Aurora Mobile Ltd (JG) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile First Quarter 2020 Earnings Conference Call. (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, Christian Arnell. Thank you. Please go ahead, sir.

Thank you. 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 follows. 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 over to Mr. Luo. Please go ahead.

Thanks, operator. Good morning, and good evening to everyone on the call, and welcome to Aurora Mobile's first quarter 2020 earnings call. This first quarter of 2020 has proven to be a challenging one for many companies, including us. Firstly, the quarter is typically a seasonally weak one due to the Chinese New Year holiday. This year, the COVID-19 outbreak adversely impact this seasonally slow period even further across China. Many business were temporarily shut down or delayed restarting their operations for many weeks as the pandemic unfolded. Despite the slower-than-expected period, we ramped up to 100% capacity by the middle of March, in line with most of our customers who resumed normal operations in mid-to-late March.

During this period of temporary disruption, we took the initiative to further strengthen our core competency. This included narrowing our focus on developer services, improving operational and technical efficiency, streamlining internal procedures and reinforcing our commitment to delivering exceptional customer service. With this initiative now in place, we believe we will emerge from this pandemic stronger than ever and ideally position to better adapt to the current uncertainties that hang over the market.

With that in mind, let's begin our review of our key operating and financial performance for the first quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations reached 1.49 million as of March 31, 2020, from approximately 1.17 million last March. This represents an average of 16,000 new apps coming on board every month during the quarter. This was an impressive achievement considering the difficult and challenging operating environment during the first quarter.

Second, cumulative SDK installations increased by 64% to 37.2 billion as of March 2020 from 22.7 billion in March 2019. First, the number of monthly active unique mobile devices we cover continue to increase, reaching 1.36 billion in March 2020 from 1.07 billion in March 2019. This was fueled by the increasing number of apps that use our SDK, particularly as JVerification SDK becomes more widely adopted across the market. Lastly, in the first quarter of 2020, we saw the number of paying customers increased to 2,211 from 1,951 a year ago.

Now before I go over our financial performance, let me quickly provide an update on our developer services revenue classification. Beginning from this quarter, the revenues from advertisement SaaS and Light-Push services, which help developers grow and monetize their user base will be separately classified as value-added services under developer services. No changes are made to other revenue classifications.

Our strategic focus remains to drive the growth of developer services and SaaS products. Over time, we expect the revenue and gross profit contribution from target marketing to be less and less significant.

And for the financial numbers. Our core businesses, including developer services and SaaS products continued to see healthy 15% year-over-year revenue growth and 20% year-over-year gross profit growth despite the impact from the pandemic and lower seasonality. Our strategy transitioning away from the low margin and high-risk target marketing business that we started in the third quarter 2019 has done very well with target marketing now only contributing about 12% of our total gross profit. Such transition has reflected in our revenue decline by 45% for RMB 230 million in first quarter 2019 to RMB 126 million in the current quarter. Our growth of revenue and profitability is no longer dependent upon this legacy target marketing business.

Developer services, once again, was the highlight of the quarter with an impressive performance. Developer services, which includes both the subscription and value-added services recorded a solid 72% revenue growth year-over-year at the back of increase in both ARPU and customers. For subscription services, we continue to see more customers signing up to our suite of developer services. New customers include, but are not limited to China Pacific Insurance, [Hung Kai Bank], IKEA China and Shanghai Pudong Bank. We also launched a live version of private cloud service catering to customers who need a private cloud set up across the entity. Subscription revenue grew by 37% year-over-year, primarily driven by an increase in the number of customers by 41%. In Q1 2020, we saw more customers signing up to our fee-based JVerification services. They include, but are not limited to (foreign language).

Cumulatively, we now have more than 2,000 apps using these services with aggregate DAU existing 130 million. The growing demand by app developers to use our JVerification product along with JPush have contributed to the continued growth in this segment.

Value-added services, which include revenue from advertisement SaaS and Light-Push services, which we did not offer during the same period last year grew strongly. Market adoption for our value-added services has exceeded our expectations. The average monthly revenue from value-added services was approximately RMB 2.1 million in the first quarter of 2020. This has since doubled in April, and we expect a strong revenue growth momentum to continue into Q2. Key customers of the light -- of our Light-Push services in the quarter included Weibo, Pinduoduo and Alipay. Next, as we transition away from target marketing business, revenue from this segment was down 39% year-over-year and now account for only 61% of total revenue compared with 81% a year ago. Despite accounting for 61% of revenue, margin contribution from this business account for only about 12% of our total gross profit. As we mentioned in previous quarter's earnings call, this is a business we want to transition away from. This coronavirus outbreak has accelerated this transition. We expect both the revenue and margin contribution from the target marketing business to further decline in coming quarters.

Now I will turn the call to Fei, who will discuss the Q1 performance of the 3 business lines within SaaS product in more detail.

Thank you, Chris. The combined revenues from SaaS products, including financial risk management, market intelligence and iZone decreased by 28% from RMB 24.8 million in the first quarter of last year to RMB 17.8 million this quarter. Revenues from our market intelligence product grew by 26% year-over-year, mainly fueled by strong growth in the number of customers. Recently, we launched our iAPP overseas version, where customers now can obtain deep insight into app analytics in the Southeast Asia and India markets. New investor and fund -- and customers in the quarter, include [Priva] [MIRA] and [Genie] and the new corporate customers include Uber, Baidu and Huawei. For financial risk management, revenue declined year-over-year by 47%. That was attributable to decreases in both the number of customers and ARPU year-over-year.

The impact of coronavirus has taken a toll on the overall business environment in China. The financial sector was more adversely impacted than other business sectors. With the significant decline in lending activity in first quarter of 2020, demand for our financial risk management products also fell. Nevertheless, we did manage to sign a few new contracts with leading financial companies such as JD Finance, Ningbo Bank and the Jinshang Bank during the quarter. Business in this sector has since stabilized in second quarter. And lastly, our iZone business recorded a 31% decline in revenue year-over-year. As expected, with the social distancing and the travel restrictions imposed since the outbreak of coronavirus in late January, many daily activities such as traffic congestion to tourism sites and the shopping malls were temporarily impacted. This resulted in weak demand to analyze location-based data during the quarter. Since the beginning in April, we have begun to see an uptick in demand for our iZone products. As businesses gradually return to normal, we believe that demand for our iZone product in the real estate, tourism and the retail sector will rebound quickly.

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

Thanks, Fei. Since Chris and Fei has already talked about our top line numbers for the quarter, I'll go through some of our P&L items. Despite a tough business environment in the first quarter of 2020, we managed to maintain our gross margin at 33%, flat sequentially, and a meaningful increase from 27.5% during the same period last year. This was a direct result of our focus shift away from the traditional targeted marketing business first announced in Q3 2019. Our focus is now on growing our high-margin SaaS businesses, namely developer services, which include both the subscription and value-added services and SaaS product.

As a percentage of revenue, developer services and SaaS-based product accounted for 39% during the quarter, a significant increase from 19% during the same period last year. Targeted marketing, on the other hand, accounted for 61% of revenue during the quarter, down from 81% during the same period last year. On gross margin contribution, developer services and SaaS product accounted for 88% of gross profit compared to targeted marketing, which is no longer our strategic focus, accounting for only 12% of gross profit during the quarter. With the growth in high-margin contribution and importance of developer service and SaaS product over the quarters, we believe we have identified and build a higher quality, more resilient and sustainable business model that can support and fuel our margin growth and profitability in the future.

Next, on to the OpEx. Total operating expenses decreased by 1% year-over-year to RMB 91 million. In particular, as reported in the previous quarter, in late 2019, we have reduced our headcount by approximately 120. As a result, we achieved some savings in terms of staff costs in Q1 2020. In hindsight, this proven to be a wise decision. R&D expenses decreased by 3% to RMB 41 million, mainly driven by decreases in costs and personnel costs, but was partly offset by increase in depreciation of servers. Selling and marketing expenses decreased 7% to RMB 25.2 million as COVID-19 restricted travelers and (inaudible).

G&A expenses increased 8% to RMB 26.5 million, mainly due to increases in staff cost and bad debt provision. Our adjusted EBITDA was negative RMB 30 million during the quarter compared to negative RMB 7.4 million a year ago.

On to the balance sheet items. Total assets were RMB 884 million as of March 31, 2020. This includes cash and cash equivalent of CNY 383 million; the cost receivable of CNY 107 million; prepayment of CNY 54 million; fixed assets of CNY 109 million; long-term investment of CNY 170 million. Total liabilities were CNY 175 million as of March 31, 2020. This includes accounts payable of CNY 18 million; deferred liabilities -- deferred revenue of CNY 89 million, accrued liabilities of CNY 68 million. As of March, we maintained a healthy level of working capital of CNY 397 million.

Lastly, before I conclude, I'll give an update on the share repurchase plan. In the quarter ended March 31, 2020, we did not purchase any shares. As of March 31, 2020, cumulatively, we have repurchased a total of 921,000 ADS since the start of our repurchase program. And the company today announced that its Board of Directors has approved a new program under which the company may repurchase up to USD 10 million of its shares over the next 12 months, and the company plans to fund these repurchases from its existing cash balances.

And this concludes the management's prepared remarks. We're happy to take the call -- take the question now. Christian, back to you.

We are ready to begin the Q&A, operator.

(Operator Instructions) Your first question comes from Ryan Roberts from Navis Capital.

Just want to actually -- maybe this is more for Shan-Nen. Kind of get a sense of the -- with the new kind of disclosure that you've changed for Q1, just to make sure I'm understanding the line items you called out kind of in this prepared remarks, please. So looks like, I guess, developer services and SaaS was about CNY 49 million and target marketing was about CNY 77 million. Can you give us a breakdown of the -- of that CNY 49 million? I think on the -- in the script, you guys were mentioning what's in there, like SaaS and VAS and something else. Can you give us some more clarity on what that is, please?

Ryan, I just want to clarify your question. You want to have a further breakdown of the revenue numbers?

Yes. With the new -- kind of the new segment disclosure, it's not -- I just want to verify that that's -- my understanding is correct. So I think -- yes, if you could run through that that would be great.

Yes. Yes. So Ryan, actually, the developer service, the subscription part is CNY 25 million. And under developer service, the value-added service is CNY 6.4 million. And for the SaaS product, it's CNY 17.8 million, and the target marketing is CNY 77 million.

Got you. Okay. And the -- okay. Okay, got you. And then you mentioned kind of in the remarks that you've seen some kind of a better-than-expected, I suppose, momentum on the VAS segment, kind of I think it was -- I think you mentioned April. Here we are now in June, about halfway through June. Can you give us a sense of how Q2 is tracking, please?

Yes. At least the double.

(inaudible) Yes.

Yes. Yes, more than double.

Got you. So that's for the VAS on a monthly basis. Can you give us a sense of how the rest of the business is doing? Kind of you've been back in the office...

Actually, on a quarterly basis, it should be more than double.

Okay. Sorry. Is that for the entire segment, the dev services and SaaS segment, or you mean, just -- is that just VAS?

VAS. VAS.

Just VAS. Okay. And then can you give us a sense of how the rest of the business is kind of recovering and maybe tracking, kind of now we are kind of post COVID or getting to a point where maybe post COVID, how things are shaping up? I think you've had everyone back kind of in the office for a little bit now. I'm just kind of curious what you're seeing. Any kind of color you can offer on that would be great.

Yes. So yes, let me talk about business line by -- by different business line, right? So for the developer services, the subscription business, as you know, this is a very sticky, stable business, and we will continue to see quarterly growth, okay, in the second quarter, okay, which is within our expectation. And VAS, as I said, it should be more than double from the first quarter. And for the SaaS product, the recovery is a little bit slower than the other business. And this business should slightly increase from the first quarter, okay? And for the target marketing, as we mentioned, this is not our strategic focus anymore. So over time, this business will gradually go down. And at a certain point of time, we might completely wind down this business, right? But in the second quarter, the revenue and the margin contribution in terms of the absolute dollar amount should be slightly smaller than the first quarter. So net-net, basically, you will see both the revenue growth as well as meaningful margin, gross margin growth from first quarter.

Got you. Okay. That's actually -- yes, that's very helpful. And if we look at like maybe how the rest of the year is tracking, and I know it's obviously early days to kind of think about second half, but I'm curious people that you're talking to and kind of activity you're seeing, can you give us a sense of how your second half is looking? We're hearing from other people in the market that second half is looking increasingly, I guess, better than perhaps it looked, maybe, I don't know, a couple of months ago, and want to get a sense of what you guys are seeing.

Yes. Currently, we feel very comfortable about the outlook of second quarter. From macroeconomic perspective, we think it's healthy, business has resumed to normal, okay? And specifically to our business, right, like developer service, that should continue to grow very nicely in the second quarter. Because if you look at even in the first quarter, actually, we achieved very good numbers for the developer service, the subscription business, right? We -- even in the first quarter, we had 41% year-over-year growth, not to mention the second half of this year. So we are very confident about the subscription business.

And for the value-added service, I think this business is -- we are already seeing the strong ramp up, right, quarter-over-quarter, triple-digit growth. And we are very confident the growth momentum will continue. And we expect a significant revenue contribution as well margin contribution from this VAS business in the second half. And for the SaaS business, in the second half, we think it will recover, should already be completed by the end of second quarter. In the third quarter and the fourth quarter, we should see financial risk management as well as the iZone. This 2 business, we saw decline in the second quarter, right -- in the first quarter, but the thing has come back to normal, and we should expect the revenue pick up from these 2 segments.

And for the market intelligence, actually, that business in the first quarter, we -- even under the coronavirus, we saw the very nice double-digit growth, right? And this growth will continue in the second half. And for the target marketing business, actually, this legacy business, as I mentioned, it becomes less and less relevant regardless -- in terms of -- to our revenue -- to our margin contribution, right? So probably in the -- some point of time in the third quarter or fourth quarter, you will see this business is going to be removed from our disclosure. So net-net, we are very confident about second half. I think the first quarter, we reached a low point, and we are very confident about the growth trajectory for both the revenue as well as the margin from first quarter.

If I could just tack on one real quick one. Just a follow-up, if you will allow. On the margin, you just mentioned, it looks like for developer services and SaaS, that kind of -- I guess, everything ex target marketing, looks like the gross margin was around 74% and about 6% or so for kind of the target marketing. Fitting kind of the earlier discussion you guys were giving us on earlier calls about how shifting to this newer model, the SaaS model, billing is going to be margin accretive. Sort of double check my -- that that math is roughly correct and also just get a sense of how the margin should be tracking as this transition kind of completes or let's say progresses further later in the second half.

Yes. Yes, you're right. Actually, your math is very accurate. It's the same as mine. So non-target marketing actually on a blended basis, all those business, they pretty much share similar margin profile. Gross margin profile is about like 74%. It might have some small fluctuation from quarter-to-quarter, but around 75%-ish, that's the right number to think about. And for the target marketing business, for first quarter, it's 6%, right? But since this business is not going to grow and the non-targeted marketing business is going to grow in revenue, right, so you should expect the growth -- the overall, the company's growth margin to improve meaningfully in the second quarter compared to first quarter.

And as the growth continued to kick in for the non-target marketing business in the second half, the margin should continue to grow on a quarterly basis. Ideally, actually, if you remove target marketing business, right, today, we have 74% of gross margin. That's the direction we are aiming towards.

(Operator Instructions) As there is no one in the queue now, I will close the question-and-answer session. I will now hand the call back to Christian Arnell for closing remarks.

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.

Thank you.

Thank you all.