Aurora Mobile Ltd (JG) 2019 Q3 法說會逐字稿

Hello, ladies and gentlemen, and thank you for standing by for Aurora Mobile Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Mr. Christian Arnell.

Please proceed, Chris.

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 the 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. 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, anticipate, future, intends, plans, believe, estimates, confidence and similar statements.

Aurora may make forward statements in its periodic reports to the U.S. Securities and Exchange Commission, in its annual report to shareholders, in 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 these statements are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties, a number of factors which could cause actual results to differ materially from those contained in the forward-looking statements. Further information regarding these and other risks and factors is included in the company's filing with the U.S. Securities and Exchange Commission.

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 Third Quarter 2019 Earnings Call. I would like to kick off this call by reviewing our progress and key operating data this quarter. First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations reached 1.39 million as of September 30, 2019, from approximately 991,000 last September. We continue to see a steady stream of new apps using our SDKs during the quarter with approximately 40,000 new apps coming on board each month this past quarter.

JVerification continues to generate solid growth momentum since we launched the product since the end of 2018. This quarter, with a total of more than 100 paying customers begin using this SDK, which will press growing market interest and its enormous growth potential.

Notable customers include [Joya Bank, Huabao, Cool], Fanli, [Yunji, FirstEnergy] and Tuniu. DAU generated by JVerification SDKs has [exactly 100 million], quickly becoming the second largest developer services, service product adopted by a wide range of developers after push SDK. Second, cumulative SDK installations increased to 30.8 billion as of September 2018 -- 2019 from 17.4 billion last September.

Third, the number of monthly active unique mobile devices we cover continued to increase, reaching 1.34 billion in September 2019 from 1.03 billion in September 2018. This was fueled by the increasing number of apps that used our SDK, particularly with the rapid adoption of JVerification SDK.

While still in the early stage, our developer services collaboration with Tencent Cloud has reinforced our brand recognition as well as our developer customer acquisition. Lastly, in the first quarter of 2019, we saw the number of paying customers increased to 2,312 from 1,877 a year ago.

Now let me discuss a few highlights from our financial performance during the quarter before I let Shan-Nen go into the more details a bit later.

Starting this quarter, we will begin breaking down revenue into 3 categories: developer services, SaaS products and targeted marketing, to reflect our core strategy focus on -- of serving app developers.

Total revenue during the quarter was revenue CNY 202 million, up 3% year-over-year. Revenues from developer services increased 39% from CNY 15.7 million during the same period last year to CNY 21.9 million.

This was mainly due to growth in the number of customers from 1,170 to 1,675, while our ARPU remained stable. The majority of the growth was driven by our continued penetration into the SDK market with JVerification, in particular, seeing revenue increase sixfold sequentially during the quarter. The top paying verticals included financial services, e-commerce, education, local services and SMS. Revenue from target marketing were down 8% year-over-year.

This is due to the following 3 factors: first, on a macro level, the Chinese economy has been softening which has a negative impact on overall ad spending. Certain industry-specific policy changes were introduced to the market, which led many advertisers to adopt a wait-and-see approach. This directly resulted in more cautious and tightened ad spending by advertisers, particularly in the financial services vertical.

Second, with the economy slowing, fund raising by private company has been very challenging. Companies that rely on VC backing for marketing dollars to drive growth are facing difficult times. The risk of the company succumbing to too much debts has increased. In order to mitigate this risk, we began strategically slowing the expansion of our targeted marketing business.

We have since been very selective in customer acquisitions and only work with the large reputable customers that have a strong financial position and ability to pay.

Third, as we talked about in the Q2 earnings call in August, we are now in the process of transitioning from a traditional target marketing model to a new SaaS-based model. This transition will impact the way in which we account for revenue and gross margin within our target marketing business line.

What this means is that revenue previously accounted for on our growth base are now on a net base under U.S. GAAP. Furthermore, in our traditional target marketing business, we get an average take rate of about 15%, which will now be in the 5% to 10% range under this new SaaS-based model.

This new SaaS initiative has already generated solid results during the quarter. iZone and 360 Finance are some of the notable SaaS customers that have already signed up, and we expect more KA customers to come on board next quarter.

Let me remind you again of the significant benefits that this SaaS-based model are for us. While this initiative may initially generate lower top line target marketing growth, it will benefit us over the long run with improved gross margins, less working capital requirements and expand the advertising customer base by working with platforms such as iZone who can help us address a much larger TAM.

Prior to these, we were only able to capture a slice of direct customers at budget, but we'll now have the opportunity to capture the majority of it as they see the numerous benefits and improved ROI we are able to offer.

Direct customers were able to use our data package to help them deploy and [compare] across all major media platforms.

Our revenue mix has been fairly balanced this quarter with the financial service vertical contributing 30% of total ad revenue, mobile gaming contributing 25%, media and entertainment and other 18%, and the remaining 27% contribute to other vertical -- contributed to other vertical including e-commerce, education and auto.

In terms of advertising inventory, Tencent GDT accounts for 32% in dollar terms.

Lastly for target marketing, I would like to give you an update on live push alliance initiative I touched upon last quarter. By the end of the quarter, more than 1,000 apps have already embedded our live push SDKs.

We expect this number to grow as we progress. In this quarter, we already started to monetize the live push traffic by working with a number of trial customers. The eCPM we were able to achieve is very satisfactory. I look forward to providing more color and update on how live push is progressing in the quarter ahead. This will significantly expand our overall target marketing gross margin forward.

Now I will turn the call to Fei who will discuss Q3 performance of 3 business lines within SaaS products in more detail.

Thank you, Chris. Combined revenues from SaaS products including financial risk management, market intelligence and iZone demonstrated impressive resilience in the growth by increasing 52% from CNY 22 million in the third quarter last year to CNY 33.6 million.

This was mainly due to the strong 18% year-over-year increase in the number of paying customers as well as continued expansion of ARPU, which increased 29% year-over-year.

Year-over-year, all 3 product lines within SaaS products generated revenue growth of around 50%. For financial risk management, the top paying customers this quarter included 360 Finance, [Zhuofu] and Ping An credit consulting.

Our strategy remains very consistent. We are focused on tailoring to the leading players in the banking and the consumer finance markets. This strategy is clearly paying off, as reflected in a solid organic growth, in both customer numbers and ARPU.

It also helped us navigate smoothly in a challenging market environment where has been impacted by major policy changes. We are also in the process of launching new products to help our customers monitor high-risk illegitimate lending app.

Customer demand for this product has grown significantly following initial trial operations. Our market intelligence product is growing strongly in both consumer numbers and ARPU -- in both customer numbers and ARPU on both a year-over-year and a sequential basis.

New customer acquisition has been particularly strong within the corporate segment. We have won new big corporate customers such as Sony Mobile, NetEase Cloud Music, iQiyi and Starbucks. As a result, revenue contribution from corporate customers also exceeded the revenue from fund customers.

And lastly, our iZone business continued to generate solid growth of over 40% year-over-year during the quarter. Top paying customers included Bitauto, [EG] and the China Urban Planning Institute. We see continued solid demand across the real estate, new retail and urban planning verticals.

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 other P&L items. Gross margin for Q3 increased meaningfully from -- up to 28.2% from 26.2% last quarter. This was a direct result of our optimized product mix.

Developer services and SaaS-based products generate a much higher gross margin and contributed a larger percentage of total revenue during the quarter. The revenue contribution grew from 17% last quarter to 28% this quarter.

In renminbi terms, our gross profit increased by 7% to CNY 57 million. Total operating expenses increased by 41% year-over-year to CNY 111.5 million. In particular, R&D expenses increased 16% to CNY 43.3 million.

This was mainly due to increases in staff costs, depreciation and amortization and bandwidth costs. Selling and marketing expenses increased 26% to CNY 30.5 million, mainly due to increases in staff costs, marketing expenses and lease and office expenses.

G&A expenses increased 115% to CNY 37.7 million, mainly due to increase in staff costs, professional fees and bad debt allowance of CNY 17.8 million. This CNY 17.8 million bad debt allowance this quarter was related to specific companies having difficulties in repaying their outstanding debts to us.

The majority of the CNY 17.8 million is related to a single e-commerce customer, who was not able to raise additional funds from the existing and prospective investors and shareholders and announced publicly that they could not repay any of their suppliers. As Chris mentioned, we have been very selective in customer acquisition. And we only work with large and reputable customers.

Based on our assessment at the time of this call, we believe this to be a one-off event and related to this specific customer. There are no other material debt on top of this that we are aware of at this time.

Our adjusted EBITDA was negative CNY 26 million in Q3 '19 compared to a negative CNY 6.9 million in the same quarter of 2018. Excluding the bad debt allowance, our adjusted EBITDA would have been negative CNY 8.2 million.

On to the balance sheet items, total assets were CNY 971.4 million as of 9/30/2019. The key assets as of September 30 were cash and cash equivalents of CNY 420 million. Cash and cash equivalents increased by CNY 38 million sequentially. This is a direct result of our disciplined granting of credit terms to customers and collection efforts. Account receivable were CNY 150 million. Prepayments were CNY 97 million. Fixed assets were CNY 110 million. Long-term investment were CNY 134 million.

Total current liabilities increased from CNY 164 million as of 12/31/2018 to CNY 200 million as of 9/30/2019.

The key current liabilities item were: Accounts payable of CNY 22 million, deferred revenue of CNY 85 million, accrued liabilities of CNY 91 million. As of 9/30/2019, we maintained a healthy level of working capital of CNY 501 million. Looking forward, we expect total revenues for the full year 2019 to be in the range of CNY 909 million to CNY 919 million, representing growth of 27% to 29% year-over-year.

And lastly, before I conclude, I'll give a quick update on the share repurchase plan. As of September 30, 2019, we have repurchased a total of 805,648 ADS since the start of our repurchase program.

In the third quarter this year, we repurchased 7,937 ADS at an average purchase price of USD 3.77, spending a total of USD 29,900. We will continue to monitor the need to repurchase depending on the market conditions and the underlying share price.

And this concludes management prepared remarks. We'll be happy to take your question now. Operator?

(Operator Instructions) Your first question comes from the line of Ribery Gu from Credit Suisse.

I have a question regarding the top line revenue. It seems that the reported revenue this quarter is a bit off from the guidance that the management formally give out in second quarter earnings. Could the management help us to work through the challenges or difficulties that we have been experienced in this quarter to the resulting the relatively weakness in the revenue?

And secondly my question is about the operating costs here. Despite the one-time of cost out for the G&A line, could the management help us to understand the sales and marketing expense and the research and development expense as a percentage of revenue going forward as we see relatively spike in this quarter?

Ribery, this is Fei. Yes. So regarding your first question, regarding the top line -- the revenue number, right? So as you can see, actually, we break the revenue into 3 segments.

The developer service, which grew 39%, which is very, very stable, pretty good ball -- very healthy business. It's a typical SaaS business, right, and the 3 SaaS products, which also grew over 40%, which is also very healthy and that's also very typical SaaS products.

The only revenue line that we saw decline is basically the target marketing. So actually, target marketing year-over-year, it declined about like 80% and the main reason is because -- actually, Chris mentioned, there are 3 reasons.

So first 2 is actually due to the macro environment. So the -- we do see some customers, ad customers, they kind of like tightened their ad budget. This is the one reason.

And the second reason is because we purposely actually do not want to work with some risky customers. We worked with them before because we assess their potential of being like delaying payment or being default like the one-time write-off, it's actually purely due to a single customer called taojiji, and you know the customer.

Actually that customer was a star, right, like a few months ago, but now they cannot find an investor to continue to support them, right? So the CEO publicly announced that they don't want to pay their suppliers anymore, right?

So we want to avoid this kind of customer and situation to happen again. So we purposely actually got rid of some business actually we would otherwise conduct in a normal macro situation.

So these 2 actually and the net effect is we lost about (technical difficulty) revenue opportunity and then actually [if we] versus the target marketing, the gap is about like CNY 90 million. So another CNY 40 million actually is [the trend] from the traditional [marketing] to our new [model] okay? So that CNY 40 million, you can call it as GMV, the gross revenue.

Now since we are doing it, conducting it in a SaaS model, we take like 5% of the take rate. So actually, that revenue become [CNY 2 million], right? So these 2 net effects, actually, you see the reduction of the target marketing business, okay?

So I hope that this can explain what happened and quantify what exactly happened.

And also, regarding your second question regarding the operating expense, right? So the company -- actually without the -- this quarter was actually abnormally higher than the previous quarter.

The main reason is because of the taojiji write-off, right? So if you remove taojiji write-off, the one-time actually, this quarter the cost structure is actually the lower than the previous quarter. And for the current quarter, the fourth quarter, the cost structure will pretty much remain similar to the second quarter. And then going forward, actually our company, we will continue to look for opportunities to optimize our cost structure in terms of basically getting rid of people who is not performing.

So in terms of the head count, actually, we are looking to like reduce like 20% head count, okay, in the current quarter.

So next year, if you look at the total operating expense level, it should be, at most, similar to this year's number. And it may be even a little bit lower, yes. So that's the cost structure going forward.

(Operator Instructions) There are no questions at this time. I would now like to hand the conference back to Chris. Go, Chris.

Thank you, everyone, for joining our call this evening. If you have any questions or comments, please don't hesitate to reach out to the Investor Relations team. This concludes the call. Have a good night. Thank you.

Thank you so much, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may all disconnect.