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spk05: Ladies and gentlemen, thank you for standing by and welcome to Klupin's fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question and answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference call over to your host today, Elaine Dye. Crouppen's Investor Relations. Please go ahead.
spk04: Hello, everyone, and thank you for joining Crouppen's fourth quarter and full year 2020 earnings conference call. The company's financial and operating results were issued in a press release via newswire services earlier today and are posted online. You can download the earnings press release and sign up for our distribution list by visiting our IR websites. Participants on today's call will be Mr. Changshun Sun, our founder and chief executive officer, and Mr. Stephen Lee, our chief financial officer. Stephen will provide an update on our operational performance as well as our strategic initiatives on behalf of our CEO, Mr. Sun, and then he will give you an overview of our financial performance and provide guidance for the first quarter of 2021. Management will begin with prepared remarks, and the call will conclude with a Q&A session. Before I hand it over to the management, I'd like to remind you of Crouppen's safe harbor statement in relation to today's call. Except for the historical information contained herein, certain matters discussed in the conference call are forward-looking statements. These statements are based on current trends, estimates, and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. For more information about the potential risks and uncertainties, Please refer to the company's balance with the Securities and Exchange Commission. With that, I will now turn the call over to our CFO, Steven Li.
spk01: Thank you, Yilin. Hello, everyone, and thank you for joining us today. I'm pleased to deliver today's opening remarks on behalf of our CEO, Mr. Sun. This is our first earnings call as a public company following our IPO in February this year. We are excited to speak with all of you about our financial and operating results and to update you regarding our journey to transform the enterprise communications industry in China. Many of you listening today may be new to our story, so let me spend a few moments describing our business before walking through our full year and first quarter highlights. We are a leading multi-capability cloud-based communication solution provider in China, offering a full suite of cloud-based communication solutions. Our services include Communications Platform as a Service, or CPaaS, cloud-based contact centers, or CC, and cloud-based unified communications and collaborations, also referred to as UCMC. Our CPaaS offers services similar to Twilio's, allowing enterprises to add real-time communications capabilities such as voice and messaging to their applications and systems by deploying APIs and SDKs. With our CC service, enterprises can interact with customers through different channels at a lower cost and better efficiency. Zendesk would be a U.S. comp for this type of service. Our third segment, UCNC, helps enterprises manage communications within their organizations through user interfaces. This service is similar to products offered by RingCentral in U.S. Our prime customers in China are large enterprises with a broad range of communication demands. With our comprehensive business portfolio, we are better positioned to fulfill those business demands. In 2020, we generated about 70% of our total revenues from large enterprise customers. About one-third of these customers employed more than one category of our solutions, providing us considerable cross-selling and up-selling potential. In addition, the migration of the communications industry to cloud-based solutions has only just begun in China. The penetration of cloud-based communications in China was just 2.7% in 2019, compared to roughly 10% in the U.S. The market is also very fragmented and therefore ripe for consolidation. We are confident that our recognized leadership position and comprehensive cloud-based communications solutions put us in a position to adapt to market dynamics and capitalize on the tremendous growth opportunity. I think it goes without saying that 2020 was a year that has tested all of us in one way or another. Through ingenuity, adaptability, and a great deal of hard work, our team was able to work through problems, meet challenges, and seize upon opportunities. This is evidenced by our results. We are proud that we have not only preserved through the extraordinary year, but have been able to come out even stronger. Our IPO in February this year was a testament to our hard work and recognition of our market leadership position. The IPO also raised our brand's profile significantly on the international stage. Despite the unprecedented challenges presented by the COVID-19 pandemic, We are pleased to report solid 2020 top-line growth of 18.1% year-over-year, with revenue of 767.7 million RMB, driven by a 13% expansion in the number of active customers to reach over 13,000 by the end of 2020, as compared to the number of active customers as of December 31, 2019. We are delighted to see the outstanding value proposition that our products and services deliver resonate with more and more enterprises in the marketplace. In the first quarter of 2020, we firmly executed our mission, continuing to cultivate an expanding customer base and further develop our cloud and AI-based communication services offering. Revenues in the first quarter increased significantly. to RMB 258.7 million, representing a 15.5% increase year-over-year. Next, let me provide some highlights at the business segment level. We continued to see double-digit growth in 2020 for our CPaaS segment. Revenue from CPaaS in 2020 grew by 15.9% to 400.1 million RMB, primarily due to the rapid growth of our text messaging services which saw increased demand from certain large enterprises, as well as significant increases in revenues generated from our IoT services. In the first quarter of 2020, revenue for CPaaS was 130.5 million RMB. Our cloud-based CC segment was the standout performer in 2020, seeing revenues increase by 41.2%, to 245.1 million RMB, driven by a significant increase in customer numbers. That performance could have been even stronger if it wasn't for shrinking of the business by certain medium or small enterprises customers who were affected by the COVID-19 outbreak. We saw some of this unwind in the first quarter of 2020, where the CC revenues upped 74% year-on-year to 19 million RMB driven by the release of underserved demands during the COVID-19 outbreak in the first half of 2020. COVID-19 solutions had a more difficult year with revenues decreasing 3.9% to RMB 118.3 million in 2020 and decreasing 9.5% year-over-year in the first quarter of 2020 to RMB 36.5 million. These declines primarily came as a result of delayed project delivery due to the COVID-19 outbreak. As we move ahead in 2021, we have seen our business accelerate significantly in the first quarter, benefiting from the broad-based economic recovery being experienced by China. We have successfully acquired new large enterprise customers with the numbers in the teens, and our dollar-based net customer retention rate has bounced back to above 100% in the beginning of 2021. Internationally, we have registered significant growth from our Japan business, as well as made progress with market entry in Southeast Asia, most recently opening our first office in Southeast Asia. In March, we entered into a definitive agreement to acquire Elite CRM, a leading customer relationship management software provider. We see substantial synergies in terms of product portfolio and customer base from this acquisition. CRM software adds to our capabilities in serving large enterprise clients, and it helps us to solidify our position as a comprehensive solution provider. In terms of customer base, Elite CRM has built up an impressive customer portfolio, particularly in TMT and insurance. which will complement our historically strong position with financial service sector. Once the transaction is closed, we expect Elite CRM to immediately make a positive contribution to our bottom line. In a segment right before consolidation, the added financial firepower that came with our IPO gives us a great foundation on which the next stage of the company's growth can be built. We will continue to explore other opportunities to strengthening our company through M&A selectively as the year progresses. This concludes Mr. Sun's prepared remarks. I will now provide a brief overview of our financial results for the first quarter of 2020. All comparisons are year over year and all numbers are in RMB unless otherwise noted. Our revenues reached 258.7 million RMB in the first quarter of 2020, increasing 15.5%. The increase was mainly driven by very strong performance from our cloud-based contact center solutions business, which saw revenues increase 74% year over year to 91.5 million RMB, primarily due to an increase in the number of customers, as I mentioned earlier. Cost of revenues increased by 19.2% to 158 million RMB, which was due to increased cost of revenues from CPAS solutions as our expanding customer base drove an increase in taxing costs and an increase in cost of revenue from CC solutions, primarily as a result of our increased business scale, as well as increased infrastructure and equipment costs as we continued to ramp up project delivery. Gross profit was 100.7 million RMB, 10.2% higher than the fourth quarter of 2019. Now let's look at our expenses. In the fourth quarter, operating expenses were 180.4 million RMB, representing a 30% increase from 138.8 million RMB in the fourth quarter of 2019. R&D expenses increased by 5.8% to 52.5 million RMB, primarily due to an increase in technology service expenses paid to the third-party outsourcing service providers for the development of certain non-core features and functions in cloud-based UCMC solutions, partially offset by a decrease in the R&D staff expense as a result of a reduction in social insurance contributions due to favorable impact from government relief policies during the COVID-19 outbreak. Selling and marketing expenses increased by 29.4% to 60.7 million RMB, mainly due to increasing staff expenses and the increase in spending on online advertising campaigns and marketing services as the company continues to scale its business and reach a wider customer base. G&A expenses increased by 59.2% to 67.1 million RMB. The increase was primarily due to costs incurred preparing for the company's IPO and the increase in share-based compensation expenses. We also saw an increase in our doubtful account provision in the period. Net loss for the first quarter of 2020 was 305.4 million RMB, compared with 53.9 million RMB in the first quarter of 2019, with the increase primarily driven by 240.1 million RMB of non-cash items, including change in fair value of world reliability of RMB 224.8 million and the share-based compensation of RMB 15.4 million. basic and diluted net loss per share was 37.65 RMB in the first quarter of 2020. As of December 31st, 2020, the company had 296.6 million RMB of cash and cash equivalents. For more of our 2020 full-year financial results, please refer to our earnings press release for further details. Looking forward to 2021, We believe we are well-positioned as a company to take advantage of pent-up demand from enterprise activities delayed in 2020 and to capture expanding cloud communication services deployment opportunities, the positive impacts of which we have already begun to witness in the first quarter of 2021. For the first quarter of 2021, Klopin currently expects revenues to be between 192 million RMB to 197 million RMB, which would represent an increase of 45% to 48.8% year-over-year. The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demand. which are all subject to substantial uncertainty. With that, I'd like to open up the call to questions. Operator, please.
spk05: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and one. To remove yourself from the question queue, you may press star and two. If you are using a speakerphone, we do ask you please pick up your handset before pressing the keys to ensure the best sound quality. Once again, to ask a question, it is star and one. Our first question today comes from Mark Lee from Citi. Please go ahead with your question.
spk00: Hi, management. Thank you very much for your presentation. I'm Mark Lee from Citibank Research. My first question is for Doug. Congratulations on the strong growth in the contact center business. May I know what is the perceived growth and any color on the output growth within this segment that you could break down and give a bit more color? And my second question is for your first quarter guidance. Could you give us any color on the growth for the major segments, i.e., CC, UCNC, and CPAS? Thank you.
spk01: Sure. For the first question, as for our CC performance in the first quarter of 2020, The increase was mainly due to the increase of number of customers, as I mentioned in the call. I think I discussed this before. Right now, I think the company's number one priority is still to get more market share, to acquire more customers, expand into more sectors or more industries. So from the company's perspective, we're not eager to really increase the price of our offerings, but rather to have more access to more customers and also to try to ask our customers to pay for a more premium package of our product offerings. As for our guidance for the first quarter of 2021, overall, way back, our revenue will increase by close to 50%. Among the three business lines, The CC business and the UCMC business apparently are much more important, and also the company will invest much more strategic resources into those two segments, as we talked before. So the increase for the CC business and UCMC business will be much higher, actually, compared to the 45% to 48% increase. especially the CC business. We expect our CC business will have a very strong performance in the first quarter of 2021. Very clear.
spk00: Thank you, Stephen.
spk05: Our next question comes from Siwon Ang from Goldman Sachs. Please go ahead with your question.
spk02: Hi, management. This is Tina Ho from Goldman Sachs. Congratulations on the result and thank you very much for your time. So I have a few questions if I may. The first one is that could you give us the breakdown in terms of gross margin for the three segments for 2020 and also the gross margin outlook for 2021 as well. The second question is in terms of your acquisition, because it's still, I assume it's still pending closure. So I assume that the first quarter result or the first quarter guidance for 2021 does not include any revenue contribution there yet. So is it reasonable to assume that going into the second, third, fourth quarter of the year, we are going to see even better revenue traction due to the acquisition. And also, what is the 2020 annual revenue as well as growth margins for the Elite CRM company? And then the third question is in terms of maybe Tencent, because we know that Tencent invested in Rolian in November last year. So wondering how we would like to leverage Tencent's platform and their potential customer base to expand our business and market share. And then the last question is also related to that. So you mentioned that because China's cloud communication market is much more fragmented than in the U.S. So in your view, how long would it take for the Chinese market to become the same consolidation level as the U.S.? And also for Ronglia specifically, do we have any mid- to long-term market share targets, for example, five or ten years? Thank you very much.
spk01: Okay. Yeah, there are a lot of questions, so I will try to not miss anyone. If I miss any questions, you can just remind me or ask again. So your first question is regarding the breakdown of the gross margin regarding each of our business segments for 2020. Overall, the gross margin for our 2020 performance is 40%. The CPAP business has a lower gross margin, is about 28%, 29%. And for the CC business, CC business has a gross margin of between 55% and 56%. And for the UCNC business, the gross margin is around 45%. So that's the breakdown for the three segments for the entire year of 2020 in terms of gross margin. Your second question is regarding the acquisition of the CRM company, Elite CRM. Yes, you're right. We are not expecting to include any of that revenue in Q1 because the acquisition will be completed at earliest at the end of this month. So in terms of revenue contribution, that will start from Q2. But what I would like to remind all of you is The reason why the company acquired this CRM company, not just for the short-term revenue contribution or the net profit contribution, but rather we want to add CRM to our product offerings. As we continue to expand our total solutions to our customers, CRM apparently is a core function for many of our customers. And by adding those functional modules to our total solutions, we believe that will actually give the company better position to serve our customers in the long term. And also, as I mentioned during the call, we have a great synergy with this CRM company, both in terms of the customer base and in terms of the product offerings. Yeah, but what I can tell a little bit is the company, on a yearly basis, this CRM company has a revenue of, roughly between 50 to 60 million RMB, so in that range. This company actually is a profit-making business, so that will benefit our bottom line as well, as I mentioned during the call. Your next question, if I remember correctly, is regarding the Tencent. Tencent is a very important strategic investor for our company, and Tencent actually offers a very important channel for us to have access to a lot of large enterprise customers and governments. Actually, during the Q1 so far, we have already had several signed deals from Tencent. And the pipeline is even bigger. And we started working with different teams from Tencent. So we expect that Tencent will really help our business develop significantly in the coming future. The last question is regarding how we look at our business in the long term. As I mentioned during the call, right now the Chinese market is still in a very early stage compared to the US. The penetration rate is very low. The market is highly fragmented. We as a company will continue to use our advantage of multi-product web solution strategy to continue to expand into new industries to acquire new customers. And also, we will continue to look for... The M&A targets, the companies such as this company will continue to look for, for example, the RPA business, the AI business, the CDP business to continue to add to our product mix. So the M&A will be one of the key strategies for the company in the long term. And also the international, the overseas markets, as I mentioned during the call, our Japan business has been doing really, really well for the past two years. And our Japan business will, we expect our Japan business will actually be more than double than this year in terms of the revenue. And we are right now exploring the new markets in Southeast Asia as well. So the international expansion will also be one of our key strategies into the future. So by doing all of that, we expect our revenues, our growth margin, and also our bottom line will improve into the future over the long term. And in five years, three years is probably too short of time. In five to eight years, we expect by doing all of the things I just mentioned, the company should be able to have a market share of 5% to 10%. of the total market of cloud-based communication market in China. Did I miss any question?
spk02: Thank you very much. Yes, thank you.
spk05: Once again, if you would like to ask a question, please press star and 1. Our next question comes from Hongzhi Li from CICC. Please go ahead with your question.
spk03: okay thanks management for taking that question uh congratulations on such strong results my first question is on our 2021 guidance either on the revenue and gp margin and for the ucnc business uh because part of the ucnc others were delayed in 2020 due to kobe 19 so uh how's that deliberate pace in 2021 And for the UCNC recurring business, because we're just launching last year. So could you share more about the UCNC recurring business update? The second question is also on the M&A, because we have more M&A planned this year and beyond. So what are the metrics that we take into account on that? My third question is because the key strategy currently is to gain more market share. So could you elaborate more about our plans on enhancing the distribution channel capabilities in domestic second tier cities? Thank you.
spk01: Okay, for the first question, for our UCNC businesses, yes, unfortunately, you know, since most of the clients, UCNC businesses served our large enterprise customers, so they were impacted, or our UCNC businesses was impacted by the COVID-19 outbreak the most for last year. So the revenues actually for UCNC businesses decreased a little bit, but as the impact from COVID-19 outbreak decreased, has been disappearing for the past several months. So we saw our UCSC business have bounced back very significantly. I probably can't give a projection for that business only for the first quarter or for this year, but we fully expect our UCMC business will increase by a rather significant percentage for this year. In terms of what kind of business segments we included in our UCSB business, right now, the first one is we offer a similar product to Dinkock of Alibaba or the WeChat from Tencent, but on a private cloud-based tailor-made solution to large enterprise customers, especially the SOEs. So we are not competing with Tencent and Alibaba, but we do things differently. Actually, there are great market potential in this sector. And another thing we do for our UCNC business is our CV business, our computer vision business. Our communication business, we actually only started those from the second half of last year, but this business has been increasing really, really fast. Actually, when I mentioned that Tencent, you know, a great, a sales channel for our company. Our CV team has several contracts signed from Tencent China as well. So Tencent actually can help our CV business very greatly as well. I'm sorry, I didn't quite remember your second question. Your second question is, can you repeat that second question again?
spk03: Yeah, on the MA plan this year and beyond, what are the metrics that we take into account on that? What are the measures that we expect the MA target?
spk01: You mean for the acquisition of this CRM company?
spk03: Or in future, like, will we select the MA target?
spk01: Okay, okay, I see. Yeah, yes, when we, you know, when we look at our potential MA targets, we actually look at it from two ways. One is to add the products, you know, to add more new features to our product mix. We want to expand our product offerings. This CRM company is a great example of this strategy. We want to add CRM to our current product offerings. Also, into the future, we may add more different product features to our product offerings as well. Another way when we look at our partition M&A is to do some kind of the industry consolidation. That way we can add their customer base to our current customer base and also we can add a rather significant amount of revenue to our total operations to further widen the gap between us and other competitors. Since we are the only one in China that can offer this multi-product, one solution strategy, we want to take this advantage and also by being a public company now, we want to use the power from the capital markets to do more consolidation in our markets as well. And your third question is? Oh, yeah. Yeah, I remember regarding the expansion into larger cities. Yes, we actually opened several new – we just opened several new, actually, offices in Xiamen, in Jinan, in those cities. cities in addition to more than 10 or 12 rep offices we already had in lower tier cities. So we will continue to expand into lower tier cities. We see great demands, great market potential in lower tier cities, especially for many, many SMEs. who are in the lower tier cities, but right now may not have this kind of solution available to them. And also, speaking of our expansion to lower tier cities, I think at the same time, we will expand to do more channel sales as well. Right now, most of our sales are direct sales. But, you know, as we expand into larger cities, we may do more channel sales in this year compared to last year. Thank you.
spk03: Okay, thank you.
spk05: And, ladies and gentlemen, in showing no further questions, this will conclude our question and answer session. At this time, I'd like to turn the conference call back over to Elaine from Investor Relations for closing remarks.
spk04: Once again, thank you everyone for joining today's call. We look forward to speaking with you again soon. Good day and good night.
spk05: And ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines. We thank you for attending.
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