Aurora Mobile Ltd Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile Third Quarter 2020 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host for today, Mr. Rene Vanguestaine. 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. 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. Securities Exchange Commission. 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 third quarter 2020 earnings call. Before I proceed, I would like to take this opportunity to remind everyone that we have uploaded the quarterly earnings deck on our IR webpage for your reference. You may refer to the deck as we proceed with the call today as it contains useful financial information in addition to those we have in the press release. Let's begin our review with highlights of our key operating and financial performance for the third quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations reached 1.65 million as of September 30, 2020 from approximately 1.39 million a year ago, an average of 12,700 new apps came on board every month during the third quarter. Quarter-over-quarter, we still see the great number of mobile app developers joining us, and we are truly humbled yet encouraged by this trend. Second, the number of monthly active unique mobile devices we cover continued to increase, reaching 1.39 billion in September 2020 from 1.34 billion in September 2019. Lastly, in the third quarter of 2020, we saw the number of paying customers increase to 2,405 from 2,312 a year ago. On to the Q3 2020 financial numbers, please refer to our presentation deck uploaded to our IR webpage for the key financial highlights. I would like to begin with the discussion of SAAS Business, which includes only the Developer Services and Vertical Applications business, as it's appropriate, relevant, and helpful for investors to understand how the underlying SAAS Business are performing now. Beginning with the quarter ending March 31, 2021, we will only have this SAAS Business. Our SAAS Business continues to record impressive results in this quarter with revenue of RMB65.6 million, or 18% growth year-over-year, and gross profit of RMB49 million, or 16% growth year-over-year. The total revenue grew 18% year-over-year, mainly due to the strong 99% growth in Developer Services, partially offset by the decline in vertical applications, which have been impacted by COVID-19. It's worth noting that customer demand for Vertical Applications has gradually recovered from the second quarter of this year, and revenues from Vertical Applications have shown sequential growth for two consecutive quarters. On a quarter-over-quarter basis, revenue remained relatively stable at RMB66 million. On a SAAS Business basis, gross profit has also shown solid growth of 16% year-over-year to RMB49 million for the quarter ended September 30, 2020, due to the same reasons as what happened to the revenue trend. Also on a SAAS Business basis, gross margin for this quarter was 75% stable year-over-year and quarter-over-quarter. We expect pro forma gross margin to maintain at approximately 60% range going forward. In the third quarter, we continued to extensively explore various industry verticals, focusing on helping mobile app developers with operations, growth, and monetization by leveraging our professional, efficient, secure, and stable services along with great operational analysis capabilities. During the quarter, we launched a one-stop operational platform for app developers, helping them improve user engagement, retention, and conversion, as well as achieve greater efficiency through intelligent user acquisition tools to further refine their operations. Recently, we also signed strategic cooperation agreements with leading platforms across a greater variety of industry verticals, such as finance, insurance, weather, internet tools, gaming, fresh food e-commerce, and online education to drive user growth and improve user experience. For example, we have already signed agreements with Ping An Bank, Data Center of China Life, Moji Weather, WiFi Masterkey, Lilith Games, Missfresh, and 17zuoye, among others. Now, I'll turn the call over to Fei, who will discuss the Q3 performance in greater detail.

Thanks, Chris. Let me start the discussion of different revenue streams within the SAAS Business. Since the first quarter of 2020, Developer Services was once again the star performer for the third consecutive quarter. For the quarter ended September 30, 2020, we recorded RMB43.7 million in revenue for Developer Services, which represented a 99% growth on a year-over-year basis. The significant revenue growth in Developer Services was fueled by the 26% and the 58% growth in custom number and ARPU respectively. For Subscription services, we continue to see more customers signing up for our suite of Developer Services. New and renewal customers include, among others, McDonald's and China Mobile. Subscription services revenue was RMB30.2 million, a significant increase of 38% year-over-year, primarily driven by the increases in both the number of customers by 23% and ARPU by 12%. Value-added services, which include revenues from JG Alliance services and Advertisement SAAS, have also recorded another strong quarter. While our Subscription services satisfy app developers’ operational needs, our JG Alliance services help app developers with their user traffic monetization needs as the app market becomes incrementally competitive and user growth becomes stagnant and costly. There’s an urgent need for app developers to monetize their existing user base in order to survive, and our JG Alliance services come to market at the right time to serve this monetization purpose. We expect tremendous growth potential in this business. The revenue from value-added services was RMB13.5 million this quarter, compared to zero revenue from the same quarter a year ago. Recently, we have signed up a few hero apps with over 10 million DAUs in China, such as WiFi Masterkey and others joining our JG Alliance traffic network. The total number of DAUs within our network has already exceeded 100 million in the third quarter, reaching a major milestone since we launched this service less than a year ago. The endorsement of these hero apps has proven the market acceptance of our JG Alliance products to help mobile apps further monetize their traffic. On the demand side, many program developers have become the largest traffic consumers of JG Alliance. With the expanding mini program ecosystem, many program developers are no longer satisfied with limited traffic supply, such as those within WeChat, and they urgently need additional external traffic to meet their significant user acquisition needs. Therefore, whether from the supply or demand side, JG Alliance gives us full confidence that this business will become a growth engine to drive our overall growth in the foreseeable future. Additionally, I would like to provide a brief update on the legacy targeted marketing business. In the third quarter of 2020, the targeted marketing business continued to wind down according to plan. It contributed only 40% of revenue, down from 49% in the second quarter of 2020, and up 4% of total gross profits, compared to 5% in the second quarter of 2020. As mentioned, we will wind down this business by the end of this year. Therefore, starting from the first quarter of 2021, all revenue booked will derive from 100% SAAS Business, which includes only developer services and the vertical application. Now let's move on to the discussion of vertical applications. The combined revenue from vertical applications, including market intelligence, financial risk management, and item increased by 6% from RMB20.7 million in the second quarter of this year to RMB21.9 million. Revenues from our market intelligence product remained stable between the quarters. Revenue this quarter was equally contributed by both the Investment Fund and corporate clients. New corporate clients include Ping An Bank, Huawei, Chrysler, and SoftBank. For the financial risk management segment, revenue increased by 6% quarter-over-quarter as this business continued to recover from the impact of COVID-19. We are seeing increased demand for our products in the financial sector, mainly from banks and licensed financial institutions, with a particularly strong ARPU growth of 17%. Lastly, our item business has shown solid growth of 29% quarter-over-quarter driven by a 60% improvement in ARPU as China recovers from COVID-19. We do see an increase in demand for our location-based intelligence products across different industry verticals. With that, I'll pass the call to Shan-Nen.

Thanks, Fei. Since Chris and Fei already talked about our top-line numbers for this quarter, I'll go through some of the other P&L and balance sheet items. We're pleased that the increased contribution percentage-wise, year-over-year and quarter-over-quarter, by Developer Service and Vertical Applications has pushed our gross margin for this quarter to an all-time high. This historic high gross margin of 47% in Q3 2020 results from our commitment and success in investing, growing, and executing well on both the Developer Services and Vertical Application business. Regarding operating expenses, total operating expenses decreased by 14% year-over-year to RMB96.2 million. In particular, R&D expenses increased by 5% to RMB45.6 million, mainly due to increased depreciation and technical expenses. Selling and marketing expenses decreased by 8% to RMB28 million, mainly due to reductions in benefit costs as a result of lower headcount and less marketing expenses due to COVID-19 pandemic restrictions. G&A expenses decreased by 36% to RMB24.1 million, mainly due to reduced provisions, where we made a specific provision for one customer last year, but no such provisions were needed this quarter. I believe the healthy gross margin trajectory, along with good control over operating expenses, will continue into the next quarter and beyond, laying a solid foundation for us to further improve our financial performance in the future. Regarding the balance sheet items, these solid operating and financial results are also reflected in our balance sheet. With our stringent credit policy and collection efforts, accounts receivable turnover days have decreased significantly from 84 days in Q3 2019 to 45 days in Q3 2020. The deferred revenue balance, which represents cash collected in advance from customers, has increased by 29% year-over-year to RMB110 million as of September 30, 2020. Our operating cash flow has been positive for two consecutive quarters, with cash inflows this quarter of more than RMB30 million. Additionally, our cash and cash equivalents balance was at a healthy level of RMB437 million as of September 30, 2020. Thus, we believe we are in a very solid financial position to further invest in and expand our high-margin SAAS Business going forward. Total assets were RMB859 million as of September 30, 2020. This includes cash and cash equivalents of RMB437 million mentioned earlier, accounts receivable of RMB42 million, pre-payments of RMB40 million, fixed assets of RMB90 million, and long-term investments of RMB210 million. Total current liabilities were RMB453 million as of September 30, including accounts payable of RMB16 million, deferred revenue of RMB110 million, accrued liabilities of RMB95 million, and convertible notes of RMB232 million. Beginning from this quarter, we will start providing the quarterly SAAS Business revenue guidance. For the fourth quarter of 2020, the Company expects SAAS Business revenue to be between RMB74 million and RMB78 million, representing quarter-over-quarter growth of approximately 13% to 19%. This Q4 SAAS Business revenue outlook is based on the current market conditions and reflects the Company’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended September 30, 2020, we did not repurchase any shares, and as of September 30, 2020, cumulatively, we have repurchased a total of 921,000 ADS since the start of our program. This concludes management's prepared remarks. We are happy to take questions now. Operator, please proceed.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question from the line of Ryan Roberts. Please go ahead.

Good evening. Thanks for taking the question and congratulations on building up the SAAS and VAS with the continued progress; that's great to see. Also, thank you very much for the improved transparency. I like to applaud that. I think that's very meaningful and helpful for the market to understand more about what's going on with the business. So my question really, actually, is going to be on the SAAS Business, because one of the things we think about and have talked about in the past is the growth trajectory. As we get more to a pure SAAS Business next year, I just want to get a bit more discussion on, I guess, the growth trajectory. When I look at the SAAS Business, the sequential revenues look kind of flattish. I realize year-over-year, obviously, it's pretty significant, but looking at the sequential performance in Q3, I want to get a sense of looking into Q4 and maybe, obviously there's some growth, but maybe a bigger picture view into 2021 regarding the growth drivers. It sounds like the Push Alliance is definitely an interesting area, but also want to get your sense of what you're looking to see as the growth driver for the year ahead?

Hey, Ryan. This is Fei. Regarding the SAAS Business performance in the second quarter, you are seeing a flattish performance sequentially. The major reason is that when you compare the value-added service, there's a slight decline in the third quarter compared to the second quarter. In the earning deck, I explained what is the reason behind it. It's mainly because in the second quarter, we benefited from a couple of customers who had strong e-commerce demand due to the 618 promotion activities. E-commerce was particularly strong in the second quarter, and during that time, we were still ramping up our business. The advertising customers weren't a very diversified customer base, so if a single customer outperformed, it might skew performance. That’s why you are seeing that the second quarter seemed to have better performance than the third quarter. However, in the third quarter, we have diversified our customer base, and that diversification is continuing in the fourth quarter. You also noticed our guidance for the fourth quarter, indicating a sequential growth of 13% to 19%. That reflects our expectation for the value-added service, which will have strong quarter-over-quarter momentum.

If I could draw out, typically, when we're thinking about the transition away from targeted marketing, completing by the end of this year, and moving to a pure SAAS model next year, should we be looking for the growth driver more in the VAS segment, which is effectively the Push Alliance? Is that where we should see a lot of growth as that picks up? Alternatively, can you share some thoughts on where you see the kind of explosive growth flowing through the next year?

Yes. The growth driver will surely be the value-added service. Because of the nature of the supply and demand, it's mainly on the supply side. As long as we get enough supply, we have more apps joining our traffic network and generating more DAUs for us, then we will be able to drive the revenue growth rapidly. We have high expectations for the growth trajectory for next year for this business. We believe we will achieve triple-digit growth compared to this year. This year, for this business line, it's roughly about RMB50 million to RMB60 million, but next year, we are looking at triple-digit growth for this business. We have a strong pipeline of apps that are going to join our network. Recently, we announced the addition of WiFi Masterkey, which is currently in the ramp-up stage and hasn’t been included in the 100 million DAUs we announced earlier. WiFi Masterkey generates close to 100 million DAUs itself. All these factors give us strong confidence that we can deliver triple-digit growth for next year for this business. For other SAAS Business segments, like Subscriptions, it will follow the traditional growth trajectory of 30% to 40% growth, mainly driven by the increasing customer base and new functionalities that we’re introducing.

Additionally, I noticed in the prepared remarks you discussed that GPM is expected to stay around 60%. Is that correct?

Ryan, regarding the pro forma gross margin, you can expect it to be above 70% since the beginning of next year. Historically, it has been stable between 70% to 80%.

Thanks for clarifying that. Regarding operating expenses, I’m curious if we should expect a change in the cost structure transitioning into Q1 2021, specifically how it impacts profitability.

In terms of cost structure, we are not going to dramatically change it next year compared to this year. There will be a slight increase due to expected salary increases for employees, but we will keep the increase within that range. We are continuously looking to hire better talent and optimize the current workforce. I would expect only about a 10% to 15% increase in operating expenses compared to this year in 2021.

Let's shift to the balance sheet. I'm curious about your current accounts receivable situation and how you expect it to evolve as we transition to more SAAS.

We do not anticipate any deterioration in our balance sheet condition once we switch to the SAAS Business. Most of our SAAS Business customers are in a prepaid model. We expect deferred revenue to increase, which we've demonstrated over the past two quarters with quarter-over-quarter increases. Under the SAAS Business model, we collect money in advance from customers. Thus, we do not expect to have any accounts receivable issues going forward.

Currently, our accounts receivable calculation still includes the targeted marketing business. Once that business is completely gone, we think that the 45 days of AR we achieved in Q3 will have room for improvement. Our target is to aim for anywhere between 30 to 40 days.

We have a follow-up from Ryan Roberts. Please go ahead.

Just one more on the buyback. I noticed in the release that there has been no buyback activity in Q3. Could you give us an update post-Q3 and some guidance on capital allocation considering the shift to a cash-generative SAAS model?

Yes, we are expecting more cash soon, potentially reaching breakeven points. Once we have enough cash, we will certainly consider organic growth and might explore non-organic acquisitions to acquire proven products in the marketplace. We have robust sales infrastructure that can deliver innovative products to the market.

Any color regarding the buyback strategy?

There are no immediate plans to buy back shares as we are focusing on expanding our SAAS Business, so there's no immediate plan to repurchase at this moment.

Thank you, AJ. Thank you everyone for joining our call tonight. If you have 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 again. Goodbye.

Thank you. Ladies and gentlemen, that concludes the conference for today. Thank you for participating. You may all disconnect now. Thank you.