Kingsoft Cloud Holdings Ltd. Q3 FY2024 earnings call

• Revenue is on an accelerated growth trajectory, with year-over-year growth rate rising to 16% this quarter, outpacing the industry average. Both public cloud and enterprise cloud businesses achieved double-digit year-over-year growth.
• Profitability is improving; adjusted EBITDA margin reached 10% this quarter, with adjusted operating loss margin narrowing from 16.2% in the same quarter last year to 7%.
• AI revenue proportion of public cloud business continued to grow to 31% this quarter, with triple-digit year-over-year growth for five consecutive quarters, and a 6.9 fold increase compared to last year. Entered deep collaboration with Shine Wing to build a one-stop AI platform.
• Revenues from the Xiaomi and Kingsoft ecosystem increased by 36% year-over-year, with fast growth across all of Xiaomi's business lines, including its strong automotive business.

Total revenue for the third quarter of 2024 reached RMB1.89 billion, marking a 16% year-over-year increase. Public cloud services revenue was RMB1.18 billion, up 16% year-over-year, with AI revenue accounting for 31% of public cloud revenues, totaling RMB362 million. Enterprise cloud services revenue was RMB710 million, a 16.7% year-over-year increase. Revenues from the Xiaomi and Kingsoft ecosystem increased by 36% year-over-year.

• For Q4 2024, expect accelerated total revenue growth exceeding the industry average.
• Profitability is expected to continue improving, with significant accelerated improvement in adjusted operating profit in Q4.
• AI business and Xiaomi-Kingsoft ecosystem strategy will continue to drive revenue growth, with an application for connected party transaction revenue cap of RMB11.3 billion over the next three years, providing support for revenue and profit growth.

• Forward-looking statements are based on current expectations and market conditions, and there are known and unknown risks, uncertainties, and factors beyond the company's control that may cause actual results to differ materially from forward-looking statements. Further information regarding risks is included in the company's filings with the U.S. SEC.

Q: Could you please share your views on the growth potentials of those strategic customers as well as your service strategy?

A: The business opportunities from the Xiaomi and Kingsoft ecosystem are increasing quickly and steadily. The solid growth of their businesses lays a solid foundation for Kingsoft Cloud's revenue growth and business opportunities, and we believe we are in a good business momentum to further grow.

Q: 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?

A: Gross margin has expanded from around 3% in 2022 to 16.3% this quarter. EBITDA margin has converted from a loss of 8.6% in Q2 2022 to a positive 10% this quarter. The speed of EBITDA margin expansion will be faster than gross margin expansion, and we expect accelerated improvement in operating profit in the near term.

Q: How does the margin of your AI business compare to the overall margin profile of public cloud?

A: AI-related computing products deliver much higher gross margin compared to traditional public cloud services. Both public cloud and enterprise cloud have achieved double-digit year-over-year growth, contributing to strong top-line growth and margin expansion. Incremental AI revenue delivers double-digit gross and EBITDA margins. CDN margin contribution is in line with budget.

Q: What is your outlook for the CapEx for this year and next year, and how you plan to utilize resources to meet funding needs for AI business?

A: We have secured CapEx resources from banks, financial leasing companies, and state-owned enterprises. For the next three years, we are applying for a connected party transaction cap of around RMB11.3 billion from Xiaomi and Kingsoft, which will provide strong financial support for company growth, margin expansion, and AI investment.