Aurora Mobile Limited (JG) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Aurora Mobile First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be 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 first speaker today, Rene Vanguestaine. Please go ahead.

Thank you, Nadia. And 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; and Mr. Shan-Nen Bong, Chief Financial Officer. Following their prepared remarks, they 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 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 and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. With that, I'd now like to turn the conference over to Mr. Luo. Please go ahead.

Thanks, Rene. Good morning, and good evening to everyone on the call. Welcome to Aurora Mobile's 2022 first quarter earnings call. Before I comment on our Q1 results, I would like to remind everyone that the quarterly earnings deck is available on our IR website for your reference. You may refer to the deck as we proceed with the call today. Let me start off today's call on one important milestone we have reached. In Q1 of 2022, we have made a significant and important investments that we foresee to further solidify our leading position to help our customers to enhance their user engagement through multi-channel solutions that we can provide. As we shared in the Q4 earnings call, since then, we have completed the acquisition of a majority interest in SendCloud, China's leading e-mail API platform for consumer marketing and user-centric transactional e-mail services. With the completion of the transaction in March 2022, we have initiated the integration of the operations. In this process, we have started identifying the list of SendCloud customers that we can potentially sell our JG services into and vice versa. We believe this is an effective and efficient way to increase the revenue of the group. We will provide updates on this in the future earnings call. From a product perspective, we have SendCloud's very strong presence in the e-mail services. We have integrated its e-mail services into our UMS product. This will further enhance our leading position to help our customers from all veterans of the market to reach their users through our omnichannel communication technology. We believe this is a great product offering that the market has been longing for. Q1 of 2022 proven to be a very challenging quarter for most business due to very weak macroeconomic conditions and the resurgence of COVID across major economic hubs in China, which slowed down the business activity significantly. Nevertheless, with the effort by the teams throughout the company, we have made another set of impressive financial results amidst this tough operating environment in Q1 of 2022. The key achievements in this - in the quarter includes as follows, revenues were RMB85.3 million, up 11% year-over-year. Operating expenses were RMB94.5 million, down 7% year-over-year. Operating loss was RMB36 million, narrowed by 17% year-over-year. Net loss was RMB30.9 million, representing a 23% improvement from a year ago. Adjusted EBITDA was negative RMB8.2 million, also significantly improved by 56% year-over-year. AR days remained at a healthy level at around 46 days. Total deferred revenue was above RMB100 million for eight consecutive quarters. We are and have been closely monitoring and controlling our expenses as our continued efforts to drive operating efficiency since late last year. This effort has paid off at both our operating expenses and loss from operations have reduced year-over-year. We will continue to be very strengthened [ph] in all aspects of expenditures now and going forward. Let me continue with the different revenue streams within the group. In Q1’22, our Developer Services continued to deliver solid results with a 14% year-over-year growth which was mainly fueled by a substantial 35% year-over-year growth in Value-added Services while our Subscription Services recorded a modest 2% growth during the same period. Subscription Services revenues were RMB34.4 million, an increase of 2% year-over-year, primarily driven by new customers acquisition. During the quarter, the Financial Sector, mainly banks and brokerage firms has contributed a sizeable percentage of the revenues for both the push subscription and private cloud services. The financial sector customer in Ping An Bank, Guangzhou Bank, Ranzhou [ph] Bank, City credit card and China investment security, just to name a few. With this financial return and strong customers, retail plans to continue selling other suite of JG products and services to them in the near future. We believe this is a good strategy for us to further increase the revenue or ARPU from these existing customers as we are in a good position to know of their needs in order to provide a relevant solution. And we will also expand our reach to explore more financial sector-based KA customers as our products are well received in the center of the market. Value-added Services within Developer Services, which include revenues from JG Alliance services and Advertisement SAAS, continued to deliver a solid 35% year-over-year growth to RMB25.4 million from RMB18.8 million in Q1’21. On the supply side of the JG Alliance, the traffic pool remain stable during the quarter. Our effort in the quarter has shifted to better operate each of the DAUs within the traffic pool. In summary, what it means is we are making different attempts to have each of the apps within our JG Alliance traffic pool to search for a better match of one or more advised - advertisers so that these apps can maximize their returns on its exposure. We believe by doing so, of the traffic pool suppliers, the mobile apps and as will benefit [indiscernible] initiatives through growing the revenue to be generated for each devices within the pool. In terms of revenue contribution by product formats, both the [indiscernible] contribute approximately 50 to 60 versus 40, respectively, in Q1 of 2022. On the demand side, meaningful brand developers and retargeting related demand remains strong as our JG Alliance product format remains to be very ideal as an effective means to reach out to their target audience. In total, these both sub goods contribute more than 90% of our JG Alliance revenue in Q1 2022. During the quarter, demand from direct customers have been very strong and contributing more than 70% of JG Alliance revenue stream, while the rest came from the third-party advertising agency. Major customers of JG Alliance consisted of repeated customers and market leaders across many industry verticals. Key customers include BAT, Baidu, Alibaba, Tencent, JD and Weibo. Here, I would like to provide some color on the best services in recent months. Starting from March of 2022, we have seen advertisers getting back their advertising spend across all mediums of advertisement in China. We have felt the impact of COVID-19 and lockdowns in some key cities as the demand for our value-added services has not been as strong as anticipated. Therefore, the revenue from value-added services is better to be impacted in Q2 of 2022. Nevertheless, we believe things will turn around soon. And the demand for our Value-Added-Services will pick up again as the economy recovers. Lastly, a very important product update on the Value-Added-Services. As we announced in the press release earlier this week, we have recently launched our AD Mediation Platform. Through our proprietary SDK technology, we will be in the best position to help mobile app developers to access other mainstream adverting platforms in China with great ease and help them better monetize their app advertising inventory. This is a mature and proven business model. Overseas players such as AppLovin, MoPub, and ironSource have been helping overseas app developers to grow and monetize using similar Adverting Mediation Platform solutions. We believe we will bring great values to the mobile app developers through this arrangement. With that, I will now pass the call over to Shan-Nen, who will share more about the vertical applications and other parts of the Q1 [indiscernible]

Thanks, Luo. Let's now move on to the Vertical Applications, that mainly consisted of Financial Risk Management and Market Intelligence. These revenues grew steadily by 6% year-over-year. The Financial Risk Management business contributed the lion share of the revenue growth. In the Financial Risk Management segment, revenues increased by 11% year-over-year with a solid 33% growth in ARPU. We are very pleased with the revenue growth recorded in the periods especially the Q1’22 was a tough quarter due to the relatively weak macroeconomic conditions and the resurgence of COVID in certain pockets of the key cities in China. Nevertheless, the demand for our products remain strong. During the quarter, we acquired new key customers and continue to retain many existing customers every quarter. These customers have expanded their demands with us, resulting in a very strong 33% ARPU growth year-over-year. Some of our new and renewed customers include all licensed operators such as TD and Financial [indiscernible], just to name a few. Our Market Intelligence product line continued to sign up a number of new and well-known key account corporate customers during Q1 of ’22. They include again DT, [indiscernible] and one of the largest pension plans in the world is based in Ontario. Revenue remained at a fairly stable level with slight decline year-over-year, again, due to macro environment, which slowed down the business activities. Now I'll go through some of our key expenses and balance sheet items. On to operating expenses. As a result of our continuous effort to efficiently run the business and tightly manage our expenses in Q1 2022 our operating expenses decreased by 7% year-over-year to RMB94.5 million. In particular, R&D expenses decreased by 23% to RMB40 million, mainly due to a reduction in headcount and reduced salary cost and associated share-based compensation. Selling and marketing expenses decreased by 2% to RMB26.3 million, mainly due to the decrease in marketing expense spending in this quarter. G&A expenses increased by 24% to RMB28.2 million, mainly due to the reversal of AR provision in Q1 2021 that did not repeat in this quarter that resulted in a RMB1.5 million stream and a RMB1.4 million share-based compensation and a $1 million increase in professional fees incurred. Adjusted EBITDA calculated as EBITDA excluding share-based compensation reduction in force charges, impairment of long-term investment and change in fair value of foreign currency swap contracts recorded a 56% improvement year-over-year to negative RMB8.2 million. This was mainly possible as we managed to grow our business - grow our revenue and gross profit effectively controlling our operating expenses year-over-year. And to recap the key financial performance in these relatively tough quarters, we have managed to grow our revenue by 11% despite Q1 of 2022 being a very tough quarter for most, if not all businesses in China. Gross margin was at 69% this quarter as we paid more traffic cost to mobile app developers for our JG Alliance business. Operating expenses decreased by 7% due to management effective and stringent cost control measures. As a result, both our net loss and adjusted EBITDA has narrowed by 23% and 56% year-over-year, respectively. During the quarter, we continued to streamline our workforce in an effort to further improve our operating efficiency and ensure that OpEx is remain at an optimal level. On to the balance sheet. I will gain share two very important KPIs that we always closely monitor. First is the AR turnover days which has shortened by 2 days at 46 days this quarter compared to 48 days a year ago. Our disciplined accounting policy and cash collection efforts ensure a timely collection of our accounts receivables. Secondly, the total deferred revenue balance, which represents cash collected in advance from customer has exceeded RMB100 million at quarter end for the eight consecutive quarters. As of March 31, 2022, the total deferred revenue balance was at historical high of RMB133.3 million. Next, total assets were RMB625.5 million as of March 31, 2022. This includes cash and cash equivalents of RMB273 million, accounts receivable of RMB42.3 million, prepayments of RMB15.4 million, fixed assets of RMB55.6 million, long-term investment of RMB137.3 million and goodwill of RMB37.8 million and intangible assets of RMB24.1 million resulted from the SendCloud acquisition in March 2022. And total current liabilities were at RMB394.2 million as of March 31, 2022, and this includes short-term loan of RMB160 million, which were all repaid in Q2 2022. Accounts receivable of RMB21.6 million, deferred revenue of RMB129.5 million and accrued liabilities of RMB83 million. Next, business outlook. Since March 2022, the resurgence of COVID-19 in certain parts of China has increased the risk and uncertainties for conducting business in China. And this has, in turn, making business performance harder to forecast in the near future. With that, we believe it is the right decision for us to suspend providing or updating the revenue guidance until such time that the situation substantially improved. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended March 31, 2022, we did not repurchase any shares. As of March 31, 2022, cumulatively, we have repurchased a total of 921,000 ADS since the start of our program. And this concludes management's prepared remarks. We're happy to take your questions now. Rene, you may proceed. Rene or operator…

Thank you, for confirming. [Operator Instructions] The first question comes from the line of Brian Kinstlinger from AGP. Please ask your question.

Great. Thanks so much for taking my questions. First question I have, the year-over-year growth rate in JG Alliance has slowed significantly in the last few quarters you commented. Can you provide the factors that caused this? How much was market conditions versus COVID?

[Technical Difficulty]

Excuse me, dear speaker. Your line is not clear.

Hello, better now?

Yes...

Much better.

Okay. So I think that's the same thing, right? I mean the COVID impact affect the advertisers' budget. And the advertisers reduced their advertising budgets. So they - impact our JG Alliance revenue. Because our top advertisers basically are like JD, Alibaba, right, Weibo, especially JD and Alibaba, is affected by the logistic, which is impacted heavily by the COVID-19. So they reduced their budget heavily in Q2, but we see some color pickup in these months, but not as 100% as what happens in Q4, we still need more colors in next quarter.

Got it. Okay, thanks. And then a similar question on subscriptions. We're down to single-digit growth for this quarter. Is that all - is that generally COVID too? Is that more churn on some of your subscriptions? Just maybe take me through the factors that led to single-digit growth compared to what historically has been a little bit better growth there?

Yes. For the first question, surface, I mean, Q1 is a single digital. It is mostly impacted by the COVID because in March our headcount incentive has been a lockdown by more than one week - around one week. And we see the - in Q2 the subscription service will pick up and recover. We will see double-digital growth Q2 and Q3 as well.

I'm just curious when subscriptions, how do they change when there's lockdowns, they stop paying their subscriptions. That's what I'm confused about is why there was slower growth?

No, the impact is basically for the subscription service - its impact the new customers. So any new customers but it's basically delayed the contract renewal and delayed the paper, right? So when the lockdown time happens, we just cannot ship our site - contract to the customer. We cannot shipment - deliver the invoice to the customer. So we can close the deal with the customer. Yes. But in Q2 - from Q2, we have [indiscernible] something like that to reduce this kind of cover.

Yeah. Okay. Now with lockdowns easing albeit probably slowly. I wonder, are the segments beginning to improve, although I guess how do you think also then about advertising budget, it seems that you're still pretty weak, even without COVID, given the economic uncertainty. So maybe take us through how things are improving over the last two months in your business versus how do you think the environment has changed maybe permanently for the year?

Great, Brian, this is Shan-Nen. Back to your question. No, the ad budget demand has slowed down as what Chris has said in his script. So what we have seen is things as has been slow compared to previous quarter or previous months. So what we have seen is if you look at quarter-over-quarter, we expect the Q2 ad spend or revenue to be even potentially lower than Q1. And if you look at what we are looking forward in the next couple of months, we expect the demand to continue to be fairly slow in Q2 and maybe into Q3 to as well.

Okay. And then the new product you launched, talk about how you see that with adoption and potentially impacting revenue given those condition?

Yeah. So as you know, it's very difficult for those in the advertising market. So the APPs on the traffic, so they have various demand for them to improving monetization efficiency, right? So I mean before they probably - only what we've won a net worth. But currently, they will - what we've free or for or even more advertising networks to improve the monetization efficiency. So eventually, they can improve like AD law or CPM. So I think this product can bring value and can have those APPs can you know, monetization better in this - in the currently very challenging environments. So eventually, they will have our JG Alliance I think. So I mean, in the overseas market, APP and ironSource [ph] this kind of product can - the value is proven.

Okay. Thanks so much.

Thank you. The next question comes from the line of Ryan Roberts from Navis Capital. Please ask your question.

[Foreign Language] So I'll translate that. So my two questions are, number one, on the kind of the gross profit margin. It's kind of compressed a little bit from about 76%, 77% to down about 69%. And I want to know kind of more what's behind that with respect to the traffic pool cost, I guess, is a revenue share, if management can give us some more color on like is that kind of a temporary thing? I know your guidance has been over 70% historically, but is that more like a structural thing that we're seeing? Or alternatively, is that like a - you can have a shift? And is there color in terms of like what - what kind of partners are asking for more share, that would be good to know. And number two is more generally on the outlook and kind of the overall condition of the market. Management seems to kind of indicate that the demand is kind of holding up and the industry should rebound, I guess, after COVID. But it seems like there are some other headwinds with respect to data collection and so on and so forth that I think actually would be a tailwind for Aurora given the fact that it has a targeting data to have better ads. I'm just kind of curious if management can walk us through those two points.

Hey, Ryan, this is Shan-Nen. Okay. Back to your first question on the margin. Yes, this quarter, we have been giving more shares of the revenue to the traffic pool in the JG Alliance business. I think this is something that - a part of the negotiation that we have undergone with them. So having said that, going forward, I think looking out for the next few quarters or throughout the year, we expect the margin to be around 65% to 70%, 65% to 70% range. So this is something that - if you look at what we have is - besides JG Alliance, the other businesses like the - likes of subscription, vertical application, fixed financial risk management. Those are the ones with a much higher margin, which is above 70%. So this is the only segment of the business that we are having relatively low or comparatively low margin. So I just want to give you some color in terms of the makeup of our margins. So majority of the businesses are still having 70% and above margin. So this is the first question. And the second, on the outlook. Again, if you pay [ph] what we have in terms of the revenue, let's say, we can segregate them or we can separate them into value-added services and others. If you look at value-added services, like what Chris and I have said, the demand for the ad spending or ad revenue has been low since beginning of this quarter, which is like given the late March from March onwards, we have seen the demand for advertising has been low and pretty low. If you look at what Tencent has announced, again, their Q2 revenue is expect to drop again for about 20% to 30%. I don't think we are any better. So things will be pretty tough for value-added services. Having said that, for the subscription, the life of subscription or the financial risk management or the market intelligence, those are pretty okay, okay, in the sense that by what Chris has said in the earlier calls or answering the earlier question, the lockdown did not diminish the demand for these services. What it did is simply delay the contract renewal, delay the cash collection from customers. So the customers do that. Just the fact that we are not able to send our contract, we are not able to chase our money. So those are the delays that we are experiencing because the fact that you don't have a contract, you cannot provide service, we cannot record revenue. So we do not see any diminishing disappearance of customers is a matter of delays.

Okay. And then maybe if I can ask kind of a follow-up, let me start a two follow-ups. First, on your first one on kind of the gross margin issue. So I guess, I mean, when we first started talking about the JD Alliance and it's kind of being a unique traffic pool and kind of a very differentiated offering. It sounds like this is something that frankly ATC companies really were kind of effectively price takers because you had such a unique kind of product to offer them to monetize, help them monetize that without it, they were kind of on their - relying on the standard kind of Tencent or whatever kind of a platform to push ads on their app. But with the compression in kind of - sorry, we mean increase in take rates, I guess the expression in margin there, it seems like that's not consistent. And I guess I'd like more color there because it sounds like maybe there's some pushback for larger platforms [Foreign Language] like asking for more share because they realize the value of their traffic perhaps? And then kind of maybe on the second part, kind of on the overall demand side. I understand the weakness in [indiscernible] and so forth, but it does seem like there's kind of a - again, I take on board with a lot since, but it does seem like - like there is some overall maybe a second half loaded potential growth there. And maybe if you could give us some color on where if you have specific verticals that you're seeing either strength or weakness in that would be helpful because with COVID-19 lockdowns, it seems like there are e-commerce other kind of maybe verticals that might be some growth, which maybe could be kind of a into the second half. And so if you can maybe touch on those two follow-ups to the free?

Excuse me, have finish with your questions?

Yeah…

Ryan, on the first question, yes, you are right. We're providing a very specific unique services to those apps that need monetization. But what we are seeing is in the first quarter of 2022 due to the lack of demand or the reduced demand for the advertising. You can see the ECPM or the price that the advertisers are willing to give us has reduced, right, because the fact that the demand has decreased. So what we could not do is we could not just pass on the reduced ECPM to our app developer. So in a sense that we are taking a hit in a sense, so that's why our margin has dropped. And you can see it's fairly good, still at 70% or 69%.

Almost. It's the question. So what was - that almost sounds to me kind of like a pocket subsidy that you're offering, the app developers, which is - it's a little bit different than just kind of saying there's a structural change in revenue share with the asset holder. So is that a better way to characterize, I guess, the impact on margins that you were kind of passing through more - more revenue kind of on a temporary type basis? Or alternatively, is that a contractual structural change in how you're sharing the ad risk.

Hey, Ryan. Yes, there are some of the arrangements that we have with the app developer at a fixed ECPM arrangement, which means that if - let's say, if we are supposed to give them a dollar or renminbi ECPM, if we received $2, of course, we got a good margin. If we receive a 1.5 win ECPM from customers, we still have to give them dollar, I mean, to the app developer. That's what I'm trying to say is the amount that we have arranged to give to the app developer is kind of fixed for some of them.

Got it. Got it. let me squeeze there. Okay. Understood.

And your second question was the overall outlook on...

Yes. Just the overall outlook kind of really on kind of maybe second half, maybe if you can give some color on the different verticals that you're exposed to? Because I know that kind of gaming - irrespective of the recent announcements about new games being announced have been released that maybe there's some kind of e-commerce lift that you may see. So I think - some of the e-commerce players probably show us are kind of the year for your customers. And so with some COVID lockdown, maybe there could be an offsetting effect from that and demand from those advertisers that kind of really offset the maybe gaming and some other kind of weaker...

Cool. I guess it's not really a benefit from COVID, but on the other hand, maybe I can call us silver lining. What we are seeing is we have seen a lot of our customers, the subscription-related customers has gone overseas like the likes of BYD, MT [ph] some of the [indiscernible] So when they venture into overseas too high, right? The were, let's say, they go to Southeast Asia. In China, they are using our push services. In Southeast Asia, when they set up a new - new venture, we are providing the services there as well. So what we're trying to say is we do see a new venture or new growth driver in the true high area, which means that we are providing the same customers who are going into overseas market. Even data side, some of the Southeast Asia customers base are selecting to use or have chosen to use our push services, one of which is one from my home country, a Malaysian company, a gaming company gaming publishing companies. For some reason, I think for a good reason, they have chosen Gkuan [ph] services to push their services in Malaysia. So this is something that we see, so long as we are doing well in performing or doing well, providing a good quality service and push services. I think we have a good chance of getting more services in Southeast Asia. And probably I'll give you some color. We have recently set up companies in Singapore. And the reason why is we do see some potential new businesses or signing up contracts in that area. So if you look at what we have forecast internally, we expect the so-called overseas related revenue to be around 3% to 5% of our subscription business in Q2 and beyond. So there's some new growth drivers where we have seen missed this so-called relatively that COIVID environment.

Right, right. And maybe kind of one kind of housekeeping, one or two housekeeping questions, if I could. Could you please give us an update on the size of the JG Alliance kind of the DAU pool? I think you guys did that last quarter and like that transparent for rate. I'm sure we all appreciate it. Give us that...

Sure. The DAU pool in the traffic for JG Alliance still fairly stable. It's about - I think in the last call, we had it at about RMB190 million DAUs. So this is fairly stable. I think the numbers that I'm going to give you is the ECPM that we've seen has declined. The ECPM quarter-over-quarter, we expect to drop about 20% to 30%.

And I think as you commented on an earlier question, that's more or less kind of market softness since I got that, has there been any kind of meaningful churn in kind of JG Alliance kind of DAU outside of, let's say, normal acquisition. Because earlier, you announced some pretty large kind of marquee type wins you know, it sounds like anyway. Has there been any change in the composition of who of the pool?

No, I think there hasn't been any big loss or big change. I think what we try to do is even though let say our DAU did not increase from $19 million, that's fine. What we have seen is we are able to increase the exposure or the ad load that we talk about. I think a couple of quarters ago, we used to have like 0.5 per DAU. So long as the DAUs are there, we are able to - we are still able to make good traction, so long as we increase the exposure. If we are able to increase the exposure of the same DAU, we are able to increase the revenue.

And what's the ad load these days roughly?

Yeah, still around 1.5% because of the lack of demand.

Because of lack of demand?

Yeah, because of the lack of demand, we are not able to show as many advertisement as we would like to - to this RMB190 million exposure or the DAUs.

Great. Thanks, guys. I appreciate the color.

Thank you. [Operator Instructions] Dear speakers, there are no further questions. I would like to hand over the call back to Rene for closing remarks. Please go ahead.

Thank you, Nadia. 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. Thank you all.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.