Aurora Mobile Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to Aurora Mobile First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's 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 first speaker today, Rene Vanguestaine. Please go ahead. Thank you, Nadia. And 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; and Mr. Shan-Nen Bong, Chief Financial Officer. Following their prepared remarks, they 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 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 and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements 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.

Thanks, Rene. Good morning, and good evening to everyone on the call. Welcome to Aurora Mobile's 2022 first quarter earnings call. Before I comment on our Q1 results, I would like 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 me start off today's call on one important milestone we have reached. In Q1 of 2022, we have made significant and important investments that we foresee will further solidify our leading position to help our customers enhance their user engagement through multi-channel solutions. As we shared in the Q4 earnings call, since then, we have completed the acquisition of a majority interest in SendCloud, China's leading email API platform for consumer marketing and user-centric transactional email services. With the completion of the transaction in March 2022, we have initiated the integration of the operations. In this process, we have started identifying the list of SendCloud customers that we can potentially sell our JG services into and vice versa. We believe this is an effective and efficient way to increase the revenue of the group. We will provide updates on this in future earnings calls. From a product perspective, we have SendCloud's very strong presence in email services. We have integrated its email services into our UMS product, which will further enhance our leading position to help our customers from all sectors of the market reach their users through our omnichannel communication technology. We believe this is a great product offering that the market has been longing for. Q1 of 2022 proved to be a very challenging quarter for most businesses due to weak macroeconomic conditions and the resurgence of COVID across major economic hubs in China, which slowed down business activity significantly. Nevertheless, with the effort by the teams throughout the company, we have achieved another impressive financial result amidst this tough operating environment in Q1 of 2022. The key achievements in this quarter include the following: revenues were RMB85.3 million, up 11% year-over-year. Operating expenses were RMB94.5 million, down 7% year-over-year. Operating loss was RMB36 million, narrowed by 17% year-over-year. Net loss was RMB30.9 million, representing a 23% improvement from a year ago. Adjusted EBITDA was negative RMB8.2 million, also significantly improved by 56% year-over-year. AR days remained at a healthy level at around 46 days. Total deferred revenue was above RMB100 million for eight consecutive quarters. We are and have been closely monitoring and controlling our expenses as part of our continued efforts to drive operating efficiency since late last year. This effort has paid off, as both our operating expenses and loss from operations have reduced year-over-year. We will continue to be very stringent in all aspects of expenditures going forward. Let me continue with the different revenue streams within the group. In Q1 2022, our Developer Services continued to deliver solid results with a 14% year-over-year growth, which was mainly fueled by a substantial 35% year-over-year growth in Value-added Services, while our Subscription Services recorded a modest 2% growth during the same period. Subscription Services revenues were RMB34.4 million, an increase of 2% year-over-year, primarily driven by new customer acquisition. During the quarter, the Financial Sector, mainly banks and brokerage firms, contributed a sizeable percentage of the revenues for both push subscriptions and private cloud services. The financial sector customers include Ping An Bank, Guangzhou Bank, Ranzhou Bank, City credit card, and China Investment Security, just to name a few. With this financial return and strong customers, we plan to continue selling our suite of JG products and services to them in the near future. We believe this is a good strategy to further increase the revenue or ARPU from these existing customers as we are in a good position to understand their needs to provide relevant solutions. We will also expand our reach to explore more financial sector-based key account customers as our products are well received in the core of the market. Value-added Services within Developer Services, which include revenues from JG Alliance services and Advertisement SaaS, continued to deliver solid 35% year-over-year growth to RMB25.4 million from RMB18.8 million in Q1 2021. On the supply side of the JG Alliance, the traffic pool remained stable during the quarter. Our efforts have shifted to better operate each of the DAUs within the traffic pool. In summary, we are making different attempts to have each of the apps within our JG Alliance traffic pool search for a better match of one or more advertisers so that these apps can maximize their returns on their exposure. By doing so, the traffic pool suppliers, the mobile apps, will benefit through growing the revenue generated for each device within the pool. In terms of revenue contribution by product formats, both the value-added services contributed approximately 50% to 60% versus 40%, respectively, in Q1 of 2022. On the demand side, meaningful brand developers and retargeting related demand remains strong as our JG Alliance product format remains very effective for reaching their target audience. In total, these subcategories contribute more than 90% of our JG Alliance revenue in Q1 2022. During the quarter, demand from direct customers has been very strong and contributed more than 70% of the JG Alliance revenue stream, while the rest came from third-party advertising agencies. Key customers of JG Alliance consisted of repeat customers and market leaders across many industry verticals. Key customers include BAT, Baidu, Alibaba, Tencent, JD, and Weibo. I would like to provide some context on the ad services in recent months. Starting from March of 2022, we have seen advertisers beginning to reinvest their advertising budgets across all mediums of advertisement in China. We felt the impact of COVID-19 and lockdowns in some key cities as the demand for our value-added services has not been as strong as anticipated. Therefore, revenue from value-added services is expected to be impacted in Q2 of 2022. Nevertheless, we believe things will turn around soon and that demand for our Value-Added Services will pick up again as the economy recovers. Lastly, a very important product update on Value-Added Services. As we announced in the press release earlier this week, we have recently launched our Ad Mediation Platform. Through our proprietary SDK technology, we will be in the best position to help mobile app developers access other mainstream advertising platforms in China with great ease and help them better monetize their app advertising inventory. This is a mature and proven business model. Overseas players such as AppLovin, MoPub, and ironSource have been helping overseas app developers grow and monetize using similar Advertising Mediation Platform solutions. We believe we will bring great value to mobile app developers through this arrangement. With that, I will now pass the call over to Shan-Nen, who will share more about the vertical applications and other parts of Q1.

Thanks, Luo. Let's now move on to the Vertical Applications, which mainly consist of Financial Risk Management and Market Intelligence. These revenues grew steadily by 6% year-over-year. The Financial Risk Management business contributed the lion's share of the revenue growth. In the Financial Risk Management segment, revenues increased by 11% year-over-year with a solid 33% growth in ARPU. We are very pleased with the revenue growth recorded in this period especially since Q1 2022 was a tough quarter due to relatively weak macroeconomic conditions and the resurgence of COVID in certain key cities in China. Nevertheless, the demand for our products remains strong. During the quarter, we acquired new key customers and continue to retain many existing customers every quarter. These customers expanded their demands with us, resulting in a strong 33% ARPU growth year-over-year. Some of our new and renewed customers include license operators such as TD and Financial Services. Our Market Intelligence product line continued to sign up a number of new and well-known key account corporate customers during Q1 2022. They include DT and one of the largest pension plans in the world based in Ontario. Revenue remained at a fairly stable level with slight decline year-over-year again due to macroeconomic factors that slowed down business activities. Now I'll go through some of our key expenses and balance sheet items. On to operating expenses. As a result of our continuous effort to efficiently run the business and tightly manage our expenses, in Q1 2022, our operating expenses decreased by 7% year-over-year to RMB94.5 million. In particular, R&D expenses decreased by 23% to RMB40 million, mainly due to a reduction in headcount and reduced salary costs and associated share-based compensation. Selling and marketing expenses decreased by 2% to RMB26.3 million, mainly due to the decrease in marketing expense spending in this quarter. G&A expenses increased by 24% to RMB28.2 million, mainly due to the reversal of AR provision in Q1 2021 that did not repeat in this quarter, which resulted in a RMB1.5 million stream and a RMB1.4 million share-based compensation as well as a $1 million increase in professional fees incurred. Adjusted EBITDA calculated as EBITDA excluding share-based compensation, reduction in force charges, impairment of long-term investments, and change in fair value of foreign currency swap contracts, recorded a 56% improvement year-over-year to negative RMB8.2 million. This was mainly possible as we managed to grow our revenue and gross profit while effectively controlling our operating expenses year-over-year. To recap the key financial performance in these relatively tough quarters, we have managed to grow our revenue by 11% despite Q1 2022 being a very tough quarter for most, if not all, businesses in China. Gross margin was at 69% this quarter as we paid more traffic costs to mobile app developers for our JG Alliance business. Operating expenses decreased by 7% due to management’s effective and stringent cost control measures. As a result, both our net loss and adjusted EBITDA has narrowed by 23% and 56% year-over-year, respectively. During the quarter, we continued to streamline our workforce to further improve our operating efficiency and ensure that OpEx remains at an optimal level. On to the balance sheet. I will share two very important KPIs that we always closely monitor. First is the AR turnover days which has shortened by 2 days at 46 days this quarter compared to 48 days a year ago. Our disciplined accounting policy and cash collection efforts ensure a timely collection of our accounts receivables. Secondly, the total deferred revenue balance, which represents cash collected in advance from customers, has exceeded RMB100 million at quarter end for the eighth consecutive quarter. As of March 31, 2022, the total deferred revenue balance was at a historical high of RMB133.3 million. Next, total assets were RMB625.5 million as of March 31, 2022. This includes cash and cash equivalents of RMB273 million, accounts receivable of RMB42.3 million, prepayments of RMB15.4 million, fixed assets of RMB55.6 million, long-term investment of RMB137.3 million, and goodwill of RMB37.8 million and intangible assets of RMB24.1 million resulting from the SendCloud acquisition in March 2022. Total current liabilities were at RMB394.2 million as of March 31, 2022, including a short-term loan of RMB160 million, which was all repaid in Q2 2022, accounts receivable of RMB21.6 million, deferred revenue of RMB129.5 million and accrued liabilities of RMB83 million. Next, business outlook. Since March 2022, the resurgence of COVID-19 in certain parts of China has increased the risks and uncertainties for conducting business in China. This has made business performance harder to forecast in the near future. With that, we believe it is the right decision for us to suspend providing or updating the revenue guidance until the situation substantially improves. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended March 31, 2022, we did not repurchase any shares. As of March 31, 2022, cumulatively, we have repurchased a total of 921,000 ADS since the start of our program. This concludes management's prepared remarks. We're happy to take your questions now.

Thank you for confirming. The first question comes from the line of Brian Kinstlinger from AGP. Please ask your question.

Great. Thanks so much for taking my questions. First question I have, the year-over-year growth rate in JG Alliance has slowed significantly in the last few quarters you commented. Can you provide the factors that caused this? How much was market conditions versus COVID?

Hello, better now? I think that's the same thing, right? I mean the COVID impact affects the advertisers' budget. The advertisers reduced their advertising budgets. So they impacted our JG Alliance revenue. Because our top advertisers, basically like JD, Alibaba, and Weibo, especially JD and Alibaba, were affected by the logistics, which is impacted heavily by COVID-19. So they reduced their budget heavily in Q2. However, we see some recovery in these months, but not as strongly as what happened in Q4, we still need more recovery in the next quarter.

Got it. Okay, thanks. And then a similar question on subscriptions. We're down to single-digit growth for this quarter. Is that all - is that generally COVID too? Is that more churn on some of your subscriptions? Just maybe take me through the factors that led to single-digit growth compared to what has historically been a little bit better growth there?

Yes. For the first question, I mean, Q1 is a single-digit. It is mostly impacted by COVID because in March our headcount was locked down for around a week. We see that in Q2, the subscription service will pick up and recover. We expect to see double-digit growth in Q2 and Q3 as well.

I'm just curious, how do subscriptions change during lockdowns? Do they stop paying their subscriptions? That's what I'm confused about, is why there was slower growth?

No, the impact is basically for the subscription service. Its impact on new customers. Any new customers were delayed in contract renewals and paperwork. When the lockdown happened, we could not deliver the contracts to customers. So we could not finalize the deals or deliver invoices. But in Q2, we have measures to reduce these delays.

Yeah. Okay. Now with lockdowns easing albeit probably slowly. I wonder, are the segments beginning to improve? Although I guess how do you think also then about advertising budgets? It seems that you're still pretty weak even without COVID, given the economic uncertainty. So maybe take us through how things are improving over the last two months in your business versus how do you think the environment has changed, maybe permanently for the year?

Great, Brian. This is Shan-Nen. Back to your question. The ad budget demand has slowed down as Weidong has mentioned in his script. What we have seen is growth has been slow compared to previous quarters or previous months. If you look at the quarter-over-quarter performance, we expect Q2 ad spend or revenue to be potentially lower than Q1. In the upcoming months, we expect demand to continue to be fairly slow in Q2 and maybe into Q3 as well.

Okay. And then about the new product you launched, discuss how you see adoption and potentially impacting revenue given those conditions.

Yes, it's very challenging in the advertising market. The apps in the traffic pool have various demands for improving monetization efficiency. Before, they might rely on one ad network. Currently, they prefer working with multiple advertising networks to improve monetization efficiency. Eventually, they can improve metrics like AD spend and CPM. I believe this product can bring value and improve monetization for these apps in this challenging environment. In the overseas market, platforms such as ironSource have proven this model.

Okay. Thanks so much.

So I'll translate that. So my two questions are, number one, on the gross profit margin. It's kind of compressed a little bit from about 76%, 77% to down about 69%. I want to know what's behind that with respect to the traffic pool cost. I guess it's a revenue share, if management can give us more color on if that is more of a temporary thing. I know your guidance has been over 70% historically, but is that more like a structural thing that we're seeing? Alternatively, is that a shift? And is there color in terms of what kind of partners are asking for more share? It would be good to know.

Hey, Ryan, this is Shan-Nen. Regarding the first question on the margin, yes, this quarter we have been giving more shares of the revenue to the traffic pool in the JG Alliance business. I think this was a part of the negotiation with them. Going forward, we expect the margin to be around 65% to 70%. Most of our businesses maintain a margin above 70%. So this is the only segment with a comparatively lower margin.

Okay, understood. Thank you.

Regarding the second point about the outlook, if you explore our revenue, you can separate value-added services from others. The demand for ad spending or ad revenue has been low since the start of this quarter. Major players in the industry, like Tencent, have announced a revenue drop of about 20% to 30% in Q2. We are not expected to perform better than that. It will be tough for value-added services. However, for the subscription and financial risk management services, the demand remains stable, as the lockdown did not diminish the demand for these services, but simply delayed contract renewals and cash collection.

Okay. Then for my follow-up, what is the outlook on gross margin issues?

In Q1 2022, we are providing unique services to apps needing monetization. Still, we have seen reduced demand for advertising, which impacts the ECPM that advertisers are willing to give us. Consequently, we cannot pass those reductions to app developers entirely. Our margins did decrease, but we still maintain a margin of 69%.

Awesome. What about the overall demand side?

What we see is a silver lining. We observe many of our subscription-related customers venturing overseas, such as BYD, which are now utilizing our services beyond China. We have set up operations in Singapore to support new business across Southeast Asia. We expect revenue from overseas ventures to be around 3% to 5% of our subscription business in Q2 and beyond. Thus, we see new growth drivers amidst the COVID environment.

Could you please give us an update on the size of the JG Alliance's DAU pool?

Sure. The DAU pool in the traffic for JG Alliance is still stable at about RMB190 million DAUs. However, the ECPM we expected has declined by about 20% to 30% quarter-over-quarter.

Has there been meaningful churn in the JG Alliance's DAU outside of what would be considered normal?

No, we haven't experienced any major loss or change. We've maintained our DAU numbers and are increasing ad loads for revenue growth.

Great. Thanks, guys. I appreciate the color.

Thank you for confirming. There are no further questions. I would like to hand over the call to Rene for closing remarks. 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.