Good day, and thank you for standing by. Welcome to the Kingsoft Cloud Third 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 is being recorded. I would now like to turn the conference over to your speaker today, Nicole Shan. Please go ahead.

Thank you, Heidi. Hello, everyone and thank you for joining us today. Kingsoft Cloud's third quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on our GlobalNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Zou Tao and 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 conductive interpretation. Our interpretations are for your convenience and reference purpose only. In case of any discrepancies, management's statement in the original language will prevail. Before we begin, I'd 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, 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.

[Foreign Language] [Interpreted] Hello, everyone. Thank you and welcome all for joining Kingsoft Cloud's third quarter 2024 earnings call. I am Tao Zou, CEO of Kingsoft Cloud. This quarter, we continue to see strong results from our unwavering commitment to the high quality and sustainable development strategy. First of all, revenue is on an accelerated growth trajectory. Following solid year-over-year and month over month growth in Q2, we have seen our year-over-year growth rate rise to 16% this quarter, outpacing the industry average. This momentum stems from the strategic adjustments we made in 2022 to diversify our revenue structure, leveraging our first mover advantage. Both our public cloud and enterprise cloud businesses achieved double-digit year-over-year growth, driven by a dual engine strategy, resulting in a stronger foundation for continued development. Second, our profitability is improving at an even faster pace. After turning EBITDA positive for the first time in Q1 and reaching a margin of 3.2% in Q2, this quarter, it has accelerated to a double-digit margin of 10%. Meanwhile, our adjusted operating loss margin has significantly narrowed from 16.2% in the same quarter last year to 7% this quarter, further solidifying our path towards high quality development. Third, we continue to lead the transformation with AI. The proportion of AI revenue as a percentage of our public cloud business has continued to grow to 31% this quarter. Over the past five consecutive quarters, AI revenue has consistently shown triple-digit year-over-year growth. And this quarter, we saw a remarkable 6.9 fold increase compared to last year, outpacing the industry's growth. Our strong profit margins and customer distribution demonstrate the sustainability of this growth. Meanwhile, we are also exploring new AI business models. Having entered into a deep collaboration with Shine Wing, China's leading comprehensive professional services firm. Together, leveraging our…

Thank you, Mr. Zou, and thank you all for joining the call today. I will now walk you through our financial results for the third quarter of 2024. I would like to highlight the three areas of progress. Regarding the performance of this quarter, first of all, in this quarter, the company achieved a double-digit year-over-year growth in total revenue, reaching RMB1885.6 million, which is 2x of the high single-digit average growth rate of the industry, restoring the high speed growth of the revenue. There are three aspects we would like to highlight. First, thanks to the first mover advantage of our revenue structure adjustments starting from 2022, differentiated us from situation of our competitors in the market. Both of our public cloud and industry cloud have already benefited from the development trend of AI business, achieving double-digit year-over-year growth respectively. This has laid out a solid foundation for the balanced growth of the future business. Second, in this quarter, our AI gross billings reached RMB362 million, accounting for as high as 31% of the public cloud revenue. It has achieved a three digit year on year growth for five consecutive quarters, far exceeding the industry average level. Third, we have repositioned the business strategy of the company. Regarding the strong performance of Xiaomi's new EV cars, as well as Kingsoft Games and WPS AI, the ecosystem business progress has exceeded market expectations. Thanks to the excessive demand of customers within the Xiaomi and Kingsoft ecosystem, the revenue growth of our ecosystem customers in a single quarter has exceeded 36% year-on-year, laying a good foundation for the growth of ecosystem customer in the future. The proportion of public cloud revenue contributed by the ecosystem client in this quarter has already reached 28%. Second, in terms of profit, the expansion of…

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

[Operator Instructions] We will take our first question. And the question comes 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've got two questions here. First of all, on the revenue contribution from Xiaomi and Kingsoft Group has been continuously increasing over the past quarters. Could you please share with us your views on the growth potentials of those strategic customers as well as your service strategy? Secondly, could you please share your outlook on adjusted EBITDA margin, as well as operating margin, taking into consideration the depreciation and amortization expenses and the rising AI related CapEx?

[Foreign Language] [Interpreted] Yes, as you have seen, the business opportunities coming from the Xiaomi and Kingsoft ecosystem has been increasing very quickly and steadily. Thanks to the unprecedented AI opportunities since last year, since the AI opportunities. And of course, the business -- the AI related business opportunity itself with Xiaomi and Kingsoft Corporation has been developing fairly fast. As you would have seen from the Xiaomi results released yesterday, which is set to be historically strongest results, the Xiaomi EV delivery has been very strong. So therefore, the cloud service utilization and use cases centered around the growth of Xiaomi has a solid foundation to grow. And also I have mentioned that on the WTS office side, where they have been centered around on AI capabilities to promote new AI related functions as well as the solid growth in paid customers for AI function, this all have been driving the cloud usage on the cloud side, which is our revenue. So the conclusion is the solid growth of the Xiaomi and Kingsoft ecosystem, their business laid solid foundation for the revenue growth and for the business opportunity of Kingsoft Cloud. And we believe that we are still in this very good business momentum to further grow.

Thank you, Xiaodan. I probably will comment on the second question regarding the margin expansion. So as I mentioned in my prepared remarks, I think the sequencing we are seeing is our continued expansion from the gross margin to the EBITDA margin then drop to the operating profit. So back in 2022, at that time, our gross margin was as little as only around 3%. And this quarter, we are reaching to a certain level. We think it's getting even closer to the top tier player in the market in terms of the gross margin in the near-term. And for the EBITDA margin, you can also notice that the EBITDA margin has converted from a loss of 8.6% in Q2 2022 to a positive around 10% this quarter. And I think the expansion, the speed of expansion of EBITDA margin will be faster than the gross margin expansion. And in addition, I think our EBITDA margin given the AI has already contributed around one-third of the total public revenue, which is also higher than the major peers on the street. And I think given that reason, our EBITDA margin will continue to deliver a much higher expansion speed compared with the peers of the industry as well. So in addition, as you speak about the operating margin, as you noticed, our expense of control and cost cutting in terms of operations as well as improving efficiency in operations all contributed to the operating line as well. So I think we're hoping for the near-term, we can deliver a positive surprise to the shareholders. You may see accelerated and a significant improvement of the operating profit in the very near term. And hopefully, we can keep that track after we made a breakeven in the near-term. But at this moment, we're not providing formal guidance for the timing, but hopefully, we can keep the speed and expansion from the gross margin to EBITDA and then to the operating profit as a trend you may observe.

We will take our next question. And your next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead. Your line is open.

[Foreign Language] [Interpreted] Thank you, management, for taking my questions. I have two questions here. The first is regarding the margin profile of your AI business as well as the revenue from Xiaomi and Kingsoft Group. So just wondering how the margin compares to the overall margin profile of public cloud? And secondly, just wondering on your outlook for the CapEx for this year and next year, and how we plan to utilize the resources either on the balance sheet or off balance sheet to meet the funding resources demand to grow your business and especially the AI business?

Happy to take on those two questions. The first question, as you all know, we are not disclosing the separate line of gross margin for each of the product line given, as you know, sometimes each customer, they may use multiple different business segments. It's a bit difficult to separate that. But happy to provide some high level guidance on that. Overall, the AI-related computing related products are delivering much higher gross margin compared with the traditional, the public cloud services, including the traditional storage and networking. And our entire public cloud gross margin is higher than enterprise cloud in most cases. But however, as Mr. Tao Zou also mentioned in his prepared remarks, the reason why this quarter we're delivering much stronger and robust top-line growth as well as the margin expansion is our both public cloud and enterprise cloud have achieved double-digits Y-on-Y growth, which is unlike other peers on the market, because we actually did our business strategy adjustment much earlier back in two years ago. So we do see both parallel growth drivers has been very solid for this quarter. Coming back to your margin question, I think if we want to take in order the different product lines, I think the current revenue contribution for the incremental revenue, especially the AI delivered double-digits gross margin and a double-digits EBITDA margin. The traditional public cloud also delivered a decent gross margin as well. But, when you look at EBITDA margin, I think AI is also doing a very good margin as well. Our traditional non-public cloud services, especially for the CDN as you know, we have already planned out the scaling down as planned, which we actually execute very effectively. The margin contribution from CDN has been very effective and well on our budget. So, we…

This concludes today's question-and-answer session. I will now hand back to Nicole Shan for closing remarks.

Thank you, operator. Thank you once again for joining us today. If you have any further question, please feel free to contact IR team. Look forward to speaking with you again next quarter. Have a nice day. Thank you. Bye.

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