Paradigm Shift of Kingsoft Cloud
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Cloud computing services have emerged alongside the development of mobile Internet and becoming the infrastructure technology in the Internet era. Notably, with the emergence of Artificial Intelligence (AI), the demands for computing power and solutions have never been larger, representing a new growth wave for cloud companies. As a leading independent cloud service provider in China, during the past two years, Kingsoft Cloud (NASDAQ: KC, HKEX: 3896) has firmly executed the "high quality and sustainable development" strategy, embracing AI technology and enhancing profitability. The company has undergone a complete transformation, maintaining a competitive edge in the ever-evolving market landscape.
Changes are happening here.
Driven by the “long-term and sustainable development” strategy, Kingsoft Cloud’s profitability has been improved, as gross margin steadily increased from low-single-digit to 17%, EBITDA margin increased to 3% after turning positive in Q1, and well on track to turn operating and net profit positive. In particular, this quarter the company’s revenues reached RMB1.89 billion, not only a sequential growth of 6.5%, but also a year-over-year expansion of 3.1%; revenue from high-value-added products and services has grown, offsetting pressure brought by our proactive adjustments of the CDN services. The company has entered into a healthy and sustainable development stage.
This new round of AI-services' revenue contribution to public cloud increased from zero to approximately 26%. What makes KC stand out in AI era is the company’s position within the Xiaomi and Kingsoft ecosystems. AI revenues are highly correlated with the ecosystem business. Xiaomi and WPS AI are the most typical AI use cases that have clear commercialization opportunities. Kingsoft Cloud acts as the strategic gateway for AI computing power within the ecosystem, fostering further collaboration with Xiaomi and Kingsoft. As a result, Kingsoft Cloud is poised to benefit from its strategic partnerships with Xiaomi and Kingsoft.
Besides Xiaomi and Kingsoft, Kingsoft Cloud also cooperated with 6 out of TOP 10 independent Large-Language-Model (LLM) ventures, according to public funding information. These fast-growing Large-Language-Model companies have been establishing large-scale computing clusters with Kingsoft Cloud to train their models. Most of these LLM companies have cooperated with Xiaomi and WPS AI, offering more opportunities for Kingsoft Cloud’s AI services.
On the other hand, with all these strong AI market demands, Kingsoft Cloud also prepare the computing resources well. The total capital expenditure in the past four quarters has achieved around RMB3 billion. Furthermore, funding support from partners such as Xiaomi and Kingsoft, including financial leasing arrangements, has bolstered Kingsoft Cloud's financial position. This support has reduced the need for external financing and lowered financing costs, further supporting profitability.
In terms of Content Delivery Network (CDN) services, In the past, CDN services are the most significant revenue streams of Kingsoft Cloud, contributing over half of total revenues. However, after the proactive scaling down of this low-margin revenue streams catering to top clients in the short-form video sector in 2023, CDN services contribution has been recalibrated to approximately 19% of total revenues in the second quarter of 2024. As a result of such shift in business focus, the company is less affected by the fierce price competition in the CDN market.
Meanwhile, taking long-term perspectives, as Wuhan Research & Development Center quickly scaled up to approximately 600 people (including part-time staff), accounting for more than one-third of the company’s R&D team and, laying a solid foundation for sustained technological leadership.
Mr. Henry He, Executive Director and Chief Financial Officer commented that, “After two years of steadfast implementation of the "high-quality and sustainable development" strategy, Kingsoft Cloud's fundamentals have undergone a complete transformation. This quarter our company has achieved growth in both revenues and profits. Total revenues returned to year-over-year growth track, arriving at RMB1,891.8 million. Adjusted gross margin was 17.1%, significantly increased by 5.8 percentage points from 11.3% in the same quarter of 2023. Looking ahead, we will continue to enhance revenue quality, reduce costs and expenses, and improve profitability.”
In conclusion, Kingsoft Cloud's strategic optimization efforts, coupled with its partnerships within the Xiaomi and Kingsoft ecosystems and focus on higher-margin revenue streams, position the company for sustained growth in both revenue and profitability. As a dual primary listing company on both the NASDAQ and Hong Kong Stock Exchange, as well as member of the Hang Seng Composite Index and Hong Kong Stock Connect, Kingsoft Cloud also solidified its presence in the capital markets. As the demand for cloud services continues to rise in AI era, Kingsoft Cloud is well-positioned to capitalize on opportunities in the dynamic digital landscape.