Aurora Mobile Limited (JG) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Aurora Mobile Fourth Quarter and Full-Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that is conference is being recorded today, Tuesday, 28th of February 2019. I would now like to hand the conference over to your first speaker today Mr. Christian Arnell. Thank you, you may being your conference.

Thank you. Hello everyone and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call from Aurora today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following the prepared remarks, all three will be available to answer your questions during the Q&A session that follows. I remind you that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intense, plan, believe, estimates, confidence and similar statements. Aurora may also make return our oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission, in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including but not limited to statements about Aurora's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the Company's filing with the Securities and Exchange Commission. And with that, I'd like to now hand the conference call over to your first speaker Mr. Luo. Please go ahead.

Thanks, operator. Good morning and evening to everyone on the call and welcome to Aurora Mobile's Q4 2018 and fiscal year 2018 earnings call. Today, I am very pleased to share with you another fantastic quarter. To kick off this call, I would like to take this opportunity on various key operating data that we have launched you in this quarter. Firstly, the number of the mobile apps utilizing at least one of our development services other accumulative app installations that exhibit 1 million marks to approximately 1,067,000 as of December 31, 2018 from approximately 707,000 year-over-year. This is operated settlement and conviction on our leading position in the developers updated provided in China. Secondly, accumulative SDK installations have increased to 19.8 billion as of December 2018 from 11.4 billion year-over-year. The new installation from 2018 account for 74% of the total installations in previous six years, a strong evidence that the adoption of our development of businesses which is exacerbated. Further in the number of monthly active unique mobile devices recover has increased to 1.04 billion in December 2018 from 864 million in December 2017. Less rate in the fourth quarter of 2018, we have seen the number of paying customers increased to 2,096 from 1,379 a year ago. We see healthy growth of these operating data. The total revenue for Q4 2018 were RMB225.9 million, we should represents an increase of 102% year-over-year, an increase of 15% quarter-over-quarter, not any more inside or each of our business lines. First is developer services, within the 3 months ended December 31, 2017 and 3 months ended December 31, 2018. Our revenue from developer services increased by 44% for RMB12.1 million and to RMB17.4 million, which was mainly due to the growth in the number of customers from 858 to 1,265 year-over-year. Second, on our data solutions business line, during that same period, our revenue from data solution increased by 108% for RMB100 million to 208.5 million. The 108% growth was primarily due to the increase in both the number of paying customers and increase in average spending per customer. For our targeted marketing business, the revenue has grown 111% year-over-year. This increase was mainly due to both the increase of number of paying customers and ARPU. Our targeted marketing business, which is purely performance based, continued to expand its customer base as well as increase customers’ wallet share. We have generated sequential growth in 8 consecutive quarters since we launched this business 2 years ago, despite the volatile advertising market environment. We believe our ability to generate higher ROI for our advertising customers contributed to this continued market share gain. We expect the market share gain trend to continue given that effect in our data and low penetration of our advertising business compared to with a massive growth market. During the quarter, every single vertical recover held very nice sequential growth. Our strategy to broaden our advertising customer verticals continued to be executed well. Besides the continued strength in financial sector and media and entertainment sector, mobile gaming vertical gained a significant traction in particular. The contributors from mobile gaming have reached high single digit compared to low single digit from last quarter. We also continue to diversify our media source. Now tangibility only accounts for about 30% of total advertising inventory on dollar turn down from 35% for the quarter 2018. Now, I’ll turn the call to Fei, who will share with you on Q4 performance of other trade business lines within the data solutions.

Thank you, Chris. The combined revenues from other vertical data solutions including market intelligence, financial risk management, and R&D have increased by 93% from RMB30 million to RMB25 million year over year. This was mainly due to the increase in the number of paying customers, which almost doubled in the period. We see strong growth across all three product lines, as we continue to expand our customer base into the industry verticals. For financial risk management, the leading paying customers in the quarter include the Tencent credit bureau, [Pennine] Technology, Bank of China Consumer Financing and [Indiscernible] Bank. Our strategy is to continue to focus on the leading players in the banking and the consumer financing area. For market intelligence products, similar to what we have observed in the third quarter, we continue to see a stronger momentum in the investor community. More than two-thirds of our revenues are contributed by the investment community. Our data has proven to be widely adopted by investors who pay most attention to the accuracy of the apps operation data. Item business more than doubled in the quarter. The revenue growth is primarily driven by further penetration into the industry verticals including real estate, auto, tourism and the retails. We expect the future growth continue to come from more customer wins. Now, Shan-Nen will share with you our highlights.

Thanks, Fei. And let me take you through on the discussion on the other P&L items. The gross margin for the Q4 2018 has decreased to 27 point from 57 from 29.3 a year ago. The decrease was due to the revenue mix where targeted marketing, which has lower gross margin compared to other business lines that increases contribution to the total revenue from 77.5% to 81.1% year-over-year. In R&D terms the gross profit has increased by 90% to RMB62 million. Total operating expenses have increased by 84% to remain RMB 86.7% year-over-year. In particular, R&D expenses increased by 91% to RMB41 million, this is mainly due to the increase in staff costs, bandwidth and cloud costs and depreciation charge. Selling and marketing expenses has increased by 20% to 20.6 million and mainly due to the increasing staff costs and marketing expenses. G&A expenses have increased by 195% to 25.1 million mainly due to professional fee increased to maintaining the Company's status and staff cost. On the adjusted EBITDA, it has decreased every quarter from negative RMB11.2 billion in Q2, '18 to negative RMB6.9 million in Q3 ‘18 to negative RMB3.4 million in Q4, '18. Onto the balance sheet items, total assets have increased from RMB359 million as of 12/31/2017 to RMB998 million as of 12/31/2018. The key assets item as of 12/31/2018 are cash and cash equivalent of RMB177 million. Accounts are sober of RMB148 million, pre-payments of RMB80 million, fixed assets of RMB93 million and long-term investment of RMB79 million. Total current liabilities has increased from RMB117 million as of 12/31/2017 to RMB169 million as of 12/31/2018. The key current liabilities item as of 12/31/2018 are accounts payable of RMB19 million, different revenue of RMB65 million, accrued liabilities of RMB77 million. As of 12/31/2018, we maintain a healthy level working capital of RMB640 million. And looking forward, we expect the total revenue for Q1, 2019 to be in the range of RMB228 million to RMB233 million representing a growth of 81%, 85% year-over-year. Lastly before I conclude, and update on the share repurchase plan that we previously announced in November of 2018. Our board of directors had approved a total value of 10 million repurchase. As of 12/31/2018, the Company has repurchased approximately $468,000 under this program. And we will continue to monitor the need to repurchase depending on market conditions and the underlying share price. And this concludes the management presentation on Q4, 2018 results. Back to you, Christian.

We are ready to begin the Q&A. Operator?

[Operator Instructions] Our next question comes from the line of Bill Yu from Goldman Sachs. Your line is open.

I have some question about the margin profile. I just saw that our targeted marketing segment has been growing very fast. On the other hand, the cost of media is also growing fast. So I just wonder that, do you expect a stable growth rate between the sort of two line items resulting a stable gross margin going forward or do you see there is system improvements in this slide? So that's my first question. And my second question is regarding our other vertical data solutions revenue. I saw that the revenue growth and the number of customer growth is [Indiscernible] which imply probably a very stable ARPU, and so I wonder is it a subscription base model which means the incremental marketing is actually very high? So that's my two questions. Thank you.

Regarding your first question, so actually the revenues recognition grow very strongly for this heavy marketing and actually the margin, the gross margin is a function of the basically the vertical mix, right. So, as we continue to penetrate into a new vertical, those new verticals typically we have a lower margin to begin with. And overtime, our cost of lower margin we are getting improved. So, this is actually the minus for the overall margin trends. And with that said, on the other hand, we are building our own SSPs, which has a higher margin than the third-party SSP. So, this will help basically to tender the negative trend of the new vertical margin downward trends. So our brand is a basic, I mean that we would expect for 2019, the margin will remain stable. Okay, so this is first question. And then for the second question, actually, you are right, actually, the overall ARPU for the other vertical -- other data solutions remains pretty much constant, if you compare year-over-year. But actually we think because other vertical -- other data solutions has a three segment right. So, three segments are actually different to segments the ARPU actually is showing different basically different, basically different trends. But we would expect going forward, the margin on blended basis should -- it will continue to be up and down, you mean to be a little bit volatile before you can stabilize. And again I think that said, since we only had about 220 paying customer in the other data solutions. So, this is a small portion of the total adjusted market, so we believe there is skill huge, huge untapped market opportunity for us.

Your next question comes from the line of [Indiscernible] from Credit Suisse. You may ask your question.

I have one question regarding the R&D costs for 2019. So management shares your views on the R&D expand trend for the ongoing 2019? And my second question is the somewhat related to the R&D costs here. Because I believe the R&D costs should be reflected on the development cycle for the products in the other vertical data solution. So could management share any updates on the new products and/or the development cycle for the product, data products in these verticals? My third question is more generally about the industry perspective. So as the mini programs and the mini apps has been well on tracked or promoted by BAT. So any influence on our business so far, so could management share any views on that?

Okay, I'll take the first question. So regarding the R&D trend, so actually for 2019, we expect that R&D expense to continue to grow by roughly about 42% year-over-year, okay, which is down from 88% last year right. Margin growth was 78%, this year. We are continuing to grow, but it's not going to grow as much as the last year quite significantly. But still in R&D is actually in terms of the overall operating expense, R&D takes them half of the total expense. For the second question, update on the new products. I'd ask Chris to talk to you about a few our new product initiative and maybe you could talk about development services.

Yes, so to give some update of our new product of development cycle. So, first is about the other development services. We have largely authentication products for these developers, we space getting we are working with China Mobile, China Telecom and China Unicom to have developers to easy to authenticate their users within the apps rather than sending the SMS. So, we have launched the product in the Q4 and we are seeing, currently, they around 100 developers they are now trying an integrating our apps right now. So that’s about development services. So for data services, I will give you some updates of new verticals in targeted marketing. So as they mentioned, we are making significant progress on gaming vertical in Q4, and again being friendship view high single digital obviously within the total data target marketing revenue right now. And we also seeing very good momentum of the education and auto as well. So for example for the education so basically we can improve or reduce the cost by 20% basically. Som there's very good progress of our R&D within these verticals. So for autos, we’re also seeing very effective lead generation results. So, we will see more in the coming one or two quarter of these two vertical assets.

Yes, let me add to that actually Chris mentioned about the new product in the developer service as well as target marketing right. So, for the other data solutions actually, we are not really inventing of making any new product is mainly the new refresh freshman like updates of our existing products. So, that's not going to, have any impact on our business, if any delay or whatever. Basically, we are continued to sell existing products. And the new features are constantly being added, improvements constantly being made to the existing product, which will help customer stickiness and potentially to increase the ARPU, right. So from that perspective actually, the development cycle, I mean, it's more like the product refreshment cycle. The product refreshments depending on, actually we can control it maybe every three month. We can have a new release something like that, okay.

The other type of third question, so we see any influence of the meaningful brands to our business, as you know we -- the number of apps for which are utilizing our develop -- is one of our developers so this is, are still increase, increasing very fast. And our observation, so those apps, those app developers, if they’re developing more mini apps, so they will still have our mobile apps. I mean mini app is always passed, but not always replacement of their mobile apps. So, also -- we are also introducing some our developer suitcase for the many app developers, we should have asked to penetrate into apps because isn't that that there's a whole range of service.

Yes, so this question. Let me add to what Chris definitions. So actually if you look at our SDK installations, if you look at our third quarter number is 2.4 billion and this number strike me exactly the same. In the fourth quarter, we also had a 2.4 billion new SDK installation. So, definitely, we are not seeing any slowing down of the customers, they’re adopting and they’re using our SDKs.

Your next question comes from the line of Heejung Kim from Deutsche Bank. Your line is open.

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

You have a follow-up question from Bill Yu from Goldman Sachs. You may ask the question.

Sorry, we didn’t give the answer Heejung Kim question there.

So, I think we are very consistent on our strategy, so actually the strategy of 2019 is basically is a similar like last year, but we don’t like to as to on colors which may we want to do this year which is kind of different things. So besides that we will continue to invest a lot on it’s been different verticals on the targeted marketing right. As I mentioned, the auto education, we have seen very good testing results, and we hope I will reach we will have we expect you can get more solid numbers in the coming few quarters. Also we will start to output capability to some other advertising agencies, which they do have data. So, basically, it’s like trading decks efficient to model, so we won't wait other third-party agencies. And then, after they’re to use our pricing target marketing, so it's been to do a target marketing for sale plus advertising customers and to use our data to improve, they were advertising efficiency. And then, they will share their revenue with us or they pay us a fixed rate of their advertising dollars. So that very typical trading deck business models, so we are trying this from this quarter. We are demanding some big agencies to work with us. So, I think if this model works, it can also give us some surprise I think. So, that's one point and other point, we’re going to invest more on our SSP products. So as you know, we are now currently working with more than 1 million mobile apps. So, we want to utilize more relationship with those apps to get the SSP more traffic to our SSP. So, this I think can have us to improve the advertising margins potentially. So that's having that to two things, may have to getting more, getting better results in 2019 for us.

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

And you have a follow-up question from Bill Yu. You may ask your question.

So I have a follow-up question on the targeted marketing segments. So, I recall that you mentioned that you have been trying expanding into some new verticals. So, that the overall margin has been stable or should be stable going forward. So, I just wanted that within the verticals, we are operating now. Surely, there will be more mature ones and emerging ones which we have been exploring. So I wonder for those moments your workflows, what is the margin profile look like? And are they spending overtime or have they been stable? I'm asking this question because I believe the gross margin for certain vertical is actually a measurement on how effective our technology has been versus competitors say, even the giant say by $0.10. So, we are able to earn this gross margin because our targeting is more accurate than what they can offer. So if this gross margin is extending then that can translate to a statement that's our technology has been evolving, which is even faster than the giant operate. So this is where I'm coming from. So that's the first one. And the second one, I just want to follow up on the operating expenses. I noticed that we have certain operating leverage from well, actually all the items in [indiscernible] because they all grew slower than our revenue growth i.e., which will be able to expect from opening leverage from all these three. So, I wonder, how should we think about this going forward? Especially in R&D, if we are able to maintain a high gross margin in certain verticals. We need to invent the giant where they have been improving their targeting capability. Then how should we think about the R&D expense going forward?

Okay. So, Bill, in terms of the margin profile for different verticals. For the, actually, establish a vertical, I will not say those are mature vertical, we have to grow, everybody go actually growing quarter-over-quarter including the very establish financial vertical. So finance in our company accounts for roughly 60% of our total advertising revenue, and finance the margin actually in varies between like 18% to 20%. And this has been pretty constant over the past three quarter. And the reason why just is not going up actually it's also sort of our strategic decision, okay. So, we have two goals to achieve, okay. One is we need to grow our revenue, right. Grow our revenue, we need to have a strong revenue growth and you also have a strong revenue growth in the meanwhile, you also want to like grow the margins very strongly, actually, oftentimes, actually, they kind of like contradictory to each other. So, I’ll go basically to attract more customers and allow the customer to spend more with us, and basically we -- our strategies tend to keep the financial vertical, the margin pretty constant the table, okay. And this has proven to be very effective in terms of like and being able to drive continued the revenue growth quarter-over-quarter, okay. So, this is a number one for finance which is 18% to 20%. And the secondly established one is basically, the media entertainment in the retargeting business, right. That vertical is around like a 15% and then again this is also pretty stable over the past several quarters. And then the rest of the other emerging vertical such as the gaming, the e-commerce, education, auto, Chris mentioned that those verticals. These verticals actually order new verticals. For the new verticals, they are in the very beginning basically as we still have time to fine tune the model, the gross margin profile typically start with low-single-digit to begin with right. But over time, certainly, we also see the trend of these new verticals or margin getting improved. So that's why if you look at just rely on the third-party SSP, the overall gross margin will have a downward pressure as I had in discussion before in early of the call. But, on the other hand, as we continue to build our own SSP and this own SSP class on tap on the media. So, our cell phone on the media actually, now we incorporate into the cell phone SSP. So our cell phone media class, the other media included in the cell phone SSP now total account for roughly 15% of our total advertising revenue, right. So, for this 15%, actually, the margin is pretty good is over 20%. And so our goal is to continue to drive, more contribution from this cell phone on SSP. And in the meanwhile, continue to drive growth from the new verticals, new industry verticals. That's why I say, in the near-term, in the next couple of quarters, I would not expect the overall gross margin to improve meaningfully and you will keep a pretty much constant with the next couple of quarters. And so, this is my comment on the mix of the different vertical in the other marketing business.

And next question was about R&D.

Yes, R&D, right. So, R&D, I mentioned actually pretty much of 50% of our operating expense is contributed by through dedicated to R&D, right. So which means, R&D is, we spent very heavily on this area. So in 2019, so basically we’ll continue to grow the R&D, and basically, we expect to have a 42% year-over-year growth. And in terms of the dollar amount, it's going to be RMB190 million, so which is pretty meaningful. You want to know how we have been to compete with BAT in terms of…

Yes, surely, we would like to -- yes, sure, we’d like get more color about that because I wonder if you agree with our assessment that, the gross margin levels as we measured, how much better our expecting this is versus all the giants because the – so, we are able to earn this much margins because we can do the targeting better. So, the level of gross margin actually measured how much effective this we are versus the BAT player. So do you agree with that the assessments or not?

Yes, we agree. So, basically, as I give -- so the advantage of on our targeting marketing versus and BAT their own-self varies on different verticals. So for example, for the finance vertical, we have more than 30% advantage versus if the customer they are using our data or they don’t use our data. They do the advertising on themselves directionally. So even we have 20% margin on the customers, there have 10% as category from working with ours. So new vertical like education, education is to have many soft verticals, they have K12 or other educations, through varies. So I give you one, K12 vertical in space city, we have a 20% advantage if the customer is working with us or they are working with the China directly. So in that case I think we can improve the margin in the coming orders. So the reason, we can have a better -- we have a better performance versus BAT is because of the data nature. For example of education, we have very good coverage on the education mobile apps. We know the, how the user behavior, we think are difference education mobile apps. However, Tencent or BAT, they don't have -- they only have those behaviors. We think they'll own mobile apps, right. So, they don't know how the users are their behavior in various different medium or small mobile education apps. So, we are more diversified. So, we have more diversified data than BAT. So, they have us to have a better understanding of the mobile users’ education for routing in that vertical. So, yes, that's how it could be with BAT now.

Yes. So, basically, I think what Chris wants to tell you basically. We have the data hedge, right in various industry verticals. But this act actually is something in the asset actually BAT they don't have. And in terms of the R&D spending, actually, the R&D, we have the data scientists, so we have the teams who have successfully developed the model for the finance verticals, for media entertainment vertical, and it's just like for them to replicate the new capacity in the new vertical, right? And this was not really the rocket science and it just like we may be trying the arrows and they will figure out what pattern is. So, there is no meaning that the BAT, they have better talents, they have more people, they will be able to devise more insights from that data. And the thing is our data already has the edge and its matter of using the existing team to mine the data.

[Operator Instructions] There are no further questions at this time. I would now like to hand the call back to Fei Chen.

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

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