Q4 2023 Earnings Summary
- Kingsoft Cloud's AI business is experiencing strong growth, becoming a preferred cloud service provider for independent AI companies due to its neutrality and independence. The AI business represented approximately 8% of public cloud revenues, with an increase of 82% quarter-over-quarter.
- Management expects continued gross margin improvement driven by optimization of revenue mix, cost control measures, and focus on higher-quality projects. The company achieved an adjusted gross margin of 15.2% in Q4 2023, marking the sixth consecutive quarter of improvement. Management is confident in continued margin expansion and aims to achieve EBITDA margin break-even in the near term.
- Kingsoft Cloud anticipates significant opportunities from the integration of cloud services and digital assets, as new government policies lead to the establishment of digital asset companies and inclusion of digital assets on balance sheets. This represents a significant opportunity for cloud service providers.
- Persistent GPU chip supply constraints may limit Kingsoft Cloud's ability to grow its AI business. Despite strong demand, the imbalance between supply and demand of GPU chips is expected to continue, hindering the company's ability to fully capitalize on AI opportunities.
- Intensifying price competition in the public cloud market could pressure Kingsoft Cloud's margins and market share. Competitors are engaging in aggressive pricing strategies, and while management downplays the impact, ongoing price pressure may adversely affect the company's performance.
- The pace of gross margin improvement may slow as strategic adjustments to the CDN business near completion. With the CDN business adjustment approaching its end, one of the main drivers of margin expansion may diminish, potentially challenging the company to sustain its margin improvement trajectory.
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Margin Outlook
Q: How will gross margins improve going forward?
A: Management expects gross margins to continue expanding due to three drivers: stabilization of the CDM business contributing to margin expansion; renegotiation of supply chain contracts lowering the cost basis; and a focus on higher-quality enterprise cloud projects with better margins. -
AI Business Growth
Q: What are the growth drivers for AI public cloud?
A: Growth drivers include existing independent AI large language model customers and new customers leveraging AI, such as EV companies. Management sees significant potential from new customer demand in the future, despite ongoing supply constraints. -
Profitability and EBITDA
Q: How will adjusted EBITDA margins trend in 2024?
A: The company aims for continuous quarter-on-quarter gross margin expansion through cost-cutting and operational efficiencies. They are confident in approaching EBITDA margin break-even in the short term and focusing on revenue quality and mix optimization. -
Competitive Landscape
Q: What's the impact of peers' price cuts in public cloud?
A: Management believes peers' price cuts have not significantly impacted the market or their business. They view these reductions as marketing tactics targeting small-scale customers, which do not overlap with their customer base. The focus remains on customer satisfaction over price competition. -
Enterprise Cloud Strategy
Q: What's your 2024 plan for enterprise cloud?
A: The company sees significant opportunities from the rise of digital asset companies and the integration of cloud services with digital assets. They expect a wave of state-owned companies migrating to the cloud, representing a substantial opportunity across industries. -
CapEx Plans for AI
Q: Can you detail this year's AI CapEx plans?
A: Management will continue investing based on customer demand and pipeline but cannot comment on specific amounts or investment timing at this stage. -
AI Chip Supply and Demand
Q: What's the current AI chip supply-demand trend?
A: Despite some relief from made-in-China chips, demand for GPU chips still exceeds supply due to geopolitical tensions. The imbalance is expected to persist in the near term, and the company is implementing strategies to address it. -
Share-Based Compensation Costs
Q: How are share-based compensation costs trending?
A: Share-based compensation costs have declined from approximately RMB 360 million in 2022 to about RMB 180 million in 2023. The company has adopted a prudent approach to share granting and vesting, expecting a narrower gap between GAAP and non-GAAP margins going forward. -
Competitiveness of AI Products
Q: How competitive are your AI products and solutions?
A: While management refrains from direct comparisons, they highlight their neutrality and independence, making them a preferred cloud provider for many independent AI companies that do not have overlapping AI large language models.
Research analysts covering Kingsoft Cloud Holdings.