Aurora Mobile Ltd Q4 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Aurora Mobile Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. 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, sir.

Thank you, Amber. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on our IR website, 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. Guangyan Chen, General Manager. 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 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 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. Please go ahead.

Thanks, Rene. Good morning, and good evening, everyone. Welcome to Aurora Mobile's 2022 Fourth Quarter Earnings Call. Before I comment on our Q4 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. Before looking at the fourth quarter, I would like to reflect upon our journey in the past couple of years in a challenging environment caused by the pandemic, what we did right, what we learned, how we came from the toughest time, and how much we can grow as an organization. I'm proud to say that we came out of the difficult times and became more resilient and efficient. Along the way, we have been constantly reviewing our overall strategy, not afraid of making necessary decisions no matter how tough to ensure we are always on the right track to long-term growth. Throughout this effort, our revenues and margins remained strong as we improved gross profit while tightly controlling and lowering our costs. We started fresh as a pure SaaS business in Q1 2021. During this major transition period, we didn't stop innovating and harnessing our core business line, Developer Services. This has really been rewarding us for the long run. I will give you more details later with economic uncertainty globally. In mid-2021, we acted quickly and proactively to make our organization stronger and more agile by enacting restructuring and strict cost management across the company. We're glad we made these decisions, and our efforts are reflected in our financial results. Let me share some of the key results with you. We recorded the second positive adjusted EBITDA since Q4 2021 at RMB 0.6 million. All business segments, including Developer Services, Subscription, Value-add Services, and Vertical Applications have achieved record quarter-over-quarter growth. The highest gross profit in 2022 was RMB 59.8 million. We had the lowest adjusted operating expenses since IPO for the past 18 quarters at RMB 52.8 million. Our adjusted net loss was the lowest since Q3 of 2019 at RMB 6.6 million, improved by 18% year-over-year. The accounts receivable turnover days were at 32 days, the lowest since IPO. The deferred revenue balance is the highest in the history of the company at RMB 142.4 million. The total customer number increased by 70% year-over-year to 4,719. I am thrilled to report revenue growth in Q4 2022. Total revenue rose to RMB 86.9 million, up 8% quarter-over-quarter, with both Developer Services, our core business, and vertical applications achieving sequential growth, with the biggest revenue growth contribution coming from Developer Services at 11%. In this quarter, we recorded the highest quarterly revenue of 2022 and lowered our adjusted operating expenses, bringing the cash component of operating expenses to a historically low level. With that, our adjusted EBITDA was positive for the second quarter since Q4 2021 at RMB 0.6 million, significantly improved by RMB 7.3 million from a negative RMB 6.7 million in Q3 2022. Our adjusted net loss was also the lowest since Q3 2019 at RMB 6.6 million, improved by 18% year-over-year. Furthermore, we ended this quarter on a high note with more than RMB 142 million in total deferred revenue and remaining performance obligations, up 15% versus last year. This is an impressive set of financial numbers for Q4 2022 that our team has worked hard to achieve, and it clearly shows that we are running the business well. I sincerely believe more good things will come. We are confident that the end of the COVID-0 policy in December 2022 marks the beginning of China's emergence from the pandemic. Even though there may be some short-term challenges, we believe this has put the country on a path to returning people's lives to normalcy and resuming pre-COVID levels of consumer, social, and economic growth. Therefore, the outlook for renewed consumer activities and a gradual recovery of our business in 2023 is very promising. Now let me go through our different revenue streams. Developer Service revenue increased 11% quarter-over-quarter to RMB 63.2 million, which was mainly due to the increase in both Subscription Services and Value-added Services. Year-over-year, Developer Services revenue decreased by 1.5%, mainly due to weaknesses in Value-added Services, offset by growth in Subscription Services. Subscription Services revenue was RMB 46.3 million, up 11% quarter-over-quarter and up 4% year-over-year. Subscription services, our core business line, includes JPUSH, Analytics, UMS, and other products and services that assist app developers and enterprises in improving operational efficiency. Our private cloud service revenue increase has contributed to the Subscription revenue growth, and we were able to bring on board a number of renowned customers. The increase in ARPU also contributed to the growth in revenue, and we managed to grow our customer base with several well-known and sizable customers. Since the launch of the overseas service platform EngageLab in October, we have seen encouraging trends, and customers have expressed strong interest in our products. We expect stronger revenue growth going into 2023, and we will continue to improve our products and services to help global developers achieve greater efficiency and cost-effective user reach. As mentioned earlier, we anticipate consumer activities to recover further in 2023. During Q4, we already saw some growth in our value-added services revenue, which is a good indicator of overall recovering consumer activities. The value-added services revenue increased quarter-over-quarter by 10%, and it was the first quarter-over-quarter growth in 2022, which is a major positive sign for us. Year-over-year revenue was down 44% to RMB 16.9 million, and we expect the year-over-year growth trend to continue to recover in 2023. Major customers of the JG Alliance services consisted of repeat customers and market leaders across many industry verticals. Key customers include BAT, Baidu, Alibaba, Tencent, Xiaoshan Bank, and Juhu. For our Adpub, which was launched back in Q2 2022, we are seeing increased interest from various apps, with over 10 million daily active users joining our platform by the end of this quarter, demonstrating growth in DAUs of over 300%. As the overall economy recovers in China, we believe even more DAUs will join our platform going forward. Another exciting news that marks a major milestone for us is our pioneering work in integrating ChatGPT technology in our JPUSH, our push notification solution, and in our email and SMS service platform. Today, AI has become the cornerstone of many products and services, and it is vital for us to be one of the first movers in applying AI technology. Our proactive integration of interactive language model technology and AIGC gives us a great advantage and a significant opportunity to make our products smarter, further benefiting all our customers. For a long time, a critical concern for developers has been how to attract users' attention with creative, high-quality push content and improving click-through rates and user conversion. The AI generation resulting from the integration of ChatGPT into JPUSH provides a powerful solution. Using these, developers can quickly tap into AIGC to create personalized, intelligent push content designed to achieve high click-through rates and conversion rates, effectively improving user reach and engagement. For our email service, integrating ChatGPT will enable customers to generate personalized AIGC email content based on recipient information and preferences. The upgraded email service will not only improve the readability and attractiveness of emails but will also increase response rates and conversion rates, thereby helping customers interact more effectively with their target users and achieve higher marketing success. Furthermore, earlier last month, we became one of the first ecosystem partners of ERNIE Bot, a generative AI chatbot developed by Baidu. We will assess ERNIE Bot and apply Baidu's leading intelligent dialogue technology in our customer engagement and marketing technology surfaces. This initiative is an additional step in our implementation of our AI-driven strategy with the support of leading AI chatbot technology. As an ecosystem partner, we will have priority for internal testing with ERNIE Bot and will integrate ERNIE Bot into our products. Many renowned companies have joined our new broad ecosystem. It's clear that going forward, our businesses are preparing for this new mega AI trend. We will carry out in-depth research and development in ChatGPT-related technology to realize interactive dialogues similar to real people for ChatGPT technology and to further enhance the richness of our push message, email, and SMS content to empower greater conversion rates and marketing engagement. With that, I will now pass the call over to Shan-Nen, who will share more information about vertical applications and other aspects of our performance.

Thanks, Chris. I would like to echo Chris's comments on our revenue trend. With our relentless effort in developing our core developer service, we see a very promising recovery trend in Q4 and going forward. Not only in Developer services, we have also seen sequential growth in vertical application revenues, especially in Market Intelligence. Vertical application revenue increased by 1% quarter-over-quarter and decreased by 11% year-over-year. In the Financial Risk Management segment, revenue decreased by 14% quarter-over-quarter to RMB 12.4 million and decreased by 25% year-over-year. The decline in financial risk management revenue was primarily due to many of our customers' consumption being impacted by the COVID outbreak in November to December last year. We are not overly worried about financial risk management revenue in 2023 as we believe the decline in Q4 was temporary, and we are already seeing recovery in consumption so far this year. Our Market Intelligence Services delivered strong revenue growth, up 16% quarter-over-quarter and 27% year-over-year to RMB 10.4 million. During this quarter, our revenue increased as a result of recovery in customer spending and the addition of many well-known and sizable new clients. Furthermore, our focus on key accounts has helped us gain additional market share. Notable customers that we signed up this quarter include, among others, Tencent, Baidu, Alibaba, Zhongxin Securities, and Sentosa. Now, let me go through some of the key expenses and balance sheet items. As Chris mentioned earlier, our strategy of active and stringent cost management proved to be very wise, and our quick actions helped us maintain a nimble organization. We have had another historically low quarter in terms of operating expenses. Excluding a non-cash impairment loss of long-lived assets at RMB 73 million, we are down 21% year-over-year. All three components within the operating expenses category recorded year-over-year non-cash reductions, particularly, R&D expenses decreased by 22% to RMB 35 million, primarily due to a lower headcount which reduced salary costs and associated share-based compensation, as well as a decrease in cloud costs and depreciation expenses as a result of improvements and optimizations of our cloud platform. Selling and marketing expenses decreased by 26% to RMB 24.5 million, mainly due to a decrease in headcount by 39%. Marketing expenses and salary costs decreased accordingly in this quarter. G&A expenses increased by 149% to RMB 35.9 million, primarily due to a RMB 22.4 million non-cash increase in long-lived asset impairment due to one-time costs for transitioning to the cloud this quarter. Our adjusted EBITDA was positive for the second quarter since Q4 of 2021, at positive RMB 0.6 million. A company-wide prudent and deliberate hiring and expense control strategy has helped us maintain a comparatively low operating expense level. Let me recap some of the highlights of this quarter. We achieved the lowest adjusted operating expenses since IPO at RMB 62.8 million, down 19% year-over-year. We had the lowest adjusted net loss since Q3 of 2019 at negative RMB 6.6 million, improved by 18% year-over-year. We recorded the second positive adjusted EBITDA since Q4 2021 at RMB 0.6 million, improved by RMB 7.3 million quarter-over-quarter. Regarding the balance sheet, I will share two important KPIs that we closely monitor. Firstly, the accounts receivable turnover days decreased from 38 days in Q3 to 32 days, the lowest accounts receivable turnover days since IPO. I have to pay tribute to our team who has been diligently working to collect payments from our customers on a timely basis. Maintaining a low accounts receivable turnover days level is essential. Secondly, one of the key financial KPIs for tracking performance of SaaS companies is total deferred revenue, which represents cash collected in advance from customers for future contract performance. We recorded another highest balance in the history of the company standing at RMB 142.4 million. This is the 11th consecutive quarter that our deferred revenue has exceeded RMB 100 million. Additionally, this quarter marks the seventh consecutive quarter of continuous sequential growth in deferred revenue, which is a significant source of cash flow for us in such challenging times. Beyond healthy cash flows, the level of deferred revenue also signifies that our business is in great shape. Our customers continue to purchase our services quarter-over-quarter and year after year, and we are very pleased with the trend of this deferred revenue balance. Next, total assets were reported at RMB 420.9 million as of December 31, 2022. This includes cash and cash equivalents of RMB 116.3 million; accounts receivable of RMB 29.7 million; prepayments and other current assets of RMB 30.4 million; fixed assets at RMB 14.9 million; long-term investments of RMB 141.9 million; goodwill of RMB 37.8 million; and intangible assets of RMB 23.9 million resulting from the SendCloud acquisition in March 2022. Our total current liabilities were at RMB 249.6 million as of December 31, 2022. This includes a short-term loan of RMB 5 million; accounts payable of RMB 18.2 million; deferred revenue of RMB 138.8 million; and accrued liabilities of RMB 87.6 million. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended December 31, 2022, we repurchased 246,000 ADS. Cumulatively, we have repurchased a total of 1.19 million ADS since the start of our repurchase program. This concludes management's prepared remarks. We're happy to take the questions now. Operator, you may proceed.

Our first question comes from Brian Kinstlinger from Alliance Global Partners.

Good to see the recovery in your businesses. Can you first talk about the strategic partnership with WhatsApp in your first slide, and maybe I missed it. Can you discuss how and which segments this might drive revenue growth as you see it?

Sure. Brian, this is Shan-Nen. Based on what we have collected from our customers, especially those overseas, many of our customers are not able to tap into the WhatsApp communication channel. As you know, outside of China, WhatsApp is hugely popular in Southeast Asia and the entire Asia, excluding China. So what we are helping customers do is allow them to use WhatsApp as part of their communication channels, in addition to push notifications, to reach their users. This is beneficial as it ensures that their click-through rates, or usability rates, are significantly higher. WhatsApp is also glad that we can help them reach more customers. Many of our customers are looking forward to this new product that is already in the market. We will be able to charge our customers for the communication channel through WhatsApp, and of course, we need to pay a cost to WhatsApp as well.

So essentially, you're going to be able to send push notifications through WhatsApp. Is that right?

Correct. So this means that in the event the traditional push notifications don't reach customers, we can utilize the WhatsApp channel to ensure communication with users.

Now for existing customers that are using push, will this drive increases in the rates they pay? Or will it just be part of the service they already get?

Yes, it will be an increase. We will charge for every single push notification sent through WhatsApp, so there will be additional costs for the customers, thereby generating additional revenue for us.

Great. And then maybe you can talk about ChatGPT and with your push and SendCloud. How were the services operated before ChatGPT? Was there no automation or intelligence?

No, what we’re seeing is that AIGC has become highly significant in the past two months. Customers are eager to see if we can tap into the capabilities of ChatGPT. They really need creative content for their push to enhance click-through rates. Previously, customers were on their own to create push content, which often lacked creativity. Now, through our service, they can leverage ChatGPT to generate multiple content options, allowing them to choose the best fit for their needs. This also applies to our email services, where customers can use the ChatGPT link for SendCloud to customize emails effectively, potentially leading to better click-through rates and outcomes.

Great. That's super helpful. Can you talk about the advertising market in China? I know we saw a small recovery in the fourth quarter for revenue sequentially from value-added services. So perhaps discuss the trends you're seeing today in advertising and how you expect that recovery in 2023.

Yes, as you noted, we achieved sequential growth last quarter, which is encouraging. However, looking ahead to the next 12 months, we still anticipate some weaknesses or headwinds in the advertising market. This is particularly impactful for us since our platform is not as substantial as Tencent or other larger players. Therefore, we do not expect it to return to the levels of 2020 or 2021; however, it should be better than 2022.

Got it. Outside of that, each of your business lines showed sequential growth. Considering the holiday in Q1, should we expect seasonality impacts in the first quarter for each segment? Do you see gradual improvements in each of them? Maybe just touch on the segments. I know you don't provide revenue guidance, but from a high level, what do you think about the segment outlook for the year?

The short answer to both of your questions is yes, yes. We do expect to see seasonal lows in Q1 due to the Chinese New Year and the shorter month of February. Going forward, we anticipate Q2, Q3, and Q4 to demonstrate an uptick. In comparison of 2023 to 2022, yes, we expect all business lines to achieve at least single-digit growth.

Our next question comes from the line of Kelvin from Capital.

I would like to ask two questions, if I may. First of all, of course, we have already seen very encouraging results from many aspects. Maybe the company could share with us how you have achieved this set of good numbers. That's the first question. And the second question is a follow-up on this partnership with WhatsApp and platform. Will there be any other going overseas initiatives on the table? If yes, what's the progress of the other overseas initiatives?

Sure. If we recap your first question about the drivers behind the encouraging numbers for last year and Q4, I would say there are several key factors. First, staying focused means doing what the market and customers want and doing it well. Despite the tough environment over the past two or three years, we have remained focused on our subscription business. We continued to develop new functionalities and features to help our customers operate more efficiently. As Brian asked earlier, as soon as we saw ChatGPT becoming widely available, we were among the first to incorporate access to ChatGPT for our customers. This has been very appreciated by our clients. Secondly, making tough decisions at the right time. As you have heard in previous earnings calls, we began reexamining our cost structure as soon as we recognized the pandemic's duration. During this time, we restructured many departments and regrouped when possible, resulting in a significant headcount reduction from a peak of about 620 employees in 2021 to 415 last month. This was a challenging decision but necessary and timely. Thirdly, we executed our cost-cutting measures consistently. It is crucial that the mentality of being cost-conscious permeates all departments, from the sales VP down to our admin staff, all tightly controlling expenses. This is important for our sustainability and profitability. In summary, the reason we have seen quarter-over-quarter revenue growth across all business lines is due to the highest quarterly revenue and gross profit in 2022, alongside achieving the lowest adjusted operating expenses since our IPO and turning positive in adjusted EBITDA this quarter. Regarding the going overseas initiative, we have made notable progress since proceeding with overseas ventures in the second half of 2022. We have signed more than 50 contracts with international clients, and all contracts represent values greater than those in China. Importantly, we do not offer free trial services overseas, meaning all users of our services internationally are paying customers. We have also invested in infrastructure overseas to support and assist our customers, significantly beyond mere lip service. Furthermore, our product, EngageLab, was launched in Q3 of 2022, and we are also utilizing WhatsApp as a popular communication channel to help customers reach their users. Lastly, we are knowledgeable about the legal requirements surrounding data privacy in Southeast Asian countries, enabling us to assist our customers in managing their data risk effectively. With our current presence in Singapore, we can efficiently assist our customers in covering the entire service region. Therefore, we are confident in our ability to succeed in the overseas market, and we will continue providing updates in future earnings calls.

I'm showing no further questions. I will now turn the conference back to Rene for closing remarks.

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. Thank you.

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