Aurora Mobile Ltd Q2 FY2022 Earnings Call

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. Shan-Nen Bong, Chief Financial Officer and Mr. Guan Yang Chen, General Manager. Following their prepared remarks, they 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/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, Rene. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile's 2022 second quarter earnings call. Before I comment on our Q2 results, I would like to remind everyone that the quarterly earnings deck is available on our IR website. You may refer to the deck as we proceed with the call today. Our Q2 results were largely conditioned by the turbulence from the impact of the widespread resurgence of COVID-19. Several of our businesses were adversely affected as numerous cities were shut down between April and June. Despite the overall economic slowdown and the resurgence of COVID-19, we have seen some recovery in our business starting in July. As we mentioned on our Q1 earnings call, we have taken necessary steps and initiatives to proactively address obstacles and strengthen our management and operational capabilities to navigate through these tough times. Continuing the effort started in the first quarter, we have shaved off more operating expenses this quarter in two main areas. Firstly, we further reduced salary costs as we streamlined our workforce. This is important as salary cost is one of our biggest cost components. We need to make sure we are operating at optimal levels with the greatest efficiency. Secondly, we closely and thoroughly looked at every single expense from external technical support to technical fees. We have made conscious efforts to search for better deals or replaced vendors to reduce the expense level where possible. At this juncture, I would like to take a moment to thank everyone in our Company for their contribution to these important cost-cutting initiatives. All these efforts have been positively reflected in the Q2 financial performance. Here are the highlights of our important achievements. Lowest operating expenses for the past 14 quarters since Q1 of 2019, at RMB 87.7 million, down 17% year-over-year. Lowest net loss since Q3 of 2019, at RMB 24.4 million, narrowed down 17% year-over-year. Adjusted EBITDA at negative RMB 8 million, significantly improved by 40% year-over-year, highest level of net cash inflow from operating activities since Q4 of 2020. Total customer number up 79% year-over-year to 4,709. AR days remained at a healthy level of around 46 days despite the tough business environment. Total deferred revenue was about RMB 100 million for the 9 consecutive quarters. Let me continue with the different revenue streams within the group. Development services revenue was down 10% year-over-year to RMB 55.2 million, which was mainly due to the decrease from value-added services, while our subscription service recorded a stable 2% year-over-year growth. Subscription Service revenue of RMB 38.3 million, up 2% year-over-year. Our Subscription Services, which include JPUSH, Analytics, UMS, and others, are products and services that help APP developers and enterprises to improve their operational efficiency. Demand for our Subscription Services is relatively strong and less impacted by the general sentiment of the macro-economy. Despite a very tough operating environment during the quarter, we managed to grow our customer base and signed up several well-known and sizable customers, including China Mobile Bank, Haier Qingdao, Tiger broker, and China Merchant Security just to name a few. One key milestone in Subscription Services that I would like to share with you is our overseas business expansion. In Q2, our overseas email deliveries surpassed those in Mainland China. This is a great testament to the quality of our products and services, along with our ability to expand our businesses beyond our shores. We do see overseas expansion as one of our next key growth drivers, with obviously our core products from PUSH notifications to e-mails. I believe we are ready and will seize overseas growth opportunities in the near future. Value-added Services revenue decreased by 28% to RMB 16.9 million, which is in line with what we expected last quarter as the overall ad market has been relatively weak this quarter. Direct customers contributed more than 60% of JG Alliance revenue stream, while the rest came from the third-party advertising agencies. Major customers of JG Alliance consisted of repeated customers and market leaders across many industry verticals. Key customers included BAT, JD, and vip.com. With all the changes and uncertainty surrounding us, we are not deterred from pursuing our goals. We are more committed than ever to further emphasize and enhance our product and technology as we believe a strong and solid foundation can benefit the company in the long term. Next, I would like to update you on our products and particular innovations. Since the launch of our AD Mediation Platform in the beginning of June, over 2 million DAUs and more than 20 APPs have joined our platform, with more than 150 APPs in the pipeline. We see great potential in our APP AD Mediation Platform. As we shared with you on the last call, our overseas priorities such as entering with proven business models have been paired by acting deliveries to grow and monetize. Our AD Mediation Platform enables one-stop SDK-based access to mainstream ad platforms such as CSJ, Tencent Youlianghui, and Kuaishou, and at the same time, it can also quickly access more than 70 other high-return demand-side platforms. As a service provider with extensive experience in the market, we believe we are in a great position to have more growth apps complete the full scope of demand, development, operation, and monetization and achieve sustainable business status. To enable our customers to go global and access more overseas messaging channels, in August we signed a cooperation agreement with WhatsApp, the world's leading private messaging giant. This global cooperation represents a significant step in advancing our overseas business. Under this collaboration, WhatsApp is now embedded as one of the channels within our Overseas Messaging Cloud Solution, which was created to empower Chinese enterprises to expand in overseas markets with omni-channel intelligent messaging services. I am also very excited to share some updates from our core product, JPUSH. We have recently released our new customer management feature for VIP PUSH customers. Users of our service can now easily select target users and send promotional and customized push messages to their end users without having to go through the software coding process. According to various research reports, click rates will largely improve when sending dynamic and customized campaign push messages to end users rather than just sending generic broadcasting messages to everyone. This new feature is another meaningful add-on to our comprehensive strategy alongside our smart PUSH function, which helps the developers with the PUSH analytics. As you see, we were very productive this quarter and made the necessary product improvements and innovations despite the tough business conditions. We believe that only when we have superior products that markets demand can we continue to strive and come back even stronger after the current slowdown. I am confident that we are fully equipped and ready for the tides to turn. With that, I will now pass the call over to Shan-Nen, who will share more updates on vertical applications and other parts of the Q2 highlights.

Thanks, Chris. And now let's move on to vertical applications that consist mainly of financial risk management and market intelligence. Vertical Application revenue decreased by 25% year-over-year, mainly due to the impact of COVID-19, which resulted in a dip in the demand and logistical obstacles in contract signing. In the Financial Risk Management segment, revenue decreased by 22% year-over-year to RMB 12 million, mainly due to: one, the slowdown in the economy, which resulted in lower demand for our services; two, delays in contract signing as several major cities were locked down, which has recently made it difficult to deliver contracts to customers for their execution. Nevertheless, some existing key account customers in the financial verticals such as WeBank continued their consumption of our services during the quarter. As an update in early Q3 of this year, we have signed up many other new customers, including, but not limited to, various financial institutions. Our Market Intelligence Services revenue decreased by 9% to RMB 7.3 million, and we saw a similar trend in Market Intelligence services as well. Despite the slowdown in Q2, our teams still managed to sign many well-known customers, including Fuhu and Mihayu. So far in Q3, we have brought on board many key customers such as Morningstar. I will now go to some of the key expenses and balance sheet items. As Chris mentioned earlier, we have achieved some of the best results since Q1 of 2021 when we completed our transition to a pure search model as a result of our effective cost control initiatives. Operating expenses decreased by an impressive 17% year-over-year to RMB 87.7 million, which is the lowest OpEx since Q1 of 2019. All three components within the OpEx category have recorded year-over-year reductions. In particular, R&D expenses decreased 25% to RMB 40.8 million, mainly due to lower headcount and reduced salary costs and associated share-based compensation. Selling and marketing expenses decreased 14% to RMB 23.3 million, mainly due to decreased marketing expenses this quarter. G&A expenses decreased 1% to RMB 23.6 million, mainly due to lower salary costs. Our adjusted EBITDA improved 40% year-over-year and 2% quarter-over-quarter, respectively, to negative RMB 8 million. Although this was another very challenging quarter, our decision and company-wide effort to tightly control and reduce expenses has clearly paid off. This positive impact has been reflected in the financial statement, and I would like to share with you the following: we have recorded the lowest OpEx in the past 14 quarters since Q1 of 2019; lowest net loss since Q3 of 2019 at negative RMB 23.4 million; adjusted EBITDA at negative RMB 8 million improved by 14% year-over-year; and we have the highest level of net cash inflow from operating activities since Q4 of 2020. The total deferred revenue balance, which represents cash collected in advance from customers, exceeded RMB 100 million at quarter end for the 9th consecutive quarter. As of June 30, 2022, the total deferred revenue was at a historical high of RMB 137.7 million. Next, total assets were at RMB 481.7 million as of June 30, 2022, including cash and cash equivalent of RMB 112 million, accounts receivable of RMB 35.1 million, prepayments and other current assets of RMB 34.2 million, fixed assets of RMB 49 million, long-term investment of RMB 140 million, goodwill of RMB 37.8 million, and intangible assets of RMB 26 million. Total current liabilities were RMB 227 million. Accounts payable at RMB 19.2 million, deferred revenue at RMB 129.7 million, accrued liabilities of RMB 78.2 million and we repaid the short-term loan of RMB 150 million in April. Next on to business outlook. Although we are still facing uncertainty from the pandemic, going into Q3, we see some exciting growth from our business lines and our cost management initiatives continue to produce positive results that I want to share with you. Based on current information, we anticipate the developer service subscription revenue of Q3 2022 to achieve close to double-digit growth both quarter-over-quarter and year-over-year. For vertical application revenue, we are also expecting solid quarter-over-quarter growth. For value-added services, which we have mentioned earlier, the overall market will take time to stabilize before revenue can return to historical levels. With the anticipated growth in revenue and conscious cost spending, barring any unforeseen events, we are looking to achieve a breakeven adjusted EBITDA balance for Q4 of 2022. Please note that the growth outlook is based on the current market condition and reflects the company's current and preliminary estimate of the 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 June 30, 2022, we did not repurchase any shares. As of June 30, 2022, cumulatively, we have repurchased a total of 921,000 ADS since the start of our program.

First, can you talk about the subscription side? With the lockdowns, have you been able to deliver and get renewals for agreements signed? I see you've increased sequentially subscription revenue, but still below the fourth quarter. So I'm curious for an update on that? And maybe talk about churn and how that's changed given the market conditions.

Yes, Brian, this is Shan-Nen. If you compare to Q4, yes, we did have a few of the private cloud projects that we completed. So in comparison, the Q2 numbers were a bit low. Having said that, the lockdown has lesser impact on subscription business because the majority of them are renewals, and renewal contracts might not have the impact from the logistical obstacles that we talked about earlier that we were not able to deliver the contracts. For the subscription business, we think we are on the right track. The numbers indicate that. So we are fairly comfortable with the subscription business at this stage.

So you're still unable to deliver them. Is that what you're saying? I know you said that last quarter, or you are able to deliver those agreements?

Yes, we are for subscription business. That's why the revenue has shown year-over-year and quarter-over-quarter growth.

Okay. And then I guess what I'm a little bit confused on is that the market conditions are still challenged from an economic standpoint. So talk about what the drivers to growth are? You mentioned a couple of double-digit growth sequentially. How have you been able to do that and talk about from a demand perspective, given those conditions, how it's changed?

Yes. There are two ways to look at this. If you look at value-added services or financial risk management, those are more closely tied with the overall economy. If you look at ad spending, you have read that companies like Tencent are facing the problem that advertisers are not spending as they used to be. This is very much tied to the economy. However, if you look at the subscription business, it was less impacted by the economy because the demand for PUSH notifications would remain consistent. We still see strong growth coming from the subscription business because it is less impacted by the economy.

Got it, okay. And then, maybe touching on SendCloud, what was its contribution in the quarter, which of your business segments is that reported? And how has that been performing in the current conditions?

It's reported revenues under the subscription business, so it's under subscription and is contributing about RMB 5 million to RMB 6 million of the quarter, and that number is growing. It's growing because we are able to cross-sell some of our customers to buy the services. Additionally, as we have mentioned, our overseas e-mail delivery has surpassed China. There's a high demand for SendCloud services. So they are doing pretty well.

Yes. And lastly, good job with the operating expenses. Is this about the level of expenses we should see going forward? Will we see further declines, and maybe some of them were done mid-quarter? How should we think about OpEx going forward?

I think we are pretty much at that level. I do not foresee any spike going forward. If anything, it will be maintained at that level or lower.

I have one question. I noticed that since the last earnings call, the company has taken a number of actions on going global, such as releasing the overseas messaging cloud and establishing cooperation with WhatsApp. Can the management share more on the company's overseas strategy and maybe give us some highlights in the company's overseas business development overall?

Sure. Thanks for your question. You're right. We have been taking steps to expand our overseas business during Q2. Since the beginning of June, we have released our overseas messaging cloud solution to serve the international expansion of Chinese enterprises. This is one of the growth drivers for many Chinese companies today. By integrating our multiple messaging products such as JPUSH, SMS, e-mail, UMS, and other messaging products, our overseas messaging cloud solution focuses on integrated multi-channel communication. Users will be able to use our product more efficiently. Our overseas channel solution has already integrated platforms such as WhatsApp, and we are looking to even further incorporate others like Facebook Messenger or TikTok going forward. We are helping Chinese enterprises seeking international expansion to build closer and more efficient connections with their users overseas. This company is taking overseas expansion facing various market conditions and evolving data compliance, network environments, and several acquisitions. Therefore, we are well-positioned to help them seize overseas growth revenue.

Thank you, Amber. 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 very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.