Kingsoft Cloud Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 21, 2023

There are 5 speakers on the call.

Operator

by. Welcome to the Kingsoft Clyde Third Quarter 2023 Earnings Conference Call. Are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Wayne Wong, Investor Relations Manager of Kingsoft Clyde.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's 3rd quarter earnings release was distributed earlier today and is available on our IR website at ir. Ksyun.com as well as on Global Newswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr.

Speaker 1

Tao Zhou and CFO, Mr. Henry He. Mr. Zhou will review our business strategies, operations and company highlights, followed by Mr. He who will discuss the financials and guidance.

Speaker 1

They will be available to answer your questions during the Q and A sections that follows. There will be consecutive interpretation. All interpretations are for your convenience and reference purposes only. In case of any discrepancy, management's statement in the original language may 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.

Speaker 1

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 this and other risks, uncertainties or factors are included in the company's filings with the U. S.

Speaker 1

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 factors mentioned during this conference call are denominated in RMB. It is now my pleasure to introduce our Vice Chairman and CEO, Mr. Zhao.

Speaker 1

Please go ahead.

Speaker 2

Hello, everyone, and thank you all for joining KingsoftCloud's Q3 2023 earnings call. During the quarter, we continued to uphold the principle of high quality and sustainable development, build success based on technology and innovations and forge our reputation throughout the entire business process with customer centricity. We have enhanced our operations management and proactively embraced the new AI era. This quarter, our profitability further improved. Total revenues reached RMB 1.6 3,000,000,000.

Speaker 2

Adjusted gross margin increased steadily for the 5th consecutive quarter to 12.1%. Adjusted gross profit reached RMB196 1,000,000, increasing by 57.5% compared with the same quarter last year. Normalized adjusted EBITDA margin was negative 2.7%, which represents a significant improvement of 7.6 percentage points from the same quarter last year and 0.6 percentage points from the previous quarter. In terms of public cloud services, revenues were RMB1.02 billion with a gross margin of 4.7%, significantly higher than the negative 1.6% compared with the same quarter last year. We continued to focus on 3 priorities for public cloud services, namely the Xiaomi and Kingsoft Ecosystem, AI Business and CDN strategic adjustments.

Speaker 1

First of

Speaker 2

all, we continued to serve Xiaomi and Kingsoft ecosystem well and coordinate enterprises within the ecosystem to systematically sort out their cloud planning and fulfill their cloud demand. This quarter, Xiaomi and Kingsoft contributed 17% to our revenue, an increase of 2.2 percentage points quarter on quarter and 3.6 percentage points year on year. Among them, driven by Xiaomi Business, the capacity of its dedicated cluster has expanded significantly and Xiaomi has become our largest customer. Kingsoft Office's revenue in September increased by nearly 50% compared to January, driven by its AI business. Secondly, we proactively developed our AI business.

Speaker 2

Currently, there is a strong demand for AI business with tens of customers who have signed contracts with us or in the process of business discussion. AI related capital expenditures in this quarter exceeded RMB 400,000,000, exceeding the total of the previous 3 quarters and has increased for 2 consecutive quarters. With our continued investment and efficient execution, our AI business revenue surged by over 70% compared to last quarter with a healthy gross profit margin. Thirdly, we continued to push forward our strategic adjustments in CDN business. This quarter, CDN revenue decreased by nearly 20% compared to last quarter and CDN revenue as a proportion of total revenue has decreased to about 30%.

Speaker 2

Revenue share of our largest CBN customer has significantly decreased from 16.2% in the previous quarter to 12% in this quarter. Moving on to enterprise cloud services. Total revenues were RMB609 1,000,000, while gross margin has maintained at a healthy level of more than 24%. In public services space, we opted to focus on core areas such as public services cloud, state owned asset cloud and education cloud, further improving the end to end model from cloud migration, cloud use to cloud management, forming a product matrix centered on big data, large models as well as WPS collaboration.

Speaker 1

For

Speaker 2

example, we have been the partner for the Beijing Public Services Cloud for 9 consecutive years, winning a strong reputation to deliver secure, reliable and easy to use systems and services, resulting in 24 contract renewals this quarter and forming a virtuous cycle. In digital health space, we continued to promote the 5 business models and make new breakthroughs. This quarter, as the only cloud service provider, we participated in the revision of a national level healthcare standard setting project, gaining a 1st mover advantage as demonstrated by our business model, technical capabilities and our corporate achievements in the regional health cloud space. We have collaborated with Kingsoft office to develop an electronic medical record editor for the National Health Commission and successfully completed the task. While continuously delivering the raising hospital projects, we have also successfully signed a contract for the information construction project of the People's Hospital of Zhuhai in high-tech zone, making new progress in the hospital space.

Speaker 2

In the financial services space, we continued to deepen our business cooperation with large state owned banks and complete the delivery of the existing projects as scheduled, while winning new projects. We also actively participated in the selection stage of AI models for large state owned banks. Turning to Camelot. During the quarter, Camelot business is stable, signing up 5 new customers, while maintaining robust relationships with existing major clients. Its profitability has been rising again steadily.

Speaker 2

In terms of product and technology, we uphold our principle of building success based on technology and innovation by delivering best in class customer experience across our core product offerings. In computing space, we continue to upgrade our core products, focusing on improving stability and domestic environment compatibility. We have also identified 8 major product and technology co construction products with key leading customers so as to accurately match customer demand, planning and deepen collaborative development. In storage space, we have released a new version of object storage, significantly optimizing read performance and the small IO scenarios with an overall performance improvement of over 50% approaching the theoretical limits. In big data space, our cloud native big data platform has significantly improved its compatibility with Hadoop effectively achieving smooth migration of Hadoop tasks.

Speaker 2

In enterprise cloud space, we focus on the end to end positioning of cloud migration, cloud use and cloud management, continuously optimizing the user experience in terms of ease of use, openness and efficiency, building a unified presentation of operational data in the management cockpit and once again upgrading the 1 cloud multi CPU compatibility to provide more domestic environment support capabilities. Our Galaxy SaaS platform has obtained leadership grade designation, the highest level of certification in the national authoritative cloud benchmark evaluation has defined that our dedicated cloud service capabilities are top notch in China. We embraced the new AI era in a comprehensive approach. In terms of customers, we aim to fully align with AI cloud planning from Xiaomi and Kingsoft Ecosystem. In the meantime, leveraging our neutral position to proactively meet the model training and inference demand from a large number of independent AI companies.

Speaker 2

In terms of business model, while the general AI computing services business is taking off, we preemptively explore 1 stop AI cloud transformation services, aiming to become the AI enabler in select verticals. In terms of R and D, we make efforts in 3 directions: talent, products and solutions, establishing our AI R and D center to support the research from 3 major capability areas, including application, algorithm and platform. We also upgraded our core storage, database, network and other products with AIGC facing features and continued to perfect our mass mutual trust designated zone solution. In terms of supply chain, facing the uncertainty of international markets, we actively explore domestic supply chain alternative channels. Moving on to talent strategy.

Speaker 2

Firstly, it's about building our Beijing Wuhan dual R and D center. In less than a year since its founding last October, through voluntary relocation of key R and D staff from Beijing and Wuhan local recruitment, our Wuhan team has quickly grown to over 500 people, accounting for approximately 50% of our total R and D personnel. Secondly, we are promoting the implementation of the high potential talent program, which aims to identify and nurture the future backbone of our company. Thirdly, despite the uncertainties in macro economy, we continued to increase campus recruitment efforts to forge a talent base as foundation for the company's long term development. In summary, the continuous and steady improvement in our profitability over the past consecutive quarters has strengthened our belief in the strategies and the directions we have chosen.

Speaker 2

With both opportunities and challenges ahead of us, we will continue to uphold the strategy of high quality and sustainable development, leverage on technology, reputation and operational management to drive progress, maintain our risk awareness, optimize business structure, embrace AI opportunities and continue to improve profitability, thereby creating value for our customers, shareholders, employees and the society. I will now pass the call over to our CFO, Henry, to go over our financials for the Q3 of 2023. Thank you.

Speaker 3

Thank you, Mr. Zou, and welcome everyone for joining the call. Now I will walk you through the financial results for the Q3 of 2023. Under the strategy of a high quality and sustainable development, we are pleased to deliver another quarter of a steady profitability improvement. Our adjusted gross profit continued to grow for the 5th consecutive quarter and achieved RMB196.3 million increased by 57.5 percent year over year representing adjusted gross margin of 12.1 percent which is a record high for the company.

Speaker 3

Our normalized adjusted EBITDA narrowed from negative RMB2002.0 million in the same period of last year and a negative RMB59.9 million in the last quarter to negative RMB44.1 million this quarter. As a result, normalized adjusted EBITDA margin further narrowed from negative 10.3% in the same period last year and a negative 3.3% in the last quarter to negative 2.7% this quarter, making another solid step towards EBITDA breakeven. Our total revenue were RMB1625.2 million this quarter of which revenue from public cloud services were RMB 1016 million representing a decrease of 9.5% compared with RMB1113.0 million in the last quarter. This is primarily due to the strategic scaling down of our CDM business by approximately 20% quarter over quarter and partially offset by non CDM public cloud services. Revenues from enterprise cloud services were RMB608.5 million representing a slightly decrease of 2.2% from RMB622.0 million in the same period of last year as we continue to be stringent on our project selection.

Speaker 3

We continue to enhance our cost control measures. Total cost of revenue decreased by 22.6% year over year to RMB1429.0 million. IDC costs decreased significantly by 31.6 percent year over year from RMB1078.3 million to RMB 737.7 million this quarter. Depreciation and amortization costs decreased by 21% from RMB253.7 million in the same period of last year to RMB200.4 million. Solution development and services costs decreased by 4% year over year from RMB443.1 million to RMB425.3 million this quarter.

Speaker 3

Fulfillment costs and other costs were RMB25.7 million and RMB39.9 million this quarter respectively. Adjusted gross profit of this quarter increased by 57.5 percent to RMB196.3 million representing adjusted gross margin of 12.1% this quarter compared with 6.3% in the same period of last year making another record high as well as a 5th consecutive quarter of steady margin improvement. Each of our business lines achieved margin improvement on a year over year basis. Gross profit of public cloud services were RMB48.1 million which was significantly improved from the gross loss of RMB22.1 1,000,000 in the same period of last year. Gross margin of the public cloud services were 4.7% compared with negative 1.6% in the same period of last year.

Speaker 3

The improvement was mainly due to our success in AI business, proactive scaling down of the CDM services and adjustments of our client structure. Gross profit of enterprise cloud services were RMB147.3 million compared with RMB143.8 million in the same period of last year. Gross margin of enterprise cloud services was 24.2 percent representing a slightly increase from already healthy margin level of 23.1 percent in the same period of last year as we continue to carry out a stringent project selection. In terms of expenses, excluding share based compensation and impairment of long lived assets, our total adjusted operating expenses were RMB 504.5 million, decreased by 6.2 percent from RMB538.1 million last quarter, of which our adjusted R and D expenses were RMB 187.2 million increased by 2.7% from last quarter as we continue to focus on technology partners and welcome new graduate campus recruiting employees. Adjusted selling and marketing expenses were RMB114.1 million representing a decrease of 11% from RMB128.3 million last quarter.

Speaker 3

Adjusted G and A expenses also decreased by 10.7 percent from RMB227.5 million last quarter to RMB203.1 million. As of June 30, 2023, our cash and cash equivalents and the short term investments amounted to RMB2.6 billion providing us sufficient liquidity for operations. The capital expenditures for this quarter was RMB415.3 million as we invested in our infrastructure to build a sustainable AI business. Our operating cash flow once again recorded net inflow recording RMB20.4 million. It resulted from our margin improvements as well as our enhanced internal cash management.

Speaker 2

Looking ahead,

Speaker 3

we will continue to pursue our high quality and sustainable development strategy and unlock synergies within the Xiaomi and Kingsoft Group Ecosystems while staying agile to capture new opportunities in a new era of AI. Thank you.

Speaker 1

This concludes our prepared remarks. Thank you for your attention. We are now happy to take your questions. Please ask your questions in both Mandarin and English, if possible. Operator, please go ahead.

Operator

Thank Your first question comes from the line of Zaidan Zhang from CICC. Please go ahead. Your line is open.

Speaker 4

So my first question is regarding our AI strategy. So KingsoftCloud has become the first choice for some of the industry leading independent large language model providers when they select ICE vendors. So what is the growth trajectory for these type of clients in the recent quarters? And how were the recent supply constraints impact our AI strategy? And secondly, could management share your most recent guidance on the timing of adjusted EBITDA margin breakeven?

Speaker 4

Thank you.

Speaker 2

So the first part of the answer was provided by Mr. Liu Tao. And so to answer your question, the customers that we have signed and engaging in business with are the leading players in the AI market apart from BBAT. And they have relatively strong capital strength and business scale. Roughly, their starting point of the business corporation usually starts from 128 to 256 server units and likely to expand to 5 12 server units group of servers.

Speaker 2

And because their final goal is to move to the large language models and their parameters usually amounting to 100 of billions. So the required resources of computing power are also at the level that is above 5 12 server units and above. So for the uncertainties that you asked about the external environment, people have seen as well as you have noticed as well that since October, the export control from the United States has created quite an impact to the industry, including that industry in China and we are no exception. However, fortunately, we have foresee we have actually foresaw this coming and have made some preemptive actions. So due to our preemptive planning, we have actually got only limited impact from that export control.

Speaker 2

However, how do we see this from the medium to long term? I think it depends on a couple of factors, including the performance of made in China GPUs as well as the production capacity. So I think all in all, in the short term, in the future, for example, in 1 or 2 quarters, the impact to Kings of the Cloud should be limited. I think it's relatively under control. In the longer term, we also actually relatively confident because we have seen some of the positive progress that Chinese chip industry has made during the past year.

Speaker 2

So as I mentioned in the prepared remarks, we are seeing both opportunities and challenges ahead in the future because we have obtained a larger number of independent AI customers. We are relatively comfortable with the potential impact.

Speaker 3

Okay. Thank you. I will take on the second question. So there are actually the 2 different drivers. First of all, as some of you may remember, we actually hit quite dramatically back then, back of late part of 2021, right, given the slowdown of the Internet consumer business as well as the certain impact on the enterprise cloud sectors in the later part of 2021.

Speaker 3

So at that time, our gross margin was only 1.2%. As you all noticed that today, that will increase from 1.2% to 12% on the gross margin side. So that actually is a fundamental results of our collective efforts around improving the efficiency of the resources we have, improving the client selections and the client quality. So all putting that aside that give us about 10 times up of the gross margin percentage. So on top of that, as you probably also noticed that the spread between the gross margin and EBITDA margin, I think the largest spread probably about last year were around about 19% to 20%.

Speaker 3

But this quarter, as you may see, the spread has been also narrowed from about 20% to only 14%, which means on expenses control side, we also reduced significantly in terms of how we spend our research, how we spend on the travels, how we spend on the general management purposes. So putting everything together, the 2 fundamental driver from the business as well as how we improve the operational efficiency has given us leading to today's improvements on EBITDA margin improvement. And the subject to your question, I think given all the initiatives and the strategy we already put into place, those impact and the results will gradually be released quarter by quarter. So it's not going to be a one time off thing for this quarter, it's going to be carry out for the next few quarters steadily. And in our attention, we are hoping to improve both gross margin as well as narrowing the spread between the gross margin and EBITDA margin in the next few quarters.

Speaker 3

While as you may understand, the management team will not be given a guidance for the formal EBITDA margin breakeven at this moment. But as you can see, the trend has been steady for the past 4 quarters. And we hopefully can keep that trajectory and the pacing of improving the margin. Hopefully, we can report a breakeven not only on the EBITDA margin, but also on other items in the near future as well. So just give us a bit of time and then we can probably deliver those results to expectation.

Speaker 3

Thank you.

Operator

Thank you. We will take our next question. Your next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead. Your line is open.

Speaker 3

Thank you management for taking my question. I have two questions, both regarding the public cloud sector. First one is regarding the AI business. Could management share more color on the AI business in terms of its revenue contribution as well as the profitability level in either gross profit margin or EBITDA margin. And as you mentioned in the Q3, you spent around 1,000,000,000 CapEx in the AI business.

Speaker 3

Just wondering if management has any guidance into your CapEx into Q4 and next year, including the AI VNS? And second question is regarding the CDM VNS. As we understand that there's the overall competitive environment in China in the cloud segment is quite dynamic. Just wondering for the CDN, are we going to see more adjustments in the next few quarters? And after adjustment, what is management's view on the midterm normalized gross profit margin level of the public cloud business?

Speaker 3

Thank you. Thank you, Tim. It's Henry here. I'll probably take on the first question and then I'll translate myself briefly and Sohu can comment as well. So regarding the AI business contribution, the first point is on the CapEx.

Speaker 3

So last quarter we spent in my script I mentioned is about RMB415 1,000,000 or RMB400 level on the Q3. But go back to your first point regarding the contribution and revenue margin, a few things to share. First of all, as you know, following very fundamental and basic economic principle, right, it's really driven by 2 things. 1 is the supply demand balance. The second is about the technology we offer and the products we offer, right.

Speaker 3

So, as we all know that today really it's about the buyers on the seller's market, right. So, if you do have a very robust infrastructure and resources and it can provide a very robust service and products to the clients, clients definitely willing to pay. And for the client, it's also giving them a cutting edge advantage when they try to compete training their model to a certain level, they can compete in a world class stage. So that actually convert to a very good logic for us to have a better margin compared with other kind of resources driven ICE services historically. So we also observed the second phenomenon is the client also willing to pay for value added part of the services, not only by charging them fundamental resource usage basis.

Speaker 3

So, by giving them the best practice and giving them a value added service and products, we can share certain value with the client and that can embed it into part of the pricing in the given time. So those are the two fundamental reasons that we believe the higher margin from AI business will carry out for the future as well. That's the second point. And the third point is really about contribution, right. So the reason we didn't give a percentage for this quarter is every day counts for this quarter.

Speaker 3

So given we have a strong client demand and given we also provide enough sufficient resources for our clients and each quarter we do see a very good growth trajectory at this moment. But when you look at, because the Q3 means from 1st July until the 30 September, and right now, we're already end of November. So today's situation is very different with the 1st July. And we do believe if we look at a tail impact of the 3rd quarter, the growth trajectory and the incremental revenue even on a weekly basis is a very significant contribution to Kings of Cropp's total revenue. But if you combine as a total quarter for the Q3 alone, I think this number will be really misleading to a certain way that definitely does not count to the full credit of the AI business for us.

Speaker 3

So that's my second point. The third point regarding the CapEx direction and the guidance. So, as we probably talked last quarter as well, we do believe this part of the CapEx is a very good growth driver for us. So the more we spend, the more incremental revenue will come for sure and the more and better gross margin will come to follow as well. So even you see we spent about $400,000,000 this quarter for CapEx.

Speaker 3

We're seeing the trend for next quarter and maybe the early part of next year. This number will continue to increase. And mathematically, you will have a direct linkage for those spending convert to a new revenue for next year. I think you can do the math, but I'm not going to give you an answer, but you can see that trend is very visible as well. So I think these are the 3 parts.

Speaker 3

I just want to give you color. Given the importance of this question, I will translate myself as well.

Speaker 2

Okay. So let me quickly translate. So in relation to your second question about the CDN strategic adjustments, We have actually started the adjustment in October 31 this year and we have internal deadline of June 30, 2024. As I can see this, we are continuing to do some adjustment according to the market conditions. Currently, we get in the CDN revenue on a quarterly basis around RMB500 1,000,000 and it might continue to scale down to somewhere between RMB300 1,000,000 to RMB400 1,000,000 per quarter, and thereby reaching a relatively stable status until after June 30th last year.

Speaker 2

And in relation to a question about the profit margins for the public cloud services business, it's of 2 components. 1 is CDN and 1 is the so called pan Internet sector. For the CDN sector, as mentioned, as to the Q3 of next year, we expect the strategic adjustments to have completed. And by then, we would hope the margin of this business line to revert to the relatively healthy level that was as of the Q4 2022. Now for the pan Internet space, we are still seeing the margin, including both the GPU margin and as well as the operating profit margin steadily and gradually improving.

Speaker 2

I've mentioned one of the uncertainties is the GPU supply. And obviously, in the AI space, the demand significantly outpaces that of demand outpaces of supply. And if that can be if that supply chain issue can be resolved completely, obviously, the improvement of our business as well as margin in the AI and thereby the pan Internet space will be much faster. But even with that uncertainty, we are already seeing relatively good progress in terms of margin improvement and business scale expansion. Thank you.

Speaker 3

Thank you. That's very helpful.

Operator

Thank you. We will take our final question. Please stand by. Your final question comes from the line of Katrina Chu from Citi. Please go ahead.

Operator

Your line is open.

Speaker 4

This is Katrina Chiu asking on behalf of Brian Gong from Citi. Can management share with us the overall revenue outlook in 2024 and whether we can expect positive revenue growth next year? Thank you.

Speaker 3

Yes, Katherine. Thank you, Katrina. So after we relisted our dual listing Hong Kong, we actually didn't publish our kind of management guidance, but have to share some color as well as we moving towards the year end of 2023. First of all, as you know, even today, right now, we have about 20%, 25% by different quarter. The revenue is coming from the CDN business.

Speaker 3

Our CEO, Zhou Hao, mentioned as well. So we're kind of in the phase of some adjustment from client mix, from the products we offer and as well as we control the cost we procure the bandwidth as well. So, but if you look

Speaker 2

at that

Speaker 3

business, the first priority is we try to change the mix and the structure of the client and product, right. So, we try to remain relatively stable, but we just the combination of the clients and the products within that business. So that's actually what we're trying to do in the next 2 or 3 quarters, right. So that's kind of first factor you probably can consider. But we're not going to see the dramatic changes, the swings from that business, but change the better structure of that.

Speaker 3

So that's the first part. The second part is, as I mentioned, the new money and the capital expenditure we're spending to the AI, right, the infrastructure we build for clients and the mass we call it model as a services solutions and the services we deliver to clients as well as the value add part of the projects we do for the clients. So those are actually combined will be one of the probably the one priority for next year to grow the revenue. And if you do a quick math, I put this way is every $3 or $2 you spend this year, you're going to see probably $1 or relatively around that $1 of the incremental revenue you're going to see for the next year. So there's a kind of mathematical connection given the CapEx converts to products and products converts to the incremental revenue.

Speaker 3

So there's a second part. So you can do a bit kind of analysis on that. And the 3rd part is really about our very stable enterprise business. As you can see that our sub Camelot is delivering relatively stable revenue and for next year, I think given the macro environment has been kind of improving, so you are going to also see that revenue contribution on Camelot is going to see a relatively growth as well. And our healthcare, public sectors and financial services enterprise cloud, we also see certain growth given we already have some flagship products in place for this year and we can replicate that from city A to city B, from client A to client B going forward for next year.

Speaker 3

So we're hoping we can remain around 30 percent in terms of the GPO contribution on the project level, but replicate that to more projects for next year. So if you combine those three things, stable CDN but better mix, the spending on CapEx convert to incremental AI revenue for the public cloud, Y o Y growth for Camelot as well as the stable revenue and profits, but a growing revenue for enterprise cloud, for financial services, so on and so forth. Putting together, we are kind of confident to see without any kind of big changes on the big environment, our top line revenue for next year, you may see kind of back to the Y o Y growth and the Q on Q growth as well. And Tim mentioned in the previous question as well, we're hoping to get into a certain point that not only the EBITDA will be breakeven in the near future, but also we're going to see the OP side is going to put in our back pocket to have an intention to bring a better profitability for the shareholders as well. The last point I want to mention is we also will keep a very close eye on the competitive landscape, means our peers and competitors.

Speaker 3

We're trying to do a better quality of the work compared with other peers, but also we're happy to see we may next quarter or 2, we'll be catching up on the gross margin side in the next few quarters, but also in the Y o Y on the growth side, we can maybe catch on even better than the competitors as well because we did a few things since last year when CEO Zohta come to the office and we actually have a few things in place and those efforts are I think, 2 or 3 quarters earlier than the major competitors. You will probably see the recovery we are doing probably sooner than others as well. Thank you.

Speaker 4

Thank you. That's very helpful.

Operator

Thank you. I would now like to turn the conference back for closing remarks.

Speaker 1

Thank you, operator. Thank you once again for joining us today. If you have any further questions, please feel free to contact us. Looking forward to speaking with you again next quarter. Have a nice day.

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Key Takeaways

  • In Q3, total revenues reached RMB1.63 billion with a record-high adjusted gross margin of 12.1% (fifth consecutive quarterly increase) and normalized EBITDA margin improved to –2.7% from –10.3% a year ago.
  • Public cloud revenue totaled RMB1.02 billion with a 4.7% gross margin (versus –1.6% YoY), driven by deeper integration with Xiaomi and Kingsoft (17% of revenue), a 70% QoQ surge in AI-related revenue, and a 20% strategic scale-down of CDN services.
  • Enterprise cloud services generated RMB609 million in revenue with a healthy >24% gross margin, supported by expansions in public services, digital health standards projects, financial sector partnerships, and stable Camelot business growth.
  • Kingsoft Cloud invested over RMB400 million in Q3 on AI-related CapEx—spending expected to rise in Q4—backed by a new AI R&D center and AIGC-ready upgrades, fueling strong customer demand and setting the stage for 2024 revenue growth.
  • Cost controls on IDC, depreciation and overhead led to a 22.6% YoY drop in cost of revenue, positive operating cash flow of RMB20 million, and management anticipates continued top-line growth and further margin improvement toward EBITDA breakeven.
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Earnings Conference Call
Kingsoft Cloud Q3 2023
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