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Edited Transcript of JG.OQ earnings conference call or presentation 16-Aug-19 11:00am GMT

Q2 2019 Aurora Mobile Ltd Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Aurora Mobile Ltd earnings conference call or presentation Friday, August 16, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fei Chen

Aurora Mobile Limited - Co-Founder & President

* Shan-Nen Bong

Aurora Mobile Limited - CFO

* Weidong Luo

Aurora Mobile Limited - Co-Founder, Chairman of the Board of Directors & CEO

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Conference Call Participants

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* Chong Liu

Goldman Sachs Group Inc., Research Division - Associate

* Ivy Liu

Crédit Suisse AG, Research Division - Analyst

* Tip Fleming

Christensen & Associates - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Aurora Mobile Second Quarter 2019 Earnings Call. (Operator Instructions)

Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mr. Tip Fleming. Thank you. Please go ahead.

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Tip Fleming, Christensen & Associates - MD [2]

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Thank you, operator. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call from Aurora today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer.

Following the prepared remarks, all 3 will be available to answer your questions during the Q&A session that follows. Please be reminded this call contains forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, confident and similar other similar statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in the company's filings with the Securities and -- the SEC. Our whole information, Aurora Mobile undertakes no duty to update such information except as required under applicable law.

With that, I will now like -- I would now be happy to turn the call over to Chris. Chris, please go ahead.

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Weidong Luo, Aurora Mobile Limited - Co-Founder, Chairman of the Board of Directors & CEO [3]

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Thanks, operator. Good morning, and good evening to everyone on the call and welcome to Aurora Mobile's Second Quarter 2019 Earnings Call. We have a few piece of exciting news to share with you today.

First, we achieved our first ever quarterly profit on both an adjusted EBITDA and adjusted net income basis. This is a very important milestone and quite an accomplishment, particularly given the macro headwinds and demonstrate the strength of our business model. Continued top line growth, coupled with the increase in operating leverage that we are experiencing as we scale the business, drove the turning point in our bottom line profitability.

Second, we announced our strategic partnership with Tencent Cloud yesterday. Under this partnership, Aurora Mobile and Tencent Cloud will offer unified customer accounts to both of our customers. Once locked in, whether from the Tencent Cloud system or from Aurora Mobile system, the user will be able to access the complete set of product offering provided by both Aurora and Tencent Cloud, ensuring that the user experience will be very smooth and friendly.

On Tencent Cloud's website, cloud.tencent.com under the tab Developers, on the main page, all of Aurora's developer products will be displayed and ready for use by Tencent Cloud customers. The concept is very much like on the WeChat, where the food delivery tab is dedicated to Meituan, driving significant traffic to their service.

Similarly, on Aurora's website under the tab, Developer Services, Tencent Cloud's product offering will be displayed. The benefits to both party are very clear. For us, we will be able to acquire incrementally more developers and increase our exposure to those developers covered by Tencent Cloud provided by us. For Tencent, it enriches their cloud offering by leveraging our first-class developer services so Tencent can better service its customers. Together, by leveraging each other's unique strengths, we can develop a better developer ecosystem.

Now I will talk about various key achievement on the operating side this quarter. First, number of mobile apps utilizing at least one of our developer services, or the cumulative app installations, reached 1.29 million as of June 30, 2019, from approximately 887,000 last June. On a quarter-over-quarter basis, we continue to see a steady stream of new apps or approximately 41,000 new apps each month this past quarter that use our SDK. Notable customer wins this quarter included (inaudible) and (inaudible), and update on our new product, JVerification, launched at the end of the first quarter last year. This quarter, we added more than 70 paying customers compared with just a few thousand trial customers in the first quarter. Notable paying customer included Fanli (inaudible).

Second, cumulative SDK installations increased to 26.6 billion as of June 2019 from 14.9 billion last June. First, the number of monthly active unique mobile devices we cover continue to increase, hitting 1.13 billion in June 2019 from 972 million in June 2018. The increase was mainly due to new apps that were added in the first quarter that started to run our -- SDK with us, such as QQ Reader, (inaudible), Fanli (inaudible).

Lastly, in the second quarter of 2019, we saw the number of paid customer increase to 2,211 from 1,602 a year ago.

Now let me discuss a few highlights of our financial performance. I will ask Shan-Nen to delve more into more detail a bit later. Our total revenue for Q2 2019 was CNY 291 million, which represents an increase of 76% year-over-year. Breaking this down, our revenue from developer services increased 39% for CNY 40.5 million during the same period last year to CNY 20.2 million. This was mainly due to the growth in the number of customer from 1,005 to 1,488, while our ARPU remained stable. Our revenue from data solutions increased 80% from CNY 150 million during the second quarter last year to CNY 271 million (sic) [CNY 241.8 million].

The revenue growth was primarily due to the increase in both the number of paying customers and average spending per customer. Revenues from targeted marketing rose 84% year-over-year. This increase was mainly due to both an increase in the number paying customer and ARPU. ARPU increased about 52% year-over-year, while the number of paying customer increased 21%.

The revenue mix for the quarter remained quite balanced, while with the financial services vertical contributing less than 30% of total ad revenue, down from 40% last quarter and mobile gaming continuing to gain momentum, it now accounts for over 25% in total revenue, up from 16% in the first quarter.

The media and entertainment vertical contributed about 20% of our ad revenue. The other, mainly include e-commerce, education and auto business. Together, this segment accounted for 25% of total ad revenue, up from 15% last quarter.

Customer retention this quarter was again very high, among the top 20 paying ad customer in the first quarter. We had 0 customer attrition during this quarter.

In terms of advertising inventory, Tencent GDT account for 30% in dollar terms, which was similar to the first quarter. For targeted marketing, I would like to discuss a few new initiatives that we are currently implementing.

First, we are in the process of building out our light push alerts. The concept is for developer to contribute their push message resources to us to create a common media resource pool where we will manage the pool of resources to do retargeting for developers' mobile apps. The benefit to developer is that this concept would allow them to increase their AVP's activity. The product will require a specially new push SDK. We are currently rolling it out and expect to generate revenue in the first quarter.

Second, we are transitioning some of our advertisers from performance-based to end-to-end advertisement services to a SaaS subscription-based model. Instead of committing CPA by taking inventory risk, we will provide a select target audience data package based on the particular advertiser's target user profile. The goal is for advertisers or agents to run queries on this data package wherever they need to bid on the ad media inventory, which sure help to increase their ad performance. While these initiatives may lead to a slower top line growth for our targeted marketing business near term, it will bring attractive benefit to us such as enhanced gross margins, lower working capital requirements and expanded advertising customer base and great customer techniques.

Now I will turn the call to Fei who will talk about the Q2 performance of our 3 business lines within data solutions.

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Fei Chen, Aurora Mobile Limited - Co-Founder & President [4]

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Thank you, Chris. The combined revenues from our other vertical data solutions, including financial risk management, Market Intelligence and iZone increased 55% from RMB 18.9 million in the second quarter last year to RMB 29.2 million. This was mainly due to a strong 22% year-over-year increase in the number of paying customers as well as continued expansion in ARPU. We saw solid growth across all 3 product lines.

For financial risk management, the top paying customers this quarter included Baixin Bank, 360 Finance and the (inaudible). We also signed a multimillion dollar contract with Ping An Technology.

Our strategy remains very consistent. We are focused on catering to the leading players in the banking and the consumer finance market, and we were happy to see good growth in both customer numbers and ARPU.

For our market intelligence product, we also saw solid growth in both customer numbers and ARPU on a both year-over-year and a sequential basis. Revenue this quarter was contributed almost equally between investor and the corporate customers.

For our new iMarketing product, which we launched in the first quarter, we were already able to sign a few new partners in the second quarter. Moreover, we are generating momentum with large corporate customers, and we expect to sign with a few BAT-level customers in current quarter.

And lastly, our iZone business posted a solid growth of 15% sequential growth in the second quarter. Top paying customers included, e.g., Carrefour and the China Urban Planning Institute. We saw very good demand across the real estate, new retail and urban planning verticals.

With that, I will now pass the call to Shan-Nen.

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Shan-Nen Bong, Aurora Mobile Limited - CFO [5]

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Thanks, Fei. Since Chris and Fei has already talked about our top line numbers, I'll go the through some of the other P&L items.

Gross margin for Q2 decreased slightly to 26.2% from 27.5% last quarter. The decrease was largely due to the mix shift towards the targeted marketing segment. Also within the targeted marketing, our ramp-up of new verticals also led to the slight margin decrease.

In renminbi terms, our gross profit increased by 62% to CNY 76 million. Total operating expenses increased by 39% year-over-year to CNY 95 million. In particular, R&D expenses increased 47% to CNY 46.3 million. This was mainly due to increases in staff costs, depreciation and amortization and bandwidth costs.

Selling and marketing expenses increased 41% to CNY 30.6 million, mainly due to the increases in staff costs, marketing expenses and lease and office expenses. G&A expenses increased 19% to CNY 18.3 million, mainly due to increases in staff costs and professional fees. However, OpEx as a percentage of revenue continued to decrease both year-over-year and quarter-over-quarter.

Our adjusted EBITDA went from negative CNY 11.13 million in Q2 2018 to positive CNY 12.54 million in Q2 '19.

On to the balance sheet items. The total assets decreased from CNY 992 million as of 12/31/2018 to CNY 962 million as of 6/30/2019. The key asset items as of June 30 were: cash and cash equivalents of CNY 381 million, which included a short-term deposit of CNY 100 million; accounts receivable of CNY 225 million; prepayments of CNY 89 million; fixed assets of CNY 108 million; long-term investment of CNY 104 million.

Total current liabilities increased from CNY 164 million as of 12/31/2018 to CNY 173 million as of 6/30/2019. The key current liability items were accounts receivable of CNY 26 million; deferred revenue of CNY 75 million; accrued liabilities of CNY 69 million. As of 6/30/2019, we maintained a healthy level of working capital of CNY 566 million.

Looking forward, we expect the total revenues for Q3 2019 to be in the range of CNY 295 million to CNY 305 million, representing growth of 50% to 55% year-over-year.

Lastly, before I conclude, I'll give a quick update on the share repurchase plan. As of 6/30/2019, we have repurchased a total of 797,711 ADS since the start of our repurchase program. In the second quarter, we repurchased 490,917 ADS at an average purchase price of USD 7.13, spending a total of USD 3.5 million. We will continue to monitor the need to repurchase depending on the market conditions and the underlying share price.

And this concludes management prepared remarks, and we'll be happy to take your question now. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Bill Liu from Goldman Sachs.

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Chong Liu, Goldman Sachs Group Inc., Research Division - Associate [2]

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Weidong, Fei, Shan-Nen, congratulations on your first profitable quarter. My question is about the business outlook. So if we look at the middle point of your guidance of CNY 300 million, so how should we think about this from a growth perspective? Because it's almost a flattish on a Q-on-Q basis. So I wonder, does that factor in our SaaS strategy given that the revenue may decline although the margin may increase for the SaaS portion of the revenue? So that's my first question.

And my second question is on the Tencent Cloud collaboration. So I wonder, how would you consider the potential impact in terms of the paying customer going forward? So I saw we already have a healthy increase to 2,200. So is there any expectation that you have that the Tencent collaboration can bring more paying customer?

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Fei Chen, Aurora Mobile Limited - Co-Founder & President [3]

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This is Fei. So regarding the business outlook, actually you are absolutely right. So we have already incorporated our new strategy for target marketing to shift gradually to a SaaS-based model. And the main reason is because as we ramp up -- as you know, for our existing model, if we ramp up the new vertical, and the new vertical is really growing too fast, then it's going to have a negative impact to the overall target marketing gross margin. And also with current headwind of the macro environment, and if we continue to grow this business, which will require a significant amount of working capital, which is also not something we want to do, right? So given that, if we switch the model from end-to-end performance-based ad placement service to a SaaS-based model, which can totally solve all these problems because it's subscription based and the customers are required to pay in advance.

And also, in terms of the margin, absolute dollar terms, it's not really going to affect much to our margin. So taking into consideration all these factors, that's why we -- purposely, we do not want to 100% focus on the existing model, but rather, we want to switch to this very sticky SaaS-based target marketing business model. We are already actually currently rolling out, trying out a few customers and they are already -- and the feedback has been pretty positive.

So with that, I think I will let Chris answer the second question.

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Weidong Luo, Aurora Mobile Limited - Co-Founder, Chairman of the Board of Directors & CEO [4]

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Yes. So for the partnership -- strategic partnership with Tencent Cloud, so if you go to Tencent Cloud's website, cloud.tencent.com, you can see our advanced developer product are displayed and ready for use under the tab, Developers. So that's pretty -- a very nice entry point on their main page. So we expect there's going to be a very good incremental numbers of developers who can contribute to us. So as you know, most of Tencent Cloud's developer are paying customer, are not free. So we believe this cooperation can bring us more paying customers on the developer services. So that is the answer of the second question.

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Fei Chen, Aurora Mobile Limited - Co-Founder & President [5]

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Yes, Bill, let me give you a number. So in terms of number of developers, we currently serve -- it's about 500,000, right, in the current quarter. But for the Tencent Cloud, actually, they cover about 2 million developers, so -- and that's the reason working with Tencent, we'll have incremental more traffic driving to our platform, okay?

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Operator [6]

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(Operator Instructions) Your next question comes from the line of Tina Long from Crédit Suisse.

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Ivy Liu, Crédit Suisse AG, Research Division - Analyst [7]

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Congratulations. This is Ivy Liu on behalf of Tina. So I have 2 questions here. First one is I noticed the R&D expense ratio to total revenue slightly declined this quarter. So is it related to more prudent R&D decisions or like development cycles overall? What will the trend of R&D expense be like for the rest of 2019?

And my second question is you just mentioned that you're shifting towards more of a subscription-based model from traditional CPC model. So what the strategy's impact on cost line be like, such as media costs?

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Fei Chen, Aurora Mobile Limited - Co-Founder & President [8]

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Yes. Regarding the R&D expense, so actually this quarter, we actually had a sort of like basically restructuring or optimizing of our R&D talent. So basically, we do not really have increase of -- much increase of R&D head count, right? So -- but going forward, we surely will continue to invest in R&D. But as a percentage of the total revenue, this will continue to decline. And the second question?

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Shan-Nen Bong, Aurora Mobile Limited - CFO [9]

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I guess the second question is impact on the cost in terms of us moving to the SaaS...

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Fei Chen, Aurora Mobile Limited - Co-Founder & President [10]

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So the impact to the cost of goods sold, it will decline as a percentage of total revenue.

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Operator [11]

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(Operator Instructions) There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

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Tip Fleming, Christensen & Associates - MD [12]

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Thank you, everyone, for joining the call today. If you have any further questions, please don't hesitate to contact us or the company directly. Thank you very much for joining. Good night.

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Operator [13]

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Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may now disconnect.