Ladies and gentlemen, thank you for standing by and welcome to the Kingsoft Cloud’s First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded today. I will now like to hand the conference over to your speaker today, Ms. Nicole Shan. Thank you. Please go ahead.

Thank you, operator. Hello, everyone and thank you all for joining us today. Kingsoft Cloud’s first quarter 2020 earnings release was distributed early today and is available on our IR website at ir.ksyun.com as well as on Globe Newswire Services. On the call today from Kingsoft Cloud we have Mr. Yulin Wang, Chief Executive Officer; and Mr. Haijian He, Chief Financial Officer. Mr. Wang will review business operations and company highlights followed by Mr. He, who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows. Before we begin, I like to remind you that this conference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defect in the U.S. Private Securities Litigation Reform Act of 1994. This forward-looking statements are based upon management’s current expectations and current market and operating conditions and are related to events that involve known or unknown risks and uncertainties and other factors 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 and uncertainties factors are included in the company’s filings with the U.S. SEC. The company doesn’t undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under the applicable law. Finally, please note that unless otherwise stated, our figures mentioned during this call are in renminbi. It’s now my pleasure to introduce our Chief Executive Officer, Mr. Yulin Wang. Please go ahead.

[Foreign Language] Thank you, Nicole, and thank you all for joining us for our first earnings call as a public company. We were successfully listed on NASDAQ on May 8, 2020, a significant milestone in our company history and a new chapter for us. Since the inception, we help in building strong relationships with enterprise customers with high-quality services. As a public company, we are now committed to create value for our shareholders. We have built a solid foothold in the cloud-based game and video verticals and have strategically expanded our presents into financial and traditional enterprises. We focus on select fast growing verticals, from here to our technology driven approach, to growing our business and are committed to providing the cloud services and solutions to our primary customers. With the focus and full commitment on our cloud business, we are able to avoid potential conflicts of interest and maintain a unique neutral position in the cloud industry. As enterprises are paying more attention about data security and to avoid potential conflict of interest, more and more leading enterprises are adopting multi-cloud strategy, which has further entertained our rapid growth due to our neutral position. Before I begin, I like to express our deepest sympathies to all those affected by the current global pandemic situation. We will continue to support our clients and their communities. Our cloud-based services are critical to business during this difficult economic environment. The pandemic has a top reliance on digital solutions and remote working abilities. Many customers have approached us since the outbreak in need of more efficient cloud services deployment and technological support, which gives us confidence in the business development in a mid to long-term, while at the same time, ablating our profile in the cloud market. [Foreign Language] We had an outstanding…

Thank you, Yulin and thank you, Nicole. Hello everyone. I will discuss the financial performance of this quarter. Please be reminded that all announced currency here will be RMB. Please also refer to our earnings release for detailed information. Before we go through the details, I would like to highlight the following four points. First of all, in our F-1 prospectus, we provided revenue outlook of the first quarter of 2020 which ranged from RMB1.35 billion to RMB1.4 billion. The total revenue of this quarter finished at the top end of range at RMB1.39 billion, representing an increase of 64.5% year-over-year and exceeding the growth of the public cloud industry in China in general. Second, we achieved the positive gross profit for the third consecutive quarter. And adjusted gross margin has continued to improve gradually for seven quarters. As a result, the adjusted gross margin increased rapidly from negative 5.3% in Q1 2019 to positive 5.3% in the Q1 2020, an improvement of 10.6 percentage points. Number three, adjusted EBITDA margin increased as well, up from negative 12.9% in the Q1 2019 to negative 2.8% in the Q1 2020, an improvement of 10.1 percentage points. Adjusted EBITDA margin continued to improve steadily for seven consecutive quarters. Lastly, we have maintained a healthy balance sheet and sufficient liquidity. As of March 31, 2020, we had cash and cash equivalents, term deposits of RMB1.97 billion. On 8 May, we have raised US$551.3 million of the net proceeds from the IPO. Going forward, we will continue to remain and maintain the healthy balance sheet and ensure sufficient investments into R&D and IT infrastructures. To summarize, we are pleased to have maintained the high revenue growth rate and significantly improved our profitability. Growing economic of scale have been already benefiting our performance. Now I…

This concludes our prepared remarks. Thank you for your attention. We are now happy to take your questions. Operator, please go ahead.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Alexia Quadrani from JPMorgan. Please go ahead.

[Foreign Language] Good evening, management. Thank you for taking my question and congrats on a strong quarter out of the IPO gate. My question is about the industry dynamic opposed to COVID-19 in China. Now that we are entering into a post-COVID-19 stage, could you share us with your observation in terms of the industry dynamic in China current market? Specifically, we are interested in the demand for cloud consumption from video operators, as well as the pricing trends for CDN in China. And also we would like to hear your thoughts on the enterprise cloud demand. Have you been seeing different behavior among the large enterprise now the – we are posted the COVID-19. Thank you.

[Foreign Language] Thank you. I will translate for Mr. Wang. Well, thanks for asking the question. We think the pandemic has increased over industrially significantly from two aspects versus a utility and the second is the new emerging demands. For the utility, in the internet industry, in general, the first quarter is not always the peak season in the year. However, because of that pandemic, we have seen a demand searched from the video and the gaming verticals. The usage has been booming in the first quarter. Also in the – other verticals, in the internet industry, for example, the e-commerce and online education, we have seen some new demands from customers in this area. For the enterprise cloud services, many enterprises and the organizations have seeing the convenient and value of the cloud services. This can help the public service organizations to improve the difficultness and healthcare efficiency. However, because of the pipeline of this – this kind also it is different from the public also. It takes some time for our customers demand to convert into our revenues. And the second question, you talk about to the enterprise. In general, we adapt a primary customer strategy. So our primary customer, they focus more on the technology and the stability of our services. So they are not very price sensitivities – we operate price fluctuation and volatility in this quarter. Thank you.

Thank you. We have our next question from the line of Kenneth Fong from Credit Suisse. Please ask your question.

[Foreign Language] Congratulations on the very strong set of results. I have a question on the GP margin having seen that over the past eight, nine quarters, you have seen a very significant progression on the GP margin front. How should we think about the driver going forward? And we also see like on the education, e-commerce, which normally consume data during daytime has been the variable buzzing top of demand. Would it further help the existing capacity utilization and hence will be a further driver on margin? Thank you.

Hey, thank you, Kenneth. This is Henry. So I can take on those questions. As we introduced in our prepared remarks, you probably notice that both of our gross margin, as well as the EBITDA margin has been improving for seven consecutive quarters. And these are the two indicators are not only measure the fundamental IT resource utilization rates, but also our SG&A and internal operation management efficiency, to the extent. So to your question, because we actually just started to enjoy the benefits of economic of scale, which are evidence by the gross margin now turned to positive, since Q3 of last year. So we do believe we’re assuming a very, very early age to enjoy that benefit. And I think there’s definitely going to be an upside potential for further improvements of the profitability from both gross margin and the bottom line perspective. And the fundamental driver are not only by the – for example, the data pattern that we basically see our traffic, but also the fundamental technology that we’re build in-house. As we mentioned, over 60% of person now are working in a cutting-edge technology, which are not only serving for today’s client needs, but also for the technology climate demand for the full years to come. So that’s why we believe that technology driven the profit margin expansion are the primarily faster. We’ll see that potential uplift going forward. To your question, we’re definitely also seeing a diversification of the different verticals within the internet space, as you mentioned, definitely correctly. The online education and other verticals, for example, e-commerce, the data usage is throughout a day. We’ll definitely see different patterns. And these would definitely be one of the reason where help push up the profit margin and further improve the margin profile. But as I also mentioned, I think in-house, we’re building the technology and also the diversification of a client base themselves will also be both go hand-in-hand. So we’re definitely, we’re not only be a passive mode to waiting for further diversification on client demand, but also we have the proactive approach that use more and a better technology to further improve the utilization of the efficiency. So to conclude my response, I would think that as you would probably see the supply/demand dynamics in the China cloud market, we’re also favor the independent cloud company like us. And we’re definitely enjoyed our trends to make sure that were relatively stable environment in a market structure. So we can kind of deliver better – and the better service for the client. Thank you, Kenneth.

Thank you very clear. Congrats again.

Thank you. We have our next question from the line of Thompson Wu from UBS. Please ask your question.

[Foreign Language] Some of your larger cloud players in China, cloud platforms and their investments over the next three to five years particularly in the cloud, can you talk a little bit more about your investments now with a fresh run of capital coming in for your business over the next three to five years? And that’s the first question. And the second question is, just about some of the disclosures you’ve been around a number of premium customers in ARPU. Will you be providing that information going forward? [Foreign Language]

[Foreign Language]

Yes, thank you, Yulin. And also just to compliment on the second point, and then Nicole can help translate. So for the capital expenditures, as we mentioned right now, we do have sufficient balance sheets. We have, we almost are debt free, so we do have a very great capital structure that can deploy. But also with that’s on one side, we want to remain a very prudent approach to manage our balance sheets given the market environment and all the challenges we are aware. But on the second perspective, we all will go in parallel to make sure that we are going to make it a sufficient investment into a key technology that will drive the substantial conversation with the client going forward a few areas that our CEO mentioned in the prepared remarks. So out of the $515 million actual proceeds, we definitely will make sure it’s going to invest into upgrading and expanding to our IT infrastructures for about 50%. And we’ll definitely use about one quarter of the actual proceeds to further invest into the key technologies, for example, AIoT, big data and other cloud technologies. For the remaining 15%, we’re definitely looking into the areas, we’ll be basically solidify the ecosystem players and also maybe potentially looking into the global expansions. The remaining 10% will be supplement to our working capital. So again, I think we’re definitely looking into how to balance the capital we have, but also I want to make sure the sufficient investment into the technology will be very important. And it’s going to be the key driver to drive the potential revenue growth. Nicole please translate. Thank you.

Thank you, Henry. [Foreign Language] I will translate for Mr. Wang. We think that the cloud business is a long-term investment theme. Most of our competitors have their appliance to build a new infrastructure. However, in this industry, we have already kept investing. The new infrastructure has clarified the objective and give – the corporations have a clear track on this cloud services. And we have already invested in our infrastructure and technology. Henry has already introduced our detailed plan. And for the customers, because we didn’t disclose any data for the – or the number of customers we define this as a annual number and we will be closing our 2020 outlook in the April next year. However, for the operational level, we think the customers are very healthy growing. Thank you.

Thank you. We have our next question from the line of Leping Huang from CICC. Please ask your question.

[Foreign Language] So I have two questions for the management. The first one is related to the competition. So recent years Huawei has put a lot of efforts on their cloud business. So would the competition from Huawei impact our enterprise clients acquisition. And my second question is related to our revenue growth and CapEx budget. As KC has around RMB6 billion cash at hand after IPO could management share the current revenue growth target and CapEx budget? Thank you.

[Foreign Language] Thanks for the question. I’ll answer the first question. We think the market of cloud business is simple and clear. And we think the market is very huge. So the competitor has a much pressure on us. There are only very few top players in this industry. And you can see from our full year and the first quarter 2020 data, our revenue growth is very strong. Second, we are a technology-oriented company. We are engineering house oriented. So our big data and video streaming technology has been highly recognized by our customers within the cloud internet based public cloud technology. And we haven’t done much on the hardware industries. So we believe our revenue grows will keep going and I will let Henry to add more about for the second question. Thank you.

Thank you. I would like to give a few color regarding the – your question regarding the CapEx and the top line growth. On the CapEx you’ll probably notice that after disclosing the F1 the past two years, our capital expenditure were roughly about RMB1 billion each year. And going forward, I think to support our revenue growth, as well as investment into the key technology, we’re definitely seeing increasing trend of capital expenditures each year, but based on the baseline of the previous two years as a base case. So we do see a potential increase on the capital expenditure levels. But having said that as we mentioned, we definitely want to remain very prudent about how and where we want to spend the capital expenditures. Historically we spent CapEx largely for improving and purchase of IT infrastructures, example, the servers and all the users. And going forward, I think we’re still going to relatively – remain relatively similar in terms of how we look at the spending and where we’re going to spend. So I think going forward, you can look at our historical basis and we grow reasonably based on that. And two, your question regarding the revenue, we expect our top our revenue for the second quarter will be around RMB1.2 – sorry, RMB1.5 billion to RMB1.54 billion for the second quarter, which implying about 60% to 65% yield via increase. I think that’s definitely going to be a very healthy growth rate, and definitely our intention to remain that our top line growth faster – relatively faster than a public cloud market in China in general, I think that’s our intention. So we do want to also remain rather a good balance amount of top line growth the past for the profitability of the bottom line, and to speed up the margin expansion as well as our cash and the balance sheet position. I think we definitely proven that, we have the capability of managing the performance in a historical period of time. And going forward we definitely look at a set of variables that would deliver a balance to the financial performance of the company. Thank you.

Thank you. We have our next question from the line of Ziyi Chen from Goldman Sachs. Please ask your question.

[Foreign Language] My question is about enterprise cloud businesses. So can management share a little bit more color on the seasonality of this segment? And also maybe how should we think about the revenue growth into the rest of the quarters? And can we expect accelerated trend in the growth trajectory here? And meanwhile, can you also share a little bit more on the long-term competitive advantage and opportunities to Kingsoft Cloud? Thank you.

Thank you. This is Henry happy to take your question. Thanks for paying detailed attention to the results appreciate that. What I’d like to mention on the first question, the fundamental demand from the traditional enterprise to move from on-premises IT to a cloud has been very strong. There’s no change about it. And especially in a COVID-19 situation, many of the traditional enterprise clients realize the true technology actually can help them to dissolve the real world issues. So, however, on the other side, as we probably also mentioned, and the disclosed in F1 perspectives, we actually taken a very, very prudent and conservative revenue recognition method, which means upon delivery and completion of the projects, which are primarily made up revenue from the enterprise cloud segments upon their completion and delivery, check will recognize the revenue for the projects. As you mentioned, probably many of the cities in China they were actually reopened only after April. So even though most of our projects were pretty much on track and many of the project were already started in Q3 and Q4 last year, are actually started because of travel bans and inconvenience to do the onsite completion check and the delivery checks before the March end. We basically will not be able to recognize the revenue before end of March. I think that’s basically because of the prudent revenue recognition definition that we already adopted. But however, I want to point out that number one, as you currently see that our year-over-year growth rate of enterprise cloud is very strong. Number two, even with a quarter-over-quarter performance of enterprise cloud is not that fast, but we do see a diversification of the revenue stream from enterprise cloud has been improving as well. And that will also become a part…

Thank you.

Thank you. I will not like to hand the conference back to Ms. Nicole Shan for any closing remarks. Please continue.

Thank you, operator. Thank you everyone for joining us today. If you have any further questions, please feel free to contact us. Our contact information for IR can be found on today’s press release. That’s all, have a good day. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Thank you.