Q1 2023 Aurora Mobile Ltd Earnings Call
Participants
Shan-Nen Bong; CFO; Aurora Mobile Limited
Weidong Luo; Co-Founder, Chairman & CEO; Aurora Mobile Limited
Brian David Kinstlinger; MD, Director of Research, Head of TMT Research & Senior Technology Analyst; Alliance Global Partners, Research Division
Unidentified Analyst
Christian Arnell; MD; Christensen & Associates
Presentation
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Aurora Mobile First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand over to your host today, Christian Arnell. Thank you. Please go ahead, sir.
Christian Arnell
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 or through Newswire services. On the call today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Shan-Nen Bong, Chief Financial Officer; and Mr. Guangyan Chen, General Manager. Following their prepared remarks, they will be available to answer your questions during the Q&A session that follows.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E 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, which are difficult to predict and 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 and/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 statement as a result of new information, future events or otherwise, except as required under applicable law. With that, I would now like to turn the conference over to Mr. Luo. Please go ahead.
Weidong Luo
Thanks, Christian. Good morning, and good evening, everyone. Welcome to Aurora Mobile's 2023 first quarter earnings call. Before I comment on our Q1 results, I would like to remind everyone that the quarterly earnings deck is available on our IR website. You may refer to the deck as we proceed with the call today. Despite a challenging macro environment, we successfully concluded the first quarter of 2023 with business and social activities slowly recovering during Q3 following a shift in COVID policy towards the end of 2022.
Some of our businesses will impact to varied degrees. However, we are pleased to report that so far in Q2, we witnessed good momentum in revenue growth, especially from Developer Services. Although the external macro environment was murky during the first quarter, we have not stopped it -- not stopped making our organization more efficient. We carry on with our strict cost management strategy and (inaudible) strengthen our management structure. And as a result, our overall expenditure have continued to drop year-over-year and quarter-over-quarter.
We believe these efforts will help us improve our financial performance in the long run, which will also give us the space in a difficult environment to execute on our ambition. Here are some key financial results that I am proud to share, lowest net loss since 2019 Q3, CNY 15.2 million; lowest adjusted operating expenses since IPO at CNY 57.4 million; lowest operating expenses since IPO at CNY 64.8 million; gross margin back to 70%; AR turnover days at 39 days; deferred revenue balance has been higher than CNY 100 million for over 12 consecutive quarters. Total customer number remains stable at 4,527 up 1% year-over-year.
Our effective cost optimization continue to earn noticeable financial results with the lowest net loss since 2019, Q3 at CNY 15.2 million and adjusted operating expenses at historically low since IPO of CNY 57.4 million. We also maintained a very healthy gross margin of 70%.
Now let me go through our different revenue streams. Developer Services revenue decreased 24% year-over-year, mainly due to the weakness in Value-added Services, offset by the growth in Subscription Services. Subscription Services revenue were CNY 37.5 million, up 9% year-over-year, mainly driven by increasing ARPU. Subscription Services as our core business includes JPush Analytics, UMS and other products. And despite the external uncertainty in macro environment, we sign up many well-known clients, including but not limited to (inaudible), [SABA] and BYD. Going into Q2, we expect a major recovery in Subscription Services, and we hope we will see double-digit growth on the Q-over-Q basis.
Value-Added Services revenue were CNY 8.0 million, decreased by 69% year-over-year, which was a result of a weak advertising demand. We believe advertising-related revenue will continue to be impacted by the uncertain and volatile macroeconomic environment.
Moving on to our products and services. We have seen strong growth potential and interest in the Engagelab platform that we launched during Q4 last year. We [have implemented] improvements to other products under EngageLab. Recently, EngageLab has established a reliable network of data centers in multiple regions around the world to ensure that customers can choose the storage location that best suits their business needs. These data centers meet the highest security centers and standards and have part of rigorous certification and audit process.
With the rapid growth in global data exchange, oversea customers held increasing data security and comparison requirements. In addition to Singapore, EngageLab has now added more data center option for overseas customers to deploy its push notification product, AppPush and WebPush. This includes China-Hong Kong, Germany-Frankfurt, U.S.-California, Japan-Tokyo and South Korea-Seoul, UAE-Dubai, Brazil-Sao Paulo and Australia-Sydney. Customers can select one appropriate data center to store data for an application based on comprehensive consideration such as the location of their end user and regulations.
We will continue to invest in technology innovation and global infrastructure building and are committed to providing our customers with the highest level of data security and compliance assurance. We are thrilled to report that EngageLab has attracted numerous variable overseas customers and generate significant revenue and ARPU in just a few months. And currently, new contribution from overseas customers continue to outpace those from domestic customers, and we anticipate that our overseas business will be one of our biggest growth drivers going forward.
Our products have been well received by customers in multiple countries and regions, including the U.S., Malaysia, Thailand and Singapore. Notably, well-known companies such as BYD, (inaudible) has become our value customers. With this recognition from our customers, we remain committed to enhancing our products and services to enable global developers to achieve high efficiency and cost-effective user reach. In addition to other achievements this quarter, we have launched our latest development JPush, the in-app messaging function.
And [light] notifications (inaudible) app message appear within the apps, using pop-up windows and floating box to capture users' attention. This feature pays emphasis on user integration and engagement, ensuring developers can (inaudible) and retain their most valuable users. While push notification bring user back to the app, in-app message guide the users to interact with the app in a way that meets their expectation. With our app developer-centric strategy and through our ongoing improvements and iterations of products and technologies, we will continue to improve the app and help mobile app developers to answer their optional and growth demands and provide better user experience. With that, I will now pass the call to Shan-Nen, who will share more information about the Vertical Applications and other aspects of our performance.
Shan-Nen Bong
As Chris has mentioned before, we are facing external uncertainties during [Q1], and our vertical application business was also challenged this quarter. Vertical Applications mainly consists of financial risk management and market intelligence. Vertical Applications revenues decreased by 22% year-over-year, for both Financial Risk Management and Market Intelligence segment. Revenues were negatively impacted and decreased by 20% and 5%, respectively, year-over-year to CNY 11.8 million and CNY 7.2 million.
Our Q1 revenue was impacted since many of our customers were not able to close contract on a timely basis due to the COVID outbreaks. Going into Q2, we have seen recovery in the revenue from both sectors already. Under the challenging environment in Q1 of 2023, we were still able to set up various KA customers such as (inaudible) and Vipshop just to name a few. I will now go through some of our key expenses and balance sheet items.
On to operating expenses. We are on track in our operational goal to becoming a more efficient company by centralizing our resources to focus on fewer, but more important parts. During Q1, adjusted operating expenses marked another all-time low since IPO at CNY 57.4 million. Our net loss has also narrowed down to CNY 15.2 million, the lowest since Q3 of 2019. All 3 components within OpEx category recorded year-over-year and quarter-over-quarter reduction in particular.
R&D expenses decreased by 21% year-over-year to CNY 31.7 million, mainly due to lower headcount that reduced salary costs and associated share-based compensation and a decrease in cloud costs and depreciation expenses as a result of improvement and optimization of our cloud platform. Selling and marketing expenses decreased by 28% year-over-year to CNY 18.9 million, mainly due to the decrease in headcount by [31%].
G&A expenses decreased by 49% year-over-year to CNY 14.3 million, mainly due to an CNY 8.4 million decrease in personnel costs, the CNY 2.9 million decrease in professional fees as a result of our strict cost management control strategy and a CNY 1.8 million decrease in bad debt provision as a result of our company-wide concerted efforts on strict financial control measures.
And adjusted EBITDA, [calculated as EBITDA excluding share-based] compensation, reduction in force, charges, impairment, improved by 9% year-over-year to negative CNY 7.5 million.
On to the balance sheet. I will again share 2 very important KPI that we closely monitor. We continue to maintain a healthy AR turnover days at 39 days. Usually, Q1 is a slower quarter because of the Chinese New Year holidays. But I'm glad to see that our persistent payment collection policy works effectively for the period. Secondly, one of the key financial KPIs for tracking the performance of the SaaS companies is a total deferred revenue, which represents [cash collected in] advance from customers for future contract performance. Again, ended quarter on a high note at CNY 133.8 million. And this is the 12th quarter our deferred revenue balance exceeded CNY 100 million.
Healthy cash flow aside, the level of deferred revenue also signifies that our business is in great shape. Our customer has continued to buy our product and services quarter-over-quarter, year after year, and we are very pleased with the trending of this deferred revenue balance.
Next, total assets were CNY 396.4 million as of March 2023, this includes cash and cash equivalent of CNY 88.4 million; accounts receivable of CNY [26.2] million; prepayments and other assets of CNY 33.7 million; fixed assets of CNY 11.9 million; long-term investment of CNY 141 million; goodwill of CNY [37.8] million; and intangible assets of CNY 22.3 million resulted from the share SendCloud acquisition in March 2022.
Total current liabilities were CNY 238 million, as of March 31, 2023. This includes short-term loan of CNY 5 million, accounts payable of CNY 18.4 million; current operating liability of CNY 18.2 million; deferred revenue of CNY 131 million; accrued liabilities of CNY 65.2 million.
Lastly, before I conclude, I'll give an update on the share repurchase plan. In the quarter ended March 31, 2023, we repurchased 194,000 ADS. Cumulatively, we have repurchased a total of 1.39 million ADS since the start of our repurchase program.
And this concludes management's prepared remarks. We're happy to take your calls nows.
Question and Answer Session
Operator
(Operator Instructions) First question comes from the line of (inaudible) from Spica Capital.
Unidentified Analyst
I'd like to have 2 questions, if I may. Two questions related to financials. First of all, about OpEx, we note that the company continue to record historical low on your both GAAP and adjusted OpEx. Just wonder how did you do that? Did you make a further headcount reduction? If so, how will the reduced [headcounts] impact on your business operations? And the related question is that do you expect to see further reduction in OpEx in the coming quarters? How low could that go? So that's question related to OpEx. Another question is related to revenue. We saw a dip in revenue year-on-year and quarter-on-quarter. Of course, management has already made a very good explanation on the reasons behind. So what we would like to know is, going forward, what will be the revenue growth drivers. So 2 questions, one on OpEx, the other on revenue.
Shan-Nen Bong
This is Shan-Nen. Let me try to answer your question. I guess from financial perspective, we are very pleased before that we achieved the so-called GAAP and non-GAAP adjusted OpEx on a low basis this quarter again. And as to how we do it, there are a couple of things that we have been doing well. First, our Going-Cloud project was executed successfully, which is that we are able to reduce significant amount of depreciation from the server expenses. This is very important. Server expenses aside, as you know, over the past few years, we have been spending like CNY 10 million per year on servers. And with the Going-Cloud project that we have done over the past year, we are no longer needing to spend such money. So for servers that we're using right now, the cloud servers, and we are only paid as we go and that we really have to incur [expenses] based on what we have consumed. And this also greatly improved our cash flow. And this is the first thing we did.
The second -- the thing that we have done on the reducing the OpEx is that we have implemented this strict cost control based management strategy over the past years. And probably, you can see over the years, we have reduced the headcount, we have also looked at every single expense that we have. And moving forward, we do not anticipate any further reduction or big reduction in our headcount, and we are pretty comfortable in terms of where we are in terms of headcount to continue our operations. And so this is the first question.
I think you asked about how low can the OpEx go going forward? I think the short answer is, as I say, all expenses is at a pretty optimum level right now, and we do not expect to have significant decrease in OpEx every quarter going forward. So this is at a pretty optimal level that we think we can operate within the framework right now.
And I think the second big question to us is the dip in revenue and what are our revenue growth driver going forward. I think if you recap what Chris has said during the call earlier, we have seen a huge opportunity from overseas business, which is the EngageLab products. There are a couple of things that we have -- I would like to share with you. Based on the overall contract topline that we have internal research, about 15% to 20% of our total sales leads are now coming from overseas, which means that this coming back will be a big chunk of our revenue contribution because (inaudible) 15% to 20% of our [total sales leads] are coming from the overseas. And this is one of the metrics I share with you.
The second is for the new contract that we have signed by value, the percentage contributed by overseas customer has grown 3x from 3% to 10% of the total contract value in Q1 2023, which means that the contract value has grown 3x over the past quarter. And this percentage we have seen in the Q2 of this year, which means the month of April and May, the contribution percentage has continued to improve. I guess with this trend, we believe that our overseas revenue will be the primary growth driver going forward. Having said that, what we have not -- we have not taken our eyes off our bread and butter, which is the Developer Services. These are and will continue to be our major contributor for our stable cash flow and revenue in the future. I hope this answers your question.
Operator
(Operator Instructions) Our next question comes from the line of Brian Kinstlinger from AGP.
Brian David Kinstlinger
Just a follow-up to the answer you just gave on the revenue drivers. You said overseas has gone from 3% of bookings to 10%. What products that you sell or services are most being bought by these overseas customers? Is it EngageLab? Or is it some of your other services?
Shan-Nen Bong
This is Shan-Nen. Those are 100% from EngageLab.
Brian David Kinstlinger
So I guess -- if I understand correctly, EngageLab is a product that's helping customers choose data storage locations. You own the [networks]? Are these partners of yours? And then how are you acquiring customers for this product? That would be helpful.
Shan-Nen Bong
No. Brian, EngageLab is the push notification that will help the customers being outside of China to do the notification, the messaging. So it's nothing to do with the storage, which means that a customer in, say, like Singapore, they have app, A-P-P. They would like to reach out to their customers or users in Southeast Asia. We help them to do the push notification in Singapore. This is exactly what we are doing since 2021 in China, just that we replicate the products overseas.
Brian David Kinstlinger
Okay. And then you said you expected a recovery in Subscription Services. What's driving this recovery in you view? I suspect the environment remains challenging.
Shan-Nen Bong
Yes. I think there's a couple of things. One is, simply because the Q1 was low season, that's [already given]. And right now, what we are seeing is customers are -- again, people are trying to be more cost efficient. They try to get the best view of their services through the more likely to outsource to us, which is one of the best partners in terms of doing the push notification. So this is a kind of a change in the mindset of rather for them to invest a lot of money, people, engineers to do in-house, they are going outsourced to third-party like us. I guess good numbers that I can share with you. Based on what we are seeing right now in Q2, we have the April and May numbers in already. And based on this, the trajectory that we're looking at is the Developer Services, subscription business, we expect to have double-digit growth in Q2 quarter-over-quarter. So you can see the numbers are looking good and people are buying our services.
Brian David Kinstlinger
And then Value-Added Services really bottomed out. You mentioned, and obviously, the advertising market is quite challenging. I don't think that's changing right now. So what's the outlook for that business? Can it decline further if the market remains weak? Or how do you manage that business right now?
Shan-Nen Bong
Yes. Based on what we are seeing, no, the Value-Added Services remain to be fairly flat. We do not expect it to have good numbers going forward and [that too] try to be flat in the next quarter or so. Because if you look at what we have is we have researched some of the bigger app player in China, such as those like the Tencent, Baidu and Weibo, all of them are recording quarter-over-quarter reduction in revenue from ad spending. So we are not any better. So I think that the overall environment or overall ad market in China has remained weak or has not recovered to previous times.
Brian David Kinstlinger
Okay. My last question is really a high-level question. You said customers have been challenged to (inaudible) still given COVID. How paint a picture of what the market is today? I mean that was the first quarter, obviously. Here we are 2/3 into the second quarter. Is COVID still a major challenge for you? And what are the main obstacles in China (technical difficulty) today?
Shan-Nen Bong
No. As far as COVID is concerned, lack of a better word, I think it's almost all over. The people are not shutting down or work from home because of COVID anymore. And there's no regulation or policy that workers must work from home or cannot come to work. So COVID per se is over. So what we are looking at right now is probably the recovery from the overhang of the COVID.
Yes, COVID is over, but that doesn't mean that the business operation is -- business activity is 100% back to where it was, but we do see recovery. As I said, the Developer Services, Subscription business, we have seen more double-digit growth quarter-over-quarter. So this is a very encouraging sign.
Operator
(Operator Instructions) At this time now, no further questions on the line. I'd like to hand the call back to Christian for closing remarks.
Christian Arnell
Thank you, everyone, for joining the call tonight. If you have any further questions or comments, please don't hesitate to reach out to myself or anyone on the Aurora Mobile IR team. This concludes the call. Thank you, and have a good evening.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
