Good day and thank you for standing by. Welcome to Kingsoft Cloud's Second Quarter 2023 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 speaker today Nicole Shan, IR Manager. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as our GlobalNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; and our CFO, Mr. Haijian He. Mr. Zou will review our business strategies, operations and the Company highlights; followed by Mr. He, who will discuss the financial guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive integration, our integrations are for your covenants and reference purpose only. In case of any discrepancy in management statement in our 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 related to on that well 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.

[Foreign Language] Hello, everyone, and thank you all for joining Kingsoft Cloud second quarter 2023 earnings call. During the quarter, we continued to uphold the principle of high quality and sustainable development, build success based on technology and innovation and forge our reputation throughout the entire business process with customer centricity. We have enhanced our operations management and proactively embraced the new AI era. This quarter, our profitability further improved. Total revenues reached RMB1.84 billion. Adjusted gross margin increased steadily for the fourth consecutive quarter to a new record high of 11.3%. Adjusted gross profit reached RMB207 million, more than three times the amount for the same quarter last year. Normalized adjusted EBITDA margin was negative 3.3%, which represents a significant improvement of 5.3 percentage points from the same quarter last year and 2.6 percentage points from the previous quarter. So in terms of public cloud services revenues were RMB1.16 billion with a gross margin of 5.2%, significantly higher than and turning positive from the negative 2.4% gross margin in the same quarter last year. We continued to focus on three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, customer mix and cost reduction. First of all, we continued to serve Xiaomi and Kingsoft ecosystem well. In particular, total revenues from Kingsoft Group increased by approximately 15% year-over-year. Second, we continued to optimize our customer mix. The revenue share of our largest customer dropped further to around 16% while signing up more than 20 new medium-sized customers. Meanwhile, we also resolutely withdrew from long-term loss-making projects and customers, achieving a more balanced and healthier revenue mix. Third, we have made cost reduction and efficiency improvement and ongoing initiative. We established a dedicated cost optimization team to tackle redundancy including the cancellation, relocation, consolidation, reuse, and disposal of…

Thank you, Mr. Zou and I welcome, everyone for joining the call. Now, I will walk you through the financial results for the second quarter 2023. Uphold strategy of high quality and sustainable development, we are pleased to deliver another quarter of steady profitability improvement. Our adjusted gross profit continued to grow for the fourth consecutive quarter and achieved record high of RMB206.8 million increased by 202% year-over-year representing adjusted gross margin of 11.3%. Along with our strict expense control, our normalized adjusted EBITDA narrowed from negative RMB163.7 million in the same period of last year to negative RMB59.9 million this quarter. As a result, normalized adjusted EBITDA margin further narrowed from negative 8.6% in the same period of last year and negative 5.9% in the last quarter to negative 3.3% this quarter. Thanks to the operational efficiency improvement, the quarter-over-quarter narrowing of normalized adjusted EBITDA margin outpaced increase of adjusted gross margin. Our total revenue were RMB1,835.4 million this quarter of which revenue from public cloud services were RMB1,159.5 million, representing a decrease of 10.1% compared with RMB1,289.1 million in the same period of last year as we steadily adjusted our revenue mix and proactively scaling down services to our top CDN clients. Revenue from enterprise cloud services were RMB675.2 million, representing an increase of 9.5% from RMB616.6 million in the same period of last year. The year-over-year increase was mainly driven by our continued to focus on selective verticals and quality projects, recovery from COVID-19 impact, our investment into flagship products bearing fruits, enhancing our capabilities to replicate solutions and services to different regional customers. We continued to enhance our cost-control measures. Total cost of revenue decreased by 11.5% year-over-year to RMB1,628.8 million. IDC costs decreased significantly by 16.4% year-over-year from RMB1029.1 million to RMB860.7 million this quarter.…

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

[Operator Instructions] Our first question comes from the line of Xiaodan Zhang from CICC. Please go ahead.

[Foreign Language] So thanks management for taking my questions. And I got two questions here. First of all, the company has been proactively scaling down the CDN business in the past year or two. So when do you expect structural optimizations for your public cloud business to be completed? And is there any chance that your public cloud segment will return to positive growth in the upcoming quarters? And secondly, what do management think of the prospects of incremental revenue contribution from large language models and generative AI related business? Thank you.

Okay, so to respond to your question, you mentioned the structural adjustment we have been conducting in the public cloud services sector segment and this can be broken down into two parts. One is the CDN business and the other is the other public cloud services business. Now for the CDN part, actually since I took the role of CEO last year, we have communicated with the market and I would have to say that. In general, the development for this adjustment of this business has been in line with what I have communicated in the past quarters, but due to the changes in the overall market situation, the speed has been a little bit faster than what we had expected. However, in general, the pace and the direction is consistent. We would expect the adjustment for the CDN business to continue for a while and we expect to complete that within half a year to one year, and for the non-CDN business part of the public cloud services business, the business adjustment has been going through rather smoothly and we have done an excellent job in terms of cost reduction. As can be shown in our financial performances, the gross margin for the public cloud services business has improved from negative 2.4% in the second quarter 2022 to positive 5.2% in this quarter, which we are reporting. So this also relates to the second question that you have about the AI business. We expect that this round of AI opportunity has the potential opportunity to bring us more growth to the public cloud services business. So to answer your question, we do believe that this round of new AI opportunities will bring a lot of opportunity for us. As you can see, after the Chinese Spring Festival, the GPT…

Operator, next question please.

Thank you. We'll now move on to our next question. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead.

[Foreign Language] Thank you management for taking my questions. I have two questions, one is regarding the gross profit margin as I see the gross margin of public cloud, enterprise cloud has been upward trend over the past few quarters and especially for enterprise cloud, the gross margin has achieved above 20% for the past two quarters. Could management further elaborate on the drivers for the gross margin behind that? And what is our updated view on the gross margin target for this year and in the mid-term? And secondly, and also regarding the enterprise cloud and the question is regarding the revenue, as I see the potential for the revenue has been in the declining mode slightly in the second quarter. Just wondering if there is any specific reason behind that and how should we look at the revenue trend into the second half this year. Thank you.

Thank you, Tim, this is Henry. Happy to take on the first question and our CEO, Mr. Zou will take on the second one. So actually acknowledge the improvement of the gross margin of enterprise cloud business. Actually, there are few things we actually discussed this earlier about, you eventually see that trend, actually kept very stable and you see that improvement expansion, a few things, first of all is we talk about, is the right client selection process. So I think that actually the first and the beginning point that do the right business with right people and if you do look at our average revenue mix from enterprise cloud, we used to have some kind of heavyweights on the top clients with over RMB30 million or RMB40 million per contract. But right now, we're focused on the sweet spot around like RMB8 million to about RMB10 million per contract. So working on that range of the right clients, we have a better ability to control the cost and to make sure that all the receivables and cost control measures kind of actually finally deliver, I assume this is the first point. The second one is really about the repeating sales for the more standardized products. So we're working very closely with our sales team and our R&D team as well. We will make sure that we not only work with one client or one product, but we want to -- working with different clients with the same product. So I think that percentage, obviously, we didn't disclose the number from last year to this year, the standardization of the products, services and solutions has been very important driver, that's the second part and the third one is really about, I appreciate all the comments from the research analysts…

[Foreign Language] So before I answer the details of your question, I would like to give you an overview of how we think about the enterprise cloud business. The real thinking is that we have been becoming more focused on high-quality products -- high-quality projects in terms of selecting high-quality projects and also for the projects that are more sustainable for us. So in terms of project quality, in terms of reputation, in terms of deployment capabilities and services we offer to customers, we have been working very hard on those fronts and that is why you have been seeing in the consecutive quarters we have been experiencing improving profitability levels. I now ask your question of why the slight decrease for the revenue of enterprise cloud from the second quarter versus the first quarter. The answer is really just the seasonality because the revenue recognition for enterprise cloud projects, they generally delay from the time of the signing of those projects to the revenue recognition for some -- for several quarters to one year, some -- and in some other cases can be as long as two years. And therefore the financial results you see in one single quarter is the -- added is the combined results of different projects signing a different time points and the different delays in the overall revenue recognition cycle and therefore, I wouldn't say that a slight decrease for the financial of the revenue for enterprise cloud for the second quarter versus the first quarter is a reflection of the -- of our business performance for the enterprise cloud, on the contrary, we feel that the fundamentals of the enterprise cloud business have been going quite well and in some future quarters. For example, in the Fourth quarter, you might be also seeing a sudden surge of our enterprise cloud revenue. However, that's -- not necessarily reflect equivalent search of the business fundamentals. So that's the general idea I would like to give you. In fact, we have also been in communication with the auditors, hoping to find a metrics that would provide real-time reflections of our fundamental business situation and the alignment with that of the financial performance, we're still exploring that, we hope to find that metrics soon. thank you.

Thank you. That's helpful.

Operator, next question please.

Thank you. We'll now move on to our next question. our next question comes from the line of Allen Li from JPMorgan. Please go ahead.

[Foreign Language] Thank you management for taking my question. I have a follow-up question on gross margin. So for public cloud services, if we exclude CDN business, what's the gross margin trend for core computing and storage in past few quarters? And how do we think the trend into the second half? And also Henry, you just mentioned you have increasing revenue contribution from higher margin SaaS and PaaS services and could management share some color on how should we think about the long-term revenue contribution from these two business? Thank you.

Thank you, Allen. This is Henry. Happy to share some color. So first of all, again, while we're talking about the structure challenge of the client and revenue mix, CDN versus non-CDN. But I want to point out that the CDN business itself is not really problematic business. The point is a concentration risk together with the CDN products to certain clients is really a high-risk flat for us. So that's why we did some changes in the past few quarters but putting that aside, as you mentioned, there are two things we can share why we haven't disclosed in detail on that numbers. First of all, the marketing of the CDN business does have certain fluctuations, depends on the season, depends on time mix. And while we're cutting down certain client penetration and the client concentration, we do need to switch and reallocate certain resources, especially on the DNA and the bandwidth, we need to change and cancel and renew, those actions will take out some fluctuations. But I will say that in the old days, let's say, last year, a year before as you mentioned, there are certain quarters, our CDN business gross margin was negative in certain regions, certain notes. But right now, we do have relatively stable positive gross margin of the CDN business where it's really not as high as a public cloud product. The second part is gross margin of the cloud -- public cloud services including computing network and storage definitely higher and I think CDN products are much higher than CDN products in terms of the gross margin and we're trying to improving the percentage of their revenue from their products, so if you're putting that everything together, I think in few quarters when we're looking ahead given that we do have…

Thank you.

Thank you. Due to time constraints, this concludes our question-and-answer session. So I'll hand the call back to you for 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. Thank you.

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