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    Kingsoft Cloud Holdings Ltd (KC)

    Q3 2024 Earnings Summary

    Reported on Mar 20, 2025 (Before Market Open)
    Pre-Earnings Price$4.34Last close (Nov 18, 2024)
    Post-Earnings Price$4.40Open (Nov 19, 2024)
    Price Change
    $0.06(+1.38%)

    What went well

    • Strong growth in revenue contribution from strategic customers Xiaomi and Kingsoft Group, with business opportunities increasing very quickly and steadily due to unprecedented AI opportunities. The solid growth of the Xiaomi and Kingsoft ecosystem, including strong Xiaomi EV deliveries and growth in WPS Office AI capabilities, lays a solid foundation for Kingsoft Cloud's revenue growth and business opportunities.
    • Significant improvement in profitability, with gross margin increasing from around 3% in 2022 to levels approaching top-tier players. EBITDA margin improved from a loss of 8.6% in Q2 2022 to a positive around 10% this quarter. AI contributes around one-third of total revenue, higher than major peers. The company expects accelerated and significant improvement of operating profit in the near-term, potentially delivering a positive surprise to shareholders.
    • The company has secured substantial future business opportunities and financial support from Xiaomi and Kingsoft, applying for related party transactions with a cap of RMB 11.3 billion over the next 3 years, which is about 10x over this year's number, providing solid support for revenue and profit growth.

    What went wrong

    • Significant CapEx requirements for AI investments could strain financial resources, as the company plans to apply for a related party transaction cap of RMB 11.3 billion over the next three years, which is about 10 times over this year's number.
    • Heavy reliance on Xiaomi and Kingsoft Group for growth poses a risk, as any adverse changes in these relationships or in the performance of these strategic customers could negatively impact the company's business.
    • Lack of detailed disclosure on margin profiles of different product lines may obscure potential areas of concern and makes it difficult for investors to assess profitability, since the company is not disclosing the separate line of gross margin for each of the product line.

    Q&A Summary

    1. Margin Expansion
      Q: What's the outlook for margins considering rising AI CapEx?
      A: Our gross margin has improved from around 3% in 2022 to a higher level this quarter, nearing top-tier players. EBITDA margin turned from a loss of 8.6% in Q2 2022 to a positive ~10% this quarter. With AI contributing around one-third of total revenue, we expect EBITDA margins to expand faster than gross margins, outpacing industry peers. Expense control and efficiency improvements are boosting operating profit, and we anticipate significant improvement in operating profit in the near term.

    2. AI Business Margins
      Q: How do AI margins compare to overall public cloud margins?
      A: AI-related computing products deliver much higher gross margins than traditional public cloud services like storage and networking. Our AI business shows double-digit gross and EBITDA margins, significantly enhancing overall profitability. Both our public cloud and enterprise cloud segments achieved double-digit year-over-year growth this quarter, unlike peers in the market.

    3. CapEx and Funding
      Q: What's the CapEx outlook and funding plan for AI investments?
      A: We've secured additional CapEx resources, including banks, financial leasing companies, and state-owned enterprises, to invest in GPU and AI infrastructure. We're applying for a related-party transaction cap of RMB 11.3 billion from Xiaomi and Kingsoft over the next three years, about 10 times this year's amount. We are committed to not diluting public shareholders through additional share issuance or dilutive transactions. Strong support from our major shareholders will drive company growth, margin expansion, and a robust financial position in the coming years.

    4. Growth from Xiaomi and Kingsoft
      Q: What's the growth potential from Xiaomi and Kingsoft Group?
      A: Business opportunities from the Xiaomi and Kingsoft ecosystem are increasing rapidly, driven by unprecedented AI opportunities. Xiaomi's strong EV delivery results and WPS Office's AI functions are boosting cloud service utilization and revenue. The solid growth of Xiaomi and Kingsoft lays a strong foundation for our revenue, and we believe we're in a good momentum for further expansion.

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