Earnings Call Transcript - KC Q3 2021

Operator, Operator

Good day. Thank you for standing by and welcome to the Kingsoft Cloud Third Quarter 2021 Earnings Conference Call. I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.

Nicole Shan, IR Manager

Thank you, operator. Hello everyone and thank you for joining us today. Kingsoft Cloud third quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com as well as on global newswire services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang; and CFO, Mr. Haijian He. Mr. Wang will review our business operations and accompanying highlights, followed by Mr. He, who will discuss the financials and guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation. All interpretation are for your convenience and reference purpose only. In case of any discrepancy, management statement in original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 20-E of Security 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 expectation and the current market and operating condition and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties or 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 statements as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this call are denominated in RMB. It's now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

Yulin Wang, CEO

Thank you, Nicole and thank you all for joining our third quarter 2021 earnings call. In the third quarter, we generated RMB2.41 billion in total revenues, which was an increase of 40% from the same quarter last year. Our public cloud services revenues reached RMB1.69 billion, an increase of RMB140 million over the second quarter. Our enterprise cloud services revenues reached RMB730 million, up 78% over the same period last year. Since the beginning of 2021, we continue to deliver rapid growth despite market headwinds, regulatory changes and ongoing challenges as everyone adjusts to a new normal as the pandemic continues to evolve. As the largest independent cloud service provider in China, we will continue to execute our growth strategies, strive to become the most trusted cloud partner for our customers and to create the digital future together. Our neutral position enabled us to develop more in depth and extensive collaboration with an expanding base of premium customers and further nurture our multidimensional ecosystem. We believe we will benefit from our long-term thinking and achieve continued and sustainable growth. Now, let me walk you through our performance across our major verticals. I'll start off with public cloud. Despite the challenging market environments, we still achieved faster growth than the industry average this quarter. Leveraging our neutral position, bringing solutions and premium customer experience, we made significant progress, expanding our customer base and diversifying our products and services portfolio, especially for multi-cloud deployments. As mentioned in our last earnings call, Meituan, China's leading local lifestyle service platform has become our new premium customer for public cloud services. Together with other newly engaged premium customers, their data usage increases contributed to our public cloud revenue growth. Following our success with Meituan in Q2, we continued to expand our customer base among top internet companies. We are proud to announce that Pinduoduo, one of the largest e-commerce platforms in China has become our new customer in Q3. We believe such new customer engagement trend will continue and will drive our growth in public cloud services. We proved ourselves to be agile and move quickly to engage with emerging high-quality premium clients amidst the regulation changes. We engaged with Shouqi car-hailing, a leading player which has been rising amidst the shifting competitive landscape. We delivered a full suite of hybrid cloud solutions, including computing resources, DevOps and Big Data products at the path level. In the pan-internet space, we further diversified our offerings beyond video and gaming. We continue to provide public cloud storage services to Qunar.com, one of the leading online travel platforms in China. On top of this, we provided them with more products, such as containers, big data solutions, and bare metal servers. On the gaming front, we are highly recognized by customers for our full cloud services, including game hosting solutions. We signed an agreement with IGGGAMES to support their proprietary blockbuster mobile game, The Clues 2. We help them plan and design their cloud architecture to support game deployments, which resulted in a stable and smooth gaming experience for tens of millions of concurrent players. On the product and technology front, according to the 2020 China Financial Grade Distributed Database Market reports that was published in September by Frost and Sullivan, an internationally authoritative survey agency, our DragonBase database was placed in the Leaders quadrant of their profit radar. Along with other two leading competitors in China, our product was recognized for its visionary technology, excellent product performance, and outstanding monetization. This once again demonstrates the recognition our core PaaS product commands in the industry, including among top global industry research firms. Earlier this year, our Big Data Cloud products were also placed in the leaders quadrant by Frost & Sullivan in their 2020 China Data Management Solutions Market Reports. At the same time, we continue to ramp up our investments in cutting-edge technologies. According to IDC, 50% of data will be processed at the edge by 2023. During this quarter, we improved our app storage capabilities and developed edge storage nodes in Jiangsu province in September, providing strong support for various edge applications. Moving to the Enterprise Cloud segment. Going digital has become essential for many businesses and industries to adapt to new norms. In the financial services sector, we continue to expand our client base and deepen our collaboration with our customers. On the central bank level, we won a bid to build a big data cloud platform to support China's new digital RMB. After winning contracts from Huaxia Bank and China CITIC Bank in Q3, we furthered our cooperation with another top commercial bank and helped it migrate its middle office to the cloud. Our solution enables the smart management of their underlying business data and leads to a 65% efficiency improvement in their big data capabilities and development. As we announced back in August, we agreed to acquire Camelot as a part of our efforts to build out our enterprise cloud service business. Now that we have officially joined hands with Camelot, we will be able to cover all the top 20 banks in China. We will fully consolidate Camelot's SaaS products and solutions into our product portfolio, especially in the risk management, financial compliance and anti-money laundering areas, which have been offered to more than 240 financial institutions. In the health care sector, we have been pioneering new lighthouse projects in Jiangsu and Hubei provinces, among other provinces. In Q3, we kicked off the delivery of the Jiangsu Province medical imaging cloud. This project will be the first to enable provincial level medical image data sharing, expected to connect more than 30 hospitals by the end of this year. Once put into operation, it is estimated that the project will save billions of RMB in medical insurance each year. We're very proud to be able to create such positive social impact together with our customers. We're also making steady progress with our Big Data Cloud project in Hubei province. Meanwhile, we also made significant progress in our health care ecosystem. In one case, we have been cooperating with a leading health care data solution provider. This cooperation has already introduced us to many premium customers, including Ruijin Hospital, which is the fourth largest hospital in China and the largest in Shanghai. Building on this foundation, we plan to expand our collaboration and strengthen our branding resources and service capabilities with more hospitals in China. In the public services sector, we were selected for Phase 4 of Beijing City Cloud projects. The total contract value is approximately RMB85 million. This marks the fifth year in a row that we will provide services for the same project, exemplifying our ability to secure repeated revenues. In addition, we also quickly replicated our successful experience with public services clouds to other parts of China, and one bid for projects from cities in Anhui province and Shandong province, to name a few, which are all in the delivery phase. We won the bid to be the exclusive provider of an urban cloud infrastructure for a city in Hubei province. With a contract value around RMB36 million, we will leverage our leading cloud computing and big data technologies and facilitate the intelligent transformation of the city's public service systems. We also started cooperating with the Shenzhen Big Data Research Institute. With strong policy support, the Institute will integrate big data research resources in Shenzhen, the Greater Bay Area and further across China to facilitate the nationwide advancement of big data applications. Despite some disturbances from the pandemic and power shortages, we are steadily carrying out our project. We're also making progress with new bids and our backlog continues to increase. Within our Enterprise Cloud segment, the integration of Camelot is well underway. As we mentioned in Q2, Camelot has delivered centers in most major cities across China. We have selected six cities to be initial pilot cities for integrated project delivery. In the finance services sector, we have started engaging with nearly 10 banks that Camelot has introduced to us. Our integrated team will provide delivery and services directly to these customers. In terms of ecosystem cooperation, Xiaomi, Kingsoft Group and WPS have all started working with Camelot in various aspects. We will focus our efforts on the finance, health care and public services sectors and we have started with consulting and planning services in the hope of developing a fully integrated one stop suite of solutions. In terms of regulatory backdrop, we have been paying close attention to all new regulations and policies, including the draft regulation on protecting Internet data security that was published by the Cyberspace Administration of China for public opinion. The regulations have yet to be finalized and the effective date is still uncertain. But as we have always emphasized, we manage our business operations in a localized approach within each jurisdiction, and continue to deliver solid progress with data security, privacy, and ESG programs. Unlike companies that possess data of millions of individual users, we focus on serving enterprise customers. In addition, we have fully complied with regulatory requirements, including around data classification and data security. So now, we have successfully obtained ISO 27001, ISO 27017 and ISO 27018, which are the worldwide recognized standards and certification in terms of data security and personal information protection management systems. I will now pass the call over to our CFO, Haijian He, to go over our financials for the third quarter. Thank you.

Haijian He, CFO

Thank you, Yulin. Now I will walk you through our financial performance for the past quarter. Our total revenue reached RMB2.41 billion in Q3, representing approximately 40% year-over-year growth, which is consistently higher than the growth of the major peers in mainland China. Revenue from public health services was RMB1.69 billion, a quarter-over-quarter increase of RMB135.2 million, representing the seventh consecutive quarter revenue increase since our IPO. There were a number of drivers. First, our existing client base remain stable, including our top three clients, in particular. Our neutral position makes it possible to avoid any potential conflicts of interest with our customers, and we have been able to grow together with our customers. Second, we continue to engage with new premium customers. In Q2 this year, Meituan, China's leading internet conglomerate has become our new premium customers for public health services. With the trend continues, we are proud to announce that Pinduoduo, one of the leading largest e-commerce platforms in China has become our new premium customers in Q3. This new client case exemplifies our choice of strategy. Number one, the multiple cloud strategy is gradually more accepted by the market. Number two, these efforts have to diversify our customer base and de-risk the top client concentration risk. And also, clients from non-video related vertical will also help grow our computing business and contribute to the public cloud incremental high-quality revenue growth. Lastly, we were able to dig deeper into the needs of our clients. As Yulin mentioned earlier, we are providing a more diversified portfolio of products and technology through cross-selling, including containers, edge computing and PaaS solutions. Revenue from enterprise cloud services was RMB726.9 million, representing approximately 78% year-over-year growth. We’ve seen a rapid growth in demand in enterprise cloud markets. As demand grew rapidly in enterprise cloud market, we build more flagship projects in the financial services, health care and public service sectors, and replicate our success to more customers. As a result, our client base continues to grow steadily. In the short-term, however, deliver our enterprise cloud projects in some regions in mainland China were affected by the recent wave of pandemic. Although we can deliver technological support of some projects remotely, our team has been unable to deliver on site tasks at some of our client own data center due to travel restrictions. In addition, in Q3, some of our projects were also delayed due to power shortages or limits by local authorities. As a common practice, for enterprise cloud, we implement our public cloud technology to enterprise cloud product environment in the whole IDC centers. Although our public cloud operations were not affected by power shortages, some of our customers saw temporary disruptions to their own private IDC center. This shortened the time available for our team to deliver projects on site and caused certain delays. However, we're happy to see currently the situation has been improving in the process. In line with a strong top line growth, cost of the revenue grew 44% year-over-year to RMB2.33 billion. IDC costs, the largest cost component representing approximately 60.7% of total cost of revenue, grew 33.1% year-over-year to RMB1.41 billion. IDC costs consist of cabinets and bandwidth costs. The costs increased by RMB155.4 million on a sequential basis, which is due to the preemptive storage of underlying resources. Depreciation and amortization costs increased by 28% to RMB200 million, representing approximately 8.6% of the total revenue. Adjusted gross profit was RMB92.2 million compared with RMB114.8 million in the same period of last year. Our adjusted gross margin for this quarter was 3.8% compared with 6.6% in the same period of last year. We would like to offer a bit more color on this short-term volatility. To support the growth of the public cloud business, cloud companies typically purchase servers and lease the data centers in advance based on the forecast of demand from our clients and the market in general at the beginning of every year. However, as many in the audience may have seen, starting from mid of this year, the IT demand from many internet clients in China is growing, but slower than previously market forecasts at the beginning of this year. Therefore, the underlying infrastructure resources have not been fully utilized as targeted. The incremental investment of resources made earlier this year may not be fully monetized in the short-term toward the end of this year, which may impact our business. Due to this reason, for example, the increase of RMB155.4 million in IDC costs this quarter impacted our gross margins this quarter. Our business model and client base remain very robust. And we believe the utilization pattern will naturally be optimized as we see our public cloud demand continue to grow. Total non-GAAP operating expenses were RMB451.2 million, representing a 50.3% increase from Q3 last year, mainly due to the ongoing investments in our business and to maintain our competitiveness. We have provided our core team with competitive compensation and therefore increased personnel expenses. Excluding share-based compensation, adjusted R&D expenses were RMB231.6 million, representing an increase of 51.3% year-over-year. As a percentage of total revenue, it increased slightly from 8.9% in Q3 last year to 9.6% this quarter. Adjusted selling and marketing expenses increased by 37.4% to RMB114.3 million. As a percentage of total revenues, it decreased slightly from 4.8% in Q3 last year to 4.7% this quarter. Adjusted G&A expenses were RMB106.3 million. As a percentage of revenue, it increased from 3.7% in Q3 last year to 4.4% this quarter, although the level is among the lowest in the peers. Accordingly, our adjusted EBITDA loss was RMB140.7 million. Adjusted EBITDA margin was negative 5.8% this quarter, compared with negative 2.5% last quarter. The quarter-over-quarter decrease was due to the decrease in gross profit, the increase in personnel expenses, and one-time costs related to the Camelot transaction. Our adjusted net loss was RMB363.8 million with adjusted net margin at negative 15.1%. As of September 30, 2021, we had sufficient cash and cash equivalents amounting to approximately RMB6 billion. During this quarter, capital expenditures were RMB96.6 million. Since Q4 last year 2020, supply chain pressure has led us to purchase sufficient servers in advance to support our business growth. Based on our current operations and in pursuit of higher operational efficiency, we will take a very disciplined approach to capital expenditures for the second half of this year. In addition, the service delivery and payment cycle also led to a relatively low CapEx in Q3. However, we do think the full year CapEx will be at a similar level compared with last year. In addition, we have received great endorsement from regulators as evidenced by obtaining unconditional approval for the Camelot transaction from the National Anti-Monopoly Bureau, aka SAMR State Administration for Market Regulation of China. The approval process was completed within about one month, which is significantly faster than the regular review timeframe, especially considering today's market regulation environment. In October, we submitted F3 filings regarding the registration of shares related to the transaction, and we have now completed the transaction and begun integration of the two teams. Camelot brings us over 500 premium customers and a wealth of industry know-how, especially in industries such as Internet, financial services, consumer retail and manufacturing, among others. Camelot has delivery hubs in multiple key cities across China. Their local teams will deliver future enterprise cloud projects directly and improve our execution capabilities as a whole company. We believe significant synergies will be further unleashed into next year. Looking ahead, we expect our total revenue to be between RMB2.63 billion and RMB2.83 billion for the fourth quarter of 2021, representing a year-over-year increase of 37% to 47%. This is based on our current and preliminary views on the market and operational conditions, which are subject to change. Lastly, we held our first Investor Day event after the IPO on October 21 this year. Representatives from our key account clients, ecosystem partners, and industry leaders joined our senior executives and discussed industry trends and our recent developments, including senior executives and clients from the National Health Commission, China Construction Bank, Camelot, and others sharing diverse perspectives. We are committed to improving our business transparency, bringing sustainable values to our stakeholders and delivering long-term value to our shareholders.

Nicole Shan, IR Manager

This concludes our prepared remarks. Thanks for your attention. We're now happy to take our first question. Please ask your question in both Mandarin and English, if possible. Operator, please go ahead. Thank you.

Operator, Operator

Your first question comes from Brian Gong from Citi. Please ask your question.

Brian Gong, Analyst

I will translate myself. Good evening management. Thanks for taking my questions. My question is regarding the enterprise cloud. I understand our enterprise cloud segment was impacted by power shortage and the pandemic, given pandemics largely under control and the power shortage largely eased, have we seen any accelerating projects delivery? Should we see enterprise cloud revenue growth to go back to normalized level for next year? And what growth level we should expect? Thank you.

Yulin Wang, CEO

The CEO, Mr. Yulin Wang, responded that there are two main factors impacting our enterprise cloud segments: power shortages and the pandemic. Regarding the power shortage, this was a significant issue in Q3. In our public cloud segments, the data centers had a relatively high level of protection and most had backup power, so they were not adversely affected. However, for the enterprise and industrial cloud segments, the private data centers, which are usually customer-designated, were impacted on a case-by-case basis. While the power shortage has largely been resolved, there may still be ongoing pressure regarding carbon emission controls and potential policies affecting data center construction and power usage. For now, the short-term power shortage issues have been alleviated, allowing us to move forward with enterprise cloud deliveries in Q4. As for the pandemic, it continues to affect some cities, with strict government measures causing delays in our deliveries. Nonetheless, the overall demand for our enterprise cloud remains strong, and our backlog continues to grow. We've been actively seeking solutions to mitigate these delays by utilizing local teams across China to improve delivery efficiency and adjusting our delivery schedule to recover lost time due to power shortages and pandemic restrictions. Overall, the industrial cloud is experiencing significant growth driven by strong demand. Thank you.

Brian Gong, Analyst

Thank you. That's very helpful.

Operator, Operator

Our next question comes from Liping Zhao from CICC. Please ask your question.

Liping Zhao, Analyst

Good evening, management. I have three questions here. We've seen a cool down in the public cloud space this year. And so my first question is what's your opinion on the next 2 to 3 years market growth and what will be the company's organic growth drivers and targets to achieve. And second question, this year, our gross margin has seen some pressure caused by upfront infrastructure and our delay in revenue recognition. My question is, when do the utilization rates to catch up and what's your budget for next year's CapEx? And lastly, we do wonder how is the collaboration with ByteDance going so far? Thank you.

Yulin Wang, CEO

Okay, to quickly summarize for your question regarding growth prospects in public and enterprise cloud, I will start with the public cloud. We have observed that this year, public cloud demand has slowed down. We believe this is due to two main reasons. First, there was a high demand last year due to the pandemic which created a significant surge in cloud services. However, this is not a new factor this year. Second, since the beginning of this year, new regulations from the government have been affecting many of our customers and the industries we work with. These customers will need time to comply with these regulations. We see this as a short-term impact as the regulatory environment becomes clearer and more manageable. Looking at the long term, we observe that our customers are beginning to explore new verticals, particularly in entertainment, video, and gaming, coinciding with the increased deployment of 5G technology. Concepts like the metaverse are also gaining traction, along with the volume of related hardware increasing and technology evolving rapidly. We believe the internet sector is cyclical and expect to enter a new growth cycle in the next one to two years that should exceed the historical average growth rate for the sector. We have acquired a significant number of new customers this quarter despite market challenges. This is largely due to our neutrality and alignment with the multi-cloud trend, making us a preferred choice for customers seeking new cloud vendors. Our customer base, both in volume and relationship depth, remains strong, providing a solid foundation for the company. Regarding the industry cloud, as I mentioned in response to CITI’s question, market demand stays strong and we perceive the demand for digitalization as inelastic. We anticipate this trend will persist for the foreseeable future in our chosen verticals, allowing us to continue growing our customer base and revenue. As for our collaboration with ByteDance, we have a long-standing partnership that dates back to the rapid growth of short video content in China, including applications like TikTok, which has positioned us as a trusted partner. We have recently entered into comprehensive partnership agreements with Volcano Engine, a ByteDance entity, to leverage our respective strengths for mutual benefit. More recently, we have also been working with the Alien software for identity authentication, exploring ways to enhance its application. Additionally, there are partnerships between WPS, Kingsoft, and ByteDance, reflecting our strong and multifaceted relationships within these ecosystems. Thank you.

Haijian He, CFO

Thank you, Yulin. I will briefly address a second question and share a few points. Firstly, this year, you might have noticed that the pricing environment, particularly on the supply side and for our clients, has remained very stable. As we assess our major products, both our contribution margin and gross margin have been stable as well. This stability is not the reason impacting our gross margin in Q3. Secondly, in the enterprise service or B2B sector in China, procurement is typically negotiated annually. As we are currently in Q4, we are already in the process of negotiating pricing, terms, volume, and quality with our major suppliers. We are also gathering IT budgeting information from our key accounts. Hence, we believe that next year we can conduct a proper analysis to align demand and supply, thereby improving utilization. We aim to gradually resolve the resource mismatch by the end of this year. Next year, with new annual contracts for some key clients and vendors, we can further address the pricing and gross margin impacts. There will be a short-term effect. Regarding next year and CapEx, we will prioritize spending on high-quality potential revenue streams. For instance, rather than investing in high-end CPUs or GPUs for CDN services, we will focus our expenditures on high-quality procurement arrangements, which we believe will lead to significant revenue opportunities. Additionally, during our recent Investor Day event, which Intel co-hosted, we shared valuable information about our partnerships with key vendors to secure robust infrastructures. Lastly, we will continue to develop our own infrastructures. Recently, we successfully completed the first phase of the Tianjin Data Center on schedule. We are planning for the second phase next year to add a new revenue stream for public cloud opportunities. To summarize, we are seeing an incremental revenue growth of 100 million in our public cloud business, which will help mitigate the effects of the resource mismatch and gradually improve our gross margin moving forward. Thank you.

Operator, Operator

Thank you. Your next question comes from Thomas Chong from Jefferies. Please ask your question.

Thomas Chong, Analyst

Thank you to management for addressing my questions. My first question is about our new customers this year. We have added Meituan and Pinduoduo, both major players in the internet sector. I would like to understand their revenue contribution over the next couple of years as they grow within Kingsoft Cloud. My second question relates to our long-term expectations regarding revenue, margins, and the balance between appropriate and enterprise costs. Additionally, considering the impact of Beijing on various businesses, I would appreciate any insights into the contributions from Beijing or any qualitative information. Thank you.

Yulin Wang, CEO

So thank you very much for the question. And I think, as you pointed out, the larger internet names, like you mentioned, Meituan and Pinduoduo and Juhu, the multi-cloud deployment for them is an inevitable choice, both from a technology perspective and from a business or commercial perspective. And as mentioned, Kingsoft's Cloud, as a professional and neutral cloud provider, is also their inevitable and top choice. We do think, currently, the revenue and growth of these customers have been very stable. Unfortunately, we don't have detailed numbers as for a percentage of revenue, but we do see them continue to grow very stably and on good trends. Now, in terms of the macro environment, uncertainty that I mentioned, also split into public cloud and enterprise cloud spaces and to discuss briefly, respectively. In the public cloud space, as mentioned, I do think it's going to be a short-term impact. And once this is over, it is going to enter into a larger business cycle, where we expect to see growth accelerate. In the industry cloud space, the demand remains very strong. And two of the factors affecting this are power shortages, and the other is pandemic. The power shortage has already been largely resolved. The pandemic impact has been alleviated. Our way to fight these negative impacts is leveraging Camelot's local teams to try our best to catch up with the progress and to deliver revenue. Now, as I mentioned before, the impact on Beijing, actually, because we're locally based in Beijing. So we do not really have any material impact in the Beijing projects, due to the pandemic control measures. Thank you. And I leave the margin questions for Haijian to answer. Thank you.

Haijian He, CFO

Thank you, Yulin. Thank you, Clark. Very quickly on the margin. So first of all, I want to mention that we still keep the same intention to deliver improving margin profile for the long-term. So both gross margin and non-GAAP EBITDA margin, one of the priorities, while we think about next year's budget. So that's why, as I just mentioned, when we think about the demand, think about supply side, think about the pricing environment and also how we optimize our personnel expenses. These are the key priorities for next year's budgeting process as we are doing today. So that's why we probably at this moment, for this earnings call will not give a very clear guidance for the EBITDA margin regular timing. But as some in the audience may remember, we did have the intention to have that margin improvement to be delivered in the near term. And this is first point. The second point, I think, given the high-quality revenue opportunities is also our key areas to focus for next year. So when we think about capital expenditures, and how they're converted into the revenue opportunity and how that impact both on gross margins and D&A expenses, we did a very thorough analysis and look at that impact for the margin improvement. So as a result, we want to say at this moment is, I think for next year, hopefully, we'll see on an annual basis, both gross margin and non-GAAP EBITDA margin, we'll see improvement compared with this year on an annual basis. I think we remain confident in that objective. However, the timing and scale of that, hopefully, we can communicate once we complete the prudent budgeting process for next year. Thank you.

Thomas Chong, Analyst

Thank you.

Operator, Operator

We will take the final question from Kyna Wong from Credit Suisse. Please ask your question.

Kyna Wong, Analyst

Thank you for taking my question. The first question is actually we are looking for more visibility or idea from the company on the path and capability enhancement in the future. I mean, even after our cooperation with ByteDance. And the second question is about what kind of IDC policy change that may impact the public cloud? Obviously, the IDC suffers from the render as well or your own business, like enterprise cloud. So thank you.

Yulin Wang, CEO

So in terms of tax capabilities, in fact, our tax capability in terms of particular verticals, for example, financial services, health care and big data capabilities, we have actually become more and more leading in the among our peers. And also we have seen increasing revenue percentage and the promotion of margin it has brought to us in our business. Now, we do believe that we will continue to increase our investment and development of PaaS capabilities in those areas, in those verticals that we choose to focus on. However, we don't think this is in any way in conflict with our cooperation with Volcano Engine or ByteDance. In relation to your question about IDC policy, we do not really think any policy changes will have any material impact on the public cloud IDCs. As explained earlier, we do think that the public cloud IDCs generally have relatively high standards, and they have been built according to the latest government policies and guidelines, including the IDCs that we built ourselves, and then we do not think they are going to be negatively affected. In terms of the IDCs for enterprise cloud customers, the impact mainly came because of the abruptness of the policy change from the government, i.e. the power shortage. And we do think that in the future, they will be able to adjust to any policy changes in that space as well. Thank you.

Operator, Operator

At this point, I would now like to hand the call back to Nicole Shan for the closing remarks.

Nicole Shan, IR Manager

Thank you, operator, and once again, thanks everyone for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Bye, bye.

Operator, Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.