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Kingsoft Cloud Holdings Limited (NASDAQ:KC) Q3 2022 Earnings Call Transcript

Kingsoft Cloud Holdings Limited (NASDAQ:KC) Q3 2022 Earning Call Transcript November 23, 2022

Kingsoft Cloud Holdings Limited misses on earning expectations. Reported EPS is $-1.99 EPS, expectations were $-1.64.

Operator: Thank you for standing by, and welcome to the Kingsoft Cloud Holdings Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I would now like to hand the conference over to Ms. Nicole Shan, IR Manager. Please go ahead.

Nicole Shan: Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobeNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and the CEO, Mr.Tao Zou; and the CFO, Mr.Haijian He. Mr.Zou will review our business strategies, operations and the 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 interpretations. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management's statement in the original language will prevail.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all 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 or 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.Tao Zou. Please go ahead. Thank you.

Tao Zou: Hello, everyone. Thank you all for joining Kingsoft Cloud's third quarter 2022 earnings call. Since taking on the CEO role in August, I have been leading the company through a systematic review of our strategy, business, and financials. And during the quarter, we continued to implement various initiatives in a solid and down to earth manner. First, we continued to invest in technology, focus on our core businesses, and revise our original vision for cloud services. Second, we continued to review and evaluate our customer base and project portfolio, strengthen cost control, to achieve a better balance between revenue growth and profitability. At the same time, we continued to strengthen our ecosystem synergies explore high value business opportunities and pursue a path of high quality development.

We achieved solid financial performance in the quarter. Our total revenues were RMB1.97 billion, in line with our guidance. Adjusted gross margin improved significantly to 6.3% from 3.6% in the second quarter. And our operating cash flow has been positive for two consecutive quarters, indicating that our business adjustment and cost control efforts are starting to yield initial results. In terms of business, we adhere to the conviction of building success based on technology, continued to focus on building key product capabilities on the IF and SaaS layers. These efforts were recognized by Frost & Sullivan Lead Leo Institute in China Data Management Solutions Market Report published in the third quarter this year, in which Kingsoft Cloud's data management solutions ranks among the leaders of the market for innovation competency and growth performance.

Meanwhile, IDC's latest addition of China's software defined storage tracker 2022 first half ranked our enterprise level storage solution, King storage, at top four in China's software defined object storage market. In terms of ecosystem collaboration, we stepped up our technological cooperation with Kingsoft Office to achieve enhanced cloud document processing, including authentication, encryption and proof-reading. Leveraging our cloud computing capabilities, we helped Kingsoft Office strengthen the business logic layer for cloud document processing, and thereby further improve their end user experience. In terms of different business scenarios, we continue to focus on our core industry verticals, replicating our successful lighthouse projects and apply to customers in their respective sectors.

In public services space, we built a smart cloud solution for municipality leveraging our hybrid cloud and distributed cloud storage technology among others to enable and facilitate the management of economic affairs in a coordinated and integrated manner. In financial services sector, we validated our data governance services capabilities, particularly in data lake and metadata management in various projects for major commercial banks. We will continue to replicate such success with more clients in the industry. In the healthcare sector, we are about to complete the capacity expansion projects for the medical image clouds in regions, including Sichuan and Chongqing. A testament of our ongoing support and monetization to address our customers' needs to expand and upgrade their existing projects.

Overall speaking, we will continue to invest in technology, focus on core businesses and enhance the foundation and the structure, which enables sustainable high quality development. Under the backdrop of the wave of digitalization, we aspire to penetrate deep in verticals of strategic choice and offer our customers safe, robust and efficient cloud computing services. I will now pass the call over to our CFO, Haijian, to go over our financials for the quarter. Thank you.

See also 15 Best Cloud Computing Stocks to Buy and Biggest Bitcoin Mining Companies in the World.

Haijian He: Thank you, Tao Zou, and welcome, everyone for joining the call. Now I will walk you through the financial results for the third quarter 2022.We have actively taken measures to improve efficiency demonstrating our strong commitment to pave the path for profitability. This quarter, our adjusted gross margin has improved considerably and continuously from the lowest point of 1.2% in the fourth quarter of 2022, to 3.6% in the second quarter this year and further to 6.3% in the third quarter. Our operating cash flow has been positive for the past two quarters consecutively and we have achieved RMB100.9 million net operating cash flow this quarter. Our total revenue was nineteen RMB1,968.8 million in Q3. Within that, revenues from public cloud services was RMB1,349.0 million. While increased by 4.4% compared with Q2, it represents a 20.2% decrease compared to the same period in 2021.The change was primarily due to the company's proactive scaling down of CDN business, with its gross billing decreasing by about 28% on a Y-o-Y basis.

Revenues from enterprise cloud services was RMB622.0 million, which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China. While proactively applying more selective criteria to project screening to strive for better profitability and cash flow. Our cost saving measures are well on track within our plan. Total cost of revenues decreased by 20.6% year-over-year and remained stable quarter-to-quarter at RMB1,846.4 million. IDC costs decreased significantly by 23.6% year-over-year from RMB1,410.9 million, to RMB1,087.3 (ph) million this quarter. Depreciation and amortization costs increased by 26.9% from RMB200 million in the same period of last year to RMB253.7 million, while remained stable compared to last quarter. It is in line with our revenue mix adjustments as we moderated the procurement process of service of public cloud. Solution development and services costs increased from RMB160 million to RMB443.1 million this quarter. The increase was mainly due to the consolidation of Camelot since September last year. Fulfillment costs and other costs were RMB31.9 million and RMB39.3 million this quarter.

The adjusted gross profit of this quarter was RMB124.7 million, representing adjusted gross margin of 6.3%.The significant gross margin improvement was mainly due to the effect of cost control measures and strategic adjustments of our revenue mix. In terms of expenses excluding share-based compensation, total adjusted operating expenses was RMB577 million. Within that, adjusted R&D expenses was RMB231.6 million increase from RMB190.8 million from last quarter as we remain focused on our technology development. Adjusted selling and marketing expenses was RMB125.5 million compared with RMB120.1 million last quarter. Adjusted G&A expenses increased slightly from RMB196.0 million last quarter to RMB219.9 million, which is partially due to the one-time of expenses of Hong Kong listing projects.Net loss margin was 40.7% this quarter and adjusted net loss margin was 24.8%.The adjustment was mainly due to the foreign exchange loss of RMB218.9 million, caused by the significant fluctuation of U.S. dollar RMB exchange rates, which is totally a non-cash item impact on the P&L items.

As of September 30, 2022, our cash and cash equivalents and short-term investments amounted to RMB5.3 billion, providing us sufficient liquidity for operations. The capital expenditures for the quarter was RMB253.3 million, which primarily consists of payment for service, which we ordered previously. The decrease of CapEx was in line with our proactively scaling down CDN business. We expect to keep our total CapEx within RMB1.5 billion for the full year of 2022.In terms of share repurchase program, regarding our $100 million share repurchase program within a 12 month period as approved by the Board and announced in March this year.

We have been duly executing since the release of our Q2 earnings results up to November 18, we bought a total of 10.41 million ADS shares for roughly about $23.92 million. Going forward, supported by our ample cash reserve of about RMB5.3 billion. We expect to continue to execute from time to time with way to mandated repurchase program. These efforts fully demonstrate our Board and management's strong commitment and the full confidence in the long term business prospects of the company. As we strive to reward our shareholders for their support and we believe our share price will eventually reflect company true value. Finally, we submitted the application for Hong Kong's due primary listing on July 27, 2022.As always, the listing and the potential timing is subject to regulatory approvals.

Looking ahead, although, we are still implementing our strategy initiatives, including business repositioning and cost control efforts on an ongoing basis. Such adjustments have already yielded positive preliminary results as reflected in the clear improvement of the profit margin in Q3.We expect our total revenue to be between RMB2 billion and RMB2.2 billion for the fourth quarter of 2022, representing a quarter-over-quarter increase of 1.6% to 11.7%.While these forecasts and comments above are based on our current and preliminary views of the market and operational environment, which are subject to change. We firmly believe that given the time the effects of our ongoing strategic initiatives, we will continue to amplify and reflect our financials in the mid to long-term.

Thank you.

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

To continue reading the Q&A session, please click here

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