Aurora Mobile Ltd Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will be given at that time. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Rene Vanguestaine. Thank you. Please go ahead, sir.

Thank you, Michel. 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. Shan-Nen Bong, Chief Financial Officer; and Mr. Guangyan Chen, General Manager. 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. Bong. Please go ahead.

Thanks, Rene. Good morning, and good evening, everyone. Welcome to Aurora Mobile's 2023 Third Quarter Earnings Release Call. For all our callers and listeners today, I wanted to let you know that our CEO, Chris, is on a business trip in a different time zone and is not available to attend the call today. In Chris's absence, I have the privilege to share with you all the great quarter that we have this quarter. Before I comment on our Q3 results, I would like to remind everyone that the quarterly earnings deck is available on our IR website. This quarter has been great operationally and financially for a number of reasons. Firstly, two of our business lines recorded sequential revenue growth in each of the three quarters of 2023, where developer subscription revenue grew 15% quarter-over-quarter, and Vertical Applications revenue grew 6% quarter-over-quarter, driven by Financial Risk Management revenue, which grew 11% quarter-over-quarter. Secondly, our gross profit in absolute dollar terms also grew in each of the three quarters in 2023. Thirdly, we achieved yet another lowest operating expenses in history in this quarter. Last but not least, we achieved adjusted EBITDA positive in this quarter. Therefore, this quarter has been operationally and financially outstanding. As for our total group revenue, we achieved positive growth of 1% quarter-over-quarter. Developer Service revenue decreased 10% year-over-year, mainly due to the weakness seen in the value-added service, offset by the 12% growth in subscription services. Subscription business revenue was CNY 46.7 million, up 12% year-over-year and 15% quarter-over-quarter, driven by increases in both ARPU and customer numbers year-over-year and quarter-over-quarter. This quarter included notable new and renewal customers such as City Bank, FAW Volkswagen, FAW Toyota, Italian Bank, and German Bank, just to name a few. Value-Added Service revenue was CNY 4.9 million, decreasing by 58% quarter-over-quarter, largely due to the lack of annual shopping festivals in Q2. Now, let me give you some updates on our overseas product EngageLab. We are proud to announce we now have more than 100 customers signed up to purchase our EngageLab product. These customers come from 16 different countries and regions, including Hong Kong and Taiwan. In this quarter alone, we added four new countries where EngageLab is made available to overseas customers. Our cumulative signed contract value of EngageLab has exceeded CNY 10 million since the product launch in Q3 of 2022. To further our EngageLab expansion, we will continue to expand our reach within the 16 countries and regions we are currently servicing, aiming to sign up more customers, and we will expand to new countries and regions every quarter. Our EngageLab product allows our customers in various countries and regions to engage with their own customers in an effective yet cost-efficient manner, utilizing messaging channels such as app push, web push, email service, SMS service, and WhatsApp Business API. We are pleased with the progress thus far and are committed to further improving our service delivery of EngageLab. Next, I'll elaborate on the revenue for Vertical Application, which consists of Financial Risk Management and market intelligence. Vertical Application had another fantastic quarter, with revenue growth in each quarter of 2023. In Q3 alone, it grew another 6% quarter-over-quarter, propelled by strong revenue growth from Financial Risk Management. For Financial Risk Management, revenue grew both year-over-year and quarter-over-quarter, supported by customer growth of 18% year-over-year and 27% quarter-over-quarter. The addition of new customers signifies that we are gaining market share and that customers are renewing their services, which is crucial for our revenue growth. In Q3, we signed customers including various licensed financial institutions throughout China. As for Market Intelligence, revenue decreased 4% quarter-over-quarter due to less investment sentiment towards Chinese ADRs, while demand for China-based APP data also decreased accordingly. Nevertheless, we still managed to sign up some prominent customers such as Mercedes and other global hedge funds and overseas investment funds. Regarding operating expenses, I am pleased to report that in Q3 2023, we achieved another record low quarterly OpEx at CNY 60 million, down 25% year-over-year and 6% quarter-over-quarter. Maintaining a low level of OpEx is critically important to us, which allowed us to record the lowest quarterly net loss since our IPO and return to adjusted EBITDA positive this quarter. In particular, R&D expenses decreased 14% year-over-year to CNY 32.8 million, driven by lower headcount reducing salary costs and associated compensation. Selling and marketing expenses decreased by 10% year-over-year to CNY 21.8 million due to salary cost reduction from headcount adjustments. G&A expenses fell by 69% year-over-year to CNY 5.4 million, mainly from a one-time gain on the disposal of fixed assets. Even without this one-time item, G&A expenses still decreased by 37%, thanks to our efforts to streamline expenses across the board. Due to our focus on driving OpEx at optimal levels, we recorded an adjusted EBITDA of positive CNY 4.5 million this quarter. In plain English, this means that the group is making more than it is spending, which is an impressive outcome that I am proud of. On to our balance sheet, I'd like to share two important KPIs we closely monitor. We maintain a healthy accounts receivable turnover lease at 40 days, consistent year-over-year and quarter-over-quarter, which we take pride in compared to our industry peers. Secondly, our deferred revenue balance, representing cash collected in advance from customers for future contract performance, remained high at CNY 130.6 million, marking the seventh consecutive quarter above CNY 130 million. Both our onshore and overseas customers are continuing to purchase and renew our services. More importantly, we are collecting cash in advance from customers. Our total assets were CNY 359.5 million as of September 30, 2023, which includes cash and cash equivalents of CNY 98.4 million, accounts receivable of CNY 31.3 million, prepayments and other current assets at CNY 23.7 million, fixed assets of CNY 1.9 million, long-term investments of CNY 134.9 million, goodwill of CNY 37.8 million, and intangible assets of CNY 19.5 million. Total current liabilities were CNY 233.2 million as of September 30, 2023, including a short-term loan of CNY 5 million, accounts payable of CNY 20.2 million, current operating liability of CNY 6.4 million, deferred revenue of CNY 130.6 million, and accrued liabilities of CNY 71 million. Now, I would like to highlight four key achievements from this quarter for you to take away from this call. One, our Developer Service subscription and Financial Risk Management businesses recorded three consecutive quarters of revenue growth; two, we signed more than 100 EngageLab paying customers from 16 countries and regions, with cumulative signed contract value exceeding CNY 10 million; three, we achieved the highest quarterly gross profit and lowest quarterly OpEx in 2023; and four, we turned adjusted EBITDA positive. Lastly, before I conclude, I'll give a quick update on our share repurchase plan. In the quarter ended September 30, 2023, we repurchased 854,000 ADS, bringing our total repurchased to 2.69 million ADS since the start of the program. This concludes management's prepared remarks. We'll be happy to take questions now. Operator, please proceed.

Our first question comes from Calvin Wong with Spica Capital.

I would like to ask a few questions, if I may. First of all, congrats on your great Q3 results! It seems that the positive adjusted EBITDA has come earlier than we discussed last quarter. I appreciate it if management could share more about how this was achieved and whether we will continue to see positive adjusted EBITDA going forward. Second, regarding the EngageLab business, it is great to see that you have signed up more than 100 overseas customers with over CNY 10 million contract value within the year. With this, I'd like to hear from management how you plan to expand this EngageLab business outside of China and how you managed to make such progress in overseas markets. So, two questions: One on adjusted EBITDA and the second on EngageLab business.

Sure. Calvin, thanks for your question. Yes, you are correct. We are very pleased to achieve adjusted EBITDA positive this quarter earlier than expected. In summary, it's a combination of driving high-margin revenue business, increasing gross profit, and tightly controlling operating expenses. On the revenue front, as I touched on earlier in the earnings call, both our Developer Subscription business and Vertical Application business have recorded consecutive quarter growth in 2023. These high-margin businesses have a gross margin in the range of 75% to 80%. The Developer Service Subscription business performed well, with both ARPU and customer growth quarter-over-quarter. Particularly this quarter, we completed several private cloud projects that contributed to our revenue growth. Similarly, Financial Risk Management also experienced ARPU and revenue growth sequentially. With this growth in high-margin businesses, our gross profit increased. Regarding operating expenses, we again achieved a record low OpEx at CNY 60 million in Q3. With revenue growth and reduced OpEx, we eventually turned adjusted EBITDA positive. As for Q4 and beyond, we typically do not provide guidance on adjusted EBITDA. All I can say is that we are focused on growing high-margin revenue and continue to control expenses. Now, on your second question regarding EngageLab. Yes, it seems that EngageLab is gaining traction. Looking back, the most crucial decision we made over a year ago was to venture overseas. It was not a smooth start, and the journey was challenging, but rewarding. We began the business in Q3 of 2022 with zero customers and contract value, and we have made excellent progress since then. To do business overseas, we invested in infrastructure to ensure our customers have peace of mind regarding their data storage in their desired countries, whether in Southeast Asia, Europe, or Australia. We also collaborate closely with Chinese companies expanding overseas, as they usually select us as their vendor of choice. Additionally, we engage quality independent software vendors (ISVs) in overseas markets, which has benefited us in several ways: ISVs are well-connected in their domestic markets with existing customers, which aids in selling our product; and having a presence in different overseas markets reduces our need to establish local offices, hire sales teams, and simplifies contract negotiations and pricing, thus saving on administrative burdens. Overall, the EngageLab overseas business is vital for us, and it represents a new growth engine, less reliant on the Chinese mainland economy, allowing us to continue executing our revenue growth plans regardless of the situation onshore. Calvin, I hope I answered your questions.

There are no further questions at this time. I'd like to turn the call back over to Rene for any closing remarks.

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 day. Thank you.

Thank you for participating. This does conclude the program, and you may now disconnect. Everyone, have a great day.