Kingsoft Cloud Holdings Ltd (KC) 2021 Q3 法說會逐字稿

Good day. Thank you for standing by, and welcome to the Kingsoft Cloud's Third Quarter 2021 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager of Kingsoft Cloud. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third quarter 2021 earnings 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 CFO, Mr. Haijian Henry. Mr. Wang will review our business operations and company highlights followed by Mr. He, who will discuss the financials and the guidance. They will be a will to answer your questions during the Q&A session that follows. There will be consecutive integration. Our integrations are for your covenants and reference covers only. In case of any discrepancy in management statement in original language will prevail.

Before we begin, I'd like to remember that this conference call contains forward-looking statements. within the meaning of section on the E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Security 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 all known and 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 of 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. 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 call are denominated in RMB. It is now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

[Interpreted] Thank you, Nicole, and thank you all for joining our third quarter 2021 earnings call. In the third quarter, we generated RMB 2.41 billion in total revenues which was an increase of 40% from the same quarter last year. Our public cloud services revenues reached RMB 1.69 billion, an increase of RMB 140 million over the second quarter.

Our enterprise cloud services revenues reached RMB 730 million, up 78% over the same period last year. Since the beginning of 2021, we continue to deliver rapid growth despite market headwinds, regulatory changes and ongoing challenges as everyone adjusts to a new normal as the pandemic continues to evolve. As the largest independent cloud service provider in China, we will continue to execute our growth strategies, strive to become the most trusted cloud partner for our customers and to create the digital future together. Our neutral position enables us to develop more index and extensive collaborations with an expanding base of premium customers and further nurture our multidimensional ecosystem. We believe we will benefit from our long-term thinking and achieve continued and sustainable growth.

Now let me walk you through our performance across our major verticals. I'll start off with public cloud. Despite the challenging market environment, we still achieved faster growth than the industry average this quarter. Leveraging our neutral position, heating solutions and premium customer experience, we made significant progress expanding our customer base and diversifying our products and services portfolio, especially for multi-cloud deployments. As mentioned in our last earnings call, Meituan, China's leading local lifestyle service platform has become our new premium customers for public cloud services. Together with other newly engaged premium customers, their steady usage increases contribute to our public cloud revenue growth.

Following our success with Meituan in Q2, we continued to expand our customer base among top Internet companies. We are proud to announce that Pinduoduo, one of the largest e-commerce platforms in China have become our new customer in Q3. We believe such new customer engagement trend will continue and will drive our growth in public cloud services. We've proved ourselves to be agile and move quickly to engage with emerging high-quality premium clients amidst the regulation changes. We engaged with Shouqi car-hailing, a leading player, which has been rising amid the shifting competitive landscape. We delivered a full suite of hybrid cloud solutions, including computing resources, DevOps and big data products at the path level.

In (inaudible), we further diversified our offering beyond the video and gaming. We continue to provide public cloud storage services to Qunar.com, one of the leading online travel platforms in China. On top of this, we provided them with more products such as containers, big data solutions and bare-metal servers. On gaming front, we are highly recognized by customers for our full stack cloud services, including IaaS, PaaS and Saas. We signed an agreement with IGE Games to support their proprietary blockbuster mobile game the (inaudible). We helped them plan and design their cloud architecture to support game deployment, which resulted in a stable and smooth gaming experience for tens of millions of concurrent players.

On product and technology front. According to the 2020 China financial grade distributed database market report that was published in September by Frost & Sullivan, an internationally authoritative survey agency. Our Dragon based database was placed in the leaders quadrant of their frost radar. Along with other 2 leading competitors in China, our product was recognized for its visionary technology, excellent product performance and outstanding monetization. This, once again, demonstrates the recognition of our core cat products to come out in the industry, including among top global industry research firms. Earlier this year, our big data cloud products were also placed in the leaders quadrant by Frost & Sullivan in their 2020 China data management solutions market report.

At the same time, we continue to ramp up our investments in cutting-edge technologies. According to IDC, 50% of data will be processed at the edge by 2023. During this quarter, we improved our ag storage capabilities and developed edge storage nodes in Jiangsu province in September, providing strong support for various edge applications.

Moving to the enterprise cloud segment. going digital has become essential for many businesses and industries to adopt to new norms.

In the financial services sector, we continue to expand our client base and deepen our collaboration with our customers. On the Central Bank level, we won a bid to build a big data cloud platform to support China's new digital RMB. After winning contracts from Huaxia Bank and China CITIC Bank in Q3, we furthered our corporation with another top commercial bank and helped it migrate its middle office to the cloud. Our solution enables the smart management of their underlying business data and led to by 65% efficiency improvement in their big data capabilities and development. As we announced back in August, we agreed to acquire Camelot as a part of our efforts to build out our enterprise cloud services business.

Now that we have officially joined hands with Camelot, we will be able to cover all the top 20 banks in China. We will fully consolidate Camelot's SaaS products and solutions into our product portfolio, especially in the risk management financial compliance and anti-money laundering areas, which have been offered to more than 240 financial institutions.

In the health care sector, we have been pioneering new lighthouse projects in Zhengzhou and Hubei provinces, among other provinces. In Q3, we kicked off the delivery of the Jiangsu Province Medical Imaging Cloud. This project will be the first to enable provincial-level medical image data sharing, expected to connect more than 30 hospitals by the end of this year. One put into operation it is estimated that the project will save billions of RMB in medical insurance each year. We are very proud to be able to create such positive social impact together with our customers. We are also making steady progress with our Big Data cloud project in Hubei province. Meanwhile, we have made significant progress in our health care ecosystem. In 1 case, we have been cooperating with a leading health care data solution provider. This corporation has already introduced us to many premium customers, including Ruijin Hospital which is the fourth largest hospital in China and the largest in Shanghai. Building on this foundation, we plan to expand our collaboration and strengthen our branding, resources and service capabilities with more hospitals in China.

In the public services sector, we were selected for Phase 4 of Beijing City cloud projects. The total contract value is approximately RMB 85 million. This marks the fifth year in a row that will provide services for the same project exemplifying our ability to secure repeated revenues. In addition, we also quickly replicated our successful experience with public services cloud to other parts of China and one bid is for projects from cities in Anhui province and Shandong province to name a few, which are all in delivery case. We won the bid to be the exclusive provider of an urban cloud infrastructure for city in Hubei province, with contract value around RMB 36 million. It will leverage our leading cloud computing and data big data technologies and facilitate the intelligent transformation of the city's public service systems. We also started cooperating with the Shenzhen Big Data Research Institute with strong policy support. The Institute will integrate big data research resources in Shenzhen, the Greater Bay Area and further across China to facilitate the nationwide advancement of big data applications. Despite some disturbances from the pandemic and power shortages, we are steadily carrying out our projects. We're also making progress with new bids and our backlog continues to increase.

Within our enterprise cloud segment, the integration of Camelot is well underway. As we mentioned in Q2, Camelot has delivered send in most major cities across China. We have selected 6 sites to be initial pilot cities for integrated project delivery. In the finance services sector, we have started engaging with nearly 10 banks that Camelot has into to us. Our integrated team will provide delivery and services directly to these customers. In terms of ecosystem cooperation, Xiaomi, Kingsoft Group and WPS have all started working with Camelot in various aspects. We will focus our efforts on the finance, health care and public services sectors, and we have started with consulting and planning services in the hope of developing a fully integrated one-stop suite of solutions.

In terms of regulatory backdrop, we have been paying close attention to all new regulations and policies including the draft regulation on protecting Internet data security that was published by the Cyberspace Administration of China for public opinion. The regulation has yet to be finalized and the effective date is still uncertain. But as we have always emphasized, we manage our business operations in a localized approach within each jurisdiction and continue to deliver solid progress with data security, privacy and ESG programs. Unlike companies that possess data of millions of individual users, we focus on serving enterprise customers. In addition, we have fully complied with regulatory requirements, including around data classification and data security. Until now, we have successfully obtained ISO 27001, ISO 27017 and ISO 27018, which are the worldwide recognized standards and certification in terms of data security and personal information protection management systems.

I will now pass the call over to our CFO, Henry, to go over our financials for the third quarter.

Thank you, Yulin. Now I'll walk you through our financial performance for the past quarter. Our total revenue reached RMB 2.41 billion in Q3, representing approximately 40% year-on-year growth, which is consistently higher than the growth of the major peers in Mainland China. Revenues from public cloud services was RMB 1.69 billion, a quarter-over-quarter increase of RMB 135.2 million, representing the seventh consecutive quarter revenue increase since our IPO.

There were a number of drivers. First, our existing client base remains stable, including our top 3 clients in particular. Our neutral position makes it possible to avoid any financial conflicts of interest with our customers. And we have been able to grow together with our customers. Second, we continue to engage with new premium customers. In Q2 this year, made while China's leading Internet conglomerate has become our new premium customers for public cloud services. With the trend news, we are proud to announce that Pinduoduo, one of the leading largest e-commerce platform in China has become our new premium customers in Q3. This new client case exemplifies 2 things.

Number one, the multiple cloud strategy is gradually more accepted by the market. Number two, these efforts have to diversify our customer base and derisk the top client concentration risk. And also client non-video related vertical will also help grow our computing business and contributes to the public cloud incremental high-quality revenue growth. Lastly, we were able to dig deeper into the needs of our clients. As Yulin mentioned earlier, we are providing a more diversified portfolio of products and technology through cross-selling, including containers, edge computing and part solutions. Revenue from enterprise cloud services was RMB 726.9 million, representing approximately 78% year-over-year growth.

We have seen a rapid growth in demand in the enterprise cloud market. As demand grew rapidly in enterprise cloud market, we built more flagship projects in the financial services, health care and public service sectors and replicate our success to more customers. As a result, our client base continues to grow steadily. In the short term, however, delivery of our enterprise cloud projects in some regions in Mainland China was affected by the recent wave of pandemic. Although we can deliver technology support of some projects remote, our team has been unable to deliver on-site tasks at some of our client-owned data center due to travel restrictions. In addition, in Q3, some of our projects were also delayed due to power shortages or limits by local authorities. As a common practice for enterprise cloud, we implemented our public cloud technology to enterprise cloud private environment in their own IDC centers.

Although our (inaudible) were not affected by power shortages, some of our customers saw temporary disruptions to their own private IDC center. This shortened the time available for our team to deliver projects on site and caused certain delays. However, we have to see currently, the situation has been improving in the process. In line with the strong top line growth, cost of the revenue grew 44% year-over-year to RMB 2.33 billion. IDC costs, the largest cost component representing approximately 60.7% of total cost of revenue grew 33.1% year-over-year to RMB 1.41 billion. IDC cost consists of cabinets and bandwidth costs. The costs increased by RMB 155.4 million on a sequential basis. which is due to the preemptive storage of underlying resources. Depreciation and amortization costs increased by 28% to RMB 200 million, representing approximately [8.6%] of the total revenue. Adjusted gross profit of RMB 92.2 million compared with RMB 114.8 million in the same period of last year.

Our adjusted gross margin for this quarter was 3.8% compared with 6.6% in the same period of last year. We would like to offer a bit more color of the strong term volatility. To support the growth of the public cloud business, cloud company typically purchase servers and leased data centers in advance based on the forecast of demand from our clients and the market in general in the beginning of every year. However, as many of the audience may have seen starting from middle of this year, the IT demand from many Internet clients in China are growing but slower than previously market forecast beginning of this year. Therefore, the underlying infrastructure resources has not been fully utilized as targeted and incremental investment of resources made earlier this year may not be fully monetized in the short term towards by end of this year, which may impact our business.

Due to this reason, for example, the increase of RMB 155.4 million in IDC costs this quarter impacted our gross margin this quarter. Our business model and client base remains very robust, and we believe the utilization pattern will naturally be optimized as we see our public cloud demand continue to grow. Total non-GAAP operating expenses were RMB 451.2 million, representing a 5.3% increase from Q3 last year mainly due to the ongoing investments into our business and remain our competitiveness. We have provided our core team with competitive compensation and therefore, increased personnel expenses. Excluding share-based compensation, adjusted R&D expenses were RMB 231.6 million, representing an increase of 51.3% year-over-year. As a percentage of total revenue, it increased slightly from 8.9% in Q3 last year to 9.6% this quarter.

Adjusted selling and marketing expenses increased by 37.4% and to RMB 114.3 million. As a percentage of the revenues, it decreased a little bit from 4.8% in Q3 last year to 4.7% this quarter. Adjusted G&A expenses were RMB 106.3 million. As a percentage of revenue, it increased from 3.7% in Q3 last year to 4.4% this quarter, although the level among the lowest in the peers. Accordingly, our adjusted EBITDA loss was RMB 140.7 million. Adjusted EBITDA margin was negative 5.8% this quarter compared with negative 2.5% last quarter. The quarter-over-quarter decrease was due to the decrease in gross profit, the increase in personnel expenses and onetime of related capital transaction expenses. Our adjusted net loss was RMB 363.8 million with adjusted net margin at negative 15.1%. As of September 30, 2021, we had sufficient cash and cash equivalents amounting of approximately RMB 6 billion.

During this quarter, capital expenditures was RMB 96.6 million. Since Q4 last year 2020 and 8 supply chain pressures, we have purchased a sufficient service in advance to support our business growth. Based on our current operation and in pursue of high operational efficiency, we will make a very disciplined approach with capital expenditures for the second half of this year. In addition, the server delivery and the payment cycle also led to a relatively low CapEx in Q3. However, we do think the fourth year CapEx will be at a similar level compared with last year. In addition, we have received great endorsement from regulators as evidenced by obtaining on conditional approval for the capital transaction from the National Anti-monopoly Bureau aka SAMR State Administration for Market Regulation in China. The approval process was completed within about 1 month's time, which is significantly faster than the regular review time frame, especially considering today's market regulation environment. In October, we submitted F3 filings regarding the registration of shares related to the transaction, we have now completed transaction and began integration of the 2 teams.

Camelot bring us over 5 in customers at a wealth of industry know-how, especially in industries such as Internet, financial services, consumer, retail and manufacturing, among others. Camelot delivery hubs in multiple key cities across China. Their local teams will deliver future enterprise cloud projects directly and improving our execution capabilities of the whole company. We believe significant synergies will be further unleashed into next year.

Looking ahead, we expect our total revenue to be between RMB 2.63 billion, and RMB 2.83 billion for the fourth quarter of 2021, representing a year-over-year increase of 37% to 47%. This is based on our current and preliminary views of the market and optimal conditions, which are subject to change. Lastly, we held our first Investor Day events after IPO on October 21 this year. Representative from our key accounts clients, ecosystem partners, industry soft leaders join our senior executives and discuss industry trends and our businesses, including senior executives and clients from National Health Commission, China Construction Bank so Cuban, Camelot and among others, to share diverse perspective. We are committed to improving our business transparency, bring sustainable value to our stakeholders and are delivering long-term value to our shareholders.

This concludes our prepared remarks. Thanks for your attention. We're now happy to take your questions. Please answer your question in both Mandarin and English. Operator, please go ahead.

(Operator Instructions) Your first question comes from Brian Gong from Citi.

(foreign language) My question is regarding the enterprise cloud. I understand our enterprise cost segment was impacted by power shortage and the pandemic largely under control and the power shortage largely eased. Have we seen any accelerating project delivery? Should we see enterprise cloud revenue growth to go back to normalized level for next year? And what gross level we should expect?

[Interpreted] Okay. So the response from the CFO -- from the CEO, Mr. Wang Yulin is that as he rightly pointed out, there are 2 key factors affecting our industry segment, one is the power shortage of curtailment. The other is the pandemic. In terms of the power shortage, as you know that in Q3, that was the main factor. And in our 2 business segments, respectively, I'll talk about them. So in the public cloud segment because the IDCs enjoying relatively high grade of protection and priority. And then most of them have reserve or backup power generators. So those were not natively affected. But in terms of enterprise cloud, industrial proud because of the IDCs in most of the cases are their private IDCs, which are designated by the customers.

So generally, case by case and have been affected by the power shortage. I have to agree with you that currently the power shortage situation has largely been alleviated. However, we do see that in the midterm to long term, the carbon emission control, we continue -- the pressure will continue to be there. And there might be more policies in relation to IDC, construction and IDC power content. But in any case, the power shortage we expect in the short term has been alleviated and then we're able to progress our deliveries of enterprise cloud in Q4.

The second factor about pandemic, obviously, there's still going on in some cities because of the very stringent measures the government takes, which causes the delay of our delivery. However, you do see that overall speaking, the demand in the industry or enterprise cloud remains very strong. Our backlog continues to grow. While there at delivery, we also have proactively tried to find solutions to this impact. One is we have been proactively utilizing the Camelot's local teams which are distributed across China to help with delivery increase delivery efficiency. The second part is that we proactively manage our time table of delivery and try to make up for some of the time that was lost because of the power shortage and pandemic control. But overall speaking, we do see the industry cloud to enjoy a very high growth rate coming from the demand. This very strong demand.

Our next question comes from Liping Zhao from CICC.

I have 3 questions here. We've seen a cooldown in public cloud space this year. And so my first question is what's your opinion in next 2 to 3 years market growth and what will be company's organic growth drivers and targets to achieve. And second question, this year, our gross margin has seen some pressure caused by upfront infrastructure and our delay in revenue recognition. My question is, when do you the utilization rates to catch up? And what's your budget for next year's CapEx? And lastly, we do wonder how is the collaboration with Biden going so far?

[Interpreted] Just to quickly translate for the reference. So in relation to your question about the growth prospect in public cloud and enterprise cloud. I start with public cloud. Obviously, we have noted that this year, the public cloud demand has decelerated. And from our perspective, we think it's due to 2 reasons. One is that there was a high base. It was actually a high base for last year as a result of the pandemic. So the demand cloud service has surged a lot and actually shifted to a great extent. But obviously, that is not a new factor for this year. Now the second reason is as you have all noticed, that since the beginning of this year, actually even until now, new regulations have been coming out from the government to regulate a lot of the customers and industries that we engage with. And accordingly, our customers in such industries will need to come through those new regulations and to be compliant, which we believe takes some time.

But we do think that this is going to be a short-term impact as the regulations become more and more clear and more feasible from the government perspective. But also looking at the long-term picture, we do see that these customers have already started to make new arrangements in new potential vertical market in the spaces of entertainment, video and gaming. And this -- we have to see that this actually happened together with the further penetration of 5G technology. And we're seeing the new concepts like the metaverse and the hardware in terms of those -- for those applications has been launching and increasing in volume. The technology integration has also been accelerating. We do think that the Internet sector is a cyclical factor, which we do think that in the future, 1 to 2 years to come, we are entering into a new large cycle, which will reasonably expect to have a higher growth rate than average growth rate of the sector. As you tour ourselves, we actually have engaged a significant amount of new customers in this quarter and meet the market headwinds, as mentioned before. And we believe those are really benefiting from our neutrology and also from the multi-cloud deployment trend, whereby we have essentially become the top choice for our customers. whenever they want to engage a new cloud vendor. And we think that our customer base in terms of volume and the depth of relationship remain robust. And then that serves as a very strong fundamental for the company. In terms of industry cloud, as I answered in the first question that was asked by city, the market demand remains very strong. We think the demand of digitalization is actually in the elastic and for a long time, to come. We also expect this demand to remain strong. And also in the verticals that we have chosen to be focused on, we'll continue to tap this benign cycle of gaining more customers and developing our advantages. And as a result of that, increasing our revenue.

In terms of your third question of corporation with Biden, we actually have a very long-term partnership and cooperation history with bias actually starting from the -- basically the eruption, explosive growth of short video clips in China. That includes a lot of applications like (inaudible), which essentially made essentially made us a trusted partner of Biden. That is a very solid relationship with them. And as you have also seen that we have signed the comprehensive partnership agreement with Volcano Engine, which is under the Biden's umbrella where we are working to explore ways to combine our advantages in terms of his capabilities and nationwide delivery capabilities with Volcano Engine to create a win-win situation.

And more recently, the corporation we have with a software that's called Alien, which is identity authentication software where we have been tweaking and trying to find ways to promote the application of this software. So -- and beyond the 2 companies, if you look at a provider zoom out into our ecosystem partners, there's also a cooperation between WPS and Kingsoft and Biden. So I would say that across our 2 ecosystems, we have always maintained multidimensional and strong relationships with Biden.

Thank you, Liping. I will take on the second question very briefly. A few points. First of all, you probably all loose this year, the pricing environment, especially not only on the supply side but also of our client side has been very stable. So when you look at our major products, our product level contribution margin or gross margin has been very stable. So that's actually not the reason that affecting our gross margin in Q3. Point number two, if you also know that in most of the enterprise service or [2B] industry in China, the procurement arrangement will be negotiated on an annual basis, which means that right now, we're already in Q4. So we are already getting to the process to negotiate the pricing, terms, volume and quality and all the key terms with our major suppliers. And we're right now in the process to collecting the IT budgeting inside information from our key accounts.

That's why we do believe next year, we can do a good kind of analysis and matching the demand and the supply and further improving the utilization. So that's why I think the mismatch on the resource side can be gradually mitigated by the end of this year. So for next year, given it's a new annual contracts for some of the key clients and also some of the key vendors as a supply. So the pricing and the gross margin impact can be further mitigated. So it's going to be a short-term impact.

Point number three, for next year, as you're asking about CapEx, even for the same dollar, we will definitely prioritize that into high-quality potential revenue streams. So when we look at the dollar, when we consider to spend on CDN servers rather than the CPUs, the high-end CPUs or the GPU will for next year, prioritize that into the high-quality procurement arrangement. And we believe that will directly converted into a potential of a high-quality revenue stream going forward. And also, if you remember in the recent Investor Day, Actually, Intel has been partnered with us to host the Investor Day events that actually also have good information that we are partnering with the key vendors, and we're going to have a direct regiment with the key vendors to secure the high-quality fundamental infrastructures. And the last point, I think for next year, we also will continue to build our own infrastructure. In the recent quarter, we have closed very successfully on time for the Tianjin data center for the first phase. For the second phase, for another 30,000 cabinets, I will -- we will basically plan for starting to plan for next year, and then we're adding to a new revenue stream for the public cloud revenue opportunity. So as a summary, we are second in a row to see net incremental revenue over $100 million of the public cloud business. I think that will naturally to mitigate the impact of the mismatch and of the IT resources, and we'll gradually improving the gross margin going forward. Thank you

Thank you. Your next question comes from Thomas Chong from Jefferies.

The first question is regarding our new customers for this year, we have added Meituan and Pinduoduo, the Internet joints. Just want to get a sense about the revenue contribution over the next couple of years as they ramp up in Pinduoduo. And my second question is regarding our long-term assumptions in terms of the revenue and the margin as well as the mix between appropriate and enterprise cost. And on the near-term side of the story, we -- given that the Beijing (inaudible) effects, a lot of the different business. Just want to get a sense about any color about the contribution coming from Beijing or any qualitative color would be great. Thank you.

(inaudible) So thank you very much for the question. I think as you pointed out, the larger Internet names, like you mentioned, Meituan, Pinduoduo and Juhu, the multi-cloud deployment for them is an inevitable choice, both from a technology perspective and from a business or commercial perspective. And as mentioned in Kingsoft's Cloud as professional and neutral cloud provider were also they're inevitable and top choice. We do think currently, the revenue and growth these customers have been very stable. And unfortunately, we don't have like detailed numbers as for a percentage of revenue, but we do see them to continue to grow very stable and on the good trend.

Now in terms of the macro environment uncertainty that I mentioned, I also split into a public cloud and enterprise cloud space and to discuss briefly, respectively. In the public cloud space, as mentioned, I do think it's going to be a short-term impact. And once this is over, it is going to enter into a larger business cycle where we expect to see growth to accelerate. In the industry cloud space, the demand remains very strong. And as 2 of the affecting factors, one is power shortage and the other is pandemic. The power shortage has already been largely been resolved. The pandemic impact has been alleviated. Our way to fight this negative impact are leveraging Camelot's local teams to try our best to catch up with the progress and to deliver revenue. Now as I mentioned for the impact on Beijing, actually because we are locally based in Beijing. So we do not have any material impact in the Beijing projects due to the pandemic control measures. And I'll leave the margin questions to -- for Henry to answer.

Thank you Yulin. Thank you, Clark. Very quickly on the margin. So first of all, I want to mention that we still keep the same intention to deliver improving much profile for the long term. So both gross margin and non-GAAP EBITDA margin are 1 of the priorities when we think about next year's budget. So that's why, as I just mentioned, when we think about the demand, think about supply side, think about the price environment and also how we optimize our personnel expenses -- These are the key priorities for next year's budgeting process as we are doing today. So that's why we probably at this moment for this area will not give a very clear guidance for the EBITDA margin being timing. But as some of the audience may remember, we did have intention to have that margin improvement to be delivered in the near term. And this first point. Second point, I think given the high-quality revenue opportunities is also our key areas to focus for next year. So when we think about the capital expenditures and how they are converted into the revenue opportunity and how that impact both on gross margin and D&A expenses we did we will do a very thorough analysis and looking at the impact for the margin improvement. So as a result, what we want to say at this moment is, I think for next year, hopefully, we will see on an annual basis both gross margin and non-GAAP EBITDA margin we will see improvements compared with this year on an annual basis. I think we remain confident on that objective However, the timing and the scale of that, hopefully, we can communicate once we complete the prudent budgeting process for next year.

We will take the final question from Gena Wang Kyna Credit Suisse.

(foreign language) The first question is actually, we are looking for more visibility or idea from the company on the path and capability enhancement in the future. I mean, even after our cooperations with Biden. And the second question is about what kind of like IDC policy change that may impact the public cloud, obviously, the IDC surface from the vendor as well or your own business like enterprise cloud. So thank you.

So in terms of tax capabilities, in fact, our tax capability in terms of particular verticals, for example, financial services, health care and big data capabilities, we have actually becoming more and more leading in the -- among our peers. And also, we have seen increasing revenue percentage and the promotion of margin it has brought to us to our business. Now we do believe that we will continue to increase our investment and development of has capabilities in those areas, in those verticals that we choose to focus on. However, we don't think this is in any way in conflict with our corporation with Volcano engine or by desk. In relation to your question about IDC policy, we do not really think that any policy changes will have any material impact to the public cloud IDCs. As explained earlier, we do think that the public cloud IDC generally have relatively high standards, and they have been built according to the latest government policies and guidelines, including the IDCs that we built ourselves. And then we do not think they're going to be actively affected. In terms of the IDCs for enterprise cloud customers, the impact mainly came because of the abruptness of the policy change from the government. -- i.e., the power shortage. And we do think that in the future, they will be able to adjust to any policy changes in that space as well.

At this point, I would now like to hand the call back to Nicole Shan for the closing remarks.

Thank you, River, and once again, thanks to everyone for joining us today. If you highlight any further questions, please feel free to compare us. Look forward to speaking with you again next quarter (inaudible).

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]