Aurora Mobile Limited (JG) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Aurora Mobile First Quarter 2019 Earnings Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 6th of June 2019. I would like to hand the conference over to your first speaker for today, Mr. Christian Arnell. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call today from Aurora are Mr. Chris Luo, Chairman and Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following the prepared remarks, all 3 will be available to take your question during the Q&A session that follows. Before we begin, I'd like to remind you that this conference contains forward-looking statements. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipates, future, intends, plans, believes, estimates, confidence and similar statements. Aurora may also make forward-looking statements in periodic reports to the U.S. Securities and Exchange Commission and its annual report to shareholders and press releases and other written materials and other oral statements made by its officers, directors or employees to third parties. With that, I'd now like to hand the call over to your first speaker, Mr. Luo. Chris, go ahead.

Thanks, operator. Good morning and evening to everyone on the call, and welcome to Aurora Mobile's Q1 2019 Earnings Call. Today, I am very pleased to share with you our first quarter results in the 2019. To kick off this call, I would like to take a few minutes on various key operating data that we have achieved in this quarter. Firstly, the number of mobile apps utilizing at least one of our developer services, or the cumulative app installations, averaged 1.165 million as of March 31, 2019 from approximately 785,000 year-over-year. For quarter-on-quarter basis, we continue to see a steady stream of new apps, approximately 30,000 new apps a month using our developer services SDK. The notable customer win in this quarter included [indiscernible], [ Kanji ], Clean Master, QQ Reader. For our new product JVerification, since launching end of Q4 last year, we have gained strong interest from the developer community. A few thousands of customers are currently in testing period, including QQ Reader, [indiscernible], [indiscernible] and [ Kuwo ]. Secondly, the cumulative SDK installations have increased to 22.7 billion as of March 2019 from 13.1 billion year-over-year. Today, the number of monthly active unique mobile devices we cover has continued to increase to 1.07 billion in March 2019 from 925 million in March 2018. Lastly, in the first quarter of 2019, we have seen the number of paying customer increased to 1,951 from 1,348 a year ago. With the healthy and steady growth of this operating data, the total revenues from Q1 2019 were CNY 230.5 million, which represents an increase of 82% year-over-year. Now let me further break down each of our business lines. Firstly, developer services. Within the 3 months ended March 31, 2018 and the 3 months ended March 31, 2019, our revenues from developer services increased by 47% from CNY 12.5 million to CNY 18.3 million, which was mainly due to the growth in the number of customers from 894 to 1,275 year-over-year, while apps remain stable. Second, on our data solution business lines, during the same period, our revenue from data solutions increased by 86% from CNY 114 million to CNY 212 million. The 86% growth was primarily due to the increase in both the number of paying customers and the increase in average spending per customer. For targeted marketing business, the revenue has grown 90% year-over-year. This increase was mainly due to both the increase of number of paying customer and ARPU. Our targeted marketing business, which is purely performance based continued to expand its customer base as well as increase customers' wallet share, which has generated sequential growth in 9 consecutive quarters since we launched this business more than 2 years ago. We continue to gain more advertising dollars from customers through the delivery of higher ROI. Year-over-year, the ARPU has increased about 28% for targeted marketing, a strong evidence of customers shifting more advertising budget to us. During the first quarter, which is traditionally a slow and challenging quarter for the entire advertising market in China due to Chinese New Year, we managed to record healthy revenue growth. Our strategy to broaden our advertising customer verticals continue to execute well, and we have seen solid results. The highlight for this quarter is revenue mix is more balanced, with financial accounting for less than 40% of total ad revenue, down from 50% last quarter. And mobile gaming continued to gain momentum. It now accounts for 16% of total revenue, up from 10% in fourth quarter. Media and entertainment vertical continued to grow nicely quarter-on-quarter with about 30% ad revenue contribution. The others mainly include education, e-commerce, auto, and this segment accounts for more than 15% total ad revenue. Customer retention in the quarter remains very high. For the top 20 paying advertising customer in fourth quarter, we had 0 customer attrition during this quarter. On our media source. For the first quarter of 2019, self-owned SSP contributed approximately 15% of ad inventory. And in this quarter, Tencent GDT accounted for about 30% of total advertising inventory on dollar term, similar to that in the first quarter 2019. Now I'll turn the call to Fei, who will share with you on the Q1 performance of our other 3 business lines within the data solutions.

Thank you, Chris. The combined revenues from other vertical solutions, including financial risk management, market intelligence and iZone have increased by 64% from CNY 15 million to CNY 25 million year-over-year. This was mainly due to the strong increase in the number of paying customers, which increased by approximately 50% between the period as well as continued expansion in ARPU. We see strong growth across all 3 product lines. For financial risk management, the top paying customers in the quarter include CITIC, [ Taishin Bank ], 360 Finance, Bank of China Consumer Finance and the Pufa Bank. Our strategy is to continue to focus on the leading players in the banking and the consumer financing area as we believe these customers will have long-term business sustainability regardless how policy in the marketing environment change over time. For market intelligence products, more than half of revenue is contributed by investor customers. We had started to generate a great momentum in corporate accounts in the past quarters, and our products become more influential to corporate customers. Our iAPP product has also launched a new marketing version called iMarketing. This product can help advertisers and ad agencies to identify suitable media to place targeted ads based on specific user profiles. We expect this product to help us penetrate more into corporate accounts by leveraging a large base of advertising customers we've already built in our targeted marketing business. iZone business, again, more than doubled in the quarter year-over-year. The revenue growth is primarily driven by more customer wins across the various industry verticals, including government urban planning institutions, real estate, tourism and the retail. We expect the future growth to continue to come from more customer wins. Now Shan-Nen will share with you our financial highlights.

Thanks, Fei. Let me take you through on the discussion on other P&L items. Gross margin for the Q1 2019 has remained fairly consistent at 27.5% compared to 27.4% a year ago. In renminbi terms, the gross profit has increased by 83% to CNY 63.3 million. The total operating expenses have increased by 70% to CNY 94.2 million year-over-year. In particular, R&D expenses increased by 75 million to RMB -- 75% to CNY 34 -- CNY 43 million. This was mainly due to the increase in staff costs, bandwidth and cloud cost and the depreciation charge of the service. Selling and marketing expenses has increased by 55% to CNY 27 million mainly due to the increase in staff costs due to headcount expansion. G&A expense has increased by 80% to CNY 24 million, mainly due to professional fee, bad debt provision and expenses related to listing company status. On the adjusted EBITDA, it has seen decrease 53% from negative CNY 15.9 million in Q1 '18 to negative CNY 7.4 million in Q1 '19. On to the balance sheet items. Total assets has increased from CNY 992 million as of 12/31/2018 to CNY 1 billion as of 3/31/2019. The key asset items are cash and cash equivalents, including short-term deposits of CNY 180 million, totaling CNY 465 million; accounts receivable of CNY 208 million; prepayments of CNY 89 million; fixed asset of CNY 113 million; long-term investment of CNY 81 million. Total current liability has increased from CNY 169 million as of 12/31/2018 to CNY 206 million as of 3/31/2019. The key current liability items are accounts payable of CNY 37 million, deferred revenue of CNY 65 million, accrued liability of CNY 99 million. And as of 3/31/2019, we maintained a healthy level of working capital of CNY 583 million. And looking forward, we expect that total revenue for Q2 2019 to be in the range of CNY 285 million to CNY 295 million, representing a growth of 73% to 79% year-over-year. Lastly, before I conclude, an update on the share buyback plan. As of 3/31/2019, cumulative number of 306,794 ADS has been repurchased, of which 237,339 ADS amounted to CNY 1.6 million has been repurchased during the first quarter of 2019 at an average price of USD 6.94. We will continue to monitor the need to repurchase, depending on the market conditions and the underlying share price. And this concludes the management presentation for the Q1 2019 results. Now back to you, operator.

[Operator Instructions] Our first question comes from the line of Bill Liu of Goldman Sachs.

Congratulations on expanding the business scope to cover more verticals. I have 2 questions. First one is about our targeted marketing. So we heard from the industry peers citing that a pressure on advertising inventory. And I wonder, have you seen a similar trend? And does that have any potential benefit to your -- potentially media cost? Because as I understand, you purchased the inventory from say, including Guangdiantong and other inventory suppliers. My second question is about our accounts receivable. So I noticed that in our G&A expense this quarter, we said there is a bad debt provision of CNY 3 million. And also I noticed there's a -- as a percentage of revenue, our account receivable have increased from sequential basis. So I just wonder, could you give us some color on this line? Especially, is there any seasonality about this in Q1?

Yes. So for your first question, Bill, actually the media inventory, actually we don't see any impact to our business, whether it's on the positive side or on the negative side because for us, we are basically advertising, right? So if the media cost increases, the cost to other -- our peers will increase. And for us, as long as we can deliver the same level of ROI, a better performance, we are fine with that. So media, we don't see any media impact to us at all. And for the second question, I think for the bad debt, I would ask Shan-Nen to explain to you.

Bill, for the bad debt that we have charged to the P&L this quarter, all of them are general provision, which means that none of them has gone bad, actually. So it's just a matter of reapplying the same provision policy. And probably you know, in the first quarter of this year, there's a Chinese New Year period, so a lot of accounts did not get paid because of that. It is simply because of timing. And so it's not because of the fact that debt has gone bad.

Also for the AR provision. Actually, accounts receivable, the increase is mainly due to -- like a part of the reason is the seasonality in the first quarter, typically because of the Chinese New Year. So the payment period is kind of like a drag longer than usual. And the second reason is because our growth in the online gaming. The online gaming, we grow very strongly because in the Chinese New Year, actually, the gaming, especially after the new licenses had been issued and the other gaming companies, they start to put more advertising dollar, which also benefited us as well. For the gaming industry, customer typically, they pay a longer period of time than the other industry vertical. And also, this activity happened after Chinese New Year, so it's purely because the cutoff days for the -- to calculating the accounts receivable is end of March, but we are receiving money right now. So -- no, actually, in April or May, so that's why it's -- it's simply because of timing difference. We do expect that the accounts receivable days to decline this quarter.

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

Congratulations on another solid quarter. I have one follow-up question on your outlook for the second quarter top line. As we see some of the peers of the online advertising industry are seeing weak second quarter guidance for the top line because of the macro headwinds plus some of the oversupply issue, could the management further elaborate the resilience in our second quarter revenue guidance?

Yes. So we -- actually, we see the peers' guidance is relatively weak due to the macroeconomy and the weak advertising market. But as our targeted marketing business is basically performance-based and for those advertisers who care more about performance rather than before, they don't care about the ROI, right? So which is, I think, that's good for us. So even from Q1, you can see more remaining advertisers. They are shifting more advertising budget to us. So I think they are going to have to cut some branding or marketing dollars and shift the marketing budget to performance-based advertising channel like us. So I think we benefit from -- a little bit from the macro issues. So in this case, we still see very strong momentum in the Q2. So that's why we give the guidance as Shan-Nen tell you. So that's it.

Yes. So also -- as you know, actually, the Q2 already have 2 months of the operating performance in the market, right, in our pocket. So we have a pretty good visibility and confidence to give you this guidance given our continued momentum.

[Operator Instructions] Our next question comes from the line of [ Ryan Roberts ] of [ Navis Capital ].

So mine is also kind of following up on the bad debt. I realize that's just a provision. It's not kind of a write-down yet. So my question was kind of on that charge. Was there any particular sector, customer or by industry vertical, something like that, you can give us some color on? Or alternatively, you said that was a timing thing with respect to the end of Q1. Have any of those accounts come -- become current since the reporting date of the 31st?

Yes. [ Ryan ], we don't see any particular concentration on particular vertical. So they are across the board. And simply because of the timing and in terms of how we collect and when the customer pays during the Chinese period, Chinese New Year period. And back to your second question, yes, we did see more collection in second quarter. And as such, we reached our provision balances in Q2.

Got you. So it sounds like these charges have been reversed. Is that kind of what you're -- you're like saying materially reversed? Is that what you're saying?

No. It's not a reversal. When it comes to 6/30, we will reassess what the total balance that we need and we'll see whether is that a charge -- is that a net charge or a net increase or decrease. So until such time we do this assessment at 6/30, yes, we do not know what's the final number as yet. But we do see a lot of those customer who did not pay in the first quarter started to pay because of the Chinese New Year period has gone past.

Okay. Yes. No, just curious if, again, those specific debt, the bad debt expenses had been worked out, like if those accounts had become current. But it sounds like you assess that at the end of the quarter. Understood. Okay. Then maybe next question is kind of on the ARPU trend. I see kind of for targeted marketing, I saw from the remarks, I think management discussed a bit on how that's trending, up about 30% nearly Y-o-Y. One of the questions I want to ask about that was if we dig in deeper into the cohorts, if you have some of that kind of color, customers who've been, let's say, using your services for a longer time, what kind of change in ARPU are you seeing for them? And in the kind of the more mature customers who have been using this service for a while, you mentioned deeper wallet share. Can you give us some more color on that, please?

Yes. For that, for a customer who has been with us for longer period of time, actually are -- most of them, they are like the financial customers because financial is the sector we have entered for the longest period of time. And therefore, those customers, actually, once they become stable stage, actually they are kind of like -- the ARPU kind of fluctuates depending on the seasonality, right? So for example, in the first quarter, of course, we know the financial guys, the ARPU is going to be smaller than the fourth quarter. But that said, we have the new verticals such as the gaming. Those -- in that vertical, the customers, new customer and a number of new customers, they actually increase the debt spending very significantly. And that kind of helps to increase the overall -- the ARPU increase. Yes.

Okay. Yes, just, again, it seems like with -- a few of your customers have been using the advertising services for longer. But I can -- I understand the mix, how that changes kind of on a quarter-to-quarter basis. Okay. Maybe just lastly kind of on the guidance. Again, for the Q2 guidance. Are you emphasizing more customer acquisition or alternatively, ARPU? Kind of when you're looking at the guidance, is that kind of how you split that in terms of the overall priority for driving revenue growth?

I think that depends on like the customers in different verticals, right? So for -- I think it's going to be a function of both. Like for targeted marketing, I think we still continue to see the ARPU expansion, and therefore, other verticals like the iZone or market intelligence, those ARPUs are pretty stable. So it's going to be mainly driven by a number of new customers. And similarly, too, for the SaaS, for the SaaS business development service, the ARPU has been very, very stable, very, very constant over the past few years. So it's going to be simply by driven the number of new customers, new paying customers.

Got you. Okay. And maybe just one last question. Sorry, I'll [ pass ] this on. Was there any kind of updated headcount you can provide?

Yes. The headcount actually remained pretty stable in the first quarter compared to the fourth quarter last year. But the second quarter, we are -- because after Chinese New Year, and that's like a hiring season, so we start to pick up a few dozen, have continued to increase. But overall, for this year, the headcount increase compared to last year is very limited, and we are trying to optimize our talent.

We got a follow-up question from Bill Liu of Goldman Sachs.

Just quickly, a follow-up. The -- about the business mix regarding our self-owned SSP. I recall Chris mentioned that it's already 15% of the targeted marketing revenue. I'm not sure if I catch that number correctly. So comparing that to 1 year ago, I recall we launched the self-owned SSP back in Q2 last year. So Q1 is -- so we have almost 0 mix versus 15% mix now. I just want to understand, what is the margin impact from the self-owned SSP initiative? Because I think our gross margin has been fairly stable in the past couple of quarters.

Yes. So self-owned SSP actually currently account for 15%, 1-5 percent, okay? So in terms of margin impact, self-owned SSP actually typically has a higher margin than the third-party SSP. Self-owned SSP, the margin is typically between 20% to 30%, while the third-party SSP is around, I guess, 15%, right? So it does have a positive impact to the margin. But that said, the margin is also a function of the mix of different advertiser vertical. For example, the gaming vertical, typically the margin is lower. That's why you have benefits from self-owned SSP, which is -- which helps the margin, but the gaming makes the margins tougher a little bit. So on a blended basis, actually, the margin remains fairly stable over the last quarter here.

[Operator Instructions] Thank you. This is the end of our question-and-answer session of our conference call. Thank you for participating. You may now all disconnect.