Aurora Mobile Limited (JG) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Aurora Mobile Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd like to hand the conference over to your first speaker today, Mr. Tip Fleming. 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 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 questions during the Q&A session that follows. Please be reminded that this call contains forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates future, intends, plans, believes, estimates, confident and similar -- other similar statements. Forward-looking statements involve inherent risks and uncertainties and 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 filings with the Securities - the SEC. Our whole information, Aurora Mobile undertakes no duty to update such information except as required under applicable law. With that, I will now like - I would now be happy to turn the call over to Chris. Chris, please go ahead.

Thanks, operator. Good morning, and good evening to everyone on the call, and welcome to Aurora Mobile's second quarter 2019 ended earnings call. We have a few piece of exciting news to share with you today. First, we achieved our first ever quarterly profit on both an adjusted EBITDA and adjusted net income basis. This is a very important milestone and quite an accomplishment, particularly given the macro headwinds and demonstrates the strength of our business model, continue to top line growth coupled with the increasing operating leverage that we are experiencing as we scale the basis, drove the turning in our bottom line profitability. Second, we announced our strategic partnership with Tencent Cloud yesterday. Under this partnership, Aurora Mobile and Tencent Cloud will offer unified customer accounts to both of our customers. Once locked in, whether from the Tencent Cloud system or from Aurora Mobile system, the user will be able to access the complete set of product offering provided by both Aurora and Tencent Cloud, ensuring that the user experience will be very smooth and friendly. On Tencent Cloud's website, cloud.tencent.com, under the tab Developers on the menu page, all of Aurora's developer products will be displayed and ready for use by Tencent Cloud's customers. The concept is very much like on the WeChat, where the Food Delivery tab is dedicated to Meituan, driving significant traffic to their service. Similarly, our Aurora's website under the path Developer Services, Tencent Cloud's product offering will be displayed. The benefits to both parties are very clear. For us, we will be able to acquire incrementally more developers and increase our exposure to those developers covered by Tencent Cloud, but not yet by ours. For Tencent, it enriches their cloud offering by leveraging our first costs developer services. So Tencent can better service its customers. Together by leveraging each others unique strengths, we can develop a better developer ecosystem. Now, I will talk about various key achievements on the operating side this quarter. First, number of mobile apps utilizing at least one of our developer services or the cumulative app installations, reached 1.29 million as of June 30, 2019 from approximately 887,000 last June. On a quarter-over-quarter basis, we continue to see a steady string of new apps of approximately 41,000 new apps each month this past quarter. They use our app details. Notable customer win this quarter included [indiscernible] and update on our new product. JVerification launched at the end of the first quarter last year. This quarter, we have more than 70 paying customers compared with just 10,000 [ph] trial customer in the first quarter. Notable paying customer included [indiscernible] Second, cumulative SDK installations increased to 26.6 billion as of June 2019 from 14.9 billion last June. First, the number of monthly active unique mobile devices we cover continue to increase, reaching 1.13 billion in June 2019 from 972 million in June 2018. The increase was mainly due to the increase was mainly due to new apps that were added in the first quarter. They started to run SDK with us, such as QQ Reader [indiscernible] Lastly, in the second quarter of 2019, we saw the number of paying customer increasing to 2,211 from 1,602 a year ago. Now, let me discuss a few highlights of our financial performance. I'll ask Fei Chen to talk more into more detail later. Our total revenue for Q2 2019 was RMB291 million, which represents an increase of 76% year-over-year. Breaking this down, our revenue from developer services increased 39% for RMB14.5 million during the same period last year to RMB20.2 million. This was mainly due to the growth in a number of customers from 1,005 to 1,488, while our ARPU remained stable. Our revenue from data solutions increased 80% from RMB150 million during the second quarter last year to RMB271 million. The revenue growth was primarily due to the increase in both the number of paying customers and average spending per customer. Revenues from targeted marketing rose 84% year-over-year. This increase was mainly due to both increase in number of paying customer and ARPU. ARPU increased about 52% year-over-year, while the number of paying customer increased 21%. The revenue mix for the quarter remained quite balanced, with the financial services vertical contributing less than 30% of total ad revenue, down from 40% last quarter, and mobile gaming continue to gain momentum and accounts for over 25% of total revenue, up from 16% in the first quarter. The media and entertainment vertical contributed about 20% of our ad revenue, the other mainly included e-commerce, education and auto. Together, these segments account for 25% of total ad revenue, up from 15% last quarter. Customer retention this quarter was occurring very high among the Top 20 paying customer in the first quarter. We had zero customer attrition during this quarter. In terms of advertising inventory, Tencent to be accounted for 30% in dollar terms, which was similar to the first quarter. For targeted marketing, I would like to – discuss a few new initiatives that we are currently implementing. First, we are in the process of building out our live push alerts. The concept is for developer to contribute their push message resources to us to create a common media resource pool. We will manage the pool of resources to do retargeting for developers' mobile apps. The benefit to developer is that this concept will allow them to increase their app's activity. The product will require a special new push SDK. We are currently rolling out, and expect to generate revenue in the first quarter. Second, we are transitioning some of our advertisers from performance-based end-to-end advertisement services to our SaaS subscription-based model. Instead of committing CPA by taking inventory risk, we will provide select targeted audience data package based on the particular advertisers targeted user profile. The goal is for advertisers or agents to run queries on this data package wherever they need to beat on the end media inventory, which should have to increase their ad performance. While this initiative may lead to slower top line growth for our targeted marketing business near-term it will following attractive benefit to us, such as enhance the gross margins, lower working capital requirements, and expanding advertising customer base and great customer techniques. Now I will turn the call to Fei, who will talk about the Q2 performance of our operating business announced within data solutions.

Thank you, Chris. The combined revenues from our other vertical data solutions, including Financial Risk Management, Market Intelligence and iZone, increased 55% from RMB18.9 million in the second quarter last year to RMB29.2 million. This was mainly due to a strong 22% year-over-year increase in the number of paying customers, as well as continued expansion in ARPU. We saw solid growth across all three product lines. For Financial Risk Management, the top paying customers this quarter included Baixin Bank, 360 Finance and, 360 Finance and Zhuofu. We also signed a multi-million dollar contract with Ping An Technology. Our strategy remains very consistent. We are focused on catering to the leading players in the banking and the consumer finance markets. And we were happy to see good growth in both customer numbers and ARPU. For our Market Intelligence products, we also saw a solid growth in both customer numbers and ARPU on both year-over-year and sequential basis. Revenue this quarter was contributed almost equally between investor and the corporate customers. For our new high marketing product, which we launched in the first quarter, we were already able to sign a few new partners in the second quarter. Moreover, we are generating momentum with large corporate customers and we expect to sign with a few BAT level customers in current quarter. And lastly, our iZone business posted a solid growth of around 15% [ph] sequential growth in the second quarter. Top paying customers included, BJEV, Carrefour and the China Urban Planning Institute. We saw very good demand across the real estate, new retail, and the urban planning verticals. With that, I'll now pass the call to Shan-Nen.

Thanks, Fei. Since Chris and Fei has already talked about our top line numbers, I'll go through the some of the other P&L items. Gross margin for Q2 decreased slightly to 26.2% from 27.5% last quarter. The decrease was largely due to the mix shift towards the targeted marketing segment. Also within the targeted marketing, our ramp-up of new verticals also led to the slight margin decrease. In renminbi terms, our gross profit increased by 62% to RMB76 million. Total operating expenses increased by 39% year-over-year to RMB95 million. In particular, R&D expenses increased 47% to RMB46.3 million. This was mainly due to increases in staff costs, depreciation and amortization, and bandwidth costs. Selling and marketing expenses increased 41% to RMB30.6 million, mainly due to the increases in staff costs, marketing expenses and lease and office expenses. G&A expenses increased 19% to RMB18.3 million, mainly due to increases in staff costs and professional fees. However, OpEx as a percentage of revenue, continued to decrease both year-over-year and quarter-over-quarter. Our adjusted EBITDA went from negative RMB11.13 million in Q2 2018 to positive RMB12.54 million in Q2 '19. Onto the balance sheet items. The total assets decreased from RMB992 million as of 12/31/2018 to RMB962 million as of 6/30/2019. The key asset items as of June 30th were cash and cash equivalent of RMB381 million, which included a short-time deposit of RMB100 million, accounts receivable of RMB225 million, prepayments of RMB89 million, fixed assets of RMB108 million, long-term investment of RMB104 million. Total current liabilities increased from RMB164 million as of 12/31/2018 to RMB173 million as of 6/30/2019. The key current liability items were accounts receivable of RMB26 million, deferred revenue of RMB75 million, accrued liabilities of RMB69 million. As of 6/30/2019, we maintained a healthy level of working capital of RMB566 million. Looking forward, we expect the total revenues for Q3 2019 to be in the range of RMB295 million to RMB305 million, representing growth of 50% to 55% year-over-year. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. As of 6/30/2019, we have repurchased a total of 797,711 ADS since the start of our repurchase program. In the second quarter, we repurchased 490,917 ADS at an average purchase price of $7.13, spending a total of $3.5 million. We'll continue to monitor the need to repurchase depending on the market conditions and the underlying share price. And this concludes management's prepared remarks, and we will be happy to take your question now. Operator?

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Bill Yu from Goldman Sachs. Please ask your question.

Hello, Weidong, hello Fei, hello Shan-Nen. Thank you for taking the question, and also congratulations on your first profitable quarter. My question is about the business outlook. So if we look at the midpoint of your guidance of RMB300 million, so how should we think about this from a growth perspective because it's almost flattish on a Q-on-Q basis. So I wonder does that factor in our SaaS strategy, given that the - I mean the revenue may decline although the margin may increase for the SaaS portion of the revenue. So that's my first question. And my second question is on the Tencent Cloud collaboration. So I wonder, how would you consider the potential impact in terms of a paying customer going forward? So I saw we already have a healthy increase up to 2,200. So, is there any expectation that you have that the Tencent collaboration can bring more paying customer? Thank you.

Hi, Bill. This is Fei. Hi. So regarding the business outlook, actually, you are absolutely right. So, we have already incorporated our new strategy for target marketing to shift gradually to the SaaS-based model. And the main reason is because - as we ramp up -- as you know for our existing model, if you ramp up with the new vertical and then the new vertical if they grow too fast, then it's going to have a negative impact to the overall target marketing gross margin. And also with current headwind of the macro environment and -- if we continue to grow this business which will require significant amount of working capital, which is also not something we want to do, right? So, given that, if we switch the model from end-to-end performance-based advertisement service to a SaaS-based model, which can totally solve all these problems because it's a subscription based and the customers are required to pay in advance. And also in terms of the margins, absolute dollar term, it's not really go into effect much to our margin. So taking into consideration all these factors, that's why we purposely we do not want to 100% of focus on the existing model, but rather we want to switch to this. It's a very sticky SaaS-based target marketing business model. We are already actually currently rolling out -- trying out a few customers and already -- and the feedback has been pretty positive. So, with that, I think I will let Chris answer the second question.

Yes. So for the strategic partnership with Tencent Cloud, so if you go to Tencent Cloud's website, cloud.tencent.com, you can see our advanced developer product is -- are displayed and ready for use under the tab new developers. So that's a pretty, very nice entry point on that menu page. So, we expect there's going to be very good incremental numbers of developers who can contribute to us. So as you know, most of Tencent Cloud's developer are paying customer, are not free. So we believe this corporation can bring us more paying customers of the developer services. So that's the answer for the second question.

Yeah. Bill. Actually let me give you a number. So in terms of number of developers, we currently sort of it's about 500,000, right, in the current quarter. But for the Tencent Cloud, actually they cover about 2 million developers. So that's the reason. Working with Tencent, we will have incremental more traffic driving to our platform. Okay.

Okay. Thank you. Congrats.

Yeah. Thank you.

[Operator Instructions] Your next question comes from the line of Tina Long from Credit Suisse. Please ask your question.

Hi. Good evening, management. And thanks for taking my questions. Congratulations. This is Ivy Liu on behalf of Tina. So I have two questions here. The first one is, I noticed the R&D expense ratio to total revenue is slightly declined this quarter. So is it related to more prudent R&D decisions or like development cycles overall? What will be the trend of R&D expense be like for the rest of 2019? And my second question is - and you just mentioned that you are shifting towards more of a subscription-based model from traditional CPC model. So what's the strategy’s impact on cost lines you like such as media costs? Thanks.

Yeah. Hi. Regarding the R&D expense, so actually this quarter, we actually had a sort of -- like basically restructuring or optimizing of our R&D talent. So basically, we did not really have increased - much increased of R&D headcounts, right. So - but - going forward, we surely we will continue to invest in R&D as a percentage of the total revenue that will continue to decline. And the second question?

I guess the second question is impact on the cost in terms of us moving into the SaaS.

Yeah. So the impact to the cost of the goods sold, it will decline as a percentage of the total revenue.

Thank you.

[Operator Instructions] There are no further questions at this time. I'd like to hand the conference back to today's presenters. Please continue.

Thank you, everyone for joining the call today. If you have any further questions, please don't hesitate to contact us or the Company directly. Thank you very much for joining. Good night.

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