the other public cloud service business. Now for the CDM part, actually since I took the role of CEO last year, we have communicated with the market. And I would have to say that in general, the development for this adjustment of this business has been in line with what I have communicated in the past quarters. But due to the changes in the overall market situation, the speed has been a little bit faster than what we had expected. However, in general, the pace and the direction is consistent. We would expect the adjustment for the CDN business to continue for a while, and we expect to complete that within half a year to one year. And for the non-CDN business part of the public cloud services business, the business adjustment has been going through rather smoothly, and we have done an excellent job in terms of cost reduction. As can be shown in our financial performances, the gross margin for the public cloud services business has improved from negative 2.4% in the second quarter of 2022 to positive 5.2% in this quarter which we are reporting. So this also relates to the second question that you asked about the AI business. we expect that this round of AI opportunity has the potential opportunity to bring us more growth to the public cloud services business.

Okay. To answer your second question, our AI overall plan, in fact, as you can see, with the outbreak of GPT this spring, the demand for the entire AI market is extremely high. We have also talked about it many times. This is because of our identity of this kind of Zhongli Yun. In fact, we have obtained this. This should be said that the vast majority of this AI startup company's reputation is basically like this. I just talked about it in my previous speech. We already have more than a dozen or even more. They are signing with us one after another. Yes, of course, this is just one part of it. This is called this. This is the part of algorithmic knowledge. Yes. China China China The impact of various factors makes it difficult to supply stable goods in a short period of time. So in terms of these factors, our demand is far greater than the supply. So this will reflect our impact. We originally expected that in Q3, the whole area's income, at least in the area provided by the budget, will be greatly improved. But from the current impact of the public car, uh uh uh uh From the sales side, it exceeded our expectations. But from the supply side, there is still a certain gap from our expectations. Maybe the market still needs to give us 1-2Q of time. This is not just us. The entire industry may need to spend 1-2Q of time to gradually flatten the supply and demand. So from a more long-term strategic development perspective in the future, after many interviews. Yes, we call it the horn of the AI. Yes, I also talked about this point at the internal conference. I also said that the horn of the AI has two meanings. One is gathering and the other is rushing. So the current stage is definitely gathering. So internally, some organizational structures have also made some corresponding adjustments. So to answer your question, we do believe that this round of new AI opportunities will bring a lot of opportunity for us

As you can see, after the Chinese Spring Festival, the GBT concept started to explosively grow. The demand for AIGC has been particularly strong. And as mentioned, our neutral positioning has enabled us to win the favor of the vast majority of venture AI companies in China. And we are in the process of signing up contracts with dozens of such companies. And so this is about in terms of supporting their computing power. In addition, as mentioned, we're also providing companies with mass model-as-a-service business. We're also making progress in that front. For example, we have launched the mass mutual trust dedicated zone solution, and we're also collaborating very closely with Xiaomi and Kingsoft. So in general, in summary, basically what we have been seeing is on the demand side, the demand is particularly strong. However, on the supply side, there is significant bottleneck in particular in terms of NVIDIA's supply chain, the supply of GPU chips. And we believe that bottleneck is relatively difficult to resolve within the short period of time. So in short, the supply far exceeds the demand far exceeds the supply in the market, and that is not the situation for our S1 company. It's a general situation for the industry. As a result of that, we had originally expected the revenue from AI to be shown in our financials in the third quarter, and that is likely to be delayed due to the shortage of supply of GPU servers to the fourth quarter or even the first quarter of 2024. However, I would say in terms of overall deployment and response to this new era of AIGC, the results that we have achieved, including the contracts that we have signed, including the models, the solutions that we have launched, are quite successful. In the even longer term, we believe embracing the AI wholeheartedly will actually become the most core direction for Kingsoft the Cloud and Kingsoft Group.

Thank you. We'll now move on to our next question. Our next question comes from the line of Timothy Xiao from Goldman Sachs. Please go ahead.

This is about the net profit. We see that the net profit of the public sector and the industry has actually increased in several consecutive seasons, especially the industry, which has now reached a net profit of more than 20% in two consecutive seasons. I would like to ask the management to continue to explain what the driving factor behind this is. If we look at the net profit of this year or the entire company in the mid-term, I don't know if the company has a relatively updated guidance. Thank you, Benjamin, for taking my questions. I have two questions. One is regarding the gross profit margin as I see the growth margin of public cloud and enterprise cloud has been in the upper trend over the past few quarters, and especially for enterprise cloud, the growth margin has achieved above 20% for the past two quarters. Could management further elaborate on the drivers of the growth margin behind that, and what is our updated view on the growth margin target for this year and in the midterm? And secondly, and also regarding the enterprise cloud, and the question is regarding the revenue, as I see the financial process, the revenue has been in the declining mode slightly in the second quarter. Just wondering if there's any specific reason behind that, and how should we look at the revenue trend into the second half of this year? Thank you.

Thank you, Tim. This is Henry. I'm happy to take on the first question, and our CEO, Ms. So, will take on the second one. So, yeah, it's helpful, actually, to acknowledge the improvement of the growth margin of our enterprise cloud business. Actually, there are a few things. We actually discussed this earlier, but you eventually see that trend actually kept very stable and see that improvement and expansion. A few things. First of all is... we talk about is the right client selection process. So I think that's actually the first and the beginning point that to do the right business with right people. And if you do look at our average revenue mix from Enterprise Cloud, we used to have some kind of heavyweights on the top clients with over 30 or even 40 million RMB per contract. But right now we're focused on the sweet spot around like 8 million to about 10 million RMB per contract. So Working on that range of the right clients, we have a better ability to control the cost and make sure that all the receivables and cost control measures can actually finally deliver. I think that's the first point. The second one is really about the repeating sales for the more standardized products. So we're working very closely with the sales team and our R&D team as well. So we make sure that we not only work with one client on one product, but we want to work with the different clients with the same product. That percentage, obviously, we didn't disclose the number, but from last year to this year, the standardization of the product services and the solutions has been a very important driver. That's the second part. And the third one is really about, I appreciate all the good comments from the research analysts and our shareholders. We're actually moving up from the ICE to path level of the services, and in some cases, we're actually working with clients on SaaS-level products, especially given the AI drivers and the new phenomenon Hopefully, we can actually go up a little bit. Obviously, it depends on different verticals on the right penetration of the path and the source level product, which actually narrow carry with some higher margin. So as a conclusion, Tim, we do believe we have a capacity and the willingness to keep the growth margin above 20% of the enterprise cloud services, including both Kingsoft and Camelot as well. And given the right incentive, for our solution and delivery team to control their own costs, which were actually embedded into their own budgeting and a bonus calculation. We hopefully have more internal measures to make sure this pressure has been moving down the chain and make sure everyone working in the cloud actually pays attention on the bottom line. So going forward, hopefully we can keep above 20% on growth margin of enterprise cloud, as well as we're hoping after the AI eventually unfolded, our enterprise cloud margin can be even higher, hopefully above the three handles in the mid-term. So I think that hopefully gives you some color. Thank you, Tim. And the second question will pass over to Zhou Zong.

I'll first talk about Han Yun's overall thoughts, and then answer your question. I think Han Yun, in the past year, our core focus has been focus. Then, in terms of the choice of the project, we chose relatively higher quality, more sustainable projects. I think this is one of the most fundamental changes you can see in the overall change. In addition, we have done a lot of work around the quality of the project, the customer's reputation, and the ability to further improve the delivery. So, you can see that the development trend of the entire cloud, whether it is the quality of the whole project or the ground level, even the energy level, has been greatly improved. This is a whole development trend. You just mentioned that you saw that the QR and QE slightly declined. This is essentially due to the impact of the activity. Because our cloud projects usually have a longer cycle. So, in fact, what you really see, what the QR report shows, That's basically a year or even two years ago. And then these projects are affected by the various factors of the project itself. The timing of its delivery is not the same. It's just that the second season saw that it was just the delivery of those projects that were completed. China. China. China. China. China. China. Uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, China China China China China But this kind of delivery and receipt of this seasonal impact This kind of situation will still exist Will still exist Okay, so I think I have to Uh, I have to make it clear to you about this kind of blessing behind it Okay, so I'm going to make it clear I think business itself is very positive But due to the characteristics of his business itself Caused him to look at it from a financial point of view In fact, it may be sometimes high, sometimes low So before I answer the details of the question, I would like to give you an overview of how we think about the enterprise cloud business.

The root thinking is that we have been becoming more focused on high-quality projects in terms of selecting high-quality projects and also for the projects that are more sustainable for us. So in terms of project quality, in terms of reputation, in terms of deployment capabilities and services we offer to customers, we have been working very hard on those fronts. And that is why you have been seeing in the consecutive quarters we have been experiencing improving profitability levels. And now as to a question of why the slight decrease for the revenue of enterprise cloud for the second quarter versus the first quarter, the answer is really just the seasonality because the revenue recognition for enterprise cloud projects, they generate delay from the time of the signing of those projects to the revenue recognition for several quarters to one year. And in some other cases, it can be as long as two years. And therefore, the financial results you see in one single quarter is the combined result of different projects signing at different time points and the different delays in the overall revenue recognition cycle. And therefore, I wouldn't say that the slight decrease for the revenue for Enterprise Cloud for the second quarter versus the first quarter is a reflection of our business performance for the Enterprise Cloud. On the contrary, we feel that the fundamentals of the Enterprise Cloud business have been going quite well. And in some future quarters, for example, in the fourth quarter, you might be also seeing a sudden surge of our Enterprise Cloud revenue. However, that does not necessarily reflect an equivalent surge of the business fundamentals. So that's the general idea I would like to give you. In fact, we have also been in communication with the auditors in hoping to find a metric that would provide a real-time reflection of our fundamental business situation and the alignment with that of the financial performance. We're still exploring that. We hope to find that metric soon.

Thank you.

Thank you. Very helpful.

Thank you. We'll now move on to our next question. Our next question comes from the line of Alan Lee from JP Morgan. Please go ahead.

Thank you, Ms. Guan, for accepting my question. I have a question about supply and demand. I just want to ask, if we remove CDN business, What is the trend of our core calculation and storage interest rate in the past few quarters? And if we look at the next half of the year, what is the trend of our interest rate in this area? And then the other thing that Henry mentioned just now is that we have more and more income from high-interest PaaS and SaaS business. I would like to ask the management if we can say that if we look at it in the long term, how much can our PaaS and SaaS business account for? Yes, I will translate it soon. Thank you, Benjamin, for taking my question. I have a follow-up question on growth margin. So for public cloud services, if we exclude CDN business, what's the growth margin trend for core computing and storage in the past few quarters, and how do we think of the trend into the second half? And also, Henry, you just mentioned you have increasing revenue contribution from higher margin SaaS and PaaS services. And could management share some color on how should we think about the long-term revenue contribution from these two businesses? Thank you.

Thank you, Alan. This is Henry. Happy to share some color. So first of all, again, while we're talking about the structure change and the client and revenue mix, CDN versus non-CDN, but I want to point out that the CDN business itself is not really a problematic business. The point is A concentration risk together with the CDM products to certain clients is really a high-risk flag for us. That's why we did some changes in the past few quarters. But putting that aside, as you mentioned, there are two things we can share while we haven't disclosed in detail numbers. First of all, the margin of the CDM business does have certain fluctuations. It depends on the season. It depends on the time mix. And while we're cutting down certain client penetration and the client concentration, we do need to switch and reallocate certain resources, especially on the DNA and the bandwidth. We need to change and cancel and renew. Those actions will take on some fluctuations. But I would say that, you know, in old days, let's say last year or a year before, you know, as you mentioned, there are certain quarters, our city and business, certain regions, certain nodes. But right now, we do have a relatively stable, positive growth margin of the CDN business, while it's really not as high as a public cloud product. The second part is the growth margin of the public cloud services, including computing network and storage, definitely higher, and certain products are much higher than the CDN products in terms of the growth margin. And we are trying to improve the percentage of that revenue from that product. So if you're putting that everything together, I think in a few quarters when we're looking ahead, given we do have a lot of efforts on the resource management and the cost control, hopefully the spread between the computing storage versus the CDN will be expanded. And the computing and storage database and the network products will deliver even higher growth margin going forward given the changes we have. So I don't want to provide a detailed guidance on the gross margin by product. As I mentioned, it's really a dynamic and really kind of fluid in certain situation. But overall, I can tell you that from management perspective, we're aiming for a relative expansion for the public cloud gross margin as a whole, and we'll try to manage on that. And one more point is, you know, you don't have to split that out because You know, one client, they will use multiple product lines, and in one IDC center, we may deliver different products, and one resources we're trying to co-share and provide more utilization as well. So it's not really from that very single, straightforward line of calculation. So hopefully you can understand. On the second point is, I think the earlier question from Tim was really regarding enterprise cloud. It's not really about the path of SaaS within the public cloud, really two different animals, I'll put it this way. The enterprise cloud side, as I mentioned, our path and the SaaS level, they are packaging with the solution and our services, and we do see that service convert to a higher margin. On the public cloud, I don't want to provide a detailed guidance because, as I mentioned, once the AI is coming, all the business new model is changing. When we're talking about the math and other things, when our CEO mentioned, we don't want to kind of develop and divide it by the traditional concept of ICE and non-ICE products. But we are aiming for The mass products and services is a whole package. And as a whole, I think the margin will be much higher than the traditional eyes and computing services going forward. Thank you, Adam. Thank you.

Thank you. Due to time constraints, this concludes our question and answer session. So I'll hand the call back to you for closing remarks.

Thank you all for your interest. Thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.