Q1 2024 Earnings Summary
- Kingsoft Cloud achieved positive adjusted EBITDA margin of 1.9% for the first time in Q1 2024 and expects to maintain and improve profitability in upcoming quarters, driven by a better revenue mix and cost control measures.
- AI-related revenues surged by 93% quarter-over-quarter to RMB 160 million, accounting for 13.5% of public cloud revenues, and the company anticipates further growth due to continued investments in AI infrastructure and services.
- The company is capitalizing on increasing demand from various AI companies by providing not only cloud computing services but also assisting in training their models, leading to diversified and expanding revenue streams.
- Kingsoft Cloud's customers in the AI and large language model space are facing aggressive pricing competition from major players like ByteDance, Alibaba, and Baidu, potentially threatening their survival, which could negatively impact KC's AI revenue growth.
- Kingsoft Cloud plans to significantly increase its capital expenditures for AI investments, potentially spending several times the RMB 1.2 billion spent in the first quarter of 2024, which may strain the company's cash resources and balance sheet.
- The company intends to utilize multiple financing channels, including financial leasing and bank borrowings, to fund its AI investments, potentially increasing its leverage and financial risk.
-
EBITDA Margin Outlook
Q: What is your expectation for adjusted EBITDA margin improvement pace?
A: Management is pleased to have achieved EBITDA breakeven this quarter—the first time in 12 years. The drivers include a better revenue mix, high-margin contribution from the AI business, revamping supply chain tactics, and improved operational efficiency. They expect these factors to continue contributing and are confident that both gross margin and EBITDA margin will continue to improve in the following quarters. While not providing numeric guidance, they aim to achieve industry top levels of gross margin and EBITDA margin. -
AI Revenue Growth Drivers
Q: What is driving significant AI revenue growth?
A: The significant AI revenue growth is driven by diversified demand from clients across various sectors, including AI companies building base clusters, Internet companies creating their own language models, and picture and video companies increasing requirements. Kingsoft Cloud is investing in the right clients and expects to continue investing more, leading to higher revenue in coming quarters. The total investment into AI this year is expected to be several times this quarter's RMB 1.2 billion. -
CapEx Guidance
Q: Any guidance into total CapEx for this year?
A: Having spent around RMB 1.2 billion in CapEx this quarter, they anticipate the total investment into AI for this year to be several times that amount. They plan to continue investing in AI infrastructure and are leveraging various funding sources, including financial leasing, operational leasing, bank borrowing, and supplier credits. They are not setting a cap on AI investments based solely on current cash reserves. -
Coping with Aggressive Pricing Strategies
Q: How will you cope with aggressive pricing by IC and large language model vendors?
A: Management expected this pricing pressure as large language models in China enter a mature stage. Kingsoft Cloud provides services and computing power to large language model players but does not develop large language models themselves. Their focus is on whether their customers can survive the competition; many have secured large financing and are considered robust for the next 1 to 2 years, which is within their contract periods. They believe vertical application models have a good chance to find their own niche markets.
Research analysts covering Kingsoft Cloud Holdings.