Aurora Mobile Ltd Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host today, Rene Vanguestaine. Thank you. Please go ahead.

Thank you, Amber. 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 follows. 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. Future information regarding these and other risks, uncertainties and/or factors are included in the Company's filings with the U.S. Securities and 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 over to Mr. Luo. Please go ahead.

Thanks, operator. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile's fourth quarter and full year 2020 earnings call. The year 2021 marks the 10th anniversary of Aurora Mobile. Looking back, we are extremely proud of what we have achieved in the past decade in helping all our mobile app customers in China to improve their operational efficiency, helping each and every one of them improve their operations, grow, and now monetize. I vividly remember the very first JPush product we developed for mobile app developers way back in 2011, and we have come a long way since. Over the past decade, through in-house innovation, technical progress, and relentless pursuit of excellence, we have reached many milestones. We started with one JPush product in 2011 and over the years, we developed seven additional products for mobile app developers meeting their different and evolving needs. Cumulatively, as of December 31, 2020, we have worked with more than 591,000 app developers, representing more than 1.7 million apps in total. Our developer service SDKs have been installed more than 46.7 billion times. In the fourth quarter of 2020, on average, every month, more than 17,000 new mobile apps joined and used one or more of our developer services. I would like to take this opportunity to thank all the mobile app developers who have been alongside us, trusted us, and cooperated with us over these 10 years. I believe the next 10 years will be even greater for our customers, thanks to the new exciting and innovative product and service offerings from Aurora Mobile. The year 2020 was very extraordinary, as an unexpected pandemic reshaped the world and changed how people live their lives and how companies conduct their businesses in many ways. During the crisis, we persistently carried out our core strategy to serve our developer customers by helping them with their business operations, user growth, and the monetization of their user base. Based on the solid business foundation built with our developer subscription services, we ventured into new territory by innovatively creating our JG Alliance business lines to help our developer customers better monetize their user traffic. The JG Alliance became a great success, as we achieved a phenomenal growth of 15 times year-over-year in revenue, and daily active users grew rapidly from nil to 120 million in merely five quarters. Meanwhile, we completed the wind down of our Targeted Marketing business. Despite being the largest revenue contributor in 2019, we felt the Targeted Marketing business did not fit our company's long-term direction. I'm proud to announce that by the end of the fourth quarter 2020, our business transition was 100% complete, and we have successfully transitioned our company to a pure SaaS-based business model. During the year, we also put greater emphasis on product development and innovation. We successfully launched three new heavyweight products. First, we enhanced our JG Alliance product portfolio by adding a new In-App message product. In our developer subscription business, we launched our Unification Messaging Service or UMS and Video as a Service or VAAS products to address new critical needs from developers. On the customer front, we have won partnerships with numerous well-known and key customers across almost every industry vertical, as you have seen from the press releases we issued from time to time. Cooperation with these key customers has helped us better penetrate into different industries, like the New Energy sector, for example. After our cooperation with a leading New Energy manufacturer BYD, as of this week, we now have 39 customers within the auto industry, 19 of which are prepaid. We are replicating the success of the electric vehicle market expansion model in other industries such as short video applications, gaming, finance, telecom, e-commerce, and blockchain. For this nominal effect, where we leverage our existing cooperative relationships with the market leaders of each industry, we believe we can quickly sign up more customers to ramp up or increase our market share. For the year, we also upgraded our talent pool by hiring a number of senior executives across R&D, sales, operations, and HR, who have rich management experience accumulated from Tencent, Alibaba, Baidu, and Huawei. We optimized our business operations so we can run the business more efficiently and create more certainty. Continuing the talent acquisition with a performance-based incentive scheme in place and fine-tuning the way we manage our organizations will lay a solid foundation for our future as our business grows and surpasses expectations. Before I comment on our fourth quarter results, I would like to remind everyone that we have uploaded quarterly earnings materials on our IR webpage for your reference. You may refer to the deck as we proceed with the call today. Let me continue with our key operating highlights for the fourth quarter of 2020, other than those I have mentioned earlier. First, the number of monthly active unique mobile devices continued to grow, reaching 1.395 billion in December 2020 from 1.36 billion in December 2019. Approximately 90% of mobile devices in China have at least one or more cumulative SDKs installed. Second, during the quarter, we saw the number of paying customers grow to 2,420 from 2,121 a year ago. I would like to focus the discussion on our SaaS businesses, which include only Developer Services and Vertical Applications businesses, as we have officially exited the traditional Targeted Marketing business as of December 2020. Therefore, starting from January 1, 2021, all our revenue will be contributed by these SaaS businesses. Our SaaS businesses continue to record impressive results this quarter with revenue of RMB76.6 million, representing 17% growth year-over-year and 18% growth quarter-over-quarter, with a gross profit of RMB58.5 million, growing 29% year-over-year and 20% quarter-over-quarter. On a SaaS business basis, the total revenue grew 70% year-over-year, mainly due to the strong 46% growth in Developer services, partially offset by the decline in Vertical Applications, which have been impacted by COVID-19. Nevertheless, revenues from Vertical Applications have seen solid sequential growth for three consecutive quarters as customer demand in this segment continues to recover. On a quarter-over-quarter basis, SaaS businesses revenue recorded a strong sequential growth of 18% to RMB76.6 million. In Q4 2020, our SaaS businesses contributed 72% of total revenue, up from 60% in Q3 2020. Going forward, SaaS businesses will contribute 100% of our revenues. On a SaaS business basis, gross profit also showed strong growth of 28% year-over-year to RMB58.7 million for the quarter ended 2020, due to both the revenue growth of 17% year-over-year and margin expansion from 70% to 76% year-over-year. We expect our gross margin in 2021 to remain above 70% throughout the year. For Q4 2020, SaaS businesses contributed 98% of the gross profit, up from 96% in Q3 2020. Moving ahead, SaaS businesses will contribute 100% of our gross profit. Here, I would also like to take a moment and share our new product initiatives. With the recent release of the launch of the JG UMS and JG VAAS products, after conducting thorough market analysis with our app developers and customers to understand their needs and pain points. Importantly, JG UMS, which stands for Unification Messaging System, enables businesses to engage with their targeted customers more efficiently and cost-effectively through one integrated messaging management platform, thereby improving operational simplicity while reducing costs with flexible routing strategy management. In the past two years, with the proliferation of many user engagement channels, such as mini programs, user engagement has become much more complex than ever before. UMS therefore comes to the market as the right product at the right time to address such pain points. UMS is not only suitable for app developers, but also suitable for businesses that do not even have a mobile app. Virtually all businesses in China will need this product, as long as they have a sizable customer base and utilize multiple channels to reach their customers. JG VAAS, which stands for Video-as-a-Service, enables mobile app developers to provide relevant user-friendly short video content in their apps, thereby improving their user experience, increasing user engagement and stickiness, and enhancing monetization capability. It's a distributed way for users to consume short videos anytime and anywhere, rather than having to go to dedicated short-video apps to view short videos in a centralized fashion. Both UMS and VAAS are offered in a subscription fee-based model, where our customers pay an annual fee based on the features they wish to use. We believe both products can greatly expand our paying customer base and average revenue per user for our developer subscription business over time. We anticipate these two products will start generating revenue in the second quarter of 2021. Now, I will turn the call to Fei, who will discuss the Q4 performance in greater detail.

Thank you. Let me start the discussion of different revenue streams within the SaaS businesses. Our SaaS for Developer Services continued to shine from the first quarter to the fourth quarter of 2020 and was the biggest revenue contributor within our SaaS businesses in the fourth quarter of 2020. For the quarter ended December 31, 2020, we recorded RMB52.5 million in revenue for Developer Services, which represented 46% growth on a year-over-year basis. The significant revenue growth in Developer Services was fueled by 28% and 14% growth in customer numbers and average revenue per user, respectively. For Subscription Services within the Developer Services, we continued to see more customers signing up for our suite of Developer Services. New and renewed customers include, among others, Farfetch and Ping An Bank. Subscription Services revenue was RMB35.1 million, an increase of 6% year-over-year and 16% quarter-over-quarter, primarily driven by the increase in customer numbers. Value-Added Services within Developer Services, which include revenues from JG Alliance services and Advertisement SaaS, recorded another strong quarter, as revenues grew by 29% quarter-over-quarter and 432% year-over-year. The value-added services full-year revenue grew from RMB3.3 million in financial year 2019 to RMB52.5 million. This 15X annual revenue growth demonstrates the large potential market opportunity and growing demand for our value-added services. In the fourth quarter, the revenue from value-added services was RMB17.4 million compared to RMB3.2 million in the same quarter a year ago. This 432% year-over-year revenue growth is attributable to the growth in both the supply and demand sides of the JG Alliance. On the supply side, we continued to see many apps joining our JG Alliance traffic network. The total number of apps and daily active users within our network exceeded 200 apps and 130 million daily active users in the fourth quarter, representing 100% and 30% growth from the third quarter of 2020, respectively. The new members of JG Alliance on the traffic side mainly include large and popular mobile apps from various industry sectors, such as utilities, education, and finance. The continued growth in the number of apps and daily active users is proof of the strong market demand for JG Alliance products. On the demand side, mini program developers continued to play a pivotal role as traffic consumers of JG Alliance by contributing 39% of revenue in the quarter. Notable customers of JG Alliance included, but are not limited to, Weibo, JD, and others. Our JG Alliance’s ever-increasing traffic pool resources and innovative and unique advertising formats have provided our customers with brand new, effective, and different media for user acquisition needs and dormant user retargeting needs. Now, I would like to provide a brief update on the legacy targeted marketing business. The revenue and gross profit contributions from Targeted Marketing have both declined from 40% in Q3 ‘20 to 28% in Q4 and from 4% in Q3 ‘20 to 2% in Q4 ‘20, respectively. The fourth quarter of 2020 is the last quarter where we recognized revenues from Targeted Marketing. This business has ceased its entirety as of December 31, 2020. Therefore, starting from the first quarter of 2021, revenues will be 100% from our SaaS businesses, which include only Developer Services and Vertical Applications. Now let's move on to the discussion of Vertical Applications. The combined revenues from Vertical Applications, which include market intelligence, financial risk management, and iZone, increased by 10% sequentially from RMB21.9 million in the third quarter of this year to RMB24.1 million. Revenue from Vertical Applications recorded sequential growth every quarter in 2020. Revenues from our marketing intelligence products increased by 16% year-over-year. We continue to see strong growth from corporate clients, with more than 60% of revenue contributed by corporate clients. New corporate customers include Douban, Huawei, and Baidu. In the financial risk management segment, revenue increased by 23% quarter-over-quarter, as demand for this business has recovered strongly from the impact of COVID-19. Since the first half of 2020, solid and continued demand from banks and licensed financial institutions has pushed both the average revenue per user and customer numbers to grow by 15% and 7% respectively, sequentially. Lastly, our iZone business is still facing challenges due to the impact of COVID-19 on location-based products. This business unit is still undergoing several new initiatives in product transition. We recently launched a joint product with Country Garden called Tucod. This product will not only provide foot traffic analysis for properties up for sale, but also help property developers to identify and target potential property buyers. We expect such a product could help renew growth in iZone over time. With that, I'll now pass the call to Shan.

Thanks, Fei. Since Weidong 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 and summarize the key takeaways and highlights for the P&L items for this quarter. First, the SaaS businesses reported revenue and gross profit contributions recorded solid double-digit year-over-year growth in all four quarters of 2020. Second, the value-added services achieved revenue growth of 432% year-over-year in Q4 2020. Third, we recorded yet another record high group gross margin of 56% in Q4 2020, up from 47% in Q3 2020. With the business becoming pure SaaS-based, we anticipate our gross margin to be above 70% in 2021. Fourth, 98% of our current quarter gross profit was contributed by the SaaS businesses. Lastly, the Targeted Marketing business completely wound down by December 31, 2020, and we are now beginning a new chapter in the Aurora Mobile story. From January 2021, all our revenue will solely come from SaaS businesses. We are demonstrating operationally and financially that this transition is beneficial and healthy for our financial performance as a whole. Regarding operating expenses, total operating expenses increased by 3% year-over-year to RMB106.5 million. R&D expenses decreased by 8% to RMB40.6 million, mainly due to a decrease in staff costs, as a result of lower headcount and no severance payment in Q4 2020, due to the restructuring that took place in Q4 2019. Selling and marketing expenses decreased by 27% to RMB22.3 million, mainly due to lower salary costs resulting from reduced headcount and lower offline marketing expenses due to COVID-19 restrictions. G&A expenses increased by 51% to RMB43.5 million, mainly due to a RMB10.9 million impairment charge related to fixed assets due to our Going-Cloud project in 2021. Under US GAAP, we booked the impairment charge for the servers to be retired or made redundant. Other factors contributing to the increase include rising professional fees and bad debt provisions. Adjusted EBITDA improved by 22% to negative RMB17.1 million from negative RMB22 million in Q2 2020. Additionally, Q4 2020 was the quarter in which we achieved the best quarterly adjusted EBITDA results in 2020, and the company will continue working hard to improve this number going forward. Moving to balance sheet items: accounts receivable turnover days continued to improve significantly, decreasing from 70 days in Q4 2019 and 45 days in Q3 2020 to 37 days in Q4 2020. This improvement is attributable to management's greater emphasis on a stringent customer credit-granting policy, outstanding accounts receivable monitoring, along with aggressive and timely collections during the quarter. The decline of the Targeted Marketing business also contributed to shortening AR turnover days. The deferred revenue balance, which represents cash collected in advance from customers, increased significantly by 41% year-over-year to RMB109 million as of December 31, 2020. This was in line with our shift to SaaS businesses, where most customers are required to prepay their annual contract fee upon commencement of service. In the fourth quarter of 2020, our operating cash flow was once again positive. This is the third consecutive quarter since Q2 2020 that we have recorded net operating cash inflow. All the above KPIs indicate that our transition to focusing on SaaS business is generating more cash and granting fewer AR credit days than we had under the positive marketing era. The improvement in various balance sheet items has been driven primarily by our shift to the SaaS business model, and we are very pleased with this progress over the quarters. Next, total assets amounted to RMB787 million as of December 31, 2020, which includes cash and cash equivalents of RMB436 million, accounts receivable of RMB44 million, prepayments of RMB12 million, fixed assets of RMB73 million, and long-term investments of RMB168.5 million. Total current liabilities stood at RMB460 million as of December 31, 2020, which includes accounts receivable of RMB16.6 million, deferred revenue of RMB109 million, accrued liabilities of RMB109 million, and convertible notes of RMB225 million. For the financial year ending December 31, 2021, we expect total revenue to be between RMB380 million and RMB400 million, representing a year-over-year growth of approximately 47% to 55%, and gross margin to be about 70% for the full year 2021. Please note that, for meaningful comparison purposes, the prior year revenue number used to calculate the growth percentage share excludes revenue from the Targeted Marketing business. The above outlook is based on current market conditions and reflects the company’s current and preliminary estimates of market and operating conditions and customer demand, which are subject to change. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended December 31, 2020, we did not repurchase any shares. As of December 31, 2020, cumulatively, we have repurchased a total of 921,000 ADS since the start of our program. This concludes the management prepared remarks, and we're happy to take questions now. Operator, please proceed.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line of Brian Kinstlinger from AGP. Please ask your question.

Great. Thanks for taking my questions. Could you remind listeners of the benefits of mini programs joining the JG Alliance? And which verticals are you seeing the greatest adoption versus which verticals may be taking a bit longer to adopt the technology?

Hey, Brian. Are you asking about the JG Alliance network, right? On the demand side, mini programs—okay.

Right.

So yes, as you know, mini programs have been proliferating over the past couple of years, right? Many mini program developers, once they build their mini programs, need to acquire users. Currently, most can only rely on the WeChat internal traffic for users to search for the mini programs. The traffic within WeChat is limited. To continue to grow, they have to look for additional traffic resources. That's where we come in. For the JG Alliance network, our product has two components, the in-app messages and light push messages. These formats work very well to direct traffic through WeChat mini programs. Over the past year, the demand from mini program developers for our traffic has been strong. Last quarter, approximately 39% of our revenue was generated by these mini program developers. In terms of verticals, sectors like e-commerce, travel, and finance currently experience strong demand.

Great. My follow-up is, in terms of the subscription services, can you talk about how fast you're able to convert the premium into paid customers, and what has been the biggest obstacle to converting these customers right now?

Yes, in terms of conversion, we currently have about 60,000 premium customers enjoying our free service, and the paying ratio is relatively low—about 3%, a little less than 4%. So there's room to increase conversion. We need to establish mechanisms. Our sales organization needs to engage with the premium customers and educate them about the differences and benefits they can receive by opting for a paid plan. Additionally, we are analyzing the profiles of our current paying customers to identify common features, such as the volume of messages they typically send. By identifying potential premium customers more accurately, we can increase our conversion rates. This work is being done by our R&D and sales operations teams.

Great. Thanks for answering my questions.

Thank you.

And your next question comes from Ryan Roberts from Navis Capital. Please ask your question.

Good evening. A couple from me. Maybe Shan-Nen, this is better directed at you. I'm curious about the bad debt provision we saw this quarter, and also the breakdown on the impairment related to the Going-Cloud project. At the IPO time, your network of servers across the country was highlighted as a differentiating factor for your push services. Could you provide context on the Going-Cloud project as it pertains to your infrastructure and service level?

Thanks, Ryan. I'll take your question about the bad debt. We won't go into specifics of particular debtors, but overall, these debts pertain to our legacy Targeted Marketing business, which we are winding down. These lingering debts are no longer deemed recoverable, and we've made 100% provision for them, establishing a clear view for Q1 2021 moving forward. As for the impairment related to the Going-Cloud project, we expect to complete it by the second quarter of 2021. We are leveraging technical advancements from cloud service providers to improve our service delivery and stability as we transition.

Are you going to replace a lot of your infrastructure and servers with cloud services?

No, we are not replacing everything; we are only replacing specific parts of our infrastructure that can benefit from the Going-Cloud approach. This will enable us to focus on more strategic priorities rather than server management.

Okay. And regarding the numbers, you mentioned a chunky impairment of about RMB44 million on long-term investments; could you elaborate on that?

The impairment involves investments we've made in the past with a few investees. With our transition away from the Targeted Marketing business, we no longer see value in continuing these operations, and some of them haven’t performed well. Based on US GAAP conservatism, we made full provision for several of them.

Understood. Thank you. Very helpful. Appreciate it.

Sure.

There are no further questions. I'll now turn the call back to Rene for closing remarks.

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

Bye.

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