Aurora Mobile Limited (JG) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host for today, Mr. Rene Vanguestaine. Thank you. Please go ahead, sir.

Thank you, A.J. 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 are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following their prepared remarks, all three will be available to answer your questions during the Q&A session that will follow. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management’s current expectations and current market and operating conditions, which are difficult to predict and may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and/or factors are included in the Company's filings with the U.S. Securities Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law. With that, I'd now like to turn the conference call over to Mr. Luo. Please go ahead.

Thanks, operator. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile's third quarter 2020 earnings call. Before I proceed, I would like to take this opportunity to remind everyone that we have uploaded the quarterly earnings deck on our IR webpage for your reference. You may refer to the deck as we proceed with the call today as it contains useful financial information in addition to those we have in the press release. Let's begin our review with highlights of our key operating and financial performance for the third quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations reached 1.65 million as of September 30, 2020 from approximately 1.39 million a year ago, an average of 12.7000 new apps came on board every month during the third quarter. Quarter-over-quarter, we still see the great number of mobile app developers joining us and we are truly humbled yet encouraged by this trend. Second, the number of monthly active unique mobile devices we cover continued to increase reaching 1.39 billion in September 2020 from 1.34 billion in September 2019. Lastly, in the third quarter of 2020, we saw the number of paying customers increased to 2,405 from 2,312 a year ago. On-to the Q3 2020 financial numbers, please refer to our presentation deck uploaded to our IR webpage for the key financial highlights. I would like to begin with the discussion of SAAS Business, which includes only the Developer Services and Vertical Applications business, because it's appropriate, relevant and helpful for investors to understand how the underlying SAAS Business are performing now. At beginning with the quarter ending March 31, 2021, we will only have this SAAS Business. Our SAAS Business continue to record impressive result in this quarter with revenue of RMB65.6 million, or 18% growth year-over-year and gross profit of RMB49 million, or 16% growth year-over-year. On a SAAS Business basis, the total revenue grew 18% year-over-year, mainly due to the strong 99% growth in Developer Services, partially offset by the decline in vertical applications, which have been impacted by COVID-19. It's worth noting that customer demand for Vertical Applications have gradually recovered from the second quarter of this year and revenues from Vertical Applications have been sequential growth for two consecutive quarters. On a quarter-over-quarter basis, revenue remained relatively stable at RMB66 million. On a SAAS Business basis, gross profit has also shown solid growth of 16% year-over-year to RMB49 million for the quarter ended September 30, 2020, due to the same reasons as what happened to the revenue trend. Also on a SAAS Business basis, gross margin for this quarter was 75% stable year-over-year and quarter-over-quarter. We expect pro forma gross margin to maintain at about 60% range going forward. In the third quarter, we continued to extensively explore various industry verticals, focusing on helping mobile app developers with operations, growth and monetization by leveraging our professional, efficient, secure and stable services and great operational analysis capabilities. During the quarter, we launched a one-stop operational platform for app developers, helping them to improve user engagement, retention, and conversion, as well as achieve greater efficiency, leverage on intelligent user acquisition tools to further refine their operations. Recently, we also signed strategic cooperation agreements with leading platforms across a greater variety of industry verticals, such as finance, insurance, weather, Internet tools, gaming, fresh food e-commerce, and online education to drive user growth and traffic and improve user experience. For example, we have already signed agreements with Ping An Bank, Data Center of China Life, Moji Weather, WiFi Masterkey, Lilith Games, Missfresh, and 17zuoye, and other well-known companies. Now, I'll turn the over to Fei, who will discuss the Q3 performance in great detail.

Thanks, Chris. Let me start the discussion of different revenue streams within the SAAS Business. Since the first quarter of 2020, Developer Services was once again the star performer for the third consecutive quarter. For the quarter ended September 30, 2020, we recorded RMB43.7 million in revenue for Developer Services, which represented a 99% growth on a year-over-year basis. The significant revenue growth in Developer Services was fueled by the 26% and the 58% growth in custom number and ARPU respectively. For Subscription services, we continue to be more customers signing up to our suite of Developer Services. New and renewal customers include, among others, McDonald's, China Mobile, Hunan Province, [Tianjin and Anhui] [ph]. Subscription services revenue was RMB30.2 million, a significant increase of 38% year-over-year, primarily driven by the increases in both the number of customers by 23% and ARPU by 12%. Value-added-services, which include revenues from JG Alliance services and Advertisement SaaS, have also recorded another strong quarter. While our Subscriptions services satisfy app developers’ operational needs. Our JG Alliance services help app developers with their user traffic monetization needs as the app market become incrementally competitive and the user growth become stagnant and costly, there’s urgent need for app developers to monetize existing user base in order to survive. Our JG Alliance services come to the market at the very right time to exactly serve this monetization purpose. We expect tremendous growth potential in the business. The revenue from value-added-services was RMB13.5 million in this quarter, compared to zero revenue from the same quarter a year ago. On the supply side, recently, we have signed up a few hero apps with over 10 million DAUs in China, such as WiFi Masterkey and others joining our JG Alliance traffic network. The total number of DAUs within our network has already exceeded 100 million in the third quarter, reaching a major milestone since we launched as a service less than a year ago. The endorsement of this hero app has proven the great value in the market acceptance of our JG Alliance products to help the mobile app to further monetize their app traffic. On the demand side, many program developers have become the largest and traffic consumer of JG Alliance. With the increasing expansion of the mini program ecosystem, many program developers are no longer satisfied with limited traffic supply, such as those within WeChat and they urgently needed additional external traffic to meet that huge user acquisition need. Our JG Alliance massive traffic results and the innovative advertising format can effectively meet their user acquisition need. Therefore, whether it is from the supply side or the demand side, JG Alliance gives us full confidence that this business will become a growth engine to drive our overall growth in the foreseeable future. Here, I would like to provide a brief update on the legacy targeted marketing business. In the third quarter of 2020, targeted marketing business continue to wind down according to plan. It only contributed 40% of revenue down from 49% of revenue in the second quarter of 2020 and up 4% of total gross profits. Now from 5% of total gross profit in the second quarter of 2020. As Chris mentioned, we will wind down the business by end of this year, therefore, starting from first quarter of 2021 the revenue booked will 100% of SAAS Business which includes only developer services and the vertical application. Now let's move on to the discussion of vertical applications. The combined revenue from vertical applications, including market intelligence, financial risk management and item increased by 6% from RMB20.7 million in the second quarter of this year to RMB21.9 million. Revenues from our market intelligence product remained relatively stable between the quarters. Revenue this quarter was again equally contributed by both the Investment Fund and the corporate clients. New corporate include the Ping An Bank, Huawei, Chrysler and SoftBank. For the financial risk management segment, revenue increased by 6% quarter-over-quarter as this business continued to recover from the impact of COVID-19. We are seeing quarter-over-quarter increased demand for our products in the financial sector, mainly by banks and a licensed financial institution with a particularly strong ARPU growth of 17%. And lastly, our item business has shown solid growth of 29% quarter-over-quarter driven by a 60% improvement in ARPU as China recovers from COVID-19, we do see increase in demand for our location based intelligence products across different industry verticals. With that, and I'll pass the call to Shan-Nen.

Thanks, Fei. Since Chris and Fei already talked about our top line numbers for this quarter. I'll go through some of the other P&L and balance sheet items. We're very pleased that the increased contribution percentage wise year-over-year and quarter-over-quarter by Developer Service and Vertical Applications has pushed our gross margin for this quarter to an all-time high. This historic high gross margin of 47% in Q3, 2020 is the result of our commitment and success in investing, growing and executing well on both the Developer Services and Vertical Application business. On to the operating expenses; total operating expenses decreased by 14% year-over-year to RMB96.2 million. In particular, R&D expenses increased by 5% to RMB45.6 million, mainly due to increased depreciation and technical expenses. Selling and marketing expenses decreased by 8% to RMB28 million, mainly due to reduction in benefit cost as a result of lower headcount and less marketing expenses due to COVID-19 pandemic restriction. G&A expenses decreased by 36% to RMB24.1 million, mainly due to reduction in better provision, where we make specific provision for one customer last year. No such material provision was needed for this quarter. I believe the healthy gross margin trajectory along with a good control of over operating expenses will continue into the next quarter and beyond, usually a solid foundation for us to further improve our financial performance in the future. Onto the balance sheet item; these solid operating and financial results mentioned above are also reflected in our balance sheet. With our stringent credit policy and collection effort, accounts receivable turnover days have decreased significantly from 84 days in Q3, 2019 to 45 days in Q3, 2020. The deferred revenue balance, which represents cash collected in advance from customers, has increased by 29% year-over-year to RMB110 million as of September 30, 2020. Our operating cash flow has now been positive for two consecutive quarters, with cash inflows this quarter of more than RMB30 million. In addition, our cash and cash equivalents, restricted cash and short-term investment balance was at a healthy level of RMB437 million as of September 30, 2020. Thus, we believe we are in a very solid financial position to further invest in and expand our high-margin SAAS Business going forward. Total assets were RMB859 million as of September 30, 2020. This includes cash and cash equivalent of RMB437 million mentioned above. Account receivables of RMB42 million, pre payments of RMB40 million, fixed assets of RMB90 million, long-term investment of RMB210 million. Total current liabilities were RMB453 million as of September 30, include accounts payable of RMB16 million, deferred revenue of RMB110 million, accrued liabilities of RMB95 million and convertible notes of RMB232 million. Beginning from this quarter, we will start providing the quarterly SAAS Business revenue guidance. For the fourth quarter of 2020, the Company expects the SAAS Business revenue to be between RMB74 million and RMB78 million, representing quarter-over-quarter growth of approximately 13% to 19%. This Q4 SAAS Business revenue outlook is based on the current market conditions and reflects the Company’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended September 30, 2020, we did not repurchase any shares as of September 30, 2020, cumulatively; we have repurchased a total of 921,000 ADS since the start of our program. And this concludes management's prepared remarks. We are happy to take a question now. Operator, please proceed.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Ryan Roberts. Please go ahead.

Good evening. Thanks for taking the question and congratulations on kind of building up the SAAS and in VAS with the continued progress, but that's great to see. And also thank you very much for the improved transparency. I like to applaud that. I think that's very meaningful and helpful for the market to understand more what's going on with the business. Thank you for that. So my question really, actually, of course, is going to be on the SAAS Business, because one of the things we think about and have talked about in the past is kind of the growth trajectory. And as we get more to a pure SAAS Business kind of in Q1 next year, I just want to kind of maybe get a bit more discussion on kind of, I guess, the growth trajectory. So as I look at the SAAS Business kind of from sequentially, the revenues look kind of flattish, I realized year-over-year, obviously, it's pretty significant. But looking at the sequential, it looks less so through Q3. And I want to get a sense of looking kind of into Q4 and maybe, obviously, there's some, you're looking for some growth there, but maybe kind of a bigger picture view and into 2021. What are we -- what should we be looking for as kind of the growth drivers? I mean, it sounds like the Push Alliance is definitely an interesting area, but also want to kind of get your sense of what you're looking to see to tap at the growth driver to – for the year ahead?

Hey, Ryan. This is Fei. So regarding the SAAS Business performance in the second quarter, right, you are seeing a flattish performance sequentially. The major reason is that, actually, when you compare the value-added service, actually, there's a slightly a little bit of decline in the third quarter compared to the second quarter, right? So in the earning deck, actually, on the page 2, I explained, what is the reason behind it. It's mainly, because in the second quarter, we benefit from a couple of customers who had a strong e-commerce kind of like demand due to 618 promotion activities. And so e-commerce was particularly strong. And also in the second quarter that’s sort of – because we just started the business in – at the end of last year, right? So, like the second quarter is still in the process of ramping up. So the basically, the customers, the advertising customers, actually, they are not a very diversified customer base, right? So we have given to the customers. So if a single customer who outperformed, you might skew the performance a little bit. So that's why you are seeing actually the second quarter was seemingly has a better performance than the third quarter. But since the third quarter, actually, we have diversified our customer base, and that diversification is still going on in the fourth quarter. So, you also noticed our guidance for the fourth quarter, right? SAAS Business, you are going to see a sequential growth of 13% to 19%. That also - that actually reflects our expectation for the value-added service, which will have a strong quarter-over-quarter growth momentum. And because of that, we are able to guide this sequential growth, okay? So I hope that can address your questions.

Maybe if I could kind of draw out, maybe and I take on board, it's – maybe it's a little early, but just – because when we’re thinking about the transition, kind of away from target marketing, which is going to be done at the end of this year, and then we're looking kind of a pure SAAS model next year, should we be looking for the growth driver there? Is that more the VAS segment, which is effectively, I guess, the kind of the Push Alliance? Is that kind of where we should be seeing kind of a lot of growth as that picks up? Or alternatively, maybe you can just share some thoughts on, again, where you see the kind of explosive growth flowing through the next year, would be great?

Yes. So, actually, we had a number of discussions before. So actually, the growth driver surely will be the value-added service, right? And because of the nature of the supply and the demand, it's mainly on the supply side. As long as we get enough supply, we have more app joining our traffic network and generate more DAU for us then we will be able to drive the revenue growth rapidly. So internally, we also have a very high expectation for the growth trajectory for next year for this business. And we believe we will achieve triple-digit growth compared to this year. So this year, in total for this business line, it's roughly about somewhere between RMB50 million to RMB60 million. But next year, we are looking at our triple-digit growth for this business. It's mainly, we have a very strong pipeline of the traffic of the app, who's going to join our network. And we just recently announced the, actually, the addition of WiFi Masterkey, right? So WiFi Masterkey is in the country – currently is in the initial stage of ramping up. It hasn't been included in the 100 million DAU we announced in the prepared remarks. So WiFi Masterkey, as you know, itself alone generate close to 100 million DAUs, right? So that actually, all these kind of like -- the supply, the pipeline gives us a very strong confidence that we are able to deliver triple-digit growth for next year for this business, right? For the other SAAS Business, like Subscriptions, it's going to, as I mentioned before, it's going to follow traditional path kind of like growth trajectory 40% to – 30% to 40 percent-ish growth, yes, mainly driven by the increasing number of customer as well as we are introducing new functionalities of our products, right, offering, so, which can help the ARPU as well. So basically, that's the function of both these improvements. And for the vertical applications, actually, you've already seen the sequential recovery in the second quarter and the third quarter compared to the first quarter, right? First quarter, we hit the bottom, but now we are recovering from the bottom. So on a sequential basis, you continue to see the growth from this business coming and going back to the same level, as we experienced last year, it may take a couple more quarters, a couple more quarters. Yes, so that's the overall, the SAAS Business, the three major business lines, the trends we are seeing and the color we are able to offer.

Okay. Thank you. That's helpful. And then just one kind of housekeeping thing. I think in the prepared remarks we were discussing, GPM you expected to stay around 60%. Is that right? Is that what you said?

So, Ryan, can you repeat, we didn't get you.

Sorry. Yes. During your remarks, I think we were discussing the gross profit margin, and you said kind of on a normalized basis. It should -- I think you said 60%, six and zero. Did I hear that correctly?

Yes. Ryan, actually, if you see the pro forma, the gross margin, meaning just looking at the SAAS difference, right. So over the past few years, actually, it's always very stable between 70% to 80%. It's like bouncing around 75%, right. So since the start of next year, the first quarter because we no longer have target marketing; so our -- the corporate gross margin will be -- we are basically coming on your content from the SAAS Business, right, so you can expect the gross margin to be above 70% since the beginning of next year.

Got you. That would be my question is the delta there between the 75 SAAS and kind of the lower number of products. Then maybe kind of one last thing just kind of to box it all in, so if we think about it, obviously, the revenue growth we're talking about with SAAS is obviously sounded very attractive, and in the stronger gross margin. Additionally, you point to it kind of a more explosive kind of growth profile. But then if you look at OpEx, I noticed that you guys have kept that pretty tight and kudos for doing that kind of during this year, especially kind of challenging as conditions have been. I'm wondering kind of once you transition kind of into Q1, 2021 should we be looking for a change in kind of the cost structure and you become more of a straight SaaS business or kind of maybe how should we be thinking about those costs, which ultimately obviously drive profitability to move into 2021.

Yes, so, in terms of cost structure actually, we are not going to dramatically change the cost structure next year compared to this year, right, we have a slight increase as normal because every year the employee expecting a certain amount of salary increase, right. So we will keep the increase within that range, but certainly, we are also trying to continuously hire better talent, and try to basically optimize current workforce, right, to remove some non-performer. So, in my model, actually, I would expect only about 10% to 15%, increase of OpEx compared to this year in 2021.

Okay. That's very helpful. Okay, let's, I think that's all from my side, actually maybe I, sorry, sneak in one last one. Shan-Nen on the balance sheet, it looks like yes, again, the receivables, what you guys have been talking about last year, when you began to transition have less working capital, what that looks like that's definitely playing out, as we see AR come down. I'm just kind of curious again, as we move into the SAAS more to the SAAS era, I suppose, should we be expecting some of that to continue to change, I suspect. You mentioned before deferred revenue, a lot of, some of the pay upfront, kind of business, sorry, deposit up front. So I'm just kind of curious how we should be looking at the balance sheet, as it continues to kind of evolve the new model. Maybe, Shan-Nen, maybe that's for you.

Yes, Ryan. We do not see any deterioration of a balance sheet condition once we switch to SAAS Business, probably as you know majority of our SAAS Business customer are in the prepaid mode. So we do not expect to see a huge increase in AR because we switch from the old business and new business. On the contrary, we do expect to see deferred revenue to increase which we have demonstrated for the past two quarters has been increasing quarter-over-quarter simply because the fact that under SAAS Business, we do collect money in advance from customers. So I don't see -- I do not expect us to have any AR issue going forward.

Yes, so currently AR calculation, we still have target marketing business involved, right. So one of the target marketing businesses is completely gone. As you know target marketing has a longer AR. So once that business is gone for all 45 days of AR we achieved in the third quarter of 2020. We think that there's still room for improvement. So we are aiming to get anywhere between 30 to 40. I think that's a good AR base we are trying to manage. Okay, so that's our target.

Got you. Yes. I didn't mean to indicate that there's deterioration. That's all the AR is coming.

It's not deterioration, yes. So actually we are continuing to improve.

We have a follow up again from Ryan Roberts. Please go ahead.

Sorry, guys. Just one more on the buyback. I noticed kind of in the release. You mentioned there have been no buyback activity kind of in Q3, wondering if you could maybe give us an update kind of maybe post Q3. Additionally, can you maybe give us a sense of how you with any kind of capital allocation, maybe as you kind of as it gets some of the, I guess, balance sheet kind of hurdles to convert effectively taken care of at some point soon. How should you think about the capital allocation as you have kind of entered the more cash generative SAAS kind of model?

So, Ryan, so actually with assets as you are right, Ryan, we are expecting more cash day by day and quickly, we might reach the breakeven points. And once we have enough cash, actually, we certainly decide organically growth, we would think about the non-organic acquisition right to acquire some the upcoming or kind of like a proven product in the marketplace, right, with a small team, but they have a good product for those SAAS players, or what they are making is, they don't have a salesforce, they don't have the customer base, right. So we have a very robust sales infrastructure, we have the system to deliver those innovative products into the market, right. So I think we should actively leverage our advantage, and to basically to look for opportunistically such kind of opportunities. So by doing so, we can accelerate our growth trajectory, yes.

Thanks and any kind of color or discussion, maybe on the buyback strategy?

No. I don't think there are any immediate plans to buyback as much because as soon as you say we are trying to get more expansion in terms of the growth of SAAS Business, so there's no immediate plan to repurchase right now.

Thank you. As there are no further questions, I would like to hand the call back to Rene

Thank you, AJ. Thank you everyone for joining our call tonight. If you have any further questions and comments, please don't hesitate to reach out to the IR team. This concludes the call. Have a good night. And thank you again. Goodbye.

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