Aurora Mobile Ltd Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile First Quarter 2021 Earnings Conference Call. At this time, all participants will be in a listen-only mode. And 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 today, Mr. Rene Vanguestaine. Thank you. Please go ahead, sir.

Thank you, Annie. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier 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. Further information regarding these and other risks, uncertainties and other 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 First Quarter 2021 Earnings Call. This is the first quarter where our financial results reflect only our SAAS Businesses as we fully exited our legacy Targeted Marketing business at the end of 2020. We now enter our new chapter and are very excited about our future business prospects. Before I comment on our Q1 results, I would like to take this opportunity to remind everyone that the quarterly earnings deck is available on our IR website for your reference. You may refer to the deck as we proceed with the call today. Let's begin our review with the highlights of our key operating and financial performance for the first quarter of 2021. As we completely exited Targeted Marketing at the end of 2020, our business is now focused on the SAAS Businesses, which include Developer Services and Vertical Applications. For apple-to-apple comparison, numbers presented excluded the contribution from the legacy Targeted Marketing in the prior year and prior quarter. In the first quarter, we continued to put our company-wide focus and concerted effort to grow our SAAS Businesses and delivered impressive results. The number of paying customers increased to 2,512 from 2,049 a year ago, up 23% year-over-year. Revenue was RMB76.6 million, up 56% year-over-year. Group gross margin reached a historical high of 75.9%, more than 2.3x from a year ago. Gross profit was RMB58.1 million, up 60% year-over-year, growing faster than revenue. And adjusted EBITDA was negative RMB18.4 million, a substantial improvement of 39% from a year ago, demonstrating strong operating leverage. The strong SAAS Businesses revenue growth was mainly due to strong growth of 67% in Developer Services and 36% in Vertical Applications. The historical high gross margin is strong evidence of how the transition to a pure SAAS business model has been positively impacting our results as this model typically creates record-high gross margins due to our competitive advantage in notification distribution network and the high efficiency of JG Alliance delivering services with minimum working capital. The strong SAAS Businesses gross profit growth was driven by both the revenue growth of 56% year-over-year mentioned earlier and the margin expansion from 73.9% to 75.9% year-over-year. Here, I would also like to take a moment to give an update on our latest products, JG UMS and JG VaaS. For JG UMS, which stands for Unification Messaging System, we started to commercialize this product post the Chinese New Year in March 2021. Since then, we have signed contracts with a value exceeding RMB1 million with an ARPU of more than RMB100,000. These customers cover a wide range of industry verticals, including social e-commerce, education, lifestyle services, medical industry, etc. We are seeing a strong pipeline being developed and scaled, and we believe this product has addressed the critical needs of many corporate customers who want to manage their customer engagement more cost-effectively. For the JG VaaS product, which stands for Video-as-a-Service, we signed more than 10 customers' contracts since its official rollout post the Chinese New Year with ARPU of more than RMB100,000 as well. The continued sales momentum and traction demonstrate the demand from the mobile app developers who have successfully applied our VaaS to their applications, helping improve user experience, increase user engagement time and enhance monetization capability. On average, user engagement time for applications with VaaS products has increased by 30%. We will continue to provide updates on these products in the coming quarters. We continue to put great emphasis on product development and innovations by hiring more talent and upgrading our infrastructure. Our R&D team achieved significant improvements on our diversified product offering and expanded functionality to exceed our customers' expectations. In particular, after continuous integration of JPush SDK, mobile app developers are now able to access the mobile phone manufacturer message channel, which will significantly improve the push message success rate. This further cements our leading position among all mobile ad developers seeking more engaging and effective ways of marketing to their users. In addition, our newly updated JG UMS version 2.0 officially launched recently. With the rapid adoption of 5G technology, we are pleased to announce that our JG UMS version 2.0 can fully support 5G messaging channels, third-party messaging service performance, richer subscription messaging, and we are able to conduct post-message analysis for app developers to get a better big picture of user behavior. Mobile app developers can also adjust their message strategy in real-time, which reduces disruption to end users in a highly effective way, allowing more flexibility to meet marketing needs and extend the reach. Now I will turn the call to Fei, who will discuss the Q1 performance in greater detail.

Thank you, Chris. Let me start with a discussion on different revenue streams within the SAAS Businesses. Following its stellar performance throughout 2020, Developer Services continued to be the biggest revenue contributor in the first quarter of 2021. We recorded RMB52.4 million in revenue for Developer Services, which represented a very strong 67% growth on a year-over-year basis. The significant revenue growth was driven by a strong 35% growth in Subscription Services and a 189% growth in Value-Added Services. Subscription Services revenue was RMB33.7 million, an increase of 35% year-over-year, primarily driven by the new push notification customer acquisition and cross-selling of non-push notification products in our product portfolio, which includes other subscription products such as JVerification, JSMS, JAnalytics, etc. Revenue contribution from non-push notification products increased to 35% from 23% in 1Q 2020. Non-push notification products have a higher ARPU, resulting in the overall ARPU for Subscription Services increasing by 21% to RMB16,900 compared with RMB13,900 in 1Q '20. New and renewed contracts of notable customers included Starbucks, McDonald's, Jans, iHerb, China Eastern Airlines, and so on. Value-Added Services within Developer Services, which include revenues from JG Alliance services and Advertisement SAAS, recorded another very impressive quarter as revenues grew by 189% to RMB18.8 million from RMB6.5 million in 1Q '20 despite Q1 being a seasonally slower quarter. This stellar year-over-year revenue growth is attributable to the growth in both the supply and demand side of the JG Alliance. On the supply side of JG Alliance, the total number of apps and DAU within our network exceeded 280 apps compared to 200 in the fourth quarter and 150 million DAU compared to 130 million in the fourth quarter, representing very strong 40% and 15% growth from the fourth quarter 2020, respectively. In this quarter, we continued to sign up many large and popular mobile apps from different industry verticals into our JG Alliance traffic supply pool. This continued increase in the traffic pool is important as it provides a great number of usable DAUs, which in turn helps us to increase impressions and generate higher revenues. On the demand side, we see strong demand from mini-program developers, which, again, contributed more than one-third of JG Alliance revenue. Since we launched JG Alliance in late 2019, it has proven to be an effective traffic acquisition medium for these mini-program developers who continuously need to expand their user base. Our services for mini-program developers are also beneficial to mini-program platforms such as WeChat because the platform encourages traffic originated from outside the WeChat ecosystem to enhance the traffic pool for its mini-programs inside WeChat. The other vertical where we see strong demand includes apps that use our services for dormant user retargeting purposes. Major customers of JG Alliance in the quarter consisted of market leaders across many industry verticals. They include, but are not limited to, Weibo, iTai, Jingdong, Taobao, Tu Xiaomai, and Xuhu Vipshop. JG Alliance is a highly complex business model which requires many moving parts that need to work cohesively and seamlessly in order to make it fully integrated such as technical product innovation, traffic acquisition and operation, advertisers acquisition and operation, data and AI algorithm development, and the smooth operation of the ad ecosystem and platform, just to name a few. We believe the relationships and the trust that we have built with our developers over the past 10 years have enabled us to sustain a steady flow of traffic and accumulate invaluable big data insights. As we continue to get steady traffic and use machine learning for data analysis, this will reinforce the magnitude of our AI technology and the capabilities on performance ads, which, in turn, continue to bring higher ROI for advertisers and higher return to our traffic suppliers. The total addressable market of JG Alliance is massive and is projected to be over RMB10 billion based on third-party research, and we are just at the very beginning of the growth curve. Now let's move on to the discussion of Vertical Applications. Collectively, the revenues from Vertical Applications, including market intelligence, financial risk management, and iZone. Year-over-year, Vertical Applications revenue continued to grow by 36% as demand continued to recover from the pandemic. Particularly, the financial risk management business has outperformed where revenue grew by 56%. All these businesses recorded solid year-over-year revenue growth. Revenues from our market intelligence product increased by double digits year-over-year. We continue to see strong growth from corporate clients with more than 60% of revenue contributed by corporate clients. New and renewed corporate customers included Taobao, Uber, iQiyi, etc. In the financial risk management segment, revenue increased significantly by 56% year-over-year. We believe the demand for this business has fully recovered from the impact of COVID-19. Solid and continued demand from banks and licensing institutions has pushed the ARPU up by 64% year-over-year. New and renewed customers included Baidu and 360 Finance. The strong performance is also the result of our strategy shift to focus on key accounts customers, who typically have massive demand and big budgets. As long as we offer solid products that perform well, brand stickiness will be retained among key account customers. Lastly, our iZone business is still in the midst of product transition. Based on market demand and our product strength, we are focusing our product development efforts on city planning, real estate, and marketing-related demand. Nevertheless, we recorded a solid 38% year-over-year revenue growth in the quarter driven by demand from real estate and city planning customers. With that, I will now pass the call to Shan-Nen.

Thanks, Fei. I'll go through some of the key expenses and balance sheet items. On to the operating expenses. Total operating expenses decreased by 9% year-over-year to RMB101.5 million. In particular, R&D expenses increased by 25% to RMB51.9 million mainly due to the increase in staff costs, higher bandwidth and cloud expenses to support our SAAS Businesses expansion. Selling and marketing expenses increased by 7% from RMB26.9 million mainly due to increased customer visits after the traffic restriction limits at the start of 2021 and other online marketing expenses incurred. G&A expenses decreased by 14% to RMB22.8 million mainly due to year-over-year reduction of RMB6.8 million in bad debt provision. The decrease in bad debt provision was partly due to the reversal of bad debt provision as we continued to receive funds from long outstanding debt to legal proceedings. This was also partly offset by the increase in professional fees incurred. Adjusted EBITDA, calculated as EBITDA excluding share-based compensation, improved 39% year-over-year to negative RMB18.4 million from negative RMB30.3 million in Q1 2020. In summary, for the year-over-year comparison, the key takeaways in this quarter include our SAAS Businesses revenue increased significantly by 56%; group gross margin improved from 33% to 76% as a direct result of Q1 2021 gross margin being 100% contributed by high-margin SAAS Businesses; OpEx, however, only increased by 9%. As a result, our adjusted EBITDA has improved by 39% as scalability of our business model has become clear. We are very proud of and very pleased with the results of Q1 2021. This has clearly demonstrated that our decision to invest in the SAAS Businesses was the right strategy. We believe that the SAAS Businesses will continue their growth momentum and bring solid results moving forward. On to the balance sheet. With our continued efforts to closely monitor our outstanding accounts receivables, the AR turnover decreased significantly from 86 days in Q1 2020 to 48 days this quarter. This was due to both the shift away from the legacy Targeted Marketing business to focus on SAAS Businesses and the Company's continued efforts to shorten the AR collection cycle. And for the fourth consecutive quarter, the deferred revenue balance, which represents cash collected in advance from customers, has exceeded RMB100 million at quarter end. As of March 31, 2021, the balance was at RMB110 million. The shift to SAAS Businesses, where most customers are required to prepay, has partly improved our cash flow compared with the prior quarters, where we had legacy Targeted Marketing business. Next, total assets were RMB734 million as of March 31, 2021. These include: cash and cash equivalent of RMB400 million; accounts receivable of RMB36 million; prepayments of RMB9 million; fixed asset, RMB67 million; and long-term investment of RMB169 million. Total current liabilities were at RMB430 million as of March 31, 2021. These include: accounts payable of RMB16 million; deferred revenue of RMB110 million; accrued liabilities of RMB81 million; and convertible notes of RMB229 million, which were fully redeemed in April 2021. On to business outlook. The Company confirms that the previously provided guidance for the financial year ended December 31, 2021, was for total revenues of RMB380 million to RMB400 million, representing year-over-year growth of approximately 47% to 55%; and gross margin to be above 70% for the full year remains unchanged. Just for meaningful comparison purposes, the prior year revenue numbers used to calculate the revenue growth percentage excludes revenue from Targeted Marketing business. The growth outlook is based on the current market conditions and reflects the Company's current and preliminary estimate of the market and operating conditions and the customer demands we are subject to, 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 March 31, 2021, we did not repurchase any shares. As of March 31, 2021, cumulatively, we have repurchased a total of 921,000 shares since the start of our repurchase program. And this concludes the management's prepared remarks. We're happy to take your questions now. Operator, please proceed.

Our first question comes from Bo Pei of Oppenheimer.

Congratulations on the strong results. I have three questions. First, could you discuss the operating cash flow for the first quarter? I know that our accounts receivable and deferred revenues have shown significant improvement. Second, regarding JG UMS and our Video-as-a-Service product, how many companies are we currently in discussions with, and what is the conversion rate? Additionally, how does the average revenue per user compare with our JPush and other developer services? Lastly, about JG Alliance, you mentioned there’s strong demand and supply. Given that the business is experiencing close to 200% growth, which side do you see as the bottleneck right now—the demand side or the supply side? Those are my questions.

Thank you for your questions. I'll address the first question about the operating cash flow for Q1 2021. In Q1, we experienced a negative cash flow from operating activities due to a couple of reasons. Firstly, customer collections were slower during Q1 because of the Chinese New Year, as many of our customers were away for the extended public holidays, which delayed cash collections. Secondly, many companies in China, including ours, typically pay annual bonuses to employees in Q1. The combination of these factors led to a negative cash position in Q1 of 2021. Similarly, in Q1 2020, we saw a comparable trend due to slower cash collections during the Chinese New Year and the cash bonuses we paid to employees in Q1.

Let me address the second question about JG UMS and VaaS, specifically the pipeline situation. As Chris noted in the prepared remarks, the pipeline is quite robust. After the Chinese New Year, we signed over 10 contracts with paying customers within a two-month period for both products, and the annual revenue per user (ARPU) exceeded RMB100,000 per year, which is significantly higher than our JPush products where the typical ARPU is about RMB60,000 annually. In terms of pipeline numbers, we have built up over 200 meaningful and credible opportunities. Our sales team is diligently following up with each of these pipeline customers, with a total contract value exceeding RMB30 million. Now, regarding your third question about the JG Alliance, the business model requires a supply-first approach. Once we establish a supply within the JG Alliance traffic pool, we can then focus on the demand side to allow customers to utilize that traffic. I wouldn't label one side as a bottleneck; rather, it's about which side is more critical, similar to the chicken and egg scenario where we need the supply first. Our business development unit is quite strong, having been developed from our traditional developer subscription service team. They can utilize existing relationships with these customers to sell this new service aimed at helping them monetize their traffic. Progress is going well, as evidenced by our daily active users (DAU) reaching around 150 million in the first quarter. We expect to onboard an additional 30 million DAU before the end of June. The pipeline looks very promising, and we are confident everything is on track for continued success in this area.

Just to follow up on this question about JG Alliance, how has the demand been looking for mini-programs in the second quarter? And what verticals are you seeing the greatest adoption in?

Yes. So the demand from mini-programs continues to be very strong. Again, it contributed close to 40% of the total JG Alliance revenue in the first quarter. So we typically see customers from the travel sector. Tongcheng Travel is one of our big customers. Also, we see big demand from the finance sector. Baidu and Tu Xiaomai are also big finance customers in this segment. Overall, we see this mini-program continue to be the revenue driver for this JG Alliance business, and the trend is continuing in the second quarter as well.

Great. And are you seeing any cross-selling opportunities from your UMS offering? And what's the interest level been for mini-programs that you have? And then just if you could give us a little more detail, sorry, on the Video-as-a-Service. Is it live now? And if not, when is it going to be live?

Are you talking about the cross-selling of UMS with our traditional subscription product?

Yes, cross-selling between Subscriptions and then in the JG Alliance, if that's happening.

Yes, yes. You are right. When we go to a market, from the very beginning, of course, we will try to find our customers who are already our subscription customers because we have a massive base of subscription customers. This is our core asset. So whenever we introduce a new product, whether it's JG Alliance or whether it's JG UMS or VaaS, we typically go to the existing customer to promote this new product. So from the contracts we have signed in the first quarter as well as in the two months into the second quarter, actually, the majority of the signing customers are existing customers. Once we exhaust all of our existing resources, then we may think about expanding the customer base into those customers who are not our existing customers. So currently, you can consider that basically a majority of the selling is from the cross-selling. As for VaaS, actually, it's already live, and we have already delivered the products for those customers who have already signed the contracts. They will not sign if they don't have the opportunity to test the product. They have to feel comfortable before they sign the contracts with us. So that's a must. A product should be ready before we sign any contract.

So just to clarify, Video-as-a-Service, it's live for some customers? And are you generating revenue from it yet?

Yes. Yes, we are generating revenue. We have already generated revenue over RMB1 million. I will not say revenue because that's an accounting basis measurement. The contract value is over RMB1 million; we have already signed such contracts for the VaaS customers.

Okay. So I'm sorry, so I guess I misunderstood. So from UMS, have you shared the contract value so far? I know you said about 30 million in the pipeline. So have you recognized any revenue? Are you going to recognize any revenue in the second quarter from UMS?

Yes. Actually, in the first quarter, we already signed a contract and recognized a small amount of the revenue for the UMS as well.

Contract value...

Yes.

Okay. I have one final question, and then I'll return to the queue if I have more. I'm curious if Apple's IDFA policy in the new iOS update has affected your ability to reach mobile consumers. I would assume it has little to no impact since Apple has a minimal market share in China, and I assume you're obtaining first-party data. Has this been an issue at all?

No for us. Actually, in China, Apple's market share is pretty small. It's only 20%. Because our market presence mimics the market share of the device manufacturers, right? So the majority of our SDK is in the Android device, around 80% of the total market. This new privacy policy, from the market share perspective, basically impacts us very, very minimally. Secondly, most of our business does not actually rely on iOS data. iOS data compared to Android data, basically iOS, as you know, is a closed system. So actually, whether it's an app developer or SDK provider, the access to the iOS data is very minimal to begin with. In our business, whether it's JG Alliance or the subscription business, actually the revenue generation does not really depend upon the iOS ecosystem and also iOS data. The policy change will not impact us much. I would say very immaterial. Maybe this data policy change will impact the big companies, those whose main business is in advertisement and who have many iOS customers could have some kind of impact. But for us, it's immaterial. We are not worried about this at all.

Next question is from Ryan Roberts of Navis Capital.

I have a couple of quick questions. First, what is the current ad load on JG Alliance? Before we discuss starting slowly and then ramping that up as we reach the middle of the year, how has that been tracking? What is the outlook for the rest of the year?

Let me address this question. Currently, the ad load of our JG Alliance is quite small, less than one. This means that for each daily active user, we have fewer than one advertisement impression per day. We are set to launch a new product later this month that can greatly enhance the ad load per daily active user. We anticipate the number will rise to between two to three per daily active user after the product launch. This indicates a significant improvement in supply after we release the upgraded JG Alliance product.

Yes. Let me add on to Chris' comments. Our current product, the in-app product does not really support multiple ad loads per DAU. But once we launch this new product, we will be able to basically have more than one. Ideally, it should be two to three ad loads per DAU. We can basically show the ad based on the user's behavior, right, instead of blindly showing it to the user. Once the user opens the ad, after a few seconds, we show up the ad to the user. We can monitor the user's in-app behavior, whether they go to their user center, maybe that's a good opportunity to show an ad. Or they go to other pages, we can show an ad to optimize the user experience. We have already talked to the traffic suppliers. They very much welcome this kind of mechanism. So that's why we made the decision to upgrade our current product to enable this functionality.

Got it. Okay. And in terms of overall pricing, I think, again, the strategy was to start low with a pretty low eCPM-type number and then kind of bring it up over time. I just want to check if that's still on track and kind of what you're looking for that to kind of go out to as you look at the second half of the year.

Yes. Our current eCPM is low, but we have made slight improvements. We pay a basic eCPM of RMB2 to our traffic suppliers and adjust payments based on the quality of the traffic. When the traffic is of high quality, we provide additional bonuses, allowing us to differentiate among various traffic sources. This pricing strategy is very competitive in the market.

Okay, that's very helpful. I want to focus on the JG Alliance for a moment. I’m interested in understanding demand. Historically, your Targeted Marketing business had established verticals, but gaming wasn't one of your strengths, whereas you excelled in financials. As you expand with JG Alliance, are you trying to reach similar customers and leverage existing relationships? Are there any trends or characteristics emerging regarding the buyers for traffic that you can share?

Yes. So currently, we break down the JG Alliance customers by different categories. If you look at the breakdown by industry, the main industry currently that consumes our JG Alliance traffic comes from the U.S. As I mentioned in my prepared remarks, customers like Taobao and Weibo use our JG Alliance product to reactivate their dormant customers. So this is a big segment. The second category is e-commerce, like Taobao and JD. These big platforms continuously use JG Alliance for new user acquisition or dormant user reactivation. The third big category is finance, including insurance and online lending. This is about 20% of our total revenue. Currently, the big customer segments are these three. Over time, we will work to penetrate additional industries such as education and lifestyle services. We're working on that. I think as time goes by, our customer mix will resemble that of other traffic networks.

Okay. If I could just add one last point, it seems that UMS monetization is starting off strong. Video-as-a-Service monetization also appears to be performing well with more than 10 contracts, and tracking is progressing positively. JG Alliance's performance for the second half looks promising. It appears that eCPM might be adjusted upwards, and ad load is increasing significantly. I would like to understand what your guidance includes for the rest of the year, especially since it seems that some of these items may not have been considered in your prior forecasts.

Yes. So actually, the full year guidance, in our earnings release, we maintained our full year guidance, which is full-year revenue from RMB380 million to RMB400 million, based on the current business traction and outlook. If we do well in one of those things you just mentioned, like ad load, the traction in JG UMS, and more traffic acquisition for JG Alliance, we have a good chance to beat the guidance. But for now, we want to maintain this guidance for the time being.

As there are no further questions, I would now like to pass the conference back to Mr. Rene Vanguestaine for his closing remarks. Please proceed.

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