Good day and thank you for standing by. Welcome to Kingsoft Cloud's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. And now, I'd like to hand the conference over to Ms. Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead. Nicole Shan Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobeNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and the CEO, Mr. Tao Zou; and the CFO, Mr. Haijian He. Mr. Zou will review our business strategy operations and the 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 purpose 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 the Section 21-E 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 these 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.

Hello everyone. Thank you all for joining Kingsoft Cloud second quarter earnings call. And it is my great pleasure to be with you today. For long time, I’ve been involved in the overall management of the company as Vice Chairman, and that experience has given me in-depth understanding of the company's strategy, business and team. Since taking over as CEO in August, I’ve been in close communication with the Board of Directors, the management and the core team to discuss our development strategy and conduct a strategic evaluation of our business under the current new circumstances. At the same time, I’ve also performed a deep dive into our front line business operations and made visits to our customers and partners. I’m delighted to report that the senior management team remain stable and committed. And our day-to-day business operates as usual. Now I would like to share some thoughts on our business before briefly taking you through our performance for the second quarter. Since Kingsoft Cloud's incorporation, we have established several core strategies as our business developed. The first one is to focus on and explore core industry verticals, with great potential, including the internet, finance, health care and public services sectors, and develop landmark projects and industry specific solutions. The second one is to further advance our products and technologies, enhance long-term relationships with customers through superior services, and help our customers grow. Third, we firmly adhere to our neutral position to provide customers with long-term trusted cloud services amid multi-cloud landscape. Fourth, we seek to enhance our professional solution and project deployment capabilities, including integrating with the resources from Camelot and the wider ecosystem to provide customers with one stop digital transformation services. Through the implementation of these strategies, we have been able to achieve rapid growth, generate annual…

I will now pass the call over to our CFO, Haijian He, to go through our financials for the quarter. Thank you.

Thank you, everyone, and welcome, everyone, for joining the call today. Now I will walk you through the financial results for the past quarter. Our total revenue was RMB1.91 billion in Q2. Within that, revenues from public cloud were RMB1.29 billion. The changes were primarily due to the company's proactive scaling down of our CDN business, with its gross billing decreasing by 30% on a Y-o-Y basis, while the gross billing from computing and storage increased by 5% year-over-year. Revenues from enterprise cloud was RMB616.6 million. We managed to deliver stable revenues from enterprise cloud year-over-year as we navigated through a difficult operating environment of COVID-19 resurgence across the country, with slowdown of the bidding and project deployment process. The COVID-19 impact on our business between April and June was more serious than our previous estimates. As new biddings and the deployment process for enterprise cloud projects both slowed, meanwhile, some of the Internet customers paused their spending and the dialogue with the new customers' leads were also affected this quarter temporarily impacting our revenue growth. Nonetheless, our cost saving measures yielded expected results, leading to a quarter-over-quarter decrease of RMB252.6 million in total cost savings and RMB8.7 million in non-GAAP R&D and sales and marketing expenses. Our profit margin decreased slightly sequentially due to the slower-than-expected revenues, and we expect such impact to be largely reflected in Q2 and Q3 this year. With the overall market environment returning to normal, we believe that our business will gradually begin to stabilize in Q4 and onwards. In terms of cost, total cost of revenue decreased by 12.1% quarter-over-quarter to RMB1.84 billion. The IDC cost decreased by RMB81.3 million from last quarter to RMB1.03 billion this quarter. It mainly consists of bandwidth and cabinet cost and a decreased trend was in line…

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

[Operator Instructions] Our first question comes from the line of Brian Gong from Citi. Please ask your questions.

I will translate myself. Thanks management for taking my questions. I have two questions. First is regarding our third quarter revenue guidance. Can management give the assumption of the revenue scale of public cloud and also the enterprise cloud? And secondly, management has just mentioned that you see the slower bidding process of enterprise cloud projects. How is latest trend in recent months? And how do you expect the tendering pace in the rest of the year? And how would that impact your revenue ahead. Thank you.

Thank you, Brian. I'm happy to take on the first question. So to start with, as we explained, I think the Q2, especially the COVID impact in the city of Beijing, affected quite a lot of the business deployment process. So looking to 3Q, I think there are something unchanged. There are something that we executed, on track, and there are something still with some uncertainties. I have to kind of elaborate one by one. First of all, I think our plan to keep a relatively scaling down size of the CDN, this plan is no change, which we communicated earlier this year. So if you look at the dollar value and the total size of the business, I think, in Q3, our CDN business will keep a relatively stable, but on a Y-o-Y basis, will be still around about 30% or about 25% to 30% Y-o-Y decline for the CDN business. And for the core part of the public cloud, which actually we are providing services on storage and computing to the key Internet clients as well as some diversified non-Internet clients who are using our product cloud, which also we are seeing that as a very positive sign, I think, for that part, we are going to see a sequential increase of the public cloud usage on cloud computing and storage in Q3. I think that we will see some trends actually picking up. On the enterprise, we keep relatively prudent and cautious in Q3 as you probably understand. The public cloud -- or the enterprise cloud will need to have some phases to be deployed and finally executed. So when we look at our backlog, still very strong and robust. And the core part of the backlog for this year, given the timing and the pacing, I think the majority of that important projects will be completed in Q4 for this year. But even with that, I think, in Q3, our enterprise cloud will have gradually a sequential increase compared with Q2 for the enterprise cloud. So that's actually formed the basis of a sequential increase of the total revenue compared with Q2. The mix of the revenue will keep relatively stable. The CDN will be relatively lower. The Enterprise Cloud, robust on the backlog, and most of them will be delivered in Q4. So I think the execution is still on track and the revenue conversion will be taking some time for this year. Thank you, Brian.

So just to briefly translate for Mr. Zou. So as you rightly pointed out, and as we reported in the prepared remarks, the COVID impact during -- between April and June, especially the lockdown in core and hub cities in Beijing and Shanghai, has inevitably created delay of our enterprise cloud bidding and deployment activities in the process. Currently, we can see for sure that commercial and business activities has improved. This is something that we can see. So I would say that for the third quarter and the fourth quarter, with the absence of other major top cities lockdown measures, we would say that recovery speed is something that we can be expected. However, it is still rather difficult to have a comprehensive estimate about the ongoing and lasting impact of COVID situation, especially under the backdrop that the global macro economy continue to be very weak and remain uncertain. As the nature of our business, it's a 2B business, if our customers' performance are under challenges under the overall macroeconomic conditions, it is hard for us to deliver a much better result. And therefore, I would say that, at least from what we can see from business activities in July and August, the pressure, to be quite honestly, we expect that pressure will be continuing for a period of time, stretching into the future. Thank you.

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Thomas, please ask your questions.

Thanks management for taking my questions. My first question is about the competitive landscape in the public and the enterprise cloud side. Do we see any changes in terms of the competitive landscape? For example, like we are seeing more new entrants? And my second question is about the pandemic outbreak and the global headwinds that we are facing. We have just talked about that the macro situation globally is still very challenging. So I just want to get some thoughts from management, qualitatively speaking, when should we expect business back to the pre-COVID level and back to normal situations? Any color would be great. And is that really impacting the ARPU or the number of customers? And my final question is about the timing that we should expect adjusted EBITDA to reach breakeven? Thank you.

So let me briefly translate for Mr. Zou. So in terms of competitive landscape, my brief answer is that, from my perspective, during the past 10 years since our inception, we believe, fundamentally, there's no material change in terms of competition because as we started out, we were competing with Ali Baba and Tencent Cloud business. And more recently, there's the players joining in the game, including giants like Huawei, but ultimately, all of them are giant companies, whereby, in any short period of time, it is not likely that our scale can actually match with theirs. However, the fact that we have developed and grown rapidly in the past 10 years, has shown that we have considerable comparable advantages even in this market in playing with the giants. The one key reason is that the nature of the 2B service industry because the nature of this industry is that the selling single product does not really deliver value to the enterprise customers, but the company has to jointly develop solutions together with the customer to really develop and deliver value to that customers. And therefore, it is never a winner takes it all market for the 2B service companies. So a metaphor would be a horse race whereby our competitor might have 20 to 30 horses, where we focus deeply on the 3 to 5 horses, which can race really well. I think in the past, especially 5 years, the growth of our businesses, in particular in financial services and in health care has been demonstrating this point. In particular, in the health care space, we believe our solutions and products are actually leading the game. So I think, in the future, we will continue to focus on a limited number of verticals and to deliver our value to the customers. And to answer your second question, it's actually very difficult for me to answer when or if we are ever going to be able to revert to our status before the pandemic. It is quite apparent that the COVID has changed a lot of things, prevailing from our daily life to larger geopolitical struggles. However, if you only refer to the revenue and financial aspect of it, I would say that the largest impact of the COVID situation to the cloud service industry in China is that the players in the market are shifting swiftly from the rather aggressive pursuit of top line growth to pursuit of more balanced growth and profitability. We have observed our competitors, for example, Ali Cloud [ph] and Tencent Cloud to adopt such adjustments. And we have also reported in the prepared remarks that we are also adjusting to a more balanced growth rather than emphasizing on revenue only. We believe that this also gives more comfort to investors and other stakeholders as we are, by doing so, switching to a more sustainable development model. Thank you.

I'll take on third question regarding the profitability path. So we understand earlier this year, when we think about this year's total budget and the pacing of improving profit margin before the April and May of the COVID impact, our initial intention has two things. First of all, we want to actually improving the efficiency and cutting loss on certain nodes and regions, especially from the CDN business. Those are two major drivers that we were set earlier to seeing improving sequential improvement of both gross margin and EBITDA margin. And we budgeted for by Q4 on a single quarter basis, hopefully, our non-GAAP EBITDA margin will turn profit. However, the COVID happening this quarter obviously affected the pacing of implementing certain measures and also the market environment also reduced certain demand for certain high-quality products demand from certain customers. So I think, at this moment, we are seeing flat, especially on the gross margin side for this quarter. Hopefully, I think we are seeing improving gross margin, hopefully, for the next two quarters. And we understand that actually very important for ourselves, but also for the shareholders and the market to see our results quarter-over-quarter to improving gross margin. That reflects the quality of the products and the value of our technology. However, also on the product aside, that given our strategy today, as we discussed earlier by Mr. Zou that we will continue and especially more focused on the investment into the R&D and R&D personnel. So I think we will make some adjustments in terms of our internal budgets on some high-quality product investments and the people investment in the next two quarters that may affect certain R&D expenses and related expenses in those two items on a marginal basis. So I think the expenses, the budgets always follow the strategy and the business demand and the vision. And I think we explained earlier in the remarks today, we have laid out that clearly regarding the priorities we want to pursue in the next two quarters. So as a result, I think I will have two attentions as a summary. First of all, we will try our best to improve the gross margin on a quarter-over-quarter basis. This is no change. And point #2, we will make necessary investment into the R&D for the next two quarters and especially for high-quality products. So if that will have some impact, I think the timing of the EBITDA margin may be delay, or earlier or later. But again, I think it's only about the timing. And I think if we make the right investment on the products and the customers, our EBITDA margin will turn breakeven sooner or later. Thank you.

We thank you very much for all your questions. We have now reached the end of the question-and-answer session. I'll now turn the conference back to Ms. Nicole Shan for closing remarks.

Thank you, operator. Thank you 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 later.

Necessary investment into the R&D.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.