KINGSOFT CLOUD(KC) - 2023 Q3 - Quarterly Report

Kingsoft Cloud Third Quarter 2023 Financial Results Management Commentary Management highlighted a successful AI strategy, improved profitability for the fifth consecutive quarter, and positive operating cash flow amid a strategic CDN scale-down - The company's AI strategy shows positive results with rapid growth in AI business revenue and a strong pipeline[2] - Kingsoft Cloud is strategically reducing its CDN business, with revenue from the largest CDN customer decreasing to 12% in Q3 2023 from 16% in the prior quarter[2] - Adjusted gross margin reached a record high of 12.1%, marking the fifth consecutive quarter of growth and a 5.8 percentage point increase YoY[2] - The company achieved a positive operating cash inflow of RMB 20.4 million, its second consecutive quarter of positive operating cash flow[2] Third Quarter 2023 Financial Highlights The company's revenue declined due to a CDN scale-down, but gross profit surged and gross margin expanded significantly, while the Non-GAAP net loss narrowed YoY Q3 2023 Key Financial Metrics (YoY) | Metric | Q3 2023 (RMB million) | Q3 2022 (RMB million) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | 1,625.2 | 1,968.8 | -17.5% | | Gross Profit | 196.2 | 122.4 | +60.3% | | Gross Margin | 12.1% | 6.2% | +5.9 p.p. | | Operating Loss | (804.8) | (504.2) | Increased | | Net Loss | (789.7) | (801.4) | Narrowed slightly | | Non-GAAP Net Loss | (313.3) | (530.7) | Narrowed 41.0% | Revenue Analysis Total revenues declined 17.5% YoY, driven by a strategic scale-down in public cloud services, while enterprise cloud revenue saw a minor decrease Q3 2023 Revenue Breakdown (YoY) | Revenue Stream | Q3 2023 (RMB million) | Q3 2022 (RMB million) | YoY Change | | :--- | :--- | :--- | :--- | | Public Cloud Services | 1,016.6 | 1,346.0 | -24.5% | | Enterprise Cloud Services | 608.5 | 622.0 | -2.2% | | Total Revenues | 1,625.2 | 1,968.8 | -17.5% | - The overall revenue decline was primarily a result of the company's proactive decision to scale down CDN services and phase out loss-making clients[3] Cost and Profitability Analysis Reduced cost of revenues, particularly IDC costs, drove a significant increase in gross profit and a notable expansion in gross margin across both segments - Cost of revenues fell 22.6% YoY, with Internet Data Center (IDC) costs decreasing significantly by 31.6% from RMB 1,078.3 million to RMB 737.7 million[4] Q3 2023 Gross Profit and Margin by Segment (YoY) | Segment | Gross Profit (RMB million) | Gross Margin (%) | | :--- | :--- | :--- | | Public Cloud (Q3 2023) | 48.1 | 4.7% | | Public Cloud (Q3 2022) | (22.1) | -1.6% | | Enterprise Cloud (Q3 2023) | 147.3 | 24.2% | | Enterprise Cloud (Q3 2022) | 143.8 | 23.1% | Operating Expenses and Losses Operating loss widened due to a significant one-time asset impairment charge, though core operating expenses decreased YoY from cost control measures - The company recorded an impairment of long-lived assets of RMB 468.5 million, mainly attributable to the public cloud asset group[9] Q3 2023 Operating Expenses (YoY) | Expense Category | Q3 2023 (RMB million) | Q3 2022 (RMB million) | YoY Change | | :--- | :--- | :--- | :--- | | Selling and marketing | 116.4 | 143.4 | -18.8% | | General and administrative | 215.7 | 235.1 | -8.3% | | Research and development | 200.4 | 248.1 | -19.2% | Net Loss and EBITDA Non-GAAP net loss and Normalized Non-GAAP EBITDA loss both narrowed significantly, indicating improved underlying profitability despite the reported GAAP net loss Q3 2023 Profitability Metrics (YoY) | Metric | Q3 2023 (RMB million) | Q3 2022 (RMB million) | | :--- | :--- | :--- | | Net Loss | (789.7) | (801.4) | | Non-GAAP Net Loss | (313.3) | (530.7) | | Normalized Non-GAAP EBITDA | (44.1) | (202.0) | - Basic and diluted net loss per share was RMB 0.22, the same as in the third quarter of 2022[11] - As of September 30, 2023, the company had cash, cash equivalents, and short-term investments totaling RMB 2,612.1 million[11] Financial Statements The unaudited statements detail the company's financial position, performance showing improved gross profit, and positive operating cash flow Unaudited Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and liabilities compared to year-end 2022, with cash and equivalents at RMB 2.6 billion Key Balance Sheet Items | Account | Sep 30, 2023 (RMB thousands) | Dec 31, 2022 (RMB thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | 2,612,058 | 3,419,166 | | Total current assets | 6,568,591 | 9,048,353 | | Total assets | 14,110,374 | 17,316,231 | | Total current liabilities | 5,610,196 | 6,658,626 | | Total liabilities | 6,621,315 | 7,732,732 | | Total equity | 7,489,059 | 9,583,499 | Unaudited Condensed Consolidated Statements of Comprehensive Loss The income statement reflects improved gross profit, but a significant asset impairment led to a substantial operating and net loss for the quarter Q3 2023 Income Statement Highlights (RMB thousands) | Line Item | Three Months Ended Sep 30, 2023 | | :--- | :--- | | Total revenues | 1,625,208 | | Gross profit | 196,240 | | Total operating expenses | (1,001,075) | | Impairment of long-lived assets | (468,535) | | Operating loss | (804,835) | | Net loss | (789,718) | Unaudited Condensed Consolidated Statement of Cash Flows The company generated positive cash from operations for the second consecutive quarter, though cash used in financing led to a net decrease in cash Q3 2023 Cash Flow Summary (RMB thousands) | Activity | Three Months Ended Sep 30, 2023 | | :--- | :--- | | Net cash generated from operating activities | 20,372 | | Net cash generated from investing activities | 165,089 | | Net cash used in financing activities | (1,263,894) | | Net decrease in cash | (1,078,433) | Reconciliation of GAAP and Non-GAAP Results This section reconciles GAAP to Non-GAAP results, highlighting key adjustments like asset impairment that show a narrower Non-GAAP net loss Q3 2023 Reconciliation of Net Loss to Non-GAAP Net Loss (RMB thousands) | Description | Amount | | :--- | :--- | | Net Loss (GAAP) | (789,718) | | Add: Share-based compensation | 28,102 | | Add: Foreign exchange loss (gain) | (20,200) | | Add: Impairment of long-lived assets | 468,535 | | Adjusted Net Loss (Non-GAAP) | (313,281) | Q3 2023 Reconciliation to Normalized Adjusted EBITDA (RMB thousands) | Description | Amount | | :--- | :--- | | Adjusted Net Loss (Non-GAAP) | (313,281) | | Adjustments (Interest, Tax, D&A) | 267,879 | | Adjusted EBITDA | (45,402) | | Add: Loss on disposal of property | 1,324 | | Normalized Adjusted EBITDA | (44,078) | Supplementary Information This section provides details on Non-GAAP measures, exchange rates, forward-looking statements, and conference call information - The company uses Non-GAAP measures such as Non-GAAP gross profit, Non-GAAP net loss, and Non-GAAP EBITDA to evaluate operating performance, excluding items like share-based compensation and impairment charges[15] - The RMB to US$ exchange rate used for convenience in this report is RMB 7.2960 to US$ 1.00, the rate on September 29, 2023[17] - The report includes a safe harbor statement, cautioning that forward-looking statements are subject to inherent risks and uncertainties[18]