Kingsoft Cloud - Q2 2023

Transcript

Operator (participant)

Good day. Thank you for standing by. Welcome to Kingsoft Cloud's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Shan, IR Manager. Please go ahead.

Nicole Shan (IR Manager)

Thank you, Operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter earnings release was distributed earlier today and is available on our IR website at ir.kscloud.com, as well as on GlobeNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Zou Tao, and the CFO, Mr. Henry He. Mr. Zou will review our business strategy, operations, and company highlights, followed by Mr. He, 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 interpretation or interpretation for your convenience and reference purposes only. In case of any discrepancy, management's 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 Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Reform Act of 1995. These forward-looking statements are based upon management's current expectations, and current market and operating conditions, and they relate to events that involve known or unknown risks, uncertainties, and other factors, some 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, and 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 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 CEO, Mr. Zou. Please go ahead.

Tao Zou (Vice Chairman and CEO)

[Foriegn language] 好 ， 大 家 好 ， 欢 迎 参 加 金 山 云 二 零 二 三 年 第 二 季 度 的 业 绩 电 话 会 。 公 司 继 续 秉 持 高 质 量 可 持 续 发 展 原 则 ， 坚 持 技 术 立 业 ， 以 客 户 为 中 心 ， 打 造 全 过 程 口 碑 ， 强 化 经 营 管 理 ， 积 极 拥 抱 新 的 AI 时 代 。 本 季 度 ， 金 山 云 实 现 了 盈 利 能 力 的 进 一 步 提 升 ， 收 入 达 人 民 币 十 八 点 四 亿 元 ， 调 整 后 毛 利 率 达 百 分 之 十 一 点 三 ， 实 现 了 连 续 四 个 季 度 持 续 稳 步 提 升 ， 再 创 历 史 新 高 。 调 整 后 毛 利 额 达 人 民 币 二 点 零 七 亿 元 ， 是 去 年 同 期 的 三 倍 多 。 常 态 化 调 整 后 的 EBITDA 率 为 负 的 百 分 之 三 点 三 ， 较 去 年 同 期 大 幅 缩 窄 五 点 三 个 百 分 点 ， 较 上 季 度 缩 窄 二 点 六 个 百 分 点 。

Speaker 7

Hello, everyone, thank you all for joining Kingsoft Cloud's second quarter 2023 earnings call. During the quarter, we continued to uphold the principle of high quality and sustainable development, build success based on technology and innovation, and forge our reputation throughout the entire business process with customer centricity. We have enhanced our operations management and proactively embraced the new AI era. This quarter, our profitability further improved. Total revenues reached RMB 1.84 billion. Adjusted gross margin increased steadily for the fourth consecutive quarter to a new record high of 11.3%. Adjusted gross profit reached RMB 207 million, more than three times the amount for the same quarter last year.

Normalized adjusted EBITDA margin was negative 3.3%, which represents a significant improvement of 5.3 percentage points from the same quarter last year, and 2.6 percentage points from the previous quarter.

Tao Zou (Vice Chairman and CEO)

公 有 云 方 面, 本 季 度 实 现 收 入 RMB 1.16 billion, 毛 利 率 5.2%, 较 去 年 同 期 的 负 2.4% 显 著 提 升, 扭 亏 为 盈. 我 们 继 续 着 力 围 绕 三 方 面 下 功 夫, 即 Xiaomi Kingsoft ecosystem, 客 户 结 构, 降 本 提 效. 首 先, 我 们 继 续 服 务 好 Xiaomi 金, Kingsoft ecosystem, 特 别 是 本 季 度 来 自 Kingsoft Group 的 整 体 收 入 同 比 增 长 超 15%. 其 次, 我 们 进 一 步 优 化 客 户 结 构. 第 一 大 客 户 收 入 占 比 进 一 步 降 低 至 约 16%. 肩 腰 部 客 户 新 签 20 余 家, 同 时 坚 持 清 退 长 期 亏 损 项 目 和 客 户, 收 入 利 润 结 构 更 加 均 衡 健 康. 第 三, 我 们 把 降 本 提 效 作 为 一 项 专 项 工 作 持 续 推 进. 我 们 成 立 了 成 本 优 化 专 项 小 组-...

深 入 推 进 冗 余 资 源 的 退 订 、 搬 迁 、 整 合 、 立 就 和 处 置 工 作 ， 成 效 显 著 。

Speaker 7

In terms of public cloud services, revenues were RMB 1.16 billion, with a gross margin of 5.2%, significantly higher than, and turning positive from the -2.4% gross margin in the same quarter last year. We continued to focus on three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, customer mix, and cost reduction. First of all, we continued to serve Xiaomi and Kingsoft ecosystem well. In particular, total revenues from Kingsoft Group increased by approximately 15% year-over-year. Second, we continued to optimize our customer mix. The revenue share of our largest customer dropped further to around 16%, while signing up more than 20 new medium-sized customers. Meanwhile, we also resolutely withdrew from long-term loss-making projects and customers, achieving a more balanced and healthier revenue mix.

Third, we have made cost reduction and efficiency improvement an ongoing initiative. We established a dedicated cost optimization team to tackle redundancies, including the cancellation, relocation, consolidation, reuse, and disposal of such resources and assets, yielding remarkable results.

Tao Zou (Vice Chairman and CEO)

行 业 云 方 面 ， 本 季 度 实 现 收 入 六 点 七 五 亿 元 ， 毛 利 率 为 百 分 之 二 十 一 点 七 ， 较 去 年 同 期 的 百 分 之 十 五 点 三 大 幅 提 升 。 公 共 服 务 领 域 ， 我 们 选 择 聚 焦 政 务 云 、 国 资 云 等 核 心 领 域 ， 践 行 差 异 化 打 法 ， 不 仅 为 客 户 建 云 ， 还 专 注 于 形 成 从 上 云 、 用 云 到 管 云 的 全 链 路 管 理 模 式 ， 将 政 务 云 标 准 化 运 营 能 力 打 造 为 政 务 云 和 国 资 云 产 品 的 核 心 竞 争 力 。 例 如 ， 我 们 已 经 连 续 九 年 服 务 北 京 政 务 云 ， 安 全 、 可 靠 、 易 用 性 获 得 高 度 认 可 ， 云 上 单 位 数 量 进 一 步 增 长 至 五 十 余 家 ， 形 成 良 性 循 环 。 数 字 健 康 领 域 ， 我 们 稳 扎 稳 打 ， 先 做 强 再 做 大 。 我 们 领 军 超 大 规 模 、 超 高 负 荷 度 行 业 标 杆 项 目 的 能 力 已 得 到 市 场 验 证 。 正 以 此 为 基 础 茁 壮 成 长 。 一 方 面 ， 我 们 横 向 复 制 区 域 健 康 云 平 台 ， 该 方 案 的 架 构 领 先 性 受 到 国 家 卫 健 委 与 行 业 协 会 的 认 可 ， 并 作 为 业 界 参 考 架 构 向 全 国 十 余 省 进 行 推 广 ， 使 我 们 更 深 入 推 动 国 家 公 共 卫 生 体 系 和 全 民 健 康 信 息 化 建 设 ， 实 现 良 好 的 经 济 和 社 会 效 益 。 例 如 ， 我 们 完 成 一 期 建 设 的 江 苏 医 疗 影 像 云 ， 实 现 了 江 苏 全 省 一 千 三 百 余 家 医 疗 ， 呃 ， 医 院 影 像 数 据 的 汇 聚 ， 预 估 年 化 节 省 医 疗 影 像 费 用 约 二 十 四 亿 元 人 民 币 。 得 益 于 江 苏 一 期 影 像 云 项 目 的 标 杆 效 应 ， 我 们 在 重 庆 进 行 项 目 经 验 复 制 ， 同 时 正 在 深 入 江 苏 二 期 影 像 云 的 项 目 规 划 ， 计 划 接 入 省 内 所 有 公 立 医 疗 机 构 。 另 一 方 面 ， 我 们 将 业 务 纵 向 有 机 拓 展 到 院 端 ， 与 一 批 顶 尖 医 院 合 作 ， 基 于 云 的 新 一 代 医 院 数 字 化 转 型 ， 解 决 系 统 维 护 成 本 高 、 服 务 稳 定 性 低 、 难 以 快 速 响 应 用 户 需 求 等 痛 点 。 例 如 ， 在 三 甲 医 院 武 汉 大 学 中 南 医 院 ， 我 们 进 行 模 块 化 系 统 的 微 服 务 改 造 ， 创 新 大 型 医 院 数 据 建 设 模 式 ， 推 动 平 台 与 应 用 松 耦 合 、 横 向 一 体 化 支 撑 的 架 构 模 式 ， 实 现 业 务 流 程 优 化 和 数 据 统 一 管 理 。 金 融 领 域 ， 我 们 完 成 了 一 批 头 部 金 融 机 构 的 大 数 据 项 目 和 建 设 银 行 云 基 础 设 施 开 发 服 务 二 期 项 目 ， 并 开 始 三 期 项 目 的 交 付 工 作 。 此 外 ， 克 莱 克 业 务 表 现 扎 实 ， 在 维 持 已 有 大 客 户 合 作 稳 定 的 基 础 上 ， 本 季 度 新 签 六 家 客 户 ， 利 润 率 水 平 健 康 稳 定 。

Speaker 7

Moving on to enterprise cloud services. Total revenues were RMB 675 million, with a gross margin of 21.7%, a significant improvement from 15.3% in the same quarter last year. In public services space, we opted to focus on core areas of public service cloud and state-owned asset cloud. Executing a differentiated approach, we not only build cloud for customers, but also develop an end-to-end cloud service model covering cloud migration, cloud usage, and cloud management. We have forged our core competitiveness of standardized public services, cloud operation capabilities applicable to both public service cloud and state-owned asset cloud.

For example, we have been the partner for the Beijing Public Service Cloud for nine consecutive years, winning a strong reputation to deliver, to deliver secure, reliable, and easy-to-use systems and services, resulting in a virtuous cycle of increased cloud adoption by more than 50 public services departments. In digital health space, we have maintained a steady and sure approach. First, consolidating our strengths, then expanding in scale. Our proven capabilities and leadership in super large, ultra-complex landmark cloud projects have provided a solid foundation for further growth. On one hand, we are horizontally replicating our original healthcare cloud model to more regions. Our model features an innovative architecture recognized by China's National Health Commission and industry associations.

It has been promoted to more than a dozen provinces as an industry reference framework, allowing us the opportunity to engage more deeply in the construction of the national public health system and medical digitalization platforms, producing remarkable economic and social benefits. For example, we completed the first phase of the Jiangsu Medical Image Cloud Project, integrating image data from over 1,300 hospitals across the province, with estimated annual savings of RMB 2.4 billion from reduction of duplicated medical images. Building upon our successful experience of this landmark project, we have replicated our imaging cloud project in Chongqing Province. Meanwhile, we're working on the plan for the second phase of Jiangsu Imaging Cloud Project, which upon completion, is expected to connect all the public hospitals across the province to the cloud platform.

On the other hand, we're also vertically penetrating our business to a hospital level. We are partnering with a number of top-tier hospitals to facilitate cloud-based, next-generation digital transformation. Our solution addresses a number of pain points, including high maintenance costs, server instability, and slow response to user requests. For example, we helped the Zhongnan Hospital of Wuhan University, a grade A tertiary hospital, transform its modular system with microservice architecture, developed an innovative data structure for Daxing Hospital, creating a loosely coupled, horizontally integrated architecture for its platforms and applications, enabling business process optimization and unified data management. In the financial services space, we completed and delivered a batch of big data projects for leading financial institutions, as well as the second phase of China Construction Bank's cloud infrastructure development project. We're now in the process of deploying the third phase of this project. Turning to Camelot.

During the quarter, Camelot achieved a solid business performance, signing up six new customers while maintaining robust relationship with existing major clients. Its profitability remains at a healthy and stable level. In terms of product and technology, we uphold our principle of building success based on technology and innovation by delivering best-in-class customer experience across our core product offerings. In storage space, we launched a deep ultra-cold data archive product, particularly well-suited for data management use cases, including medical imaging, financial documents, and compliance and archives. In big data space, our big data product was recognized for its overall strengths and ranked among the top 3 leading Chinese companies by IDC, a premier international institution, in its Data Lakehouse Platform Technology Assessment Report 2023, in terms of its comprehensive capabilities such as data management, storage, development, and security.

In database space, we entered into strategic partnership with PingCAP, leveraging our respective strengths to jointly provide fully managed, fully managed, distributed cloud database services. In enterprise cloud space, we upgraded our Galaxy Stack Management System, a unified platform facing operation and maintenance personnel, and the cloud user-facing Cloud Manager, adding dozens of new features to solve cloud management and usage pain points for enterprise cloud customers. In 2023, Trusted Cloud Summit, an authoritative and prestigious event that promotes the best practice of cloud industry standards in China and hosted by China Academy of Information and Communications Technology and China Communications Standards Association.... Our Galaxy Stack won 2 milestone awards, namely Best Practice Awards for Technology and Best Practice Awards for Public Services Cloud, validating our outstanding technical strength in the domain of dedicated cloud.

Tao Zou (Vice Chairman and CEO)

迎 接 新 AI 时 代 ， 我 们 对 AIGC 的 快 速 响 应 和 全 ， 全 面 拥 抱 初 见 成 效 。 我 们 凭 借 中 立 定 位 获 得 独 立 AI 公 司 的 青 睐 ， 新 签 十 一 ， 十 余 家 AI 客 户 。 作 为 小 米 金 山 生 态 的 唯 一 战 略 云 平 台 ， 与 金 山 办 公 WPS AI 深 入 合 作 ， 实 现 训 练 和 推 理 业 务 的 部 署 。 直 击 AI to B 业 务 场 景 中 互 信 缺 失 的 痛 点 ， 联 合 业 内 头 部 大 模 型 和 向 量 数 据 库 合 作 伙 伴 ， 推 出 模 型 际 服 务 ， 互 信 推 理 专 区 方 案 。 针 对 性 升 级 容 器 存 储 产 品 ， 支 持 无 限 带 宽 技 术 和 AIGC 场 景 下 多 媒 体 处 理 需 求 。 协 同 小 米 金 山 生 态 多 渠 道 采 购 租 赁 服 务 器 ， 测 试 对 接 国 产 GPU， 储 备 备 份 方 案 。

Speaker 7

Ushering in the new AI era, we are beginning to see results from our rapid response to and comprehensive embrace of AIGC. Leveraging our neutral positioning, we have gained the preference of independent AI companies and signed up a dozen of new AI customers. As the sole strategic cloud platform in the Xiaomi and Kingsoft ecosystem, we're working closely with Kingsoft Office on WPS AI, enabling model training and inference business deployment. Partnering with industry-leading large language model and vector database providers, we launched our MaaS Mutual Trust Dedicated Zone solution to bridge the trust gap in AI to B use cases. We also carried out AI targeted upgrades to our container and storage products to support InfiniBand technology and multimedia processing in AIGC use cases.

In addition, we are collaborating with the Xiaomi and Kingsoft ecosystem to purchase or lease AI servers from various channels, conducting tests and evaluations of domestic GPUs for alternative contingency plans.

Tao Zou (Vice Chairman and CEO)

建 设 和 壮 大 武 汉 研 发 中 心 ， 为 公 司 中 长 期 技 术 研 发 纳 入 新 鲜 血 液 ， 是 金 山 云 的 重 大 战 略 部 署 。 自 去 年 十 月 武 汉 研 发 中 心 开 办 以 来 ， 不 到 一 年 时 间 ， 通 过 核 心 骨 干 自 愿 调 动 和 本 地 化 招 聘 ， 武 汉 中 心 已 经 已 达 约 四 百 人 规 模 ， 超 过 全 公 司 研 发 总 部 总 人 数 的 三 分 之 一 ， 其 中 硕 士 占 比 达 百 分 之 五 十 。 我 们 还 在 中 心 开 办 了 星 云 训 练 营 ， 为 优 秀 应 届 生 提 供 校 园 直 达 职 场 实 训 的 成 长 通 道 ， 提 前 锁 定 武 汉 高 校 人 才 和 企 业 归 属 感 。

Speaker 7

To develop and grow our Wuhan R&D center is our significant strategic initiative, which will help us nurture new talents for maintaining our technological leadership in the medium to long run. In less than a year since its inception in last October, through voluntary relocation of key R&D staff from Beijing and Wuhan local recruitment, our Wuhan team has quickly grown to approximately 400 people, accounting for more than one-third of our total R&D team, and 50% of the Wuhan team hold a master's degree. We also organized a Star Training Camp at Wuhan Center to provide aspiring university graduates with a fast track to transition from campus to workplace, and attract talents from Wuhan's top universities by fostering a sense of belongingness in our corporate family.

Tao Zou (Vice Chairman and CEO)

总 体 而 言 ， 过 去 连 续 几 个 季 度 ， 公 司 盈 利 能 力 的 持 续 快 速 提 高 ， 让 我 们 更 加 坚 信 我 们 选 定 的 策 略 和 打 法 。 展 望 未 来 ， 我 们 将 继 续 秉 持 高 质 量 ， 可 持 续 的 发 展 原 则 ， 以 技 术 、 口 碑 和 管 理 为 抓 手 ， 在 实 践 中 把 战 略 发 展 方 针 用 活 用 好 ， 为 客 户 、 股 东 、 员 工 和 社 会 持 续 创 造 价 值 。 接 下 来 有 请 CFO Henry 为 大 家 介 绍 二 季 度 财 务 业 绩 。 谢 谢 ！

Speaker 7

In summary, the continuous and rapid improvement in our profitability over the past few consecutive quarters has strengthened our belief in the strategies and the directions we have chosen. Looking ahead, we will nimbly uphold the principle of high quality and sustainable development, and focus on technology, reputation, and management to drive progress, thereby creating value for our customers, shareholders, employees, and the society. I will now pass the call over to our CFO, Henry, to go over our financials for the second quarter of 2023. Thank you.

Henry He (CFO)

Thank you, Mr. Zou, and I welcome everyone for joining the call. Now I will walk you through the financial results for the second quarter of 2023. Uphold a strategy of high quality and a sustainable development, we are pleased to deliver another quarter of a steady profitability improvement. Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved a record high of RMB 206.8 million.... increased by 202% year-over-year, representing adjusted gross margin of 11.3%. Along with our strict expense control, our normalized adjusted EBITDA narrowed from negative RMB 163.7 million in the same period of last year to negative RMB 59.9 million this quarter.

As a result, normalized adjusted EBITDA margin further narrowed from negative 8.6% in the same period of last year, and a negative 5.9% in the last quarter, to negative 3.3% this quarter. Thanks to the operational efficiency improvement, the quarter-over-quarter narrowing of normalized adjusted EBITDA margin outpaced the increase of adjusted gross margin. Our total revenue were RMB 1,835.4 million this quarter, of which revenue from public cloud services were RMB 1,159.5 million, representing a decrease of 10.1% compared with RMB 1,289.1 million in the same period of last year. As we steadily adjusted our revenue mix and proactively scaling down services to our top CDN clients.

Revenue from enterprise cloud services were RMB 675.2 million, representing an increase of 9.5% from RMB 616.6 million in the same period of last year. The year-over-year increase was mainly driven by our continued focus on selective verticals and quality projects, recovery from COVID-19 impact. Our investment into flagship projects bearing fruits, enhancing our capabilities to replicate the solutions and services to different regional customers. We continue to enhance our cost control measures. Total cost of revenue decreased by 11.5% year-over-year to RMB 1,628.8 million. IDC costs decreased significantly by 16.4% year-over-year, from RMB 1,029.1 million to RMB 860.7 million this quarter.

Depreciation and amortization costs decreased by 18.8% from RMB 249.1 million in the same period of last year to RMB 202.1 million this quarter. Solution developments and services costs decreased by 7.4% from RMB 489.1 million to RMB 452.9 million this quarter. Fulfillment costs and other costs were RMB 71.7 million and RMB 41.3 million this quarter, respectively. Adjusted gross profit of this quarter increased by 202% to RMB 206.8 million, representing adjusted gross margin of 11.3% this quarter, compared with 6.6% in the same period of last year.

The significant margin improvement testify to be the effectiveness of strategic adjustments of revenue mix, improvement of our infrastructure efficiency, phase out of loss-making customers, and optimize enterprise cloud project selections and efficient cost control measures. Demonstrating our strong commitment to improve our profitability and delivering high quality and sustainable development. Each of our business lines achieve margin improvements. Gross profit of public cloud services was RMB 59.7 million, which was significantly improved from the gross loss of RMB 30.7 million in the same period of last year. Gross margin of public cloud services was 5.2%, compared with -2.4% in the same period of last year. The improvement was mainly due to our proactive scaling down of CDN services and adjustment of our client mix.

Gross profit of enterprise cloud services was 146.7 million RMB, compared with 94.6 million RMB in the same period of last year. Gross margin of enterprise cloud services was 21.7%, improved from 15.3% in the same period of last year. The improvements were mainly due to our rigorous enterprise cloud project selection. In terms of expenses, excluding share-based compensation and impairments of long-lived assets, our total adjusted operational expenses were 538.1 million RMB, decreased by 9.7% from 595.8 million RMB last quarter, of which our adjusted R&D expenses were 182.3 million RMB, decreased by 10% from last quarter.

Adjusted selling and marketing expenses was RMB 128.3 million, compared with RMB 104.2 million last quarter. Adjusted G&A expenses decreased largely by 21.3% from RMB 289.1 million last quarter to RMB 227.5 million. We have been taking strict expense control over the period, such as reduction of several expenses and screening of other discretional expenses and others. As of June 30, 2023, our cash and cash equivalents and short-term expenses, investments amounted to RMB 4.3 billion, providing us with sufficient working capitals and liquidity for operations. The capital expenditures for this quarter was RMB 89.0 million, which primarily consists of payments for service.

We have been taking prudent control of our procurement of traditional CPU servers, such as the ones used for CDN business.

We have been saving our funds for high performance AI service, and we are working very closely with the top leading global GPU server provider and their OEM partners to fulfill the orders. We expect the capital expenditures may increase in the second half of this year, but subject to a timeline of server delivery. Our operating cash flow once again recorded net inflow after last quarter fluctuation, reached RMB 65.2 million. It resulted from our margin improvements as well as our internal cash control enhancements. Lastly, we are honored to see that we have been listed in the first edition of the Sustainable Yearbook China by S&P Global. The selection assessed almost 1,600 Chinese companies, and out of those, 88 outstanding Chinese companies across 44 industries are included in the 2023 Sustainability Yearbook China of S&P Global.

We would like to thank S&P Global recognition of our ESG efforts. We will continue our commitments to improve our governance, decreasing our footprints of carbon emissions, and making positive impact to the whole industry and the society. Looking ahead, we will continue to pursue our high quality and sustainable development strategy and unlock synergies within the Xiaomi and Kingsoft Group ecosystems, while staying agile to capture new opportunities in the new era of AI technology. Thank you.

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

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A queue. Our first question comes from the line of Xiaodan Zhang from CICC. Please go ahead.

Xiaodan Zhang (Analyst)

Tao Zou, Henry, Nico, 晚 上 好, 感 谢 接 受 我 的 提 问 啊, 我 是 中 金 的 分 析 师 Xiaodan Zhang. 我 这 边 有 两 个 问 题, 第 一 个 是, 我 们 看 到 在 过 去 的 一 年 多 的 时 间 以 内, 那 么 公 司 对 于 这 个 融 仪 的 CDN 节 点 也 在 持 续 地 去 做 一 些 优 化 和 裁 撤, 那 么 管 理 层 预 计, 就 是 我 们 公 有 云 业 务 的 一 个 结 构 性 的 优 化 会 在 什 么 时 间 点 完 成？ 公 有 云 业 务 是 否 能 够 有 希 望 在 未 来 的 几 个 季 度 内 回 归 到 一 个 同 比 的 正 增 长？ 第 二 个 问 题 是 这 个 AI 相 关 的. 公 司 从 今 年 以 来, 其 实 也 在 持 续 地 和 包 括 金 山 系, 小 米 系 和 顺 为 系, 围 绕 这 个 大 模 型 和 生 成 式 的 AI, 在 积 极 推 进 协 同 作 战. 基 于 目 前 的 一 个 业 务 探 索 的 进 展, 管 理 层 认 为, 就 是 AI 未 来 对 于 我 们 的 一 个 增 量 的 收 入 贡 献, 主 要 是 来 自 于 哪 些 维 度？ 我 快 速 地 翻 译 一 下 我 的 问 题. Thanks management for taking my questions. I got two questions here.

Speaker 7

First of all, the company has been proactively scaling down the CDN business in the past year or 2. When do you expect the structural optimization for your public cloud business to be completed? Is there any chance that your public cloud segment will return to a positive growth in the upcoming quarters? Secondly, what do management think of the prospects of incremental revenue contributions from large language models and generative AI related business? Thank you.

Tao Zou (Vice Chairman and CEO)

呃 ， 我 ， 我 先 回 答 ， 啊 ， 然 后 其 他 同 事 补 充 一 下 。 呃 ， 你 提 ， 提 到 的 第 一 个 问 题 啊 ， 就 是 关 于 我 们 这 个 公 有 云 结 构 性 调 整 的 ， 这 个 提 得 很 好 啊 。 其 实 我 把 它 拆 开 看 ， 其 实 主 要 是 分 一 个 是 CDN 和 ， 和 ， 和 ， 和 其 他 吧 。 呃 ， 重 点 其 实 我 们 调 整 的 其 实 是 CDN 这 个 ， 这 个 ， 这 个 ， 这 个 板 块 吧 。 呃 ， 这 一 块 呢 ， 其 实 我 接 任 以 来 呢 ， 我 就 跟 市 场 沟 通 过 ， 呃 ， 实 际 上 呢 ， 整 体 的 这 个 ， 这 个 发 展 趋 势 啊 ， 跟 当 初 的 预 测 是 ， 是 这 个 发 展 趋 势 是 一 致 的 ， 但 只 是 整 -- 只 是 受 市 场 外 部 的 一 些 因 素 影 响 吧 ， 整 个 的 调 整 的 节 奏 呢 ， 会 比 我 预 想 中 要 快 一 点 ， 但 总 体 来 讲 呢 ， 是 ， 是 ， 呃 ， 预 料 之 中 的 。 呃 ， 呃 ， 这 个 调 整 呢 ， 还 会 再 持 续 一 段 时 间 。 实 际 上 我 们 内 部 呢 ， 呃 ， 也 针 对 今 年 外 部 环 境 发 生 一 些 变 化 呢 ， 也 这 个 做 出 了 一 些 积 极 的 部 署 ， 呃 ， 有 可 能 会 争 取 在 半 年 到 一 年 之 内 完 成 整 个 的 调 整 。 好 吧 ， 这 是 第 一 块 。 第 二 块 呢 ， 公 有 云 整 ， 呃 ， 实 现 整 个 ， 呃 ， 这 个 同 比 增 长 。 呃 ， 其 实 如 果 刨 掉 这 些 本 身 的 影 响 ， 呃 ， 我 ， 我 自 己 认 为 ， 在 过 去 一 年 ， 我 们 公 有 云 其 他 板 块 ， 贩 售 整 个 的 板 块 的 增 ， 这 个 ， 这 个 ， 呃 ， 无 论 是 业 务 的 增 长 ， 还 是 结 构 的 调 整 ， 还 是 这 个 在 降 本 增 效 几 个 维 度 都 做 得 非 常 出 色 。 所 以 我 刚 才 也 谈 到 了 ， 我 们 整 个 的 贩 售 的 ， 呃 ， 那 个 公 有 云 毛 利 呢 ， 从 去 年 同 期 的 负 二 点 四 ， 现 在 已 经 是 正 的 五 点 二 了 。 所 以 呢 ， 我 ， 我 觉 得 这 是 就 是 一 个 很 好 的 说 明 。 当 然 ， 那 个 结 合 你 下 一 个 问 题 啊 ， 呃 ， 我 们 ， 我 们 认 为 就 是 ， 呃 ， 这 个 AI 这 波 有 可 能 啊 ， 我 现 在 只 能 说 有 可 能 ， 我 们 ， 我 们 这 个 ， 这 个 未 来 有 可 能 会 ， 会 有 一 个 更 好 的 这 个 增 长 速 度 。 然 后 正 好 就 回 到 你 第 二 个 问 题 ， 这 需 要 翻 译 吗 ？

需 要.

先 把 这 个 翻 译 了.

Speaker 7

To respond to your question, you mentioned the structural adjustment we have been conducting in the public cloud services segment, this can be broken down into two parts. One is the CDN business and the other is the other public cloud service business. For the CDN part, actually, since I took the role of CEO last year, we have communicated with the market, and I would have to say that in general, the development for this adjustment of this business has been in line with what I have communicated in the past quarters. Due to the changes in the overall market situation, the speed has been a little bit faster than what we had expected. However, in general, the pace and the direction is consistent.

We would expect the adjustment for the CDN business to continue for a while. We expect to complete that within half a year to 1 year. For the non CDN business part of the public cloud services business, the business adjustment has been going through rather smoothly, and we have done an excellent job in terms of cost reduction. As can be shown in our financial performances, the gross margin for the public cloud services business has improved from negative to 2.4% in the second quarter of 2022, to positive 5.2% in this quarter, which we are reporting. This also relates to the second question that you asked about the AI business.

We expect that this round of AI opportunity has the potential opportunity to bring us more growth to the public cloud services business.

Tao Zou (Vice Chairman and CEO)

Okay。 呃 ， 回 答 你 第 二 个 问 题 ， 我 们 的 AI 整 体 的 一 个 计 划 。 呃 ， 呃 ， 实 际 上 大 家 也 看 到 啊 ， 这 个 随 着 这 个 ， 呃 ， 今 年 这 个 春 节 后 G, GPT 的 爆 发 啊 ， 整 个 的 AI 市 场 这 个 需 求 ， 这 个 ， 这 个 极 其 旺 盛 。 呃 ， 我 们 也 多 次 谈 到 啊 ， 这 个 由 于 我 们 这 种 中 立 云 的 这 种 身 份 吧 ， 其 实 我 们 是 获 得 了 这 个 ， 这 个 大 ...

就 应 该 说 绝 大 多 数 的 这 个 AI 创 业 公 司 的 青 睐 。 基 本 上 这 个 刚 才 的 ， 呃 ， 我 之 前 的 讲 话 也 谈 到 了 ， 我 们 ， 呃 ， 呃 ， 已 经 有 十 几 家 甚 至 更 多 ， 陆 陆 续 续 都 在 跟 我 们 签 约 。 对 ， 呃 ， 当 然 这 只 ， 这 只 是 其 中 的 一 部 分 啊 ， 这 这 个 叫 做 这 个 ， 这 个 算 力 支 持 的 部 分 。 对 ， 实 际 上 我 们 那 个 ， 呃 围 绕 这 个 ， 这 个 ， 呃 ， 为 企 业 提 供 Maas 服 务 的 这 个 呢 ， 其 实 在 ， 在 Q 二 吧 ， 也 有 一 定 的 进 展 ， 无 论 是 国 内 还 是 海 外 。 所 以 我 刚 才 也 谈 到 了 ， 我 们 ， 呃 ， 推 出 了 这 种 这 个 基 于 Maas 服 务 的 互 信 ， 这 个 推 理 专 区 。 对 ， 当 然 也 包 括 啊 ， 我 们 自 身 的 ， 呃 ， 无 论 是 小 米 的 ， 还 有 ， 还 有 ， 还 有 ， 还 有 那 个 金 山 办 公 的 。 对 ， 所 以 总 - 总 体 来 而 言 呢 ， 就 是 现 在 这 个 这 一 波 的 AI 的 市 场 的 需 求 ， 这 个 应 该 说 极 其 旺 盛 。 对 ， 那 个 ， 那 个 超 出 了 我 们 想 象 ， 对 。 呃 ， 但 是 同 时 呢 ， 这 个 我 们 也 ， 也 ， 也 ， 也 面 临 着 一 个 ， 一 个 供 给 侧 的 问 题 啊 ， 这 个 就 是 ， 呃 ， 呃 ， 本 身 的 这 个 NV 的 供 货 ， 你 大 家 应 该 也 或 者 ， 或 者 知 道 啊 ， 就 是 ， 呃 ， 这 整 个 中 国 区 的 这 个 ， 呃 ， 反 正 各 种 因 素 的 影 响 吧 ， 这 就 很 难 在 短 时 间 之 内 呢 ， 呃 ， 那 个 稳 定 的 供 货 吧 。 所 以 呢 ， 综 合 这 些 因 素 来 看 呢 ， 就 现 在 我 们 是 需 求 远 远 大 于 供 给 。 对 ， 所 以 这 对 我 们 的 影 响 啊 ， 会 体 现 在 ， 就 是 我 们 原 来 预 期 在 Q 三 呢 ， 就 有 可 能 整 个 AI 的 收 入 ， 呃 ， 至 少 在 这 个 算 ， 算 力 提 供 这 个 领 域 呢 ， 会 有 比 较 大 的 提 升 。 但 是 呢 ， 从 现 在 的 供 给 侧 的 这 个 影 响 呢 ， 呃 ， 有 可 能 会 把 这 个 在 财 报 上 的 体 现 会 ， 会 ， 会 递 延 到 ， 呃 ，Q 四 ， 甚 至 到 明 年 Q 一 ， 好 不 好 ？ 所 以 总 体 来 讲 呢 ， 呃 ， 呃 ， 我 ， 我 ， 我 们 是 认 为 就 ， 呃 ， 这 一 波 啊 ， 就 我 们 积 极 拥 抱 这 个 ， 这 个 ， 这 个 AI， 新 ， 新 的 AI， 呃 ， 从 目 前 的 ， 呃 ， 叫 战 果 来 看 吧 ， 我 ， 我 觉 得 ， 我 觉 得 这 个 从 销 售 侧 是 ， 是 ， 是 超 出 了 我 们 的 预 期 。 对 ， 但 从 供 给 侧 就 是 ， 就 是 离 我 们 的 预 期 还 有 一 定 的 差 距 ， 可 能 市 场 还 要 给 我 们 ， 呃 ， 一 到 两 个 Q 的 时 间 ， 呃 ， 这 个 也 不 仅 仅 是 我 们 啊 ， 这 整 个 行 业 可 能 都 需 要 ， 呃 ， 有 经 过 一 到 两 个 Q 的 时 间 来 ， 来 ， 来 ， 来 构 建 这 个 ， 把 供 ， 供 ， 供 需 这 个 ， 这 个 拉 平 吧 ， 好 不 好 ？ 所 以 这 是 。 然 后 未 来 从 更 长 远 的 一 个 AI 战 略 发 展 的 角 度 来 看 呢 ， 我 们 内 部 也 ， 呃 ， 呃 ， 经 过 多 次 的 这 个 ， 这 个 研 讨 。 哎 ， 对 ， 我 ， 我 们 ， 我 们 叫 做 吹 响 了 AI 的 这 个 ， 这 个 号 角 。 对 ， 我 在 内 部 中 央 会 上 也 ， 也 谈 ， 谈 过 这 个 观 点 。 哎 ， 我 也 说 了 ， 这 个 吹 响 AI 的 号 角 有 两 个 含 义 哈 ， 一 个 是 集 结 ， 一 个 是 冲 锋 。 所 以 呢 ， 就 ， 就 目 前 这 阶 段 呢 ， 肯 定 是 ， 是 ， 是 集 结 了 。 所 以 内 部 呢 ， 呃 ， 关 于 这 个 ， 呃 ， 这 个 ， 这 个 一 些 ， 一 些 组 织 结 构 的 也 ， 也 做 了 一 些 相 应 的 调 整 。 呃 ， 总 ， 总 而 言 之 ， 其 实 就 是 说 以 ， 以 ， 以 极 其 开 放 积 极 的 心 态 ， 全 面 拥 抱 这 个 这 一 波 的 AI， 呃 ， 这 个 也 将 会 是 成 为 我 们 金 山 云 未 来 的 最 核 心 这 个 的 ， 的 ， 的 发 展 这 个 战 略 和 方 向 。OK。

Speaker 7

To answer your question, we do believe that this round of new AI opportunities will bring a lot of opportunity for us. As you can see, after the Chinese Spring Festival, the GPT concept started to explosively grow. The demand for AIGC has been particularly strong. As mentioned, our neutral positioning has enabled us to win the favor of the vast majority of venture AI companies in China, and we are in the process of signing up contracts with dozens of such companies. This is about in terms of supporting their computing power. In addition, as mentioned, we're also providing companies with MaaS, Model as a Service, business. We're also making progress in that front.

... for example, we have launched the MaaS Mutual Trust Dedicated Zone solution, and we're also collaborating very closely with Xiaomi and Kingsoft. In general, in summary, basically, what we have been seeing is on the demand side, the demand is particularly strong. However, on the supply side, there's significant bottleneck, in particular, in terms of NVIDIA's supply chain, the supply of GPU chips. We believe that bottleneck is relatively difficult to resolve within the short period of time. In short, the supply far exceeds the, the demand far exceeds the supply in the market, and that is not the situation for our as one company, it's, it's a general situation for the industry.

As a result of that, we had originally expected the revenue from AI to be shown in our financials in the third quarter, and that is likely to be delayed due to the shortage of supply of GPU servers to the fourth quarter or even the first quarter of 2024. However, I would say in terms of our overall deployment and response to this new era of AI PC, the results that we have achieved, including the contract that we have signed, including the models, the solutions that we have launched, are quite successful. In the even longer term, we believe this will become embracing the AI wholeheartedly, will actually become the most core direction for Kingsoft Cloud and Kingsoft Group.

Nicole Shan (IR Manager)

Operator, next question, please.

Operator (participant)

Thank you. We'll now move on to our next question. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead.

Timothy Zhao (Equity Research Analyst)

Hello. Thank you, management, for taking my questions. I have 2 questions. One is regarding the gross profit margin. As I see the gross margin of public cloud and enterprise cloud has been an upward trend over the past few quarters, and especially, for enterprise cloud, the gross margin has achieved above 20% for the past 2 quarters. Could management further elaborate on the drivers of gross margin behind that, and what is our updated view on the gross margin target for this year and in the midterm? Secondly, and also, regarding the enterprise cloud, the question is it's regarding the revenue. As I see the potential business, the revenue has been in the declining mode, slightly in the second quarter.

Just wondering if there's any specific reason behind that, and how should we look at the revenue trend into the second half of this year? Thank you.

Henry He (CFO)

Thank you, Tim. This is Henry. I'm happy to take on the first question, and our CEO, Mr. Zou, will take on the second one. Yeah, successful actually acknowledge the improvement of the gross margin of our enterprise cloud business. Actually, there are a few things we, we, we actually discussed this earlier, but you, you, you eventually see that trend actually kept very stable and see that improvement expansion. A few things. First of all, is, we talk about is the right client selection process. I think that's actually the first and the beginning point, that to do the right business with right people.

If you do look at our average revenue mix from enterprise cloud, we used to have some kind of heavy weights on the top clients with over 30, you know, RMB 30 million or even RMB 40 million per contract. Right now we're focused on the sweet spot, around like RMB 8 million to about, you know, RMB 10 million per contract. Working on that range of the right clients, we have a better ability to control the cost and to make sure that all the receivables and cost control measures can actually finally deliver. I think that's the first point. The second one is really about the repeating sales for the more standardized products.

We're working very closely with the sales team and our R&D team as well, to make sure that we not only work with one client on one product, but one, we're working with the different clients with the same product. I think that advantage, obviously, we didn't disclose the number, but from last year to this year, the standardization of the product services and the solutions has been a very important driver. That's the second part. And the third one is really about, you know, appreciate all the good comments from the research analysts and our shareholders. We're actually moving up from the IaaS to PaaS level of the services, and in some cases, we're actually working with clients on some SaaS level products, especially given the AI drivers and the new phenomenon.

Hopefully, we can actually go up a little bit. Obviously, it depends on different verticals, on the right penetration of the PaaS and the SaaS-level product, which actually narrow carry with some higher margin. As a conclusion, Tim, we do believe we have a capacity and the willingness to keep the gross margin above 20% of the enterprise cloud services, including both Kingsoft and the Camelot as well. Given the right incentive.

... for our solution and delivery team to control their own costs, which we actually embedded into their own budgeting and a bonus calculation. We hopefully have more internal measures to make sure this pressure has been moving down the chain and make sure everyone working in cloud actually pay attention on the bottom line. So going forward, hopefully we can keep above 20% of gross margin of Enterprise Cloud, as well as we are hoping after the AI eventually unfolded, our Enterprise Cloud margin can be even higher, hopefully can above the three handles, in the midterm.

Timothy Zhao (Equity Research Analyst)

So I think that's give you-- hopefully, give you some color. Thank you, Jim. The second question, we'll pass over to Zhou 总.

Nicole Shan (IR Manager)

Uh,

Tao Zou (Vice Chairman and CEO)

So before I answer that, before I answer the details of the question, I would like to give you an overview of how we think about the Enterprise Cloud business. The root thinking is that we, we, we have been been becoming more focused on high quality product, high quality projects, in terms of selecting high quality projects, and also for the projects that are more sustainable for us. So, in terms of project quality, in terms of reputation, in terms of, of deployment capabilities and services we, we offer to customers, we have been working very hard on those fronts, and that is why you have been seeing in the consecutive quarters, we have been experiencing improving profitability levels.

Now as to your question of why the slight decrease for the revenue of Enterprise Cloud for, for the second quarter versus the first quarter, the answer is really just the seasonality. Because the revenue recognition for enterprise of the cloud projects, they generally delay from in term from the time of the signing of those, those projects to the revenue recognition for some, for several quarters to one year, and in some other cases, can be as long as two years. Therefore, the financial results you see in one single quarter is the combined result of different projects signing at different time points and the different delays in the overall revenue recognition cycle.

Therefore, I, I, I wouldn't say that the slight decrease for the financial for the revenue for Enterprise Cloud for the second quarter versus the first quarter, is a reflection of the of our business performance for the Enterprise Cloud. On the contrary, we feel that the fundamentals of the Enterprise Cloud business have been going quite well. In some future quarters, for example, in the fourth quarter, you might be also seeing a, a, a sudden surge of our Enterprise Cloud revenue. However, that might not necessarily reflect a, a equivalent surge of the business fundamentals.

... That's the general idea I would like to give you. In fact, we have also been in communication with the auditors in hoping to find a metric that would provide a real-time reflection of our fundamental business situation and the alignment with that of the financial performance. We're still exploring that. We hope to find that metric soon. Thank you.

Timothy Zhao (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. We'll now move on to our next question. Our next question comes from the line of Allen Li from JPMorgan. Please go ahead.

Allen Li (Executive Director)

Thank you, management, for taking my question. Thanks, management, for taking my question. I have a follow-up question on gross margin. For public cloud services, if we exclude CDN business, what's the gross margin trend for core computing and the storage in past few quarters? How do we think of the trend into the second half? Also, Henry, you just mentioned, you have increasing revenue contribution from higher margin, SaaS and PaaS services. Could management share some color on how should we think about the long-term revenue contribution from these two business? Thank you.

Henry He (CFO)

Thank you, Alan. This is Henry. Happy to share some color. First of all, again, while we're talking about the structure change and the client and revenue mix, CDN versus non-CDN, but I want to point out that, you know, the CDN business itself is not really a problematic business. The point is a concentration risk together with the CDN products to certain clients is really a high risk flag for us. So that's why we did some changes in the past few quarters. But putting that aside, as you mentioned, there are two things we can share while we haven't disclosed in detail numbers. First of all, the margin of the CDN business does have certain fluctuations, depends on the season, depends on the time mix.

While we're cutting down certain client penetration and the client concentration, we do need to switch and reallocate certain resources, especially on the nodes and the bandwidth we need to change and cancel and renew. Those actions will take on some fluctuations. But I, I would say that, you know, in, in, in old days, let's say last year or year before, you know, as you mentioned, there are certain quarters our CDN business, even gross margin is negative, certain regions, certain nodes. But right now we do have a relatively stable, positive gross margin of the CDN business, while it's really not as high as a, as a public cloud product.

The second part is, the gross margin of the cloud, public cloud services, including computing, network and storage, definitely higher, and in certain products, much higher than the CDN products in terms of the gross margin. We're trying to improving the percentage of that revenue from that product. So if you're putting that everything together, I think in a few quarters when we're looking ahead, given we do have a lot of efforts on the resource management and the cost control, hopefully the spread between the computing storage versus the CDN will be expanded. The computing and storage database and the network products will deliver even higher gross margin going forward, given the changes we have. So I don't want to provide a detailed guidance on the gross margin by products.

As I mentioned, it's really a dynamic and really, kind of fluid, in certain situation. Overall, I can, I can, I can tell you that, from management perspective, we're aiming for a relative expansion for the public cloud gross margin as a whole, and then we'll try to manage on that. One more point is, you know, you, you, you don't have to split that out because, you know, one client, they will use multiple product lines, and in one IDC centers, we may deliver different products, and when resources we're trying to co-share and provide more utilization as well. It's not really from that very single straightforward, line of calculation. Hopefully you can understand. On the second point is, I think the earlier question from Tim was really regarding enterprise cloud.

It's not really about the PaaS or SaaS within the public cloud. It's really two different animals, I put it this way. The enterprise cloud side, as I mentioned, called PaaS and the SaaS level, they are packaging with the solution and our services, and we do see that service convert to a higher margin. On the public cloud, I don't want to provide a detailed guidance because as I mentioned, with AI is coming, all the business new model is changing. When we're talking about the MaaS and other things, when our CEO mentioned we don't want to kind of develop and divide it by the traditional concept of IaaS and the non-IaaS products.

We are aiming for the MaaS products and services as a whole package, and as a whole, I think the margin will be much higher than the traditional IaaS and the computing services, going forward. Thank you, Alan.

Allen Li (Executive Director)

Thank you.

Operator (participant)

Thank you. Due to time constraints, this concludes our question and answer session. I'll hand the call back to you for closing remarks.

Nicole Shan (IR Manager)

Thank you, operators. 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.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.