Earnings Call Transcript - KC Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Kingsoft Cloud's Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Shan. Please go ahead.

Nicole Shan, Vice Chairman

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's second quarter 2025 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com as well as on PR Newswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; the CFO, whose name is not available; Mr. Zou will review our business strategies, operations, and other company highlights followed by Mr. Li, who will discuss the financial performance. We will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation for your convenience and reference. In case of essential management statements in the original language will be provided as necessary. Before we begin, I would like to remind you that this conference call contains forward-looking statements as defined by the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and market conditions and relate to various risks and uncertainties, many of which are beyond the company's control, which may cause actual results to differ from those in the forward-looking statements. Further information regarding these risks and uncertainties is included in the company's filings with the U.S. SEC. The company does not have any obligation to update these forward-looking statements due to new information or otherwise as required by the applicable rules. Please note that unless otherwise stated, all financial figures mentioned during this conference call are in RMB. Now it is my pleasure to introduce our Vice Chairman and CEO, Mr. Zou. Please go ahead. Thank you.

Tao Zou, CEO

Hello, everyone. Thank you for joining Kingsoft Cloud's Second Quarter 2025 Earnings Call. I am Zou Tao, CEO of Kingsoft Cloud. Over the past three years, we have pursued a high-quality and sustainable development strategy, fully embraced AI opportunities, and transformed our business fundamentals. We have seen growth in both revenue and profitability, while also upgrading our IS and test cloud service capabilities for the generative AI era. This quarter, our growth capabilities were further validated. The rapid expansion of our AI intelligent computing business has generated additional demand for basic cloud services, which in turn has accelerated our revenue growth. Our Q2 revenue reached RMB 2.35 billion, marking a 24% year-over-year growth—up significantly from the previous quarters' 11%. Both public cloud and Enterprise Cloud have also shown year-over-year increases, with public cloud growing by 32% to reach RMB 1.63 billion. Our focus on AI is yielding positive results, as evidenced by AI gross billings reaching RMB 728 million this quarter, a year-over-year increase of over 120% and a quarter-over-quarter growth of 39%. This accounts for 45% of our public cloud revenue. In the last two years, we have effectively developed both our basic cloud business and our intelligent computing cloud business to nearly equal size. The rapid advancement of generative AI and its demand across various industries have significantly boosted the cloud services market. We will continue to leverage AI to enhance our technical capabilities and refine our intelligent consumer products, aiming to be a leader in the generative AI era. As the primary strategic cloud platform for Xiaomi and the Kingsoft ecosystem, we effectively tapped into the substantial demand from our ecosystem clients, striving for mutual growth and success. This quarter, our revenue from the Xiaomi and Kingsoft ecosystem totaled RMB 629 million, an increase of 70% year-over-year, contributing 27% to our total revenue. In the first half of 2025, revenue from this ecosystem reached RMB 1.13 billion, accounting for 40% of the annual cap of related product transactions for 2025. Given the ongoing prosperity of the Xiaomi and Kingsoft ecosystem and the expanding business opportunities, we are confident in the continued growth of ecological business collaborations in the latter half of this year. Now, let me highlight the key business points for the second quarter of 2025. In the public cloud sector, revenue for this quarter hit RMB 1.63 billion, a year-over-year increase of 32%. The development of our intelligent computing cloud and basic cloud services has mutually supported each other, with cloud consumption growth from both internal and external ecosystem clients progressing together. We see strong demand for training computing power services and a growing need for inference computing power services, which support the sustained development of our intelligent computing cloud. Implementation and application of AI across industries have begun to materialize, with demand from large language model companies, internet audio-video services, real-time communication providers, online travel agencies, and gaming sectors adding to the AI-related demand. Simultaneously, the data volume driven by AI has spurred the growth of our basic cloud services, expanding high-quality offerings that counterbalance any revenue pressures from our strategic reduction of low-margin services. Regarding ecosystem customers, we have deepened our partnership with Xiaomi, collaboratively integrating resources to provide stable, high-performance cloud services. We ensured the successful launch of a game system related to Kingsoft by supplying key products and services like database and cloud computation. In the enterprise cloud sector, revenue reached RMB 724 million this quarter, representing a 10% year-over-year increase. In our public services sector, we partnered with Kingsoft Office to officially launch an AI all-in-one server for government use, enhancing investment in AI for public service scenarios and demonstrating full-stack AI capabilities, including intelligent computing services and large language models. Our cooperation with Kingsoft Office has effectively merged AI technology with practical applications in public services, offering scalable solutions for customers' digital transformation needs. In the healthcare sector, we are leveraging our expertise in planning, data governance, technology, and AI capabilities to build the foundational infrastructure for digital health systems. This quarter, we aimed to secure the Changchun Municipal Public Health Information Platform project to foster collaboration and data sharing in local health initiatives. Additionally, we are involved in constructing data lakes for Zhujiang Hospital of Southern Medical University and cloud-native hospital information systems for Zhongnan Hospital of Wuhan University. In enterprise services, we are focused on implementing AI across multiple industry scenarios and complex business models to enhance operational efficiency. We recently collaborated with a major state-owned bank on a credit report automation project, setting a benchmark in the banking sector by applying end-to-end AI capabilities for improving processes from data collection to report writing, significantly elevating the efficiency of bank account managers. In product and technology, we emphasize building success through innovation, striving to deliver exceptional customer experiences across our core offerings. Our R&D teams for basic cloud and intelligent computing cloud work both independently and collaboratively to enhance our capabilities. This quarter, we continued optimizing our AI suite, facilitating cloud container services and providing cloud-native components that support the entire lifecycle of large language models. We are committed to improving the performance and cost-effectiveness of AI model training through enhanced resource management, data governance, network communication, and protection. Additionally, we launched a new version of Kingsoft Cloud Galaxy Stack, now supporting various mainstream processor platforms and domestic operating systems to facilitate private deployments. In summary, AI continues to drive new momentum in cloud computing, making it crucial to support rapid model training and adaptation. We will keep expanding and upgrading our intelligent computing cloud resources while utilizing our expertise to advance AI integration in key sectors such as public services, finance, and healthcare. The pace of AI adoption is accelerating across multiple areas, clarifying the potential to boost productivity, improve user experiences, and create new revenue streams. We firmly believe that the market opportunities from the AI revolution are just beginning. We will leverage the comprehensive capabilities we have built over the past few years while focusing on our core product and solution offerings to generate long-term value for our customers, shareholders, employees, and all stakeholders. Lastly, this quarter, I would like to welcome our new CFO, Ms. Li. I will now hand the call over to Lili to go through our financials for the second quarter of 2025. Thank you.

Unknown Executive, CFO

Thank you all for joining the call today. I plan to join Kingsoft Cloud and I am looking forward to collaborating closely with the team to tackle challenges, seize opportunities, and contribute to the development of a high-quality and sustainable strategy. I appreciate the trust placed in me by the Board, the company, and our stakeholders. Now, let’s review our financial results for the second quarter of 2025. This quarter, our AI strategy has been effective, driving growth across all products. Total revenues reached RMB 49.2 million, marking a 24.2% increase year-over-year. Revenues from public cloud services amounted to RMB 1,625.3 million, a 31.7% increase from RMB 1,234.5 million in the same quarter last year, primarily due to the rise in AI-related business, with gross billings surging over 120% year-over-year to RMB 728.7 million. Revenues for enterprise cloud services hit RMB 723.9 million, a 10% rise from the same quarter last year, driven by strong demand for IT delivery services and steady progress on external enterprise projects. The cost of revenues was RMB million, up 27.8% year-over-year mainly due to investments in infrastructure to support AI growth. IDC costs rose 10.3% year-over-year from RMB 328.2 million to RMB 803.1 million, attributed to increased purchase categories for new AI clusters. Depreciation and amortization costs increased from RMB 265.9 million to RMB 752 million this quarter, reflecting the depreciation of newly acquired high-performance servers linked to our AI business and regular CPU service support for AI customers. Solution development and service costs rose from RMB 491.1 million, influenced by the expansion in solution architecture and delivery personnel. Fulfillment costs and other costs were RMB 25.8 million and RMB 55.8 million this quarter. Our adjusted gross profit was RMB million, up 8.4% year-over-year and 7% quarter-over-quarter, mainly due to revenue scale expansion and increased contributions from AI. The adjusted gross margin improved compared to the second quarter of 2024, although it faced pressure from higher service costs and upfront expenses tied to customer interests in new activities. On the expense side, excluding share-based compensation, total adjusted operating expenses were RMB 560.7 million, a 1% increase year-over-year and 31.2% quarter-over-quarter, with adjusted research and development expenses at RMB 183.1 million, down 8.5% from last year due to personnel adjustments. Adjusted selling and marketing expenses decreased by 6.8% year-over-year. Adjusted general and administrative expenses rose by 12.8% year-over-year, mainly due to credit losses from prepayments to suppliers. Our adjusted operating loss was RMB 166 million, showing an 11.7% improvement from RMB 188.5 million last year, mainly due to share-based compensation adjustments. However, the adjusted operating loss increased from last quarter, largely due to prepayments made to service providers. Our non-GAAP EBITDA profit reached RMB 406 million, a significant increase from RMB 56 million in the same quarter last year, with a non-GAAP EBITDA margin of 73% compared to 3.2% last year, driven by a commitment to cloud computing, strategic business adjustments, and strict cost control. As of June 30, 2025, cash and cash equivalents totaled RMB 464.1 million, providing a solid liquidity position for operations and AI investments, primarily due to our public equity offering and the prepayments from strategic customers. This quarter, CapEx expenditures, including those financed by third parties, reached RMB 135 million, while asset use amounted to RMB 1,664.8 million. Moving forward, AI technology presents real opportunities for cloud computing, influencing demand and encouraging clients to adopt AI capabilities to enhance their business scenarios. Thank you all.

Nicole Shan, Vice Chairman

This concludes our prepared remarks. Thank you for your attention. We are now happy to take your questions. Please answer our questions in both Mandarin and English if possible.

Operator, Operator

We will now take the first question from Wenting Yu from CLSA.

Wenting Yu, Analyst

I'll transfer the question. The first question is about management's outlook and guidance on revenue for the second half of this year and the first half of next year. How is the investment pace in AI and is it driving the infrastructure? Additionally, what are the AI capabilities in that trend across industries like technology and others? Are we seeing large model vendors with more iterations and reduced demand for computing consumption, and which other industries show strong infrastructure? The second question concerns gross margin. This year, we have adopted more leasing of compute resources, which has already impacted gross margin in the second quarter. Looking ahead, do we expect gross margin to continue to decline in the coming quarters? As we use more leasing, what is the current proportion of leased capacity in our overall computing resources, and what is our target for the preferred ratio? Thank you.

Tao Zou, CEO

Let me summarize Mr. Tao's response to the first question regarding expectations for growth in the second half of the year. We anticipate that revenue growth in the second half will be stronger and better than in the first half. Additionally, concerning Xiaomi, I can confirm that we are currently working on providing a larger cluster to meet their ongoing power demand, though I cannot disclose further details due to confidentiality. Regarding market trends, particularly the investment in training versus reference, since the introduction of various new products, different market participants have shown varying investment behaviors. While some continue to heavily invest in training models, including Xiaomi, others have reduced their investment in computing power. Nevertheless, we have observed that some large enterprises have maintained strong demand for inference computing power since last year. Due to confidentiality, it's challenging to provide insights on specific players and customers, but overall demand for AI remains robust. Addressing the question about gross profit margins, this is important and needs to be viewed within the context of our growth model since last year. Our previous model focused heavily on sales procurement, leading to high capital expenditure and gearing ratios, which raised concerns among investors about associated risks. In response, from the second half of 2024, we are transitioning to new models, including a resource pool model and a profit-sharing approach, which should lower our capital expenditure and gearing ratios. While we may see a slight decrease in gross profit margins, I believe we've made a strategic decision in altering our procurement model, which has been successful. Regarding the ratio of self-owned assets to the profit-sharing model, we haven’t disclosed specific figures, but self-owned assets still make up the majority on our balance sheet. Moving forward, we are also exploring a new model for one of our key customers, which I refer to as the agent model. This means we will operate on behalf of our customers by managing procurement, construction, and operations for them. Overall, we will be utilizing three models, selecting the most appropriate based on customer demands and our target balance for gearing ratios, capital expenses, and levels of debt. As we implement these models in the coming quarters, we will gain clearer insight into where our gross profit margins will stabilize. However, for now, I can say that gross profit margins will likely remain at their current levels. Thank you.

Operator, Operator

We will now take the next question from the line of Xiaodan Zhang from CICC.

Xiaodan Zhang, Analyst

My first question is about our capital expenditure plans. Can management provide an update on the capital expenditure plan for this year and the expected AI computing power available by year-end? Additionally, could you share insights on the demand and delivery pace of industry cloud clients, especially since we've seen a year-over-year revenue growth in Industry Cloud that has reaccelerated from the last quarter?

Tao Zou, CEO

For this year's capital expenditure, including sales procurement and lease purchase model, we expect it to total around RMB 10 billion. In the first half of the year, we have spent around RMB 5 billion. We have three models and a strong cash position, so we will adjust our procurement processes and models based on customer demand. We still believe the whole year target is around RMB. The trend for enterprise cloud revenue in Q2 has been growing faster than before. One reason for this is the positive impact of market changes on traditional industries in China, leading to strong demand from sectors such as public services, healthcare, education, and financial services. However, we still have challenges in providing our customers with easy-to-use applications for final lending or software and AI solutions. Therefore, our strategy at Kingsoft Cloud is to focus on a few key areas where we have competitive advantages and work on those solutions to achieve significant breakthroughs before expanding further. As for the trend in the second half, enterprise cloud delivery typically shows seasonality, with the second half generally performing better than the first. We expect revenue growth in the second half to be significantly better and higher than in the first half of this year.

Operator, Operator

We will now take the next question from Citic.

Unknown Analyst, Analyst

I will translate the question. We see that the current chip supply side is undergoing some changes; for example, certain supplies are resuming, and other chips will also be available. At the same time, concerns regarding chip security and reliability indicate that future developments need to be approached with caution. Have we made any adjustments to our chip supply strategy, such as considering domestic production?

Tao Zou, CEO

To your question, we've put a lot of thought into our strategy as we enter the AI generative computing cloud business in 2023. This is influenced by the current geopolitical landscape in the U.S., which is creating significant uncertainties in the supply chain. Given this situation, we are utilizing compliant chips sourced from China and are also keeping a close watch on domestic suppliers to meet our supply chain needs. The restrictions we faced coincided with our equity raise, and their subsequent lifting occurred a few months later, which didn't surprise us given the circumstances. We are actively collaborating with various domestic chip suppliers in China and have made significant progress with a select few. In summary, while there have been fluctuations in supply chain uncertainty, our ability to meet our customers' demands remains unaffected. Our customer base primarily consists of large key accounts, and we believe our strategy and the channels we've established for both domestic and overseas chips are adequate to fulfill demand. Ultimately, the balance between supply and demand largely hinges on domestic chip capabilities and their performance. Personally, I remain cautious; if demand becomes explosive, such as with a groundbreaking application in generative AI, we might face a situation where domestic chip supply could fall short of market demand in the long run.

Operator, Operator

Thank you. I would now like to turn the conference back to Nicole Shan for closing remarks.

Nicole Shan, Vice Chairman

Thank you. Due to time constraints, we come to the end of our earnings call today. Thank you again for joining us. If you have any further questions, please feel free to contact our team. We look forward to speaking with you again next quarter. Have a nice day. Thank you. Goodbye.

Operator, Operator

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