Kingsoft Cloud Holdings Limited

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

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud second quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on global newsware services. On the call today from Kingsoft Cloud, we have our Vice Chairman and the CEO, Mr. Zhou Tao, and the CFO, Mr. Henry Hou. Mr. Zhou will review our business strategy, operations, and the company highlights, followed by Mr. Hou, who will discuss the financials and the guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interperations. Our interperations are for your convenience and reference purpose only. In case of any discrepancy, management statement in the original language will prevail. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current marketing and operating conditions. and relate to UN standing on 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 filings with the US SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and the CEO, Mr. Zhou. Please go ahead. Thank you.

Hello, everyone. from the first one to 17% or more. The EBITDA rate went up to 3%. The net profit and net profit went up steadily. Next, the opportunity to embrace AI machines rapidly. The AI business of newcomers and public employees increased from 0% to 26% The industry is leading the way. The third. Stable and clear low-profit business. Today's business accounted for 40% of it, down to about 20%. A single large client. Concentrated risk is solved fundamentally. The fourth. Detailed management of procurement, asset and operation. The cost of the quarter has dropped nearly 300 million yuan, accounting for 15% of it. Fifth, in the long run, the Wuhan Research and Development Center quickly rose to account for about 30% of the total number of employees in the company, and laid the foundation for the company's long-term technical achievements, completing the Hong Kong double-seed main listing, entering the Hengsheng, Zhongzi and Hong Kong stock market, and supporting the basic facilities of the capital market. These are all further high-quality and sustainable development has set the foundation. I would like to express my sincere gratitude to all the long-term care and support of our clients, shareholders, and employees.

Hello, everyone. Thank you and welcome all for joining Kingsoft Cloud's second quarter 2024 earnings call. I am Zou Tao, CEO of Kingsoft Cloud. Looking back on the two years since August 2022, our entire Kingsoft Cloud team has firmly executed the high-quality and sustainable development strategy, and the company has undergone a complete transformation. First of all, profitability fundamentally improved, as gross margins steadily increased from low single digits to 17%. Adjusted EBITDA margins increased to 3% after turning positive in Q1, and we are well on track to turn operating and net profits positive. swiftly embracing AIGC opportunities. As this new round of AI services revenue contribution to public cloud increased from zero to 26%, a leading figure in the industry. Third, firmly facing out low margin businesses as CDN services revenue contribution decreased from approximately 40% to 20%. And along with it, single large customer concentration risk fundamentally resolved. Fourth, implementing refined management in aspects of procurement, assets, and operation, as quarterly costs and expenses decreased by approximately RMB 300 million, representing 15% of quarterly revenues. Sixth, taking long-term perspectives, as Wuhan R&D Center quickly scaled up to hosting approximately 30% of the entire workforce including Camelot, laying a solid foundation for sustained technological leadership, as well as completing dual primary lifting on Hong Kong stock exchange, followed by inclusion into the Hang Seng Composite Index and Hong Kong Stock Connect, solidifying our capital markets infrastructure. All of these have laid solid foundation to the high quality and sustainable development in the future. I would like to express our sincere gratitude to all our customers, shareholders, and employees who have consistently supported and cared for us over the long term.

Next, I would like to introduce the performance of the second quarter of 2024. In this quarter, Jianxiaoyun has achieved new breakthroughs in terms of revenue scale, profitability, and cash flow. Revenue reached RMB 18.9 billion, not only increased by 6.5%, but also increased by 3.1%. Our high value-added products and services have increased in terms of revenue, and it has eliminated the pressure brought by the major adjustments in the CDN business. After adjustment, the net profit amount reached RMB3.2 billion, which increased by 56.4% in total. After adjustment, the net profit rate reached 17.1%, and it continued to rise steadily for eight consecutive seasons, and it reached a record high. After adjustment, EBITDA reached RMB60590,000. The EBITDA rate after adjustment reached 3.2%. On the basis of EBITDA transfer on the first quarter, it continues to steadily improve and significantly increase by 6.5%. The current cash flow is 1.5 billion yuan. The business activity and recruitment ability continue to prove the increase of many financial performance indicators. Now I will walk you through the business highlights of the second quarter of 2024. This quarter, Kingsoft Cloud has achieved new breakthroughs in terms of revenue scale, profitability, and operating cash flow. In particular,

Our revenues reached RMB 1.89 billion, not only a sequential growth of 6.5%, but also a year-over-year expansion of 3.1%. Revenue from high-value-added products and services has grown, offsetting pressure brought about by our proactive adjustment of the CDN services. Adjusted gross profits reached RMB 323 million, increased by 56.4% year-over-year. Adjusted gross margin increased to 17.1%, marking the eighth quarter of consecutive improvement. Adjusted EBITDA reached RMB 60.59 million, and adjusted EBITDA margin reached 3.2%, a sequential improvement after the milestone of turning positive in Q1, and a significant increase of 6.5 percentage points year-over-year. Net operating cash inflow amounted to RMB $115 million, once again demonstrating our cash-generating ability from operating activities. The improvement of various financial performance indicators signifies that Kingsoft Cloud's high-quality and sustainable development strategy has been effective, marking a new face in our development and laying a solid foundation for long-term healthy growth in 2024 and beyond.

In terms of public cloud, we achieved a revenue of 12.3 billion yuan this quarter, a growth of 6.5%, and a growth of 4%. We have made progress in three directions in Xiaomi Jinshan Ecosystem and AI business supply chain. First, as the only strategic cloud platform of Xiaomi Jinshan Ecosystem, we are firmly aware of the opportunity for businesses to use cloud in the ecosystem. The revenue contribution ratio of Xiaomi and Jinshan is 20%, reaching 3.7 billion yuan, with a growth of 36.9%. In addition, AI business continues to grow. This quarter, AI revenue has increased significantly from 3.3 billion yuan to 2 times the QE AI revenue, with a revenue ratio of 26.3% of the public cloud, and is in the leading position in the industry. The distribution of customer industries has been diversified and further improved, including large model companies, automatic driving, and Internet applications. We have established a large-scale computing network that has a considerable amount of computing resources, and we are leading in the field in the field of large-scale computing network and main network capabilities, which can meet the needs of the main network of the computing group of 10,000-card level. Third, the construction of a perfect supply chain system to guarantee the scale of the computing resources, In terms of public cloud services, revenues reached RMB 1.23 billion this quarter.

representing a year-over-year increase of 6.5% and a quarter-over-quarter increase of 4%. We have seen positive outcomes across our three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, AI businesses, and supply chain. 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. Revenue contribution from Xiaomi and Kingsoft reached 20%, amounting to RMB 370 million, and witnessed a year-over-year increase of 36.9%. Secondly, AI businesses continue to bear fruits. This quarter, AI revenue surged to RMB 326 million, doubling the amount in the first quarter and accounting for 26.3% of public cloud revenues, an industry-leading position. Our AI customer base also further diversified, including large language model companies, self-driving, internet applications, and others. We have established a substantial computing resource pool, leading the industry in large scale network capabilities, capable of supporting the networking topology of super computing clusters at the 10,000 shift level. Thirdly, we built a comprehensive supply chain system, securing the scale of a stable intelligent computing resource pool and managing procurement costs. By fully utilizing data centers' resources in central and western regions of China, costs are significantly reduced compared to the data centers in the core cities in the east. Meanwhile, we strictly control internal procurement costs, expand coverage of suppliers, and seek the best combination of price and quality.

On the industry side, This quarter, we achieved a revenue of 6.6 billion yuan. In the field of public service, we actively grasp the opportunity of government cloud and state-owned cloud projects. For the two types of business scenarios of government and enterprise, we use model capability, big data, and co-operative office as the base to carry out standardized operations. In the China Government Cloud Market Research Report released in June 2020 by Saipi Consultants, the company listed the industry leaders. In the IDC China Business Cloud Service Operating Service Market Report, we are the top six in the industry. It reflects the recognition of the industry market for the company's financial capacity and market share. This quarter, we have implemented a large model of a standard project in the public service sector. It will assist Beijing's assistant committee to reach the 12345 smart decision-making, smart questionnaires and other projects. Increase the accuracy and efficiency of the data of the heat line of 12345 heat line in the general statistics classification and improve service quality and response speed In the digital health field, the fifth expansion project of Changzhou Health Cloud will meet the needs of the customer's new business, image extension and storage, and fully verify the long-term cooperation, construction and operation potential of the industry cloud customer and project. In the field of AI industry applications, our investment and construction subsidiary Jinshan Intelligence gradually began to promote business. The focus is to grasp the opportunity for enterprise AI software applications and delivery deployment. In terms of the industry model, the company established a strategic cooperation relationship with China's leading large-scale law firms and established a legal artificial intelligence joint laboratory. The digital transformation of legal business has taken a step forward.

Moving on to enterprise cloud services, where revenues amounted to RMD 657 million. In public services space, we have actively pursued opportunities within public service cloud and state-owned enterprise cloud. Implementing standardized operation and maintenance, we have leveraged our four components, such as model, big data, and workspace collaboration, targeting use cases in the public service and enterprise domains. In the China e-government cloud market research report released in June 2024 by CCID, a leading consulting company in China, we are ranked in the leaders quadrant. In the China e-government cloud operation service market report by IDC, we ranked at the top six companies in the industry. Such ranks reflect recognition from the industry market for our product capabilities and market share. This quarter, we have promoted the benchmark project of implementing large language models in public services sector, which will assist the Beijing Municipal Commission of Housing and Urban Rural Development in building the 12345 hotline intelligent decision-making and smart query and data projects, enhancing the accuracy and efficiency of the commission in summarizing statistics and categorizing the 12345 hotline data, and improving the service quality and response speed In healthcare space, Changzhou Health Cloud has launched its Phase 5 expansion. It will meet the requirements of new business scenarios and the needs of extended archive of healthcare images, fully validating the potential to establish long-term cooperation for construction and operation of industry cloud customers and projects. In AI industry applications, Kingsoft AI, a subsidiary invested and established by us, has gradually started to promote its business. Focusing on seizing business opportunities in enterprise AI software applications and delivery deployments. In terms of industry models, we officially launched a strategic cooperation with Denton's Law Firm, a leading law firm in China, and established the Joint Laboratory of Legal Artificial Intelligence, taking a leap forward in digital transformation of law industry.

In terms of product technology, We continue to support the technical industry, focusing on the first-class customer experience of building core products. In terms of AI, based on the increasing demand for data cleaning by AI customers, we integrate products such as stainless steel, vertical storage, etc. Form a comprehensive solution for data cleaning of types such as text, pictures, and videos. Satisfy pre-training data, fine-tune data, and data generation. In terms of product and technology, we uphold the principles of building success based on technology and innovation.

focusing on delivering best-in-class customer experience across our core product offerings. In AI space, in response to surging data cleansing demands from AI clients, we have integrated products like bare metal and object storage to create a holistic solution for data cleansing accommodating text, images, and videos. This multi-modal solution is tailored to meet the data cleansing requirements for the creation of both pre-training and fine-tuning data sets. In enterprise cloud space, the Galaxy Stack platform released a proprietary cloud platform with low cost and high density. Compared to original standard configuration, the high density version has achieved a maximum reduction of 64% in the cost per instance and an increase of up to 300% in instance density.

To sum up, after the past two years, high-density cloud can continue to be implemented in the development strategy. The basic aspects of the cloud Thank you.

In summary, after two years of step-by-step implementation of the high quality and sustainable development strategy, Kingsoft Cloud Fundamentals have undergone a complete transformation. Looking forward, we will continue to enhance our profitability and cash generating capabilities, deepen cooperation with Xiaomi and Kingsoft ecosystem, strengthen Wuhan Research Center, and develop comprehensive understanding of new AI and explore such opportunities, thereby continuously creating 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 second quarter of 2024.

Thank you. Thank you, Mr. Zhou, and welcome everyone for joining the call. Now I will walk you through our financial results for the second quarter of 2024. We would like to highlight three key areas of progress. We are very pleased with ongoing improvement in our financial matrix. By applying the first principle thinking, we are committed to a profit-focused approach that has led to consecutive increases in our gross profit, gross margin, EBITDA profit, and EBITDA margin over the past several quarters. This quarter, our adjusted gross margin reached 17.1%. marking eight consecutive quarters of steady growth, while adjusted gross profit hit 333.4 million RMB. After turning a profit in adjusted EBITDA margin last quarter, we continued with this positive trend with 60.6 million RMB in EBITDA and 3.2% in EBITDA margin. demonstrating our successful execution of a high-quality sustainable development strategy. Second, this quarter, our revenue reached 1,891.8 million RMB, reverting to a positive increasing trend with a 3.1% increase year-over-year increase and a 6.5% rise quarter-over-quarter. By strategically adjusting our revenue mix in line with our high quality and sustainable development strategy, we have allocated more resources to develop high value services. This quarter, our AI revenues grew to 326 million RMB, making up 26% of our total public cloud services revenue, doubled the amount from last quarter. We have established resilient supply chain, scalable computing power, and a long-term partnership with customers to support our growing AI revenues. In response to cost, pressure, and a low margin, we have strategically reduced the proportion of our CDN services to 19% of total revenue, down from 23% last quarter. Third, we have recorded a net inflow of operating cash flow amounting to 151.2 million RMB. We also secured various financial channels to support our AI business, including but not limited to loan facilities from Kingshore Corporation, financial leasing, and other bank loans. Here are the details of our financial results. Total revenues for this quarter were 1,891.8 million RMB, a 3.1% increase year over year, of which revenues from public cloud services were 1,234.5 million RMB, up 4% from 1,187.4 million RMB last quarter, primarily driven by the growth in AI-related revenues to 326 million RMB. Revenues from enterprise cloud services reached 657.2 million RMB up from 588.2 million RMB last quarter due to accelerated project deliveries this quarter. We have continued to enhance our cost control, expanding our supply base to improve services quality and procurement prices. Total cost of revenue decreased by 3.4% year-over-year and remained stable quarter-over-quarter at 1,573.4 million RMB. IDC costs dropped significantly by 14.4% year-over-year from 860.7 million RMB to 728.2 million RMB this quarter, reflecting the strategic scaling down of our CDS services. optimized utility of a rack usage. Depreciation and amortization costs increased from 202.1 million RMB in the same period of last year to 265.9 million this quarter, mainly due to the depreciation of new servers acquired. Solution development and services costs increased by 8.4% year-over-year from 452.9 million RMB to 491.1 million RMB due to the solution personnel expansion of Camelot, which was in line with the revenue growth. Fulfillment costs and other costs were 37.6 million RMB and 50.6 million RMB this quarter, respectively. Our adjusted gross profit for the quarter worth 323.4 million RMB, a 56.4% increase year-over-year, with an adjusted gross margin of 17.1%. This marks a new record and the eighth consecutive quarters of steady margin improvement, up from 11.3% last year and 16.8% last quarter. In terms of expenses, including share-based compensation and impairments of long-lived assets. Our total adjusted operating expenses were 555.3 million RMB, slightly increased by 3.2% year-over-year and 18.3% quarter-over-quarter, of which our adjusted R&D expenses were 200.1 million RMB, a 3.7% increase from last quarter due to the personnel cost increase. Adjusted selling and marketing expenses were 117.5 million RMB, up from 97.9 million RMB last quarter, representing 6.2% of total revenues. Adjusted GNN expenses were 237.7 million RMB, compared to 178.7 million RMB last quarter. As of June 30th, 2024, our cash and cash equivalents totaled 1,837.8 million RMB, providing strong liquidity for operations and AI investments. Capital expenditures for this quarter was 654.8 million RMB, reflecting our investments in infrastructure to support a sustainable AI business. Looking ahead, we remain committed to the principle of high quality and sustainable development. We will continue to enhance revenue quality, reduce costs and expenses, and improve profitability. Thank you.

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

Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. And to withdraw your question, you can press star 1 and 1 again. Thank you. We will now take our first question. This is from the line of Xiaodan Zhang from CICC. Please go ahead. Your line is open.

President Zhou, Henry Clark, Nicole, good evening. Thank you for accepting my question. I have two questions I would like to ask. The first question is about our capital spending. I see that our capital spending total in the first two seasons of this year should have exceeded the level of last year. How do we look at the pace of capital spending in the subsequent seasons? The second question is about our AI-related business. Since last year, the company has been actively investing in AI-related algorithms. What is our return on investment rate so far? How is the company's contribution to AI income this year? I will quickly translate my question. So thanks management for taking my questions and I got two questions here. First of all, could you please update us on your CapEx guidance for the next two quarters? And secondly, could you give us some color on the ROI of your AI investment and how is your expectation for the AI revenue contribution for the full year? Thank you.

Thank you, Xiaodan. I can answer the first question regarding the CapEx. So I think, first of all, I think you point out correctly This year, we're actually accelerating our investment in, we think, a very good area of potential business growth opportunities. Most of the CapEx, I think probably over 95% or even higher, are relating directly to the AI investments, which we think is a very good, positive opportunity for us. At this moment, while we cannot give a full guidance for the four-year CapEx investment, but I think we can probably look into two different areas. First of all, for this quarter, you may also notice that we recorded a net cash inflow from operation side, which is around about 151 million RMB. And I think you can already see that the CapEx investment into the good area of business already converted into a positive inflow from operation cash flow. So that's actually the first point. So the second point is we also expanded our financing channels. For example, you also notice last year we secured the financing support from Kingsoft Group as well as the leasing potential opportunities from Xiaomi Group as well. But this year, especially in the last two quarters, we also got great support from, for example, the national policy banks, the state-owned financial institutions, including both banks and also the leasing companies. So in that way, we actually do not limit ourselves with a certain cap of the capex investments, just looking the only amount of our cash balance today. So my point is, giving those traditional opportunity and financing channels, we actually can reopen and have a very high ceiling of the financial capabilities we can get to support an AI investment. The third point is, Given the investment is a long-term, we also measure very carefully regarding the profitability and the sustainability of those investments. And at this moment, we are happy to share most of our AI clients are the well-known names. You probably also know this on the market. And the second, we do also have a very long-term contract from sales side, which can secure the incoming cash flow as well as the client opportunities. with a potential upside to secure more business from the same client as a recurring basis. So I remember first few quarters ago, we talked about recurring as most important driver for our profitability. I think right now, given the AI, we do see that recurring revenue percentage are much higher if you compare with the old so-called the only ice services in the old model we did before. So I think that three areas I just mentioned can come to a conclusion that We do not limit ourselves with the cash we already have today. We can have more opportunity to increase investment with the capacity. Number two, every dollar we invest today, the ROE and also the recurring cash flow to serve those liability and increase in the revenue will be very long-term and very secure. And the third is we also use our capacity to secure a good universe of the client especially the AI company in the market in China today. I think we are leading on the front with the revenues, with the financing sources we have, and we can match in those two sides for the long term going forward. But last note, I think Sheldon, you probably want to have a ballpark number, which I can mention that The total capex for this year will be always probably a few times if you look at it from ballpark number compared with last year, and that will actually have a very good possibility to convert to accelerated revenue growth on the top line in the coming quarters. Thank you.

On the application, we have also achieved some practical progress. It may be that the current exhibition has not been disclosed yet. On the training, we have been working with the office. In fact, we have had a model training for nearly a year. And the official model of the mental office has also been officially launched and applied in practice. This is from these three dimensions. Currently, from the financial perspective. Of course, we also pay attention to business. In fact, if we look at it in the same way, we are actually 10 times more than 1,000. Yes, this is actually not very meaningful, because last year we had a small number, but compared to Q1, we still have a double growth. So in general, this is mainly the current number. The reaction is still in the supply, the supply angle. In fact, in addition to the future, we are using this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, The overall interest rate level is still relatively high compared to some traditional cloud services. We may not be alone, but the overall rate is still relatively high. The overall interest rate of the company has also been greatly improved. And then we need to look ahead. You just talked about the future contribution. I think my personal point of view is that from the information I have gained so far, In fact, we have talked about several industries. In addition to this model training, I will talk about the public sector first. We are talking about autonomous driving, including the automotive industry. Autonomous driving includes giant technology. Giant technology is actually the field of robots. In fact, we all think that there is still a relatively large space for this kind of driving. Everyone is very clear. In fact, since the launch of Tesla's FSD, it has been quite shocking. We judge that almost all of the heads of these few new forces in the car, including Xiaomi, I think they all have this plan to set up. In fact, there are a few of us who have already had a deeper communication. So the future growth potential is still very high. In addition to the robot, according to what we know, at least at present, a certain company has reached 3 billion in revenue recently. Therefore, in terms of the robot itself, the robot has been given its wisdom. We are also looking forward to In addition to the car industry, it may be a wider market and space. We have been paying close attention and have some practical progress. Of course, the Q2 has not been realized yet, so we think this is also a very big space for future imagination. So this is just this part of the supply. As for the use of this part, we also believe that with the deep strategic cooperation of our customers in these areas, the results will be shown in the second half of next year and in the second half of next year. In fact, this is the strategy of the smart service that we mentioned last year, which may provide a solid foundation for implementation. Yes, so although we have not talked about it in detail, but in fact, with these projects, This is basically the end of the line. As the cooperation deepens, and the results are gradually displayed, we still believe that this is the road for the AI to become rich. Or let's call it the road for the AI to enter thousands of industries. This is a more imaginative space in the South China Sea. So from a Chinese point of view, I will continue what I said in the previous few episodes. Since June of last year, I said at the press conference, we are entering the AI era. We call it all-in AI. The upgrade of this strategy, from the current year's time, has made a very significant progress. For the future confidence, with this year's time, we should say that the confidence is stronger, the fighting spirit is stronger. Okay, let me just simply translate what Mr. Zhou said.

So in terms of AI, I really want to take this opportunity to elaborate a little bit about my overall thoughts. So in my mind, it's really about three dimensions. One is the supply of computing power. The second is the inference, which is the application of the artificial intelligence. And the third is the training, which from the current financials that you are able to see, obviously, which is a tremendous growth. For example, it's ten times year over year growth and the AI revenue growth versus the first quarter. But all these numbers that you're currently seeing are mostly coming from the area of the supply of computing power. However, I do think that in the future, the potential room for revenue and for business in terms of training and in terms of for the application of the models have far more potential. Now, circling back to a question about the ROI, I have to say that the GP margin for the AI business is far higher than that of the other parts of the business, which is also a major contributing factor for the improvement of the company's overall GP margin. Now, looking ahead, I would also like to talk about it from two different dimensions. One is the supply of computing power, and the second is the inference and the application of AI capabilities. Now, in the first dimension, two areas poses a lot of opportunities. One is electric vehicles, and in particular, the autonomous driving demand for the EV space, which since the launch of Tesla's FSD, we have been engaging with a lot of EV firms, and all of them have significant and real kind of tangible intention. to do this and to implement and to train their own autonomous driving models. So this is a lot of space for our business opportunity. Now the second one is robotics, which essentially empowers robots with artificial intelligence. So we do think we will be having a lot of opportunities in this area as well. Noticeably, there's one certain company, which I'm not gonna mention its name, has secured 3 billion RMB financing recently. So, the confidence is very high in this space. Now, the second dimension about the inference or the use cases for the model capability, as we have talked about in prepared remarks, some of the projects that we have collaborated with some of our partners are being implemented. As we deepen such collaboration and the progress and achievements elaborated in these areas, We do think that this is actually going to be laying a solid foundation for the one-stop mass model services that we aim to provide in this space. So, in summary, we do think that our overall strategy of OEM AI since June last year has been very fruitful, and we look forward to continue our pace in its investment and development. Thank you.

Your next question, please. Thank you.

Thank you. We'll now take our next question. This is from Timothy Tsao from Goldman Sachs. Please go ahead.

Thank you for accepting my question. Good evening. I have two questions. The first question is, I see that the income of Xiaomi and Jinshan Group There is a very strong growth, and it also accounts for 20% of our overall income. I don't know if I can share more about it. What are the sources of this increase? Among these increases, for example, how much will the income ratio of AI be? In addition, as Xiaomi's car increases in the second half of the year, and the monetary progress of WPS's AI, how do we think about the contribution of Xiaomi and Jinshan in the second half of this year and even longer? Thank you for taking my question. I have two questions here. And the first question is regarding the revenue contribution from Xiaomi and the Kingsoft Group. I noticed that there was a very strong revenue growth in the past quarter and the total revenue contribution already achieved to 20% of the total revenue. So may I ask what is the driver behind that and what is the AI-related revenue contribution from Xiaomi and the Kingsoft Group to their revenue to Kingsoft Cloud? And into the second half of this year and into the longer term, given we have more cars from Xiaomi on the street, as well as the WWPS monetization from Kinsoft Group. How do you think about the revenue outlook from here? And the second question is regarding the CDN revenue, as we see a continued proactive downscaling of the CDN revenue. Could you share any thoughts on the outlook for this business line going forward? Thank you.

The first question regarding the related parties revenue contribution, I think Tim, you're right. I think we do see a few very important leading positive signals regarding the revenue potential growth in the future. I think the first of all is really, as we mentioned, giving a stronger business connection, With the Xiaomi and the Kingsoft group, we allocated more resources and we prioritized the revenue and client demand from our internal client. As we mentioned a few months ago, I think this is actually a very good opportunity for Kingsoft Cloud. So for this quarter, the revenue from Xiaomi and the Kingsoft group increased around 36.9% year-over-year and contributing to about 370 million RMB for this quarter alone. I think it is a very positive signal given it is proven of our capability to serve very important internal client, including Xiaomi and Kingsoft, including WPS as well. So I think the scenario and applications from auto driving, from the AI-related SaaS services, are very important driver for this opportunity. And we also have to see, given this trend going forward, Maybe it is possible by end of this year, as we are turning to a new financial year, we may asking the shareholders to give us an increasing cap of the related party revenue approval. So I just want to also share this good news with you that maybe for the next two or three quarters in the shareholder meetings, we are going to have you to propose a higher ceiling of the revenue cap to prove that we do have a great visibility of the internal revenue from related parties. The second part is relating the AI revenue contribution. I would say that the incremental revenue from our internal parties are primarily due to the AI-related revenues. So that's the first point. The second point is around half of the AI total revenue, as you'll notice that it's actually approximately one quarter of the revenue of public cloud for this quarter. Let's say half are coming from related parties, but also the other more than half are from the external clients. I think that strikes a good balance regarding we prove our capability to serve internal clients, but also have equal capability to have those services and products for outside clients. As you may notice that our outside clients are also Most of them are the tier one AI model companies in the China tech space today. I think that actually strikes true balance from internal and outside, but also to see potential increase, especially the visibility of the potential upside of the revenue growth going forward. And the last note on the first question, I want to mention that given you can observe our growth margin has been improving steadily, Incremental dollar of the gross profit are also primarily due to the contribution from our AI-related business. And given we are carefully select the AI client today, and we think those revenue can be sustainable, secure, and visible going forward. And we're going to also learn from past experience that we will control, for example, the business contracts and the business model, and also notice the potential risk in working on those revenues, and we can also strike a return and a risk profile for the profits and the contracts we are working on in the AI space. I think that's all for the first part of the question. Next question is about the programming and CDN business. Please, our co-presenter, do a reply.

Today, our co-presenter, Mr. Bao, who is in charge of the CDN business, is here. I will ask him to answer the second question.

Hello, I am the person in charge of the CDN department. I would like to answer your second question. In terms of CDN business, we first need to distinguish its type. The standard CDN business, we are now giving up the standard CDN business with low profit. But CDN business also includes high-performance, high-growth, high-technical value services. From our overall plan, The standard CDN business is basically reduced to 300 million yuan per quarter. This is our standard volume, which is the lowest volume. It will not be lower than this. At the same time, on this basis, the dynamic acceleration of our current growth, live broadcast acceleration, live broadcast conversion, these are all high-performance CDN business. So the entire business of our CDN business will expand in the future. But the lowest-performance income part is 300 million yuan.

So I think the right way to understand, to think about this question, is that we have to make a distinction between two types of CDN business. One is the standard CDN business, which is typically marked by lower profit margin. And there's this other kind of CDN business, which represents usually higher margins. For example, like the live broadcasting acceleration, the dynamic acceleration, etc. And this usually has a higher margin because they have their higher value added. So my quick answer is that for the first type of standard CDN business, the minimum amount that we aim to maintain on a quarterly basis is 300 million RMB. And I do not expect it to be lower than that. That serves as a base for our overall business. And then we'll continue to invest and to expand the higher margin part of the CDN business. Yeah, that concludes my answer.

Thank you. Thank you. Thank you. And this concludes our .

Thank you. There are no further questions at this time, so we'll now hand back to Nicole Shan for any closing remarks.

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

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