Kingsoft Cloud Holdings Limited (NASDAQ:KC) Q4 2023 Earnings Call Transcript

Kingsoft Cloud Holdings Limited (NASDAQ:KC) Q4 2023 Earnings Call Transcript March 20, 2024

Kingsoft Cloud Holdings Limited misses on earnings expectations. Reported EPS is $-0.14 EPS, expectations were $-0.12. KC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Kingsoft Cloud’s Fourth Quarter and Fiscal Year 2023 Earnings Conference Call and Webcast. At this time, all participants are in listen only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. I would now like to turn the conference over to Nicole Shan, IR Manager of Kingsoft Cloud. Please go ahead.

Nicole Shan: Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud’s fourth quarter and fiscal year 2023 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as our GlobeNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Zou Tao; and 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 guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretations. All interpretations are for your convenience and reference purposes only.

In case of any discrepancy, the 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 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 and relate to event 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 this 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. Zou. Please go ahead.

Zou Tao: Hello, everyone, and thank you all for joining Kingsoft Cloud’s fourth quarter fiscal year 2023 earnings call. In 2023, we continued to uphold the principle of high quality and sustainable development and accomplished significant achievements. For the full year of 2023, adjusted gross margin was 12.2%, a significant increase of 6.8 percentage points, up from 5.4% in 2022. Adjusted gross profit was RMB860 million almost doubling the amount of RMB445 million in 2022. Normalized adjusted EBITDA was negative 3.4%, another significant improvement from negative 8.9% in 2022. During the year, we started building our success based on technology and innovations, forging our reputation throughout the entire business process, enhancing our operations management and building in the strength.

See also 20 States With Biggest Gender Wage Gaps and 15 Best Cities for Cyber Security Jobs in the World.

Q&A Session

We have been strategically adjusting our business mix and proactively embracing the new AI era, therefore, laying solid foundations to long-term sustainable development in 2024 and beyond. Now, I will walk you through the business highlights for fourth quarter 2023. This quarter, we achieved dual improvement in both our revenue and profitability measures. In particular, total revenues reached RMB1.72 billion increasing 6.0% quarter-over-quarter. Adjusted gross margin recorded a major increase of 3.1 percentage points quarter-over-quarter to 15.2%, marking the sixth quarter of consecutive improvement. Adjusted gross profit reached RMB262 million increasing 55.8% year-over-year. Normalized adjusted EBITDA margin was negative 1.6%, representing a significant improvement of 8.5 percentage points year-over-year.

In terms of public cloud services, revenues were RMB1.05 billion, representing an increase of 3.5% quarter-over-quarter. Excluding CDN business, public cloud revenue increased by 11.8% quarter-over-quarter, we bear fruits on our three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, AI business and CDN strategic adjustments. First of all, as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we continue to serve the demand in the ecosystem well, especially with respect to the highly visible and tangible demand in training and inference from Xiaomi EV and WPS AI, seizing opportunities in structural industry trends. This quarter, revenues contributed by Xiaomi and Kingsoft ecosystem reached 16%, representing an increase of 5 percentage points year-over-year.

Secondly, we vigorously developed our AI business with remarkable agility to emerging industry trends. Besides the AI opportunities from the Xiaomi and Kingsoft ecosystem, we have been fully penetrating leading independent AI companies in China providing long-term secured high performance computing power, which is highly sought after in the market. Our AI business represented approximately 8% to our public cloud revenues or an increase of 82% quarter-over-quarter. Besides, we have signed a loan facility agreement with Kingsoft Corporation obtaining a credit line of RMB1.5 billion dedicating to the development of AI business. Thirdly, we continued to push forward our strategic adjustments of CDN business. This quarter, CDN revenue decreased by nearly 10% compared to last quarter and CDN revenue as a proportion of total revenue has decreased to approximately 23%.

The revenue share of our largest CDN customer was 12% in the quarter. Top customer concentration has been fundamentally alleviated. Moving on to enterprise cloud services. Total revenues were RMB670 million, increasing by 10.2% quarter-over-quarter. In public service space, we actively seized opportunities of public services cloud and SASE cloud. We implemented standardized operation and maintenance with core components such as large language model, big data and workspace collaboration, targeting use cases in public service and enterprise application domains. With Beijing, Wuhan and Zhuhai as our basis, we have built benchmark projects radiating to other large and medium sized cities. This quarter, we successfully joined hands with Tianjin state owned assets cloud to facilitate the digitalization and intelligence evolution of local state owned enterprises.

In healthcare space, we continued to promote the five business models and make new breakthroughs, inheriting and developing experience from the cooperation with Shanghai rating hospital, we replicated and scaled our medical digital capabilities to more renowned hospitals, including Wuhan Union Hospital, Zhongnan Hospital affiliated to Wuhan University and the Fuwai Hospital affiliated to Chinese Academy affiliated to Chinese Academy of Medical Sciences. In financial services space, we continued to deepen our business cooperation with large state owned banks, improving our big data products and service capabilities and win the base of big data platform projects for leading state owned banks and trusts. Turning to Camelot. During the quarter, Camelot exhibited stable and healthy revenue and profitability, signing up four new customers, while maintaining robust relationships with existing major clients.

In terms of product and technology, we uphold our principle of building success based on technology and innovation, delivering best-in-class customer experience across our core product offerings. In computing space, we continued to upgrade our core products and focusing on improving stability and domestic environment compatibility. This quarter, we launched our elastic bare metal compute product, EPCX7, with significantly improved computing memory, network and storage performance. In storage space, to better serve high performance use cases such as decoupling of computing and storage, AI, computer graphic rendering, we have released the extreme version of object storage service equipped with high performance, dynamic scaling and out-of-the-box features.

In big data space, we upgraded our cloud native lake house platform with maximum throughput improvement by 4x for batch processing tasks, better supporting use cases of autonomous driving AI and data models. In enterprise cloud space, our Galaxy Stack platform ranked in the market leader quadrant of both the private cloud market and the private cloud system platform market. In the research report released by CCID Consulting, a great recognition of the products and services capabilities. This quarter, Galaxy Stack platform released another updated version, adding six cloud products and more than 100 functions, perfecting the comprehensive enterprise cloud system, which powers our end-to-end service of cloud building, cloud migration, cloud usage and cloud management.

In terms of AI, our MassMutual Trust dedicated zone solution was awarded the Most Innovative AI Solution by China Internet Economy Forum 2023. Our AI product center deepened research cooperation with Kingsoft’s office to strengthen model research capability and serve enterprise use cases. Moving on to talent strategy. Wuhan Research Center has been quickly expanded. By the end of 2023, total employees in Wuhan exceeded 500 accounting for one-third of total R&D teams and half of them hold graduate degrees. Our Beijing Wuhan dual R&D standard strategy attracts talent for our long-term development and ensures R&D intensity as we stick to our build success based on technology and innovation principle, while managing R&D expenses effectively. In summary, we have achieved great milestones in executing high quality and sustainable development strategy with our profitability measures improving continuously.