Good day, and thank you for standing by. Welcome to Kingsoft Cloud's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. I would like now to turn the conference over to Nicole Shan, IR Director of Kingsoft Cloud. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2024 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 CEO, Mr. Zou Tao; and our CFO, Mr. Henry He. Mr. Zou will review our business strategies, operations and 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. All interpretations are for your convenience and reference purposes only. In case of any discrepancy, the 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 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 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 conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zou. Please go ahead. Thank you.

[Foreign Language] [interpreted] Hello, everyone, and thank you all for joining Kingsoft Cloud's first quarter 2024 earnings call. This quarter, Kingsoft Cloud's high-quality and sustainable development strategy has achieved fruitful results. After more than a year of unwavering optimization and adjustments, and alongside our continuous and steady increase in gross profit margin, we have achieved a milestone of turning adjusted EBITDA positive for the first time since the establishment of Kingsoft Cloud. This milestone demonstrates Kingsoft Cloud's profitability and growth sustaining ability, marking the commencement of a new stage of development. It establishes a robust foundation for our long-term sustainable and healthy progression into 2024 and beyond. Now I will walk through the business highlights of the first quarter of 2024. This quarter, we continued to achieve dual improvements in both our revenues and profitability. In particular, our total revenues reached RMB1.78 billion, increasing 3.1% quarter-over-quarter. Adjusted gross profit for the quarter reached around RMB300 million, increasing 54% year-over-year. Adjusted gross margin saw a significant boost rising by 1.6 percentage points quarter-over-quarter to reach 16.8%, marking the seventh quarter of consecutive improvement. Adjusted EBITDA reached RMB33.19 million with an adjusted EBITDA margin of 1.9%, representing a significant improvement of 8.9 percentage points year-over-year. In terms of public cloud services, revenues reached RMB1.19 billion this quarter, representing an increase of 12.9% quarter-over-quarter. Excluding the CDN business, public cloud revenues saw a 9% quarter-over-quarter increase. We have seen positive outcomes across our three priorities for public cloud services, namely the Xiaomi and Kingsoft ecosystem, AI business and CDN strategic adjustments. First of all, serving as the sole strategic cloud platform within the Xiaomi and Kingsoft ecosystem, we firmly grasped the cloud business opportunities within the ecosystem, especially after the launch of Xiaomi SU7 and the commercialization of WPS AI, which led to…

[Foreign Language] Thank you, Mr. Zou, and welcome, everyone, for joining the call. Now I will walk you through the financial results for the first quarter 2024. We are very pleased to see our adjusted EBITDA margin turn profit for the first time with our adjusted gross margin has been consecutively improving for seven quarters, verifying the well-executed of our strategy of high-quality and sustainable development. Having successfully achieved profitable EBITDA margin, we would like to highlight the following three key efforts we have made to yield the results. First of all, we strategically adjusted our revenue mix under the guidance of high-quality and sustainable development strategy. During the past year, we scaled down proactively our CDN services with low margin profile. This quarter, CDN services contributed around 23% of our total revenue compared with over 50% in the peak time, looking back into 2020. Meanwhile, we expand our revenue from high-margin AI business achieving RMB160 million this quarter, contributing around 13% of our public cloud revenues. Second, both of our public cloud and enterprise cloud services improved their margins in 2023 and the quarters beyond compared with 2022. Since last year, we focused on high-margin products and services, and we select carefully about our clients, which yield better margin profiles. Third, we have been taking strict measures and a supply chain strategy to cut down our costs and expenses. We have streamlined our procurement process and enlarged our supply force to achieve higher cost effectiveness. We also closely monitor the daily operation expenses. These key initiatives bear fruit in this quarter by recording EBITDA profit, and we believe these are still potentials in the future, and we will keep our commitment into improving our profitability. Our adjusted gross profit continued to grow to RMB299.1 million, increased by 53.8% year-over-year,…

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

Thank you. [Operator Instructions] Our first question comes from Xiaodan Zhang with CICC. Your line is now open.

[Foreign Language] I got two questions here. First of all, what is your expectations for the adjusted EBITDA margin improvement pace for the subsequent quarters? And secondly, how are you going to cope with the increasingly aggressive pricing strategies of IC and large language model vendors? Thank you.

[Foreign Language]. So I probably will take on the first question. So as we mentioned in the prepared remarks, we're actually happy to see during the 12 years of history of Kingsoft Cloud is actually the first quarter we hit the EBITDA margin breakeven. And the underlying drivers, as we mentioned, are very clear. And we believe that those drivers will be continue to unleash the value and profits in the following quarters, namely, the better mix of the revenue from different BUs, high-margin contribution from AI business, the revamping of the supply chain tactics which are actively changing many of the suppliers to remain competitive in the cost side. And also, we improved the internal operational efficiency by streamlining certain internal operation initiatives and process. So these are the things. Obviously, other companies do the same, but I think we do in a better committed way, and we will carry for a long way. And also for -- if we're looking forward, we believe partial of the benefits on the profit from the initiatives we already took will continue to have the results in the coming year quarters. And in addition, as you can see that, we also have the better trends to go with the higher growth on the top line. So I think that will also give a good kick into the bottom line of the profitability as well. So in short, I think we are not going to say it's going to be onetime profitability on the EBITDA line. It will be consistent and it will be probably carried along in the following quarters. And we also see the improving better gross margin will also kick down to the EBITDA margin line as well. So I think sequentially, we'll see a better gross margin carry forward and also will be a narrowed spread between the gross margin and EBITDA margin. So we'll see probably a more accelerated trend of the EBITDA margin improvement as well. I think there's other two things we can share. Obviously, we're not going to give kind of a numeric guidance on the EBITDA margin going forward. But I think we're going to achieve kind of industry top level of the tier players in a very similar ballpark number of the gross margin and EBITDA margin line. And what I can kind of commit is the EBITDA margin breakeven for this quarter is not going to be a onetime off event. So we are pretty confident both gross margin and EBITDA margin will continue to improve in several quarters down the road as well. Thank you.

[Foreign Language] [interpreted] Okay. So I'll just very quickly summarize and translate. So to be quite honest, it is something that we had expected already. As I mentioned, people have noted the price cut of large language model offered by ByteDance, Alibaba and Baidu, and I've also commented on this, which is a sign that the large language model development in China has entered a stage of relatively mature, which I would call, the round of competition, which eliminates some of the players. However, I think it's important to mention one point that what we at Kingsoft Cloud do is different from what this large language model players do because we actually provide services and computing power to the large language model players. But we don't do like large language model ourselves. And therefore, the importance for us is that what we are closely looking at is whether these customers of us, namely the independent large language model players in the market, are going to be able to survive this competition and remain a player in the market. From the current situation, we have seen that many of them have secured a very large amount of financing in recent past. And therefore, overall, we evaluate the situation for these customers to be relatively robust, at least in the next one or two years, which is well within our contract period. From the long-term standpoint, we do think that this is a stage of development of large language model in China that is going to come, which is not going to be that sustainable for all kinds of players to remain on the table. However, we do think that vertical application models -- there's a -- for vertical application models, there's a good chance that many of them will be able to have their own niche and unique markets in the market competition.

Operator, could you please. Thank you.

Please stand by for the next question. The next question comes from Timothy Zhao with Goldman Sachs. Your line is now open.

[Foreign Language] Thank you management for takin my question. My question is regarding AI and the relevant investments. I do notice that the AI revenue actually showed strong Q-on-Q growth either from an absolute number perspective or as a percentage of revenue. Just wondering if management can share any color on what is driving that very significant AI revenue growth. And secondly, on CapEx, as you mentioned, you already spent around RMB1.2 billion CapEx. I was just wondering if management has any guidance into the total CapEx for this year. Thank you.

Thank you, Tim. Probably I'll take on part of the question and our SVP also will probably give more color on the business side as well. So regarding the investments, so I think we are probably in the -- still in the early age and there's still a lot of opportunities. We want to invest into the right clients. As we mentioned, we want to carefully select the clients. But after we committed to the client as we are getting to know client better, we will continue to make more investments. So the RMB1.2 billion for this quarter, I think it's only part of the demand we received from the clients, and we'll continue to invest more in the following quarters, which we think will result in a higher revenue in the following quarters. But on the other hand, given the AI business itself is carry a better margin and the supply/demand trend in the market is more balanced. So we are actually changing the way we use our money as you probably realize that not only we're using our equity capital, but also we leverage different sources, including the financial leasing, including some operational leasing, including the bank borrowing and other partnerships with -- for example, with the suppliers that will provide certain credits to us as well. So I think we are going to explore as many channels as possible to extend the capital we have. So the thing I want to mention, we don't want to set a cap about how much we want to invest into AI just because the cash we have on the balance sheet, right? So I think you can model for different level of the ceilings on the cash number we have today. So I think that's -- on your second question.…

Yes. We just mentioned that we have many incomes from different type of companies. For example, the AI companies, they are now building the base cluster on our cloud. So as we mentioned on the report, we have built about 256 or even 512 clusters. So this all -- these kind of companies will expand their new clusters on the cloud, so we were expecting in the new quarter, we will have better revenues. And also, you can see that all cloud companies, we have the requirement not only on the hard drive technologies, but also on the language models technologies. And also we have some customers from the Internet companies. They are creating their own language models. And now we are not only can provide cluster services for them, but also we can help them to train their own models and even dealing with their new data. So -- and also, we can see some GC companies, which is something like picture and videos. They are also having the increasing requirement. So this requirement while -- we were expecting increase on that. Thank you.

Thank you, operator.

Yes. I show no further questions at this time. I would now like to turn the call back over to 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 next quarter. Have a nice day. Thank you.

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