Aurora Mobile Ltd (JG) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Aurora Mobile Fourth Quarter and Full Year 2018 Earnings Call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, 28th of February, 2019. I would now like to hand the conference over to your first speaker today, Mr. Christian Arnell. Thank you. You may begin your conference.

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 from Aurora today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer.

Following the prepared remarks, all 3 will be available to answer your questions during the Q&A session that follows. I remind you that this conference call contains forward-looking statements. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipates, future, intend, plans, believes, estimates, confidence and similar statements. Aurora may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission, and in its annual report to shareholders and press releases and other written materials and oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including, but not limited to statements about Aurora's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in the forward-looking statement. Further information regarding these and other risks is included in the company's filings with the Securities and Exchange Commission. With that, I'd like to now hand the conference call over to your first speaker, Mr. Luo. Please go ahead.

Thanks, operator. Good morning and evening to everyone on the call, and welcome to Aurora Mobile's Q4 2018 and Fiscal Year 2018 Earnings Call. Today, I am very pleased to share with you another fantastic quarter. To kick off this call, I would like to take a few minutes on various key operating data that we have achieved in this quarter.

Firstly, the number of mobile apps utilizing at least one of our developer services, or the cumulative app installations, has exceeded that 1 million mark to approximately 1.076 million as of December 31, 2018 from approximately 707,000 year-over-year.

This is a great testament and conviction on our leading position in the developer surveys provided in China. Secondly, the cumulative SDK installations have increased to 19.8 billion as of December 2018, from 11.4 billion year-over-year. The new installations from 2018 accounts for 74% of the total installations in previous 6 years, a strong evidence that the adoption of our developer services is accelerated.

Thirdly, the number of monthly active unique mobile devices we cover has increased to 1.04 billion in December 2018 from 864 million in December 2017. Lastly, in the fourth quarter of 2018, we have seen the number of paying customers increased to 2,096 from 1,379 a year ago, reflecting healthy growth of this operating data. The total revenue for Q4 2018 were CNY 225.9 million, which represents an increase of 102% year-over-year and increase of 15% quarter-over-quarter.

Now let me give you more insights on each of our business lines. First is developer services. Within the 3 months ended December 31, 2017, and the 3 months ended December 31, 2018, our revenues from developer services increased by 44% or CNY 12.1 million to CNY 74 million (sic) [17.4 million] which was mainly due to the growth in the number of customers from 858 to 1,265 year-over-year.

Second, our data service and business alliance during the same period, our revenue from data services increased by 108% or CNY 100 million to CNY 208.5 million. The 108% growth was primarily due to the increase in both of the -- both the number of paying customers and the increase in average spending per customer.

For targeted marketing business, the revenue have grown 111% year-over-year. This increase was mainly due to both the increase of number of paying customers and ARPU. Our targeted marketing business, which is purely performance-based, continued to expand its customer base as well as increase customers' wallet share. We have generated a sequential growth in 8 consecutive quarters since we launched this business 2 years ago, despite the volatile advertising market environment. We believe our ability to generate higher ROIs for our advertising customers contributed to this continued market share gain. We expect the market share gain trend to continue, given the effectiveness in our data and low penetration of our advertising business compared to the massive broad market.

During the quarter, every single vertical we covered had very nice sequential growth. Our strategy to broaden our advertising customer verticals continue to be executed well. Besides the continued strength in financial sector and media and entertainment sector, mobile gaming vertical gained a significant traction in particular. The contribution from mobile gaming has reached a high single-digit compared to low single-digit from last quarter. We also continued to diversify our media source. Now Tencent GDT only accounts for about 30% of total advertising inventory on dollar term, down from 35% in third quarter 2018. Now I'll turn the call to Fei, who will share with you on the Q4 performance of other free business alliance within the data solutions.

Thank you, Chris. The combined revenues from other vertical data solutions, including marketing intelligence, financial risk management and iZone have increased by 93% from RMB 13 million to RMB 25 million year-over-year. This was mainly due to the increase in the number of paying customers, which almost doubled between the periods. We see strong growth across all 3 product lines as we continue to expand our customer base into these industry verticals.

For financial risk management, the leading paying customers in the quarter include a Tencent Credit Bureau, Pion technology, Bank of China Consumer Financing and the Pufa Bank. Our strategy is to continue to focus on the leading players in the banking and the consumer financing area. For market intelligence product, similar to what we observed in the third quarter, we continue to see a strong momentum in the investor community. More than 2/3 of our IF revenues are contributed by the investment community. Our data has proven to be widely adopted by investors who pay most attention to the accuracy of the apps operating data. Item business more than doubled in the quarter. The revenue growth is primarily driven by further penetration into the industry verticals, including real estate, auto, tourism and the retails. We expect the future growth continue to come from more customer wins. Now Shan-Nen will share with you our financial highlights.

Thanks, Fei. Let me take you through on the discussion on other P&L items. The gross margin for the Q4 2018 has decreased to 27.57% from 29.3% a year ago. The decrease was due to the revenue mix where targeted marketing, which has lower gross margin compared to other business lines, has increased its contributing to the total revenue from 77.5% to 81.1% year-over-year. In renminbi terms, the gross profit has increased by 90% to CNY 62 million. Total operating expenses have increased by 84% to CNY 86.8 million -- 7% year-over-year, in particular, R&D expense has increased by 91% to CNY 41 million. This is mainly due to the increase in staff costs, bandwidth and cloud cost and depreciation charge. Selling and marketing expenses have increased by 20% to CNY 20.6 million and mainly due to the increase in staff costs and marketing expenses.

G&A expenses have increased by 195% to CNY 25.1 million, mainly due to professional fee related to maintaining listed company latest and staff costs.

Under adjusted EBITDA, it has decreased every quarter from negative CNY 11.2 million in Q2 '18 to negative CNY 6.9 million in Q3 '18 to negative CNY 3.4 million in Q4 '18.

On to the balance sheet items, total assets have increased from CNY 359 million as of 12/31/2017 to CNY 998 million as of 12/31/2018. The key asset items as of 12/31/2018 are cash and cash equivalent of CNY 577 million, accounts receivable of CNY 148 million, prepayments of CNY 80 million, fixed assets of CNY 93 million, and long-term investment of CNY 79 million.

Total current liabilities has increased from CNY 117 million as of 12/31/2017 to CNY 169 million as of 12/31/2018. The key current liabilities items as of 12/31/2018 are: accounts payable of CNY 19 million, deferred revenue of CNY 65 million, accrued liabilities of CNY 77 million. As of 12/31/2018, we maintain a healthy level of working capital of CNY 640 million.

And looking forward, we expect that total revenue for Q3 -- total revenue for Q1 2019 to be in the range of CNY 228 million to CNY 233 million, reporting a growth of 81% to 85% year-over-year. Lastly, before I conclude, an update on the share repurchase plan that we previously announced in November 2018. Our Board of Directors have approved a total equity value of $10 million purchase. As of 12/31/2018, the company has repurchased approximately USD 468,000 worth of ADS under this program. And we will continue to monitor the need to repurchase depending on the market conditions and the underlying share prices. And this concludes the management presentation on the Q4 2018 results. Back to you, Christian.

We're ready to begin the Q&A, operator.

(Operator Instructions) Your first question comes from the line of Bill Liu from Goldman Sachs.

I have a quick question about the margin profile. I saw that our targeted marketing segment has been growing very fast. On the other hand, the cost of media is also growing fast. So I just wonder that do you expect a stable growth rate between the, sort of, 2 line items, result in a stable gross margin going forward? Or do you see there is a certain improvement room in this line? So that's my first question.

And my second question is regarding our other vertical data solutions revenue. I saw that the revenue growth and the number of customer growth is step-in-step, which imply probably a very stable ARPU. So I wonder is this a solution-based model, which means the incremental margin is actually very high. So that's my 2 questions.

Okay. Regarding your first question. So actually the margin -- the revenue will continue to grow very strongly for the targeted marketing. And actually the margin -- the gross margin is the function of the -- basically the vertical mix, right? So as we continue to penetrate into new verticals, those new verticals typically will have a lower margin to begin with. And over time, of course, the lower margin will get improved. So this is the -- actually the minus with the overall margin trend. And with that said, on the other hand, we're also building up our own SSP, which has a higher margin than the third-party SSP. So this will help out, basically, to cancel out the negative trend of the new vertical margin downward trend. So on a blended basis net-net, we would expect for 2019, the margin will remain stable, okay? So this is the first question.

And for the second question, actually you are right. Actually the overall ARPU for the other data solutions remains pretty much constant if you compare year-over-year. But actually within -- because other data solutions have 3 segments, right? So 3 segments are actually different segments. The ARPU actually showing different -- basically different trend. But we would expect going forward the margin on a blended basis should -- will continue to be up and down, you mean, to be a little bit volatile before it can stabilize. And I think -- that said, since we only had about 220 paying customers in the other data solutions, so this is a small portion of the total addressable market. So we believe there is a still huge, huge untapped market opportunity for us.

Your next question comes from the line of Ribery Gu from Crédit Suisse.

I have 1 question regarding the R&D cost for 2019. Can the management share your views on the R&D expense trend for the ongoing 2019? And my second question is somewhat related to the R&D cost here, because I believe the R&D cost should be reflected on the development cycle for the products in the other vertical data solutions. So could the management share any updates on the new products and/or the development cycle for the products -- data products in these verticals? My third question is more generally about the industry perspective. So as the mini programs and the mini apps have been well on track, promoted by BAT, so any infos on our business so far? So could management share any views on that?

Okay, I am going to take the first question. So regarding the R&D trend, so actually for 2019, we expect that the R&D expects to continue to grow by roughly about 42% year-over-year, okay? Which is down from 88% last year, right? Last year growth was 88%. So this year, we are continuing to grow, but it's not going to grow as much as the last year on the percentage. But still, R&D is actually our -- in terms of the overall operating expense, R&D takes the half of the operating expense. So the second question, updates on the new products. I will let Chris to talk to you about a few our new product initiatives and maybe Chris can talk about the developer service work.

Yes. So I'll give you some updates of our new product and our development cycle. So first of all, it's -- about the developer services, we have launched the authentication products for the developers, which, basically, we are working with China Mobile and China Telecom and China Unicom, to have the developers to easily -- to authenticate their users within the apps rather than sending the SMS. So we have launched the product in the Q4, and we are seeing almost -- currently, there are around 100 developers. They are now trying -- integrating our apps right now. So that's about developer services.

So for data solutions, I will give you some updates of some new verticals in targeted marketing. So as Fei mentioned, we are making significant progress on gaming vertical in Q4. And the gaming contribute high single-digit of the -- within the total data -- targeted marketing revenue right now. And we're also seeing very good momentum of the education and auto as well. So for example, for the education, so basically we can improve the -- or reduce the CPA cost by 20%, basically. So that's a very good progress of our R&D within this vertical. So for autos, we're also seeing very effective lead generation results. So we will see more in the coming 1 or 2 quarters of these 2 verticals, I think.

Yes, let me add to that. Actually, Chris mentioned about the new product in the developer services as well as the targeted marketing, right? so for the other data solutions, actually, we are not really inventing or making any new product. It's mainly the new refresh -- refreshment, like the update of our existing products. So that's not going to have any impact on our business, if any delay or whatever. Basically, we're continuing to sell our existing products and the new features are constantly being added, improvement constantly being made to the existing products, which will help customer stickiness and, potentially, to increase the ARPU, right? So from that perspective, actually, the development cycle is more like the product refreshment cycle, the product refreshment, depending on we actually -- we can control it. Maybe every 3 months, we can have a new release. Something like that, okay. Yes.

Yes. I will take the first question. So we -- see any influence of the mini program to our business, as you know, we -- the number of apps who -- which are utilizing our -- and it is one of our developers' surveys, are still increasing very fast. And from our observation -- so those apps -- those app developers, if they develop more mini apps, so they will still have mobile apps. I mean, mini apps is always a plus, but not a replacement of their mobile apps. So also -- we are also introducing some developer showcase for the mini apps developers, which help us to penetrate into mini apps' ecosystem. That is how we observe.

Yes. So this question -- let me add to what Chris just mentioned. So actually, if you look at our SDK installations, if you look at our third quarter number, it's 2.4 billion, and this number is strikingly exactly the same in the fourth quarter. We also had 2.4 billion new SDK installations. So definitely, we are not seeing any slowing down of the customers. They're adopting and they're using our SDKs.

Your next question comes from the line of Han Joon Kim from Deutsche Bank.

Great. When I kind of look at the fourth quarter, seems like the overall business is tracking largely in line with how you guys were looking at it before. So things seem to be pretty stable, pretty good. As you end the year and think about 2019, are there any aspects where you wish you could have done a little bit better or things that were kind of different from your expectations? And -- or are there any particular tweaks to how you think about 2019?

You have a follow-up question from Bill Liu from Goldman Sachs.

Operator, sorry, we didn't -- sorry, Bill, we didn't get to answer Han Joon's question there for a second.

Yes, so I think from the -- I think we are very consistent of -- on our strategy. So actually, the strategy of 2019 is -- basically, is similar like last year. But I will like to add some colors, which may -- we wanted you to see, which is kind of different things. So besides, we will continue to invest a lot on, expand different vertical on the targeted marketing, right? As I mentioned, the auto, the education, we are seeing very good testing results. And we hope we -- we wish we will have -- we expect to get more solid numbers in the coming 2 quarters. Also, we will start to output our capability to some other advertising agencies, which they don't have our data. So basically, it's like a trade index business model. So we will work with other third-party agencies and then ask them to use our advertising targeted marketing assistant to do target marketing for sale, ask our targeted marketing customers to use our data to improve their advertising's efficiency. And then, they will share their revenue with us or they pay us a fixed rate of their advertising dollars. So that's a very typical trade index business model. So we are trying this from this quarter. We are inviting some big agencies to work with us. So I think, if this business model work, it going to give us some surprise, I think. So that's one point. And our plans, we will continue to invest more on our SSP products. So as you know, we are now currently working with more than 1 million mobile apps. So we want to utilize more relationships with those apps and to get the SSP -- to attract more traffic to our SSP. So this, I think, can help us to improve the advertising margins, potentially. So that 2 -- I think, that's 2 things may help to getting more -- getting better results in 2019 for us.

Yes. So basically, the SSP -- let me give you a little bit of update on this initiative. So actually, we started building our own SSP in July last year. So in third quarter, we are doing the trial-and-error, right? So we didn't really generate any meaningful revenue contribution from SSP. For the fourth quarter, actually, SSP already accounts for 3% of our total advertising revenue. And in recent weeks -- and we are seeing this number already going up to 5%. So definitely, it's gaining traction and gaining momentum. And hopefully, by -- for the whole year, the SSP can account for 10% of our total advertising revenue.

And you have a follow-up question from Bill Liu.

So I have a follow-up question on the targeted marketing segment. So I recall that you mentioned that you have been trying -- expanding into some new verticals so that the overall margin has been stable -- or should be stable going forward. So I just wondered that within the verticals we are operating now, surely there will be more mature ones and the emerging ones, which we have been exploring. So I wonder for those more mature verticals, what does the margin profile looks like? And are they expanding over time? Or have they been stable? I'm asking this question, because I believe the gross margins for a certain vertical is actually a measurement on how effective our technology have been versus competitors, say -- even the giants, say, Baidu or Tencent. So we are able to earn this gross margin because our targeting is more accurate than what they can offer. So if this gross margin is expanding, then that can translate to a statement that our technology has been evolving, which is even faster than the giant offering. So this is where I'm coming from. So that's the first one.

And the second one, I just wanted to follow up on the operating expenses. I noticed that we have certain operating leverage from -- well, actually, all the items, so with marketing, R&D, G&A, because they all grew slower than our revenue growth, i.e., we should be able to expect some operating leverage from all these 3. So I wonder how should we think about this going forward, especially in R&D. If we are able to maintain a high gross margin in certain verticals, i.e., we need to out-invent the giants where they have been improving their targeting capability. Then, how should we think about the R&D expense going forward?

Okay. So Bill, in terms of the margin profile for different verticals, for the -- actually, established verticals. I will not say those are mature verticals, because they are still growing. Everybody grow -- actually is growing quarter-over-quarter, okay, including the very established finance vertical, okay? So finance currently accounts for -- it accounts for roughly 50% of our total advertising revenue. And finance, the margin, actually, it varies between like 18% to 20%. And this has been pretty constant over the past 3 quarters. And the reason why this is not going up, actually, it's also sort of our strategic decision, okay? So we have 2 goals to achieve, okay? One is, we need to grow our revenue, right? Grow our revenue and we need to have a strong revenue growth. And you also have a strong revenue growth, in the meanwhile, you also want to, like, grow the margin very strongly. Actually -- oftentimes, actually, they are kind of like contradictory to each other. So although it's basically in order to attract more customers and allow the customer to spend more with us, basically, we -- our strategy is tend to keep the finance vertical, the margin pretty constant and stable, okay? And this has proven to be very effective in terms of like -- in being able to drive the -- continue the revenue growth quarter-over-quarter, okay? So this is the #1 for finance, which is 18% to 20%. And the second established one is, basically, the media and entertainment retargeting business, right? That vertical is around like 15%. And again, this is also pretty stable over the past several quarters. And then the rest -- the other emerging verticals, such as the gaming, the e-commerce, education, auto, Chris mentioned those verticals, and these verticals actually are the new verticals. For the new verticals, they are, in the very beginning, basically, as we're still trying to fine-tune the model, the growth margin profile typically start with low single digit to begin with, right? But over time, certainly, we are also seeing the trends of these new verticals' margins getting improved. So that's why if you look at -- just rely on the third-party SSP, the overall gross margin will have a downward pressure, as I answered this question before in early of the call. But on the other hand, as we continue to build our own SSP and -- this is the own SSP plus our own sales on the media. So our sales on the media, actually, now we incorporate into the self-build SSP. So our sales on the media plus the other media included in the self-owned SSP now total accounts for roughly 15% of our total advertising revenue, right? so for this 15%, actually, the margin is pretty good, it's over 20%. And so our goal is to continue to drive more contribution from this self-owned SSP, and in the meanwhile, continue to drive growth from the new verticals -- new industry verticals. That's way I say in the near term -- in the next couple of quarters, I would not expect the overall gross margin to improve meaningfully and it will keep pretty much constant over the next couple of quarters. And so this is my comment on the mix of different verticals in the targeted marketing business. What's the second...

Yes. And next is we go to R&D.

Yes, yes, so R&D, right? So R&D, I mentioned, actually, pretty much 50% of our operating expense is contributed by -- to -- dedicated to R&D, right, so -- which means R&D is -- we spend very heavily on this area. So in 2019, so basically we will continue to grow the R&D and basically we have -- expect to have 42% year-over-year growth. And in terms of the dollar amount, it's going to be RMB 190 million, so -- which is pretty meaningful. You want to know how we happen to compete with BAT in terms of the R&D expense?

Yes, surely, we would like to -- yes sir, so we'd like to hear more color about that, because I wonder if you agree with our assessment that the gross margin level actually measures how much better our effectiveness is versus all the giants, because the -- so we are able to earn this gross margin because we can do the targeting better. So the level of gross margin actually measures how much effectiveness we are versus the BAT players. So do you agree with that assessment or not?

Yes, we agree, so basically -- so the advantage of -- on our targeted marketing versus BATs, their own self, it varies on different verticals. So for example, for the finance vertical, we have more than 20% advantage versus if the customer, they're using our data or they don't use our data, they do the advertising on Tencent directly. So even we have a 20% margin, the customers still have 10% advantage from working with us. So for -- some new vertical like education, education is -- has many sub-verticals. They have K12 or adult education, so it varies. So I'll give you one K12 vertical. It's basically, we have 20% advantage if the customer working with us or they're working with the giant directly. So in that case, I think we can improve the margin in the coming quarters. So the reason we can have a better -- we have a better performance versus BAT is because of the data nature. For example, for education, we have very good coverage on the education mobile apps. We know the -- how the user behavior we think are different in education mobile apps. However, Tencent or BAT, they don't have -- they only have those behaviors we think on mobile apps, right? So they don't know how the users -- they act -- they'll be carrying. It varies different, medium or small mobile education apps. So we're more diversified. So we have more diversified data than the BAT. So that helps us to have a better understanding of the mobile users' education profiling in that vertical. So that's how we compete with BAT.

Yes. So basically, I think what Chris wants to tell you is, basically, we have the data ads, right, in various industry verticals. And this ad, actually, is something -- the ad that actually BAT, they don't have. And in terms of the R&D spending, actually the R&D, like we have the data scientist, we have the team who have successfully developed the model for the finance vertical, for media and entertainment vertical. And it's just like for them to replicate the new success in the new vertical, right? And this was not really the rocket science. And it's just like we manage high in the arrows and they will figure out what the pattern is. So it does not mean that BAT, they have better talents, they have more people, they will be able to derive more insights from their data. And the thing is, our data already has the edge, and it's a matter of using the existing team to mine the data.

(Operator Instructions) There are no further questions at this time. I would now like to hand the call back to Christian.

Thank you. That concludes tonight's call. Thank you very much, everyone, for joining us. If you have any further questions or comments, please don't hesitate to reach out to us. Good night.

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