Good day. Thank you for standing by and welcome to the Kingsoft Cloud Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.

Thank you, operator. Hello everyone and thank you for joining us today. Kingsoft Cloud third quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com as well as on global newswire services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang; and CFO, Mr. Haijian He. Mr. Wang will review our business operations and accompanying highlights, followed by Mr. He, who will discuss the financials and guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation. All interpretation are for your convenience and reference purpose only. In case of any discrepancy, management statement in 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 20-E of Security 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 expectation and the current market and operating condition 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 call are denominated in RMB. It's now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

Thank you, Nicole and thank you all for joining our third quarter 2021 earnings call. In the third quarter, we generated RMB2.41 billion in total revenues, which was an increase of 40% from the same quarter last year. Our public cloud services revenues reached RMB1.69 billion, an increase of RMB140 million over the second quarter. Our enterprise cloud services revenues reached RMB730 million, up 78% over the same period last year. Since the beginning of 2021, we continue to deliver rapid growth despite market headwinds, regulatory changes and ongoing challenges as everyone adjust to a new normal as the pandemic continues to evolve. As the largest independent cloud service provider in China, we will continue to execute our growth strategies, strive to become the most trusted cloud partner for our customers and to create the digital future together. Our neutral position enabled us to develop more in depth and extensive collaboration with an expanding base of premium customers and further nurture our multi dimensional ecosystem. We believe we will benefit from our long-term thinking and achieve continued and sustainable growth. Now, let me walk you through our performance across our major verticals. I'll start off with public cloud. Despite the challenging market environments, we still achieved faster growth than the industry average this quarter. Leveraging our neutral position, bringing solutions and premium customer experience, we made significant progress, expanding our customer base and diversifying our products and services portfolio, especially for multi cloud deployments. As mentioned in our last earnings call, Meituan, China's leading local lifestyle service platform has become our new premium customers for public cloud services. Together with other newly engaged premium customers, their data usage increases contributed to our public cloud revenue growth. Following our success with Meituan in Q2, we continued to expand our customer base…

Thank you, Yulin. Now I walk you through our financial performance for the past quarter. Our total revenue reached RMB2.41 billion in Q3, representing approximately 40% year-over-year growth, which is consistently higher than the growth of the major peers in mainland China. Revenue from public health services was RMB1.69 billion, a quarter-over-quarter increase of RMB135.2 million, representing the seventh consecutive quarter revenue increase since our IPO. There were a number of drivers. First, our existing client base remain stable, including our top three clients, in particular. Our neutral position makes it possible to avoid any potential conflicts of interest with our customers, and we have been able to grow together with our customers. Second, we continue to engage with new premium customers. In Q2 this year, Meituan, China's leading internet conglomerate has become our new premium customers for public health services. With the trend continues, we are proud to announce that Pinduoduo, one of the leading largest e-commerce platform in China has become our new premium customers in Q3. This new client case exemplify choosing. Number one, the multiple cloud strategy is gradually more accepted by the market. Number two, these efforts have to diversify our customer base and derisk the top client concentration risk. And also, clients from non-video related vertical will also help grow our computing business and contribute to the public cloud incremental high quality revenue growth. Lastly, we were able to dig deeper into the needs of our clients. As Yulin mentioned earlier, we are providing a more diversified portfolio of products and technology through cross-selling, including containers, edge computing and PaaS solutions. Revenue from enterprise cloud services was RMB726.9 million, representing approximately 78% year-over-year growth. We’ve seen a rapid growth in demand in enterprise cloud markets. As demand grew rapidly in enterprise cloud market, we…

This concludes our prepared remarks. Thanks for your attention. We're now happy to take our first question. Please ask your question in both mandarin and English, if possible. Operator, please go ahead. Thank you.

[Operator Instructions] Your first question comes from Brian Gong from Citi. Please ask your question.

I will translate myself. Good evening management. Thanks for taking my questions. My question is regarding the enterprise cloud. I understand our enterprise cloud segment was impacted by power shortage and the pandemic, given pandemics largely under control and the power shortage largely eased, have we seen any accelerating projects delivery? Should we see enterprise cloud revenue growth to go back to normalized level for next year? And what growth level we should expect? Thank you.

Okay. Okay, so the response from the CFO -- from the CEO, Mr. Wang Yulin is that as you rightly pointed out, there are two key factors affecting our industry cloud segments, which one is the power shortage or curtailment. The other is the pandemic. In terms of the power shortage, as you know that in Q3 that it was the main factor. And in our two business segments, respectively, I'll talk about that. So in the public cloud segments, because the IDC is enjoying relatively high rate of protection and priority and then most of them have reserve or backup power generators. So those who are not affected -- negatively affected. But in terms of enterprise cloud, industrial cloud [ph] because of the IDCs in most cases, the private IDCs which are designated by the customers. So it's generally case by case and have been affected by the power shortage. I have to agree with you that currently the power shortage situation has largely been alleviated. However, we do see that in the mid-term to long term, the carbon emission control will continue -- the pressure will continue to be there. And there might be more policies in relation to IDC construction and IDC power consumption. But in any case, the power shortage we expect in the short-term has been alleviated. And then we're able to progress our delivery for enterprise cloud in Q4. The second factor about pandemic. Obviously, it is still going on in some cities, because of the very stringent measures the government takes, which causes the delay of our delivery. However, we do see that overall speaking, the demand in industry, our enterprise cloud remains very strong, our backlog continue to grow. While there's impact to delivery, we also have proactively tried to find solutions to this impact. One is we have been proactively utilizing the Camelot local teams, which are distributed across China to help with delivery and increase delivery efficiency. The second part is that we proactively manage our timetable of delivery and try to make up for some of the time that was lost because of the power shortage and pandemic control. But overall speaking, we do see the industry cloud to enjoying a very high growth rate coming from the demand, this very strong demand. Thank you.

Thank you. That's very helpful.

Our next question comes from Liping Zhao from CICC. Please ask your question.

Good evening, management. I have three questions here. We've seen a cool down in public cloud space this year. And so my first question is what's your opinion in next 2 to 3 years market growth and what will be company's organic growth drivers and targets to achieve. And second question, this year, our gross margin has seen some pressure caused by upfront infrastructure and our delay in revenue recognition. My question is, when do the utilization rates to catch up and what's your budget for next year's CapEx? And lastly, we do wonder how is the collaboration with ByteDance going so far? Thank you

Okay. Just to quickly translate for the reference. So in relation to your question about the growth prospects in public cloud and enterprise cloud, I start with public cloud. Obviously, we have noted that this year, the public cloud demand has decelerated. And from our perspective, we think it's due to two reasons. One is that there was a high base. It was actually a high base for last year as a result of the pandemic. So the demand for cloud service has surged a lot and actually shifted to a great extent. But obviously, that is not a new factor for this year. Now, the second reason is like, as you have all noticed, that since the beginning of this year, actually even till now, new regulations have been coming out from the government to regulate a lot of the customers and industries that we engage with. And accordingly, our customers in such industries will need to come through those new regulations and to be compliant, which we believe takes some time. But we do think that this is going to be a short-term impact, as the regulations become more and more clear, and more feasible from the government perspective. But also looking at the long-term picture, we do see that these customers have already started to make new arrangements in new potential verticals or markets in the spaces of entertainment, video and gaming. And this, we have to see that this actually happened together with the further penetration of 5G technology. And we're seeing the new concepts like the metaverse and the hardware, in terms of those -- for those applications has been launching and increasing in volume, the technology iteration has also been -- in accelerating. We do think that the internet sector is a cyclical sector,…

Thank you, Yulin. I will take on a second question very briefly, a few points. First of all, you probably also [indiscernible] this year, the pricing environment, especially not only on the supply side, but also our clients has been very stable. So when we look at our major products, our products, our contribution margin, or gross margin has been very stable. So that's actually not the reason that affecting our gross margin in Q3. Point number two, if you also know that in most of the enterprise service or 2B [ph] industry in China, the procurement arrangement will be negotiated on an annual basis, which means that right now we're already in Q4. So we're already getting into the process to negotiate the pricing, terms, volume and quality and all the key terms with our majors suppliers. And we are right now in the process to collecting the IT budgeting inside information from our key accounts. That's why we do believe next year we can do a good kind of analysis and matching the demand and the supply and further improving the utilization. So that's why I think the mismatch on the resource side can be gradually mitigated by the end of this year. So for next year, given it is going to be new annual contract for some of the key clients, and also some of the key vendors as a supply, so the pricing and gross margin impact can be further mitigated. So there's going to be a short-term impact. Point number three. For next year, as you're asking about CapEx, even for the same dollar, we will definitely prioritize that into high quality potential revenue streams. So when we look at the dollar, when we consider to spend on CDN service, rather than the CPUs, the…

Thank you. Your next question comes from Thomas Chong from Jefferies. Please ask your question.

Thanks management for taking my questions. My first question is regarding our new customers for this year. We have added Meituan and Pinduoduo, the Internet giants. Just want to get a sense about their revenue contribution over the next couple of years as they ramp up in Kingsoft cloud? And my second question is regarding our long-term assumptions in terms of the revenue and the margin, as well as the mix between appropriate and enterprise cost. And on the near-term side of the story, given that the Beijing [indiscernible] effects, a lot of the different business, just want to get a sense about -- any color about the contribution coming from Beijing or any qualitative color would be great. Thank you.

So thank you very much for the question. And I think, as you pointed out, the larger internet names, like you mentioned, Meituan and Pinduoduo and Juhu, the multi-cloud deployment for them is an inevitable choice, both from a technology perspective and from a business or commercial perspective. And as mentioned Kingsoft's Cloud, as professional and neutral cloud provider were also they’re inevitable and top choice. We do think, currently, the revenue and growth of these customers have been very stable. And unfortunately, we don't have like detailed numbers as for a percentage of revenue, but we do see them to continue to grow very stable and on the good trends. Now, in terms of the macro environment, uncertainty that I mentioned, also split into public cloud and enterprise cloud spaces and to discuss briefly, respectively. In the public cloud space. as mentioned, I do think it's going to be a short-term impact. And once this is over, it is going to enter into a larger business cycle, where we expect to see growth to accelerate. In the industry cloud space, the demand remained very strong. And two of the affecting factors, one is power shortage, and the other is pandemic. The power shortage has already been largely been resolved. The pandemic impact has been alleviated. Our way to fight this negative impacts are leveraging Camelot's local teams to try our best to catch up with the progress and to deliver revenue. Now, as I mentioned before, the impact on Beijing actually, because we're locally based in Beijing. So we do not really have any material impact in the Beijing projects, due to the pandemic control measures. Thank you. And I leave the margin questions to -- for Henry to answer. Thank you.

Thank you, Yulin. Thank you, Clark. Very quickly on the margin. So first of all, I want to mention that we still keep the same intention to deliver improving margin profile for the long-term. So both gross margin and non-GAAP EBITDA margin, one of the priorities, while we think about next year's budget. So that's why, as I just mentioned, when we think about the demand, think about supply side, think about the pricing environment and also how we optimize our personnel expenses. These are the key priorities for next year's budgeting process as we are doing today. So that's why we probably at this moment, for this earning call will not give a very clear guidance for the EBITDA margin, breakeven timing. But as some of the audience may remember, we did have intention to have that margin improvement to be delivered in the near-term. And this is first point. The second point, I think, given the high quality revenue opportunities is also our key areas to focus for next year. So when we think about capital expenditures, and how they're converted into the revenue opportunity and how that impact both on gross margin and D&A expenses, we did a very -- we will do a very thorough analysis and looking at that impact for the margin improvement. So as a result, we want to say at this moment is, I think for next year, hopefully we'll see on an annual basis, both gross margin and non-GAAP EBITDA margin, we'll see improvement compared with this year on an annual basis. I think we remain confident on that objective. However, the timing and scale of that, hopefully we can communicate once we complete the prudent budgeting process for next year. Thank you.

Thank you.

We will take the final question from Kyna Wong from Credit Suisse. Please ask your question.

Thank you for taking my question. The first question is actually we are looking for more visibility or idea from the company on the path and capability enhancement in the future. I mean, even after our cooperations with ByteDance. And the second question is about what kind of IDC policy change that may impact the public cloud? Obviously, the IDC suffers from the render as well or your own business like enterprise cloud. So thank you.

So in terms of tax capabilities, in fact, our tax capability in terms of particular verticals, for example, financial services, health care and big data capabilities, we have actually becoming more and more leading in the -- among our peers. And also we have seen increasing revenue percentage, and the promotion of margin it has brought to us to our business. Now, we do believe that we will continue to increase our investment and development of PaaS capabilities in those areas, in those verticals that we choose to focus on. However, we don't think this is in any way in conflict with our cooperation with Volcano Engine or ByteDance. In relation to your question about IDC policy, we do not really think any policy changes will have any material impact to the public cloud IDCs. As explained earlier, we do think that the public cloud IDCs generally have relatively high standards, and they have been built according to the latest government policies and guidelines, including the IDCs that we built ourselves, and then we do not think they're going to be negatively affected. In terms of the IDCs for enterprise cloud customers, the impact mainly came because of the abruptness of the policy change from the government, i.e. the power shortage. And we do think that in the future, they will be able to adjust to any policy changes in that space as well. Thank you.

At this point, I would now like to hand the call back to Nicole Shan for the closing remarks.

Thank you, operator, and once again thanks everyone 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. Bye, bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.