Thank you for standing by, and welcome to the Kingsoft Cloud Holdings Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Nicole Shan, IR Manager. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third 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 strategies, 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 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. Tao Zou. Please go ahead. Thank you.

[Foreign Language] [Interpreted] Hello, everyone. Thank you all for joining Kingsoft Cloud’s third quarter 2022 earnings call. Since taking on the CEO role in August, I have been leading the company through a systematic review of our strategy, business, and financials. And during the quarter, we continued to implement various initiatives in a solid and down to earth manner. First, we continued to invest in technology, focus on our core businesses, and revise our original vision for cloud services. Second, we continued to review and evaluate our customer base and project portfolio, strengthen cost control, to achieve a better balance between revenue growth and profitability. At the same time, we continued to strengthen our ecosystem synergies explore high value business opportunities and pursue a path of high quality development. We achieved solid financial performance in the quarter. Our total revenues were RMB1.97 billion, in line with our guidance. Adjusted gross margin improved significantly to 6.3% from 3.6% in the second quarter. And our operating cash flow has been positive for two consecutive quarters, indicating that our business adjustment and cost control efforts are starting to yield initial results. In terms of business, we adhere to the conviction of building success based on technology, continued to focus on building key product capabilities on the IF and SaaS layers. These efforts were recognized by Frost & Sullivan Lead Leo Institute in China Data Management Solutions Market Report published in the third quarter this year, in which Kingsoft Cloud’s data management solutions ranks among the leaders of the market for innovation competency and growth performance. Meanwhile, IDC's latest addition of China's software defined storage tracker 2022 first half ranked our enterprise level storage solution, King storage, at top four in China's software defined object storage market. In terms of ecosystem collaboration, we stepped…

Thank you, Tao Zou, and welcome, everyone for joining the call. Now I will walk you through the financial results for the third quarter 2022. We have actively taken measures to improve efficiency demonstrating our strong commitment to pave the path for profitability. This quarter, our adjusted gross margin has improved considerably and continuously from the lowest point of 1.2% in the fourth quarter of 2022, to 3.6% in the second quarter this year and further to 6.3% in the third quarter. Our operating cash flow has been positive for the past two quarters consecutively and we have achieved RMB100.9 million net operating cash flow this quarter. Our total revenue was nineteen RMB1,968.8 million in Q3. Within that, revenues from public cloud services was RMB1,349.0 million. While increased by 4.4% compared with Q2, it represents a 20.2% decrease compared to the same period in 2021. The change was primarily due to the company's proactive scaling down of CDN business, with its gross billing decreasing by about 28% on a Y-o-Y basis. Revenues from enterprise cloud services was RMB622.0 million, which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China. While proactively applying more selective criteria to project screening to strive for better profitability and cash flow. Our cost saving measures are well on track within our plan. Total cost of revenues decreased by 20.6% year-over-year and remained stable quarter-to-quarter at RMB1,846.4 million. IDC costs decreased significantly by 23.6% year-over-year from RMB1,410.9 million, to RMB1,087.3 (ph) million this quarter. Depreciation and amortization costs increased by 26.9% from RMB200 million in the same period of last year to RMB253.7 million, while remained stable compared to last quarter. It is in line with our revenue mix adjustments as we…

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

Thank you. [Operator Instructions] Your first question today comes from Thomas Chong with Jefferies. Please go ahead.

[Foreign Language] [Interpreted] Thanks, management for taking my questions. My first question is about the recent outbreak of COVID as well as the uncertainties of the macro environments. How should we think about the near term as well as 2023 outlook when we do the budgeting process? And number two is about the Q4 revenue guidance, can management comment about the trend for public and enterprise call during the quarter? Thank you.

[Foreign Language] [Interpreted] Thank you, Thomas. So on your second question regarding the Q4, so as we mentioned, we do see a third point, we do see a relatively expected recovery curve on the top line right, starting from last quarter, and carry from this quarter and Q4 sequentially. So the total revenue will be improving trend in Q4. And in terms of the mix, given we have almost completed the initiatives on the CDN business adjustments on the priorities in terms of investments and the client mix. So I think that provides us with a relatively stable base to project the public cloud revenue in Q4. So because of that, I think in Q4, our public cloud -- as a total, we will see a sequential marginal improvement on the top line, but the profitability on the line of the public cloud will continue to see a positive contribution for the company's total gross margin in Q4. And on enterprise cloud side, as we mentioned, I think if you're really looking back from Q1, Q2 and this quarter, and as Tao Zou mentioned, part of the due to the COVID measures in Beijing City that preventing us some of the project bidding and the deployments and execution in Q2, which was around about April and May, and sometime in part of July -- June and July. We do actually tried our best in Q3 this time to accelerate the deployment execution. So hopefully, some of the flagship projects, including a few important projects that we discussed and disclosed earlier, for example, some of the provision-level healthcare cloud, hopefully, we can be deployed and fulfill the execution in Q4, and that will carry with the revenue booking in Q4. So with that, I think our enterprise cloud, you may see relatively a little step up of the revenue of enterprise cloud as part of the total revenue contribution. So overall, my feeling is right now, I think the sequential improvement on both top line and the gross margin will be two important priorities for management team, while we will need to continue to make sure that our cost control measures of expenses lines will carry forward. Hopefully, will be -- have some benefits in Q4 and Q1, starting from next year as well. So it will take some time, but I think some of the initiatives were already implemented in place, just we need to have the time clock and see the benefits going forward. Thank you, Thomas.

Thank you. And I think it's just a quick translation of what Mr. Zou responded to the first question. So the COVID situation has been going on for years. And honestly speaking, it has been impacting the overall society significantly across all verticals, including us. And like you rightly pointed out, we are also observing and trying to see what the next step might be. As you might be aware, in recent days and weeks, the situation in Beijing is becoming more severe, to abide by the government rules. We have only 20% of the workforce currently working in the office. And as you know, there has been one situation like this back in April and May. So it's really difficult to predict or to comment the situation. What we can do is to abide by the rules promulgated by the government. However, I think from a strategy perspective, in light of the uncertainty and potential uncertainty in future years. From a strategy perspective, what we can do is to maintain a robust and relatively defensive approach. And what I mean by that is exactly what we commented in the prepared remarks, which is no longer blindly pursuing top line growth and but to switch to our pursuit of sustainability and path to profitability. And as you have seen, the gross margin in the third quarter has already improved quite a lot from 3.6% to 6.3%. So we believe that by abiding by that relatively conservative and robust strategy, we'll be able to navigate through the potential uncertainties in the years to come. As to your question of our budgeting, we are currently going through the process of making a comprehensive budgeting, currently going through the first round of review and compiling the numbers. We expect to have more clarity towards the end of December or the beginning of January. So unfortunately, we don't have much -- more data to share at this stage. Thank you.

Thank you.

Your next question comes from Xiaodan Zhang with CICC. Please go ahead.

[Foreign Language] [Interpreted] So my first question is regarding our non-GAAP EBITDA margin, as which dropped slightly quarter-on-quarter in Q3. So I just wonder, do you expect a delay in terms of the timing for non-GAAP EBITDA margin breakeven. And secondly, what is our CapEx plan for the next two to three years? And are there any foreseeable plan to further extend the useful life service the some of the overseas peers have extended that from four to six years. Thank you.

Thank you. This is Henry. Happy to take all those three questions on the financial related matters. The first question is regarding the EBITDA breakeven, yeah, we do acknowledge that the EBITDA on a sequential basis, we actually dropped a little bit marginally. We noted that there are a few things on the line. First of all, if you look at the total expenses on the dollar value, actually, our sales, marketing and R&D expenses actually was quite stable. So there's no major changes on that. However, the booking of certain G&A expenses due to, for example, the Hong Kong Dual Primary Listing projects that we actually need to pay certain fees, as you may understand, that actually also eating up the bills as well. And also given this year, we do have certain cost-cutting, for example, the optimization of human capitals of the company. We need to pay certain compensations for the people they may choose other credit tracks for things like that. We did a batch of that arrangement in Q3. So especially towards the end of Q3. So the savings on the salary has not been reflected on expenses in Q3, while we need to pay even more for the compensation for the people that they choose other credit tracks. So in and out, you see actually the fluctuation and even increasing on certain expenses items. But I think these are the right thing to do for the company and the benefits on the cost of savings and expenses will be gradually released in Q3, and I think for some time down from Q1 next year. So that's actually quite clear on online reasons. So we don't worry too much about that a little fluctuation, but the online -- or the normalized operational expenses in Q3 already…

Thank you. That’s very helpful.

[Operator Instructions] The next question comes from Joel Ying with Nomura. Please go ahead.

[Foreign Language] [Interpreted] I’ll transfer myself. So regarding the margin improvement, can management talk about situation, so where it comes from, public, cloud enterprise cloud and will it be sustainable into the first quarter and going forward? Thank you.

Thank you, Joel. Yeah. On the GP (ph) margin, you touched upon a few things. The improvements, the breakdown, the root causes and the sustainability. It's a very broad scope actually. So I think I'll start with the reasons, first, so there are a few things we actually start to work on since Q4 last year. So it's not actually happening only this quarter. There are a few things involved. As you may remember, first of all, is we're kind of cutting some losses for certain loss making clients. Number two, we optimize the product mix, right? So try to make the computing, the storage, some of the big data solutions and certain more high value added products and more profitable products we invest a bit more, right? So I think these are the second reason. We start to do that from Q1 this year. And the third reason is, the improvement and the screening of the projects. So as Tao Zou mentioned in the CEO remarks, we actually starting from this quarter, have adopted a very comprehensive approach to analyze returns on each projects and different ratings internally for different clients, et cetera. So we can prioritize and select the right projects we're working on, and some of that has already yield a good for this quarter as well. And the last reason is actually, if you remember last year, we do kind of learn our experience and the lessons. We've bought -- a little bit (ph) too much of the service, and we ordered a bit too much of the bandwidth, and it cannot be returned. So the eating up on the gross margin last year, especially the second half. So this year, we have changed our process to evaluate the procurement process to make sure that we…

Thank you, Henry.

The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

[Foreign Language] [Interpreted] Thank you, management for taking my question. My question will be about the outlook for 2023 as we understand this year is the transition year in terms of our business adjustment, and also there is impact from the macro environment as well as COVID. Could management share some thoughts on how we should look at the demand of overall cloud industry in China. And also for our revenue growth, when should we see an inflection point in terms of cloud revenue in your growth into 2023? Thank you.

[Foreign Language] [Interpreted] Okay. Just very quickly responding to your question. The first point is, as I commented previously, we're currently undergoing the first round of budgeting for the next year and we currently do not have a comprehensive picture which we will be able to have towards the end of this year to share more color to the market, and to the investors. Now the second thing is, although that being said, I think I can share with you some of my thoughts towards the macro situation and our strategy in response to that. The first is, the -- given the dynamic situation and the control measures within China, we have been changing the guiding principle, as I commented, from revenue from the pursuit of revenue growth to profitability, which is also a change that we have been increasingly observing within the sectors. The second point being the -- there still remains significant uncertainty to the COVID control measures that will come. And also including the uncertainties of what the country's overall economic planning after the two sessions in 2023 is going to be. So we all generally adopt a conservative and defensive approach. And this approach, including some of the falling measures, number one, we will exit some of the projects and customers and transactions that have not been profitable for a long time -- for the long-term. And secondly, we will be looking at our customer base and adjust the customer base structure, in particular in the past that some of the largest customers have been commanding large share of revenue contribution, and has impacted to our financial performance. And we might decrease that revenue contribution and increase the revenue contribution coming from the waste and shoulder-level kind of customers. And thirdly, in terms of enterprise cloud services, we will continue to dig deeper into the strategically selected verticals as we have done in the past, but also cautiously explore new verticals that are highly beneficial for the cloud industry, for example, the electric vehicle industry. That's some of the thoughts that I can share with you at the macro level. Thank you.

Yes. Thank you, Timothy. I also add one point as well, while we follow the market and client demands carefully, and while we are looking for -- as you do as well, for the next kind of acceleration or the v-shape acceleration of the demand from clients we have a capacity on the cash reserve as well. So as you can see that we already delivered a net positive on operating cash flow side this quarter. And hopefully, for next quarter and going forward, we can continue to do that. So we remain relatively robust on the cash balance. And while we're investing carefully on the potential new verticals that will carry relatively faster growth, as Tao Zou mentioned, for example, the new energy EV cars and other verticals as well. So I think we do not worry too much about the timing because we have enough cash, and we can wait for the market to come back and work with the right clients. So I think that's actually one more point I just want to say as well. Thank you.

Thank you, guys. Very helpful.

There are no further questions at this time. I will now hand the call back to Ms. Shan for any closing remarks.

Thank you, operator. 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. Good-bye.

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