Kingsoft Cloud Holdings Ltd (KC) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to Kingsoft Cloud's First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

And now I'd like to turn the conference over to Ms. Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com as well as on GlobeNewswire services.

On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang; and the CFO, Mr. Henry He. Mr. Wang will review our business operations and the company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer your questions during the Q&A session that follows.

There will be consecutive interpretations. All interpretations are for your convenience and reference purpose only. In case of any discrepancy, management's statement in the original language will prevail.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 as mandated 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 and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which 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 other 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 statements as a result of new information, future events or otherwise, except as required under applicable law.

Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB.

It's now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

(foreign language) Thank you, Nicole, and thank you all for joining our 2022 first quarter earnings call. In the first quarter, we generated RMB 2.17 billion in total revenues, which was an increase of 20% year-over-year and above the high end of our revenue guidance range. Our public cloud services revenues reached RMB 1.38 billion, remaining stable year-over-year. And our enterprise cloud services revenues reached RMB 792.5 million, up 89% year-over-year.

(foreign language) As previously communicated, starting from the second half of 2021, the Internet sector faced pressures from market headwinds, new regulations and the epidemic. For public cloud services, traffic-driven demand continued to grow, but at a pace slower than before as Internet companies focused more on high-quality development.

In response to the market change, we initiated our strategic adjustments in the fourth quarter of last year. We have proactively downsized our CDN services and allocated more resources to core cloud services, including computing, storage and enterprise cloud, facilitating their fast growth.

We are pleased to say that we have completed the strategic adjustments planned for this quarter, which started to bear fruit. Gross billings from core cloud services increased 61.2% year-over-year and exceeded our guidance. The proactive downsizing adjustments of the CDN services is progressing in an orderly manner. In Q1, the gross billings for CDN services decreased 20.2% year-over-year.

In terms of profitability, our initiatives to cut costs and improve efficiency has delivered substantial results, with our adjusted gross margin improving to 3.8% from 1.2% in the fourth quarter of 2021. In future quarters, we expect to continuously evaluate and dynamically optimize resources allocation, enhancing business agility and promoting gradual improvements of profitability.

(foreign language) Since the beginning of March, the COVID resurgence across China and the corresponding prevention measures adopted significantly slowed down market demand and severely interrupted offline business operations. For us, in response to the continued slowdown of the traffic-driven demand in Internet sector, we proactively scaled down CDN services, while the growth of computing services among public cloud services remained strong as gross billings of computing achieved 45% year-over-year growth.

As a result, our public cloud services remained stable as a whole. In terms of our enterprise cloud services, the market demand potentially remained enormous. However, the epidemic did cause delays in bidding, delivery and acceptance check of cloud projects.

On customer front, benefiting from our premium customer strategy and the robust business operations such customers enjoy, we're able to maintain stable relationships with our existing premium customers while strengthening our efforts to expand our customer base with industry vertical leaders. For example, in the first quarter, we teamed up with Camelot to sign our first partnership agreement with Genki Forest, a fast-growing beverage brand in China. Overall, in the short term, we still face challenges from the macro environment.

For this year, we plan to focus on quality growth, margin improvements and core industry verticals. In the long run, we believe that the ongoing trend for digital transformation where enterprises increased cloud adoption to drive efficiency and save costs remain intact and will keep driving massive demand for our business.

(foreign language) Now on to our public cloud services. Internet companies have been transferring more non-traffic-driven business operations from their internal on-premise environment on to cloud services. Therefore computing services growth remained strong. We'd also like to mention that on the gaming front, with the recent release of several gaming licenses, we are actively engaging with our gaming customers on their incremental cloud service needs and are making progress in our cooperation with Seasun Games along with another top gaming company to support the launch of their new games.

(foreign language) Moving to Enterprise Cloud Services. Enterprises and institutions across the board have been increasingly turning to cloud as the natural choice of digital transformation. However, the epidemic has disrupted the pace of such demand, causing delays to project timelines and increases in delivery costs. To mitigate the impact, we are implementing higher project of quality standards and margin thresholds. In the public services sector, we won the bid to build a one-stop rental housing e-platform for Guiyang Industrial Development Holdings Park. The platform allows users to -- of various roles to operate, manage and supervise the affordable rental housing services for the city.

As a leading cloud company with core technology capabilities, we continue to take part in the national projects, transporting data from Eastern regions to Western regions for storage and calculation or in Chinese (foreign language). Besides the pilot project for Xiangqian cluster in Gansu computing hub, which is 1 of the 10 national clusters, we expect to see more opportunities in big data and computing projects.

(foreign language) In the financial services sector, we continued to dive deeper into top customers' needs for cloud services in multiple scenarios, delivered industry lighthouse projects and keep assessing our solutions offering. With Camelot joining us, we further expanded our coverage of top financial services customers.

We now serve 90% of China's top 20 banks and have been continuously adding cooperation dimensions. Take some of our key account projects, for example, during this quarter, in banking space, we won the bid to provide data management and cloud infrastructure products to ICBC technology to jointly build a unified financial service and management platform.

In the insurance space, we will provide public cloud services to China Life Insurance, a leading insurance company in China. This represents an important landmark project as it pioneers insurance companies transitioning from on-premise deployment to hybrid cloud environment by improving their recognition of public cloud.

(foreign language) In the health care sector, digitalization upgrade has become a key topic for medical institutions, regional health care networks and smart health cities since COVID started. Health care cloud solutions needs to address several challenges, including the magnitude of data size, complicated structure, high storage requirements for image data and varying digitalization levels among regions. A robust and stable digital cloud infrastructure provides the foundation for the value maximization of data assets.

And cloud service companies like us have proved to be an essential component of the digital upgrade for the health care industry. As the epidemic resurged in Shanghai and Jiangsu Province since March, we took quick action and urgently deployed our teams together with cloud infrastructure resources to support local containment efforts. We set up a cloud infrastructure dedicated to Kunshan of Suzhou City for epidemic containment. The infrastructure enables data collection, aggregation, governance, analysis, integration and sharing, providing high-quality and stable data support.

In Hubei Province, following our success with the health care project in Hubei Province and Wuhan City, we won another project to build an information system for special disease prevention and control, where we will be building a middle platform.

(foreign language) In conclusion, the complex economic environment and epidemic resurgence this year have put pressure on the short-term growth. But thanks to the strategic adjustments since Q4 last year, we have laid solid foundation for mid to long-term revenue expansion and margin improvement. Cloud computing carries long-term potentials.

Looking ahead, we will adhere to our strategic direction and pursue steady and high-quality development while improving our business stability and profitability. We will fully leverage our technological strength to provide stable and efficient cloud services to our premium customer base.

(foreign language) I will now pass the call over to our CFO, Henry, to go over our financials for the first quarter.

Thank you, Yulin, and welcome, everyone, for joining the call. Before diving into the financial details, I would like to walk you through the following slide for the past quarter.

First of all, our total revenue reached RMB 2.17 billion in Q1, above the high end of our guidance, which ranged from RMB 2.05 billion to RMB 2.15 billion. It represents a growth of 20% year-over-year. Within that, our core cloud services, including computing, storage and enterprise cloud services increased by 61.2% year-over-year this quarter.

Second, we are pleased to see that we have been making significant progress in our cost control strategy execution. The adjusted gross profit for this quarter increased by 152% quarter-over-quarter to RMB 83.6 million. Adjusted gross margin increased largely from 1.2% in previous quarter to 3.8% this quarter.

Adjusted EBITDA margin narrowed from negative 10.5% in the previous quarter to negative 7.1% this quarter. As we introduced in last quarter as the new technology budgets from Internet sector clients in general have been increasing at a slower pace than expected. Starting from second half of last year, the demand to us has been softened and the effect of resource efficiency connected to the bottom line. In response to the market change, since Q4 last year, we proactively downsized our CDN services and allocated more resources to our core cloud services.

We have taken active cost control measures and improved overall operational efficiency. Even though we are still facing the challenging macroeconomic environment, we believe we are on track to achieve quarterly adjusted EBITDA margin breakeven in Q4 2022.

Third, as of March 31, 2022, we had cash and cash equivalents and short-term investments amounting to RMB 5.6 billion, providing us sufficient liquidity for operations. The CapEx for this quarter was RMB 622.4 million. The increase was primarily due to the procurement of high-performance service, which catering to our increasing demand from our core computing services as well as the cash payment for the servers we ordered last quarter.

For the full year 2022, we expect to keep our total capital expenditure plan in the range of RMB 1 billion to RMB 1.5 billion. We firmly executed our high-quality development targets and allocated online server resources prudently to our core cloud service growth.

Last, our Board of Directors has recently authorized the company to repurchase up to USD 100 million of our ordinary shares in the form of American depository shares during a 12-month period. Today we are pleased to announce that we have entered into a share repurchase program, which is demonstrating our strong confidence in the company growth and a commitment to generating long-term value to our shareholders.

I will now go through our financials in detail. Revenues from public cloud remained stable year-over-year at RMB 1.38 billion this quarter. It was primarily due to 45.1% year-over-year growth of our computing services and offset by 20.2% year-over-year decrease of our CDN business, which proactively narrowed down.

In terms of enterprise cloud services, even though the COVID-19 has disrupted delivery of certain offline projects, market demand from traditional enterprises and organizations remained strong. Our Enterprise Cloud Services achieved a solid increase of 89% year-over-year to RMB 792.5 million.

In terms of cost control and optimization, we have achieved the effectiveness this quarter. Total cost of revenues decreased by 20% quarter-over-quarter to RMB 2.09 billion. The IDC costs decreased by RMB 221.6 million from last quarter to RMB 1.11 billion this quarter. It remain consistent of bandwidth and the cabinet cost and a decreased trend was in line with our adjustment of CDN business.

Solution, development and services costs decreased by 8% quarter-over-quarter to RMB 476.0 million. It consists of payments to our solution design, development and services personnel. Depreciation and amortization costs increased by 10% quarter-over-quarter to RMB 246.1 million. Fulfillment costs were RMB 184.5 million this quarter and it represents the cost of purchasing technologies, products and services from third-party to fulfillment, the demand of our solutions.

Other costs were RMB 76.9 million this quarter. In terms of expenses, we have completed the preliminary organizational optimization and efficiency improvement. Resulting personnel expenses decreased compared with Q4 last year. Excluding share-based compensation and D&A, total adjusted operational expenses were RMB 532.2 million, decreased sequentially by 9.6% from RMB 578.7 million in Q4 last year.

Within that adjusted R&D expenses were RMB 221.7 million compared with RMB 246.2 million last quarter. Adjusted selling and marketing expenses were RMB 127.6 million compared with RMB 161.2 million last quarter. Adjusted G&A expenses remained stable at RMB 174.0 million.

As of March 31, 2022, we had sufficient cash and cash equivalents and short-term deposits of RMB 5.6 billion. During this quarter, capital expenditures were RMB 622.4 million. The increase was mainly due to the increase in purchase of high-end performance services to meet the incremental demand from strategic core services of computing and storage. We expect our full year CapEx will range from RMB 1 billion to RMB 1.5 billion, which will be prudently allocated to meet the demand from our core cloud services.

Meanwhile, we have released our ESG; environmental, social and governance report for 2021, along with our annual report in early May. We would like to highlight that nominating the corporate governance committee of the Board who're primarily responsible for overseeing ESG initiatives at board level. And the company has appointed the first independent female Board Director, enhancing gender diversity and workplace inclusivity.

Looking ahead, we keep focusing on the balance between revenue expansion and margin improvement. We expect our total revenue to be between RMB 2 billion and RMB 2.2 billion for the second quarter of 2022, representing a year-over-year increase of about negative 8% to positive 1.2%. It is mainly due to the offline fulfillment delay of enterprise cloud business in the middle of the short-term COVID-19 resurgence.

We will continue to embrace opportunities post-pandemic. We are also in a view that our profitability will keep in upward trend. The adjusted gross margin will continue to be higher in the second quarter compared with Q1. Under the stable market condition assumptions, we believe we are on track to achieve quarterly adjusted EBITDA margin breakeven by Q4 2022.

All these forecasts and comments above are based on our current and preliminary views of the market and operational conditions, which are subject to change. In addition, based on the capital market conditions, we have already commenced a share repurchase program, which was authorized by the Board in March to purchase up USD 100 million of the shares during the 12-month period. We were closely hearing feedback from shareholders and deliver long-term value to our shareholders.

Finally, we are moving forward with our Hong Kong Stock Exchange listing plan. And we are on track with this progress. We seek to maintain independent listing status in both Hong Kong and the U.S. to maximize protection of our shareholders.

Given the recent positive progress in the negotiation of the Sino U.S. Auditing Cooperation, combined with fluctuation in the global capital markets, we will carefully monitor and proactivity adjust our execution timeline to safeguard the interests of our existing shareholders. We will closely monitor the market and the regulatory dynamics and proceed prudently at the right time. The final listing decision and timeline is subject to both regulatory approvals and market conditions. Thank you.

Thank you. This concludes our prepared remarks. Thank you for your attention. And we are now happy to take your questions. Please ask your questions in both Mandarin and English if possible.

Operator, please, go ahead. Thank you.

(Operator Instructions) Our first question comes from the line of Thomas Chong from Jefferies.

(foreign language) My question is about the Q2 revenue guidance. Can management comment about the monthly trend that we are seeing in April, May and June respectively? And given right now, we have already passed the first week of June, just want to get a sense about our confidence level in terms of the guidance. Under what scenario would we be hitting the low end and the high end because I think the low end, we are talking about negative growth. So I just want to get some color about our thoughts at this point. Thank you.

(foreign language) So thank you very much for your question. So essentially the second quarter is mainly impacted by the COVID situation. And as you can see, I just elaborated according to the 2 services. In terms of public cloud services, we think the impact is limited. There is some small impact for the increased amount in our data centers in the Eastern China, and Northern China for their increasing business operations, but it's not any material impact.

The impact on the other hand, on the enterprise cloud side is relatively large, especially in Q2 because the -- basically, the control measure in terms of the scope and the timing that it spends has exceeded our expectation. And that situation has impacted the bidding, the implementation, the deployment and the delivery of our enterprise cloud projects.

But as far as we can see, since the end of last week, some of the projects that's ongoing, we have already started to resume some of those projects that had been impacted. And we're still having several weeks towards the end of June. So we are trying to catch up with the time to meet the product target as much as possible. So that leads us to the guidance that Henry has provided towards the end of the prepared remarks. Thank you.

Our next question comes from the line of Sophie Zhang from CICC.

This is Sophie from CICC. So we've heard about the news of headcount cutting across many top-tier Internet companies. I just wondered like many of which are KC's key customers, so do we expect any change in their demand? And how will the dollar value of those core customers change? And accordingly, shall we expect any headcount adjustments within KC? (foreign language)

(foreign language) Thank you very much for your question. So, in terms of public cloud, we know that the market is predominantly forcing on the Internet conglomerate, which some of them are our customers. So for the changes and adjustments that you mentioned, actually, we had already expected that. And what we see is that's happening in this quarter is exactly unfolding according to what we had expected.

And as mentioned in the expectation of those changes, we have proactively downsized our CDN business due to the increased volatility of the CDN business. Now by adjusting downwards of CDN supply, we're able to come on a more profitable business, which, again, is consistent with our expectations. And another part of the non-CDN business for those customers of ours is that when they are focusing on reduction of their cost, it is also an incentive for them to increase the cloud adoption, which is good for their cost savings. And therefore, we are observing increased amount for non-CDN business on cloud usage.

And thirdly, we also have made progress in the first quarter in terms of new customers for public cloud services. In the enterprise class space, I know you didn't particularly ask that. But as we discussed earlier, it's mostly impacted by the COVID situation and control measures. And for the second question you asked about the KC headcount adjustments. Since the completion of acquisition of Camelot year, we have started the integration with Camelot, which includes the integration of the employees, which has largely been completed by last year, end of last year.

So as of now, we have a combined headcount of roughly 10,000 people for KC and Camelot combined together. And we expect that number to remain relatively stable or with a small decline throughout this year, but largely stable. Thank you.

Our next question comes from Kyna Wong from Credit Suisse.

(foreign language) Now, let me translate myself. The first question is actually a follow-up question that I wanted to take on more detail about the impact on the enterprise cloud because perhaps some project cannot complete -- cannot be completed by the end of this year due to the pandemic impact in the first quarter and second quarter? And -- or some is actually impacted by the adjusted budget from the government or like published office projects? And the second question is about the corporate cloud industry trend because we do see some landscape change here and I wanted to hear the sharing from the management.

(foreign language) So yes, thank you very much for your question. And I think to answer the first question about the COVID impact. Essentially the impact is pretty much concentrated on the enterprise cloud side. And for the public cloud side, the impact does not have any material -- the COVID situation does not have any material impact to our business, especially we do think maybe there is actually some short-term uplifting of the public cloud usage just before that COVID factor per se. And for the enterprise cloud side, for the first quarter, actually, the impact is limited because -- it's mainly after the Chinese Spring Festival that impact had start to show the resurgence of the COVID situation started to take place.

But the second quarter impact was almost covering the full quarter, so it's relatively severe. So there are 2 kinds of situations. One is that some of the projects that's already in process and we're essentially seeing delays on those projects. And for those sort of projects, because we're currently still in June, in the early June, we think -- if you take a look on a full year perspective, we do think there's still time to catch up with the time that's lost during the quarter due to the controlled measures. And for the second type, which is essentially the bidding process that's got delayed during the control measure, we think that according to our communication to our prospective customers, there's no material change in that respect, especially in terms of public service customers and health care customers.

We think the risk of missing the full year guidance currently, as we can see it, is not material. So we think, generally speaking, here, the basis, we're still on track to deliver the full year guidance right now. And we don't think I think of any necessity to adjust for that guidance for the enterprise cloud business. Now for the public cloud side, our communication with our key premium customers, those internet customers included has been very smooth. And we have a very open and smooth channel for communicating with them. So despite all the changes and challenges that you mentioned, those are, things that's not outside of our expectations. For both the -- as you can see and also evidenced by the numbers that we just disclosed in the first quarter. For both existing customers and new customers, there has been a relatively fast growth for the usage of the non-traffic-driven demand.

So that's something nice to know. And also in terms of competitive dynamics, we think that for the various industry verticals that we're focusing mainly the financial services, the Internet, the public services and health care, the barrier to entry in those particular verticals actually have relatively high. And we think after this many years of operation, our competitive energy has been reinforcing. So we think we do not see really a material change in this -- in the enterprise cloud competitive dynamics. Thank you.

Yes. Kyna, if I may, I'm also happy to offer a few more data points to help that translate. First of all, if you remember, in the recent disclosed annual report, our dollar retention rate for the public cloud clients for last year was around 114%. So even consider the active decrease of the CDN revenue contribution, this number is developing a rolling basis into the Q1 this year, we still believe is above 100%. So that's actually has a base of the growth of the revenue opportunities for across the board of the public cloud clients.

And the second point is, if you look at our previous mix of the revenue of the CDN versus computing business, in Q1, our computing business itself actually delivered a very solid growth around 40% on a year-over-year basis. I think this number is also above the industry average in Q1, especially in a very difficult market conditions.

So if you're putting the 2 numbers together, you may see a relatively flat number, but the fundamental demand of the computing demand for -- from our Internet client base actually pretty okay. And if you cross-check that number with our capital expenditures in Q1 this year, we spent about RMB 600 million. You can tell that the money we spend, basically the servers and high-end infrastructures already started to produce the revenue in Q1 immediately.

So if there is, a lot of risk and issues regarding the demand of the client and our capital expenditure will not be converted into the revenue so quickly and efficiently in Q1, especially for the storage and computing business. I think these are the few numbers you probably can help inform a foundation of the growth, especially from computing and storage and relatively high-end business from our public cloud clients.

Our next question comes from Joel Ying from Nomura.

(foreign language) So my first question -- I have 2 questions. My first question is about CDN business. Can we release the CDN business as a percentage of total public cloud for 1Q '22? And second one is for short-term because of the public cloud market situation. Maybe we are focused on enterprise market, enterprise cloud, but into a long-term. I guess we are still -- based on the 2-year strategy, we'll focus on both public and enterprise cloud and put the R&D into both sectors to deliver business, am I understanding correct? Thank you.

Sure, Joel, happy to take on the first question. There are a few important considerations when I think about planning and budgeting. We want to use the opportunity to balance not only the CDN revenue contribution, but also the top client concentration risk as well. So there are a few important dimensions we'll track on an annual basis. First of all, for 2022, we are assuming no single-client will contribute more than 20% of the total revenue of Kingsoft Cloud. And point number 2 is we want to assume around 25% or around the range of the CDN business as a total revenue of Kingsoft Cloud financial year 2022.

So when we look at that strategy in Q1, I think we're happy to see that the CDN revenue as a contribution of total revenue of Kingsoft Cloud has decreased from historically, let's say, above 50%, right, in historical years to around 30% already below 50% in Q1. So the trend is very clear. And in the following quarters, I think the absolute dollar value of the CDN revenue will remain relatively stable because it will affect our total efficiency on the networking and then our infrastructure. But as a percentage of total revenue, we will see it gradually coming down in the next few quarters. But I think the 2 important dimension numbers, as I mentioned in the beginning, will be important guidance for when we think about the whole year next set of the combination. Thank you.

Our next question comes from Alex Yao from JPMorgan.

(foreign language) So my question is to follow-up the enterprise cloud demand in this year. Based on your observation, is the budget allocation to adopt enterprise cloud is very strong, demand from the corporate, with or without the COVID impact or with or without the economic slowdown impact, they will be very strongly committed to the adoption of the cloud or put another way, digitization of their own business?

Or do they have more flexibility on trial adoption? And if the top line is facing pressure from macro from COVID impact, they are likely to slow down the budget allocation to adopt those cloud solutions. And I guess the answer has a lot to do. Will they be able to see immediate efficiency improvements or more monetization right after the adoption of these cloud solutions?

Or are they still in the kind of narrow stage to figure out how to use the cloud solution to make the efficiency make their operation more efficient.

(foreign language) So just to add on one of the prior questions, which was about whether we continue to do 2-wheel kind of driven our business model going forward, and the answer is for sure, certainly. And for the public cloud side, we see that the demand continues to be actually very strong, being driven by the cost reduction incentive of those customers or driven by the multi-cloud demand. So we continue to be committed to this type of business. And for the enterprise cloud side, it actually differs among -- across the verticals that we specialized in.

For example, in financial services sector, although the sector has been developing for many years, and we have, as just mentioned in the prepared remarks, I've been covering 90% of the top banks, top 20 banks in China. There is actually continued to be inelastic demand from those customers. And that demand comes from the demand and requirements for technology and for their business. So it's not even related to the budgeting. So this is in at demand. And we had also evidenced by the fact that the COVID doesn't have any impact to this kind of project. And the second one is health care industry, which as you can understand, it actually increased. The COVID situation actually increased the demand for health care projects.

And that also increased the granularity of a lot of the health care institutions and government agencies management process and thereby driving more projects as well. For the public services side, from our communication with the potential customers that we haven't really heard about the efficiency of budgeting and therefore, changing or cancellation of those projects. So that's basically the situation. Thank you.

Our next question comes from Thompson Wu from UBS.

(foreign language) My first question is relationship with what Alex just asked about. A lot of investors are asking how China's macro situation will impact enterprise and cloud adoption over the long term, if there is any impact? And then if so, what verticals specifically? And then the second question is asking on behalf of investor on the call, he/she would like to know what full year guidance the company has given beyond reaching an adjusted EBITDA breakeven point in fourth quarter as the company given full year 2022 guidance?

(foreign language) So we think that -- we understand that people in the market really care about make growth, the economy situation in China. From our experience, for our company, in the public cloud services side of our customers are mainly Internet sector customers. We feel like it's not going to be materially impacted as long as the general policy of the government remains stable. From what we can experience our business for the public cloud side remains robust and with the strong growth. So we are relatively optimistic with that. And on the enterprise cloud side, the -- as mentioned just now, the -- there hasn't been any significant sign of potential customers canceling projects or canceling or changing materially their budget.

And we also see that the government has some incentive macroeconomic policies for the second half of the year. And we expect there might also be a wave of opportunities for us to see. So admittedly, the COVID control measures in the second quarter have had some impacts. But those impacts are mainly above the pace and uncertainty for that particular period of time. And we don't think that -- so overall speaking, for enterprise cloud side part of the business, we remain optimistic.

Thank you, Thomas. On the second question, on the buckets of the profitability, you're right. I think we're expecting to hit the quarterly breakeven of the non-GAAP EBITDA margin in Q4 of 2022. And as we also mentioned, given we are in week 1 of June. So in Q2, I think our gross margin will be likely higher than Q1 2022. And hopefully, we can keep upward trend in general of the gross margin.

On the second part, given we're doing work on the cost control mix and the diversification of the clients. So hopefully, our core cloud services, including computing, storage and enterprise cloud, as a whole, the total revenue of that bucket will be generally grow at a higher pace compared with the industry average and the major peers.

And the third, while we are not providing official guidance for the full year total revenue. But as CEO Yulin mentioned, I think we are executing on track of our total budget internally. And while there is a onetime quarterly impact in Q1, given the COVID-19, but hopefully, on the full year basis, will remain the same in terms of the total target internally. And we're executing that based on that and there's no change of the total budget. Thank you.

Our final question comes from Timothy Zhao from Goldman Sachs.

(foreign language) My question is on the cost control side, especially as we see in the first quarter, there was a big Q-on-Q decline in IDC cost. How much for the decline can we expect from IDC cost for Q2 and full year? And what other cost control initiatives will you going to implement for the rest of this year? Thank you.

Thank you, Tim. Very quickly on this out, I think we do -- even in a very short period of time, we do see a great and solid trend on the results. So you're right, we're approximately saving about RMB 200 million on IDC costs. As you know, within the IDC cost item, there are the leasing expenses we paid to rent the cabinets, and they are the bandwidth costs, which are a majority of the portion on the IDC costs.

So the major reason was our adjustment of the CDN business strategy since Q4 last year. But going forward, we are still assuming there are few things we are working on. We will have further leverage to decrease the IDC costs, including there's better planning of rental of the IDC locations, including our budgeting and more advanced technology to saving energies, including a few initiatives we are taking to optimize the downloading up-streaming of the bandwidth capacities and we are working on that.

I frankly don't think the D&A costs will go down because, as you know, we are spending the CapEx to buy in high-performance CPUs and infrastructures. I think assuming that is a good CapEx that will drive the good revenue. So the D&A expenses, I don't think will affecting a lot and that mathematically will not affecting the EBITDA margin, as you'll understand, because the D&A expenses was adding back.

The fulfillment cost and the development of the solutions, those 2 items has been giving the further integration with Camelot, we may have further room to reduce the cost of those 2 items. And that 2 items were also affecting given we are selling more recurring business and products. We're also converting into a higher margin as we are seeing there are a few important clients, especially in the financial services and health care while doing already the Phase II and Phase III.

So the initial fulfillment and R&D expenses will be reduced given the scalability and the recurring basis of those revenues. Regarding the R&D, I think we may have some potential room to see a dollar value decrease going forward, while we continue to spend time and resources on core strategy and technologies.

The sales and marketing and the G&A, I think will remain relatively flat. But I think in the G&A, we'll also have some flexibility to adjust on that. So we have a very strict, prudent internal approach to navigate and prioritize a few different initiatives. But I think those things will be unfolded in the next few quarters. But a majority of the work has been completed and already in place. Thank you.

Thank you very much for all your questions. So I'll now turn the call back to Nicole for closing remarks.

Thank you, Amber, and thank you once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you.

Thank you. This does conclude our conference for today. Thank you for participating. You may all disconnect.