Earnings Call Transcript - JG Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to Aurora Mobile First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, Christian Arnell. Thank you. Please go ahead, sir.

Christian Arnell, Host

Thank you. 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. 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 factors are included in the Company's filings with the U.S. SEC. 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.

Weidong Luo, CEO

Thanks, operator. Good morning and good evening to everyone on the call, and welcome to Aurora Mobile's first quarter 2020 earnings call. This first quarter of 2020 has proven to be a challenging one for many companies, including us. Firstly, the quarter is typically a seasonally weak one due to the Chinese New Year holiday. This year the COVID-19 outbreak adversely impacted this seasonally slow period even further across China. Many businesses were temporarily shut down or delayed restarting their operations for many weeks, as the pandemic unfolded. Despite the slower-than-expected period, we ramped back up to 100% capacity by the middle of March along with most of our customers, who resumed normal operations in mid-to-late March. During this period of temporary disruption, we took the initiative to further strengthen our core competencies. This included narrowing our focus on Developer Services, improving operational and technical efficiency, streamlining internal procedures, and reinforcing our commitment to delivering exceptional customer service. With these initiatives now in place, we believe we will emerge from this pandemic stronger than ever, and ideally positioned to better adapt to the current uncertainties that hang over the market. With that in mind, let’s begin our review on our key operating and financial performance for the first quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations reached 1.49 million as of March 31, 2020, from approximately 1.17 million last March. This represents an average of 16,000 new apps coming on board every month during the quarter. This was an impressive achievement considering the difficult and challenging operating environment during the first quarter. Second, cumulative SDK installations increased by 64% to 37.2 billion as of March 2020, from 22.7 billion in March 2019. Third, the number of monthly active unique mobile devices we cover continued to increase, reaching 1.36 billion in March 2020, from 1.07 billion in March 2019. This was fueled by the increasing number of apps that used our SDK, particularly as JVerification SDK becomes more widely adopted across the market. Lastly, in the first quarter of 2020, we saw the number of paying customers increase to 2,211 from 1,951 a year ago. Now, before I go over our financial performance, let me quickly provide an update on our Developer Services, revenue classification. Beginning from this quarter, the revenues from Advertisement SaaS and Light-Push services, which help developers grow and monetize their user base, will be separately classified as 'Value-Added-Services' under Developer Services. No changes are made to other revenue classifications. Our strategic focus remains to drive the growth of Developer Services and SaaS products. Over time, we expect the revenue and gross profit contributions from Targeted Marketing to be less and less significant. Onto the financial numbers, our core businesses, including Developer Services and SaaS products continued to see healthy 15% year-over-year revenue growth and 20% year-over-year gross profit growth, despite the impact from the pandemic and lower seasonality. Our strategic transition away from the low margin and high-risk Targeted Marketing business, that we started in the third quarter of 2019, has gone very well with Targeted Marketing now only contributing about 12% of our total gross profit. Such transition has reflected in our revenue decline by 45% from RMB 230 million in the first quarter of 2019 to RMB 126 million in the current quarter. Our growth of revenue and profitability is no longer dependent upon this legacy Targeted Marketing business. Developer Services once again was the highlight of the quarter with an impressive performance. Developer Services, which includes both the Subscription and Value-Added Services recorded a solid 72% revenue growth year-over-year, at the back of an increase in both ARPU and customers. For Subscription Services, we continue to see more customers signing up to our Developer Services. New customers improved are not limited to China Pacific Insurance, IKEA China, and Shanghai Bank. We also launched a live version of private cloud service catering to customers who need our private cloud setup across their entity. Subscription revenue grew by 37% year-over-year, primarily driven by an increase in the number of customers by 45%. In Q1 2020, we saw more customers signing up to our fee-based JVerification services. They include, but are not limited to several large companies. Cumulatively, we now have more than 2,000 apps using the services with aggregate DAU exceeding RMB130 million. The growing demand by advertisers to use our JVerification product along with JPush has contributed to the continued growth in this segment. Value-Added Services, which improved revenue from Advertisement SaaS and Light-Push Services that we developed also during the same period last year, grew strongly. Market adoption for our Value-Added Services has exceeded our expectations. The average monthly revenue from Value-Added Services was approximately RMB2.1 million in the first quarter of 2020. This has since doubled in April, and we expect the strong revenue growth momentum to continue into Q2. Key customers of our Light-Push Services in the quarter include several prominent companies. Next, as we transition away from the Targeted Marketing business, revenue from this segment was down 59% year-over-year and now accounts for only 51% of total revenue, compared with 81% a year ago. Despite accounting for 51% of revenue, the margin contribution from this business accounts for only about 12% of our total gross profit. As we mentioned in previous quarters' earnings call, this is a business we want to transition away from. This coronavirus outbreak accelerated this transition. We expect both our revenue and margin contribution from the Targeted Marketing business to further decline in the coming quarters. Now I will turn the call to Fei, who will discuss the Q1 performance of three business lines within SaaS products in more detail.

Fei Chen, President

Thank you, Chris. The combined revenue from SaaS products including financial risk management, market intelligence, and iZone decreased by 28% from RMB 24.8 million in the first quarter of last year to RMB 17.8 million this quarter. Revenues from our market intelligence product grew by 26% year-over-year, mainly fueled by strong growth in the number of customers. Recently, we launched our iAPP overseas version, where customers can now obtain deep insights into app analytics in the Southeast Asia and India markets. New investors and founding customers in the quarter include several major companies, and the new corporate customers include Baidu and Huawei. For financial risk management, revenue declined year-over-year by 47%. That was attributable to decreases in both the number of customers and ARPU year-over-year. The impact of coronavirus has taken a toll on the overall business environment in China. The financial sector was more adversely impacted than other business sectors. With a significant decline in lending activity in the first quarter of 2020, demand for all financial risk management products also fell. Nevertheless, we did manage to find a few new contracts with leading financial companies, such as JD Finance, Ningbo Bank, and Jinshang Bank during the quarter. Business in this sector has since stabilized in the second quarter. And lastly, our iZone business recorded a 31% decline in revenue year-over-year. As expected, with the social distancing and the travel restrictions imposed since the outbreak of coronavirus in late January, daily activities such as traffic congestion, tourism sites, and shopping malls were temporarily impacted. This resulted in weak demand to analyze location-based data during the quarter. Since the beginning of April, we have begun to see an uptick in demand for our iZone products. As businesses gradually return to normal, we believe that demand for our iZone product in the real estate, tourism, and retail sectors will rebound quickly.

Shan-Nen Bong, CFO

Thanks, Fei. Since Chris and Fei have already talked about our topline numbers for the quarter, I'll go through some of our P&L items. Despite a tough business environment in the first quarter of 2020, we managed to maintain our gross margin at 33%, flat sequentially, and a meaningful increase from 27.5% during the same period last year. This was a direct result of our focused shift away from the traditional Targeted Marketing business first announced in Q3 2019. Our focus is now on growing our high margin SaaS businesses, mainly Developer Services, which include both the Subscription and Value-Added services and SaaS products. As a percentage of revenue, Developer Services and SaaS-based products accounted for 39% during the quarter, a significant increase from 19% during the same period last year. Targeted Marketing, on the other hand, accounted for 61% of revenue during the quarter, down from 81% during the same period last year. On gross margin contribution, Developer Services and SaaS products accounted for 88% of gross profit compared to Targeted Marketing, which is no longer our strategic focus, accounting for only 12% of gross profit during the quarter. With the growth in high margin contribution and importance of Developer Services and SaaS product over the quarters, we believe we have identified and built a higher quality, more resilient, and sustainable business model that can support and fuel our leading growth and profitability in the future. Next onto the OpEx. Total operating expenses decreased by 1% year-over-year to RMB 91 million. In particular, as reported in the previous quarter, in May 2019, we have reduced our headcount by approximately 120. As a result, we achieved some savings in terms of staff costs in Q1 2020. On a high side, this has proven to be a wise decision. R&D expenses decreased by 3% to RMB 41 million, mainly driven by decreases in cloud costs and personnel costs, that was partly offset by an increase in depreciation of services. Selling and marketing expenses decreased by 7% to RMB 25.2 million, as COVID-19 restricted travel. G&A expense increased by 8% to RMB 26.5 million, mainly due to increases in staff costs and embedded provision. Our adjusted EBITDA was negative RMB 30 million during the quarter, compared to negative RMB 7.4 million a year ago. Onto the balance sheet items, total assets were RMB 884 million as of March 31, 2020. This includes cash and cash equivalents of RMB 383 million, accounts receivable of RMB 107 million, prepayment of RMB 54 million, fixed assets of RMB 109 million, and long-term investment of RMB 117 million. Total liabilities were RMB 175 million as of March 31, 2019. This includes accounts payable of RMB 18 million, deferred revenue of RMB 89 million, accrued liabilities of RMB 68 million. As of March, we maintained a healthy level of working capital of RMB 397 million. Lastly, before I conclude, I’ll give an update on the share repurchase plan. In the quarter ended March 31, 2020, we did not purchase any shares. As of March 31, 2020, cumulatively, we have repurchased a total of 921,000 ADS since the start of our repurchase program. The company today announced that the Board of Directors has approved a new program under which the company may repurchase up to U.S. $10 million of its shares over the next 12 months. The company plans to fund these repurchases from the existing cash balances. And this concludes the management prepared remarks. We’re happy to take your questions now. Christian, back to you.

Christian Arnell, Host

We’re ready to begin the Q&A operator.

Operator, Operator

Ladies and gentlemen, we'll now begin the question-and-answer session. Your first question comes from Ryan Roberts from Navis Capital. Please ask your question.

Ryan Roberts, Analyst

Good evening. Management, thank you for taking my question. I would like to ask Shan-Nen about the new disclosure changes for Q1. I want to understand why you didn't address this in your prepared remarks. It appears that Developer Services and SaaS generated about RMB 49 million, while Targeted Marketing was around RMB 77 million. Could you provide a breakdown of that RMB 49 million? In your script, you mentioned elements like SaaS and BaaS. Can you clarify what those are?

Shan-Nen Bong, CFO

So, I just want to clarify your question. You want to have a further breakdown of the revenue numbers?

Ryan Roberts, Analyst

Yes. With the new kind of the new segment disclosure, I just want to verify that my understanding is correct. So I think, yes, if you can run through that, that would be great.

Shan-Nen Bong, CFO

Yes. So, Ryan, actually the Developer Service, the subscriptions part is RMB 25 million. And under Developer Service, the Value-Added service is RMB 6.4 million. And for the SaaS products, it’s RMB 17.8 million, and Targeted Marketing is RMB 77 million.

Ryan Roberts, Analyst

Got you. Okay. And then you mentioned kind of in your remarks that you’ve seen some kind of a better than expected I suppose momentum on the VaaS segment, kind of, I think you mentioned April. Here we are now in June, but halfway through June. Can you give us a sense of how Q2 is tracking please?

Fei Chen, President

Yes. At least the double. Yeah. More than double.

Ryan Roberts, Analyst

Got you. So that’s for the VaaS on a monthly basis. Can you give us a sense of how the rest of the business is doing, kind of you’ve been back in the office now?

Fei Chen, President

Actually, on a quarterly basis it should be more than double.

Ryan Roberts, Analyst

Okay. So, is that for the entire segment, the Dev Services and SaaS segment? Or you mean, is that just BaaS?

Fei Chen, President

BaaS.

Ryan Roberts, Analyst

Just BaaS. Okay. And then can you give us a sense of how the rest of the business is kind of recovering and maybe tracking kind of now we’re kind of post-COVID or getting to a point where maybe post-COVID how things are shaping up? I think you've had everyone back in the office for a little bit now. So I'm curious what you're seeing, any color you can offer and that'd be great.

Fei Chen, President

Yes. So, let me talk about business line by different business line, right. So, for the Developer Services, the subscription business as you know, this is a very sticky, stable business. And we continue to see quarterly growth in the second quarter, which is within our expectation. And BaaS as I said, it should be more than double from the first quarter. And then for the BaaS products, the recovery is a little bit slower than the other business. And this business should slightly increase from the first quarter. And therefore, the Targeted Marketing, as we mentioned, this is not our strategic focus anymore. So, over time this business will gradually go down, and at a certain point in time, we might completely wind down this business. But in the second quarter, the revenue and the margin contribution in terms of the absolute dollar amount should be slightly smaller than the first quarter. So, net-net, basically, you will see both revenue growth and meaningful gross margin growth from first quarter.

Ryan Roberts, Analyst

Got you. Okay. That's actually, yeah, it is very helpful. And if we look at like maybe how the rest of the year is tracking, and I know it's obviously early to kind of think about second-half. But I'm curious, people that you're talking to and kind of activity you're seeing, can you give us a sense of how your second-half is looking? We're hearing from other people in the market that second-half is looking increasingly, I guess, better than perhaps, it looked maybe, a couple of months ago, and I want to get a sense of what you guys are seeing?

Fei Chen, President

Yes. We are very optimistic about the outlook for the second quarter. From a macroeconomic standpoint, things appear to be healthy and business is returning to normal. Specifically for our Developer Service, we anticipate continued strong growth in the second quarter. In fact, we achieved impressive results in the first quarter, with a 41% year-over-year growth in our Subscription business, and we expect this trend to continue into the second half of the year. Regarding our Value-Added Service, we are already observing substantial quarter-over-quarter growth, and we anticipate sustained momentum. We expect a considerable contribution to revenue and margins from our SaaS business in the second half. By the end of the second quarter, we should complete our recovery, and in the following quarters, we expect to see improved performance in our financial risk management and iZone segments, which had declined in the first quarter but have normalized since. Additionally, our market intelligence business experienced strong double-digit growth in the first quarter and we anticipate this growth to carry into the second half. As for our Targeted Marketing business, it has become increasingly irrelevant in terms of revenue and margin contribution, and we may remove this segment from our disclosures in the near future. Overall, we are confident about the second half, having reached a low point in the first quarter, and we are optimistic about the growth trajectory for both revenue and margin moving forward.

Ryan Roberts, Analyst

Thank you for the comprehensive response. I'd like to ask a quick follow-up. Regarding the margin you just mentioned, it seems that for Developer Services and SaaS, excluding Targeted Marketing, the gross margin was around 74%, while Targeted Marketing was about 6%. This aligns with what you discussed on earlier calls about how transitioning to the new SaaS model will enhance margins. I want to confirm that my calculations are approximately correct and also understand how the margin is expected to progress as this transition continues, particularly in the second half of the year. Thank you, Fei.

Fei Chen, President

Yes, you're right. Actually, your math is very accurate, it's the same as mine. So non-Targeted Marketing, actually, on a blended basis, all those businesses, they pretty much share a similar margin profile. The gross margin profile is about 74%. It might have some small fluctuation from quarter to quarter, but around the 75%-ish. That's the right number to think about. For the Targeted Marketing business for the first quarter, it is 6%. But since this business is not going to grow, and the non-Targeted Marketing business is going to grow in revenue, right? So you should expect the overall, the Company’s gross margin to improve meaningfully in the second quarter compared to the first quarter. As the growth continues to kick in for the non-Targeted Marketing business in the second half, the margin should continue to grow on a quarterly basis. Ideally, if you remove the Targeted Marketing business, but today, we will have 74% of gross margin. That's the direction we are aiming towards.

Ryan Roberts, Analyst

Got it. Understood. Thank you very much. I appreciate it.

Operator, Operator

As there are no further questions, I will conclude the question-and-answer session. Now, I will turn the call back over to Christian Arnell for his closing remarks.

Christian Arnell, Host

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.

Weidong Luo, CEO

Thank you.

Shan-Nen Bong, CFO

Thank you, all.