Kingsoft Cloud Holdings Limited

Good day and thank you for standing by. Welcome to the Kingsoft Clyde's third 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 this session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Wayne Wong, Investor Relations Manager of Kingsoft Cloud. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud third quarter earnings release was distributed earlier today. and is available on our IR website at ir.ksyun.com, as well as on Global Newswire Services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zhou, and CFO, Mr. Henry He. Mr. Zhou will review our business strategy, operations, and company highlights, followed by Mr. He, who will discuss the financials and guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation. All interpretations are for your convenience and reference purposes 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 21 of the Securities Exchange Act of 1934 as amended, and as defined in the U.S. Private Securities 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 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 achievement to differ materially from those in the forward-looking statement. Further information regarding this and other risks, uncertainties, or factors are included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that Unless otherwise stated, all financial factors mentioned during this conference call are denominated in OMB. It is now my pleasure to introduce our Vice Chairman and CEO, Mr. Zhao. Please go ahead. Hello, everyone.

Welcome to the 3rd quarter of the YMCA in 2023. The company continues to adhere to the principle of high-quality sustainable development, stick to technical interests, with customers as the center, build up the whole process reputation, strengthen business management, and actively embrace the new AI era. This quarter, Jin Xianyun has achieved further improvement in profitability, with a revenue of RMB 16.3 billion, and a net profit of 12.1% after adjustment. It has achieved a steady increase of 5 consecutive quarters, and a new record of history. Hello everyone, and thank you all for joining KingsoftCloud's third 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 1.63 billion. Adjusted gross margin increased steadily for the fifth consecutive quarter to 12.1 percent. Adjusted gross profit reached RMB 196 million, increasing by 57.5 percent compared with the same quarter last year. Normalized adjusted EBITDA margin was negative 2.7 percent, which represents a significant improvement of 7.6 percentage points from the same quarter last year and 0.6 percentage points from the previous quarter.

In terms of supply and demand, the revenue of this quarter is 10.2 billion yuan, and the profit margin is 4.7%, which is a significant improvement from the negative 1.6% in the same period last year. We will continue to work around the three aspects, namely Xiaomi Jinshan Ecology, AI business, and strategic adjustment of CDN. First of all, we will continue to serve Xiaomi Jinshan Ecology. to meet the cloud needs of eco-friendly enterprises. In this quarter, Xiaomi and Jinshan's income contributions reached 17%, and the ratio increased by 2.2%, and the same ratio increased by 3.6%. Among them, under the guidance of Xiaomi's business, the large-scale expansion of the exclusive group used by us has become our biggest customer. And Jinshan Office, under the guidance of its AI business, In September, the income increased by nearly 50% per month. Secondly, we are working hard to develop our AI business. Currently, the demand for AI business is skyrocketing, reaching dozens of customers who have signed up and are about to start their business. This quarter, AI-related capital spending has exceeded RMB 400 million, exceeding the total of the first three quarters, and has been rising for two consecutive quarters. In our firm investment and efficient execution, our AI business income compared to the second quarter increased by more than 70%, and the profit was healthy. Third, we continue to advance the strategic adjustment of CDN business. This quarter, CDN income decreased by nearly 20%, and the total income ratio dropped to about 30%, and the largest CDN customer ratio

In terms of public cloud services, revenues were RMB 1.02 billion, with a gross margin of 4.7%, significantly higher than the negative 1.6% compared with the same quarter last year. We continued to focus on three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem. AI business, and CDN strategic adjustments. First of all, we continued to serve Xiaomi and Kingsoft ecosystem well and coordinate enterprises within the ecosystem to systematically sort out their cloud planning and fulfill their cloud demand. This quarter, Xiaomi and Kingsoft contributed 17% to our revenue, an increase of 2.2 percentage points quarter on quarter, and 3.6 percentage points year on year. Among them, driven by Xiaomi business, the capacity of its dedicated cluster has expanded significantly, and Xiaomi has become our largest customer. Kingsoft Office's revenue in September increased by nearly 50% compared to January, driven by its AI business. Secondly, we proactively developed our AI business. Currently, there is a strong demand for AI business, with tens of customers who have signed contracts with us or in the process of business discussions. AI-related capital expenditure in this quarter exceeded RMB 400 million, exceeding the total of the previous three quarters, and has increased for two consecutive quarters. With our continued investment and efficient execution, our AI business revenues surged by over 70% compared to last quarter, with a healthy gross profit margin. Thirdly, we continued to push forward our strategic adjustments in CDN business. This quarter, CDN revenue decreased by nearly 20% compared to last quarter, and CDN revenue as a proportion of total revenue has decreased to about 30%. The revenue share of our largest CDN customer has significantly decreased from 16.2% in the previous quarter to 12% in this quarter.

In terms of industry cloud, the income achieved this quarter is 6.1 billion yuan. The profit margin maintains a health level of more than 24%. In the field of public service, we chose to focus on the core areas such as government cloud, state cloud, education cloud, etc., to further improve the full network management model from the top cloud to the control cloud, and form a core product evidence with large data, large model, and today's cooperation. For example, we have served Beijing Zengwu Cloud for nine consecutive years. Safety, reliability, ease of use, or high recognition. There are 24 pre-contract contracts this quarter to form a positive cycle. In the field of digital health, we continue to advance the five major modes to make new breakthroughs. This quarter, we are the only cloud manufacturer to participate in the repair of national and health standards. In the financial field, we continue to deepen our business cooperation with large state-owned banks to complete the old project review and the new project target. We are also actively involved in the selection stage work of the state-owned large bank AI model. In addition, Kite's business stability is on the basis of maintaining the stability of large customer cooperation. The new contract of five well-known customers this quarter has a stable return on profit.

Moving on to enterprise cloud services, total revenues were RMB 609 million, while gross margin has maintained at a healthy level of more than 24%. In public services space, we opted to focus on core areas such as public services cloud, state-owned assets cloud, and education cloud, further improving the end-to-end model from cloud migration, cloud use, to cloud management, forming a product matrix centered on big data large models, as well as WPS collaboration. For example, we have been the partner for the Beijing Public Services Cloud for nine consecutive years, winning a strong reputation to deliver secure, reliable, and easy-to-use systems and services, resulting in 24 contract renewals this quarter and forming a virtuous cycle. In digital health space, we continued to promote the five business models and make new breakthroughs. As the only cloud service provider, we participated in the revision of a national-level healthcare standard-setting project, gaining a first-mover advantage as demonstrated by our business model, technical capabilities, and our concrete achievements in the regional health cloud space. We have collaborated with Kingsoft Office to develop an electronic medical record editor for the National Health Commission and successfully completed the task. While continuously delivering the Rui Jing Hospital project, We have also successfully signed a contract for the information construction project of the People's Hospital of Zhuhai in high-tech zone, making new progress in the hospital space. In the financial services space, we continued to deepen our business cooperation with large state-owned banks and complete the delivery of the existing projects as scheduled while winning new projects. We also actively participated in the selection stage of AI models for large state-owned banks. Turning to Camelot, during the quarter, Camelot's business is stable, signing up five new customers while maintaining robust relationships with existing major clients. Its profitability has been rising again steadily.

In terms of product technology, we continue to hold on to the technology, focusing on the first-class customer experience of the core product. In the computing field, we continue to upgrade core products, to improve stability and financial stability in the domestic environment. We also focus on leading customers to determine eight product technology construction projects to accurately match the needs of customers and deepen co-development. In the storage area, we have released a new version of the object storage, which greatly improves the reading performance in small IO scenarios. The overall performance has increased by more than 50% and is close to the theoretical limit. In the field of big data, our cloud-generated big data platform greatly improves the reliability of Hadoop, effectively realizing the smooth transition of Hadoop's work. In the field of industry cloud, we surround the full network positioning of cloud, use cloud, manage cloud, continue to optimize the user experience at the useful, open, and efficient levels, and construct a unified operating data of the leadership driver's cabin, and again upgrade One cloud with a lot of new video capabilities provides richer domestic environmental support capabilities. Our Galaxy Cloud platform has achieved the highest level of cloud-level certification in the country's full-level cloud standard assessment. The mark is the exclusive cloud service and security capabilities of Jinxian Cloud to reach the top level of China.

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 options. In computing space, we continue to upgrade our core products, focusing on improving stability and domestic environment compatibility. We have also identified eight major product and technology co-construction projects with key leading customers. so as to accurately match customer demands, planning, and deepen collaborative development. In storage space, we have released a new version of object storage, significantly optimizing read performance under small I.O. scenarios, with an overall performance improvement of over 50%, approaching the theoretical limit. In big data space, our cloud-native big data platform has significantly improved its compatibility with Hadoop, effectively achieving smooth migration of Hadoop tasks. In enterprise cloud space, we focus on the end-to-end positioning of cloud migration, cloud use, and cloud management, continuously optimizing the user experience in terms of ease of use, openness, and efficiency, building a unified presentation of operational data in a management cockpit. And once again, upgrading the one-cloud multi-CPU compatibility to provide more domestic environment support capabilities. Our Galaxy Stack platform has obtained leadership-grade designation, the highest level of certification in the national authoritative cloud benchmark evaluation, testifying that our dedicated cloud service capabilities are top-notch in China.

Welcome to the new era of AI. We embrace AI from all dimensions, In terms of customers, we are fully in line with Xiaomi's business plan, and at the same time play a neutral advantage to actively meet the training and reasoning needs of a large number of independent AI companies. In terms of business model, at the same time as the general AI algorithm service is launched, the full-fledged digital transformation service of the full-fledged digital transformation service of the full-fledged digital transformation service of the full-fledged digital transformation service of the full-fledged digital transformation service of the full-fledged digital transformation service We embrace the new AI era in a comprehensive approach. In terms of customers,

we aim to fully align with AI cloud planning from Xiaomi and Kingsoft ecosystem. In the meantime, leveraging our neutral position to proactively meet the model training and inference demand from a large number of independent AI companies. In terms of business model, while the general AI computing services business is taking off, we preemptively explore one-stop AI cloud transformation services, aiming to become the AI enabler in select verticals. In terms of R&D, we make efforts in three directions, talent, products, and solutions, establishing our AI R&D center to support the research from three major capability areas, including application, algorithm, and platform. We also upgraded our core storage, database, network, and other products with AIGC-facing features and continued to perfect our mass mutual trust designated zone solution. In terms of supply chain, facing the uncertainty of the international market, we actively explore domestic supply chain alternative channels.

In terms of human resources strategy, first of all, to build Beijing Wuhan Double Research and Development Center. Since the establishment of Wuhan Research and Development Center in October last year, about a year, through the voluntary mobilization and localization of core components, the general staff of Wuhan Research and Development Center Moving on to talent strategy.

Firstly, it's about building our Beijing-Wuhan dual R&D center. In less than a year since its founding last October, through voluntary relocation of key R&D staff from Beijing and Wuhan local recruitment, our Wuhan team has quickly grown to over 500 people, accounting for approximately 50% of our total R&D personnel. Secondly, we're promoting the implementation of the High Potential Talent program which aims to identify and nurture the future backbone of our company. Thirdly, despite the uncertainties in macroeconomy, we continued to increase campus recruitment efforts to forge a talent base as foundation for the company's long-term development.

Overall, in the past few consecutive seasons, the company's profitability has steadily increased, which makes us more confident in the strategy and approach we have chosen. Looking forward to the future, Next, I would like to invite CFO Harry to introduce the financial performance of the third quarter.

In summary, the continuous and steady improvement in our profitability over the past consecutive quarters has strengthened our belief in the strategies and the directions we have chosen. With both opportunities and challenges ahead of us, we will continue to uphold the strategy of high-quality and sustainable development, leverage on technology, reputation, and operational management to drive progress, maintain our risk awareness, optimize business structure, embrace AI opportunities and continue to improve profitability, 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 third quarter of 2023. Thank you.

Thank you, Mr. Zhou, and welcome everyone for joining the call. Now I will walk you through the financial results for the third quarter of 2023. Under the strategy of high quality and sustainable development, we are pleased to deliver another quarter of steady profitability improvement. Our adjusted gross profit continued to grow for the fifth consecutive quarter and achieved 196.3 million RMB, increased by 57.5% year-over-year, representing adjusted gross margin of 12.1%, which is a record high for the company. Our normalized adjusted EBITDA narrowed from negative 202.0 million RMB in the same period of last year and a negative 59.9 million RMB in the last quarter to negative 44.1 million RMB this quarter. As a result, normalized adjusted EBITDA margin further narrowed from negative 10.3% in the same period last year and a negative 3.3% in the last quarter to negative 2.7% this quarter, making another solid step towards EBITDA breakeven. Our total revenue were 1,625.2 million RMB this quarter, of which revenue from public cloud services were 1,016.6 million RMB, representing a decrease of 9.5% compared with 1,113.0 million RMB in the last quarter. This is primarily due to the strategic scaling down of our CDM business by approximately 20% quarter-over-quarter, and partially offset by non-CDM public cloud services. Revenues from enterprise cloud services were 608.5 billion RMB, representing a slightly decrease of 2.2%. from 622.0 million RMB in the same period of last year, as we continued to be stringent on the project selection. We continue to enhance our cost control measures. Total cost of revenue decreased by 22.6% year-over-year to 1,429.0 million RMB. IDC cost decreased significantly by 31.6% year-over-year from 1,078.3 million RMB to 737.7 million RMB this quarter. Depreciation and amortization costs decreased by 21% from 253.7 million RMB in the same period of last year to 200.4 million RMB. Solution development and services costs decreased by 4% every year from 443.1 million RMB to 425.3 million RMB this quarter. Fulfillment costs and other costs were 25.7 million RMB and 39.9 million RMB this quarter, respectively. Adjusted growth profit of this quarter increased by 57.5 percent to 196.3 million RMB, representing adjusted growth margin of 12.1 percent this quarter, compared with 6.3 percent in the same period of last year, making another record high, as well as the fifth consecutive quarter of steady margin improvement. Each of our business line achieved margin improvement on a year-on-year basis. Growth profit of public cloud services were 48.1 million RMB, which was significantly improved from the growth loss of 22.1 million RMB in the same period of last year. Growth margin of the public cloud services were 4.7% compared with negative 1.6% in the same period of last year. The improvement was mainly due to our success in AI business, proactive scaling down of the CDM services, and adjustments of our client structure. Growth profit of enterprise cloud services were 147.3 million RMB, compared with 143.8 million in the same period of last year. Growth margin of enterprise cloud services was 24.2%, representing a slightly increase from already healthy margin level of 23.1% in the same period of last year, as we continue to carry out stringent project selection. In terms of expenses, excluding share-based compensation and impairment of long-life assets, our total adjusted operating expenses were 504.5 million RMB, decreased by 6.2% from 538.1 million RMB last quarter, of which our adjusted R&D expenses were 187.2 million RMB, increased by 2.7% from last quarter, as we continue to focus on technology powerness and welcome new graduate campus recruiting employees. Adjusted selling and marketing expenses were 114.1 million RMB, representing a decrease of 11% from 128.3 million RMB last quarter. Adjusted G&A expenses also decreased by 10.7%, from 227.5 million RMB last quarter to 203.1 million RMB. As of June 30th, 2023, our cash and cash equivalents and the short-term investments amounted to 2.6 billion RMB, providing us sufficient liquidity for operations. The capital expenditures for this quarter was 415.3 million RMB, as we invested in our infrastructure to build a sustainable AI business. Our operating cash flow, once again, recorded net inflow, recording 20.4 million RMB. It resulted from our margin improvements, as well as our enhanced internal cash management. Looking ahead, we will continue to pursue our high quality and sustainable development strategy and unlock synergies within the Xiaomi and Kingsong Group ecosystem. while staying agile to capture new opportunities in a new era of AI. Thank you.

This concludes our preparing month. Thank you for your attention. We're now happy to take your questions. Please ask your questions in both Mandarin and English if possible. Operator, please go ahead.

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. We will take our first question. Your first question comes from the line of Zaidan Zhang from CICC. Please go ahead. Your line is open.

The first one is that we see that JinShanYun, with its neutral positioning, has also gained a lot of support from many independent AI companies. I would like to ask the management, from the recent seasons, what is the growth trend of this type of client in JinShanYun as a whole? How does the management view the uncertainty of the recent supply lines, and how does it further influence our AI-related business strategy? The second question is, So my first question is regarding our AI strategy. So Kingsoft Cloud has become the first choice for some of the industry-leading independent large language model providers when they select ICE vendors. So what is the growth trajectory for these type of clients in the recent quarters? And how will the recent supply constraints impact our AI strategy? And secondly, could management share your most recent guidance on the timing of adjusted EBITDA margin breakeven? Thank you.

The first question, Let Liu Tao answer first, and then I will make a supplement. The second question is answered by Harry, okay? Let Liu Tao.

Okay, let me first say that these AI players that we are currently signing are all major players in China, except for the BBAC. I think you can see the financial strength of these players and their financing scale in this video. So these players are very large in terms of the demand for us to sign. The initial principle should be 128-256 nodes, and then it will expand to more than 512 nodes in the future. And then they because the ultimate goal of training is to go overseas in terms of big models OpenAI related to the benchmark, so the model size is more than 1,000. Then the corresponding required training resources are also more than this 512 node. Okay, I'll talk about it.

Okay, the rest is that the external environment is uncertain. What impact will this business have on us? uh, uh, uh, uh, uh, uh, uh, uh, We have a certain prediction about the whole of this, this, this, this kind of limitation. So we think this, this, this, this, this wave has been established since this release. In fact, this, this, because of some of our previous reserves, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we We still have to look at the future of high-end chips. How long will it last? From a long-term perspective, the impact will be deeper. So I also answered this question in the last Q. We also fully consider this point. So we are also actively looking for this way of replacing domestic products. And After a few efforts We think on this road We have also achieved some practical progress So comprehensively I think in the future Within one or two Qs In fact, the impact of Jin Shan Yun itself I think it is still controllable Next from a long-term point of view In fact, it depends on this state-owned property This road This road can be walked through It depends on its own production capacity and performance to do a comprehensive assessment. But from the point of view of the industry, we think it is still quite confident, especially in China this year. In general, the progress achieved in some chip fields, so I just talked about opportunities and challenges at the phone conference. On the one hand, the demand for this market is extremely abundant. We have acquired a large number of customers through our position as a neutral cloud. So the first part of the answer was provided by Mr. Liu Tao. And so to answer your question,

The customers that we have signed and engaging in business with are the leading players in the AI market apart from BBAT, and they have relatively strong capital strength and business scale. Roughly, their starting point of the business corporation usually starts from 128 to 256 server units and likely to expand to 512 server units group of servers. And because their final goal is to move to the large language models, and their parameters usually amounting to hundreds of billions. So the required resources of computing power are also at the level that is above 512 server units and above. So for the uncertainties that you asked about the external environment, People have seen, as you have noted as well, that since October, the export control from the United States has created quite an impact to the industry, including that industry in China, and we are no exception. However, fortunately, we have we have actually foresaw this coming and have made some preemptive actions. So due to our preemptive planning, we have actually got only limited impact from that export control. However, how do we see this from the medium to long term? I think it depends on a couple of factors, including the performance of made in China GPUs, as well as the production capacity. So I think all in all, in the short term, in the future, for example, in one or two quarters, the impact to Kingsoft Cloud should be limited. I think it's relatively under control. In the longer term, we're also actually relatively confident Because we have seen some of the positive progress the Chinese chip industry has made during the past year. So as I mentioned in the prepared remarks, we are seeing both opportunities and challenges ahead in the future. Because we have obtained a larger number of independent AI customers, we are relatively comfortable with the potential impact.

Okay, thank you. I will take on the second question. So there are actually the two different drivers. First of all, as some of you may remember, we actually hit quite dramatically back then, in the late part of 2021, given the slowdown of the internet consumer business, as well as the certain impact on the enterprise cloud sectors in the later part of 2021. So at that time, our gross margin was only 1.2%. As you all noticed that today, that increased from 1.2% to 12% on the gross margin side. So that actually is the fundamental results of our collective efforts around improving the efficiency of the resources we have. improving the client selections and the client quality. So all putting that aside, that gives us about 10 times up of the gross margin percentage. So on top of that, as you probably also noticed that the spread between the gross margin and EBITDA margin, I think the largest spread probably about the last year were around about 19 to 20%. But this quarter, as you may see, the spread has been also narrowed from about 20% to only 14%, which means expenses control side will also reduce significantly in terms of how we spend our research, how we spend on the travels, how we spend on the general management purposes. So putting everything together, the two fundamental driver from the business as well as how we improve the operational efficiency has given us leading to today's improvements on EBITDA margin improvement. And to a question, I think given all the initiatives and the strategy we already put into place, those impact and the results will gradually be released quarter by quarter. So it's not going to be a one-time-off thing for this quarter. It's going to be carried out for the next few quarters steadily. And in our attention, we are hoping to improve both gross margin as well as narrowing the spread between the gross margin and EBITDA margin in the next few quarters. While, as you may understand, the management team will not be given a guidance for the formal EBITDA margin break-even at this moment, but as you can see, the trend has been steady for the past four quarters, and we hopefully can keep the trajectory and the pacing of improving the margin. Hopefully, we can report a break-even not only on the EBITDA margin, but also on other items in the near future as well. So, just give us bit of time and we can probably deliver those results to expectation. Thank you.

Thank you. We will take our next question. Your next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead. Your line is open.

Okay, thank you for accepting my question. I have two questions here. They are all from the public sector. The first one is related to AI. Could you please share with us the contribution scale of AI to the public sector, as well as the profit rate we are seeing now, including interest rates or EBITDA? What is the overall profit rate level? You just mentioned that in the third quarter, we have a KPEX of about 1 billion in AI. I don't know We can see the 4th quarter and the 24th year from the back. Do we have any direction of direction for the AI-related KPaaS and the overall KPaaS of the company? The second one is about some adjustments to the CDN business in the public cloud. Because we see that there are some changes in the China cloud market. I would like to ask if the adjustment we made in CDN has reached a certain scale and has achieved a certain effect, or if we will see some further adjustment in the next few seasons. How do we judge the adjustment and the level of long-term interest? Thank you, Benjamin, for taking my question. I have two questions, both regarding the public cloud sector. First one is regarding the AI BNS. Could Benjamin share more color on the AI BNS in terms of its revenue contribution, as well as the profitability level in either gross profit margin or EBITDA margin? And as you mentioned, in the third quarter, you spent around $1 billion in the AI BNS. Just wondering if Benjamin has any guidance into your CAPEX into fourth quarter and next year, including the AI BNS. And second question is regarding the CDN BNS, as we understand that the overall competitive environment in China in the cloud segment is quite dynamic. Just wondering, for the CDN, are we going to see more adjustments in the next few quarters? And after adjustment, what is the measurement view on the mid-term normalized growth profit margin level of the public health business. Thank you.

Thank you, Tim. It's Henry here. I'll probably take on the first question, and then I'll translate myself briefly, and so Don can comment as well. So regarding the AI business contribution, the first point is on the CapEx. So last quarter, we spent, in my script I mentioned, it's about 415 million RMBs, or 400 levels. on the third quarter. But go back to your first point regarding the contribution and revenue margin, a few things to share. First of all, as you know, following very fundamental and basic economic principle, it's really driven by two things. One is supply-demand balance. The second is about the technology we offer and the products we offer. So as we all know that today, really is about the buyers on the seller's market, right? So if you do have a very robust infrastructure and resources, and it can provide a very robust service and products to the clients, clients are definitely willing to pay. And for the client, it's also giving them a cutting edge advantage when they try to compete and training their model to a certain level, they can compete in a work class stage. So that actually convert to a very good logic for us to have a better margin compared with other kind of resources driven ICE services historically. So we also observe the second phenomenon is the client also willing to pay for a value added part of the services, not only by charging them on a fundamental resource usage basis. So by giving them the best practice and giving them a value added service and products, we can share certain value with the client and that can embed it into part of the pricing we give to the client. So those are the two fundamental reasons that we believe the higher margin from AI business will carry out for the future as well. That's the second point. And the third point is really about contribution. So the reason we didn't give a percentage for this quarter is, you know, every day counts for this quarter. So given we have a strong client demand, and given we also provided enough sufficient resources for our client, And each quarter, we do see a very good growth trajectory at this moment. But when you look at it, because the third quarter means from 1st of July until the 30th of September, and right now, we're already at the end of November. So today's situation is very different with the 1st of July. And we do believe, if we look at a tail impact of the third quarter, the growth trajectory and the incremental revenue, even on a weekly basis, is a very significant contribution to Kings of Crop total revenues. But if you combine as a total quarter for the third quarter alone, I think this number will be really misleading to a certain way that definitely does not account for the full credit of the AI business for us. So that's my second point. And third point regarding the CapEx direction and the guidance. So as we probably talked last quarter as well, we do believe this part of the CapEx is a very good growth driver for us. So the more we spend, the more incremental revenue will come for sure. and the more and the better growth margin will come to follow as well. So even you see we spend about $400 million this quarter for CapEx. We're seeing the trend for next quarter and maybe the early part of next year. This number will continue to increase. And mathematically, you will have a direct linkage for those spending convert to a new revenue for next year. I think you can do the math, but I'm not going to give you the answer. But you can see that trend is very visible as well. So I think these other three parts is going to give you color Given the importance of this question, I will translate myself as well. I will translate myself as well. I will translate myself as well. I will translate myself as well. I will translate myself as well. As we mentioned before, we think this part of capital expenditure is actually a good capital expenditure. The more you spend, the better your future income will be in terms of mathematics. And the profit from this part is also relatively good, so it can also lead to the expected profit and net profit growth. So we still think this part is a relatively good trend. We are not very convenient to give numbers, but in the fourth quarter of this year, even including the beginning of next year, we think that we spend high-quality capital expenditure in AI. from the second half of the third quarter of this year to the fourth quarter of this year and the first half of this year, there will be a trend of rapid growth. Although it is inconvenient for us to give a mathematical guidance, but in terms of logic and mathematical logic, you can also make some speculations, especially on the prediction of this model. We should bring a relatively obvious and predictable growth and profit growth in the future. The second point is that you just asked about the profit problem of AI in the third quarter. As I said, any business logic is based on two things. One is the relationship between the customer and the other is the value of the product and the original value of the product to the customer. Now, as you all know, there is no need to talk about the relationship between the customer and the customer. As a cloud company, there must be a gap between the wind and the waves, including what Mr. Zou and Mr. Liu have just introduced. The demand is very high, and as an independent cloud company, there is no problem at all. This also gives us better value for money, which is also different from what we did in the past three or four years. We are doing a purely resource-based service pricing method. And then the second one, we are now seeing more and more customers doing mass service, and they are also willing to pay for some of the growth efficiency increased by AI. So we will also see more customers not only paying for resources, but also paying for the value and service that AI brings. So these two parts also have some obvious growth in profit for our way of spending. So this is a question of profit. And then the third one is what you talked about, which is the income contribution of AI this quarter. Because I just mentioned that today is November 21st. Our third quarter is from July 1st to September 30th. In fact, the time between November 21st and July 1st is completely different. There has been a major change in the external environment. So I just mentioned that in fact, we actually disclosed a ratio in this quarter. It doesn't necessarily mean that we are now doing a very good job. So we are now using the day to measure. Every week, every day, we are

In fact, based on the current plan, we have set a time point of 630 next year. In general, starting from August 31 this year, we have set a general adjustment plan. Based on the market situation, we will make certain adjustments in the future. We have allocated a certain amount of revenue separately. Actually, we still have 5 billion yuan left in each quarter. We will adjust it to 3 to 4 billion yuan. In general, by 2030, we think we will reach a stable stage. This is an adjustment rhythm. Then I asked about the interest rate of the public sector in the long term. Actually, I should have divided it into two parts. One is CDNZ. CDNZ itself, from the adjustment plan for next year, also strives to start from Q3 next year, Q4. Then gradually, from the interest rate level, even from the interest rate level, it can reach Q4 last year. And then this Fanhu side also includes the AI part we just talked about. From what we can predict so far, this is still improving steadily. Of course, there is a very uncertain factor in this. Just now we talked about AI, which is still saying that the supply of GPUs is still greatly affected. Uh, to be honest, I'm a few of these, these, these, these, these, these, these, these, these, these, these, these, these, these, these, Okay, so let me quickly translate.

So in relation to a second question about the CDN strategic adjustment, we have actually started the adjustment in October 31st this year, and we have an internal deadline of June the 30th, 2024. As I can see this, we are continuing to do some adjustment according to the market conditions. Currently, we get in the CDN revenue on a quarterly basis around 500 million RMB, and it might continue to scale down to somewhere between 300 million to 400 million RMB per quarter, and thereby reaching a relatively stable status until after June the 30th, And in relation to a question about the profit margins for the public cloud services business, it's of two components. One is CDN and one is the so-called pan-internet sector. For the CDN sector, as mentioned, as to the third quarter next year, we expect the strategic adjustments to have completed. And by then, we would hope the margin of this business line to revert to the relatively healthy level that was as of the fourth quarter of 2022. Now, for the PAM Internet space, we are still seeing the margin, including both the GPU margin and as well as the operating profit margin, steadily and gradually improving. As mentioned, one of the uncertainties is the GPU supply. And obviously in the AI space, the demand significantly outpaces that of demand, outpaces of supply. And if that supply chain issue can be resolved completely, obviously the improvement of our business as well as margin in the AI and thereby the PAN internet space will be much faster. But even with that uncertainty, we're already seeing relatively good progress in terms of margin improvement and business scale expansion. Thank you.

Thank you. That's very helpful.

thank you we will take our final question please stand by your final question comes from the line of katarina chu from city please go ahead your line is open

Good evening. Thanks, management, for taking my question. This is Katrina Chiu asking on behalf of Brian Ghosn from CDE. Can management share with us the overall revenue outlook in 2024 and whether we can expect positive revenue growth next year? Thank you.

Thank you, Katrina. After we relisted our due list in Hong Kong, we actually didn't publish our management guidance, but have to share some color as well as we're moving towards the year end of 2023. First of all, as you know, even today, right now, we have about 25%, 20-25% by different quarter. The revenue is coming from the CDM business. Our CEO, Zhou Zong, mentioned as well. So we're kind of in the face of some adjustment from Climax, from the products we offer, and as well as we control the cost, we procure the bandwidth as well. But if you look at that business, the first priority is we try to change the mix and the structure of the client and products. So we try to remain relatively stable, but just the combination of the clients and the products within that business. So that's actually what we're trying to do in the next two or three quarters. So that's kind of the first factor you probably can consider. But we're not going to see the dramatic changes or swings from that business, but change the better structure of that. So that's the first part. The second part is, as I mentioned, the new money and the capital expenditure we're spending to the AI, right? The infrastructure we build for clients and the math, we call the model as the services, the solutions and the services we deliver to the client, as well as the value-add part of the projects we do for the clients. So those are actually combined will be one of the, probably the one, priority for next year to grow the revenue. And if you do a quick math, I put this way as every, you know, $3 or $2 you spend this year, you're going to see probably $1 or relatively around that $1 of the incremental revenue you're going to see for the next year, right? So that's the kind of mathematical connection given the CapEx converts to products and products converts to the incremental revenue. So that's the second part. So you can do a bit of kind of analysis on that. And the third part is really about our very stable enterprise business as you can see that our sub Camelot is delivering relatively stable revenue and for next year I think given the micro environment has been kind of improving so you are going to also see that revenue contribution on Camelot is going to see a relatively growth as well and our healthcare public sectors and financial services enterprise cloud will also see certain growth given we already have some flagship products in place for this year. And we can replicate that from city A to city B, right? From client A to client B going forward for next year. So we're hoping we can remain around 30% in terms of the GPO contribution on the project level, but we replicate that to more projects for next year. So if you combine those three things, stable CDN but better mix, the spending on CapEx convert to incremental AI revenue for the public cloud. YY growth for Camelot, as well as the stable revenue and profits, but a growing revenue for Enterprise Cloud for financial services, so on and so forth. Putting together, we are kind of confident to see, without any kind of big changes on the big environment, our top-line revenue for next year, you may see kind of back to the YY growth and the Q&Q growth as well. And Tim mentioned in the previous question as well, we're hoping to get into a certain point that not only the EBITDA will be breakeven in the near future, but also we're going to see the OP side is going to put in our back pocket to have intention to bring a better profitability for the shareholders as well. But the last point I want to mention is we also will keep a very close eye on the competitive landscape. means our peers and the competitors. We're trying to do a better quality of the work compared with other peers, but also we're happy to see we may, you know, next quarter or two, we've been catching up on the growth margin side in the next few quarters, but also in the YOY on the growth side, we can maybe catch on even better than the competitors as well because we did a few things I think last year when CEOs all have come to the office and we actually have a few things in place, and those efforts are, I think, two or three quarters earlier than the major competitors. You will probably see the recovery we are doing probably sooner than ever as well. Thank you.

Thank you. That's very helpful. Thank you. I would now like to turn the conference back for closing remarks.

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

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