Good day, and thank you for standing by. Welcome to the Kingsoft Cloud's Second 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 today's conference is being recorded. I would now like to hand the conference over to your first speaker today, 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 second quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobalNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; and CFO, Mr. Haijian 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. Our interpretations are for your convenience and reference purposes 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 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. Thank you and welcome all for joining Kingsoft Cloud's second quarter 2024 earnings call. I am Zou Tao, CEO of Kingsoft Cloud. Looking back on the two years since August 2022, our entire Kingsoft Cloud team has firmly executed the high quality and sustainable development strategy and the company has undergone a complete transformation. First of all, profitability fundamentally improved as gross margin steadily increased from low-single digit to 17%. Adjusted EBITDA margin increased to 3% after turning positive in Q1 and we are well on track to turn operating and net profit positive. Second, swiftly embracing AIGC opportunities as this new round of AI services revenue contribution to public cloud increased from 0% to 26%, a leading figure in the industry. Third, firmly phasing out low-margin businesses, as CDN services revenue contribution decreased from approximately 40% to 20% and along with it, a single large customer concentration risk fundamentally resolved. Fourth, implementing refined management in aspects of procurement, assets, and operations as quarterly costs and expenses decreased by approximately RMB300 million, representing 15% of quarterly revenues. Fifth, taking long-term perspectives as Wuhan R&D center quickly scaled up to hosting approximately 30% of the entire workforce, including Camelot, laying a solid foundation for sustained technological leadership as well as completing dual primary listing on the Hong Kong Stock Exchange, followed by inclusion into the Hang Seng Composite Index and Hong Kong Stock Connect, solidifying our capital markets infrastructure. All of these have laid a solid foundation to the high quality and sustainable development in the future. I would like to express our sincere gratitude to all our customers, shareholders and employees who have consistently supported and cared for us over the long term. Now, I will walk you through the business highlights of the second…

[Foreign Language] [Interpreted] Thank you, Mr. Zou, and welcome everyone for joining the call. Now I will walk you through our financial results for the second quarter of 2024. We would like to highlight three key areas of progress. First, we are very pleased with the ongoing improvements in our financial matrix. By applying the first principle thinking, we are committed to a profit-focused approach that has led to consecutive increases in our gross profit, gross margin, EBITDA profit, and EBITDA margin over the past several quarters. This quarter, our adjusted gross margin reached 17.1%, marking eight consecutive quarters of steady growth, while adjusted gross profit hit RMB333.4 million. After turning a profit in adjusted EBITDA margin last quarter, we continued with this positive trend with RMB60.6 million in EBITDA and 3.2% in EBITDA margin, demonstrating our successful execution of a high-quality sustainable development strategy. Second, this quarter our revenue reached RMB1,891.8 million reverting to a positive increasing trend with a 3.1% increase -- year-over-year increase and a 6.5% rise quarter-over-quarter. By strategically adjusting our revenue mix in line with our high-quality and sustainable development strategy, we have allocated more resources to develop high-value services. This quarter, our AI revenues grew to RMB326 million, making up 26% of our total public cloud services revenue, doubled the amount from last quarter. We have established a resilient supply chain, scalable computing power and a long-term partnership with customers to support our growing AI revenues. In response to cost pressure and the low margin, we have strategically reduced the proportion of our CDN services to 19% of total revenue, down from 23% last quarter. Third, we have recorded a net inflow of operating cash flow amounting to RMB151.2 million. We also reduced -- we also secured various financial channels to support our AI…

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

Thank you. [Operator Instructions] We will now take our first question. This is from the line of Xiaodan Zhang from CICC. Please go ahead. Your line is open.

[Foreign Language] [Interpreted] So thanks, management, for taking my questions. And I got two questions here. First of all, could you please update us on your CapEx guidance for the next two quarters? And secondly, could you give us some color on the ROI of your AI investment and how is your expectation for the AI revenue contribution for the full year? Thank you.

[Foreign Language] [Interpreted] Regarding the CapEx. So I think -- first of all, I think you pointed out correctly, this year, we're actually accelerating our investment in, we think, a very good area of financial business growth opportunities. Most of the CapEx, I think probably over 95% or even higher, are relating directly to the AI investment, which we think is a very good positive opportunity for us. So, at this moment, while we cannot give a full guidance for the full-year CapEx investment, but I think we can probably look into two different areas. First of all is, for this quarter, you may also notice that we recorded a net cash inflow from the operations side, which is around about RMB151 million. And I think you can already see that the CapEx investment into the good area of business already converted into a positive inflow from operation cash flow. So this is actually the first point. So the second point is, we also expanded our financing channels. For example, you also notice, last year, we secured financing support from Kingsoft Group as well as the leasing potential opportunities from Xiaomi Group as well. But this year, especially in the last two quarters, we also got great support from, for example, the national policy banks, the state-owned financial institutions, including both banks and also the leasing companies. So, in that way, we actually do not limit ourselves with a certain cap of the CapEx investments just to looking the only amount of our cash balance today. So, my point is, giving those additional opportunities and financing channels, we actually can reopen and have a very high ceiling of the financial capability we can get to support an AI investment. The third point is, given the investment is a long term,…

[Foreign Language] [Interpreted] Okay. Let me just translate -- simply translate what Mr. Zou said. So, in terms of AI, I really want to take this opportunity to elaborate a little bit about my overall thoughts. So, in my mind, it's really about three dimensions. One is the supply of computing power. The second is the inference, which is the application of the artificial intelligence. And the third is the training, which -- from the current financials that you are able to see, obviously, which is a tremendous growth. For example, it's 10 times year-over-year growth and two times the AI revenue growth versus the first quarter. But all these numbers that you're currently seeing are mostly coming from the area of the supply of computing power. However, I do think that in the future, the potential room for revenue and for business in terms of training and in terms of for the application of the models have far more potential. Now, circling back to your question about the ROI, I have to say that the GP margin for the AI business is far higher than that of the other parts of the business, which is also a major contributing factor for the improvement of the company's overall GP margin. Now, looking ahead, I would also like to talk about it from two different dimensions. One is the supply of computing power, and the second is the inference and the application of AI capabilities. Now, in the first dimension, two areas poses a lot of opportunities. One is electric vehicles, and in particular, the autonomous driving demand for the EV space, which since the launch of Tesla's FSD, we have been engaging with a lot of EV firms, and all of them have significant and real kind of tangible intention…

[Foreign Language] [Interpreted] Thank you.

Thank you. We'll now take our next question. This is from Timothy Zhao from Goldman Sachs. Please go ahead.

[Foreign Language] [Interpreted] Thank you, management, for taking my question. I have two questions here. And the first question is regarding the revenue contribution from Xiaomi and the Kingsoft Group. As I noticed that there was a very strong revenue growth in the past quarter and the total revenue contribution already achieved 20% of the total revenue. So, may I ask what is the driver behind that and what is the AI-related revenue contribution from Xiaomi and Kingsoft Group to their revenue to Kingsoft Cloud? And into the second half of this year and into the longer term, given we have more cars from Xiaomi on the street as well as the WPS monetization from Kingsoft Group, how do you think about the revenue outlook from here? And second question is regarding the CDN revenue. As we see a continued proactive downscaling of the CDN revenue, could you maybe share any thoughts on the outlook for this business line going forward? Thank you.

Hey. Thank you, Tim. [Foreign Language] [Interpreted] The first question regarding the related parties' revenue contribution, I think, Tim, you're right. I think we do see a few very important leading positive signals regarding the revenue potential growth in the future. I think the first of all is really, as we mentioned, giving a stronger business connection, especially with Xiaomi and the Kingsoft Group. We allocated more resources and we prioritized the revenue and client demand from our internal client. As we mentioned a few months ago, I think this is actually a very good opportunity for Kingsoft Cloud. So for this quarter, the revenue from Xiaomi and Kingsoft Group increased around 36.9% year-over-year, and are contributing to about RMB370 million for this quarter alone. I think it is a very positive signal given it is a proven of our capability to serve very important internal clients, including Xiaomi and Kingsoft, including WPS as well. So, I think the scenario and applications from auto driving from the AI-related SaaS services are very important driver for this opportunity. And we also have to see given this trend going forward, maybe it is possible by end of this year as we are turning to a new financial year, we may asking the shareholders to give us an increasing cap of the related party revenue approval. So I just want to also share this good news with you that maybe for the next two or three quarters in the shareholder meetings, we are going to -- happy to propose a higher ceiling of the revenue cap to prove that we do have a great visibility of the internal revenue from related parties. The second part is relating the AI revenue contribution. I would say that the incremental revenue from our internal parties are…

[Foreign Language] [Interpreted] So, I think the right way to understand -- to think about this question is that we have to make a distinction between two types of CDN business. One is the standard CDN business which is typically marked by a lower profit margin and this other kind of CDN business which represents usually higher margins, for example, like the live broadcasting acceleration, the dynamic acceleration, et cetera. And this usually has higher margin because they have -- there are higher value added. So, my quick answer is that in -- for the first type of standard CDN business, the minimum amount that we aim to maintain on a quarterly basis is RMB300 million and I do not expect it to be lower than that as service as a base for our business -- overall business and that will continue to invest and to expand the higher margin part of the CDN business. Yeah, that concludes my answer.

Thank you, operator. This concludes our…

Thank you.

Yeah. Thank you, Tim Zhao. And this concludes our Q&A. [Technical Difficulty]

Thank you. There are no further questions at this time. So I will now hand back to Nicole Shan for any closing remarks.

Thank you, and 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 all. Bye.

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