Aurora Mobile Ltd (JG) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Aurora Mobile Second Quarter 2020 Earnings Conference Call. (Operator Instructions) After speakers' presentation, there will be a question-and-answer session. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host today, Mr. Rene Vanguestaine. Thank you. Please go ahead, sir.

Thank you, AJ. 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 3 will be available to answer your questions during the Q&A session that will follow.

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/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 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 call over to Mr. Luo. Please go ahead.

Thanks, operator. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile's Second Quarter 2020 Earnings Call.

Before I proceed, may I share with everyone that for the very first time, we have uploaded the quarterly earnings deck onto our IR web page under Webcasts & Presentations section for your reference. You may refer to the deck as we proceed with the call today.

Since the end of 2019, as highlighted in our last earnings call, we took the initiative to further strengthen our core competency. I'm pleased to share that our strategic decision to focus on Developer Services and Vertical Applications has produced excellent results as of the day. Later in this call, Fei, Shan-Nen and myself will take turns to elaborate more on this from different angles.

Let's begin our review with highlights for our key operating and financial performance for the second quarter of 2020. First, the number of mobile apps utilizing at least one of our Developer Services or the cumulative app installations reached 1.55 million as of June 30, 2020, from approximately 1.29 million last June. This represents an average of 18,000 new apps coming onboard every month during the quarter. We are developers' first choice service provider when it comes to push service in China.

Second, cumulative SDK installations increased by 53% to 40.6 billion as of June 2020 from 26.6 billion in June 2019. This is mainly attributable to both the impact of developers using our subscription-based Developer Services and the wide adoption of JVerification SDK. Further, the number of monthly active unique mobile devices we cover continued to increase, reached 1.39 -- 1.38 billion in June 2020 from 1.13 billion in June 2019.

Lastly, in the second quarter of 2020, we saw the number of paying customers increase to 2,396 from 2,211 a year ago. Under the Q2 2020 financial numbers, please refer to our presentation deck for key financial highlights.

Our strategic focus to drive our SaaS business, which include the Developer Services and Vertical Applications, generated a significant return on investment in this quarter. These businesses recorded impressive revenue of CNY 66.5 million, a 35% growth for both year-over-year and quarter-over-quarter; and gross profit of CNY 50.8 million, a 43% year-over-year and 39% quarter-over-quarter growth, even though the overall margin remained challenged by the impact of COVID-19 pandemic.

In building on the great momentum for the first quarter, Developer Services was once again the highlight for the quarter with its impressive performance. We recorded net CNY 45.8 million in revenue for Developer Services, a new historical high in terms of quarterly revenue. This revenue includes both Subscriptions and Value-Added Services and recorded a phenomenal 127% and 46% revenue growth year-over-year and quarter-over-quarter, respectively, on the back of increase in both ARPU and customers' numbers. Equally impressive was the gross profit from Developer Services of CNY 35 million, which represented 142% and 50% year-over-year and quarter-over-quarter growth, respectively.

For Subscription Services, we continue to see more customers signing up to our suite of Developer Services. New and renewal customers include, but are not limited to, Tesla, Starbucks, China Telecom, China Everbright Bank Credit Card Center, Ping An Health, [Ping An Tech, Chong Hing and Chiyu Bank]. Subscriptions revenue was CNY 30.7 million, a significant increase of 52% year-over-year primarily driven by increase in both the number of customers by 34% and ARPU of 14%.

Value-Added Services, which includes revenue from advertisement SaaS and JIGUANG alliance services, have also recorded another quarter of impressive results. The revenue from Value-Added Services also resulted in phenomenal growth of 134% quarter-over-quarter or CNY 6.4 million in Q1 2020 to CNY 15 million in this quarter. We noted that both the ARPU and customer numbers have grown by more than 50% within the quarter. Key customer of our Light-Push services in the quarter included Weibo, [Flickr], Tencent Video and JD. The strong performance was primarily driven by wide adoption of such services like mini program and e-commerce developers.

Here, I would like to provide some additional insight on the contribution of the legacy Targeted Marketing business. In the second quarter, Targeted Marketing business only contributed 49% and 5% of the revenue and gross profit, respectively. This was down significantly from 61% revenue contribution and 12% gross profit contribution in the last 2 quarters. As we march towards winding down the legacy Targeted Marketing business, their contributions are expected to be insignificant going forward.

Now I will turn the call to Fei, who will discuss the Q2 performance of the 3 business lines within Vertical Applications in more detail.

Thank you, Chris.

The combined revenues from Vertical Applications, including market intelligence, financial risk management and iZone, increased by 16% from CNY 17.8 million in the first quarter of this year to CNY 20.7 million this quarter.

Revenues from market intelligence products grew by 15% quarter-over-quarter mainly fueled by growth in the number of customers. Recently, we launched another product, an iAPP mini program version that allows customer to obtain insights into different analytics of mini programs in China. In the quarter, new investors and former customers include many long funds and also hedge funds. And the new corporate customers include [BABA], Meituan, Xiaomi, Agricultural Bank of China, et cetera.

For the financial risk management segment, revenue increased by 26% quarter-over-quarter. This is due to the quarter-over-quarter recovery in demand for our products in the financial sector as the market recovers from the coronavirus. And the 26% growth in revenue was mainly fueled by the improvement in ARPU, which indicates customers are using our service more in the quarter.

And then lastly, our iZone business also showed signs of recovery from the impact of the coronavirus as shopping malls and the tourist sites reopened during the second quarter. In addition, we saw increased demand for our iZone products in the coffee development sector during the quarter.

With that, I will now pass the call to Shan-Nen.

Thanks, Fei. Since Chris and Fei already talked about our top line numbers for this quarter, I'll go through some of other P&L items.

Despite the tougher-than-expected business environment in the second quarter of 2020, we managed to grow our gross profit -- our gross margin to historic high of 41% compared with 33% sequentially and a significant increase from 26% during the same period last year. This record-high 41% gross margin in Q2 2020 was a direct result of the following 2 initiatives that we undertook and we executed well.

One, we continue to focus and invest in the Developer Services and Vertical Applications. As we have previously shared, the gross margin for our Developer Service and Vertical Application has been in the range of 70% to 76% for the past 5 quarters.

Second, a ship away and the winding down of our legacy Targeted Marketing business, which generally had low single-digit gross margin. As a percentage of revenue, Developer Service and Vertical Application accounted for 51% during the quarter, a significant increase from 17% during the same period last year. Targeted Marketing, on the other hand, accounted for 49% of total revenue during the quarter, down from 83% during the same period last year. On gross profit contribution, Developer Service and Vertical Application accounted for 95% of gross profit compared with Targeted Marketing, which accounted for only 5% of gross profit during the quarter.

I'll now recap our achievement for the first half of 2020. One, we have successfully transitioned our business to a SaaS-nature, high-margin business. Our SaaS business, which includes both the Developer Service and Vertical Application with the majority of our revenue, more than 51%, and the profit being contributed by this business. Second, our SaaS business has activated significant growth trajectory with 33% year-over-year and 33 -- 35% quarter-over-quarter growth. Third, more impressive was the growth of Developer Services, which recorded 127% year-over-year growth in the quarter. Fourth, we have recorded a new all-time record-high gross margin of 41% in the second quarter. Fifth, we expect that our SaaS business, which includes both the Developer Service and Vertical Application, will continue to underpin the foundation of our business and provide solid revenue growth and higher gross margin going forward.

Next, on to the operating expenses. Total operating expenses increased by 4% year-over-year to CNY 89.8 million (sic) [CNY 98.8 million]. In particular, R&D expenses stayed relatively flat at CNY 46 million. Selling and marketing expenses decreased by 12%. G&A expenses increased by 37%.

Based on the solid financial results delivered and contributed in Q1 and Q2 of 2020 by our high and stable gross margin in Developer Service and Vertical Application, we believe that we have now -- we now have the right strategy in place to further improve our business and our financial performance going forward. This is evidenced by the following KPIs: one, higher percentage of revenue contribution from Developer Services and Vertical Applications; two, continued improvement year-over-year and quarter-over-quarter in gross margin; three, OpEx growing at a much slower pace than revenue and gross profit; four, all of the above resulted in a 40% improvement in our adjusted EBITDA, where it was a negative CNY 18.3 million during the quarter compared to negative CNY 30 million -- CNY 30.3 million in the last quarter.

On to the balance sheet item. Total assets were CNY 879 million as of June 30, 2020. This includes cash and cash equivalents of CNY 416 million, account receivables of CNY 66 million, prepayments of CNY 44 million, fixed assets of CNY 100 million, long-term investment of CNY 213 million.

Total current liabilities was CNY 438 million. This includes accounts payable of CNY 16 million, deferred revenue of CNY 98 million, accrued liabilities of CNY 85 million and convertible notes of CNY 239 million.

Lastly, before I conclude, I'll give an update on the share repurchase plan. In the quarter ended June 30, 2020, we did not repurchase any shares. As of June 30, 2020, cumulatively, we have repurchased a total of 921,000 ADS during -- since the start of our repurchase program.

And this concludes the management's prepared remarks. We're happy to take the call now. Operator, please proceed.

(Operator Instructions) The first question comes from the line of Ryan Roberts.

I had a couple of quick questions. I hope you can indulge me a bit here. First thing is I just want to get a sense of the -- yes, on the cost line there for kind of the sales and marketing. I recall one of the advantages of shifting to the new SaaS billing was to kind of have less customer relationships to manage, so to speak, kind of working with the larger platforms and apps that you mentioned earlier. I want to get a sense of what's happening kind of on the sales and marketing line there kind of this quarter and, maybe kind of more broadly, what's happening in the other kind of fixed expense line.

So Ryan, just to recap, your question is relating to sales and marketing expenses for the quarter, right?

Yes. Yes.

Yes. I guess because, as you know our business, majority of our sales and marketing is relating to sales, not marketing. So the slight increases in connection with the increase in revenue for the Developer Service and the -- yes, the SaaS business for Developer Service and Vertical Application, so those are majority tied to the increase in that particular business.

Okay. But I guess kind of as we look forward here kind of down the pipe, obviously, again, with the business model of having less kind of customers to manage and corral, it seems like there should be some leverage there for that item. I mean there should be leverage across all kind of main cost lines there, but it just looks like kind of with the transition, we haven't really seen much of that yet. I know the kind of sales and marketing has come down a little bit kind of Y-o-Y but not very much. And I just was expecting kind of as you trim down the sales force to manage less accounts, that, that should have improved a bit more. I'm just kind of curious why we're not seeing that.

No. I don't believe that would be the case because we still need to have a lot of salesperson to [BD] the Developer Service segment of the business, right? So those are the things that tie to the selling expenses. So we do not see a dip -- we do not expect to see a dip in selling and marketing expenses while we grow our Developer Service. So it doesn't go that way.

Okay. So it sounds like, I guess, head count is going to stay roughly flat. I must have misunderstood in the previous conference call when you were mentioning that selling to -- directly to platforms, working directly with platforms was less manpower intensive than having your direct Targeted Marketing business. I must have missed that. Okay.

And then just kind of -- maybe kind of sticking with the kind of the cost kind of stuff for a second. I saw working capital came down quite a bit. I just want to get a sense of as you kind of go forward, is that a level we can kind of expect to normalize out or kind of -- maybe if there's some more improvement there? Any kind of color you can share on the capital intensity of the new business model, appreciate it.

Sure. Probably we do not disclose the cash flow for this quarter. But if you look at -- based on our cash flow statement, for this quarter, we did have a cash inflow -- operating cash inflow of more than CNY 50 million. And this is by far the best quarter that we have in terms of cash inflow in -- at the operating level. So that is [at our sight].

If you look at the investment that we required to make, no, we do not expect to have a huge investment in, say, like servers or some other fixed CapEx anymore. I guess the only -- the reason why the working capital this quarter looks a bit smaller is because of the fact that we reclassified the convertible notes from long-term liability to short term because we are required to potentially repay the convertible notes by next April. So it's accounting that we adjust the classification of the [CB].

So in terms of cash -- so in terms of operating assets -- operating cash flow, where we're comfortable at where we are, and based on the fact that we are moving into SaaS business, we are no longer required to do what we did for Targeted Marketing, where we prepaid the media, where we have to give credit to our Targeted Marketing customer. So this SaaS business is good for us operationally in terms of cash flow, in terms of gross margin. So we are very comfortable where we are right now.

Got it. Yes. I was referring more -- I saw the AR came down significantly. So you kind of stressed some AP -- some payables a little bit, so that was the cash flow kind of driver. Yes, I saw the move on the conversion. Yes, I understand that. I was just going to get a sense of the overall working -- kind of working capital status. And it sounds like where you are is about kind of where you want to be, the level of revenue that you're doing, which makes sense.

Okay. That's all for me. Appreciate it.

(Operator Instructions) As there are no further questions, I would like to hand the call back to Rene for any closing remarks. Thank you. Rene, over to you for any closing remarks.

Yes. Thank you, AJ, and 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 all.

Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect now. Thank you.