Chinese Tech Companies Report Mixed Q2 2024 Results Amid AI Push and Global Expansion

Zepp Health Corporation (ZEPP) Q2 2024 Earnings Call Transcript

Grace Zhang - Director of Investor Relations Wayne Wang Huang - Chairman and Chief Executive Officer Leon Deng - Chief Financial Officer Hello, ladies and gentlemen. Thank you for standing by for Zepp Health Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the Company. Please go ahead, Grace. Grace Zhang Hello, everyone. And welcome to Zepp Health Corporation's second quarter 2024 earnings conference call. The company's financial and operating results were issued in a press release via the Newswire services earlier today and are posted online. You can also view the earnings press release and slides referred to on this call by visiting the IR Section of the company's website at ir.zepp.com. Participating in today's call are Mr. Wayne Wang Huang, our Chairman of the Board of Directors and Chief Executive Officer, and Mr. Leon Deng, our Chief Financial Officer. The company's management will begin with prepared remarks and the call will conclude with a Q&A session. Mr. Mike Yeung, our Chief Operating Officer, will join us for the Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties are included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2023, and other filings as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Zepp's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial information. That press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I'll now turn the call over to our CEO, Mr. Wang Huang. Please go ahead. Wayne Wang Huang Hello, everyone. Welcome and thank you for joining our call. To begin, I would like to provide an update on our strategic transformation. Our second quarter results aligned with expectations with an increase in Amazfit branded product sales and achieving a high gross margin. Despite a year-over-year decline in sales, our net loss for the first half narrowed. With several new products slated for launch in the second half of the year, we firmly believe that the worst time of our transformation is behind us. The progress we have achieved is centered on three key pillars. First, we are investing in new technologies, including AI, to meet the needs of our customers and maintain a competitive advantage against our peers. Second, we focus on product innovations and profitable growth. We plan to launch our hit products during the upcoming IFA events. In addition, we are enhancing the global visibility of our Amazfit branded products through sponsorship of major sports events and partnerships with renowned athletes to expand our roster of international representatives. Now let's delve into the three pillars as we witness the transformative impact of AI applications in the industry. According to the latest analyst reports, AI is both enhancing existing use cases and creating new ones, significantly boosting user loyalty. Zepp Health is leveraging AI to transform sports and health experiences. This quarter, we launched Zepp OS 4.0 in integrating OpenAI's GPT-4 into our Amazfit smartwatches for safer and more useful responses, enhancing their role as wellness companions. Key features of Zepp OS 4.0 include an upgraded Zepp Flow with intelligent language interactions and new health-focused mini apps. Zepp OS 4 is now available for Amazfit Balance and Amazfit Active, with support for other models coming later in 2024. Moreover, our R&D team has made significant breakthroughs in AI technology using Zepp Flow platform as a foundation. We plan to release a new form of AI hardware within the next six months, making a new chapter in our journey in smart wearable technology. These upcoming releases not only demonstrate our technological strengths, but also highlight our long-term approach to product innovation and market strategy. As we prepare for the upcoming IFA in Berlin, we are excited to introduce several innovative products, including the highly anticipated T-Rex 3 outdoor smartwatch and our new line of Open Wearable Stereo, OWS, earbuds. In recent years, we have observed a growing demand for comfort in headphone design, which had led to increased interest in open type headphones. Market research indicates that the open headphone segment is poised for substantial growth, presenting a promising opportunity within the Bluetooth headset market. These new offerings will highlight our latest advancements in hardware development. Additionally, I am pleased to announce that the smart chip jointly designed with Whale Microchip [ph], a subsidiary of Jiangsu Yitong, which we invested in 2021, has successfully entered mass production. This state-of-the-art chip will support Zepp OS 4.0 and will be featured in the smartwatches we launch at IFA. In our commitment to innovation, we are thrilled to introduce the Amazfit Helio Ring, our first smart ring, which complements our smartwatch lineup. Launched at CES 2024, it has received critical acclaim and will soon be available in more countries. The Helio Ring is ideal for those who prefer not to wear watches while sleeping. Pairs seamlessly with Amazfit smartwatches like the Cheetah Pro and T-Rex Ultra for continuous 24/7 health monitoring. It offers advanced recovery insights. And the Zepp app integrates data from both devices, empowering athletes to optimize their performance. With additional sizes, the Helio Ring is expanding to a broader market, driving further sales growth. By integrating smartwatches, rings, and the upcoming OWS earbuds, to launch at IFA, we have crafted a seamless user experience loop, establishing a comparing competitive advantage in bundled sales. We anticipate these offerings will further strengthen our market position and drive growth in the second half of the year. On the marketing front, around the time of the IFA release, we will announce a major partnership with HYROX in Europe and North America. Moreover, we have expanded our roster of athlete ambassadors. In the second quarter, we welcomed US Olympic medalist Morgan Pearson, Italian national endurance icon, Yemaneberhan Crippa, and Chinese marathon runner Xiao Dong Wu [ph] to our team Amazfit family. These partnerships enhance our presence in the running and endurance sector and demonstrate their performance advantages of our cutting-edge smart wearables. This also will be a significant step in our brand strategy, further enhancing our influence in global markets. These efforts are part of our broader strategy to increase the global visibility of our brand and products. By aligning with prominent athletes and sports events, we continue to build a strong, recognizable brand identity and create meaningful connections with consumers worldwide. Through those brand and marketing investments, we have solidified our influence in major populous countries such as China, India, and Brazil. Additionally, we achieved a breakthrough in Germany recently, deepened our partnership with Decathlon in France, and steadily improved our global gross margin. In conclusion, our transformation journey highlights the effectiveness of our strategic direction with a strong focus on AI and expanding self-branded products. These efforts, combined with increased brand visibility, position us for sustainable growth. As we head towards IFA in Berlin with new product releases and rising brand awareness, we anticipate continued growth momentum in the second half of the year. Thank you for your continued support and confidence in Zepp Health. I will now turn the call over to Leon to go over the highlights of our second quarter financial results. Leon Deng Thanks, Wayne. Greetings, everyone. Let me walk you through some of the key metrics of our second quarter financial results. Over the past two years, the entire consumer electronics sector has been facing significant challenges. We have observed that the pressure of discretionary spending, especially in an inflationary environment, is also creating headwinds for our operations. Additionally, major brands like Apple and Samsung offered larger-than-usual discounts during the past prime day in certain regions, highlighting the competitiveness of the industry landscape. However, we are cautiously optimistic to see that, according to IDC Research, overall smart wearable market will return to growth in this year, with AI-enabled health insights and GenAI services as the growth drivers. Our focus has always been on positioning ourselves effectively in the current market. This is why we are prioritizing profitability, aiming to maximize profits from our self-branded product sales, and continuing with the cost transformation initiatives we implemented in previous quarters. It's also worth highlighting that we entered the smart ring category recently, as it represents a $2 billion plus market that is growing at a high-double-digit rate in the upcoming years. Simultaneously, we'll be entering into the Open Wearable Stereo earbud segment, which will deliver substantial growth in the Bluetooth headphone market. Now turning to sales, echoing Wayne's statement, we believe the most challenging phase of our transformation is behind us. The three key pillars driving our progress are applying new technologies, particularly with a focus on AI, product innovations with profitable growth, and enhancing global visibility through major sports sponsorship and marketing efforts. We are particularly excited about our expanding self-branded product offerings, which position us for long-term growth as a global leader in smart wearables and health care solutions. For the second quarter, our overall sales aligned with our guidance with a 6% sequential increase in our self-branded products more than offset the decline of Xiaomi branded product sales. This positive development is a testament to the progress we have made in our transformation efforts and we anticipate continued sequential growth in the quarters ahead. Moving on to gross margin, which can be influenced by various factors, such as product mix, product launch timing, and product life cycles, including model upgrades. Despite a year-over-year decline in sales, which were in part due to the timing of new launches skewed towards the second half of 2024 and the broader macro challenges, our gross margin for the quarter reached 40.3%. This marks a continuation of the margin expansion we initiated in the third quarter of 2023 and represents the highest gross margin in our company's history. Driven primarily by the increased probability of our self-branded products, contributing factors include that improved product mix, a higher proportion of new products, and a reduction of clearance activities. Looking ahead, together with the new product launches in second half of the year, we are confident that this positive trend in gross margin will persist into the second half of the year, with full year margins expected to remain at similar levels. This outcome underscores our strategic decision to prioritize profitability over scale, leveraging the revenue from our self-branded products to sustain the company's overperformance. Now, let's turn to costs. We remain steadfast in our commitment to cost management, continuing with the program which we began in Q3 2020 on reducing overall operating costs. In the second quarter, we maintained a rigorous approach on discretionary spending while investing in research and development activities and marketing expenditures to preserve our long-term sustainable growth. As a result, operating costs for the quarter were $25.3 million, the lowest level in the past year, and is in line with our previous guidance. Our R&D expenses for the second quarter of 2024 were $10.4 million, reflecting a 13.8% decrease year-over-year. This represented 25.6% of our revenue compared to 13.1% during the same period in 2023. The reduction in R&D spending was a result of our ongoing efforts to optimize resource allocation, ensuring we achieve maximum return on investment and productivity. At the same time, we're committed to investing in new technologies and suitable AI functions to maintain our competitive edge against our competitors. Selling and marketing expenses for Q2 amounted to $10.5 million, a modest increase of 3.9% year-over-year. This accounted for 25.8% of our revenue, up from 10.9% in the previous year. The rise was primarily driven by our strategic investments in outdoor marketing and television commercials across Europe, aimed at boosting brand awareness ahead and during the UEFA 2024 and Summer Olympics in Paris. In parallel, we have been enhancing retail profitability and refining our channel mix by carefully optimizing our retail channels and strategically managing our sales teams. We're committed to making smart investments in marketing and branding initiatives that will fuel our long-term growth. G&A expenses were $4.4 million in Q2, marking a 36.3% decrease year-over-year. These expenses represented 10.9% of our revenue compared to 7.5% in the same period last year. This reduction reflects our successful personnel optimization initiatives and strict control over discretionary costs. Looking ahead, we remain committed to prudent cost management, aiming to keep costs at or below current levels in the upcoming quarters. Despite reporting the operating loss this quarter, largely attributable to cost coverage issues, when we consider the first half of 2024 as a whole, despite lower sales and thanks to higher gross margin and tightly controlled cost levels, we have narrowed the net income loss by 15% versus the same period last year. Now turning on to balance sheet, we continue to manage our working capital effectively. Our inventory levels at the end of Q2 were lower than Q1, marking the lowest level in the company's history. We will maintain this disciplined working capital approach in subsequent quarters. Our cash balance stands at $129 million by the end of Q2, consistent with the first quarter's cash level, despite the quarterly losses. This strong cash position equips us with the necessary resources to seize potential market opportunities and invest strategically in future growth. In Q1 2023, we have initiated the retirement of our short/long-term debt portfolio. Since then, and including Q2 2024, we have successfully retired $55.2 million of debt. As our operating cash flow continues to strengthen in second half, we will continue to optimize the capital structure for the company. In line with our commitment to deliver long-term value to our shareholders, we'll proceed with our share buyback program throughout 2024. This initiative underscores our confidence in the company's future and our dedication to enhancing shareholders' value. Looking ahead on the third quarter of 2024, we're guiding a revenue in the range of $45 million to $60 million. It represents 18% to 59% growth on the revenue of self-branded products compared with actual Q2 2024. We're confident in our ability to build on the momentum we have generated to drive further growth and profitability in the quarters to come. Thank you once again for your time and continued support. I will now open the line for any questions. Operators, please go ahead. [Operator Instructions]. The first question today comes from Sid Rajeev with Fundamental Research Corp. Sid Rajeev First of all, great to see the spike in sequential sales growth of self-branded units. But I guess the real surprise was the continued improvement in gross margins. What's really driving this? Is it higher product prices, cost optimization or something else? I know you gave some reasons. I was trying to find out what exactly or what's the main reason for this increase. And the second thing is with new product launches, can you bring it up to the 45% to 50% range? Leon Deng Let me start with the easy ones. As you heard from Wayne's script, we have a lot of exciting new product launches lined up for the upcoming month, especially in IFA. You heard about the OWS earbuds. You heard about the new T-Rex watches, and you also heard about the ring. And we also have some exciting innovations on the way. And all of these products will carry a very healthy gross margin to the magnitude of over 45% or 50%, depends on the product line we're talking about. So these are the new product launches, which is due for the second half of this year. Coming back to your first question, that's also one of the reasons which drives the gross margin of the company, continuously improved quarter on quarter for the past four quarters. I think to a big part, this is coming from optimizing the product mix. But also, it's like I said, more new products, which has been launched recently, less products which is on clearance. That definitely helps our overall gross margin performance. On the other hand, we're also doing retail channel mix. For example, we cut the bleeders on those channels, which doesn't make money. And by doing so, through optimizing the retail channel mix as well as our product mixes, together with the new product launches, which is lined up in the second half of the year, we're confident that we can continue on the gross margin improvement trend for the upcoming quarters. Sid Rajeev My next question is, you have a lot of new products planned. So to make it easier for us to track, are you able to give us a number, as in how many new products or updated products planned this year versus last year? Leon Deng I think we have at least three, if not four, products which are scheduled to be launched in the second half of the year. And last year, same period, I think we have two products, if I remember clearly. No, the first half of this year, we only had one. You can count one and a half because we launched the Bip 5 Unity which is a different variable of the Bip 5. Sid Rajeev I know you don't provide segmental revenue by region, but did you notice any material change in sales in any region, particularly, last quarter? Leon Deng No, I think we have told you before that United States still remains as a region whereby we see a lot of potential growth from. And also, we have seen some breakthroughs in Europe, like what Wayne mentioned in Germany and France. And we have worked with the key accounts such as Decathlon in those countries. And in Asia Pacific, specifically in China, we have seen a very good growth from China, and we have put in a lot of marketing efforts to promote that as well. Sid Rajeev Just one question finally. Could you provide an update on the status with NYSE given the non-compliance notice you received a few months back? Leon Deng We have ultimately until October 31st to rectify this issue. And as we have communicated before, we are committed to resolve this through either organically the share price to push above $1 or, if needed, a reverse split. So we're confident that before that date, we'll be regaining the compliance. The next question comes from Nicolette Jones [ph] with Brooks Investments [ph]. Unidentified Participant I just have two questions. I'd also like to just dig in a little bit more about the new product map and some of your thinking behind your product decisions. And then in addition, I'd like to find out more information on the net income trend. Leon Deng Maybe I take the easy ones, Nicolette. Obviously, the net income trend, you have noticed that it has been on uptrend. Quarter on quarter, it's improving. If you look at the first half of this year, the net income obviously is much better than the same period of last year. I think it was an improvement of 15%, to that magnitude. And we are actually looking or targeting at improvement also for a second half of this year. So hopefully, throughout the year, we can come back to profitability. That's always the target which we have been striving for. And coming back to your first question on the new products and the thinking behind it, I think you have heard us saying that in the upcoming IFA, which is in September, we're going to launch a new watch. Our most popular outdoor smartwatch, T-Rex, is up for an update. Actually, a lot of new functionalities will be added to that watch. And we are also going to launch a new OWS earbuds. OWS is a very popular concept. It's basically talking about open-end headset, which you can wear without feeling it. It's very different from the AirPods, which is made by Apple. And according to the market research, the OWS earbuds is going to be a fast growing segment in the Bluetooth headset market in the upcoming years. So, we are quite excited to have that product add to our lineup. And you also heard that we have the Helio Ring, and we're going to put Helio Ring into more geographies and also into more sizes, especially the smaller sizes, which are more tailored for the mass market and mass consumers. So I think we are going to be one of the only players, if not the only players, who have the smartphone coupled with the ring coupled with the OWS headphones and maybe some other form factors, because we have always been saying that we're trying to offer a full suite of wearable devices, smart wearable devices, so that our users can have a one-stop shop on better controlling and understand their health conditions. So I think this is always the concept what we try to bring this company to. So we want to be smart wearable player not only restricted to smart watch, per se, and we want to offer a complete suite of health care services to the users. So that's the whole theme behind the new products which we are going to launch. I'm not sure if I answered your question correctly or...? Unidentified Participant No, that's really informative actually. It's much more color. As there are no further questions, I'd like to turn the call back over to the company's IR director, Grace Zhang, for any closing remarks. Thank you once again for joining us today. If you have further questions, please feel free to contact Zepp Health investor relations department through the contact information provided on our IR website. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Kingsoft Cloud Holdings Limited (KC) Q2 2024 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Kingsoft Cloud's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shan, IR Director of Kingsoft Cloud. Please go ahead. Nicole Shan Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobalNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; and CFO, Mr. Haijian He. Mr. Zou will review our business strategies, operations and 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 purposes 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 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 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. 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. Thank you. [Interpreted] Hello, everyone. Thank you and welcome all for joining Kingsoft Cloud's second quarter 2024 earnings call. I am Zou Tao, CEO of Kingsoft Cloud. Looking back on the two years since August 2022, our entire Kingsoft Cloud team has firmly executed the high quality and sustainable development strategy and the company has undergone a complete transformation. First of all, profitability fundamentally improved as gross margin steadily increased from low-single digit to 17%. Adjusted EBITDA margin increased to 3% after turning positive in Q1 and we are well on track to turn operating and net profit positive. Second, swiftly embracing AIGC opportunities as this new round of AI services revenue contribution to public cloud increased from 0% to 26%, a leading figure in the industry. Third, firmly phasing out low-margin businesses, as CDN services revenue contribution decreased from approximately 40% to 20% and along with it, a single large customer concentration risk fundamentally resolved. Fourth, implementing refined management in aspects of procurement, assets, and operations as quarterly costs and expenses decreased by approximately RMB300 million, representing 15% of quarterly revenues. Fifth, taking long-term perspectives as Wuhan R&D center quickly scaled up to hosting approximately 30% of the entire workforce, including Camelot, laying a solid foundation for sustained technological leadership as well as completing dual primary listing on the Hong Kong Stock Exchange, followed by inclusion into the Hang Seng Composite Index and Hong Kong Stock Connect, solidifying our capital markets infrastructure. All of these have laid a solid foundation to the high quality and sustainable development in the future. I would like to express our sincere gratitude to all our customers, shareholders and employees who have consistently supported and cared for us over the long term. Now, I will walk you through the business highlights of the second quarter of 2024. This quarter, Kingsoft Cloud has achieved new break-throughs in terms of revenue scale, profitability, and operating cash flow. In particular, our revenues reached RMB1.89 billion, not only a sequential growth of 6.5% but also a year-over-year expansion of 3.1%. Revenue from high value-added products and services has grown, offsetting pressure brought about by our proactive adjustment of the CDN services. Adjusted gross profit reached RMB323 million, increased by 56.4% year-over-year. Adjusted gross margin increased to 17.1%, marking the eighth quarter of consecutive improvement. Adjusted EBITDA reached RMB60.59 million and adjusted EBITDA margin reached 3.2%, a sequential improvement after the milestone of turning positive in Q1 and a significant increase of 6.5 percentage points year-over-year. Net operating cash inflow amounted to RMB150 million, once again demonstrating our cash-generating ability from operating activities. The improvement of various financial performance indicators signifies that Kingsoft Cloud's high-quality and sustainable development strategy has been effective, marking a new phase in our development and laying a solid foundation for long-term healthy growth in 2024 and beyond. In terms of public cloud services, revenues reached RMB1.23 billion this quarter, representing a year-over-year increase of 6.5% and a quarter-over-quarter increase of 4%. We have seen positive outcomes across our three priorities for public cloud services, namely, the Xiaomi and Kingsoft ecosystem, AI businesses and supply chain. First of all, serving as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we firmly grasp the cloud business opportunities within the ecosystem. This quarter, revenue contribution from Xiaomi and Kingsoft have reached 20%, amounting to RMB370 million, and witnessed a year-over-year increase of 36.9%. Secondly, AI businesses continue to bear fruit. This quarter, AI revenue surged to RMB326 million, doubling the amount in the first quarter and accounting for 26.3% of public cloud revenues, an industry-leading position. Our AI customer base also further diversified, including large language model companies, self-driving, Internet applications and others. We have established a substantial computing resource pool, leading the industry in large-scale network capabilities, capable of supporting the networking topology of supercomputing clusters at a 10,000 chips level. Thirdly, we built a comprehensive supply chain system, securing the scale of a stable, intelligent computing resource pool and managing procurement costs. By fully utilizing data centers' resources in central and western regions of China. Costs have significantly reduced compared to the data centers in the core cities in the east. Meanwhile, we strictly control internal procurement costs, expand coverage of suppliers, and seek the best combination of price and quality. Moving on to enterprise cloud services, where revenues amounted to RMB657 million. In public services space, we have actively pursued opportunities within public service cloud and state-owned enterprise cloud, implementing standardized operation and maintenance. We have leveraged our core components such as models, big data, and workspace collaboration, targeting use cases in the public service and enterprise domains. In the China e-government cloud market research report released in June 2024 by CCID, a leading consulting company in China, we are ranked in the leaders quadrant. In the China e-government cloud operations service market report by IDC, we ranked as the top six companies in the industry. Such ranks reflect recognition from the industry market for our product capabilities and market share. This quarter, we have promoted the benchmark project of implementing large language models in public services sector, which will assist the Beijing Municipal Commission of Housing and Urban-Rural Development, in building the 12345 hotline, intelligent decision-making and smart query and data projects, enhancing the accuracy and efficiency of the commission in summarizing statistics and categorizing the 12345 hotline data and improving the service quality and response speed. In the healthcare space, Changzhou (ph) Health Cloud has launched its phase five expansion. It will meet its requirements of new business scenarios and the needs of extended archive of healthcare images, fully validating the potential to establish long-term cooperation for the construction and operation of industry cloud customers and projects. In AI industry applications, Kingsoft AI, a subsidiary invested and established by us, has gradually started to promote its business, focusing on seizing business opportunities in enterprise AI software applications and delivery deployments. In terms of industry models, we officially launched strategic cooperation with Dentons law firm, a leading law firm in China, and established the joint laboratory of Legal Artificial Intelligence, taking a leap forward in the digital transformation of law industry. In terms of product and technology, we uphold the principles of building success based on technology and innovation, focusing on delivering best-in-class customer experience across our core product offerings. In AI space, in response to surging data cleansing demand from AI clients, we have integrated products like Bare Metal and object storage to create a holistic solution for data cleansing, accommodating text, images and videos. This multi-modal solution is tailored to meet the data cleansing requirements for the creation of both pre-training and fine-tuning datasets. In enterprise cloud space, the Galaxy Stack platform released a proprietary cloud platform with low cost and high density compared to original standard configuration. The high-density version has achieved a maximum reduction of 64% in cost per instance and an increase of up to 300% in instance density. In summary, after two years of steadfast (ph) implementation of the high-quality and sustainable development strategy, Kingsoft Cloud fundamentals have undergone a complete transformation. Looking forward, we will continue to enhance our profitability and cash-generating capabilities, deepen cooperation with Xiaomi and Kingsoft ecosystem, strengthen Wuhan Research Center and develop comprehensive understanding of new AI and explore such opportunities. Thereby continuously creating value for our customers, shareholders, employees, and other stakeholders. I will now pass the call over to our CFO, Haijian, to go over our financials for the second quarter 2024. Thank you. [Interpreted] Thank you, Mr. Zou, and welcome everyone for joining the call. Now I will walk you through our financial results for the second quarter of 2024. We would like to highlight three key areas of progress. First, we are very pleased with the ongoing improvements in our financial matrix. By applying the first principle thinking, we are committed to a profit-focused approach that has led to consecutive increases in our gross profit, gross margin, EBITDA profit, and EBITDA margin over the past several quarters. This quarter, our adjusted gross margin reached 17.1%, marking eight consecutive quarters of steady growth, while adjusted gross profit hit RMB333.4 million. After turning a profit in adjusted EBITDA margin last quarter, we continued with this positive trend with RMB60.6 million in EBITDA and 3.2% in EBITDA margin, demonstrating our successful execution of a high-quality sustainable development strategy. Second, this quarter our revenue reached RMB1,891.8 million reverting to a positive increasing trend with a 3.1% increase -- year-over-year increase and a 6.5% rise quarter-over-quarter. By strategically adjusting our revenue mix in line with our high-quality and sustainable development strategy, we have allocated more resources to develop high-value services. This quarter, our AI revenues grew to RMB326 million, making up 26% of our total public cloud services revenue, doubled the amount from last quarter. We have established a resilient supply chain, scalable computing power and a long-term partnership with customers to support our growing AI revenues. In response to cost pressure and the low margin, we have strategically reduced the proportion of our CDN services to 19% of total revenue, down from 23% last quarter. Third, we have recorded a net inflow of operating cash flow amounting to RMB151.2 million. We also reduced -- we also secured various financial channels to support our AI business, including but not limited to our loan facilities from Kingsoft Corporation, financial leasing and other bank loans. Here are the details of our financial results. Total revenues for this quarter were RMB1,891.8 million, a 3.1% increase year-over-year, of which revenues from public cloud services were RMB1,234.5 million, up 4% from RMB1,187.4 million last quarter, primarily driven by the growth in AI-related revenues to RMB326 million. Revenues from enterprise cloud services reached and RMB657.2 million, up from 550 -- RMB588.2 million last quarter, due to accelerated project deliveries this quarter. We have continued to enhance our cost control, expanding our supply base to improve service quality and procurement prices. Total cost of revenue decreased by 30.4% year-over-year and remained stable quarter-over-quarter at RMB1,573.4 million. IDC costs dropped significantly by 14.4% year-over-year from RMB860.7 million to RMB728.2 million this quarter, reflecting the strategic scaling down of our CDN services and optimize utility of the rack usage. Depreciation and amortization costs increased from RMB202.1 million in the same period of last year to RMB265.9 million this quarter, mainly due to the depreciation of new servers acquired. Solution development and services costs increased by 8.4% year-over-year from RMB452.9 million to RMB491.1 million due to the solution personnel expansion of Camelot, which was in line with the revenue growth. Fulfillment costs and other costs were RMB37.6 million and RMB50.6 million this quarter, respectively. Our adjusted gross profit for the quarter were RMB323.4 million, a 56.4% increase year-over-year with an adjusted gross margin of 17.1%. This marks a new record and the eighth consecutive quarters of steady margin improvement, up from 11.3% last year and 16.8% last quarter. In terms of expenses, excluding share-based compensation and impairments of long-lived assets, our total adjusted operating expenses were RMB555.3 million, slightly increased by 3.2% year-over-year and 18.3% quarter-over-quarter, of which, our adjusted R&D expenses were RMB200.1 million, a 3.7% increase from last quarter due to the personnel cost increase. Adjusted selling and marketing expenses were RMB117.5 million, up from RMB97.9 million last quarter, representing 6.2% of total revenues. Adjusted G&A expenses were RMB237.7 million compared to RMB178.7 million last quarter. As of June 30, 2024, our cash and cash equivalents totaled RMB1,837.8 million, providing strong liquidity for operations and AI investments. Capital expenditures for this quarter was RMB654.8 million, reflecting our investment in infrastructure to support our sustainable AI business. Looking ahead, we remain committed to the principle of high quality and sustainable development. We will continue to enhance revenue quality, reduce costs and expenses, and improve profitability. Thank you. Nicole Shan This concludes our prepared remarks. Thanks for your attention. We are now happy to take your questions. Please ask your question in both Chinese Mandarin and English, if possible. Thank you. [Operator Instructions] We will now take our first question. This is from the line of Xiaodan Zhang from CICC. Please go ahead. Your line is open. [Interpreted] So thanks, management, for taking my questions. And I got two questions here. First of all, could you please update us on your CapEx guidance for the next two quarters? And secondly, could you give us some color on the ROI of your AI investment and how is your expectation for the AI revenue contribution for the full year? Thank you. [Interpreted] Regarding the CapEx. So I think -- first of all, I think you pointed out correctly, this year, we're actually accelerating our investment in, we think, a very good area of financial business growth opportunities. Most of the CapEx, I think probably over 95% or even higher, are relating directly to the AI investment, which we think is a very good positive opportunity for us. So, at this moment, while we cannot give a full guidance for the full-year CapEx investment, but I think we can probably look into two different areas. First of all is, for this quarter, you may also notice that we recorded a net cash inflow from the operations side, which is around about RMB151 million. And I think you can already see that the CapEx investment into the good area of business already converted into a positive inflow from operation cash flow. So this is actually the first point. So the second point is, we also expanded our financing channels. For example, you also notice, last year, we secured financing support from Kingsoft Group as well as the leasing potential opportunities from Xiaomi Group as well. But this year, especially in the last two quarters, we also got great support from, for example, the national policy banks, the state-owned financial institutions, including both banks and also the leasing companies. So, in that way, we actually do not limit ourselves with a certain cap of the CapEx investments just to looking the only amount of our cash balance today. So, my point is, giving those additional opportunities and financing channels, we actually can reopen and have a very high ceiling of the financial capability we can get to support an AI investment. The third point is, given the investment is a long term, we also measure very carefully regarding the profitability and the sustainability of those investments. And at this moment, we are happy to share, most of our AI client are the well-known names you probably also notice on the market. And the second, we do also have a very long-term contract from sales side which can secure the incoming cash flow as well as the client opportunities with a potential upside to secure more business from the same client as a recurring basis. So I remember, first few quarters ago we talked about recurring as most important driver for our profitability. I think right now, given the AI, we do see that recurring revenue percentages are much higher if you compare with the old so-called the only IaaS services in the old model we did before. So, I think that the three areas I just mentioned can come to a conclusion that we do not limit ourselves with the cash we already have today, we can have more cumulative increased investments with the capacity. Number two, every dollar we invest today, the ROE and also the recurring cash flow to serve those liability and increase in the revenue will be very long-term and very secure. And the third is we also use our capacity to secure a good universe of the client, especially the AI company in the market in China today. I think we are leading on the front with the revenues, with the financing sources we have and we can matching those two sides for the long term going forward. But last note, I think, Xiaodan, you probably want to have a kind of ballpark number, which I can mention that, the total CapEx for this year will be always probably a few times if you look at it from a ballpark number compared with last year, and that will actually have a very good possibility to convert to accelerated revenue growth on the top line in the coming quarters. Thank you. [Interpreted] Okay. Let me just translate -- simply translate what Mr. Zou said. So, in terms of AI, I really want to take this opportunity to elaborate a little bit about my overall thoughts. So, in my mind, it's really about three dimensions. One is the supply of computing power. The second is the inference, which is the application of the artificial intelligence. And the third is the training, which -- from the current financials that you are able to see, obviously, which is a tremendous growth. For example, it's 10 times year-over-year growth and two times the AI revenue growth versus the first quarter. But all these numbers that you're currently seeing are mostly coming from the area of the supply of computing power. However, I do think that in the future, the potential room for revenue and for business in terms of training and in terms of for the application of the models have far more potential. Now, circling back to your question about the ROI, I have to say that the GP margin for the AI business is far higher than that of the other parts of the business, which is also a major contributing factor for the improvement of the company's overall GP margin. Now, looking ahead, I would also like to talk about it from two different dimensions. One is the supply of computing power, and the second is the inference and the application of AI capabilities. Now, in the first dimension, two areas poses a lot of opportunities. One is electric vehicles, and in particular, the autonomous driving demand for the EV space, which since the launch of Tesla's FSD, we have been engaging with a lot of EV firms, and all of them have significant and real kind of tangible intention to do this and to implement and to train their own autonomic driving models. So, this is a lot of space for our business opportunity. Now, the second one is robotics, which essentially empowers robots with artificial intelligence. So we do think we will be having a lot of opportunities in this area as well. Noticeably, there's one certain company, which I'm not going to mention its name, has secured RMB3 billion financing recently. So the confidence is very high in this space. Now, the second dimension about the inference or the use cases for the model capability, as we have talked about in prepared remarks, some of the projects that we have collaborated with some of our partners are being implemented as we deepen such collaboration and the progress and the progress and achievements elaborated in these areas. We do think that this is actually going to be laying a solid foundation for the one-stop mass model as a service -- services that we aim to provide in this space. So, in summary, we do think that our overall strategy of owning AI since June last year has been very fruitful and we look forward to continue our pace in its investment and development. Thank you. Thank you. We'll now take our next question. This is from Timothy Zhao from Goldman Sachs. Please go ahead. [Interpreted] Thank you, management, for taking my question. I have two questions here. And the first question is regarding the revenue contribution from Xiaomi and the Kingsoft Group. As I noticed that there was a very strong revenue growth in the past quarter and the total revenue contribution already achieved 20% of the total revenue. So, may I ask what is the driver behind that and what is the AI-related revenue contribution from Xiaomi and Kingsoft Group to their revenue to Kingsoft Cloud? And into the second half of this year and into the longer term, given we have more cars from Xiaomi on the street as well as the WPS monetization from Kingsoft Group, how do you think about the revenue outlook from here? And second question is regarding the CDN revenue. As we see a continued proactive downscaling of the CDN revenue, could you maybe share any thoughts on the outlook for this business line going forward? Thank you. [Interpreted] The first question regarding the related parties' revenue contribution, I think, Tim, you're right. I think we do see a few very important leading positive signals regarding the revenue potential growth in the future. I think the first of all is really, as we mentioned, giving a stronger business connection, especially with Xiaomi and the Kingsoft Group. We allocated more resources and we prioritized the revenue and client demand from our internal client. As we mentioned a few months ago, I think this is actually a very good opportunity for Kingsoft Cloud. So for this quarter, the revenue from Xiaomi and Kingsoft Group increased around 36.9% year-over-year, and are contributing to about RMB370 million for this quarter alone. I think it is a very positive signal given it is a proven of our capability to serve very important internal clients, including Xiaomi and Kingsoft, including WPS as well. So, I think the scenario and applications from auto driving from the AI-related SaaS services are very important driver for this opportunity. And we also have to see given this trend going forward, maybe it is possible by end of this year as we are turning to a new financial year, we may asking the shareholders to give us an increasing cap of the related party revenue approval. So I just want to also share this good news with you that maybe for the next two or three quarters in the shareholder meetings, we are going to -- happy to propose a higher ceiling of the revenue cap to prove that we do have a great visibility of the internal revenue from related parties. The second part is relating the AI revenue contribution. I would say that the incremental revenue from our internal parties are primarily due to the AI-related revenues. So, that's the first point. The second point is, around half of the AI total revenue, as you'll notice that, it's actually approximately one-quarter of the revenue of public cloud for this quarter. Let's say, half are coming from related parties, but also they added more than half from external clients. I think that strikes a good balance regarding, we prove our capability to serve internal clients, but also have equal capability to have those services and products for outside clients. As you may notice that, our outside clients are also most of them are the tier-one AI model companies in the China tech space today. I think that actually strikes to balances from internal and outside, but also to see potential increase, especially the visibility of the potential upside of the revenue growth going forward. And the last note on the first question, I would mention that given you can find that you can observe our gross margin has improving steadily, the incremental dollar of the gross profit are also primarily due to the contribution from our AI-related business. And, given we are carefully select the AI clients today and we think those revenue can be sustainable, secured and visible going forward. And we're going to also learn from past experience that we will control, for example, the business contracts and the business model and also notice the potential risks in working on those revenues. And, we can also strike a return and risk profile for the profits and contracts we're working on in the AI space. I think that's all for the first part of the question. [Interpreted] So, I think the right way to understand -- to think about this question is that we have to make a distinction between two types of CDN business. One is the standard CDN business which is typically marked by a lower profit margin and this other kind of CDN business which represents usually higher margins, for example, like the live broadcasting acceleration, the dynamic acceleration, et cetera. And this usually has higher margin because they have -- there are higher value added. So, my quick answer is that in -- for the first type of standard CDN business, the minimum amount that we aim to maintain on a quarterly basis is RMB300 million and I do not expect it to be lower than that as service as a base for our business -- overall business and that will continue to invest and to expand the higher margin part of the CDN business. Yeah, that concludes my answer. Yeah. Thank you, Tim Zhao. And this concludes our Q&A. [Technical Difficulty] Thank you. There are no further questions at this time. So I will now hand back to Nicole Shan for any closing remarks. Nicole Shan Thank you, and thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you all. Bye. Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.

GDS Holdings Limited (GDS) Q2 2024 Earnings Call Transcript

Yang Liu - Morgan Stanley Frank Louthan - Raymond James Sara Wang - UBS Daley Li - Bank of America Securities Edison Lee - Jefferies Louis Tsang - Citi Jonathan Atkin - RBC Capital Markets Hello ladies and gentlemen, thank you for standing by for GDS Holdings Limited Second Quarter 2024 Earnings Conference Call. At this time all participants are in listen-only mode. After management's prepared remarks there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura. Laura Chen Thank you. Hello, everyone. Welcome to the Second Quarter 2024 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via Newswire Services earlier today and are posted online. A summary presentation which we'll refer to during this conference call, can be viewed and downloaded from our IR website at investors.gds-services.com. Leading today's call is Mr. William Huang, GDS's Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS's CFO, will then review the financial and operating results. Ms. Jamie Khoo, CEO of GDS International, is also available to answer questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the US SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that GDS earnings press release at this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. GDS's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn over the call to GDS's Founder, Chairman and CEO, William. Please go ahead, William. William Huang Thank you. Hello, everyone. This is William. Thank you for joining us on today's call. In Q2 2024, we achieved a revenue growth of 18% and adjusted EBITDA growth of 15%. This growth rate is quite remarkable in current market conditions. It reflects the progress which we have made in stabilizing our China business and the uplift from the highly successful execution of our international strategy. For our China business, we have two key financial objectives. Number one is to grow EBITDA at a steady rate. And then number two is to generate a positive cash flow before financing. We believe that this combination can create significant equity value and help to drive our share price recovery. In order to achieve these objectives, [indiscernible] delivering the backlog, at the same time, we take a highly selective approach to new business, targeting orders which [fits] (ph) our inventory and have fixed the move-in schedules. This will allowed us to grow while minimizing the need for incremental CapEx. We have been following this strategy for a while, and it's starting to produce noticeable results. Over the past couple of quarters the gross move-in rate has clearly stepped up. In 2Q 2024, it was over 20,000 square meters, the highest level for the past three years. The main reason for this improvement is the contract which we signed with faster move-in schedule. These are mainly larger internet customers, whose business continues to grow strongly. However, we are also beginning to see improvements from orders which have been in the backlog for longer. We expect this trend to continue as our customers implement their AI plans. In order to support higher move-in, we need to complete some projects which have been in progress for a while. In the first half of 2024, we brought 45,000 square meters into service. As at 30 June, this was already over 20% utilized. In the second half of 2024, we expect to complete another 32,000 square meters. The good news is that this does not require a lot of new CapEx, as we only incur the cost to complete. The first indications of improved demand is customers observing capacity for which they already made commitments. This is underway. After that, we will start to see more new business opportunities. We are well positioned to support AI demand as we are holding enough land and power quota. In the meantime, we will stick with our strategy of being very selective about what new business we take on. In our international business, we are already seeing very strong demand. We had a phenomenal second quarter with [206 megawatts] (ph) of new orders spread across our two campuses in Johor. More recently, we signed a master sales agreement with a global technology company for capacity at our new campus in Batam. This is a major breakthrough which will lead to further larger orders. Singapore-Johor-Batam is fast emerging as one of the very largest data center markets in the world. And we have a great market position. Where is this demand coming from? Part of it is regional expansion. And part of it is spillover from the US which is mostly AI related. A critical success fact is that we were first-mover into Johor and helped to create the market. We anticipated where demand will flow and secure this resource, which give us a time to market advantage. We have shown that we can execute delivering data centers in record time with the state-of-the-art design and technology solutions. We have also shown that we can operate working with the local institutions to sourcing -- to source and [train] (ph) talent. From the perspective of our customers, these are really meaningful differentiators. As of today, we have 388 megawatts of total customer commitments, out of which 101 megawatts is already utilized and 287 megawatts is backlog. The delivery schedule for most of the backlog is very short and the customers undertake to move-in quickly. As a result, based on the terms of the existing contracts, we expect to have over 350 megawatts of utilized capacity within 24 months. I will now pass on to Dan for the financial and operating review. Daniel Newman Thank you, William. Following the completion of the first external equity capital raising for our International business, we have started formal disclosures of segment financials. As shown on Slide 17, DigitalLand Holdings Limited and its subsidiaries comprises all of our business and assets outside of mainland China, except for some minor third-party data centers in Hong Kong. We refer to this segment as GDSI or International. GDS Holdings Limited and all of its subsidiaries excluding GDSI, comprises our ultimate holding company and all of our business and assets in mainland China. We refer to this segment as GDSH or China. Starting with the China segment on Slide 18. In 2Q '24, GDSH revenue increased by 8.9% and adjusted EBITDA increased by 4.3% year-on-year. In order to show the underlying growth rate, we excluded previously disclosed one-time items from 2Q '23. GDSH revenue growth was mainly driven by an increase in total area utilized of 10.2% year-over-year. As Shown on Slide 21, MSR per square meter comparing 2Q '24 with 2Q '23 was flat. However EBITDA margin for 2Q '24 versus 2Q '23 was down by 2.1 percentage points. The main reason for this is the increase in power tariffs, which occurred during the second half of last year. Turning to the International segment on Slide 19. In 2Q '24, GDSI revenue increased by 24% and adjusted EBITDA by 80% quarter-on-quarter. As shown on Slide 21, during 2Q '24, there was a 28 megawatts increase in IT power utilized. The MSR per kilowatt per month was $135 including power income. As William mentioned, the ramp-up over the next 24 months will be extraordinary. The rate of progress quarter-by-quarter depends on the timing of capacity completions and contractual revenue commitments. The increase in the next couple of quarters is quite small, but thereafter it will take off. Turning to CapEx on Slide 23. In 1H '24, our China CapEx totaled RMB1.8 billion. We expect lower CapEx in the second half of the year, including the proceeds of the B-O-T data center transfer and still maintain our RMB2.5 billion guidance for the full year. In 1H '24 our International CapEx was also around RMB1.8 billion. In the second half of the year, we expect CapEx to increase significantly and it is likely that we will exceed our CapEx guidance for International of RMB4 billion. Fortunately, the lead time from incurring CapEx to generating revenue in the International business is very short. Turning to cash flow on Slide 24. Following the closing of the Series A new issue for International, GDSH received over RMB1.5 billion from GDSI, on repayment of a shareholder loan. This is included in investment cash flow for the GDSH segment and financing cash flow for GDSI. Including this repayments, cash flow before financing for GDSH will be clearly positive this year, in-line with our financial objectives. GDSI cash flow for 2Q '24 included $448 million or RMB3.2 billion of proceeds from Series A. The remaining $224 million from Series A was received by GDSI in July. As shown on Slide 25, at the end of 2Q '24, the cash balance of GDSH increased to RMB8.4 billion and the net debt to last quarter annualized adjusted EBITDA multiple decreased to 7.2 times. In order to accelerate our financial transformation, we are working on a number of asset monetization initiatives. Our key strategic goal is to set up a REIT, listed in China holding data center assets. There is strong policy support for new infrastructure REITs and we've selected a stabilized project to move forward and are working through the regulatory approval process. This will be a first of a kind transaction for data centers in China, and we're strongly committed to making it happen. Turning to International on Slide 27. At the end of 2Q '24, GDSI had a cash balance of RMB3.1 billion, pro forma for the second tranche of Series A proceeds. Given the existing level of customer commitments and the strong sales pipeline, we plan to raise further equity for GDSI in a Series B round. The process is already underway. There is strong interest from global investors, and we are confident this round will set a higher benchmark for the value of our equity investment in International. Finishing on Slide 29, we're maintaining our formal guidance for FY '24 consolidated revenue, adjusted EBITDA and CapEx. However, it is likely that we will raise our CapEx guidance at the time for 3Q '24 results when we have a firmer view on the timing and amount of CapEx for International. We'd now like to open the call to questions. Operator, please? Thank you. We will now begin the question-and-answer session. [Operator Instructions] For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please re-enter the queue. One moment for the first question. First question comes from the line of Yang Liu from Morgan Stanley. Please go ahead. Yang Liu Thanks for the opportunity to ask questions. I would like to congratulate you first on the very strong set of results. I would like to ask about the China part, the REITs plan. Could management elaborate more in term of the timing of this infrastructure REITs and also what could be the potential valuation when you inject the asset to the REITs? And who could be the -- or what type of investor could be the buyer? And what is the current, whatever hurdle or key debate between the buyer and the company, and also between the regulator and the company? Yes, thank you. Daniel Newman Thank you, Yang Liu. It's Dan here. I'll answer that question. In order to pursue this strategy, we've selected a single site with two data centers as the seed asset for the REIT. Typical REIT offerings in China historically have been around RMB2 billion per transaction, and that seems to be a size, which the market is comfortable with. And we select an assets to fit with that. Under the REIT regulations, the asset must be stabilized. We must own the real estate, so the asset also qualifies on that basis. There's a series of regulatory approvals that we need to obtain, and we've already been working on this for over one year. And we are getting to the level where the regulatory approvals would be sought at central government level. And if that is successful, we will receive approval for -- to be able to proceed with the offering, which is then valid for one year. We hope to reach that milestone next year. It is not normal to do testing the waters or pre-marketing exercise in China, but we do have an active dialogue with major financial institutions in China, because we've also been looking at pre-packaging some assets which are not yet stabilized, as a way of creating a pipeline for the REIT, and we received very positive feedback. There is a significant appetite amongst financial institutions in China to get exposure to new infrastructure, including data centers, data centers which are green, which have very high-quality Internet company or cloud customers. We think that a substantial percentage of the offering to the public will be taken up by strategic or anchor type investors. Under the regulations, we will be required to retain a 20%. Now there is a quite a significant public-listed REIT sector in China. Those REITs, which are real estate based, trade on dividend yields which fall within a fairly well defined range. If we take that range, look at it very conservatively based on the amount of income which we think we will be able to distribute, it implies an EBITDA multiple, which I think will be clearly accretive compared with where we are trading. If you look at our current public market value on a sum of the parts basis to strip-out of International, the last Series A price benchmark. Our China business is being valued at somewhere between 9 times to 10 times current EBITDA. The China REIT sector is trading at implied EBITDA, which is a quantum higher than that. So hopefully we will be able to capture that. Thank you for the questions. One moment for the next questions. Our next question comes from the line of Frank Louthan from Raymond James. Please ask your question. Frank Louthan Great, thank you. Can you characterize how much of the business in mainland China is AI-driven? And can you give us an idea of the current impact of the Chinese economy to the demand on that base of the business. Thanks. William Huang Okay. Frank, this is William. The first question is the -- I think the current demand, the new demand in China currently, I think the 70% was driven by the AI type requirement, including the training and also influence. So the remaining 30% is driven by the Internet company and also the traditional cloud business. Yeah, this is the --. what's the second question? I think, so far, I think for the training and cloud business, I think this is not direct impact from current China macro environment. It is totally opposite. And I think this is based on a lot of the, let's say, giant. They are continuing to invest the CapEx to change their own model and also try to -- in China, there is a lot of the -- a lot of -- there's a lot of startup company is -- was invested by the Venture Capital to do the more application type, vertical type of the AI stuff. So this looks like the -- it's created a very -- it's created his own let's say, environment, right? So this is what happening in China right now. Thank you for the questions. Next question. One moment, please. Our next question comes from Sara Wang from UBS. Please go ahead. Sara Wang Thank you for the opportunity to ask the question and congratulations on the solid results. I have one question about International business. As Dan just mentioned, there's quite some CapEx needed for International business. May I ask what's the future financing plan, especially in the near term, as well as in the mid-term, first of all the potential spin off or IPO? Thank you. William Huang I think it will be -- before I answer this question, its -- I think, it is a -- yeah, all the financing requirement is based on our forecast for the next two or three years. So our target is to double the current order number within next three years. So this is our base. So in terms of the financing plan, I think I would like to let Dan introduce -- explain a little bit more here. Daniel Newman Yeah. I mentioned that we started the process for a Series B round. This will be raising capital once again from external investors, global investors using a similar -- will be a similar instruments type of security, convertible preferred shares. Our base case assumption is that the new issue size will be similar to Series A, say $600 million to $800 million. It is possible that we could increase the size. The appetite is there. After completing that offering, which we aim to do before the end of this year, I think that the next financing that we will undertake at our International holding company level maybe mezzanine debt. Certainly intend to explore that as a way of optimizing the overall cost of capital international. At the same time, we're putting in place senior debt at the project level, usually in local currencies. And we are currently undertaking a large syndicated term-loan for our Malaysian business that covers the range of different financing initiatives in International. Thank you for the questions. Next questions will come from the line of Daley Li of Bank of America Securities. Please go ahead. Daley Li Hi management. Thanks for taking my question. I have one question about the International business. It seems that the area in service is in a good momentum in 2Q, up like 50% in the quarter-on-quarter. And how do we see the trend in Q3 and Q4 for the area in service for the International business in absolute value or like quarter-on-quarter gross? Thank you. William Huang We gave some guidance in the earnings presentation and the prepared remarks about the timeframe for delivery of a very substantial part of the overall backlog. I mean, we currently have about 280 megawatts of capacity which is committed but not yet delivered and utilized. And we said that -- that will be most of that. In fact, 260 megawatts out of 280 megawatts will be delivered and utilized and revenue generating within 24 months, which is a very rapid ramp-up. It implies that our revenue generating capacity will increase by 3.5 times over the next 24 months. We did not give a quarter-by-quarter breakdown, but as an indication, over the next two quarters the second half of this year, the increase in capacity and service and the delivery and utilization will increase by a relatively small amount. But over the course of next year 2025, the increase will be very substantial. Thank you for the questions. Our next question comes from Edison Lee of Jefferies. Please go ahead. Edison Lee Thank you for taking my question. Congratulations again. I have two questions. Number one is that for your power capacity or power secured in Southeast Asia, I think that amount increased from 711 megawatt from your first quarter presentation to 797 megawatt. So may I know where that incremental is coming from? Which location it is coming from? And number two is you said that you won a big International technology customer at Batam. And can you discuss your customers in Malaysia? Is this still a single company right now? And what do you expect that to change or situation to change or happen over the next couple of quarters? William Huang The first question about the increase in secured resource developable capacity, that is in both of our sites in Johor where we completed land purchases for additional plots contiguous with our existing sites and where there is power infrastructure in place, and we were able to upsize the amount of power that we will be able to obtain through that infrastructure. The second question Edison asking about the customer mix in Southeast Asia? I think the -- currently we already have, let's say five customers from the -- both from China and International, right or like the industry technology leader. So I think, we are very, very focused on to try to diversify the customer. This is always our target right? So the current mix is a -- let's say, around 70% from China. It is not a single customer, it's three of them. And another is also International customer. Based on our current forecast, I think in the next 12 months, the International customer will increase the percentage as well. Ultimately, I think it will be 50-50, yeah in this region. Edison Lee Thanks. Can I follow-up with one quick question. So you said that there are five customers, including China and International, and then you said that you won a big International customer in Indonesia. So can I assume that you have one International customer in Indonesia or one -- just one customer in Indonesia and that's International? And you have four customers in Malaysia, and that's China and International. Is my understanding correct? William Huang Yes, yes, yes. Indonesia is the International. Yeah. And four in Johor is Chinese and International. Yeah, you're right. Thank you for the questions. Next question comes from the line of Louis Tsang from Citi. Please go ahead. Louis Tsang Thank you management for taking my questions. Congratulation on a strong result set with like solid International growth [signing] (ph) and then the domestic recovery. I actually got a two quick question. The first one is for the domestic one. I think that like the net move-in for this quarter is very encouraging and the MSR is trending up. Like how shall we think about the pace of the move-in and MSR recovery ahead. And more importantly, the sustainability of the demand? And then second question is for the International. I think some regional or global peers also have their plan in Johor. And for seeing like increasing DC supply, what is your strategy in [SEA] (ph) and what are the -- like your advantage over the regional or the global peers? And then also one more thing on like the supporting infrastructures like electricity grid, like will those kind of stuff limit the near-term supply growth? Thank you. Daniel Newman Louis, I'll begin with your questions about China. The move-in yes, there is a very clear step-up in 1Q '23 compared with the level of move-in over the past twelve quarters. And that was continued, in fact it was even higher in the second quarter. And this is partly a result of the contracts we signed in the last 12 or 18 months, which have faster moving schedules than those that we signed previously. And also the beginning of the pickup in the move-in by customers whose commitments have been in the backlog for longer. So based on the contractual terms, but also what we currently know about our customers intentions, we expect the current level of move-in to continue through next year, as far as we have visibility, which I think is very encouraging. For the MSR, we look at MSR on a quarterly basis and compare the rate of change with the same quarter of the prior year. And so over the past few quarters, on average, the MSR has decreased by a little over 2%. And as we go into next year, there will be further decrease, probably less than the decrease during '24 as compared with '23. So it's also encouraging to see that the MSR is bottoming out. William Huang Okay. The second question is, I think the -- about our strategy in this region, right, in Johor. I think, the -- number one, I think the -- we are the -- everybody know we are the first-mover in this region. And we still in the next three years, I think that we still enjoy the first-mover advantage because the [time-to-market] (ph) and the demand profile still will continue maintain a very strong level. So even after three years, I think still the market size will increase, still continue to increase. So I don't think in short term, in the next five years, it will not a issue for all the players in this region. So I think this is based on our understanding of the market, yeah. So of course, if we talk about after five years what will happen, I think the -- our strategy is, number one, I think we are looking at not only this region market, we are also start -- we already start to get back to that region -- other market in this region. Everybody knows GDS is a market creator. So we don't follow. So I think the -- we will give you another surprise in the next three years. Thank you for the questions. One moment for the next questions. Follow up questions from Yang Liu of Morgan Stanley. Please go ahead. Yang Liu Thanks for the opportunity to ask another question. One more thing from my side is regarding the REITs plan in China. Could you please talk about so whether the REITs will be a public traded REIT or it's a private REIT, or actually you are targeting both? And another thing is, what could be the estimated debt reduction if you can deliver one REIT project to the -- inject one asset to the REITs? Daniel Newman Yeah, Yang. It's Dan here. For the -- the REIT is listed, will be listed on one of the stock exchanges in China, and it will be offered publicly. The typical REIT offering size, I mentioned earlier, is about RMB2 billion. As a guideline, I'd say, that transaction that size, we would expect to deconsolidate around RMB1 billion of debt. And if we sell 80% of the equity, then we will receive equity cash proceeds for the disposal of the 80% at the valuation of the offering. So the combined effect should be that it helps to increase our liquidity and decrease net debt and also accretive on - to EBITDA multiple basis. That's a single transaction. Of course, once the REIT is established, the possibility is there for us to drop further assets into it, and that's what we would hope to do over the longer term. But for now, our focus is just on the achieving the first step, which is to set up this vehicle. And you asked about privately placed, right? I mentioned earlier that we are working on pre-packaging some assets that will be privately placed. And its takes the form of asset-backed security. Technically it is listed on stock exchange, but it is easier to think of it as a privately placed security. It is a stepping stone in terms of packaging the assets, so that it is ready to be injected into a REIT when the assets are stabilized. Yang Liu Thank you. And one more question regarding the International business. It's very encouraging to see the big new orders. Could you please update us what is the IRR trend for the big new orders? Is it stable or rising a little bit or declining a little bit? What's the trend compared with the previous orders? Daniel Newman I'd say, it's very consistent, sort of maybe easier to talk about a -- like a development yield rather than IRR. The development yield is in the low-teens which is quite acceptable to us in terms of a return on our invested capital and these are very high quality customer contracts. They are, I'd say, US standard. And 10 years to 15 years, some of them are priced in US dollars and some of them have escalators. And so it's very high quality business. Thank you for the questions. Next question comes from the line of Jonathan Atkin from RBC Capital Markets. Please ask your question. Jonathan Atkin Thanks. So just got you a two-parter, one about China and then one about International. So in China, I was just interested in any comments you would have about the contract renewals and churn outlook for the remainder of this year. It looks like you've got a fairly sizable amount coming up for renewal in second half of this year, 12.1% of total area committed. And then Internationally, I would agree with William's comments about Johor. And I think you have somewhat of an incumbency early mover advantageous, but is something that I was interested in because you were one of the winners of the CFA process. And is there any visibility in terms of timeline as to when you might get that project underway and when that might be ready for service, or is it too soon to have you on that? Thank you. Daniel Newman So Jonathan, it's Daniel. The first part of your question about churn in China, you are right, we have a large amount of contract renewals in the second half of the year. We look at the quantum of churn, we measure it in terms of area utilized, the churn as a percentage of our total area utilized. And over the past six quarters, it's been running at an annualized rate of about 5%, which I believe is relatively low by International standards. In absolute terms, it's averaged about 5,000 square meters per quarter. In the second half of this year, it will continue at about that rate. But if we look into next year, I think the 3% to 5% of annual churn rate would be normal for us. And we don't currently actually have any visibility on any churn, which is exceptional. Those numbers represent really quite a small percentage of the total amount of capacity which is coming up for contract renewal, as you pointed out. William Huang Yeah. Jon, I think the Singapore project -- yeah. In Singapore, so I think it's very difficult. One -- number one is the -- get the CFA. It's very difficult, right? The second -- now we got -- we win the CFA, but the second question is to -- issue with -- to get at a very, very good location of the land is more difficult, right? So, fortunately, we are in the process to acquire a land right now. I think we believe it is in the process and should be down in the next couple of months completing the process, and we aim to deliver with -- in a -- before the end of 2026 to launch the service to the market. That's a pretty firm schedule. Thank you for the questions. In the interest of time, that concludes the Q&A session. I would now like to turn the call back over to the company for closing remarks. Thank you once again for joining us today, and we'll see you next time. Bye. This concludes today's conference call. You may now disconnect your lines. Thank you.

Earnings call: Kingsoft Cloud reports growth and AI sector progress By Investing.com

Kingsoft Cloud Holdings Limited (NASDAQ: KC), a leading cloud service provider in China, has reported positive financial results for the second quarter of 2024. The company's earnings call highlighted improved profitability, with gross margin increasing to 17%, and adjusted EBITDA margin reaching 3%. Kingsoft Cloud's revenue for the quarter was RMB1.89 billion, marking a 6.5% sequential growth and a 3.1% increase year-over-year. The company has seen significant contributions from its artificial intelligence (AI) services and strategic partnerships. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In summary, Kingsoft Cloud is positioning itself for long-term growth by capitalizing on the burgeoning AI market and leveraging strategic partnerships. The company's focus on high-margin businesses and prudent management practices have contributed to a consistent improvement in financial metrics. As Kingsoft Cloud continues to invest in technology and explore new market opportunities, it maintains a cautious yet optimistic outlook for its future. InvestingPro Insights Kingsoft Cloud Holdings Limited (NASDAQ: KC) has demonstrated resilience with its recent positive financial results, despite facing some headwinds in the broader market. To provide a deeper understanding of the company's financial health and market position, here are some key insights based on real-time data and InvestingPro Tips. InvestingPro Data shows that Kingsoft Cloud has a market capitalization of $546.05 million, which reflects the overall value that the market is assigning to the company. The data also reveals a Price / Book ratio of 0.58 for the last twelve months as of Q1 2024, indicating that the stock may be trading at a relatively low valuation compared to the company's book value. This could be seen as an opportunity for investors looking for potentially undervalued stocks. A notable metric is the company's revenue, which stands at $963.75 million for the last twelve months as of Q1 2024. However, it's important to note that this represents a decline of 11.59% compared to the previous period, signaling a challenge in revenue growth. InvestingPro Tips highlight two critical factors that investors should consider. Firstly, Kingsoft Cloud is quickly burning through cash, which could raise concerns about the company's liquidity and financial sustainability in the short term. Secondly, the company suffers from weak gross profit margins, with the latest data showing a margin of 13.64%. This suggests that despite increasing revenues, the cost of goods sold is taking a significant portion of the revenue, potentially impacting profitability. For investors seeking more comprehensive analysis and tips, there are an additional 16 InvestingPro Tips available on the InvestingPro platform for Kingsoft Cloud, which can be found at https://www.investing.com/pro/KC. These tips provide deeper insights into the company's financials, market performance, and potential investment risks and opportunities. Full transcript - Kingsoft Cloud Holdings Ltd (KC) Q2 2024: Operator: Good day, and thank you for standing by. Welcome to the Kingsoft Cloud's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shan, IR Director of Kingsoft Cloud. Please go ahead. Nicole Shan: Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobalNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; and CFO, Mr. Haijian He. Mr. Zou will review our business strategies, operations and 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 purposes 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 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 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. 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. Thank you. Tao Zou: [Foreign Language] [Interpreted] Hello, everyone. Thank you and welcome all for joining Kingsoft Cloud's second quarter 2024 earnings call. I am Zou Tao, CEO of Kingsoft Cloud. Looking back on the two years since August 2022, our entire Kingsoft Cloud team has firmly executed the high quality and sustainable development strategy and the company has undergone a complete transformation. First of all, profitability fundamentally improved as gross margin steadily increased from low-single digit to 17%. Adjusted EBITDA margin increased to 3% after turning positive in Q1 and we are well on track to turn operating and net profit positive. Second, swiftly embracing AIGC opportunities as this new round of AI services revenue contribution to public cloud increased from 0% to 26%, a leading figure in the industry. Third, firmly phasing out low-margin businesses, as CDN services revenue contribution decreased from approximately 40% to 20% and along with it, a single large customer concentration risk fundamentally resolved. Fourth, implementing refined management in aspects of procurement, assets, and operations as quarterly costs and expenses decreased by approximately RMB300 million, representing 15% of quarterly revenues. Fifth, taking long-term perspectives as Wuhan R&D center quickly scaled up to hosting approximately 30% of the entire workforce, including Camelot, laying a solid foundation for sustained technological leadership as well as completing dual primary listing on the Hong Kong Stock Exchange, followed by inclusion into the Hang Seng Composite Index and Hong Kong Stock Connect, solidifying our capital markets infrastructure. All of these have laid a solid foundation to the high quality and sustainable development in the future. I would like to express our sincere gratitude to all our customers, shareholders and employees who have consistently supported and cared for us over the long term. Now, I will walk you through the business highlights of the second quarter of 2024. This quarter, Kingsoft Cloud has achieved new break-throughs in terms of revenue scale, profitability, and operating cash flow. In particular, our revenues reached RMB1.89 billion, not only a sequential growth of 6.5% but also a year-over-year expansion of 3.1%. Revenue from high value-added products and services has grown, offsetting pressure brought about by our proactive adjustment of the CDN services. Adjusted gross profit reached RMB323 million, increased by 56.4% year-over-year. Adjusted gross margin increased to 17.1%, marking the eighth quarter of consecutive improvement. Adjusted EBITDA reached RMB60.59 million and adjusted EBITDA margin reached 3.2%, a sequential improvement after the milestone of turning positive in Q1 and a significant increase of 6.5 percentage points year-over-year. Net operating cash inflow amounted to RMB150 million, once again demonstrating our cash-generating ability from operating activities. The improvement of various financial performance indicators signifies that Kingsoft Cloud's high-quality and sustainable development strategy has been effective, marking a new phase in our development and laying a solid foundation for long-term healthy growth in 2024 and beyond. In terms of public cloud services, revenues reached RMB1.23 billion this quarter, representing a year-over-year increase of 6.5% and a quarter-over-quarter increase of 4%. We have seen positive outcomes across our three priorities for public cloud services, namely, the Xiaomi and Kingsoft ecosystem, AI businesses and supply chain. First of all, serving as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we firmly grasp the cloud business opportunities within the ecosystem. This quarter, revenue contribution from Xiaomi and Kingsoft have reached 20%, amounting to RMB370 million, and witnessed a year-over-year increase of 36.9%. Secondly, AI businesses continue to bear fruit. This quarter, AI revenue surged to RMB326 million, doubling the amount in the first quarter and accounting for 26.3% of public cloud revenues, an industry-leading position. Our AI customer base also further diversified, including large language model companies, self-driving, Internet applications and others. We have established a substantial computing resource pool, leading the industry in large-scale network capabilities, capable of supporting the networking topology of supercomputing clusters at a 10,000 chips level. Thirdly, we built a comprehensive supply chain system, securing the scale of a stable, intelligent computing resource pool and managing procurement costs. By fully utilizing data centers' resources in central and western regions of China. Costs have significantly reduced compared to the data centers in the core cities in the east. Meanwhile, we strictly control internal procurement costs, expand coverage of suppliers, and seek the best combination of price and quality. Moving on to enterprise cloud services, where revenues amounted to RMB657 million. In public services space, we have actively pursued opportunities within public service cloud and state-owned enterprise cloud, implementing standardized operation and maintenance. We have leveraged our core components such as models, big data, and workspace collaboration, targeting use cases in the public service and enterprise domains. In the China e-government cloud market research report released in June 2024 by CCID, a leading consulting company in China, we are ranked in the leaders quadrant. In the China e-government cloud operations service market report by IDC, we ranked as the top six companies in the industry. Such ranks reflect recognition from the industry market for our product capabilities and market share. This quarter, we have promoted the benchmark project of implementing large language models in public services sector, which will assist the Beijing Municipal Commission of Housing and Urban-Rural Development, in building the 12345 hotline, intelligent decision-making and smart query and data projects, enhancing the accuracy and efficiency of the commission in summarizing statistics and categorizing the 12345 hotline data and improving the service quality and response speed. In the healthcare space, Changzhou (ph) Health Cloud has launched its phase five expansion. It will meet its requirements of new business scenarios and the needs of extended archive of healthcare images, fully validating the potential to establish long-term cooperation for the construction and operation of industry cloud customers and projects. In AI industry applications, Kingsoft AI, a subsidiary invested and established by us, has gradually started to promote its business, focusing on seizing business opportunities in enterprise AI software applications and delivery deployments. In terms of industry models, we officially launched strategic cooperation with Dentons law firm, a leading law firm in China, and established the joint laboratory of Legal Artificial Intelligence, taking a leap forward in the digital transformation of law industry. In terms of product and technology, we uphold the principles of building success based on technology and innovation, focusing on delivering best-in-class customer experience across our core product offerings. In AI space, in response to surging data cleansing demand from AI clients, we have integrated products like Bare Metal and object storage to create a holistic solution for data cleansing, accommodating text, images and videos. This multi-modal solution is tailored to meet the data cleansing requirements for the creation of both pre-training and fine-tuning datasets. In enterprise cloud space, the Galaxy Stack platform released a proprietary cloud platform with low cost and high density compared to original standard configuration. The high-density version has achieved a maximum reduction of 64% in cost per instance and an increase of up to 300% in instance density. In summary, after two years of steadfast (ph) implementation of the high-quality and sustainable development strategy, Kingsoft Cloud fundamentals have undergone a complete transformation. Looking forward, we will continue to enhance our profitability and cash-generating capabilities, deepen cooperation with Xiaomi and Kingsoft ecosystem, strengthen Wuhan Research Center and develop comprehensive understanding of new AI and explore such opportunities. Thereby continuously creating value for our customers, shareholders, employees, and other stakeholders. I will now pass the call over to our CFO, Haijian, to go over our financials for the second quarter 2024. Thank you. Haijian He: [Foreign Language] [Interpreted] Thank you, Mr. Zou, and welcome everyone for joining the call. Now I will walk you through our financial results for the second quarter of 2024. We would like to highlight three key areas of progress. First, we are very pleased with the ongoing improvements in our financial matrix. By applying the first principle thinking, we are committed to a profit-focused approach that has led to consecutive increases in our gross profit, gross margin, EBITDA profit, and EBITDA margin over the past several quarters. This quarter, our adjusted gross margin reached 17.1%, marking eight consecutive quarters of steady growth, while adjusted gross profit hit RMB333.4 million. After turning a profit in adjusted EBITDA margin last quarter, we continued with this positive trend with RMB60.6 million in EBITDA and 3.2% in EBITDA margin, demonstrating our successful execution of a high-quality sustainable development strategy. Second, this quarter our revenue reached RMB1,891.8 million reverting to a positive increasing trend with a 3.1% increase -- year-over-year increase and a 6.5% rise quarter-over-quarter. By strategically adjusting our revenue mix in line with our high-quality and sustainable development strategy, we have allocated more resources to develop high-value services. This quarter, our AI revenues grew to RMB326 million, making up 26% of our total public cloud services revenue, doubled the amount from last quarter. We have established a resilient supply chain, scalable computing power and a long-term partnership with customers to support our growing AI revenues. In response to cost pressure and the low margin, we have strategically reduced the proportion of our CDN services to 19% of total revenue, down from 23% last quarter. Third, we have recorded a net inflow of operating cash flow amounting to RMB151.2 million. We also reduced -- we also secured various financial channels to support our AI business, including but not limited to our loan facilities from Kingsoft Corporation, financial leasing and other bank loans. Here are the details of our financial results. Total revenues for this quarter were RMB1,891.8 million, a 3.1% increase year-over-year, of which revenues from public cloud services were RMB1,234.5 million, up 4% from RMB1,187.4 million last quarter, primarily driven by the growth in AI-related revenues to RMB326 million. Revenues from enterprise cloud services reached and RMB657.2 million, up from 550 -- RMB588.2 million last quarter, due to accelerated project deliveries this quarter. We have continued to enhance our cost control, expanding our supply base to improve service quality and procurement prices. Total cost of revenue decreased by 30.4% year-over-year and remained stable quarter-over-quarter at RMB1,573.4 million. IDC costs dropped significantly by 14.4% year-over-year from RMB860.7 million to RMB728.2 million this quarter, reflecting the strategic scaling down of our CDN services and optimize utility of the rack usage. Depreciation and amortization costs increased from RMB202.1 million in the same period of last year to RMB265.9 million this quarter, mainly due to the depreciation of new servers acquired. Solution development and services costs increased by 8.4% year-over-year from RMB452.9 million to RMB491.1 million due to the solution personnel expansion of Camelot, which was in line with the revenue growth. Fulfillment costs and other costs were RMB37.6 million and RMB50.6 million this quarter, respectively. Our adjusted gross profit for the quarter were RMB323.4 million, a 56.4% increase year-over-year with an adjusted gross margin of 17.1%. This marks a new record and the eighth consecutive quarters of steady margin improvement, up from 11.3% last year and 16.8% last quarter. In terms of expenses, excluding share-based compensation and impairments of long-lived assets, our total adjusted operating expenses were RMB555.3 million, slightly increased by 3.2% year-over-year and 18.3% quarter-over-quarter, of which, our adjusted R&D expenses were RMB200.1 million, a 3.7% increase from last quarter due to the personnel cost increase. Adjusted selling and marketing expenses were RMB117.5 million, up from RMB97.9 million last quarter, representing 6.2% of total revenues. Adjusted G&A expenses were RMB237.7 million compared to RMB178.7 million last quarter. As of June 30, 2024, our cash and cash equivalents totaled RMB1,837.8 million, providing strong liquidity for operations and AI investments. Capital expenditures for this quarter was RMB654.8 million, reflecting our investment in infrastructure to support our sustainable AI business. Looking ahead, we remain committed to the principle of high quality and sustainable development. We will continue to enhance revenue quality, reduce costs and expenses, and improve profitability. Thank you. Nicole Shan: This concludes our prepared remarks. Thanks for your attention. We are now happy to take your questions. Please ask your question in both Chinese Mandarin and English, if possible. Operator, please go ahead. Thank you. Operator: Thank you. [Operator Instructions] We will now take our first question. This is from the line of Xiaodan Zhang from CICC. Please go ahead. Your line is open. Xiaodan Zhang: [Foreign Language] [Interpreted] So thanks, management, for taking my questions. And I got two questions here. First of all, could you please update us on your CapEx guidance for the next two quarters? And secondly, could you give us some color on the ROI of your AI investment and how is your expectation for the AI revenue contribution for the full year? Thank you. Haijian He: [Foreign Language] [Interpreted] Regarding the CapEx. So I think -- first of all, I think you pointed out correctly, this year, we're actually accelerating our investment in, we think, a very good area of financial business growth opportunities. Most of the CapEx, I think probably over 95% or even higher, are relating directly to the AI investment, which we think is a very good positive opportunity for us. So, at this moment, while we cannot give a full guidance for the full-year CapEx investment, but I think we can probably look into two different areas. First of all is, for this quarter, you may also notice that we recorded a net cash inflow from the operations side, which is around about RMB151 million. And I think you can already see that the CapEx investment into the good area of business already converted into a positive inflow from operation cash flow. So this is actually the first point. So the second point is, we also expanded our financing channels. For example, you also notice, last year, we secured financing support from Kingsoft Group as well as the leasing potential opportunities from Xiaomi Group as well. But this year, especially in the last two quarters, we also got great support from, for example, the national policy banks, the state-owned financial institutions, including both banks and also the leasing companies. So, in that way, we actually do not limit ourselves with a certain cap of the CapEx investments just to looking the only amount of our cash balance today. So, my point is, giving those additional opportunities and financing channels, we actually can reopen and have a very high ceiling of the financial capability we can get to support an AI investment. The third point is, given the investment is a long term, we also measure very carefully regarding the profitability and the sustainability of those investments. And at this moment, we are happy to share, most of our AI client are the well-known names you probably also notice on the market. And the second, we do also have a very long-term contract from sales side which can secure the incoming cash flow as well as the client opportunities with a potential upside to secure more business from the same client as a recurring basis. So I remember, first few quarters ago we talked about recurring as most important driver for our profitability. I think right now, given the AI, we do see that recurring revenue percentages are much higher if you compare with the old so-called the only IaaS services in the old model we did before. So, I think that the three areas I just mentioned can come to a conclusion that we do not limit ourselves with the cash we already have today, we can have more cumulative increased investments with the capacity. Number two, every dollar we invest today, the ROE and also the recurring cash flow to serve those liability and increase in the revenue will be very long-term and very secure. And the third is we also use our capacity to secure a good universe of the client, especially the AI company in the market in China today. I think we are leading on the front with the revenues, with the financing sources we have and we can matching those two sides for the long term going forward. But last note, I think, Xiaodan, you probably want to have a kind of ballpark number, which I can mention that, the total CapEx for this year will be always probably a few times if you look at it from a ballpark number compared with last year, and that will actually have a very good possibility to convert to accelerated revenue growth on the top line in the coming quarters. Thank you. Tao Zou: [Foreign Language] [Interpreted] Okay. Let me just translate -- simply translate what Mr. Zou said. So, in terms of AI, I really want to take this opportunity to elaborate a little bit about my overall thoughts. So, in my mind, it's really about three dimensions. One is the supply of computing power. The second is the inference, which is the application of the artificial intelligence. And the third is the training, which -- from the current financials that you are able to see, obviously, which is a tremendous growth. For example, it's 10 times year-over-year growth and two times the AI revenue growth versus the first quarter. But all these numbers that you're currently seeing are mostly coming from the area of the supply of computing power. However, I do think that in the future, the potential room for revenue and for business in terms of training and in terms of for the application of the models have far more potential. Now, circling back to your question about the ROI, I have to say that the GP margin for the AI business is far higher than that of the other parts of the business, which is also a major contributing factor for the improvement of the company's overall GP margin. Now, looking ahead, I would also like to talk about it from two different dimensions. One is the supply of computing power, and the second is the inference and the application of AI capabilities. Now, in the first dimension, two areas poses a lot of opportunities. One is electric vehicles, and in particular, the autonomous driving demand for the EV space, which since the launch of Tesla (NASDAQ:TSLA)'s FSD, we have been engaging with a lot of EV firms, and all of them have significant and real kind of tangible intention to do this and to implement and to train their own autonomic driving models. So, this is a lot of space for our business opportunity. Now, the second one is robotics, which essentially empowers robots with artificial intelligence. So we do think we will be having a lot of opportunities in this area as well. Noticeably, there's one certain company, which I'm not going to mention its name, has secured RMB3 billion financing recently. So the confidence is very high in this space. Now, the second dimension about the inference or the use cases for the model capability, as we have talked about in prepared remarks, some of the projects that we have collaborated with some of our partners are being implemented as we deepen such collaboration and the progress and the progress and achievements elaborated in these areas. We do think that this is actually going to be laying a solid foundation for the one-stop mass model as a service -- services that we aim to provide in this space. So, in summary, we do think that our overall strategy of owning AI since June last year has been very fruitful and we look forward to continue our pace in its investment and development. Thank you. Nicole Shan: [Foreign Language] [Interpreted] Thank you. Operator: Thank you. We'll now take our next question. This is from Timothy Zhao from Goldman Sachs (NYSE:GS). Please go ahead. Timothy Zhao: [Foreign Language] [Interpreted] Thank you, management, for taking my question. I have two questions here. And the first question is regarding the revenue contribution from Xiaomi and the Kingsoft Group. As I noticed that there was a very strong revenue growth in the past quarter and the total revenue contribution already achieved 20% of the total revenue. So, may I ask what is the driver behind that and what is the AI-related revenue contribution from Xiaomi and Kingsoft Group to their revenue to Kingsoft Cloud? And into the second half of this year and into the longer term, given we have more cars from Xiaomi on the street as well as the WPS monetization from Kingsoft Group, how do you think about the revenue outlook from here? And second question is regarding the CDN revenue. As we see a continued proactive downscaling of the CDN revenue, could you maybe share any thoughts on the outlook for this business line going forward? Thank you. Haijian He: Hey. Thank you, Tim. [Foreign Language] [Interpreted] The first question regarding the related parties' revenue contribution, I think, Tim, you're right. I think we do see a few very important leading positive signals regarding the revenue potential growth in the future. I think the first of all is really, as we mentioned, giving a stronger business connection, especially with Xiaomi and the Kingsoft Group. We allocated more resources and we prioritized the revenue and client demand from our internal client. As we mentioned a few months ago, I think this is actually a very good opportunity for Kingsoft Cloud. So for this quarter, the revenue from Xiaomi and Kingsoft Group increased around 36.9% year-over-year, and are contributing to about RMB370 million for this quarter alone. I think it is a very positive signal given it is a proven of our capability to serve very important internal clients, including Xiaomi and Kingsoft, including WPS as well. So, I think the scenario and applications from auto driving from the AI-related SaaS services are very important driver for this opportunity. And we also have to see given this trend going forward, maybe it is possible by end of this year as we are turning to a new financial year, we may asking the shareholders to give us an increasing cap of the related party revenue approval. So I just want to also share this good news with you that maybe for the next two or three quarters in the shareholder meetings, we are going to -- happy to propose a higher ceiling of the revenue cap to prove that we do have a great visibility of the internal revenue from related parties. The second part is relating the AI revenue contribution. I would say that the incremental revenue from our internal parties are primarily due to the AI-related revenues. So, that's the first point. The second point is, around half of the AI total revenue, as you'll notice that, it's actually approximately one-quarter of the revenue of public cloud for this quarter. Let's say, half are coming from related parties, but also they added more than half from external clients. I think that strikes a good balance regarding, we prove our capability to serve internal clients, but also have equal capability to have those services and products for outside clients. As you may notice that, our outside clients are also most of them are the tier-one AI model companies in the China tech space today. I think that actually strikes to balances from internal and outside, but also to see potential increase, especially the visibility of the potential upside of the revenue growth going forward. And the last note on the first question, I would mention that given you can find that you can observe our gross margin has improving steadily, the incremental dollar of the gross profit are also primarily due to the contribution from our AI-related business. And, given we are carefully select the AI clients today and we think those revenue can be sustainable, secured and visible going forward. And we're going to also learn from past experience that we will control, for example, the business contracts and the business model and also notice the potential risks in working on those revenues. And, we can also strike a return and risk profile for the profits and contracts we're working on in the AI space. I think that's all for the first part of the question. Tao Zou: [Foreign Language] [Interpreted] So, I think the right way to understand -- to think about this question is that we have to make a distinction between two types of CDN business. One is the standard CDN business which is typically marked by a lower profit margin and this other kind of CDN business which represents usually higher margins, for example, like the live broadcasting acceleration, the dynamic acceleration, et cetera. And this usually has higher margin because they have -- there are higher value added. So, my quick answer is that in -- for the first type of standard CDN business, the minimum amount that we aim to maintain on a quarterly basis is RMB300 million and I do not expect it to be lower than that as service as a base for our business -- overall business and that will continue to invest and to expand the higher margin part of the CDN business. Yeah, that concludes my answer. Nicole Shan: Yeah. Thank you, Tim Zhao. And this concludes our Q&A. [Technical Difficulty] Operator: Thank you. There are no further questions at this time. So I will now hand back to Nicole Shan for any closing remarks. Nicole Shan: Thank you, and thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you all. Bye. Operator: Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.

Earnings call: FinVolution Group posts solid Q2 growth, eyes international market By Investing.com

FinVolution Group (NYSE:FINV), a leading fintech platform, reported a strong second quarter in 2024, marked by growth in both China and international markets, and a robust financial performance. The company saw a 6% year-over-year increase in China's transaction volume, reaching RMB92.5 billion, and a significant 32% jump in international markets, with transaction volumes hitting RMB4.5 billion. Serving approximately 31.5 million borrowers, FinVolution's strategic focus on customer acquisition resulted in a 22% rise in new borrowers, particularly in international markets. The company's social media presence also grew, aiding its marketing efforts. Despite macroeconomic challenges in China, FinVolution remains optimistic about future growth, supported by stable borrowing rates, improved funding costs, and a declining delinquency rate. The company's net revenue for the quarter was RMB3.17 billion, with net income standing at RMB551 million. FinVolution (ticker symbol not provided) is committed to maintaining a healthy balance sheet and liquidity as it continues to expand its international presence. FinVolution Group's second-quarter results demonstrate its resilience and strategic growth in a competitive fintech landscape. With a clear focus on international expansion and technology-driven customer acquisition, the company is well-positioned to continue its trajectory of high-quality growth, supported by a strong balance sheet and improved operational efficiencies. FinVolution Group's recent financial performance and strategic growth initiatives are underscored by several key metrics and insights from InvestingPro. The company's market capitalization stands at a robust $1.48 billion, signaling a strong market presence and investor confidence. Notably, FinVolution is trading at a low earnings multiple with a P/E ratio of 4.61, suggesting that its stock might be undervalued compared to its earnings potential. This is further emphasized by the company's price-to-book ratio of 0.77, indicating that the shares might be trading at less than the company's net asset value. In terms of profitability, FinVolution has demonstrated a commendable ability to maintain its dividend payments for six consecutive years, with a dividend yield of 3.81% as of the latest data. This consistent dividend growth, including an 11.28% increase over the last twelve months, reflects the company's commitment to returning value to shareholders and its confidence in sustained financial health. With a 6.99% revenue growth over the last twelve months as of Q1 2024, FinVolution is not only expanding its operational scale but also enhancing its profitability, as evidenced by an operating income margin of 54.77%. This aligns with the company's reported net income of RMB551 million for the quarter. The company's liquid assets also exceed its short-term obligations, which supports its claim of maintaining a healthy balance sheet and liquidity. InvestingPro Tips highlight that FinVolution is a prominent player in the Consumer Finance industry and analysts predict the company will be profitable this year. These insights, along with a strong return over the last three months of 20.76%, paint an optimistic picture for current and potential investors. For those interested in deeper analysis and additional insights, InvestingPro offers more tips on FinVolution, which can be accessed at https://www.investing.com/pro/FINV. Operator: Hello, ladies and gentlemen. Thank you for participating in the Second Quarter 2024 Earnings Conference Call for FinVolution Group. At this time, all participants are in listen-only mode. After managements' prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I would now like to turn the call over to your host, Jimmy Tan, Head of Investor Relations for the company. Jimmy, please go ahead. Jimmy Tan: Thank you, Alison. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. The company results were issued via Newswire services earlier today and are posted online. You can download the earnings release and sign up for the company email alerts by visiting the IR section of our website at irr.finvgroup.com. Mr. Tiezheng Li, our Chief Executive Officer, and Mr. Jiayuan Xu, our Chief Financial Officer, will start the call with their prepared remarks and conclude with a Q&A session. During this call, we will be referring to several non-GAAP financial measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and reconsideration to GAAP measures, please refer to our earnings press release. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company filings with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable laws. Finally, we will post a slide presentation on our high-end website providing details of our results for the quarter. I will now turn the call over to our CEO, Mr. Tiezheng Li. Please go ahead, sir. Tiezheng Li: Thanks, Jimmy. Hello, everyone, and thank you for joining our earnings call. This is Tiezheng Li, CEO of FinVolution Group. We are happy to speak with you today. We ended the first half of 2024 on a positive note, driving progress growth in the China market while maintaining our rapid growth momentum internationally. Through determined, strong execution of our local excellence global outlook strategy, or simply LEGO, legal strategy, we made great strides across our business in the markets in which we operate. Cumulatively, we have served around 31.5 million borrowers across China, Indonesia, and the Philippines as of June 30, 2024. During the first half of 2024, transaction volume for the China market reached RMB92.5 billion, up 6% year-over-year. Transaction volume for the international market continued to grow rapidly, soaring to RMB4.5 billion, up 32% year-over-year. In terms of outstanding balance, China reached RMB64.2 billion, while our international market rose to RMB1.4 billion, up 3% and 27% respectively year-over-year. This stellar performance stands out as a testament to the effective execution of our legal strategy and the unwavering commitment of our team. Customer acquisition is a key element of our legal strategy. We view it as an ongoing investment that will ultimately lead to a higher percentage of better quality repeat borrowers and drive sustainable growth. During the second quarter, our number of total new borrowers reached 823,000, up 22% year-over-year and 15% sequentially, validating our ability to grow our business across different countries. Notably, as we completed the transition to better quality borrowers in Indonesia and began to diversify our business model, the percentage of new international borrowers once again surpassed the percentage of new China borrowers. Furthermore, our number of new borrowers in the Philippines continued to grow robustly in the second quarter, increasing by 198% year-over-year and 69% sequentially. Our effective social media strategy in the international market also continued to yield positive outcomes. As of the end of the second quarter, our followers on leading social media platforms such as Facebook (NASDAQ:META), TikTok and Instagram had risen to approximately 1.3 million, 850,000 and 240,000, up 41%, 30% and 8% year-over-year respectively, validating the strong brand awareness of deep localization we have created in our overseas market. As a fintech leader, technology is deeply engraved in our DNA. It remains the core of our business and our primary competitive edge. During the second quarter, we hosted an internal tech competition called Hackathon [ph], bringing together 60 R&D teams for a 36-hour session in a closed-door environment. Winning projects included Admin AI Bots, which can incorporate API function calls into large language models. This framework can also be expanded to include multiple internal tools and support the management of different tools across platforms. Another standout is e-slot [ph], leveraging AIGC to utilize fragmented time slots to increase productivity. We believe these projects demonstrate great implementation potential for enhancing our operations and overall efficiency. Next, I'd like to share some updates on our ESG progress. We recently published our 2023 ESG report, the sixth in our company's history, highlighting our dedication to transparency and sustainability. In 2023, we advanced our mission of leveraging innovative technologies to make financial services better, as well as our ESG strategy centered on technology, green principles, and candidates. In addition to giving back to society with innovative technologies, FinVolution emphasizes integrity and compliance, low-carbon development, and harmonious relationships with employees, partners, and communities in its ESG management efforts. Moreover, we continue to support small business owners through the second quarter's challenges. During the second quarter of 2024, we cumulatively served around 415,000 small business owners and facilitated RMB14.2 billion of loans to neutralize their debts. I also want to highlight our longstanding cooperation with the national weightlifting team and congratulate them on their recent wins at the Paris Olympics. We are proud to promote awareness of the sport alongside the team and leverage their public image to help small business owners increase their product sales. Our joint initiatives embody our shared interest of the Olympic values of excellence, respect, and friendship, helping to create a better society for all. We will continue to integrate ESG management throughout our business operations and partnerships, providing sustainable development across the industry. Before we move on to our CFO's review of operational and financial metrics, I'd like to share that FinVolution celebrates its 17th anniversary during the second quarter, a milestone that inspires us to look towards our sustainable future. As such, we set our vision for 2030 to become an international Fintech platform connecting borrowers and financial institutions across multiple global markets, and leading the industry in each of them. We remain dedicated to leveraging innovative technology to make financial services better and greener, sustainably propelling FinVolution's long-term growth. To summarize, despite China's ongoing macro challenges, we successfully deployed our leading technologies and operations capabilities to achieve solid progress in the second quarter across all the markets in which we operate. Going forward, as China's macro environment improves, we are confident of resuming faster growth and delivering consistent returns across multiple metrics for all our stakeholders. With that, I will now turn the call over to our CFO, Jiayuan Xu, who will discuss our operational and financial results in great detail. Jiayuan Xu: Thank you, Li, and hello everyone. Let's go through our key results for the second quarter. To be mindful of the length of our earnings call today, I encourage listeners to refer to our second quarter earnings press release for further details. Despite China's 5% GDP growth in the first half of 2024, uncertainty still persists in the macro environment. Small ticket items and tourism-related activities remained the bright spot with the May holiday, 618 shopping festival and consumption-related index all showing signs of improvement. However, China's overall retail sales slowed to 2% growth year-over-year in June, which does not reflect an optimal recovery trajectory. China's manufacturing PMI index remained largely stable in July with manufacturing PMI holding steady at 49.4 points. Concurrently, the manufacturing PMI and compensated PMI both reached 15.2 points, which is within the expansion range, indicating Chinese enterprises' gradual production recovery. In short, although China's economy is recovering, there are still pockets of turbulence, which we will need to navigate using our vast experience in the technological and operational process. As Li mentioned, our performance in the first half of the year was solid with transaction volume growth in both China and the international market slanting within our guidance range. This was supported by consistent excellence across numerous other areas, such as institutional funding, loan collection, and risk performance, among others. Let me walk you through some of the details. During the second quarter, our average borrowing rate in China remained stable at IRR 22.2%, validating our strong commitment to advancing financial inclusion. Given financial institutions' growing desire to obtain good-quality borrowers for our platform, our funding costs improved significantly, shrinking another 90 bps during the quarter and recording a cumulative improvement of 114 bps in the first half of 2024, leading to consistent improvement in our take rate. Such a huge semi-annual improvement in funding costs underscores financial institutions' deep trust in our credit risk assessment capabilities and our ongoing enhancement of the quality of our borrowers. Given the quality of our borrowers and ample market liquidity, we are confident of achieving continued improvement in funding costs in the second half of the year. Regarding risk management, the recovery economy and our agile adjustment to our credit risk assessment models drove progressive improvement in our day-one delinquency rate, which fell by 10 basis points sequentially to reach 5.1% for the quarter. From a vintage perspective, we maintain our view that vintage delinquency will stabilize at around 2.5%. By referring our responsive payment deduction strategy, we have enhanced the efficiency of our loan collection process, resulting in an improvement in our loan collection recovery rate to 88%, up 200 basis points from the previous quarter. We expect this strong recovery momentum of loan collection will persist in the second half of the year. Furthermore, as we continue to optimize our operations, we have strategically adjusted our business portfolio to adapt our partners' involving requirements. For the first half of 2024, transaction volume for our international market reached RMB4.5 billion, up 32% year-over-year to reach the upper range of our guidance. Supported by the strong global microenvironment and our effective legal strategy, we believe our international business growth momentum is sustainable with further diversification among different business models. Moving on to our international expansion efforts, Indonesia, our first and largest overseas market has shown continued growth in its macroeconomy throughout the first half of this year, with a recorded GDP growth of 5.05% for the second quarter and a targeted GDP growth of 5.2% for full year 2024. The Indonesia Consumer Confidence Index has remained high at above 120% for 18 months. The volume of motorbike sales increased 26% year-over-year and 17% sequentially to 599,000 as of July 2024, further illustrating the nation's heightened consumer optimism. Beside a moderate correction to 49.3% in July 2024, Indonesia's manufacturing PMI has remained above 15% since September 2021, reflecting nearly three consecutive years of sustained economic prosperity. The unemployment rate decreased further year-over-year in March 2024 to 4.8% from 5.5% in the same period last year, further strengthening consumers' confidence. After two quarters of business adjustment towards better quality spoilers under the new pricing cap, we are proud to share that we have stabilized our operations in Indonesia and continue to gain recognition from local customers and other stakeholders. This recognition has attracted new funding partners, including a leading local digital bank. We are also steadily building and strengthening our relationships with larger and more reputable local financial institutions to diversify our funding sources, thereby optimizing funding costs. Next, our second international market, the Philippines. As of July 2024, its manufacturing PMI has remained above 15% for 11 consecutive months. The Philippines' labor market is also exhibiting positive momentum, with the unemployment rate dropping to 3.1% as of June 2024 from 4.5% compared to the same period last year. Furthermore, private consumption contributed 72.5% of the Philippines' nominal GDP in the second quarter of 2024, reflecting robust domestic demand that will further support the nation's rapid economic growth. Notably, our Philippines' operations continue to outperform expectations, with transaction volumes growing 140% year-over-year and 20% quarter-over-quarter to RMB674 million in the second quarter, representing 29% of the international transaction volume. This outstanding performance reflects strong support from our local partners such as SeaBank, Union Bank, and Myer Bank, our latest funding partners who recently partnered with us on a $47 million program. With sufficient funding in place, we believe we can maximize the benefits of our e-commerce cooperation with TikTok Shop, acquire additional new borrowers from diversified channels, and sustain continued high growth rates. Now turning to our financial metrics, this quarter's operational excellence lead to better than expected financial results. Net revenue for the quarter reached RMB3.17 billion, up 3% year-over-year. Our net income was RMB551 million, a 4% increase quarter-over-quarter, underscoring our operational stability. Meanwhile, sales and marketing expenses increased by 5%, sequestering to RMB473 million as we continue to invest in growth across all of our markets. As we restructured our business mix, our leverage ratio adjusted to 3.5 times, indicating opportunities for dramatic growth when the economy further recovers. Our balance sheet remained robust, with short-term liquidity maintaining a healthy level at RMB8.1 billion, reflecting our strength and flexibility in executing our legal strategy to advance our international expansion and drive shareholders' returns. Consistently, rewarding our shareholders remains a top priority for FinVolution, both through business growth across different markets and our market-leading capital return program incorporating share repurchase and dividends. Our first share repurchase program began in March 2018, shortly after our IPO in November 2017, and has been widely embraced by our shareholders. Our buyback history indicates two repurchase programs with a total deployment of around $216 million. We are now conducting our third repurchase program of up to $115 million. Notably, in the second quarter, we deployed around $13 million and repurchased 6.1 million ADS. For the first half of 2024, we have deployed around $57 million for share repurchase. Our total cumulative share repurchase amount reached $337 million as of the end of the second quarter. In addition, our dividends have steadily increased over the past four years, with the cumulative dividend amount reaching $325 million. In total, our capital return program has returned $662 million to our shareholders, with the payout ratio rising to 49% of net profit in 2023. Going forward, we will continue to strengthen our capital return program for our shareholders. In summary, our solid second quarter results showcase our legal strategy's effectiveness. Our nameable business model and our technological advantages, we expect our Indonesia operations to become profitable in 2024 and our Philippines operations to contribute profits in 2025, boosting our confidence in deploying a more proactive international expansion strategy. As we capitalize on the massive opportunities in the international markets, we look forward to delivering sustainable growth and sharing our success with all our stakeholders. That concludes my prepared remarks. We will now open the call to the questions. Operator, please continue. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Cindy Wang of China Renaissance. Please go ahead. Cindy Wang: Thank you management for taking my call. I have two questions here. First question is, could you give us some color on the trend of your China borrowers' loan demand in the second quarter and also in July? And the second question is, in Indonesia, your customer acquisition strategy after the APR meets the requirement. And any updates on the regulation front of the interest rate requirement in 2025? Thank you. Tiezheng Li: Hello, Cindy. Let me do the translation. Regarding China demand, during the second quarter, the trend of our borrowers' demand is largely in line with the weakness in residential credit demand. The daily application rate of repeat borrowers declined by mid-single digit around 6% on an annual basis and quarterly comparison, reflecting weak consumer confidence. In July and August, we have observed that the application rate of our repeat borrowers has increased by mid-single digit between 6% to 7% on a daily basis. The demand of our borrowers is concentrated in the area of daily necessity. Therefore, when the economy is weak, it will show more resilience and we expect demand will gradually improve in the second half of the year. Hello, Cindy. Let me do the translation. From the Indonesian market environment, it is presenting a much more positive trend. After the Indonesian election, political situations have normalized with an improving economy such as GDP increase. Let us concentrate on our performance in Indonesia. During the second quarter, transaction volume for Indonesian market reached RMB1.64 billion, up about 6% to 7% annually, with outstanding loan balance between RMB1 billion, up about 4%. Revenue for the quarter reached RMB430 million. Number of borrowers reached RMB530,000 up 4% sequentially, and number of new borrowers reached 200,000, up 9% sequentially. We have cumulatively cooperated with seven financial institutions, and all our funding is from local financial institutions now. Our Indonesian operations has completed its pricing transition in just five months, and we have made adjustments in borrowers' costs, model iteration and credit risk has improved by 28%, meaningfully offsetting the impact of interest rate reduction. Therefore, our take rate returned to 10%, reflecting our business entering a more stable stage. For the second half of the year and for the third quarter, we expect Indonesian operations will resume growth of over 10%, with transaction volume potentially reaching new record high. Indonesian online operations will remain stable, with credit risk, customer acquisitions improving consistently. For offline operations, we have completed the acquisition of a multi-finance license, with a controlling stake of 83.7%. Going forward, we will proactively explore both online and offline China's multi-products and buy now, pay later installments for different scenarios such as electricity and electric bikes, et cetera. We will fully leverage our China expertise and leverage them in our Indonesian market to ensure future growth. Hello, Cindy. Any more questions from you? Operator: Thank you. And our next question will come from Yada Li of CICC. Please go ahead. Yada Li: Then I will do the translation. Hello, management. Thank you for taking my questions. And I was wondering, what's the plan and growth target for the company's domestic business? And I've noticed that the company has gained a slightly faster volume growth compared with the peers. And looking ahead, how likely the company can maintain such growth? And how does the company balance the volume growth and profitability? That's all. Thank you. Jimmy Ta: Hello Yada, let me do the translation for Alexis. As you know, China market has some changes this year, and it is very different from the previous years. And currently, the scale of China consumer market has slowed down and entered into a stage of increased competition. After the fiscal risk fluctuation in the industry during the second half of 2023, many players have experienced varying degree of earnings reduction. Under the uncertain macro environment, we are searching for certainty that is beneficial for us and execute sustainable development in China. We have a few ways to achieve this. First of all, we have certainty for success on acquiring new borrowers through information fees, leveraging on data and behavior. We continue to optimize the information fees in China and improve the algorithms, and conduct joint modeling to enhance ROI. And we are able to increase the accuracy in determining the lifetime value of our customers and maintain stable customer acquisition strategy. Transaction volume contributed by new borrowers was up 2% and 27% year-over-year. Our percentage of new customers was between 12% to 15%. At the same time, we are able to have better cost control and a healthy LTB level. Apart from information fees in China, we are also actively diversifying our customer acquisition in China and have found multiple new internet platform partners to work with us. In addition, we are also leveraging on our brand to influence our borrowers. For example, during the Olympics period, our support for the national weightlifting teams has achieved tremendous success along with their wins at the games. Along with promoting a positive image for China Olympics, we have also gained remarkable results of over 100 million views and over 20 million counts of video traffic transmission. And secondly, the management of repeat borrowers is a certainty for us, and we have over 17 years of operating history and we are very familiar with our borrowers. Through deeply excavating their diversified multi-layers and differentiated requirements, we will then refer them with the most suitable products based on different scenarios such as user profiles and behavior characteristics. And all these have led us to increase our users' promotion impact by 36% in the first half, which leads to a higher transaction volume for repeat borrowers. Thirdly, our business operations remain healthy with stable performance coupled with continuous improvement in funding costs, which leads to progressive improvement on multiple funds such as tick rates. All these ensure our high-quality growth, which is above the industry and lay the cornerstone for sustainable growth going forward. Okay, thank you, Yada. Operator: Thank you. [Operator Instructions] And our next question today will come from Alex Ye of UBS. Please go ahead. Alex Ye: Thank you. So, my first question is on asset quality. We have noted that early indicators have claimed to improve in the second quarter. Just wondering what are the key drivers behind a recent trend? And should we be worrying about any potential uptick in NPR in the second half, like in the third quarter last year? And the second question is on the sequential trend on the take-away. What have been the key drivers behind? What is the outlook for the second half? And is there any more room for improvement for the final cost? Thank you. Jiayuan Xu: Hello, Alex. Let me do the translation. Regarding our overall asset quality. During the initial phase of restoration last year, we leveraged on our years of experienced and [Indiscernible] accurate predictions of industry trends and higher approval rates for riskier borrowers and higher debt, higher risk, and deploy different strategies for medium risk groups, and quickly adjust for the risk strategies during the early stages of delinquencies. In the first quarter, risk performance stabilized, and we are one of the earliest platformers in the industry that are able to contain risk at a lower level. During the second quarter, we further optimized, adjusted and iterated on the overall credit limit, and explored solutions for different types of users, while maintaining growth in transaction volume and balancing risk. We have also shared that during the second quarter, our vintage delinquency remained stable at 2.5%, while day one delinquency reduced by 10 basis points to 5.1%, and loan collection recovery rates improved to 88%. We don't think this situation will happen in the second half as the overall environment is much more stable now. I would like to share more information with you. Over the past 17 years in our operating history, industry-wide fluctuations in asset qualities have occurred four times, and such fluctuations on average last around 4-5 months, with the longest lasting 7 months and the shortest lasting 2 months. The fluctuation for this round is considered to be mid-term, and the impact of fluctuation is smaller. Based on past recovery experience, the recovery process normally takes place at between the 4 to 6 month. Therefore, the fluctuation this time round is not unique, and has already shown signs of recovery. And we are confident to handle any more of such fluctuations in the future, based on our experience. Hello, Alex, let me do translation. Regarding take rates during the second quarter our average borrowing rates remains at 22.2%. Funding cost optimized by 90 bps in the second quarter while vintage delinquency remain stable at 2.5% and take rate further improved to 3.1%. For the second half of 2024, we expect average borrowing rate to remain stable and funding cost and vintage delinquencies to have further optimization. Our asset quality is popular in such environment and we are one of the few platforms that are able to maintain growth. This is the reason why we are more room to negotiate for better funding costs with our funding partners. Funding costs has continued to improve by 140 basis points in the first half, improved by 90 basis sequentially. And going forward we still believe it will have room for improvement based on how it adjusted for the year. Okay, thank you, Alex. Operator: Okay, thank you. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks. Jiayuan Xu: Thank you once again for joining us today. If you have any further questions, please feel free to contact FinVolution Group's Investor Relations Team. Thank you all, and have a nice day. Operator: This concludes this conference call. Thank you for joining. You may now disconnect your line.

Earnings call: Agora, Inc. sees steady growth and focuses on AI By Investing.com

Agora, Inc. (ticker: API) has exhibited a stable financial performance in its second quarter of 2024, with a slight increase in total revenues, reporting $34.2 million. The company, specializing in real-time engagement and conversational AI technologies, announced the transition of its speech-to-text product to general availability and a new partnership with Unity China. Despite a modest year-over-year revenue increase, Agora faces a non-GAAP net loss of $6 million and anticipates phasing out some low-margin products. Looking ahead, Agora expects to achieve breakeven on a GAAP basis by 2024 and is confident in its long-term growth, particularly in the live shopping and IoT sectors. Agora's financial health and market performance can be better understood by considering some key metrics from InvestingPro. Despite the company's challenges, a closer look at the data reveals some potential areas of strength and concern. InvestingPro Data shows that Agora's market capitalization stands at $200.83 million, reflecting the market's current valuation of the company. The company's price-to-earnings (P/E) ratio is negative at -4.73, indicating that the company is not currently profitable based on the last twelve months as of Q2 2024. However, the gross profit margin is quite robust at 62.58%, suggesting that Agora maintains a strong ability to convert revenue into gross profit. The revenue growth presents a mixed picture. While there was a slight decrease of 8.77% in revenue over the last twelve months as of Q2 2024, there was a modest quarterly increase of 0.5%. This suggests that while the company has faced some challenges over the past year, it may be starting to see some turnaround in its revenue trajectory. InvestingPro Tips highlight that Agora's price is at 65.17% of its 52-week high, which may indicate a potential discount relative to its highest valuation over the past year. Additionally, the fair value estimates from analysts and InvestingPro suggest a price target of $2.63 and $3.4, respectively, which is above the previous close price of $2.34. This implies that analysts see some upside potential in the stock. InvestingPro has additional tips that could provide further insights into Agora's performance and potential investment opportunities. There are 15 more InvestingPro Tips available that could help investors make a more informed decision about the company. In summary, while Agora faces challenges, certain metrics indicate areas of strength, such as a high gross profit margin and a potential undervaluation based on fair value estimates. Investors interested in a deeper analysis can find more InvestingPro Tips to guide their investment strategy. Operator: Good day, and thank you for standing by. Welcome to the Agora, Inc. Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. The company's earnings results press release, earnings presentation, SEC filings and a replay of today's call can be found on its IR website at investor.agora.io. Joining me today are Tony Zhao, Founder, Chairman and CEO; Jingbo Wang, the company's CFO. The reconciliations between the company's GAAP and non-GAAP results can be found in earnings press release. During this call, the company will make forward-looking statements about its future financial performance and other future events and trends. These statements are only predictions that are based on what the company believes today, and actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that could affect the company's financial results and the performance of this business in which the company discussed in detail in its filings with the SEC, including today's earnings press release and the risk factors and other information contained in the final prospectus relating to its initial public offering. Agora, Inc. remains no obligation to update any forward-looking statements the company makes on today's call. With that, let me turn it over to Tony. Tony Zhao: Thanks, operator, and welcome everyone to our earnings call. I'll first review our operating results in the past quarter. Agora revenues were $15.6 million in the second quarter, up 2% year-over-year, mainly driven by business expansions in certain use cases, such as live shopping. Shengwang revenue were RMB 132 million in the second quarter, up 0.3% year-over-year and 8% quarter-over-quarter, mainly due to usage growth of digital transformation and Internet-of-Things customers. I'm glad to see that both Agora and Shengwang delivered year-over-year revenue growth this quarter despite a very challenging macro environment. This success is due to our relentless innovation in driving new use cases and enhancing the quality and value of our products in existing use cases. Now moving on to our business products and technology updates for this quarter. Let's first talk about Agora. Recently, our real-time speech-to-text product transitioned from beta to general availability. As I mentioned in our previous earnings call, this product enables customers to transcribe the audio of each user in the channel. Text can be distributed as live captions to all channel participants to enhance accessibility and user experience. Throughout the development and beta testing stage, we have improved the performance of our product to accommodate up to 3 simultaneous speakers and added support for our major language and dialects. Additionally, our product is integrated with large language models, allowing customers to receive automatically generated summaries of meetings or events and gain insights at the end of each session. For example, HelloTalk, a leading language learning platform with more than 50 million users has been one of our customers to first adopt our real-time speech to text product. With the integration of our product and the large language model, HelloTalk can now provide their users advanced capabilities, including live language analysis, live translation, language proficiency assessment, creating contextual and personalized learning experiences. Additionally, I'm happy to announce the launch of Agora's new website. At Agora, we believe all our customers are developers at heart. Recognizing the innovative spirit of our new website boasts an intuitive interface, enhanced litigation and a more modern design to create a cool and sleek user experience. It also offers a wealth of resources tailored to both developers and key business decision makers. Next, let's turn to Shengwang. We are excited to announce our recent partnership with Unity China to integrate our in-game voice calling capabilities in Unity China's UOS engine. This collaboration allows game developers to seamlessly add multi-player voice channel into their games. It is especially appealing to small game studios and independent developers who often lack the skill set and resources to address all the technical challenges on their own. In addition, our proprietary advanced features such as 3D spatial audio, AI noise suppression and echo cancellation are available to developers, enabling them to create immersive experiences for players. In this quarter, we have also facilitated wider application of AI in our customers' use cases. For example, we helped XiaoTianCai to add real-time transcription for video calling in their latest flagship smartwatch. Previously, when users conduct video calling -- video calls on the smartwatch in noisy environment, it was often difficult to hear the other party clearly. Moving the wrist and watch closer to the ear would make it impossible to see video on the screen, therefore, forcing users to make a hard choice between audio and video. Now with our cloud AI real-time transcription capabilities, users can enjoy video calls with captions on their smartwatch, significantly enhance their user experience. Last September, we become the first company to offer real-time voice SDK that enables conversations with generative AI models. Since then, we have facilitated our customers to launch conversational AI applications in various use cases such as AI companion, productivity assistant, language tutor and customer service. Although these applications are still in their early stage, we have already seen promising user adoption and engagement trends. Looking forward, we are committed to staying at the forefront of technology advancement to enable developers to innovate at a faster pace and build the conversational AI application of tomorrow. This year marks the 10th anniversary of our economic real-time engagement or RTE conference. This coming October, we will host our RTE conference in Beijing, focusing on the intersection of AI and RTE technologies. And the exciting possibility that lies a hand. Experts and practitioners from both the AI and RTE community will gather to share the vision and efforts to create revolutionary technologies, products and applications. There will also be for focusing on more traditional verticals such as digital transformation, entertainment, education and Internet opportunities. We welcome you all to attend the conference and experience firsthand the vibrant spirit of the industry. Before concluding my prepared remarks, I want to thank both Agora and Shengwang teams for their hard work and commitment during the challenging period. Let's stay focused on creating long-term customer value and strengthen our leading market position. With that, let me turn things over to Jingbo, who will review our financial results. Jingbo Wang: Thank you, Tony. Hello, everyone. Let me start by first reviewing financial results for the second quarter of 2024, and then I will discuss outlook for the third quarter. Total revenues were $34.2 million in the second quarter, an increase of 3.6% quarter-over-quarter and an increase of 0.5% year-over-year. We have finally overcome the impact of the pandemic, the macroeconomic turmoil, and regulatory changes and returned to year-over-year revenue growth for the first time since 2021. Agora revenues were $15.6 million in the second quarter, a decrease of 1.3% quarter-over-quarter and an increase of 2% year-over-year. The quarter-over-quarter decrease was primarily due to reduced usage from customers in emerging markets. The year-over-year increase was primarily due to business expansion and usage growth in certain verticals such as live shopping. Shengwang revenues were RMB 131.9 million in the second quarter, an increase of 7.6% quarter-over-quarter and an increase of 0.3% year-over-year. The increase were primarily due to increasing revenues from certain verticals such as Internet-of-Things. Dollar-based net retention rate is 92% for Agora, and 79% for Shengwang excluding revenues from discontinued business. Moving on to cost and expenses. For my following comments, I will focus on non-GAAP adjusted financial measures, which exclude share-based compensation expenses, acquisition-related expenses, amortization expenses of acquired intangible assets, income tax related to acquired intangible assets, impairment of goodwill, depreciation of property and equipment, and amortization of land use right. Adjusted gross margin for the second quarter was 63.4%, which was 3.8% lower than Q2 last year and 0.2% higher than Q1 this year. The year-over-year decrease was mainly due to change in product mix. The quarter-over-quarter increase was mainly due to improved utilization rate of infrastructure. Adjusted R&D expenses decreased 6.6% year-over-year to $15.5 million in Q2, mainly due to our continued cost control measures. Adjusted R&D expenses represented 45.4% of total revenues in the quarter compared to 48.8% in Q2 last year. Adjusted sales and marketing expenses were $5.9 million in Q2, decreased 16.9% year-over-year. Sales and marketing expenses represented 17.3% of total revenues in the quarter compared to 20.9% in Q2 last year. Adjusted G&A expenses were $6.6 million in Q2, slightly increased 6.5% year-over-year, primarily due to the increase of expected credit loss. G&A expenses represented 19.1% of total revenues in the quarter compared to 18.2% in Q2 last year. Overall, adjusted operating expenses were 6.1% lower than the same period last year, thanks to our effective cost control. Adjusted operating expenses were 2.2% higher than Q1 this year. The sequential increase was mainly because we decided to replace certain share-based compensation with cash compensation for employees, in order to reduce dilution for our shareholders when shares are trading below cash value. Adjusted EBITDA was negative $6 million, translating to a 17.6% adjusted EBITDA loss margin for the quarter compared to 19.5% in Q2 last year. Non-GAAP net loss was $6 million in Q2, translating to a 17.5% net loss margin for the quarter lower than the net loss margin of 19.4% in Q2 last year. Now turning to cash flow. Operating cash flow was negative $7.6 million in Q2, compared to negative $5.3 million last year. Free cash flow was negative $7.9 million compared to negative $5.6 million last year. Moving onto the balance sheet. We ended Q2 with $371 million in cash, cash equivalents, bank deposits and financial products issued by banks or $4.03 per ADS. Net cash outflow in the quarter was mainly due to free cash flow of negative $7.9 million and share repurchase of $2.3 million. Now turning to guidance. For the third quarter of 2024, we currently expect total revenues to be between $31.5 million and $33.5 million. This forecast reflects our end of sale of certain products with unsatisfactory profitability. Such products generated approximately $2.4 million of revenue in the third quarter of 2023 and $3.3 million of revenue in the second quarter of 2024. The average gross margin of such products was below 10%. So we expect end of sale of such products will lead to a meaningful increase in our gross margin and a positive impact on bottom line in the third quarter. This outlook also reflects our current and preliminary views on the market and operating conditions, which are subject to change. In closing, returning to the year-over-year growth is an inspiring turning point under a challenging operating environment. We are excited about emerging use cases, especially the intersection between real-time engagement and conversational AI, and we remain confident about our long-term growth potential. Thank you to both Agora and Shengwang teams for their hard work and contribution during this period. Thank you, everyone, for attending the call today. Operator, let's open it up for questions. Operator: [Operator Instructions] First question is from the line of Yang Liu with Morgan Stanley (NYSE:MS). Yang Liu: I have two questions here. The first is regarding the business outlook. As Jingbo just mentioned that you will face out some of the low-margin business. Could you please elaborate more about the reason behind that led you to the competition or the outlook of that business? And you mentioned that the business has a quite low gross margin, and I'm not sure whether that business operating margin or net margin is also very bad or what is the potential impact to the bottom line. And the second question is based on the company's pipeline, what is your expectation of the future of emerging applications or use cases for RDC or whatever AI-related application, if you see any potential booming of the RDC usage. Could you please share more about that? Jingbo Wang: I'll take the first question. So yes, so we already are in a certain products in this quarter, and these products we mentioned in the -- few years back is one more CDN-based technology and given how competitive that market is. These products have pretty low gross margin, but in the low single-digit range. And because we -- they are also related to other expenses. So actually a net margin -- operating margin basis, it's close to even slightly inactive. And as we know, we have been very focused on improving the overall operating efficiency and drive business towards sustained profitable growth. And that's why we believe this business is a not generally being profit, and we don't see that market turning on very quickly in the near term. And that's why we decided to basically terminate the sale of such products. That doesn't mean we will exit the entire kind of medium latency live streaming market. We are getting other innovative products, not based on the traditional existing technology, but more based on the RDC related technology. So we'll continue to be competing in that market, but we will be more focused on innovation versus that offering more traditional and legacy products. Tony Zhao: I'll take GenAI side of the question. We have been actively talking to leading large language model companies globally with very positive feedback in general. The importance of multi-model capabilities and a highly reliable, low-latency transmission network is well recognized by all players. We are working closely with many of them to drive multi-model products and solutions. Some of our consumer applications have already - some of real consumer applications have already integrated with our SDK. Meanwhile, we have also worked together in engaging with AI developer community. If you look at the [indiscernible] almost 500,000 different models such we have working with them to engage with different communities on that to bring the models into real low use case. We also partnered with companies like [indiscernible] start-up program to help the offers to innovate. Please stay tuned for more announcements in our RTE conference in October. Operator: One moment for our next question. It comes from the line of David Lee with Bank of America (NYSE:BAC) Securities. David Lee: I have two questions here. Number one is about the revenue by segment. It seems that Shengwang revenue is getting stronger quarter-on-quarter recovery in Q2 compared to Agora. And what's the key drivers? And how do we see the trend in Q3 for the domestic market and an international one? And the second question about our breakeven target. As we have been -- how to control about the expenses and also still down the low-margin business. And do we have update about the -- for the given target in the following quarters or some time. Tony Zhao: In terms of Q3 demand, for U.S. and international markets, we see growth momentum in live shopping and IoT verticals, particularly in direct-to-market. Since we become the first company to offer real-time voice SDK that enables a conversation with generative AI models, competitors have also followed us and provide similar products. We believe this will be the new battlefield of RTE. With our recent launch of our conversational AI framework, we will gain significant competitive edge to engage with AI developers and serve their applications. In China market, we see growth pressure in IoT customers, also some strong demand for conversational AI applications. Competitive landscape largely unchanged during the past quarter. Competitive pressure stabilized. Jingbo Wang: I'll take the second question. So from what we see right now, demand for our corporates remain pretty robust. So we do expect a sequential revenue growth in Q3 compared to Q2 and hopefully, Q4 compared to Q3 as well. And the gross margin of our corporates remain very healthy. So you will see a pretty nice uptick in gross margin in Q3 and Q4. But as I mentioned, the information on the certain low margin products will not impact the bottom line. In terms of the OpEx, we'll continue to manage OpEx very cautiously, and we do not act to be higher than Q2 in the coming quarters. If anything, we might try to further improve efficiency. So at this point, I cannot promise that timing of the chat breakeven, given there are still a lot of moving parts, but we are committed to achieving profitable and sustainable growth. So if we think about the business in this quarter, we returned to year-over-year growth after a lot of the macro challenges dynamic, the macro environment in both China and in the U.S., [indiscernible] and funding environmental changes as well as relations. So now we have finally come back to revenue growth, and we believes the eternal point and the core business will continue to grow from this point out. And as we maintain our cost discipline and drive efficiency, but maybe it's just a matter of halftime before we achieve that goal - capital and continue to grow from there. And then, we expect to achieve such a breakeven on GAAP basis and on a continued basis in 2024. Operator: And as there are no further questions, I want to thank everybody for attending the company's call today. As a reminder, the reporting of the earnings release will be available on the company's website at investor.agora.io. And if there are any questions, please feel free to e-mail the company. Thank you, everyone.

Analog Devices, Inc. (ADI) Q3 2024 Earnings Call Transcript

Michael Lucarelli - Vice President, Investor Relations and FP&A Vincent Roche - Chief Executive Officer and Chair of the Board of Directors Richard Puccio - Executive Vice President and Chief Financial Officer Good morning. And welcome to the Analog Devices ' Third Quarter Fiscal Year 2024 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call Mr. Michael Lucarelli, Vice President of Investor Relations and FP&A. Sir, the floor is yours. Michael Lucarelli Thank you, Kevin. And good morning, everybody. Thanks for joining our third quarter fiscal 2024 conference call. With me on the call today, ADI's CEO and Chair, Vincent Roche; ADI's CFO, Richard Puccio. For anyone who missed the release, you can find it in relating financial schedules and investor.analog.com. Onto the disclosures, information we're about to discuss includes forward-looking statements which are subject to certain risks and uncertainties as further described in our earnings release and our periodic reports and other materials follow the SEC. Actual results could differ materially from the forward-looking information, as these statements reflect our expectations only as a date of this call. We undertake no obligation to update the statements except as required by law. Revenue, adjusted gross margin, operating and non-operating expenses, operating margin, tax rate, EPS and free cash flow in our comment today will be on non-GAAP basis, which excludes special items. When comparing our results to historic performance. Special items are also excluded from prior periods. Reconciliation of these non-GAAP measures to most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's release. And with that, I'll turn it over to ADI's CEO and Chair, Vince? Vincent Roche Thanks very much, Mike, and a very good morning to you all. The stronger demand for a high-performance product portfolio and skillful execution resulted in third quarter revenue of more than $2.3 billion, operating margin north of 41%, and EPS of $1.58. All above the midpoint of our outlook. These favorable results, combined with improved customer inventory levels and order momentum across most of our markets, increase my confidence that our second quarter marked the cyclical bottom for ADI. My optimism remains guarded, however, as challenging economic and geopolitical conditions are limiting a sharper recovery. We continue to balance near-term fiscal discipline with strategic investment in our long-term growth initiatives, positioning ADI to capitalize on the extraordinary opportunities that we see ahead. Now I'd like to draw attention to our industrial end market, which is our largest, most diverse, and most profitable business, generating durable revenue streams that last close to two decades, on average. As our business begins to recover from the pandemic's volatility, we're excited about the tremendous long-term growth opportunities of the industrial market. We offer our customers an unparalleled suite of high-performance solutions stretching from antenna to bits, sensor to cloud and nanowatts to kilowatts. Our extensive technology portfolio combined with our deep domain expertise and engineering muscle has enabled us to secure leading positions across the most attractive industrial sectors. Now, with growing digital software and algorithmic capabilities augmenting our cutting-edge analog portfolio, ADI is strongly positioned to solve our customers most difficult challenges in factory and process automation, energy efficiency, secure connectivity and many, many more. To illustrate the power and potential of our industrial franchise, let me share with you a few examples of how our recent innovations are unlocking new revenue streams and positioning us for strong growth in the years ahead. For example, our Instrumentation and Test business, which includes scientific instruments, electronic test and measurement, and automated test equipment is essential to the important scientific and technological advancements of the digital era. Within automated test equipment, for example, our next generation solutions increase channel density and throughput, while reducing energy consumption by up to 30% per system. These are crucial parameters for testing complex, high performance compute GPUs and high bandwidth memory systems for AI. As the AI infrastructure build up remains a priority for global hyperscalers, we expect growth to continue into 2025 and indeed well beyond. Turning now to Aerospace and Defense, which has been our most resilient business during this downturn, ADI's domain expertise and high performance portfolio across orphan microwaves, high speed and precision converters, power and MEMS uniquely positions us to deliver complete edge solutions offering our customers scale, velocity and lower total cost of ownership. As an example, we're building upon our programmable Apollo signal chain platform today to create full software defined earth communications and sensor systems, which has the potential to increase our sound by five times in commercial, defense and aerospace communication systems. Indeed, we see a path to double digit revenue growth in this sector in 2025, fueled by several high value design wins that are going to production. In Automation, though we've seen a slow recovery to date, we remain strongly confident in its future growth potential as the benefits of increased productivity are ever more clear. Customers are prioritizing enhanced digitalization and IT-OT integration on their factory floors. Their deployments of in-line instrumentation and advanced robotics are driving the need for more sensing, edge processing, secure connectivity, and car management. Within robotics, we're seeing a progression from fixed-arm machines to autonomous and mobile robots to eventually humanoid robots. This evolution creates additional opportunities for a precision signal chain franchise. And sensing, connectivity, and motion-controlled subsystems with fully isolated and efficient power solutions can drive content from hundreds of dollars in robots today to thousands in autonomous and humanoid robots. What is additionally exciting about these advances is their broad applicability beyond factories, such as surgical robots and imaging systems in healthcare. ADI's products have the potential to dramatically improve a surgeon's effectiveness through a more precise surgical experience with lower latency connectivity. Additionally, patients gain the potential benefits of shorter hospital stays and fewer complications. The evolution in robotics is expected to unlock billions of dollars of potential opportunity for a high-performance analog, mixed signal, power connectivity, and sensing solutions. We see the potential for a doubling of our robotics revenue in the years ahead. Turning now to Energy Transmission and Distribution, our customers are modernizing and digitizing the electrical grid to respond to exponentially accelerating energy demand driven in part by the proliferation of electric transportation and rapid AI adoption. This process is resulting in a grid that is distributed dynamic and bidirectional, a paradigm shift from the past model of linear stable supply. We're working with traditional suppliers and disruptors to enable the necessary intelligence for the new grid, from decentralized power plants to the distribution edge. We're leveraging our analog and algorithm capabilities in cutting edge energy monitoring and management solutions. Additionally, our battery management technology increases capacity and improves energy utilization in the grid's renewable energy storage systems. This reimagined intelligent grid of the future has the potential to expand our return by over $10 billion and creates tailwinds for our energy franchise for many years to come. Given the synergies across our industrial portfolio, our pace of innovation and the emergent signs of market recovery, we're optimistic for our industrial business that has turned the corner and '25 will be a robust growth year. So in closing, our investments in high-performance analog solutions are enabling us to intersect with and leverage the numerous concurrent secular trends that transcend the business cycle and will propel us into the future. Our commitment to our customers' success and to impactful innovation will be the path that carries us there, ultimately increasing long-term shareholder value. And so with that, I'm going to turn it over to Rich, who'll take you through the numbers. Richard Puccio Thank you, Vince. And let me add my welcome to our third quarter earnings call. Third quarter revenue of $2.31 billion came in above the midpoint of our outlook, finishing up 7% sequentially and down 25% year-over-year. Industrial represented 46% of revenue in the third quarter, finishing up 6% sequentially and down 37% year-over-year. Every major application increased sequentially except for automation, which declined at a much slower pace than it had in previous quarters. Automotive represented 29% of revenue, finishing flat sequentially and down 8% year-over-year. We saw continued double-digit growth year-over-year for our industry-leading connectivity and functionally safe power platforms. Conversely, automotive production cuts are extending inventory digestion across customers, particularly impacting our legacy automotive and electrification businesses. Communications represented 12% of revenue, finishing up 10% sequentially and down 26% year-over-year. Slowing customer inventory digestion enabled both wireless and wireline growth sequentially. And lastly, Consumer represented 14% of revenue, finishing up 29% sequentially and increased year-over-year for the first time since 2022. We saw diversified growth across applications with notable strength in portables and gaming. Now let's move from the top line to the rest of the P&L. Third quarter gross margin was 67.9%, up 120 basis points sequentially, driven by higher revenue, higher utilization and favorable mix. Operating expenses in the quarter were $619 million, up modestly sequentially, driven primarily by higher variable compensation. Operating margin of 41.2% exceeded the high end of our outlook. Nonoperating expenses finished at $70 million and the tax rate for the quarter was 10.8%. The net result was EPS of $1.58, which finished near the high end of our outlook. Our financial position is solid and I'd like to call out a few items from our balance sheet and cash flow statement. We ended Q3 with more than $2.5 billion of cash and short-term investments and a net leverage ratio of 1.2. Inventory decreased $51 million sequentially and days declined to 178 from 192. As planned, we reduced channel inventory further this quarter with weeks ending near the low end of our 7 to 8 week target. Operating cash flow for the quarter and trailing 12-month was $0.9 billion and $4 billion respectively. CapEx for the quarter and trailing 12-month was $154 million and $1 billion respectively. For fiscal '24, CapEx is tracking to our $700 million plan, which is down roughly 45% versus 2023 as our hybrid manufacturing investment cycle tapers. Not included in these figures are the anticipated benefits from both the European and U.S. CHIPS Act. During the last 12 months, we generated $2.9 billion of free cash flow or 30% of revenue. Over this same time period, we have returned $2.8 billion via dividends and share repurchases. As a reminder, our strategy is to return 100% of our free cash flow to our shareholders over the long term. Now I'll turn to the fourth quarter outlook. Revenue is expected to be $2.4 billion plus or minus $100 million, up 4% sequentially at the midpoint. We expect sell through to be roughly equal to sell in this quarter. At the midpoint on a sequential basis, we expect industrial and consumer to increase, communications to be flattish and automotive to decrease. Operating margin is expected to be 41% plus or minus 100 basis points. Our tax rate is expected to be between 11% and 13% and based on these inputs, EPS is expected to be $1.63 plus or minus $0.10. In closing, our third quarter results and fourth quarter outlook support our view that we have passed this cycle's trough. However, challenging economic and geopolitical conditions are limiting a faster demand recovery. I will now give it back to Mike for Q&A. Michael Lucarelli Thanks, Rich. Let's get to our Q&A session. We ask that you limit yourself to one question in order to allow for additional participants on the call this morning. If you have a follow -up question, please requeue and we'll take your question if time allows. With that, we have our first question, please. Our first question comes from Tore Svanberg with Stifel. Tore Svanberg Yes, thank you so much. Great to see the turn here. Vince, could you maybe elaborate a little bit more on this sort of mixed environment, right? Because inventories have bottomed, access to inventories have bottom, at the same time end demand seems to be kind of mixed. So, as you navigate through this period, could you elaborate a little bit on your visibility, how's backlog trending? Are you finally starting to see new products ramping more into production? Because these are typical signals that you want to see at the beginning of a new cycle. Vincent Roche Yes, thanks Tore. Well, I'd say first and foremost, we run this company on POS signals. That's how we plan our production, how we run the company operationally. So, we pay very, very close attention to what's happening in terms of the end market demand. And my confidence has increased since last quarter that indeed 2Q was the cyclical bottom. We've exited 3Q with very, very lean channel inventory. We've taken inventory of our own balance sheet though. We're positioned with a very, very healthy backlog of inventory on our own balance sheet so that the anticipated demand upsurge as we expect in 2025, were very, very well equipped and ready to meet that. So foray in the fourth quarter, as we've said, we expect to see continued sequential growth. And indeed, we'll also see, I think, particularly in the industrial area, continued improvement on customer inventory levels. So, look, it's all the whole recovery, the ramp of the recovery will depend on the macro situation. But nonetheless, given the design wins, we've a record design win pipeline in the company. So we're facing many, many secular tailwinds with a very strong pipeline, a very, very good supply line, and with a very, very lean inventory on the customer's balance sheet. So that gives me the optimism, Tore, that we're very, very well positioned coming into the new year. Our next question comes from Joseph Moore with Morgan Stanley. Joseph Moore Yes, thank you. My question's on the trajectory of automotive versus industrial. It seems like automotive entered into an inventory correction a little bit later, and so far, has been much less severe. I guess you sort of talked about some ongoing headwinds in that space. Can you just talk about what overall drawdown might you expect in automotive and where are we in customers kind of growing down safety stock inventory Richard Puccio So, Joe, this is Rich, and I'll take a crack at that one. So, I'll just level set a little bit from our perspective. And what we're seeing in the market cars continue to become more electric and software-defined, which is also driving our semi-content growth, largely trying to address increased battery densities, more sensors displays. And we do expect that is going to be a long-term tailwind to our business. However, and this is where we're starting to see some of the pullback. The vehicle market has softened in the near term. We're seeing our customers pull back on their production. And at this point, we're seeing them start to choose to burn off some inventory. So we are seeing that, right. The softness is evidence in our results. Auto has been down year-over-year for two straight quarters. And we expect it will be down again in 4Q. And from a bookings perspective, we did see a decline in bookings in auto. In particular, we've seen inventory digestion in our legacy auto and in our BMS portfolios. And we expect that's going to continue into at least the fourth quarter, particularly when you consider the challenging purchasing environment that currently exists for customers. However, to your question around the peak to trough unless our returns to pandemic levels we don't see the peak to trough being nearly as dramatic as we saw in our other end markets. The underlying secular growth trends that I described driving higher semi content. Also, we've continued to see more penetration and value capture across all vehicle types, whether it's ICE, plug-in hybrid of electric or full electric in the fastest growing applications. If you think about that, ADAS, digital cockpit and electrification. So we will be down, but we don't expect that the cycle depth to be as severe as we saw, for example, in industrial. Joseph Moore Great, thank you very much. And I guess as a follow-up, are you seeing that behavior any different regionally? Is the China automotive market different than the western markets in terms of where they are? Vincent Roche No, I'll say overall, it's pretty unanimous across all markets. I'd say China, all of us did okay. We talked about some design and branding there, so that's helping offset some of the softness. But it's an overall comment, auto is a bit weaker today than it was 90 days ago, whether it's North America, Europe or Asia. Our next question comes from Vivek Arya with Bank of America Securities. Vivek Arya Thanks for taking my question. Vince, glad to hear about your optimism about turning the cyclical corner. Do you think the environment allows for sequential growth to continue into Q1? Seems like industrial could grow, autos, I'm not sure, given some of the bookings commentary. And consumer tends to be down seasonally. So just conceptually, how should we model the shape of this recovery into Q1? Thank you. Vincent Roche Yes, well, at this point it's hard to call, given that the environment is still a little, let's say, a bit of disequilibrium but I think generally speaking, we would probably expect to see a bit of a seasonal decline in the first quarter, and then a bounce back in the second, and I think that's the sentiment, but overall I maintain my outlook that we will see a brisk growth year in '25. Richard Puccio And then I'll help you out a little bit on the seasonality question. It's been a few years now since we've seen seasonal trends in our business. You're right. If you look back over the past 10, 15 years for ADI, consumers down 10% plus sequentially in 1Q, and the BV markets of industrial, auto, and comms are down low single digits, as Vince said, there's probably no belief today that we'd be any better than seasonal given where we are today, but we'll update you in 90 days of how we feel about 1Q. Vincent Roche Yes. I think the big modulator for us will be what happens in industry in particular, and what I can tell you is that the various C-suite conversations I've had with our industrial customers would suggest that their optimism is also strong for '25. Our next question comes from Timothy Arcuri with UBS. Timothy Arcuri Thanks a lot. I just wanted to ask on that answer. So you were above seasonal in fiscal Q3 or above seasonal in fiscal Q4. Sounds like you're not willing to commit that you're going to be above seasonal in fiscal Q1. The street's modeling like 5% or 6% above seasonal for fiscal Q1. Was there something that happened in bookings? Did bookings like slow in the last couple weeks or the last month or something to make you not want to commit to the fact that fiscal Q1 would be above seasonal or just that it's 90 days away and you just don't want to comment on it? Thanks. Vincent Roche I'll start out on the street expectations and then Rich talk a little about bookings. We never guided 1Q. I think the street makes up -- the street expectation for 1Q. I think the street is of everyone better than seasonal for a calendar 4Q or a fiscal 1Q. I would hope of a snapback. I would say, yes, there are things that have changed in 90 days, but we're optimistic about '25 and full year. We just don't know if it's above seasonal in that outlook for a good year in '25. I'll pass it to Rich to go through some of the bookings dynamics. Richard Puccio Yes, so from a bookings perspective up until Q2, as we talked about, we'd seen three straight quarters of broad-based bookings improvement. However, Q3 was different. We saw continued bookings growth for industrial, consumer, and communications, but we did see automotive orders decline, which resulted in a modest drop in our total bookings during the quarter. We did still end with a book to bill around parity. If I look at it from a geographic perspective, regionally bookings were the weakest in Europe. Americas was modestly weaker, which offset bookings growth in Asia. Our next question comes from Toshiya Hari from Goldman Sachs. Toshiya Hari Hey, good morning. Thanks for taking the question. It was good to see inventory on your balance sheet come down again, and you guys spoke to channel inventory coming down as well. As you look forward, what are your thoughts on utilization rates internally? How are you engaging with your foundry partners, and what's embedded in your October quarter outlook as it pertains to the channel? Thank you. Richard Puccio So, as I noted in the last call, we said both utilization and, in fact, gross margins had bottomed in Q2, and that is proving to be true. From an inventory in the channel perspective, the expectation is we will ship to end demand. We are currently at the very low end of our range in the channel at seven to eight weeks. And I think we've mentioned previously if we saw continued improvements, we would start shipping to end demand. So we will do that in the fourth quarter. Obviously, when it comes to the balance, we have a hybrid manufacturing system which enables us to keep utilization rates as high as possible internally, and when our factories run out of capacity, then we have lots of choices externally for silicon capacity. So obviously, we've got a lot of inventory on the balance sheet, and our factories are well capable of improving utilization rates as the demand continues to improve over the coming quarters. Toshiya Hari As a quick follow-up, I think your internal utilization rates last quarter were in the mid-50s, if I'm not mistaken. Are you at or above 60% at this point, or if you can comment on that. Richard Puccio We have to be -- given our look at the utilization towards as we give the rate, I would say there were lower last score to move in higher here in 3Q and 4Q, and there were well off the normal level, they're all called 85% to 90% utilization. And then I'll give you some context -- I'll give you some little context. What does this mean as utilization ramp? What does that mean for gross margins? If you look at the decline of gross margins over the past year or so, about half the decline relates to utilization, the other half relates to mix. So you can see as you listen, pick up what that means for gross margin expansion. Our next question comes from Stacy Rasgon with Bernstein Research Stacy Rasgon Hi, guys. Thanks for taking my question. I was hoping you could give us a little more granularity on the segment guide for next quarter. And then you said industrial, and I think consumer up and auto down. Any more for the color, like is consumer usually up, is it up double digits, is industrial up mid-single, auto down by low single, like any further color you could give us on the segments would be helpful. Vincent Roche Sure, Stacy, I'll grab that one. Yes, so let's start with consumer. You're right, consumer's up about double digits, about 10% or so embedded in our outlook. Industrial's had another also solid growth quarter, probably high single digits sequentially. We had cases about flattish plus minus, depending on kind of how things go here, and although the weak market as we discussed and hit a little bit earlier on the call, probably down low single digits sequentially. Stacy Rasgon Got it. That's helpful. If I could have a quick follow up, just how are you thinking about OpEx growth in the next quarter? It was pretty well under control this quarter. Is there anything that drives that up? Like what do you think about the OpEx trends as we're going to the end of the year? Richard Puccio So Stacy, I'll take that one. So obviously we exceeded the high end of our outlook in the third quarter, given the beat on gross margin and revenue as well as our continued cost management. Our Q4 guide obviously does imply a modest margin contraction sequentially despite our expectation for higher revenue and gross margin. The main driver of that is our increase for merit increases that will go into effect during the fourth quarter. So that will be a downward pressure as we head into the fourth quarter. Vincent Roche I mean, the big margin on our OpEx, Stacey, is obviously the bonus. And that obviously with declining profit and revenue over the past several quarters, that dropped accordingly. Now, with increase, with growth in revenue and improvement in profitability that will obviously increase. But that's self-funding, so to speak. For our fourth quarter outlook, I'd say sequentially increase in our OpEx around 5%. Our next question comes from Christ Danley with Citigroup. Christopher Danley Thanks guys. First, just a little clarification on inventory in the auto market. Vince, I said it, I think at the beginning you talked about inventory is very lean out there, but then you're also saying that there's inventory digestion going on in the automotive market. Can you just expand on that a little bit? Richard Puccio Dan, I'll grab that, and then Vince, talk about the overall customer inventory. Yes, I think every market spawned in different cases of inventory digestion. We feel good about industrial consumer comms have really normalized inventory levels. There are pockets on the auto side that's still, I'll call it digesting. I mean, production levels have been cut over the past quarter, whether it's an ICE car or an EV car. That impact inventory levels and desire to hold inventory on their balance sheets. From that standpoint, Chris, I don't know, Vince, if you have anything to add. Vincent Roche I think, Chris, overall, we've seen the worst is behind us, I think, in the industrial consumer and comms market. But automotive, I think, is a sector where we will see some inventory digestion issues into at least the early part of 2025. Christopher Danley Great. Thanks. That's helpful. And then just a quick clarification on industrial. How would you characterize your, I guess, booking/ visibility on the industrial market now versus three months ago? Is it roughly the same, or has it improved a little bit? Richard Puccio Hey, Chris, it's Rich. I would say visibility is pretty consistent. And as we talked about, we're seeing continuing growth sequentially across all of the sub-elements of industrial with the exception of automation, which we are seeing improvements, but not yet seeing growth. Our next question comes from Harlan Sur with JPMorgan. Harlan Sur Good morning. Thanks for taking my question. So for fiscal '23, China domestic consumption, I think was about 18% of their total revenues, it was the worst performing geography. Last couple of quarters where bookings in China have been growing sequentially. Did that translate into sequential revenue growth out of the region in the July quarter? And then it looks like orders from the China region grew sequentially in July. How are they trending so far quarter-to-date? Are you still seeing sort of positive signs out of this region? Vincent Roche Yes, we continue to see strong performance from a bookings perspective in China. We did see double digit growth across industrial, auto and comms being slightly offset by a decrease in consumer. So China does continue to perform well. And our design win and our pipeline there are very strong. Our next question comes from Joshua Butler with TD Cowen. Joshua Butler Hey, guys, thanks for taking my question. Maybe you can walk through some of the puts and takes into gross margin into the October quarter. Back the envelope, I'm getting to roughly stable sequentially despite the revenue increase and I imagine utilization is improving as well. How much of that is mixed? And in particular, is there any changes in the pricing environment as we get sort of through this digestion into what I would imagine is a more competitive environment. Thank you. Richard Puccio Yes. I'd say it's, as we previously mentioned, it is significantly impacted by the favorable mix. Obviously, we get a benefit out of the revenue upside. From a pricing perspective, and I've talked about this before, we continue to see pretty stable pricing, and I do expect that to continue. Obviously, it's different by geography and for big and small customers, but on balance, we are continuing to see stable pricing, and I expect we will see that going forward. Vincent Roche Once our products are installed in a particular customer's design, they tend to, in the industrial business, they will stay for decades, and pricing is very, very stable there. Where the pricing, or the competitiveness, is for new sockets, new wins, but nothing is new there. Now, we as a company -- we play in the high end of the game in terms of innovation, service, support, and so on and so forth. So that's the game we play. In the game we will continue to play. We significantly higher ASPs than most. And those ASPs increase with each new generation of product. So I think overall, as Rich said, the pricing environment is stable. And so I don't see that as a headwind on margin. Michael Lucarelli Thanks, Josh. I think that's all the time we have for questions today. I thought we had a little more time, but it's August. You guys can go out there and enjoy the weather a bit. So thanks for joining us, all. We look forward to future calls with you guys, and have a great rest of summer. This concludes today's Analog Devices Conference call. You may now disconnect.

Earnings call: Kingsoft Corporation reports robust Q2 2024 results By Investing.com

Kingsoft Corporation (3888.HK), a leading office software and internet services company, reported strong financial results for the second quarter of 2024. The company saw significant growth in revenues, operating profit, and profit attributable to shareholders. Total revenues reached RMB 2.47 billion, marking a year-on-year increase of 13% and a quarter-on-quarter rise of 16%. Operating profit for the quarter was RMB 719 million, up 18% from the previous year and 32% from the prior quarter. Profit attributable to shareholders skyrocketed by 588% year-on-year to RMB 393 million, also showing a 38% quarter-on-quarter increase. Kingsoft Corporation continues to demonstrate its ability to grow and innovate in a competitive market. With a clear focus on content creation and documentation, bolstered by investments in AI and strategic collaborations, the company is well-positioned to maintain its growth trajectory and deliver value to its shareholders. Operator: Good day, and thank you for standing by. Welcome to the Second Quarter 2024 Kingsoft Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Ms. Yinan Li, IR Director of Kingsoft. Please go ahead. Yinan Li: Thank you, operator. Ladies and gentlemen, good evening and good morning. I would like to welcome everyone to our 2024 second quarter and the interim results earnings call. I'm Li Yinan, the IR Director of Kingsoft. I would like to start by reminding you that some information provided during the earnings call may include forward-looking statements, which may not be relied upon in the future for various reasons. These forward-looking statements are based on our information and information from other sources, which we believe to be reliable. Please refer to the other publicly disclosed documents for detailed discussion on risk factors which may affect our business and operations. Additionally, in today's earnings call, the management will deliver prepared remarks in both Chinese and English. A third-party interpreter will provide a consecutive interpretation into English. During the Q&A session, we will accept questions in both English and Chinese with alternating interpretation provided by the third-party interpreter. On-site translation is solely to facilitate communication during the conference call. In case of any discrepancies between the original remarks and the translation, the statements made by the management will prevail. Having said that, please allow me to introduce our management team who joined us today. Mr. ZOU Tao, our Executive Director and CEO; and Ms. Li Yi, our Acting CFO. Now I'm turning the call to Mr. ZOU. Tao ZOU: Hello, everyone, and thank you all for joining Kingsoft's 2024 second quarter and interim results earnings call. This quarter, we continue to achieve new improvement in both our revenues and operating profit. In particular, our total revenues reached RMB 2.47 billion, a year-on-year increase of 13% and a quarter-on-quarter increase of 16%. Operating profit reached RMB 719 million, a year-on-year increase of 18% and a quarter-on-quarter increase of 32%. The operating profit margin reached 32%, up one percentage point year-on-year and four percentage points quarter-on-quarter. Next, profit attributable to shareholders reached RMB 393 million, a significant year-on-year increase of 588% and a quarter-on-quarter increase of 38%. Among this, Kingsoft Office Group's revenues in second quarter reached RMB 1.187 billion, a 6% year-on-year increase. Online games and other business revenues reached RMB 1.286 billion, a 20% year-on-year increase and a significant 41% increase quarter-on-quarter. Next, I will walk through the business highlights of the second quarter of 2024. This quarter, Kingsoft Office Group focused on the development opportunities of new quality productive forces, continued to adhere to the strategy focused on AI collaboration, multi-screen, cloud, content, continued to invest in R&D of AI as a collaboration through technological innovation, product interaction, performance enhancement, and other initiatives to continuously enhance the competitiveness of product to realize the implementation of new quality product forces in the field of office. Kingsoft Office Group officially launched the WPS AI 2.0 strategy aiming to enhance new productivity through the innovative applications in the personal enterprise and government edition, helping users and clients improve their office efficiency. In terms of individual business, the number of monthly active devices of our key products maintained steady growth and reached 602 million, representing a year-on-year increase of 3.08%, of which the number of monthly active devices of the PC version products amounted to 270 million, representing a year-on-year increase of 6.11%. While the mobile version achieved 328 million monthly active devices with steadily rising year-on-year. The accumulated paying subscribers reached 38.15 million, a 14.79% year-on-year increase by continuously optimizing end-to-cloud integration experience on the product side, enhancing user stickiness to WPS cloud services and boosting user activity on the cloud. Focused on individual users, WPS AI has newly launched AI writing assistant, AI reading assistant, AI data assistant and AI design assistant, assisting users in improving efficiency and quality during office tasks. AI writing assistant offers the user an immersive overall writing feature, significantly boosting writing efficiency. AI reading assistant helps users analyze, summarize, and perform Q&A and document. AI data assistant enables users to perform large-scale data calculations, analysis and classifications through natural language interaction. AI design assistant helps users with fully complex layout design, image processing and other tasks, aiming to deliver a more practical differentiation in office experience across these four dimensions. For enterprise clients, we have launched the WPS 365, new productive forces in office. For organizations or corporate clients, it integrated the upgraded version of WPS Office, WPS Collaboration and WPS AI Enterprise Edition, and actually connecting document management, collaboration and AI capabilities. The WPS AI Enterprise Edition helps government and enterprise customers solve problems in the AI construction process with AI Hub, AI Docs and Copilot Pro and realize the efficiency of collaboration and security control for the entire organization. Proprietary as government clients, the Kingsoft Government Office Model was launched, based on which the WPS AI Government Edition was released. This edition includes capabilities such as government affairs AI writing, government affairs AI Q&A, and government affairs AI tours and is compatible with various environments such as domestically developed information technology innovation and to support private development, providing intelligent support for government affairs scenarios. Meanwhile, we continue to explore feasible solutions for the active implementation of the WPS AI Enterprise Edition in office scenarios with leading enterprise customers. The concept of enterprise brand offered by WPS 365 integrated data, algorithms and computing power to provide a powerful intelligent platform through AI capabilities. This supports enterprises in their digital transformation, enabling personalities, customers and refined production and services. We have already carried out WPS AI Enterprise Edition for creation of projects with well-known enterprises in the field of security, banking, insurance, and Internet services. We continue to promote the integration of government and enterprises and support the integration experience and collaborative office processes focused on the values and area of leading government and enterprise customers deep in the product capabilities. We are enhancing product capabilities and developing secure and efficient industry-specific solutions for sections such as finance, energy, translation, publishing, biomedical, and high-end manufacturing. We have serviced more than 18,000 leading government and enterprise clients including [Citibank], China United Property Insurance, China [Baoan] Group, Guangzhou Metro, China National Gold Group, Shanghai Construction Group, Hyundai (OTC:HYMTF) Group, [Higher] Group, BOE Technology Group, New Oriental Education and other well-known organizations have formed demonstration effect. In terms of online games business under the primary game strategy, we're focused on deeply developing the classic JX series. We are aggressively exploring new market segments and expanding into new genres. The mobile game JX3 Ultimate was successfully launched in June 2024. Achieving full platform data in hurricanes and in connection with flagship game JX3 Online significantly increasing the number of daily active users on all platforms. The first month of open beta, the monthly active users reached 11.46 million, of which 6.91 million were returning players accounting for 18.29%, as the large number of dormant players returned and continued to pay. Improving the baseline for the long-term operation of the IP with successful launch of the mobile game JX3 Ultimate. The constant influx of new users have brought new vigor to the product IP. After a long period of effort, we have achieved fruitful results in the ACG field. The sci-fi mecha game, Mecha BREAK, has completed its first domestic public beta test in August. In the third quarter, we will hold the 15th anniversary celebration of JX3 Online and continue to release new versions to further consolidate the vitality of our core IP. Looking ahead, we will continue to focus on our users adhere to technology, driving business, constantly innovate and output products and context and create a high-quality experience to create sustainable and long-term value for our users and shareholders. Next, I would like to invite Ms. Li Yi to introduce the financial performance for the second quarter and the first half of 2024. Thank you. Yi Li: Thank you, Tao ZOU and Yinan. Good evening, everyone. I will now discuss the second quarter and the first half of 2024 financial results. I'm starting from the second quarter, used RMB as currency. Revenue increased 13% year-on-year and 16% quarter-on-quarter to RMB 2,474 million. The revenue rate was 48% for office software and services and 52% for online games and others. Revenue from the office software and service business increased 6% year-on-year and decreased 3% quarter-on-quarter to RMB 1,188 million. The year-on-year increase was mainly due to the growth of domestic individual office subscription business, partially offset by decreased domestic institutional licensing business of Kingsoft Office Group. The growth of domestic individual office subscription business was primarily attributable to the improved user stickiness and commercial risk driven by our continuous product enhancements and the optimization of user experience in cloud services and AI futures. The flat quarter-on-quarter decrease was mainly due to decreased domestic institutional licensing and subscription businesses, partially offset by the increase of individual office subscription business. Revenue from the online games and others business increased 20% year-on-year and 41% quarter-on-quarter to RMB 1,286 million. The solid year-on-year increase was primarily driven by the contribution from several games, partially offset by decline in revenue for JX3 Online, which had a relatively high base in the second quarter of 2023. The significant cost-on-cost increase was mainly attributable to ongoing improvements in game experience and the successful launch of JX3 Ultimate. Cost of revenue increased 19% year-on-year and 11% quarter-on-quarter to RMB 432 million. The increases were primarily due to higher server and bandwidth costs associated with the business expansion as well as increased channel costs along with the revenue growth of online games. Gross profit increased 11% year-on-year and 17% quarter-on-quarter to RMB 742 million. Gross profit margin decreased by one percentage point year-on-year and increased by two percentage points quarter-on-quarter to 83%. The fluctuations were mainly due to changes in the revenue mix. Research and development costs increased 11% year-on-year and 4% quarter-on-quarter to RMB 741 million. The increases were mainly due to higher staff costs, including accrued performance-based bonus. Selling and distribution expenses increased 26% year-on-year and 45% quarter-on-quarter to RMB 379 million. The increases mainly reflected the increased promotional efforts to support newly launched games. Administrative expenses increased 1% year-on-year and decreased 3% quarter-on-quarter to RMB 155 million. Share-based compensation costs decreased 10% year-on-year and increased 7% quarter-on-quarter to RMB 82 million. The quarter-on-quarter increase was mainly due to the grants of awarded shares to the selected employees of certain subsidiaries of the company in this quarter. Operating profit before share-based compensation costs increased 14% year-on-year and 29% quarter-on-quarter to RMB 876 million. Net other losses for the second quarter of 2024 were RMB 12 million, compared with losses of RMB 103 million and RMB 4 million for the second quarter of 2023 and the first quarter of 2024, respectively. Share of losses of associates of RMB 169 million were recorded for the second quarter of 2024 compared with share of losses of RMB 323 million and RMB 169 million for the second quarter of 2023 and in the first quarter of 2024, respectively. Income tax expense for the second quarter of 2024 was RMB 48 million compared with income tax of RMB 78 million and RMB 42 million for the second quarter of 2023 and the first quarter of 2024, respectively. As a result of the reasons discussed above, profit attributable to owners of the parent was RMB 393 million for the second quarter of 2024, compared with a profit of RMB 57 million and RMB 285 million for the second quarter of 2023 and the first quarter of 2024, respectively. Profit attributable to owners of the parent, including share-based compensation cost was RMB 441 million for the second quarter of 2024, compared with a profit of RMB 123 million for the second quarter of 2023 and RMB 329 million for the first quarter of 2024. The net profit margin, excluding share-based compensation costs was 18%, 6% and 15% for this quarter, the second quarter of 2023, and the first quarter of 2024, respectively. I'm now on the first half of 2024. Revenue increased 11% year-on-year to RMB 4,611 million. Office software and services made up 52% and increased 11% year-on-year to RMB 2,413 million. Online games and others made up 48% and increased 10% year-on-year to RMB 2,198 million. Gross profit margin decreased by one percentage point year-on-year to 82%. Operating profit before share-based compensation costs increased 20% year-on-year to RMB 1,554 million. Share of losses of associates of RMB 338 million and RMB 554 million were recorded for the first half of 2024 and 2023, respectively. As a result of reasons discussed above, profit attributable to owners of the parent was RMB 678 million for the first half of 2024, compared with profit of RMB 250 million in the same period last year. Profit attributable to owners of the parent, excluding share-based compensation costs was RMB 770 million, compared with a profit of RMB 359 million in the prior year period. The net profit margin, excluding share-based compensation cost was 17% and 9% for the first half of 2024 and 2023, respectively. Our statement of financial position. We had cash resources of RMB 24 billion as at 30 June 2024. Net cash from operating activities was RMB 1,374 million and RMB 2,308 million for the first half of 2024 and 2023, respectively. Cash used for capital expenditure was RMB 164 million and RMB 183 million for the first half of 2024 and 2023, respectively. That's all for the introduction of financial results. Thank you all. Now we are waiting for the Q&A section. Thank you, operator. Operator: [Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC. Please ask your question. Xiaodan Zhang: So thanks management for taking my questions and I got two questions here. My first question is regarding the gaming business. So could you please share your views on the performance of JX3 Ultimate after its launch? And my second question is on office business. So Revenue growth of office business slowed down a bit during the second quarter. So what's your outlook on individual and institutional business respectively for the upcoming quarters? Thank you. Tao ZOU: So thank you, Xiaodan. Thank you for your question, and let me just answer the first question. And firstly, we've got to have the different -- the separate dimensions to prospect to answer your questions. Firstly is that regarding the JX3 Ultimate and when it launched. Firstly, we're going to check the users members. We observed that the growth of the daily active users grew nearly 100%. So as we mentioned previously that altogether all the users, when it launched at that day, firstly, their active users could reach to more than 10 million, so which is exceeding our expectations. And the second is from the perspective of the income. So we know that for the Q2. And since June up to now, the time is quite short. So the performance is not that significant. But if we're going to take a look from this July and August, especially the last time, we can see stats for only one day, it could already reach their highest record since it launched in 2009. And there's also possibilities that in August, we can reach to its highest performances in the whole single month. So that together with Q3, and together with the data in July and August, so for this JX3 Ultimate, generally speaking, from income perspective, the total performance is quite good. It is exceeding our expectations. So this is from the users and also income, the two aspects to answer your question. So this is the first part of your question. So the second way is that we're going to think about is regarding this office business. So how are we going to look at the [CN and BN]. So from the budget perspective, the office configuration rate is quite good. It's 100%. It's very good. So if we're going to look at the CN and BN, I would like to have further explanation. And for the [BN] perspective, we're going to separate into institutional authorization. So for the institutional authorization, that is for the localization. And basically, in the previous quarters, as we have previously mentioned that, currently, based on this situation, the whole environment, the business for localization, we're not going to have significant change. So it's going to be roughly the same as last year. Except for that, we were also going to have the subscription or the institutional subscription. So this is actually from the data we have. They are actually the exact subscription. The subscription growth is quite fast. And actually from this financial report, it has slightly decreased, but this is actually from to be perspective, and they have some reason. The reason is that last year, we were going to calculate the income by their annual income. But right now, we have changed it into this monthly bidding. That is why, from this financial accounting perspective, it can have smooth out. Although the total income is quite high, but from this financial report, we'll have a slight decrease. So tomorrow and the day after tomorrow we're going to have the office business road show. We're going to have further explanation. Probably some of the investors have some misunderstanding regarding it. But this is actually from the 2B's perspective for the localization. Basically, it's based on our expectation to follow to growth. And especially for the subscription, its way existing of our expectation. So from the [CN], so from different data, and from this PC version, we can see that the user scores has tremendous growth. Last year, it reached to 7.1%. The total users could reach to 270 million. So the space is quite big. Initially, we thought that the first half year is going to have the growth of 5%. But right now, it is more than our expectation and the total income could reach to RMB 38 million -- more than RMB 38 million. So good. And for the year-on-year with an increase of 15%. And probably for this market, according to my judgment is that the whole market for the whole general commercialization for the AI probably at this stage is going to give too high expectation. But according to our internal judgment, the AI commercialization has already reached to our very good expectation like AIGC and [insecure pair]. They have released the 2.0 version, which has got Phase 2 personnel and enterprise to have different functions and products. And target for this product, during the customer's experience process, they're going to have a very big space to develop. And also from the AI's commercialization perspective, it has slightly slowed down. The main reason is that we need to show the grinding for the improvement for those products. We hope that when we can make this product have a better experience from our customers and when we have a better experience for it, then we can carry up of the whole process for the commercialization. So from this data, the whole commercialization for the general AI, we have a very strong confidence for it. Yi Li: Okay. So I would like to have some adding is that for this office business, actually for the subscription revenue, we can see that for contract growth is much higher than the income increase. So later on, we would like to have a further explanation regarding this contract. And also, we can see from this contract competition, we can see that the subscription transformation speech is accelerating and has a very good course. Operator, we are ready for the next question. Operator: Our next question comes from the line of [Jessie Xing] from CITIC Securities. Please go ahead. Unidentified Analyst: My first question is about AI Office applications. How do you view the competitive landscape. And my second question is about AI investment. How do you view the investment in AI when the group has sufficient cash on the balance sheet? Tao ZOU: So actually, for this AI application, actually, that is correct. Indeed, that is emerging different products. And regarding the competition situation, regarding this topic, actually at each quarter we're going to have people to ask me this question. So I would like to share my perspective on this topic. So actually, basically speaking, except for this Microsoft, the other products, we don't think that they are our competitors. Why is that? It's because for the Kingsoft, if you can take a look of our office development history, you can take a look what exactly the product is. So I actually can say that we are actually the creator for the content for the documentation. And right now, we also are going to have some like collaborative creation sharing in this platform. So if we can make it and simplify it, is that we're going to base on this documentation, creation and treatment. This is going to be a shared platform to have all these functions. So based on this, you can clearly understand that. This AI is also being included, including like [indiscernible] is going to have crack. You can realize that they are very similar. Like some of them, especially they're going to have this AIGC. Based on AIGC, we can automatically have some abilities to create documents. And including TIMi, they also have this ability. We can understand that actually the market has a lot of products. Together with our office products, looks like we are competing with each other, but actually, they are based on this documentation creation, core generation, transform rate platform. So you can realize that actually only the Microsoft, their identification is exactly the same as us. Actually, in the past 30 years, only Microsoft is our competitor. So weather it's going to, together with the AI exact function and abilities, become stronger and stronger. It's going to have like the content creation, added historical documentations, formatter, the [indiscernible] files, et cetera. It's only actually us together with Microsoft that are doing this. The other platforms, the other companies, they are based on the AIGC content creation, content productivity. So last year, we started to make a lot of models. And lastly, we have mentioned that we're going to have three parts. The first part is the AIGC. If we don't care about the contract format or version, then we only need to produce one paragraph of the content. Actually, it doesn't necessarily require office software. Previously, if you can have the search engine, that would be enough, because if we don't care about the format, and you have some certain products that are based off AI knowledge, searching and creating an answer, then they've got to have some certain ability to do this content creation. And actually, for those type of products, they are not our competitors. What we are doing mostly is for this content. When they have created the content, we need to have format just to realize it to have some format, especially a very complex format documentation treatment. This is actually the differences, which we can understand as a gap between us with the other companies and with the other products. And even we're going to have this AI search. And after this, they have the ability to do the treatment for the documentation, but mostly during the search, that compete with each other for search certain products. So it doesn't have a significant competition relationship with us. So from a collaborative perspective, it's like thinking and facial -- and also the Tencent (HK:0700) documentation that they are the online documentation perspective. Yes, this is also another way to explain that. So this is my understanding from macro solutions, macro expectations regarding your question. Yi Li: And regarding your second question for this investment of AI, and we can explain it from two aspects. Last year as we mentioned that we're going to have -- we're trying to find some cooperations with other companies, especially the startup companies. And from the financial perspective, and also from the business perspective, we have two different perspectives. We're looking for the cooperations. And from our group perspective, because AI is just started, and our group is looking at suitable opportunities, and we are trying to make a balance with the two ends. The firstly is the shareholders' return. And for the first half year, the return is going to be HKD 400 million in the first half year, and the repurchase is canceled and the equity ratio is 1.5%. And we are also looking for suitable opportunities for this further communication with good opportunities for us regarding certain investments. Unidentified Analyst: Thank you. Yinan Li: Thank you for joining us today, and this will conclude our presentation for our 2024 second quarter and interim results earnings call. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.