Kingsoft Cloud Holdings Limited

Good day and thank you for standing by. Welcome to Kingsoft Cloud's first quarter 2024 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 would need to press star 1, 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1, 1 again. Please be advised that today's conference call is being recorded. I would like now to turn the conference over to Nicole Shawn, IR Director of Kingsoft Cloud. Please go ahead.

NICOLE SHAUN, Thank you, operator. Hello, everyone, and thank you for joining us today.

Kingsoft Cloud's first quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on Global News Warehouse Services. On the call today from Kingsoft Cloud, we have our Western Man and CEO, Mr. Zhou Tao, and the CFO, Mr. Henry He. Mr. Zhou will review business strategies, operations, and company highlights, followed by Mr. He, who will discuss the financials and the guidance. He will be available to answer your question during the Q&A session that follows. There will be consecutive integrations. All integrations are for your convenience and reference purpose only. In case of any discrepancies, management in the original language will prevail. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and current market and operating conditions, and they 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 findings with the U.S. SEC. The company does not entertain any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice President, Vice Chairman and CEO, Mr. Zou. Please go ahead. Thank you.

Hello, everyone. Welcome to the first quarter of the business development meeting of Jinshan Yun in the first quarter of 2024. This quarter, Jinshan Yun's high-quality, sustainable development strategy has achieved results. After more than a year of unwavering optimization and adjustment, on the basis of continuous stability and improvement in net profit, we have come to Jinshan Yun's first loss-to-loss win after adjustment since its establishment. This milestone Hello, everyone, and thank you all for joining Kingsnok Cloud's first quarter 2024 earnings call.

This quarter, Kings of Cloud's high-quality and sustainable development strategy has achieved fruitful results. After more than a year of unwavering optimization and adjustment, and alongside our continuous and steady increase in gross profit margins, we have achieved the milestone of turning adjusted EBITDA positives for the first time since the establishment of Kings of Cloud. This milestone demonstrates Kings of Cloud's profitability and growth-sustaining ability, marking the commencement of a new stage of development. It establishes a robust foundation for our long-term sustainable and healthy progression into 2024 and beyond.

Next, I will introduce the performance of the first quarter of 2024. This quarter, Xinshan Yun continues to achieve double growth in revenue and profitability. Revenue reached RMB 17.8 billion, and the interest rate increased by 3.1%. After the adjustment of the single quarter, the net profit reached RMB 3 billion, which increased by 53.8% in the same period last year. After adjustment, the net profit reached 16.8%. Compared to the previous quarter, it increased by 1.6%. It achieved a steady increase of 7 consecutive quarters. It reached a record high again. After adjustment, EBITDA profit reached RMB3319 million. After adjustment, EBITDA rate reached 1.9%. It increased by 8.9% at the same time as last year.

Now, I will walk through the business highlights of the first quarter of 2024. This quarter, we continued to achieve dual improvements in both our revenues and profitability. In particular, our total revenues reached RMB 1.78 billion, increasing 3.1% quarter over quarter. Adjusted growth profits for the quarter reached around RMB 300 million, increasing 54% year-over-year. Adjusted growth margin saw a significant boost, rising by 1.6 percentage points quarter-over-quarter to reach 16.8%, marking the seventh quarter of consecutive improvement. Adjusted EBITDA reached RMB 33.19 million, with an adjusted EBITDA margin of 1.9%, representing a significant improvement of 8.9 percentage points year-over-year.

In terms of public cloud, this quarter, we achieved a revenue of RMB1.19 billion, a 12.9% growth rate. In addition to CDN business, public cloud revenue increased by a 9% growth rate. In Xiaomi, Jinshan Ecology, AI business, and CDN business, we have improved in all three directions. First of all, as the only strategic cloud platform of Xiaomi Jinshan Ecotourism, we firmly grasp the business opportunities of ecotourism enterprises, especially the high-performance calculation of high-performance calculation of high-performance calculation of high-performance calculation of high-performance calculation of high-performance calculation of high-performance calculation of high-performance calculation of high-performance calculation with an increase of 4%. Second, we fully believe that the strategic memories brought by AIGC will continue to develop AI business. In this quarter, AI revenue has increased significantly from RMB1.6 billion to 93% and accounts for 43.5% of the total net revenue. Customer and industry distribution has diversified, We will continue to invest in infrastructure. This quarter's capital investment is more than 12 billion yuan, and we have established a large-scale computing resource pool. On the other hand, we are optimistic about the historical basis of AI rich energy, thousands of pages and hundreds of pages, Jinshan Intellectual Property Co., Ltd. to seize the opportunity to digitize enterprises and professional services. Third, we will continue to advance the strategic adjustment of CDN business. In this quarter, CDN remains stable in terms of revenue, and its total revenue ratio is stable at 23%. We will continue to enhance the business performance of CDN. In terms of public services, revenues reached RMB $1.19 billion this quarter, representing an increase of 12.9% quarter-over-quarter. Excluding CDN business,

public cloud revenues saw a 9% quarter-over-quarter increase. We have seen positive outcomes across our three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, AI business, and CDN strategic adjustments. First of all, serving as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we firmly grasped the cloud business opportunities within the ecosystem, especially after the launch of Xiaomi SU7 and the commercialization of WPS AI, which left you strong demands for computing power in autonomous driving and AI office use cases. This quarter, revenues contributed by Xiaomi and Pingsoft ecosystem reached 19%, representing an increase of 4 percentage points year over year. Secondly, we have been proactive in seeding the strategic opportunities brought about by this round of AIGC and have made significant strides in our AI business. This quarter, AI revenue surged to RMB $116 million, an increase of 93% quarter over quarter, accounting for 13.5% of public cloud revenues. This expansion further diversified our customer industry distribution. On one hand, we continued to invest in infrastructure with capital expenditure exceeding RMB 1.2 billion this quarter, establishing a high computing power resource pool with substantial scale. On the other hand, recognizing the historic opportunity of AI empowering various industries, We have established Kingsnorth AI as a wholly owned subsidiary, seizing the opportunities in intelligent digital transformation of enterprises and professional services. Thirdly, we continued to push forward our strategic adjustments of CDN business. This quarter, CDN revenue remained stable compared to the last quarter, accounting for 23% of total revenues. We remain committed to enhancing profitability of CDN by promoting high-value-added product sales externally, rigorously controlling procurement costs internally, expanding supplier coverage, and optimizing market price and service offerings.

In terms of the industry cloud, this quarter's revenue reached 5.9 billion RMB. In the public service sector, we are actively grasping the opportunity of the government cloud and the state cloud. for two types of business scenarios, using model capabilities, big data, and co-working as a base, to carry out standardized operations. In this quarter, we provide the construction of the Wuhan Guanggu Yun online trial operation, and provide a fully accessible all-regional centralized computing storage platform for the Eastern Lake Highland Region of Wuhan, to carry out data classification, explore data sharing, and provide convenient public cloud infrastructure services for high-end and commercial enterprises. In addition, we also continue to pay attention to the development trend of the data asset roadmap. In recent years, we have hosted experts to discuss the data asset and data elements conference, invited experts from data exchanges, accounting firms, big data centers, and data research institutes, on policy interpretation, data assetization, national cloud service, data asset chart implementation, and other topics. Only with the business opportunity of data assetization. Digital health field, the industry's leading data platform, medical imaging cloud platform, and integrated electronic disease platform are all evaluated. We selected the first batch of Chinese Information and Communications Research Institute digital medical products and services high-quality development prospects to show our product innovation in the medical and artificial intelligence industry and service capability to reach a new level. In the financial field, we provide targeted storage expansion services for a certain head of the stock market bank, provide perfect targeted storage for customers, data storage, large data net, and other storage capabilities, and fully built up the existing group. In addition, Kite's revenue and profit level is healthy and stable. On the basis of maintaining stable cooperation with large clients, this season has signed four well-known clients. At the same time, Kite has opened the landing of its exclusive cooperation service plan with Xiaomi Jinshan.

Moving on to enterprise cloud services, revenues amounted to RMB 590 million. In public service space, we have actively pursued opportunities within public service cloud and state-owned asset cloud. Implementing standardized operation and maintenance, we have leveraged our core components, such as model capabilities, big data, and workspace collaboration, targeting applications in the public service and enterprise domains. During this quarter, we initiated a trial operation for the Wuhan Optics Valley Cloud that we constructed, providing an independent and controllable centralized computing and storage platform for the entire Wuhan East Lake high-tech development zone. This platform has assisted in collecting data exploring data sharing, and providing convenient public cloud infrastructure services for science and technology innovation enterprises in the high-tech zone. In addition, we have remained attentive to the trend of data asset inclusion on balance sheets. Recently, we convened a seminar on data assets and data elements, engaging experts and scholars from various institutions such as data exchanges, accounting firms, big data centers, and data research institutes to discuss topics such as policy interpretation, data assetization, and state-owned enterprises' cloud services, as well as data asset inclusion practices, closely following the business opportunities of data assetization. In healthcare space, our DAS platform, medical imaging cloud platform, and integrated electronic medical record platform have all passed evaluations and been selected as one of the first batch of high quality development panorama of digital medical products and services by China Academy of Information and Communications Technology. This showcases our achievements in product innovation and service capabilities in medical artificial intelligence industry. In financial services space, we provide object storage expansion services for a leading joint stock bank with comprehensive storage capabilities such as object storage file storage, and big data gateways while making full use of existing clusters. Turning to Camelot, this quarter witnessed stable and healthy revenue and profitability. We have signed up four new well-known customers while maintaining robust relationships with existing major customers. From the perspective of overall ecosystem business development, Camelot has launched a dedicated cooperation service plan with Xiaomi and Pingzhang's ecosystem customers, exploring new models of talent and business cooperation.

In terms of product technology, we continue to hold on to the technology industry, focusing on creating the first-class customer experience of core products. In terms of AI, we have accumulated 256 and 512 nodes and a large number of service experiences. It has realized the attack automation of large-model group deployment, delivery and reception, and operation management. In the field of HanYunYun, YingHeYun has launched a new version of the operation platform with an additional 84 items, including hardware, performance, and other monitoring capabilities, to assist customers in detailed statistics management. At the same time, the new version of the operating platform

In terms of product and technology, we uphold our principle of building success based on technology and innovation, focusing on delivering best-in-class customer experience across our core product offerings. In the AI space, We have accumulated technology and extensive service experience in deploying 256 and 512 node clusters, achieving automation in large-scale cluster deployment, acceptance, and operation and maintenance management. In enterprise cloud space, the Galaxy Stack platform released an updated version of its operations and maintenance platform. adding 84 new hardware and performance monitoring capabilities to assist the customers in refined statistical management. At the same time, new version of the operation platform calculates the usage of cloud resources such as cloud hosts and networks for all tenants from a business standpoint, enabling efficient and refined operations. This enhances our intelligence and precision in cloud migration, cloud management, and cloud usage For a couple of years.

In summary,

Our high-quality and sustainable development strategy has been steadily implemented, achieving the milestone of turning EBITDA competitive for the first time. Additionally, revenues have also achieved continuous growth in the past two quarters, and our gross profit margin has improved for seven consecutive quarters. Looking forward, we will remain committed to our long-term strategy, focusing on high-value added products and services. embracing AI opportunities, promoting technological advancement, and continuing to enhance profitability. By increasing management efficiency, maintaining a strict cost and expense control, enhancing talent training, and expanding our Wuhan R&D center, we are confident that we will continue to create value for our customers, shareholders, employees, and other stakeholders. I will now pass the call over to our CFO Henry to go over our financials for the first quarter of 2024. Thank you. Thank you, Mr. Zhou, and welcome everyone to join the call. Now I will walk you through the financial results for the first quarter of 2024. We are very pleased to see our adjusted EBITDA margin turn profit for the first time with our adjusted growth margin has been consecutively improving for seven quarters. verifying the well-executed of our strategy of high quality and sustainable development. Having successfully achieved profitable EBITDA margin, we would like to highlight the following three key efforts we have made to yield the results. First of all, we strategically adjusted our revenue mix under the guidance of high quality and sustainable development strategy. During the past year, we scaled down proactively our BDN services with low margin profile. This quarter, CDN services contributes around 23% of our total revenue compared with over 50% in the peak time, looking back into 2020. Meanwhile, we expand our revenue from high margin AI business, achieving 160 million RMB this quarter, contributing around 13% of our public cloud revenues. Second, both of our public cloud and enterprise cloud services improved their margins in 2023. and a quarter is beyond, compared with 2022. Since last year, we focused on high-margin products and services, and we slept carefully about our clients, which yield better margin profiles. Third, we have been taking strict measures and a supply chain strategy to cut down our costs and expenses. We have streamlined our procurement process and enlarged our supply pools to achieve higher cost effectiveness. We also closely monitor the daily operation expenses. These key initiatives bear fruits in this quarter by recording EBITDA profits, and we believe these are still potentials in the future. And we will keep our commitment into improving our profitability. Our adjusted gross profit continues to grow to 299.1 million RMB, increased by 53.8% year-over-year. representing adjusted growth margin of 16.8%, which is a record high for the company and improved 1.6 percentage points compared with last quarter. Our adjusted EBITDA narrowed from negative 130.5 million RMB in the same period of last year and an active 27.7 million RMB in the last quarter to positive 33.2 million RMB this quarter. Adjusted EBITDA margin further narrowed from negative 7% in the same period of last year and an active 1.6% in the last quarter to positive 1.9% this quarter. Our total revenue were 1,775.7 million RMB this quarter, increased by 3.1% sequentially, of which revenues from public cloud services were 1,187.4 million RMB, representing an increase of 12.9% compared with 1,052 million RMB in the last quarter. The increase was primarily due to the expansion from AI-related revenues and the relatively stable scale of Obsidian business. Revenues from enterprise cloud services were 588.2 million RMB, representing an increase from 670.3 million RMB in the last quarter, as fewer projects are scheduled for delivery during the Chinese New Year holidays period. We continue to enhance our cost control measures, expanding our coverage of suppliers to search for better service quality and procurement prices. Total cost of revenue decreased by 11.2% year-over-year and a relatively stable quarter-to-quarter to 1,482.4 million RMB. IDC cost decreased significantly by 11.9% year-over-year from 872.4 million RMB to 768.5 million RMB this quarter. The decrease was in line with a scaling down of CDS services Depreciation and amortization cost decreased by 18.3% from 224.6 million RMB in the same quarter last year to 183.5 million RMB this quarter. The decrease was mainly due to the previous impairment of a long-lived asset and a partially offset by the depreciation of new services, new servers we acquired. Solution development and services cost increased by 5.3% year-over-year from 423.6 million RMB to 446.0 million RMB this quarter. The increase was mainly due to the solution personnel expansion of Camelot. Fulfillment costs and other costs were 36.1 million RMB and 48.3 million RMB this quarter, respectively. Adjusted gross profit for this quarter increased by 53.8% year-over-year to 299.1 million RMB, representing adjusted gross margin of 16.8% this quarter, compared with 10.4% in the same period of last year and a 15.2% last quarter, making another record high, as well as a seven consecutive quarter of steady margin improvement. In terms of expenses, excluding share-based compensation and impairments of long-lived assets. Our total adjusted operating expenses were 469.6 million RMB, decreased by 21.2% year-over-year, and 5.1% from last quarter, of which our adjusted R&D expenses were 193.0 million RMB, increased by 18.8% from last quarter, The increase was mainly due to our continuous investment into technology. Adjusted selling and marketing expenses were 97.9 million RMB, representing a decrease of 8.3% from 106.7 million RMB last quarter. Adjusted G&A expenses were decreased by 20.8% from 225.6 million RMB last quarter to 178.7 million RMB. The decrease was mainly due to the strict control over data operational expenses and a decrease of Fed debt provisions. As of 31st, 2024, our cash and cash equivalents amount to 1.8 billion RMB, providing us liquidity for operations and investments into AI era. The capital expenditure for this quarter were 1,212.2 million RMB. as we invested in our infrastructure to build a sustainable AI business. In April, we released our ESG report for 2023, providing an in-depth review of the company's progress in the last year in its ESG practices, including business ethics, responsible operation, talent development, green development, sustainable supply chain, and corporate responsibility. In 2023, we were awarded as a member out of a total top 88 companies in the first edition of S&P Global Sustainable Yearbook, China edition. We are also rated as a single A rating in MSCI ESG rating, leading in the all ADR stock of China. We will fulfill our social responsibility and create value to our customers employees, shareholders, suppliers, and the whole society. Looking ahead, uphold the principle of high quality and sustainable development. We keep taking initiatives to improve our revenue quality, cutting down costs and expenses, and improve our profitability. The breakeven of EBITDA is a well beginning for us, and we expect the more balanced and healthy business performance and financial results are coming in the future. Thank you.

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

Thank you. To ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for the first question. Our first question comes from Xiaodanzong with CICC. Your line is now open.

So thanks management for taking my questions and I got two questions here. First of all, what is your expectations for the adjusted EBITDA margin improvement pace for the subsequent quarters? And secondly, how are you going to cope with the increasingly aggressive pricing strategies of ISAN large language model vendors?

Thank you.

Thank you.

So I'll probably take on the first question. So as we mentioned in the prepared remarks, we're actually happy to see during the 12 years of history of Intel Cloud, it's actually the first quarter we hit the EBITDA margin break-even. And the underlying drivers, as we mentioned, are very clear. And we believe that those drivers will continue to unleash the value and profits in the following quarters, namely the better mix of the revenue, from different views right a high margin contribution from AI business the revamping of the supply chain tactics which are actually changing many of the suppliers to remain competitive in the cost side and also we improve the internal operation efficiency by streaming our internal operation initiatives and process so these are the things obviously other company may do the same but I think we do in a better committed way and we will carry for a long way. And also if we're looking forward, we believe partial of the benefits on the profit from the initiatives we already took will continue to have the result in the coming year quarters. And in addition, as you can see that we also have the better trends. to go with the higher growth on the top line. So I think that will also give a good kick into the bottom line of the profitability as well. So in short, I think we are not going to say it's going to one-time profitability down the EBITDA line. It will be consistent and it will probably carry along in the following quarters. And we also see the improving better growth margin will also kick down to the EBITDA margin line as well. I think sequentially you will see a better cross margin carry forward and also will be a narrowed spread between the gross margin and the EBITDA margin. So we'll see probably a more accelerated trend of the EBITDA margin improvement as well. I think these are the two things we can share. Obviously, we're not going to give a kind of numeric guidance on the EBITDA margin going forward, but I think we're going to achieve kind of industry's top level of the tier players in a very similar ballpark member of the gross margin and EBITDA margin line. And what I can kind of commit is The EBITDA margin break-even for this quarter is not going to be a one-time-off event, so we are pretty confident. Both gross margin and EBITDA margin will continue to improve in the several quarters down the road as well. Thank you.

Okay. I'll answer the second question first. Liu Fang, you can add to that later. Indeed, everyone is paying attention to the recent price war between a few big companies. including Zijie, Ali, and Baidu. Yes. So, of course, this is also expected. It can be said that the level of maturity of China's large-scale development has reached a certain level. Right? Everyone thinks it can be used. This is one. The second one also marks the official opening of the elimination war. From the beginning of this year to the beginning of the second half of the year, We have done an experiment on this trend. So to be honest, it's a little earlier than we expected. I didn't expect it to be so big. This is our understanding of this phenomenon. But let's talk about it in detail. The first one is, to be honest, this is a model manufacturer for commercial use, to attract customers and manage the market. It should be said that it uses a very common technique and price. Well, I want to model the effect anyway, blow each other, blow their own weight, but we are all very clear, especially in our office. Well, everyone has a say. Who is the best? How about it? So this price has become a very key factor. This is what I want to express. In fact, it is a kind of model factory business in order to reduce the price of the commercial market. And today, he does not provide this large model of this one. This is a service. We are providing computing services to these big model manufacturers. Yes, so I think this one. I also hope that everyone can get this concept clear. You can understand this. Just take an example. This is the one that produces beef cans. We are. We are not making cans. We are providing services to these people who make cans. Yes, these cans that are made have a lower price. It's not the same as ours. All right, I hope this. Don't confuse this concept. It seems to be saying that the big model is like this. How about our cloud service? Of course, the impact on us is obvious. In fact, we have talked about it just now. It has been eliminated. We have talked about this many times. As the identity of this kind of cloud, so in the past, for more than a year, the vast majority of these entrepreneurial big model companies are our customers. So, the problem that we are really concerned about is the elimination. Our clients will be eliminated in the end. This is what we are really concerned about. This is also likely to happen in the future. From our point of view, from the current point of view, we haven't reached that point yet. Our clients in the following year, including this year and the coming year, have continued to get This is a relatively large amount of financing. From the perspective of our own assessment, it's not that it fell from the beginning. I think it can still run a few steps. This problem is not big. At least in the next two years, this risk is controllable. So basically, this contract is also a two or three-year long-term contract. So we think this risk is controllable in our contract period. Of course, after three or five years, I think China will not be able to continue to exist for a long time. This is not possible. From the 20-odd years of China's logistics development, whether it's IAM, e-commerce, search, payment, etc., 2B, 2C, especially 2C, it's not possible. This is a waste of time. Yes, I believe the industry will be in good shape. Even some of our customers, or those who live in large-scale markets, I think in the future, they will also be divided into 2C and 2B. They will also be divided. So, this is a big trend. We believe that China's large-scale development will definitely go through such a stage. Liu Daoyang.

Okay, so I'll just very quickly summarize and translate. So to be quite honest, it is something that we had expected already. As I mentioned, people have noted the price cut of large language models offered by ByteDance, Alibaba, and Baidu, and they have also commented on this, which is a sign that the large language model development in China has entered a stage of relatively mature, which I would call the round of competition which eliminates some of the players. However, I think it's important to mention one point, that what we at King of Cloud do is different from what these large language model players do, because we actually provide services and computing power to the large language model players, but we don't do large language model ourselves. Therefore, the importance for us is that what we're closely looking at is whether these customers of ours, mainly the independent large language model of players in the market are going to be able to survive this competition and remain a player in the market. From the current situation, we have seen that many of them have secured very large amounts of financing in recent past. And therefore, overall, we evaluate the situation for these customers to be relatively robust, at least in the next one or two years, which is well within our contract period. From the long-term standpoint, we do think that this is a stage of development of the last language model in China that is going to come, which is not going to be that sustainable for all kinds of players to remain on the table. However, we do think that vertical application models, there's a good chance that many of them will be able to have their own niche and unique markets in the market competition.

Next question, please. Thank you.

Please stand by for the next question. The next question comes from Timothy Zhao with Goldman Sachs. Your line is now open.

Thank you for accepting my question. My question is about our AI and AI-related investment.

I see that This quarter, our AI-related income, whether it's from Q-on-Q or from a standstill perspective, is actually a relatively obvious improvement. Could you please share with us what the main source of the improvement in AI income is? If we look at it from a demand point of view, and if we look at it from a GPU aspect, what are the things we have done? Another relevant question is that we just talked about our entire CapEx. In fact, we have already spent Thank you, Benjamin, for taking my question. My question is regarding AI and the relevant investments. I do notice that AI revenue actually shows strong QNQ growth, either from the absolute number perspective or a substantive revenue. Just wondering if Benjamin can share any color on what is driving that very significant AI revenue growth. And secondly, on CAPEX, as I mentioned, you already spent around 1.2 billion RMB CAPEX. I was just wondering if Magiman has any guidance into the total CAPEX for this year. Thank you.

Thank you, Kim. Probably a take on part of the question, and our SVP, Leopoldo, will probably give more color on the basis side as well. So regarding the investments, so I think we are probably still in the early age, and there's still a lot of opportunities we want to invest into the right client, as we mentioned. We want to carefully select the client, but after we commit to the client, as we get to know the client better, we will continue to make more investments. So the 1.2 billion RMB for this quarter, I think it's only part of the demand we receive from the clients, and we'll continue to invest more in the following quarters. which we think will result in a higher revenue in the following quarters. But on the other hand, given the AI business itself is carrying a better margin and the supply-demand trend in the market is more balanced, so we are actually changing the way we use our money. As you probably realize that not only are we using our equity capital, but also we leverage different sources, including the financial leasing, including some operational leasing. including the bank borrowing and other partnership with, for example, with the suppliers that will provide certain credits to us as well. So I think we're going to explore as many channels as possible to extend the capital we have. So the thing I want to mention, we don't want to set a cap about how much we want to invest into AI just because the cash we have on the balance sheet. So I think you can multiply different levels the seedings on the cash number we have today. So I think that's a second question. So if you put a total number on the 2024, I think the total investment, including the CapEx, including the investments and the R&D expenses we put on the AI team, including different ways, we have flexible ways to work with suppliers. I think the total investment for this year is going to be a few more times multiplied by this quarter's number. I think that's probably the ballpark number I can give. And that will yield, again, a better and much higher AI revenue in the following quarters. And for the opportunity of the AI business, one thing I just want to start, and Liu Chaozong can add on the following points is, so the demand from client actually carry a more diversified way. So not only one vertical, from, for example, a big model company, but also, as you can see, as AI business get into the year two, right, last year to year zero, get into the year two, more clients and a different type of the clients will use the AI computing power, not only for the computing itself, but also will carry with applications, data, scenarios, the more different verticals, including internet, including probably the financial services, the legal and auditing and other, for example, public sector clients will all probably use that. And actually, those revenue will gradually come in and work into different products we have today. So I think probably that's the better mix and diversified revenue streams we're happy to see in the following quarter as well.

We just mentioned that we have many incomes from different types of companies. For example, the big AI companies, they are now building the base clusters on our cloud. So as we mentioned on the report, we have built about 256 or even 512 clusters. So all these kind of companies, they will expand their new clusters on the cloud. So we were expecting in the new quarters, they will have better programming. And also, we can see that the off-drive companies, they have the requirements not only on the off-drive technologies, but also on the language models technologies. And also, we have some customers from the internet companies. They are training their own language models. Now we not only can provide cluster services for them, but also we can help them to print their own models and even dealing with their new data. And also we can see some TV companies, which is something like picture and videos, they are also having the increasing requirement. So this requirement, we are expecting increase on that. Thank you.

Thank you, operator.

Okay, I show no further questions at this time. I would now like to turn the call back over to Nicole Shawn 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. Look forward to speaking with you again next quarter. Have a nice day. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. you Thank you. Thank you. Good day and thank you for standing by. Welcome to Kingsoft Cloud's first quarter 2024 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 would need to press star 1, 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference call is being recorded. I would like now to turn the conference over to Nicole Shawn, IR Director of Kingsoft Cloud. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining us today.

Kingsoft Cloud's first quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on Global News Warehouse Services. On the call today from Kingsoft Cloud, we have our Western Man and CEO, Mr. Zhou Tao, and the CFO, Mr. Henry Huo. Mr. Zhou will reveal business strategies, operations, and company highlights Followed by Mr. Ho, who will discuss the financials and the guidance. There will be available to answer your question during the Q&A session that follows. There will be consecutive integrations. All integrations are for your convenience and reference purpose only. In case of any discrepancies, management in 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 demanded and as defined in the U.S. Priority Security Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and current market and operating conditions, and they relate to events that involve known or unknown risks, uncertainty, and other factors. All of which are difficult to predict, and many of which are beyond the company's control, which may cause the company's actual results performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks and certainties of factors are included in the company's findings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice President, Vice Chairman and CEO, Mr. Zhou. Please go ahead. Thank you. Hello, everyone.

Welcome to the first quarter of the JinShanYun's first quarter of the year. This quarter, JinShanYun's high-quality sustainable development strategy has achieved results. After more than a year, unquestionably optimized adjustment. On the basis of continuous steady improvement of net profit, after the establishment of Jinxiaoyun, EBITDA was the first to turn a loss into a gain. This milestone marks Jinxiaoyun's profitability and recruitment ability. The company's development has entered a new stage. For the long-term and post-2024

Hello, everyone, and thank you all for joining Kingsoft Cloud's first quarter 2024 earnings call. This quarter, Kingsoft Cloud's high-quality and sustainable development strategy has achieved fruitful results. After more than a year of unwavering optimization and adjustment, and alongside our continuous and steady increase in gross profit margins, We have achieved the milestone of turning adjusted EBITDA positive for the first time since the establishment of Kings of Cloud. This milestone demonstrates Kings of Cloud's profitability and growth sustaining ability, marking the commencement of a new stage of development. It establishes a robust foundation for our long-term sustainable and healthy progression into 2024 and beyond. Samir.

Let me introduce the performance of the first quarter of 2024. In this quarter, Xinshan Yun continues to achieve double growth in terms of revenue and profit. Revenue reached RMB 17.8 billion, and the interest rate increased by 3.1%. After the adjustment of the first quarter, the net profit reached RMB 3 billion, and it increased by 53.8% in the same period last year. 53.8% After adjustment, the interest rate reached 16.8% Compared to the previous quarter, it increased by 1.6%. It achieved a steady increase of 7 consecutive quarters. It is a record high. After adjustment, EBITDA interest rate reached RMB 33.19 million. After adjustment, EBITDA interest rate reached 1.9%.

Now, I will walk through the business highlights of the first quarter of 2024. This quarter, we continued to achieve dual improvements in both our revenues and profitability. In particular, our total revenues reached RMB 1.78 billion, increasing 3.1% quarter over quarter. Adjusted growth profit for the quarter reached around RMB 300 million, increasing 54% year over year. Adjusted growth margin saw a significant boost, rising by 1.6 percentage points quarter over quarter to reach 16.8%, marking the seventh quarter of consecutive improvement. Adjusted EBITDA reached RMB 33.19 million. with an adjusted EBITDA margin of 1.9%, representing a significant improvement of 8.9 percentage points year-over-year.

In terms of supply and demand, this quarter, we achieved a revenue of RMB1.9 billion, a 12.9% return on growth, and a 9% return on growth on supply and demand outside the CDN business. We have made progress in three directions in Xiaomi Jinshan Ecology, AI business and CDA business. First, as the only strategic cloud platform of Xiaomi Jinshan Ecology, we firmly grasp the opportunity to use the cloud in the ecosystem, especially in the delivery period of Xiaomi. After XS AI commercialization is launched, AI office scenarios are in place. high-performance computing needs. In this quarter, the income contribution from Xiaomi and Qingshan is 19%, which is 4% higher than before. We fully believe that the strategic memory brought by AIGC will continue to develop AI business. In this quarter, AI income has increased significantly from RMB1.6 billion to 93% with a net income of 13.5% The distribution of the customer industry is diversified and further improved On the one hand, we continue to invest in infrastructure This quarter, capital investment is more than 12 billion RMB We have established a large-scale computing resource pool On the other hand, we look forward to the historical basis of AI rich energy, thousands of pages and hundreds of pages to establish an all-in-one subsidiary of Jinshan Intellect, to seize the opportunity for companies and professional services to digitalize and transform their business. Third, we will continue to promote the strategic adjustment of CDN business. In this quarter, CDN remains stable in terms of revenue, but its total revenue ratio is stable at 23%. We will continue to strengthen the business performance of CDN. In terms of public services, revenues reached RMB $1.19 billion this quarter, representing an increase of 12.9% quarter-over-quarter. Excluding CDN business,

public cloud revenues saw a 9% quarter-over-quarter increase. We have seen positive outcomes across our three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, AI business, and CDN strategic adjustments. First of all, serving as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we firmly grasp the cloud business opportunities within the ecosystem, especially after the launch of Xiaomi SU7 and the commercialization of WPS AI, which led to strong demands for computing power in autonomous driving and AI office use cases. This quarter, revenues contributed by Xiaomi and Pingsoft ecosystem reached 19%, representing an increase of 4 percentage points year over year. Secondly, we have been proactive in seeing the strategic opportunities brought about by this round of AIGC and have made significant strides in our AI business. This quarter, AI revenue surged to RMB $116 million, an increase of 93% quarter over quarter, accounting for 13.5% of public cloud revenues. This expansion further diversified our customer industry distribution. On one hand, we continued to invest in infrastructure with capital expenditure exceeding RMB 1.2 billion this quarter, establishing a high computing power resource pool with substantial scale. On the other hand, recognizing the historic opportunity of AI empowering various industries, we have established Kingsnorth AI as a wholly owned subsidiary, seizing the opportunities in intelligent digital transformation of enterprises and professional services. Thirdly, we continued to push forward our strategic adjustments of CDN business. This quarter, CDN revenue remained stable compared to the last quarter, accounting for 23% of total revenues. We remain committed to enhancing profitability of CDN by promoting high-value-added product sales externally, rigorously controlling procurement costs internally, expanding supplier coverage, and optimizing market price and service offerings.

In terms of the industry cloud, this quarter's revenue reached RMB 5.9 billion. In the public service sector, we are actively grasping the opportunity of the government cloud and the state cloud. for two types of business scenarios, using model capability, big data, and co-working as a base, to carry out standardized operations. This season, we have provided the construction of the Wuhan Highland Cloud for pre-operation, providing the free control of the whole area of the Wuhan East Lake Highland Region with a centralized computing storage platform to carry out data classification, explore data sharing, At the same time, we provide convenient public cloud infrastructure services for high-end and high-tech enterprises. In addition, we also continue to pay attention to the development trend of the data asset roadmap. In recent days, the organizers have discussed the digital asset and data elements conference, invited experts from data exchanges, accounting firms, big data centers, and data research institutes, the interpretation of old policies, the data assetization and the service of the national cloud, and the discussion on the implementation of the data asset record and other topics, and the business opportunities for data assetization. In the field of digital health, the industry's major data platform, the medical imaging cloud platform, and the integrated electronic disease platform are all evaluated. We selected the first batch of Chinese Information and Communications Research Institute digital medical products and services high-quality development prospects to show our innovation in the medical and artificial intelligence industry and service capability to reach new levels. In the financial field, we provide targeted storage expansion services for a certain head of the shareholder bank, provide perfect targeted storage for customers, file storage, large data network, and other storage capabilities, and fully built up the existing group. In addition, the health and stability of Kite's revenue and profit rate and profit level, on the basis of maintaining stable cooperation with large clients, this quarter has signed four well-known clients. At the same time, Kite has opened the landing of its exclusive cooperation service plan with Xiaomi Jinshan Ecology Clients.

Moving on to enterprise cloud services, revenues amounted to RMB 590 million. In public service space, we have actively pursued opportunities within public service cloud and state-owned asset cloud. Implementing standardized operation and maintenance, we have leveraged our core components such as model capabilities, big data, and workspace collaboration, targeting applications in the public service and enterprise domain. During this quarter, we initiated a trial operation for the Wuhan Optics Valley Cloud that we constructed, providing an independent and controllable centralized computing and storage platform for the entire Wuhan East Lake high-tech development zone. This platform has assisted in collecting data exploring data sharing, and providing convenient public cloud infrastructure services for science and technology innovation enterprises in the high tech zone. In addition, we have remained attentive to the trend of data asset inclusion on balance sheets. Recently, we convened a seminar on data assets and data elements, engaging experts and scholars from various institutions, such as data exchanges, accounting firms, big data centers, and data research institutes to discuss topics such as policy interpretation, data assetization, and state-owned enterprises' cloud services, as well as data asset inclusion practices, closely following the business opportunities of data assetization. In healthcare space, our DAS platform, medical imaging cloud platform, and integrated electronic medical record platform have all passed evaluations and been selected as one of the first batch of high-quality development panorama of digital medical products and services by China Academy of Information and Communications Technology. This showcases our achievements in product innovation and service capabilities in medical artificial intelligence industry. In financial services space, we provide object storage expansion services for a leading joint stock bank with comprehensive storage capabilities such as object storage file storage, and big data gateways while making full use of existing clusters. Turning to Camelot, this quarter witnessed stable and healthy revenue and profitability. We have signed up four new well-known customers while maintaining robust relationships with existing major customers. From the perspective of overall ecosystem business development, Camelot has launched a dedicated cooperation service plan with Xiaomi and Pingzhang's ecosystem customers, exploring new models of talent and business cooperation.

In terms of product technology, we continue to hold on to our technical interests, focusing on creating the first-class customer experience for core products. In terms of AI, we have accumulated a lot of experience and a large number of service experiences. It has realized the attack automation of large-model group deployment, delivery and reception, and operation management. In the field of cloud, Yinghe Cloud launched a new version of the operating platform to add 84 features, including hardware, performance, and monitoring capabilities, to help customers refine statistics management. At the same time, the new version of the operating platform

In terms of product and technology, we uphold our principle of building success based on technology and innovation, focusing on delivering best-in-class customer experience across our core product offers. In the AI space, We have accumulated technology and extensive service experience in deploying 256 and 512 node clusters, achieving automation in large-scale cluster deployment, acceptance, and operation and maintenance management. In enterprise cloud space, the Galaxy Stack platform released an updated version of its operations and maintenance platform. adding 84 new hardware and performance monitoring capabilities to assist the customers in refined statistical management. At the same time, new version of the operation platform calculates the usage of cloud resources such as cloud hosts and networks for all tenants from a business standpoint, enabling efficient and refined operations. This enhances our intelligence and precision in cloud migration, cloud management, and cloud usage For our customers.

In summary,

Our high-quality and sustainable development strategy has been steadily implemented, achieving the milestone of turning EBITDA competitive for the first time. Additionally, revenues have also achieved continuous growth in the past two quarters, and our gross profit margin has improved for seven consecutive quarters. Looking forward, we will remain committed to our long-term strategy, focusing on high-value added products and services, embracing AI opportunities, promoting technological advancement, and continuing to enhance profitability. By increasing management efficiency, maintaining a strict cost and expense control, enhancing talent training, and expanding our Wuhan R&D center, we are confident that we will continue to create value for our customers, shareholders, employees, and other stakeholders. I will now pass the call over to our CFO Henry to go over our financials for the first quarter of 2024. Thank you. Thank you, Mr. Zhou, and welcome everyone to join the call. Now I will walk you through the financial results for the first quarter of 2024. We are very pleased to see our adjusted EBITDA margin turn profit for the first time with our adjusted gross margin has been consecutively improving for seven quarters. verifying the well executed of our strategy of high quality and sustainable development. Having successfully achieved profitable e-data margin, we would like to highlight the following three key efforts we have made to yield the results. First of all, we strategically adjusted our revenue mix under the guidance of high quality and sustainable development strategy. During the past year, we scaled down proactively our DDN services with low margin profile. This quarter, CDN Services contributes around 23% of our total revenue compared with over 50% in the peak time looking back into 2020. Meanwhile, we expand our revenue from high margin AI business, achieving 160 million RMB this quarter, contributing around 13% of our public cloud revenues. Second, both of our public cloud and enterprise cloud services improved their margins in 2023. and a quarter is beyond, compared with 2022. Since last year, we focused on high-margin products and services, and we've learned carefully about our clients, which yield better margin profiles. Third, we have been taking strict measures and a supply chain strategy to cut down our costs and expenses. We have streamlined our procurement process and enlarged our supply pools to achieve higher cost effectiveness. We also closely monitor the daily operation expenses. These key initiatives bear fruits in this quarter by recording EBITDA profits, and we believe these are still potentials in the future, and we will keep our commitment into improving our profitability. Our adjusted gross profit continued to grow to 299.1 million RMB, increased by 53.8% year-over-year. representing adjusted growth margin of 16.8%, which is a record high for the company and improved 1.6 percentage points compared with last quarter. Our adjusted EBITDA narrowed from negative 130.5 million RMB in the same period of last year and a negative 27.7 million RMB in the last quarter to positive 33.2 million RMB this quarter. Adjusted EBITDA margin further narrowed from negative 7% in the same period of last year and an active 1.6% in the last quarter to positive 1.9% this quarter. Our total revenue were 1,775.7 million RMB this quarter, increased by 3.1% sequentially, of which revenues from public cloud services were 1,187.4 million RMB, representing an increase of 12.9% compared with 1,052 million RMB in the last quarter. The increase was primarily due to the expansion from AI-related revenues and the relatively stable scale of Obsidian business. Revenues from enterprise cloud services were 588.2 million RMB, representing an increase from 670.3 million RMB in the last quarter, as fewer projects are scheduled for delivery during the Chinese New Year holidays period. We continue to enhance our cost control measures, expanding our coverage of suppliers to search for better service quality and procurement prices. Total cost of revenue decreased by 11.2% year-over-year and a relatively stable quarter-to-quarter to 1,482.4 million RMB. IDC cost decreased significantly by 11.9% year-over-year from 872.4 million RMB to 768.5 million RMB this quarter. The decrease was in line with a scaling down of CDS services Depreciation and amortization cost decreased by 18.3% from 224.6 million RMB in the same quarter last year to 183.5 million RMB this quarter. The decrease was mainly due to the previous impairment of a long-lived asset and a partially offset by the depreciation of new services, new servers we acquired. Solution development and services cost increased by 5.3% year-over-year from 423.6 million RMB to 446.0 million RMB this quarter. The increase was mainly due to the solution personnel expansion of Camelot. Fulfillment costs and other costs were 36.1 million RMB and 48.3 million RMB this quarter, respectively. Adjusted gross profit for this quarter increased by 53.8% year-over-year to 299.1 million RMB, representing adjusted gross margin of 16.8% this quarter, compared with 10.4% in the same period of last year and 15.2% last quarter, making another record high, as well as a seven consecutive quarter of steady margin improvement. In terms of expenses, excluding share-based compensation and impairments of long-lived assets. Our total adjusted operating expenses were 469.6 million RMB, decreased by 21.2% year-over-year, and 5.1% from last quarter, of which our adjusted R&D expenses were 193.0 million RMB, increased by 18.8% from last quarter, The increase was mainly due to our continuous investment into technology. Adjusted selling and marketing expenses were 97.9 million RMB, representing a decrease of 8.3% from 106.7 million RMB last quarter. Adjusted G&A expenses were decreased by 20.8% from 225.6 million RMB last quarter to 178.7 million RMB. The decrease was mainly due to the strict control over data operational expenses and a decrease of Fed debt provisions. As of 31st, 2024, our cash and cash equivalents amount to 1.8 billion RMB, providing us liquidity for operations and investments into AI era. The capital expenditure for this quarter were 1,212.2 million RMB. as we invested in our infrastructure to build a sustainable AI business. In April, we released our ESG report for 2023, providing an in-depth review of the company's progress in the last year in its ESG practices, including business ethics, responsible operation, talent development, green development, sustainable supply chain, and corporate responsibility. In 2023, we were awarded as a member out of a total top 88 companies in the first edition of S&P Global Sustainable Yearbook, China edition. We are also rated as a single A rating in MSCI ESG rating, leading in the all ADR stock of China. We will fulfill our social responsibility and create value to our customers employees, shareholders, suppliers, and whole society. Looking ahead, uphold the principle of high quality and sustainable development. We keep taking initiatives to improve our revenue quality, cutting down costs and expenses, and improve our profitability. The breakeven of EBITDA is a well beginning for us, and we expect the more balanced and healthy business performance and financial results are coming in the future. Thank you.

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

Thank you. To ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for the first question. Our first question comes from Xiaodanzong with CICC. Your line is now open.

Zou Zong, Henry Clark, Nicole Thank you for accepting my question. We see that the company has actually achieved a turning point in the first quarter with a big profit margin of 1B. I would like to ask the management team how the rhythm of our profit margin improvement is expected for the following quarter. In addition, I would like to ask the management team to share how we plan to deal with the ongoing price drop strategy of recent cloud computing, including some large-scale manufacturers. Let me quickly translate my question. So thanks, management, for taking my questions. And I got two questions here. First of all, what is your expectations for the adjusted EBITDA margin improvement pace for the subsequent quarters? And secondly, how are you going to cope with the increasingly aggressive pricing strategies of IFAN large language model vendors?

Thank you.

Yeah, thank you. So I'll probably take on the first question. So as we mentioned in the prepared remarks, we actually have to see during the 12 years of history of King Top Cloud, it's actually the first quarter we hit the EBITDA margin break-even. And the underlying drivers, as we mentioned, are very clear. And we believe that those drivers will continue to unleash the value and profits in the following quarters, namely the better mix of the revenue from different BUs, the high margin contribution from AI business, the revamping of the supply chain tactics, which are actually changing many of the suppliers to remain competitive in the cost side. And also we improve the internal operation efficiency by streaming our internal operation initiatives and process. So these are the things obviously other companies may do the same, but I think we do in a better committed way and we will carry for a long way. And also if we're looking forward, we believe partial of the benefits on the profit from the initiatives we already took will continue to have the result in the coming year quarters and in addition as you can see that we also have the better trends to go with the higher growth on the top line so I think that will also give a good kick into the bottom line of the profitability as well so in short I think we are not going to say it's going to one-time profitability down the EBITDA line. It will be consistent and it will probably carry along in the following quarters. And we also see the improving better growth margin will also kick down to the EBITDA margin line as well. So I think sequentially we'll see a better growth margin carry forward and also will be a narrowed spread between the gross margin and the EBITDA margin. So we'll see probably a more accelerated trend of the EBITDA margin improvement as well. I think there's other two things we can share. Obviously, we're not going to give a kind of numeric guidance on the EBITDA margin going forward, but I think we're going to achieve kind of industry's top level of the tier players in a very similar ballpark member of the gross margin and EBITDA margin line. And what I can kind of commit is The EBITDA margin break-even for this quarter is not going to be a one-time-off event, so we are pretty confident. Both gross margin and EBITDA margin will continue to improve in the several quarters down the road as well. Thank you. Okay.

I'll answer the second question first. Liu Fang, you can add to that. Indeed, everyone is paying attention to the recent price war of several big companies. including Zijie, Ali, and Baidu. Yes. So, of course, this is also expected. It can be said that the maturity of the first Chinese large-scale model development has reached a certain level, right? Everyone thinks it can be used. This is one. The second one also marks the official opening of the elimination competition. Since the beginning of this year, in the first half of the year, We have done a demonstration of this trend. So, to be honest, it's only a little earlier than we expected. I didn't expect it to be so popular. This is our understanding of this phenomenon. But to be more specific, the first one is, to be honest, this is a model manufacturer for commercial use, to attract customers and manage the market. It should be said that it uses a very common technique and price. Well, I think the model effect is anyway. How about this? But we are all very clear, especially our office results. Well, let's talk about it. Who is the best? How about it? So this price has become a very key factor. This is what I want to express. In fact, it is a kind of model factory business. This is a price reduction for the commercial market. And today, he himself does not provide this large model. This is this kind of service. foreign foreign foreign foreign foreign foreign foreign foreign Everyone, don't confuse this concept. It seems to be saying that the big model is like our cloud service. How about the cloud service? Of course, the impact on us is obvious. In fact, we just talked about it. It has been eliminated. We have talked about it many times. As the identity of the Chinese cloud, so in the past, in the past year, the vast majority of these entrepreneurial big model companies are our customers. So the real concern for us is the elimination of the competition. Our clients will be eliminated in the end. This is what we really care about. This will probably happen in the future. From our point of view, from the current point of view, we haven't reached that point yet. Our clients in the last few years, including the first half of this year, This is still a relatively large amount of financing. From the perspective of our own assessment, it's not that it fell from the beginning. I think it can still run a few steps, so the problem is not big. At least in the next two years, this risk is controllable. So we basically have this contract signed for two or three years. So we think this risk is controllable in our contract period. Of course, after three or five years, I think China will not be able to have so many insurance companies in the long term. This is also not possible. From the 20-odd years of China's logistics development, whether it's IAM, e-commerce, search, payment, etc., 2B, 2C, especially 2C, it's not possible to put them all together.

Okay, so I'll just very quickly summarize and translate. So to be quite honest, it is something that we had expected already. As I mentioned, people have noted the price cut of large language models offered by ByteDance, Alibaba, and Baidu, and they have also commented on this, which is a sign that the large language model development in China has entered a stage of relatively mature, which I would call the round of competition which eliminates some of the players. However, I think it's important to mention one point that what we at King Hub Cloud do is different from what these large language model players do, because we actually provide services and computing power to the large language model players, but we don't do large language model ourselves. And therefore, the importance for us is that what we're closely looking at is whether these customers of ours, mainly the independent large language model of players in the market are going to be able to survive this competition and remain a player in the market. From the current situation, we have seen that many of them have secured a very large amount of financing in recent past. And therefore, overall, we evaluate the situation for these customers to be relatively robust at least in the next one or two years, which is well within our contract period. From the long-term standpoint, we do think that this is a stage of development of last language model in China that is going to come, which is not going to be that sustainable for all kinds of players to remain on the table. However, we do think that vertical application models, there's a good chance that many of them will be able to have their own niche and unique markets in the market competition.

Okay. Next question, please. Thank you.

Please stand by for the next question. The next question comes from Timothy Zhao with Goldman Sachs. Your line is now open.

Okay. Thank you for accepting my question.

My question is about our AI and AI-related investment. I see that This quarter, our AI-related income, whether it's from Q-on-Q or from a ratio perspective, has been significantly improved. Could you please share with us what the main source of this AI income improvement is? If we look at it from a demand point of view, and if we look at it from a GPU aspect, what are the things we have done? Another relevant question is that we just talked about our entire CapEx. In fact, we have already spent Thank you, Benjamin, for taking my question. My question is regarding AI and the relevant investments. I do notice that AI revenue actually shows strong QNQ growth, either from the absolute number perspective or as a percentage of revenue. Just wondering if Benjamin can share any color on what is driving that very significant AI revenue growth. And secondly, on CAPEX, as you mentioned, you already spent around 1.2 billion RMB CAPEX. I was just wondering if Magiman has any guidance into the total CAPEX for this year. Thank you.

Thank you, Kim. Probably a take on part of the question, and our SVP, Leopoldo, will probably give more color on the basis side as well. So regarding the investments, so I think we are probably still in the early age, and there's still a lot of opportunities we want to invest into the right client, as we mentioned. We want to carefully select the client, but after we commit to the client, as we get to know the client better, we will continue to make more investments. So the 1.2 billion RMB for this quarter, I think it's only part of the demand we receive from the clients, and we'll continue to invest more in the following quarters. which we think will result in a higher revenue in the following quarters. But on the other hand, given the AI business itself is carrying a better margin and the supply-demand trend in the market is more balanced, so we are actually changing the way we use our money. As you probably realize that not only are we using our equity capital, but also we leverage different sources, including the financial leasing, including some operational leasing. including the bank borrowing and other partnership with, for example, with the suppliers that will provide certain credits to us as well. So I think we're going to explore as many channels as possible to extend the capital we have. So the thing I want to mention, we don't want to set a cap about how much we want to invest into AI just because the cash we have on the balance sheet. So I think you can multiple different level of the the seedings on the cash number we have today. So I think that's a second question. So if you put a total number on the 2024, I think the total investment, including the CapEx, including the investment and the R&D expenses we put on the AI team, including different ways we have flexible ways to work with suppliers, I think the total investment for AI for this year is going to be a few more times multiplied by this quarter's number. I think that's probably the ballpark number I can give. And that will yield, again, a better and much higher AI revenue in the following quarters. And for the opportunity of the AI business, one thing I just want to start, and Liu Chaozong can add on the following points is, so the demand from client actually carry a more diversified way. So not only one vertical, from, for example, a big model company, but also, as you can see, as AI business get into the year two, right, last year to year zero, get into the year two, more clients and a different type of the clients will use the AI computing power, not only for the computing itself, but also will carry with applications, data, scenarios, the more different verticals, including internet, including probably the financial services, the legal and auditing and other, for example, public sector clients will all probably use that. And actually, those revenue will gradually come in and work into different products we have today. So I think probably that's the better mix and diversified revenue streams we're happy to see in the following quarter as well.

Yeah, we just mentioned that we have many incomes from different type of companies. For example, the big AI companies, they are now building the base clusters on our cloud. So as we mentioned on the report, we have built about 256 or even 512 clusters. So all these kind of companies, they will expand their new clusters on cloud. So we were expecting in the new quarters, they will have better requirements. And also we can see that the off-drive companies, they have the requirements not only on the off-drive technologies, but also on the language models technology. And also we have some customers from the internet companies. They are training their own language models Now we not only can provide cluster services for them, but also we can help them to print their own models and even dealing with their new data. And also we can see some PC companies, which is something like picture and videos, they are also having the increasing requirement. So this requirement, we are expecting increase on that. Thank you.

Thank you, Aubrey Heard.

Okay, I show no further questions at this time. I would now like to turn the call back over to Nicole Shawn for closing remarks.

Thank you, Aubrey Heard. Thank you once again for joining us today.

If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you.

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