Aurora Mobile Ltd (JG) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Aurora Mobile Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mr. Christian Arnell. Thank you. Please go ahead.

Thank you. Hello, everyone. And thank you for joining us today. On the call 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 I 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 or factors are included in the company's filings with the U.S. Securities and Exchange Commission. 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 Weidong. Please go ahead.

Thanks, operator. Good morning, and good evening to everyone on the call, and welcome to Aurora Mobile's fourth quarter 2019 earnings call. Aurora Mobile has always been committed to maintaining the high standards of corporate social responsibility, and I would like to kick off this call by sharing with you what we have been doing to support the fight against the COVID-19. In earlier February, we launched a suite of outbreak analytic and monitoring systems to assess with government decision-making for targeted prevention and control efforts. Our teams sacrificed their New Year holiday and have been working day and night since the start of the holiday to make this product ready available to authorities.

In mid-February, we also collaborated with Unified Push Alliance and other Unified Push Alliance members to jointly develop "Outbreak Alert", a service that will be used to distribute timely operate information to mobile users.

This initiative created another opportunity for us to leverage our cutting-edge big data analytics capability and collaborative approach to innovations. To demonstrate how they can support our operating efforts to fight against the COVID-19 outbreak.

Personally and as a company, we provide ourselves in contributing what we can do -- what we can to these cause. The number of push messages sent out during the month of February by our customers in the online news media, entertainment and online education centers, almost doubled when compared to previous months. Our highly robust, scalable and stable infrastructure has easily been able to handle the significant increase in demand from our developer service customer, which, again, demonstrates the superior service quality we are able to deliver even under extreme conditions.

Now let's begin our review on our key operating and financial performance for the fourth quarter. First, the number of mobile apps utilizing at least one of our developer services, or the accumulated app installations, reached 1.45 million as of December 31, 2019, from approximately 1.1 million last December. This represents an average of 22,000 new apps coming on board every month during the quarter.

Second, cumulative SDK installations increased to 33.6 billion as of December 2019 from 19.8 billion last December. Third, the number of monthly active unique mobile devices we cover continued to increase, reaching 1.36 billion in December 2019 from 1.04 billion in December 2018. This was fueled by the increasing number of apps that used our SDK, particularly with the rapid adoption of JVerification SDK.

Building upon the solid growth momentum from the previous quarter, more and more customers signed up to use our JVerification product in Q4 2019, with notable new customer including [Ximalaya] (inaudible). Since its launch at the end of 2018, we have seen an increasing number of customers sign up quarter after quarter. This reflects our ability to develop a product that meets the needs of the market.

During the quarter, more than 600 apps used our JVerification service with aggregate DAU now is sitting 130 million. JVerification is now the second largest developer services product adopted by a wide range of developers after Push SDK.

Lastly, in the fourth quarter of 2019, we saw the number of paying customers increased to 2,131 from 2,096 a year ago.

Now let me discuss a few highlights from our financial performance during the quarter. Total revenue during the quarter was CNY 183 million, down 19% year-over-year. The decrease was due to the continued transition from our target marketing -- traditional target marketing business to the new advertising driven SaaS model.

As we mentioned last quarter, this means changes in the way in which it impacts our P&L with lower revenue by an increase in margins. Throughout the transition, we believe that gross margin, both in terms of percentage and absolute number, is the best yardstick for measuring performance of our business now and going forward. I will let Shan-Nen go through this in more detail later.

Let me now give you some color on the performance of our various business segments. One highlight for this quarter is revenue generated from developer services, which increased significantly by 91% for CNY 7.4 million during the same period last year to CNY 43.2 million. This was mainly due to growth in both the number of customers from 1,265 to 1,644, and ARPU, which increased by 47%.

Developer Services accounted for 18% of total revenue, up from 8% a year ago. During the quarter, we completed and delivered a couple of large-value private cloud projects, which contributed to the ARPU growth. As the market increasingly embrace our JPush and JVerification products, we expect to see the Developer Services revenue growth steadily in the future.

Revenue from target marketing were down 44% year-over-year and now account for 66% of total revenue compared with 81% a year ago. This is due to the following 3 factors: first, this is being driven by the flow-on effect of softening Chinese macroeconomic environment during the fourth quarter of 2018 -- '19.

Certain industry remained adversely impacted by tightening regulatory policy that remained effective during the quarter. Advertisers in the financial services vertical, in particular, have greatly reduced their advertising spending in the market.

Second, as we mentioned last quarter, we continue to be highly selective and disciplined in our approach to new customer acquisition in view of macroeconomic headwinds which result in us passing on many customer that did not meet our strict internal know your customer process. We remain adamant about not readily pursuing revenue growth at the expense of increasing rates in receivables.

Third, is the impact of transition from our traditional target marketing model to our new SaaS-based model.

To recap, under this new SaaS-based model, revenue that previously was announced accounted for on a gross basis are now accounted for on a net basis. Revenue under this new model now contribute 100% to our gross margin with no cost of revenue. Market demand for this SaaS-based model has grown strongly.

Other than Kuaishou, new SaaS-based customer in (inaudible). We are currently going through the trial with Baidu and Toutiao. We believe with the new SaaS model will continue to drive the expansion of our margin going forward.

Our revenue mix by sector were fairly balanced this quarter with customers in the financial services vertical contributed 30% of total ad revenue, mobile gaming contributed to 27%, media and entertainment and other 23%, and the remaining 20% contributed by other verticals, including e-commerce, education and auto.

In terms of advertising inventory Tencent GDT accounting for 43% in dollar terms.

I would like to quickly turn to our live push alliance business before handing the call over to Fei. As of December 31, 2019, apps that embedded our live push SDK is sitting 40,000, with DAU is sitting 25 million. Paying customer using our live push alliance in China include (inaudible) JD Finance, Pinduoduo, QQ Music and Vipshop. We continue to see strong interest being created from customers and apps developers, seeking to benefit from this channel to advertise and monetize their apps. We expect DAU for our live push alliance business during the first quarter to increase by tens of millions, which we are ideally positioning it to drive significant revenue and profit growth in coming quarters.

Now I will turn the call to Fei, who will discuss Q4 performance of the 3 business alliance within SaaS products in more details.

Thank you, Chris. Combined revenues from SaaS products, including financial risk management, market intelligence and iZone generated solid growth by increasing 15% from CNY 25 million in the fourth quarter of last year to CNY 29 million. This was mainly due to a strong 10% year-over-year increase in ARPU, while customer numbers increased by 5%.

Digging a bit deeper into financial risk management, we are committed to and continue to execute our proven strategy, focusing on the leading players in the banking and the consumer financing sector. Despite a challenging business environment during the quarter, we managed to grow the revenue by 4% year-over-year, which was driven by an increase in ARPU of 14%.

New contracts signed including (inaudible). Our market intelligence product is growing strongly in terms of customer numbers, increasing 25% year-over-year. Geographically, we expanded our global footprint in Europe by signing our first U.K.-based client. From the corporate segment, we continued to sign new contracts and renew previous ones from the super apps such as (inaudible). Other vertical leaders such as (inaudible) the new upcoming companies, including (inaudible)

And lastly, our iZone business continued to generate solid growth, with revenue increasing 43% year-over-year during the quarter. New customers during the quarter included customers in the real estate, tourism and the retail sectors, including subsidiaries of (inaudible) tourist bureau. We continue to see solid demand for our iZone products, which generated ARPU growth of 43% year-over-year.

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 the -- some of our other P&L items. As mentioned earlier by Chris, we made very good progress in transitioning our traditional targeted marketing business to the new advertising-driven SaaS model during the quarter. The shifting mix of revenue from traditional targeted marketing and the new advertising SaaS model make revenue comparison difficult and are not a good reflection of the business underlying profitability and trends. We believe that gross margin, both in terms of percentage and absolute number is the best yardstick for measuring the performance of our business now and going forward.

Gross margin for Q4 increased meaningfully to 33% from 28.2% last quarter and 27.6% during the same period last year. This was a direct result of our optimized product mix where developer services and SaaS-based products are able to generate a much higher gross margin and contribute a larger percentage of revenue. As a percentage of revenue, Developer Services and SaaS-based product accounted for 34% during the quarter, an increase from 19% during the same period last year.

At the same time, we are also seeing margins improve across our targeted marketing business, as it benefits from the ongoing transition to the new advertising driven SaaS model. This improvement has helped increase our overall margin during the quarter. The net effect of our unfolding strategy is that, despite a 10% decline in revenue sequentially, gross margin in absolute dollars increased 6% sequentially, which reflects the direction we are heading in as we scale the business further.

Total operating expenses increased 19% year-over-year to CNY 103 million, in particular, as far as our effort to optimize operation in late 2019, we reduced our headcount by approximately 120 during the quarter. Associated compensation was paid at CNY 6 million, which was allocated to various OpEx, depending on the department, they were associated with. R&D expenses increased 6.8% to CNY 44 million, mainly driven by increases in staff costs, including the compensation paid.

Selling and marketing expenses increased 48% to CNY 30.5 million, mainly due to the increase in staff costs, which, again, includes the compensation paid to staff who we let go and increase in marketing expenses associated with higher number of events and seminars we attended during the quarter as part of our effort to scale our business and increase our brand awareness.

G&A expenses increased 15% to CNY 28.8 million, mainly due to increase in staff costs, including the compensation paid for staff that we let go. Our adjusted EBITDA was negative CNY 8.9 million during the quarter compared with negative CNY 26 million in the previous quarter. The improvement in gross margin, coupled with the better control of operating expenses and a more disciplined approach to managing risk receivable resulted in a significant improvement in adjusted EBITDA sequentially.

On to the balance sheet items. The total assets were CNY 942 million as of December 31, 2019. This includes cash and cash equivalents of CNY 431 million, account receivables of CNY 137 million, prepayments of CNY 55 million, fixed assets of CNY 106 million, long-term assets of CNY 169 million, total current liabilities were CNY 196 million as of December 31, 2019. This includes accounts payable of CNY 20 million, deferred revenue of CNY 79 million, accrued liabilities of CNY 96 million.

As of December 31, 2019, we maintained a healthy level of working capital amounted to CNY 460 million. First quarter is typically a seasonally weaker quarter of the year due to the Chinese New Year holiday. This year, the COVID-19 outbreak impacted this seasonally slow period even further as businesses across China slowly restart operation later than expected. Many deals that would have otherwise been closed and contract that would have otherwise have been signed during the quarter have been delayed as a result. This uncertainty and slow start following the holiday will adversely impact our business during the first quarter of 2020.

At the same time, we are in the midst of the transition from our traditional targeted marketing business to the new advertising driven SaaS model, which also give -- which also impact our top line revenue but expand our margin.

With this in mind, we have decided to suspend issuing revenue guidance on a quarterly basis in the near-term until the situation in China normalizes and the targeted marketing transition is largely over. While things remain highly uncertain, we do believe things have been improving over the last couple of weeks as the outbreak comes under control. We believe the worst is behind us and the business activity will gradually resume to normal levels.

Lastly, before I conclude, I'll give a quick update on the share repurchase plan. As of December 31, 2019, we repurchased a total of 921,000 ADS since the start of our program.

In the fourth quarter, we repurchased 115,000 ADS at an average purchase price of USD 2.31 for an average amount of -- for an aggregate amount of USD 266,000. We will continue to monitor the need to repurchase depending on the market conditions and the underlying share price.

And this concludes the management's prepared remarks. We're happy to take the question now. Operator?

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

I can -- I have a question regarding your business transition from the traditional model into the SaaS-based model. Could you help us understand from an advertiser's perspective. So how will that transit work? For example, we understand that in your traditional model, you would purchase the media property and resell the same to the advertiser because you can yield a better conversion rate? So now given your new SaaS-based model, how will the advertiser pay you for exactly what kind of services? Because I think they used to mention the -- within the SaaS revenues, you also have risk management, you also have location-based advertising and also the market intelligence. So we just want to understand that how you may -- so in the transition, how you may lose some revenue, but earn the same budget in a different way?

Bill, this is Fei. So actually, let me clarify. Actually, this target marketing SaaS is different from the SaaS products, we actually, as a group, that includes 3 business lines, such as financial risk management, iZone and the financial -- the market intelligence, right? Those 3 products is totally different from this target marketing SaaS. So this target marketing SaaS is actually transitioning from traditional growth base to net base. By saying that, what we do in practice is that before, actually, the advertisers, they were payers, they will give us the ad budget. And then with that ad budget, we are buying media inventory on their behalf and also using our big data analytics, help them to select the target users to place the ads. So everything we do for them.

But now, actually, we don't take their budget. We only provide the data. Basically, we help them to screen out what kind of the devices, the targeted users. And then those devices will be used to either directly by the advertisers themselves when they go to a platform to place ads or this data will be used by the platform, which, in turn, will be used by the advertisers indirectly. So we only charge this data service fee, okay? This data service fee, how do we charge it? Actually, it's based on the ad budget they place on the platform.

For example, if an advertiser, they place like CNY 10 million advertising dollar on Kuaishou so actually, we charge Kuaishou actually, the fee is like, for example, 5%. So that's actually -- and this 5% is accounted as our revenue instead of this CNY 10 million.

Okay. Then in the reported number, CNY 29.2 million this quarter from SaaS product. So does the CNY 29.2 million include the revenue stream you just mentioned?

No, no, no. This SaaS product of CNY 29 million actually is just the 3 business lines: financial risk management, iZone and the market intelligence.

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

I understand the reason that why we cannot provide guidance right now, but could you please briefly like walk us through the -- like the recent 2 months operation and the financial updates from the company? Because we are very keen to understand the impact from the outbreak of coronavirus -- our business?

Yes, yes. So Ribery, this is Fei. So actually, for the month of January and February, as we look at our financial performance for the 2 months, it certainly, it's been weaker than we expected, particularly in the month of February. So the main reason is because, actually, most of -- although, we actually started -- our company resumed the work in the beginning of February, with most of employees working from the home, okay? So we are now allowed to come back to the office, physically. And -- but similarly, most of our customers they also worked from home. And many contracts actually cannot be really signed because there's no stamp can be obtained by our customer. So definitely, that slowed down the contract signing process. And then the service, which was also delayed the services we can provide with other contract signing, right? So the month of February is pretty weak. But I think starting from a week ago, pretty much most of the -- including ourselves, more than half of -- 50% of the employees are back to the office, physically. And also our customers, they are back to the office with a meaningful presence of their workforce. So things have been picking up. So I think in general, the first quarter, it surely will be weaker than we originally anticipated before the end of last year.

Yes. Just a very quick follow-on. So according to this current circumstance, so like when or how soon you expect the recovery will come?

Yes. I think the recovery, actually, we published -- we actually -- with the (inaudible) agent -- agency published a report yesterday, talk about the general population, the status of the general population returning back to work, right? So actually, pretty much as of now, about 50% of our China workforce has been back to work, okay? And -- but the thing is when they are back to work, most of people, they are still like basically going back and forth from the workplace to their home, right? They don't really carry out other offline activities, right? So the business -- the economic, actually, the full recovery is still going to take some time. And if the whole economic recovery has not been -- come back to normal, which we are certainly depressed some of the consumption, right? And if the consumption is depressed, certainly, which will also impact the advertising dollars spent and certainly, which will impact our business as well, right, particularly with the target marketing business -- traditional target marketing business, right? Although our SaaS model actually is picking up, the main reason is because it's starting from a small base, right?

So overall, net-net, the target marketing, the revenue will continue to see quarterly -- quarter-over-quarter sequential decline in the first quarter. And we are continuing to monitor the progress of the general populations returning back to work. And we think that this impact should continue until the end of this month.

(Operator Instructions) Your next question comes from the line of Ryan Roberts from Navis Capital.

My question is kind of on transition to the SaaS driven model. Can you please give us some kind of clarity on what the -- for Q4, what's the advertising dollars from your clients, what the consumption was on kind of an apples-to-apples basis versus last year, please? I realize it's a growth versus net, but certainly, you must know what the growth would be, for like I know, the average for Q4?

So Ryan, just to recap if I understand your question, you would like to know what was the traditional advertise -- traditional targeted marketing revenue?

Yes. On an apples-to-apples basis versus Q4 last year. Or alternatively, you can give that Q4 number last year, what it would have been if you build on a net basis, either way is fine?

Yes, I guess, Q4 last year, you mean 2018, right?

Yes, that's correct.

I think Q4 '18, 100% of that is traditional targeted marketing, okay? So that is...

Right. So -- yes. No, Shan-Nen, I've got that. I understand the transition. I'm trying to understand what's the magnitude -- I mean, you're stripping out the -- step away from the accounting impact and just understand what underlying demand was. So in Q4, if you did not have the SaaS billing for targeted marketing which is net, I understand that. What are we looking at on a Y-o-Y basis?

Yes. If you look at what we have under the traditional -- under the new SaaS model revenue, we would have CNY 50 million gross billing, 5-0.

CNY 50 million, okay. And where are we in terms of the overall transition process? I think the previous quarter, it has been setting us underway. Any kind of sense of how much under the -- of the customer base is due to SaaS -- billing under the SaaS model, and sort of how much more transition time do you think that will take?

I think in terms of the progress, we were making good progress. If you compare to what we have said last quarter, we -- I think we disclosed about CNY 40 million of gross revenue billing based on SaaS model and now we have CNY 50 million this quarter. If I look at what we have achieved on a monthly basis, the number has been on the rise every single month. So this is trending well, and we do expect that this will continue to go up -- on the uptrend.

And I think that's what Chris has said during the call, we are now besides Kuaishou we are talking to Baidu. We are talking about Toutiao. So with that, I think the TAM that we are able to tap on to will be much bigger in the future quarters.

Understood. Sorry, Shan-Nen, let me just make sure I understand this. For the targeted marketing, so this Q4 '19 revenue, if you're billing everything on a gross basis, would have been what?

Additional CNY 50 million, 5-0.

Additional CNY 50 million. Okay.

Your next question comes from the line of Bill Liu from Goldman Sachs.

I just want to quickly follow-up on the growth driver for the revenue? Because I noticed that your full year -- sorry, the paying customer is relatively flattish, about 2,100 last year versus this year. Meanwhile, the developer service customer actually grew by about 400. So I understand -- I also understand the loss of the 400 paying customers from the advertising side? So is there any particular reason? Because I understand if they convert the revenue model into, say, net basis, they would remain paying customers. And also just to verify the number, I think, Shan-Nen just mentioned that CNY 50 million more revenue in targeting marketing, if we use the old standard, that means for apple-to-apple comparison, the targeting marketing revenue will be CNY 170 million this quarter if we did not use the net base revenue recognition?

Bill, so basically, as you know, the number of advertiser customers actually is decreased basically because the first reason is we are very disciplined as relative to choose customers, right? Or we only work with those customers with very good credit and 3 companies, right? So we don't want to -- what we've -- those are small companies. So this criteria, basically, we can only work with those big customers, right? So those small companies does go out. And then the second reason is basically, for example, if we work with the preference what I mean preference means Kuaishou, right? So probably on Kuaishou preference we can see more than 200 customers using our data, right? But we only account for one customer is Kuaishou but not the 200 customers. So probably many small customers, they are working with us for Kuaishou's preference but in this case, we only account for one customer Kuaishou. So that's the 2 reasons.

You have a follow-up question from the line of Ryan Roberts from Navis Capital.

I was going to actually maybe touch on the balance sheet, just quickly. I want to touch on receivables. I know we've had some problems with that earlier, and I realize that moving to net billing like you guys were just saying is actually better from a customer management point of view. You have kind of one receivable from a much larger platform as opposed to direct advertisers receivable, which I understand that. I'm just kind of curious, here we are in March, kind of getting through Q1. Just kind of curious, I know Q1 is a softer quarter for advertising demand, where is -- where are our accounts receivable these days? And kind of maybe if you could add some color with respect to some of the changes that you made last year after you had some account write-offs? I just wanted to know kind of where we are in managing that in this quarter?

Yes. In terms of accounts receivables, yes, we have done since the transition into that, the number of customers like what Chris had just said, as opposed to 200 little customer, we now only have one Kuaishou which is good for us. And that impacted or translated into the accounts receivable turn over days. If you look at what we have, Q3, we have overall 84 days of turnover -- our turnover days. But in Q4, it dropped to 70 days. So you can see that itself is pretty remarkable. One, we do not have those little customer anymore. Secondly, we are more stringent in terms of customer screening and that translates to better quality accounts receivable.

And overall performance of the -- where you are, these days in terms of aging that I would do, we're here in March, I think that ended the year with about 140 or somewhere around there. They are kind of curious how it's looking into the quarter?

Yes. No, based on what we have done in the last 2 quarters, we are scrapping up. I think the quality we have is pretty good. I do not expect we have a large provision required going forward. Okay.

(Operator Instructions) There are no further questions at this time. Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may now disconnect.

Thank you.