Aurora Mobile Ltd Q2 FY2020 Earnings Call

Thank you for standing by and welcome to the Aurora Mobile Second Quarter 2020 Earnings Conference Call. All participants are in a listen-only mode at this time. After the speakers' presentations, there will be a question-and-answer session. Please note that today's conference is being recorded. I would now like to hand the conference over to your host for today, Mr. Inaudible. Thank you. Please go ahead, sir.

Thank you, A.J. Hello everyone and thank you for joining us today. Aurora’s earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following their prepared remarks, all three will be available to answer your questions during the Q&A session that will follow. 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, which are difficult to predict and 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 and/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 statement as a result of new information, future events or otherwise, except as required under applicable law. With that, I'd now like to turn the conference call over to Mr. Luo. Please go ahead.

Thanks operator. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile’s second quarter 2020 earnings call. Before I proceed, may I share with everyone that for the very first time, we have uploaded a quarterly earning deck onto our IR Webpage under the Webcast and Presentation section for your reference. You may refer to the deck as we proceed with the call today. Since the end of 2019, as I highlighted in our last earnings call, we took the initiative to further strengthen our core competency. I am pleased to share that our strategy, decision to focus on Developer Services and Vertical Applications has produced excellent results as of today. Later in this call, Fei Chen and myself will take turns to elaborate more on this from different angles. Let’s begin our review with highlights for our key operating and financial performance for the second quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or our cumulative app installations reached 1.55 million as of June 30, 2020 from approximately 1.29 million last June. This represents an average of 18,000 new apps coming onboard every month during the quarter. We are developers' first choice service when it comes to Push service in China. Second, cumulative SDK installations increased by 53% to 40.6 billion as of June 2020 from 26.6 billion in June 2019. This is mainly attributable to both the impacts of developers using our subscription-based developer services and the wide adoption of JVerification SDK. For instance, the number of monthly active unique mobile devices we covered continued to increase, reaching 1.38 billion in June 2020 from 1.13 billion in June 2019. Lastly, in the second quarter of 2020 we saw the number of paying customers increase to 2,396 from 2,211 a year ago. Onto the Q2 2020 financial numbers, please refer to our presentation deck for key financial highlights. Our strategic focus to drive our SaaS business, which included Developer Services and Vertical Applications, generated a significant return on investment in this quarter. This business's record is impressive. Revenue of RMB66.5 million or 45% growth year-over-year and quarter-over-quarter and gross profit of RMB50.8 million, a 43% year-over-year and 39% quarter-over-quarter growth given that the overall market environment is challenged by the impact of the COVID-19 pandemic. In building on the greater momentum from the first quarter, Developer Services was once again the highlight of the quarter with its impressive performance. We recorded net RMB45.8 million in revenue for Developer Services, a new historical high in terms of quarterly revenue. This revenue includes both Subscriptions and Value-Added-Services, and recorded phenomenal 127% and 46% revenue growth year-over-year and quarter-over-quarter respectively on the back of increases in both ARPU and customer numbers. Equally impressive was the gross profit from Developer Services of RMB35 million, which represented 142% and 50% increases year-over-year and quarter-over-quarter respectively. For Subscription Services, we continue to see more customers signing up to our suite of Developer Services. New and renewed customers improved, but are not limited to Tesla, Starbucks, China PCAOB, and others. Subscription revenue was RMB40.7 million, a significant increase of 52% year-over-year, primarily driven by a decrease in both the number of customers by 34% and ARPU of 14%. Value-Added Services, which incurred revenue from Advertisement SaaS and aligned services that also recorded another quarter of impressive results. The revenue for Value-Added Services also resulted in phenomenal growth of 134% quarter-over-quarter or RMB6.4 million in Q1 2020 to RMB50 million in this quarter. We noted that both the ARPU and customer numbers grew by more than 50% within the quarter. Key customers of our Light-Push Services in the quarter included major firms. The strong performance was primarily driven by the wide adoption of such services by mini program and e-commerce developers. Here I would like to provide some additional insight on the contribution of the Legacy Target Marketing business. In the second quarter, Targeted Marketing Business earnings contributed 49%, a 5% of the revenue and gross profit respectively. This was down significantly from 61% revenue contribution and 11% gross profit contribution in the last quarter. As we focus on the legacy Targeted Marketing business, their contributions are expected to be significant going forward. Now, I will turn the call to Fei, who will discuss the Q2 performance of the three business lines within vertical applications in more detail.

Thank you, Chris. The combined revenues from Vertical Application, including market intelligence, financial risk management, and iZone, increased by 16% from RMB17.8 million in the first quarter of this year to RMB20.7 million this quarter. Revenues from the marketing intelligence product grew by 15% quarter-over-quarter, mainly fueled by growth in the number of customers. Recently, we launched another product, an iAPP mini-program version that allows customers to obtain insight into different analytics of mini-programs in China. In the quarter, new investor and founder customers include mainly long funds and hedge funds, and the new corporate customers include significant companies. For the financial risk management segment, revenue increased by 26% quarter-over-quarter. That was due to a recovery in demand for our products in the financial sector, as the market recovers from the coronavirus, and 26% growth in revenue was mainly fueled by improvements in ARPU, indicating customers are using our service more in the quarter. Lastly, our iZone business also showed signs of recovery from the impact of the coronavirus as shopping malls and tourist sites reopened during the second quarter. Additionally, we saw an increase in demand for our iZone product in the property development sector during the quarter.

Thanks Fei. Since Chris and Fei have already talked about our topline numbers for this quarter, I'll go through some of the other P&L items. Despite a tougher than expected business environment in the second quarter of 2020, we managed to grow our gross margin to a historic high of 41%, compared with 33% sequentially, and a significant increase from 26% during the same period last year. This record high 41% gross margin in Q2 2020 was a direct result of the following two initiatives that we undertook and executed well. One, we continued to focus and invest in the Developer Services and Vertical Applications. As we have previously shared, the gross margin for our Developer Service and Vertical Application has been in the range of 70% to 76% for the past five quarters. Second, the shift away from and the winding down of our legacy Targeted Marketing business, which generally had low single-digit gross margin. As a percentage of revenue, Developer Services and Vertical Applications accounted for 51% during the quarter, a significant increase from 17% during the same period last year. Targeted Marketing, on the other hand, accounted for 49% of total revenue during the quarter, down from 83% during the same period last year. On gross profit contribution, Developer Services and Vertical Applications accounted for 95% of gross profit, compared with Targeted Marketing which accounted for only 5% of gross profit during the quarter. I will now recap our achievements for the first half of 2020. One, we have successfully transitioned our business to a SaaS-based high-margin business. Our SaaS business, which includes both the Developer Services and Vertical Applications, contributed more than 51% of our revenue and profit. Second, our SaaS business has executed a significant growth trajectory with 33% year-over-year and 35% quarter-over-quarter growth. Third, more impressively was the growth of developer services, which recorded a 127% year-over-year growth in the quarter. Fourth, we have recorded a new all-time record high gross margin of 41% in the second quarter. Fifth, we expect that our SaaS business, which includes both the Developer Services and Vertical Applications, will continue to underpin the foundation of our business and provide solid revenue growth and higher gross margin going forward. Next, on to the operating expenses. Total operating expenses increased by 4% year-over-year to RMB89.8 million. In particular, R&D expenses stayed relatively flat at RMB46 million. Selling and marketing expenses decreased by 12%. G&A expenses increased by 37%. Based on the solid financial results delivered in Q1 and Q2 of 2020 by our high-margin Developer Services and Vertical Applications, we believe that we now have the right strategy in place to further improve our business and our financial performance going forward. This is evidenced by the following KPIs: one, a higher percentage of revenue contribution from Developer Services and Vertical Applications; two, continued improvement year-over-year and quarter-over-quarter in gross margin; three, CapEx growing at a much slower pace than revenue and gross profit; four, all of the above resulted in a 40% improvement in our adjusted EBITDA, which was negative $18.3 million during the quarter compared to negative $30 million in the last quarter. On to the balance sheet items. Total assets were RMB879 million as of June 30, 2020. This includes cash and cash equivalent of RMB416 million, accounts receivable of RMB66 million, prepayment of RMB44 million, fixed assets of RMB100 million, and long-term investments of RMB213 million. Total current liabilities were RMB438 million. This includes accounts payable of RMB16 million, deferred revenue of RMB98 million, accrued liabilities of RMB85 million, and convertible notes of RMB239. Lastly, before I conclude, I’ll give an update on the share repurchase plan. In the quarter ended June 30, 2020 we did not repurchase any shares. As of June 30, 2020, cumulatively we have repurchased a total of 921,000 ADS since the start of our repurchase program. And this concludes the management-prepared remarks. We’re happy to take your calls now. Operator, please proceed.

Certainly. Your first question comes from the line of Ryan Roberts. Please go ahead.

Hi guys! Thanks for giving us the update here in the quarter. I had a couple of quick questions. I hope you can resolve these a bit here. First, to sort of get a sense on the cost line here for kind of the sales and marketing. I recall one of the advantages of shifting to the new SaaS billing was to have less customer relationships to manage, so to speak, you know, kind of working with the larger platforms and apps that you mentioned earlier. I want to get a sense of what's happening on the sales and marketing line there this quarter, and maybe an update, more broadly what's happening on the other kind of fixed expense lines.

So Ryan, just to recap, your question relates to sales and marketing expenses for the quarter, right?

Yes, yes.

Yeah, I guess because as you know our business, the majority of our sales and marketing is relating to sales, not marketing. So there is a slight increase in connection with the increase in revenue for the Developer Service and the SaaS business for Developer Services and Vertical Applications. So those are the majority tied to the increase in that particular business.

Okay, but I guess as we look forward here, kind of down the pipe, obviously again with the business model of having less kind of customers to manage in corral, it seems like there should be some levers there for that item. I mean, there should be leverage across all kind of main cost lines here, but it just looks like kind of with the transition we haven't really seen much of that yet. I know the selling and marketing has come down a little bit kind of year-over-year, but not very much and I was just expecting kind of as you trim down the sales force you know to manage less accounts, that should have improved a bit more. I’m just kind of curious why we're not seeing that?

No, I don’t believe that will be the case, because we do need to have a lot of salespersons to manage the Developer Service segment of the business, right? So those are the things that are tied to the marketing and selling expenses. So we do not see a dip. We do not expect to see a dip in selling and marketing expenses while we grow our Developer Service. So it doesn’t go that way.

Okay, so it’s not – I guess headcount is going to stay roughly flat. I must have misunderstood in the previous conference call when you were mentioning that selling directly to platforms. Working directly with platforms was less manpower intensive than having your targeted marketing business; I must have missed that. Okay, and then just kind of, maybe kind of sticking with the cost for a second, I saw working capital came down quite a bit. I just want to get a sense of as you kind of go forward, is that a level you can kind of expect to normalize out or if there's some more improvement there. Any kind of color you can share on the capital intensity of the new business model, I’d appreciate it.

Sure. We do not disclose the cash flow for this quarter by looking at it based on our cash flow statement. For this quarter we did have cash inflow, operating cash inflow of more than RMB50 million and this is by far the best quarter that we have in terms of cash inflow at the operating level, so that is something to be proud of. If you look at the investment that we’re required to make, no, we do not expect to have a huge investment in services or fixed CapEx anymore. The only reason why the working capital this quarter looks a bit smaller is because of the fact that we reclassified the convertible notes from long-term liability to short-term because we are required to potentially repay the convertible notes by next April. So it's accounting that we adjusted the classification of it. In terms of cash, so in terms of operating expense, operating cash flow, we're comfortable with where we are and based on the fact that we are moving into a SaaS business, we are no longer required to do what we did for targeted marketing, where we prepaid media and had to give credit to our marketing customer. So this SaaS business is good for us operationally and in terms of cash flow, and we are very comfortable with where we are right now.

Got it. Yeah, I was referring more to – I saw the accounts receivable came down significantly and also you kind of stretched some accounts payable a little bit, so that was the cash flow driver. I saw the movement on the convertible notes. Yeah, I understand that. I was just going to get a sense of the overall kind of working capital status and it sounds, where you are as to kind of where you want to be with the level of revenue that you're doing, which makes sense. Okay, that’s all for me. Thanks, I appreciate it.

Thank you. Your next question comes from the line of an unidentified participant. Please go ahead.

Yes, thank you A.J. and thank you everyone for joining our call tonight. If you have any further questions and comments, please don't hesitate to reach out to the IR team. This concludes the call. Have a good night. Thank you all.

Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect now. Thank you.