Kingsoft Cloud Holdings Limited

Good day and thank you for standing by. Welcome to the Kings of Clouds first quarter 2025 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 on your telephone. You will then hear an automatic message advising your hand is raised. To restore your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Shan, IR Director of Kings of Cloud. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kings of Cloud's first quarter 2025 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com. as well as on the DINewsware services. On the call today from Kingsoft Club, we have our West German CEO, Mr. Zhou Tao, and the CFO, Mr. Henry Hu. Mr. Zhou will review our business strategies, operations, and company highlights, followed by Mr. Hu, who will discuss the financial performance. He will be available to answer your question during the Q&A session that follows. There will be consecutive interpretations. Our interpretations are for your convenience and the reference purpose only. In case of any discrepancy, management's layman in the original language will prevail. Before we begin, I'd like to remind you that this conference call contains forward-looking statements. within the meaning of Section 21E of the Security Exchange Act of 1934, as demanded and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectation and current market and operating conditions, and relate to UNs that involve known or unknown risks, uncertainties, and other factors. All of which are difficult to predict, and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ maturely from those in the forward-looking statements. Further information regarding these and other risk, uncertainty, or factors are included in the company's filings with the U.S. SEC. the company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial 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. Welcome to the first quarter of Jinshan Yun's business phone conference in 2025. I am Jinshan Yun's CEO, Zhou Tao. This quarter, we will continue to strongly promote our company's business, focusing on the key areas of AI, with high-quality sustainable development as our goal. First of all, our revenue has increased by 11%, reaching 19.7 billion yuan. The public and industry clouds has achieved the same growth. Among them, the number of employees has increased by 14% and has achieved a revenue of RMB13.5 billion. Next, we will continue to make progress with AI. In this quarter, the revenue of AI business accounts has reached RMB5.3 billion, and the growth rate has increased by more than 200%, while the growth rate has increased by 11%. and continue to increase the ratio of revenue to 39%. In addition, this quarter, we are using a more flexible way of funding investment to strengthen the construction of the fortune-telling group. It is expected to provide services online in the second quarter to further accelerate the increase in AI revenue. Third, as the only strategic cloud platform of Xiaomi Jinshan Ecosystem, We have successfully promoted our business cooperation with Sengtai. This quarter, Xiaomi and Jinshan Sengtai's revenue has reached 500 million yuan, which is a 50% increase in the same ratio. The net revenue ratio has been further improved to 25%. Our cooperation with Xiaomi Jinshan in the AI field continues to advance and is growing day by day, fully integrating both sides' advantageous resources. together with Xiaomi Jinshan to expand the cloud-based facilities of the AI era. Finally, from the profit level, after this quarter's adjustment, the net profit is 3.3 billion yuan, which is 9.6% increase. After adjustment, EBITDA has reached 16.2%, which is 14.3% increase. is mainly due to the continuous improvement of the AI income ratio. However, we also realized that there was a fluctuation in the return on profits. By adjusting the return on net profit by 2.6%, which is 16.6%, the drop in net profit is mainly due to the decrease in the ratio of revenue in the industry, which leads to a reduction in contribution profits. and the change in the pre-calculated cost. After adjustment, the operating profit was lowered by the net profit. This quarter, the loss was 55,810,000 yuan. After adjustment, the operating profit rate fell by 2.8%. Compared to the loss of the same period last year, the loss of 7.2% increased by 4.4%. the return on interest from profit to loss. Although in the short term of this quarter's financial industry, there is a return on interest fluctuation, market change and supply chain factors are intertwined, but from a long-term perspective, we are firmly following the long-term good strategic layout, steady sales, in Xiaomi Jinshan Ecotourism Cooperation, AI应用部署方面助劳根基,推动公司整体AI云服务的战略布局.

Hello, everyone. Thank you and welcome all for joining Kingshark Cloud's first quarter 2025 earnings call. I am Zou Tao, CEO of Kingshark Cloud. This quarter, we continued to steadily advance our business with a target on high quality and sustainable development, centering on key areas of AI. First, we recorded year-over-year revenue growth of 11%, reaching RMB 1.97 billion. Both public cloud and enterprise cloud achieved year-over-year growth, among which public cloud increased by 14%, reaching RMB 1.35 billion. Second, we continued to drive progress with AI. This quarter, AI gross billing reached RMB 525 million, representing a year-over-year increase of over 200%, and a quarter-over-quarter growth of 11%, further contributing 39% of public cloud revenue. In addition, this quarter, we are accelerating the construction of our computing clusters with more flexible capital deployment which is expected to launch service officially in the second quarter, further boosting our AI business revenue. Third, as the only strategic cloud platform of the Xiaomi and Kingsoft ecosystem, our business cooperation with the ecosystem progressed smoothly. This quarter, revenue from Xiaomi and Kingsoft ecosystem reached RMB 500 million, up 50% year over year. with its contribution to total revenue further increasing to 25%. By fully integrating the strengths of both parties and jointly expanding cloud infrastructure for the AI era, our collaboration with Xiaomi and Kingsoft in the AI space continued to progress and deepen. Finally, in terms of profitability, this quarter, our non-GAAP gross profit was RMB 327 million, representing a year-over-year increase of 9.6%. Non-GAAP EBITDA margin reached 16.2%, an increase of 14.3 percentage points year-over-year, mainly attributable to the continued increase in the proportion of AI business revenue. However, we also witnessed that our profits has experienced some fluctuation quarter over quarter, while non-GAAP gross margin declined by 2.6% each point quarter over quarter to 16.6%. The decline in gross margin was mainly due to declined profit contribution from a lower proportion of enterprise cloud revenue, as well as the impact of front-loaded investment of computing resources. The non-GAAP operating profit was impacted by the decline in gross profit, resulting in the loss of RMB 55.8 million this quarter. Non-GAAP operating margin was negative 2.8%, representing an improvement of 4.4 percentage points compared with a loss of 7.2 percentage points in the same period last year, and turned from a profit to a slight loss quarter over quarter. Despite quarter over quarter fluctuations in financial performance this quarter and the headwind of both market pressure and supply chain uncertainties, we remained firmly on track with our long-term strategy and continued to move forward with confidence. We have strengthened our foundation in ecosystem cooperation, computing infrastructure deployment, and AI application, advancing the strategic layout of our company's overall AI cloud services.

Next, I would like to introduce the performance of the first quarter of 2025. In terms of supply and demand, the income achieved this quarter is 3.5 billion yuan, which is 14% of the total growth. AI business, as the key growth driving force, the top-of-the-line income of this quarter has increased significantly to 5.3 billion yuan, which is more than 200% of the total growth, which is 11% of the total growth. account for 39% of the total income of the public. To continue to lead the industry, we are on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of the amount of AI large model customers on the basis of stable improvement of Now, let me walk you through the key business highlights for the first quarter of 2025.

In public cloud space, Revenue reached RMB 1.35 billion this quarter, representing a year-over-year increase of 14%. AI business, as a key growth driver, reported a significant increase in growth feelings to RMB 525 million, up over 200% year-over-year and 11% quarter-over-quarter, accounting for 39% of public cloud revenue, continuing to lead the industry. Based on steady usage growth in ecosystem customers and foundation model customers, computing demands for AI applications in internet customer business scenarios, such as online education and online travel, also made breakthroughs. In the construction of clusters, we efficiently coordinated and responded quickly to the demand schedule of key customers, created benchmark case of delivering full spectrum cloud services for large scale clusters within the quarter. In addition, through flexible capital cooperation models, we ensured sufficient underlying computing power supply to support the rapid growth of our AI business.

In terms of the industry cloud, this quarter, we achieved a revenue of 6.2 billion yuan, which is the same as the growth of 5%. This quarter, we were affected by the slow pace of seasonal sales. The industry cloud's revenue decreased by half, From the perspective of the industry, the public service sector promotes the application of AI in the government cloud and the international cloud, and actively embraces the trend of AI. Jinshan Cloud, through the opening of the model market, builds a rich model resource. At the same time, the matching includes data processing, model standardization, model evaluation, model quantification, and other key parts of a temporary model tool chain. It has always been self-reliant in providing users with full-scale and temporary AI services to assist customers in deepening the model performance in the actual business scene. In the field of digital health, this quarter began the construction of a mutual sharing platform for Wuhan-based test and inspection results. The image cloud capability of Xinjiang Cloud in Jiangsu, Chongqing and other places has been verified again, from the image scene to the

In enterprise cloud space, revenue reached RMB 616 million this quarter, representing a year-over-year increase of 5%. Affected by seasonal slowdowns in project delivery and acceptance process, enterprise cloud revenue declined quarter-over-quarter. By industry, in the public service sector, we are advancing the application of AI in public service cloud and state-owned asset cloud, actively embracing the AI-driven trend. Kingsoft Cloud has built a rich set of model resources through open-source model marketplace, while providing a one-stop model toolchain that covers key process, including data processing, model fine-tuning, model evaluation, and model quantization. We remain committed to delivering full-process, one-stop AI services to help customers deeply optimize model performance in their business scenarios. In healthcare sector, we initiated the construction of a platform for mutual recognition and sharing of test and examination results in Wuhan. Kingsoft Cloud's medical imaging cloud capabilities, which have been deployed in regions such as Jiangsu and Chongqing provinces, were once again validated Our capabilities also expanded from imaging scenarios to test and examination scenarios, and have been further replicated and extended to the entire Hubei province market.

In terms of product technology, we continue to hold on to the first-class customer experience focused on building core products. This quarter, we continue to improve the product capabilities of the computing cloud. In terms of product and technology,

we uphold the principle of building success based on technology and innovation, focusing on delivering best-in-class customer experiences across our core product offerings. This quarter, we continue to enhance the product capabilities of our intelligent cloud computing services. Our Xing Liu training and inference platform as a one-stop AI development and deployment platform remains committed to providing enterprises with efficient, elastic, and cost-effective model training and inference services. The integration of high-quality models, including the one from Xiaomi, will further expand the platform's ecosystem capabilities and help customers apply AI technologies in scenarios such as natural language processing, multi-model interaction, and intelligent decision-making.

Overall, our AI business continues to develop rapidly cloud services into a new development cycle. In the field of public cloud, our industry-based facilities, training platforms, and AI tools are built to help customers reduce training costs, improve model development, and improve the stability, convenience, and efficiency in the process of use. In the field of industry cloud, AI, data, and office work In the development trend of corporate AI home scenarios, we provide a temporary model solution for service. Looking forward to the future, we will maintain deep cooperation with Xiaomi Jinshan, fully understand and explore new AI opportunities, and continue to create value for our customers, shareholders, employees, and other places. Next, let's welcome CFO Harry, Thank you.

Overall, our AI business continued to grow rapidly, and our cloud services have entered a new development cycle. In the public cloud space, we strengthened our capabilities in infrastructure, training and inference platforms, and AI tools to help customers reduce training costs and improve stability, convenience, and efficiency throughout model development, fine-tuning, and usage. In the enterprise cloud space, with a focus on AI, data, and office productivity, we provide one-stop model solutions and services under the trend of enterprise AI plus scenario development. Looking ahead, we will maintain deep cooperation with the Xiaomi and Kingsoft ecosystem, fully understand and explore new AI opportunities and continue to create value for our customers, shareholders, employees, and other stakeholders. I will now pass the call to our CFO Henry to go over our financials for the first quarter of 2025. Thank you.

Thank you, Mr. Tso. And I thank you all for joining the call today. I will now walk you through the financial results for the first quarter of 2025. This quarter, our AI strategy continued to drive our growth and laid a foundation for future development. Total revenues for this quarter were 1,970.0 million RMB, reflecting an 11% year-over-year increase. Out of this, revenues from public cloud services were 1,353.5 million RMB, up 14%. from 1,187.4 million RMB in the same quarter last year. This growth was mainly fueled by a surge in AI-related business, with the billing reaching 525 million RMB. This quarter, our capital expenditure reached 605 million RMB. Revenues from enterprise cloud services reached 616.5 million RMB, up 5% from 588.2 million RMB in the same quarter last year, primarily driven by increased demand in industry solutions. However, we have witnessed a 25% sequential decrease of enterprise-style revenues, which was mainly due to the seasonality impact. Total cost of revenue was 1,651.7 million RMB, up 11% year over year. which was in line with our revenue expansion. IDC costs dropped by 6% year-over-year from 768.5 million RMB to 722.8 million RMB this quarter, reflecting on execution and cost control and a better RAC utilization. Depreciation and amortization costs increased from 183.5 million RMB in the same period of last year to 378.5 million RMB this quarter, mainly due to the depreciation of newly acquired high-performance servers to expand our AI business. Solution development and the service cost rose by 13.3% year-over-year, from 446.0 million RMB to 505.2 million RMB, driven by expansion in Camelot personnel to support revenue growth. Fulfillment costs and other costs were 3.1 million RMB, and 42.1 million RMB this quarter respectively. Our adjusted gross profit for the quarter was 327.7 million RMB, a 9.6% increase year-over-year, while a decrease of 23.4% quarter-over-quarter. Adjusted growth margin was 16.6% in this quarter, compared with 16.8% in the first quarter of 2024, and a 19.2% in the fourth quarter last year. Our adjusted growth margin has been negatively impacted by the seasonality for enterprise cloud services and the higher upfront investments into servers and RECs for AI business. On the expensive side, excluding share-based compensation, our total adjusted operating expenses were 427.3 million RMB, a decrease of 9% year-over-year, and a 4.3% quarter-over-quarter. of which our adjusted R&D expenses were 200.8 million RMB, increased by 4% from the same quarter last year. Adjusted selling and marketing expenses were 107.8 million RMB, increased by 10.1% year-over-year. Adjusted G&A expenses were 118.7 million RMB, decreased significantly by 13.6% year-over-year due to the decline of credit loss. Our adjusted operating loss was 55.8 million RMB, narrowed by 56% from 127.0 million RMB in the same period of last year. The improvement was mainly due to increase of gross profit and a decrease of credit loss expenses. However, the adjusted operating profit turned loss from last quarter, which was mainly due to the decrease of gross profit in this quarter. Our non-GAAP EBITDA profit was 318.5 million RMB, increased by 8 points of 33.2 million RMB in the same quarter of last year. Our non-GAAP EBITDA margin achieved 16.2%, compared with 1.9% in the same quarter last year. It was mainly due to our strong commitment to AI cloud computing development, strategic adjustment of business structure, and our strict control over cost and expenses. As of March 31st, 2025, our cash and cash equivalents totaled 2,322.7 million RMB, providing a strong liquidity position to support operations and AI investments. Looking ahead, our cloud infrastructure is ready to serve in a short time. The demand from ecosystems and other AI application scenarios not only fueled our business growth, but also reinforced our confidence in this trajectory. With demand for AI cloud service continuing to grow, we are well positioned to capture and capitalize on AI capital opportunities. Thank you.

Thank you, Yuriko, who is now working very much Thanks for your attention. We are now happy to take your questions. Please ask your question in both Mandarin Chinese and English if possible. Operator, please go ahead. Thank you.

Thank you. Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To answer your question, please press star 1 1 again. We will now take the first question. from the line of Brian Gong from Citi. Please go ahead.

Thank you, Mr. Guan.

I have two questions. The first question is, in the first quarter, we saw that the increase in public and industry clouds seemed to be a little weaker than before. What is the reason behind this? And how should we look at the annual income situation? Another question is that Xiaomi has also developed its own model. Can you please introduce the latest changes Xiaomi has made to our needs? Thank you.

I will translate it myself. Thanks, management. This one is in the fourth quarter for both public cloud and enterprise cloud.

The growth seems a little bit weaker than our previous expectation. What are reasons behind this, and how should we see the pool year growth right now? And secondly, recently, Xiaomi released its own large-language model, and management elaborates what's the latest demand from Xiaomi. Thank you.

I'll answer first, and then Harry and Liu Tao will add to that. Your first question is to see the public language of Q1 and the Korean language. We actually talked about the Korean language in the second part. In fact, it is indeed affected by the delivery of this season. This still has a relatively big impact, whether it is our main department or Kleit's. Yes, because Q1 has a spring festival, and many industry customers or regular customers will be relatively less in the whole Q1. Basically, it's a time to do the budget. What about the supply and demand? I'll say it first, but Liu Tao can supplement it with itself. We mainly focus on big customers. Basically, it means that the construction itself has a period of time, and the fee will basically go down to the next Q, so that we can gradually see it. It's like our Q1. We actually handed over a 502G group of Xiaomi. This is basically related to your second question. But in fact, we are basically at the end of Q1. It's basically at the end of March. So the whole income can only be reflected in the second quarter. So I used to talk about games. I often talk about the staircase curve. Because we mainly focus on large-scale. Basically, it may need one queue for its construction. So, in this queue, you can see that there is a lot of investment. The impact of its income and profits is reflected in the next queue. So, when you get to the next queue, you can see that the supply chain is relatively fast, okay? So, I think this is the first question about you. The second question is about the impact of Xiaomi model on us. We talked about it just now. In fact, it was released in April. It was released in April. The GB model is the one that came out of our group after we handed it over. That's right. And as we said just now, the QE income increase of Xiaomi's today's ecosystem Compared to last year, it's only 50%. In fact, we haven't mentioned AI alone. In fact, AI is 100% or 200%. So in general, this also reflects the acceleration of AI with Xiaomi itself. This data is compatible. Okay. From a long-term perspective, the imagination space is wider. Whether it's in model training or with Xiaomi's Uh, uh, uh, uh, uh, uh, Thank you very much for your questions.

So in relation to the first question about the decline speed in terms of both public cloud and enterprise cloud, as we noted in the prepared remarks, especially for the enterprise cloud, the seasonality is quite evident. That includes impact for both our own enterprise cloud services as well as the business from Camelot, because obviously Q1, there's the factor of the Chinese New Year, and a lot of customers for enterprise cloud business are still doing their budgeting. Now, in terms of the public cloud, as we mentioned before, the public cloud business of Cloud focuses mainly on key customers, which typically are large customers, and they have their own cycle of the construction of the clusters before they can actually get online and to generate revenue. So in fact, in the first quarter, we have delivered a 512 node cluster to our key customers. However, that delivery time point was only at the end of March. And therefore, the revenue and profit reflection as in the financial numbers will only be shown in the next quarter, which is the second quarter, Q2. Now, in relation to your question about the model from Xiaomi, in fact, the Xiaomi 7 billion parameter model is actually trained from our cluster. And in fact, the tremendous growth of the KC's AI business has much to do with the demand coming from Xiaomi. In the long-term perspective, the tremendous demand for model inference coming from Xiaomi still has significant potential. However, since we're serving Xiaomi, the pace of Xiaomi's demand has a lot to do with when and the amount the revenue and profit will show on our financial statements on a quarterly basis.

Last question, please.

Okay, thank you.

Thank you. We will now take the next question from the line of Sheldon Tsang from CICC. Please go ahead.

Hi, Mr. Zhou, Ms. Henry, Ms. Clark, and Ms. Nicole. Thank you for accepting my question. My first question is, I noticed that Jinshan Tourism and Jinshan Office have jointly launched an AI system in the field of business. I would like to ask the management to share how they view the business opportunity in the AI field. Can you also introduce the pricing model of the AI integrated machine and the interest allocation model of the office? The second question is about our profit margin. We see that the non-GAAP OP margin has dropped after the transition from the previous quarter. Under the influence of this new quarter, there is also some decline. How does the management view So thanks management for taking my questions. And first of all, I noticed that the Kings of Cloud and Kings of Office has recently jointly launched an AI all-in-one model machine for government affairs sector. So how do you view the business opportunities in the government affairs AI field? And also, could you introduce the pricing models of this all-in-one machine? And secondly, could you please update on the non-GAAP OP margin outlook for the subsequent quarters? Thank you.

Okay, thank you, Xiaodan. The first question, because today at the second meeting, the person in charge of Dengxi, Rui Rong, is at the scene. So I'll ask him to answer. I'll add to that later. The second question will be answered later by Harry. Okay, Rui Rong.

Hello, I'd like to briefly explain what you said about the issue of business integration. The issue of business integration is mainly because in the government sector, large-scale model development is developing very rapidly. So, my brother's company, Jinshan Office, is also working on a solution of large-scale model development in some important places in China. This solution has also been developed A verification is also a very important need for future development. So what is a integrated machine? The main thing is that we put the solution of the problem and the AI computing hardware equipment together, and it is small, flexible, and suitable for the use of various types of customers. So last month, together with the office, in order to focus on this industry, the development of large models in the field of office, a push scene, then the software and the hardware of the software are combined into one product. This market is mainly facing the use of customers from various Chinese government agencies. So this is the general situation of the integrated class. Regarding the question you just mentioned about pricing, because it depends on different hardware, so our integrated class products cover products from the basic configuration, including some domestic hardware products. So the price is different. So it is also gradually in the process of market promotion. Basically, my answer is these questions.

So let me quickly translate. So as Riley pointed out, the market for AI in the office automation targeting the government space has been developing very fast. And therefore, that's the reason why Kingsoft Cloud and come together with Kingsoft Office to jointly develop and offer a plan or a solution to such market, which has been actually validated by the market. So that integrated solution is actually an integration of both software and hardware, and notably in software portion, there's the AI component that helps them to become more efficient in office scenarios. And this is targeted for Chinese government agencies in various layers, various tiers. Now, in terms of the pricing question you asked, it actually varies based on the different configuration of hardware that we are providing to the customers. So the pricing can actually vary by quite a lot.

Thank you for the question on the margin side. I think probably a few things I want to point out. So given this analogy in Q1, as probably many of you understand that, our primarily OPEX is the human capital expenses. So the salaries, compensation, bonuses, so on and so forth. So in Q1, basically, we not only need to incur the normal salary payment, but also there's a bonus and also certain kind of employee benefits also incurred in Q1 during the holiday seasons, as you understand. Given the revenue side was affected by, you know, the delay of certain projects and also the top line growth has been affected by seasonality. So the variation of the top line growth largely affected the bottom line. So the cost structure, especially on the salary and the compensation, are relatively fixed. So that's why it's kind of affecting on the OP margin T01. It's kind of very straight line, the reason. So going forward, I think given the better margin profile, for example, the AI projects and our relationship with our ecosystem partners, especially for Xiaomi, as our CEO, Mr. Zhou, just mentioned, the big projects were likely to deploy on the way and it will be largely a book starting from Q2 going forward. So hopefully our top-line growth will drive a better margin expansion in the following quarters. So we are in the view that our OP margin will be better in the following quarters. It depends on the top line growth, the pacing of that, and the scale of the revenue quality in the following quarters. But on the other end, we also want to point out given the EBITDA margin will be likely better compared with the OP margin given the nature of the AI business. So as the AI business penetration become higher in the public cloud services, so hopefully the EBITDA margin can be recovered a little bit faster than the OP margin side. So I think I will encourage the audience to probably closely track our growth margin profile and EBITDA margin profile as well as the R&D cost which are primarily linked to the expenses and the compensation and salaries of employees. I think these are factors that are going to be the leading indicator for the OP margin going forward for the following quarters. So while we don't give a formal guidance, I understand Brian also mentioned this, for the four-year top line revenue in the call today, but we are in the view that the margin profile in the following quarters likely, especially in the second half of this year, will be better than the first half of this year. And at this moment, we don't give a kind of formal management guidance for the top line, but the margin profile will continue to be better, especially in the second half of this year. Thank you.

Thank you. We will now take the next question from the line of Thomas Chung from Jefferies. Please go ahead.

晚上好,謝謝管理層接受我的提問。 我的問題是關於我們傳聯的AI, the CapEx, 跟那個費用的一個人士可以好像上一個季度再差以下, This breakdown. 另外的话,我想多问一下, 就是关于芯片, 就是一个chip band的那个问题, 对我们Q2的CAPEX versus Q1, 会不会有些影响? 然后这个问题也是关于一些行业的问题, 就是关于大家开始用这些扫模型, 其实对我们园的服务会不会有些影响? Thanks, management, for taking my question. My first question is about the AI card packs and the op-packs breakdown. Can we have an update, like last quarter? And my second question is about our quarterly card packs, like Q2. Does the chip ban issue affect the sequential momentum in card packs? And my first question is about more about the industry landscape. Given that customers are now using more like a distilled model, smaller models, more than large models, would that affect the cloud revenue? Thank you.

Thank you, Thomas. I will take the first question and defer to CEO, Mr. Zhou, for the second and third question. I will answer the first question first. The second question is about the new restrictions and the small model. Please go ahead, Mr. Zhou. the first question regarding the capital expenditures so I have mentioned in this quarter our total capex was six hundred zero five million RMB for the first quarter of this year so if the audience remembers since last year we actually diversified the way with financing the investment into AI especially infrastructure construction So our own cash to be used for the CapEx is one part, but also we are going to, for example, doing the financial leasing and operation leasing with our partners, for example, Xiaomi as well. But also we are going to get the financing, for example, the bank loans and a certain leasing agreement with the state-owned banks in China locally, as well as some leasing companies in China as well, to arrange certain leasing of the balance sheet of financing arrangements. So I think these are the three ways that we're financing the total AI infrastructure demand. So out of that, I think the reason you probably point out the total capex for this quarter is kind of 600 million for this quarter, but I think our total investment into AI, because we also start to leasing certain servers from third parties to reduce our burden to pay out of pocket from own cash, So there's a certain leasing and a rental agreement we actually start to negotiate and set up with third party staff from Q1. So hopefully for next quarter, we're going to give some updates regarding our total spending, including both our own cash out of pocket, but also the leasing agreement we'll start to arrange with third parties. So this is going to be the total investment of the AI infrastructure from our definition. So we're going to likely have some updates for next quarter because we just start to arrange those agreements with third parties ensure to reduce and the saving and to be more efficient in terms of our own cash management so I think right now we give the number on total capex but the leasing plus the capex and a plus our own cash will be another update for next quarter and also giving the OPEX you know as I'm mentioning earning earning cost our R&D expenses for this quarter is around kind of 200 million RMB and the sales expenses is around the 108 million RMB. And the management SG&A is around 119 million RMB. So if you're putting the three numbers together, it's roughly about 400 million on the OPEX side, including R&D, self-marketing, and SG&A. I think this probably can give you a kind of a color regarding the total OPEX plus CapEx for on a quarterly basis. Thank you. Thank you.

Let me answer the second question. I don't need to translate it. Let me answer the second question. It is true that the limitations of this HR0 definitely have an impact. I would like to expand on the specific impact. First of all, in fact, for this kind of chip limitation, It's not the first time and it's not the first day. So, we... Especially for this wave, we were still prepared. So, we made the right preparations. So, from a short-term perspective, especially since we mainly serve large customers, from a short-term perspective, the impact is small. But from a medium-to-long-term perspective, not only for our entire industry, will have a greater impact. This is the first conclusion. Secondly, in fact, from the beginning of 2023, in order to deal with this kind of relationship between China and the United States, we have actually strengthened our close cooperation with domestic manufacturers. I remember there was a Q and I talked about it. In fact, our own model, including the model of Jin Xianyun's training, is based on state-owned companies. We have been continuing this kind of cooperation. So from a long-term perspective, we must be prepared to replace state-owned companies. We are also working hard and preparing for this. Okay, so very quickly to translate from Mr. Zhou's response to the chip ban question.

So honestly and very frankly, there surely will be impact, right? However, this is actually not the same time for similar kind of restrictions to be imposed on chips. So we have experienced similar things before. And so before this round of restriction actually hit us, we have had some inventory and storage So therefore, the short-term impact is not that material. However, from a long-term, from a mid-to-long-term perspective, there will be meaningful impact for both the Kings of Cloud as a company and for the industry as a whole as well. We mentioned before, since 2023, we have already strengthened our cooperation with Made in China Computing Resources. And that kind of cooperation, we have managed to continue that cooperation since then and in light of the similar restrictions we have made and we have been well prepared for the gradual substitution of made in China computing resources should restrictions continue to be more restrictive.

Well, let's talk about the conclusion first. This small model is the reasoning for the use of small models by customers. It has no impact on the growth and sales of our business. The reason is that our traditional large model customers' models are all one-in-a-billion. So they are basically in the training and training combination. So this part of the business actually has no impact. In addition, for our Internet customers, their main use from the beginning is Smaller models or medium-sized models like this one that costs more than 30B or more than 10B. So this business is always a pure increase for us, so it has no impact on us. Yes, and then it includes our future, including the growth of Xiaomi Ecotourism. In fact, it may be a positive for us, because with the growth of the amount used by Xiaomi's resource model and WPS, or other open source and resource models, So, so the conclusion, the basic conclusion is that there's no negative impact for revenue and profitability for King Cup and reasons being follows.

The first one is for the traditional large language model customers there. Models have been 100 billion parameter large language models, and it has historically been using our computing power for training and inferences, and this part is actually not impacted. And secondly, for the more traditional internet space customers, they have actually always been using relatively smaller models, including the 30B and 10B kind of parameter amounts. for our business. So this for us is actually incremental amount for our revenue, for our revenue development. And thirdly, in terms of the, in the future for the Xiaomi and Kingsoft ecosystem, we also expect to have actually positive impact coming from the more prevailing usage of relatively small models because more of the model inference would originally that coming from outside of the Kingsoft cloud computing power infrastructure from other companies. Actually, when the Xiaomi and Kingsoft ecosystem started to adopt more medium-sized or smaller-sized models, they were actually starting to use more of Kingsoft Cloud's computing resources. So that's actually another part of potential incremental revenue and profit for us.

Thank you, Alvin.

And our next question, please. Thank you. We will now take the next question from the line of Wenting Yu from CLSA. Please go ahead.

Hello, Mr. Chen. I am Wenting Yu from CLSA. Thank you for the opportunity to ask me a question. I have two questions to ask. The first question is, can you share the trend of the domestic AI cloud business? Before, we saw that the price competition in the industry is actually mainly around the big model API price. Do we see some pressure from the price competition in the AFG rental business? The second question is about, after we saw Dipsy open RE, we observed that the demand for training in the industry has improved or slowed down. Because I understand that everyone is doing post-training models. This part will have increased demand. But RE's opening may also allow some model factories to give up and continue to carry out models. What do we see as the impact of these two factors on the training demand of the entire industry? I will quickly translate my question. So the first question is, can management share the recent gross margin transfer AI cloud leasing services? Previously, we observed the aggressive price competition in the industry, mainly focused on model API pricing. Are we seeing the pricing pressure extend to the AI server leasing business as well? And the second question is, following the open sourcing of R1 by Divsig, how do we see the latest dynamics of model training demand? While there is incremental demand for post-training models, the open-source release of R1 may also lead to some model vendors abandon further iteration. So how should we evaluate these two factors and their overall impact in the industry? Thank you.

Okay, I'll answer the first question first. Then Liu Tao will answer the second one. The first question is about domestic competitive furniture. uh uh uh uh uh uh uh uh uh uh uh uh Because the old one is a year ago Two years ago This long contract basically has little impact Mainly new customers get this There is a certain competition So this is to a certain extent From the overall point of view This will have a certain impact Of course, the degree of impact This depends on the body weight of these customers If the body weight is small China China China China China China core customers, we will have our own KPS to support the service. For some non-core customers outside, we will also adopt some ways of external resources. In fact, it is similar to the way of long-term leasehold. So to some extent, it will also have a certain impact on our profit. Simply put, it is actually like a division mode. So in relation to the AI cloud service margin or pricing pressure question,

Let me respond to you from two dimensions, which is internal and external. So externally, as you rightly pointed out, we're actually seeing sort of market concentration for AI players as our customers. And therefore, they do have some impact to our new projects, which we entered into more recently. And the impact would largely depend on the project size. However, for the old long-term contracts that we have signed in the past, and for those projects that we entered into in the past, there's no meaningful or no material impact. Another point I want to point out is that starting from the second half of 2024, we're increasingly leveraging the so-called resource pool supply chain to expand our infrastructure. The strategy basically is for top of K-A customers, we use our own cash and dry powder and to build the infrastructure and to provide cloud service to them. However, for non-top customers, we're increasingly leveraging the partners who will supply us the servers and computing resources. And we jointly together to provide cloud service to these customers. And because these are partners that provide resources, we actually will also have to share some of the profit with them. So this is like a partnership in profit-sharing model. And for that reason, that new or emerging supply chain model has also, to some extent, negatively impacted the gross margin level of the company.

The second question I would like to answer is that from the perspective of training needs, we can indeed see Because of the appearance of DeepSeq, the demand for training of domestic large model customers may be reduced. But because our past contracts are all long-term contract protection, so the impact we see in this regard is very little. On the other hand, DeepSeq's success actually stimulated large domestic players. In fact, you can see that, including Xiaomi, it is believed that Chinese people can train a SOTA model with the right resources. So we can see that large customers in China, including large customers on the Internet, and even some large customers in some new industries, have their own needs to train large models. So from this point of view, we think that the overall training needs of large models are relatively stable. On the one hand, there may be certain training for large model startup companies, but for new players,

So in response to your question regarding the impact of open source of DeepSeq R1 to the demand of model training, my answer to you is this. This is coming from our SVP, Mr. Liu Tao. So the old batch of large language model companies, the so-called independent large language model companies, We do have seen their demand shrinking to some extent due to the success of DeepSeq. However, most of the contracts that we entered with them are long-term contracts, which we have entered in the past. So as we responded in the first question, so the impact is very limited. However, there's also a group of other companies other than those large language model companies some of them coming from the internet space, some from other emerging industries, they are inspired by the success of DeepSeq and also think that by using relatively manageable resources, they will also potentially be able to train and own a state-of-the-art model. So therefore, we're seeing increasing demand coming from these customers as well. So all in all, we don't see an active impact from the success of the DeepSeq model.

Thank you.

There are no further questions at this time. This concludes today's conference call. Thank you for participating. You may now