Kingsoft Cloud Holdings Limited (KC) Q3 2021 Earnings Report, Transcript and Summary

Good day. Thank you for standing by and welcome to the Kingsoft Cloud Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.

Thank you, operator. Hello everyone and thank you for joining us today. Kingsoft Cloud third quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com as well as on global newswire services. On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang; and CFO, Mr. Haijian He. Mr. Wang will review our business operations and accompanying highlights, followed by Mr. He, who will discuss the financials and guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation. All interpretation are for your convenience and reference purpose only. In case of any discrepancy, management statement in original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 20-E of Security 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 expectation and the current market and operating condition and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties or factors are included in the company's filings with the U.S. SEC. 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. Finally, please note that unless otherwise stated, all financial figures mentioned during this call are denominated in RMB. It's now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

Thank you, Nicole and thank you all for joining our third quarter 2021 earnings call. In the third quarter, we generated RMB2.41 billion in total revenues, which was an increase of 40% from the same quarter last year. Our public cloud services revenues reached RMB1.69 billion, an increase of RMB140 million over the second quarter. Our enterprise cloud services revenues reached RMB730 million, up 78% over the same period last year. Since the beginning of 2021, we continue to deliver rapid growth despite market headwinds, regulatory changes and ongoing challenges as everyone adjust to a new normal as the pandemic continues to evolve. As the largest independent cloud service provider in China, we will continue to execute our growth strategies, strive to become the most trusted cloud partner for our customers and to create the digital future together. Our neutral position enabled us to develop more in depth and extensive collaboration with an expanding base of premium customers and further nurture our multi dimensional ecosystem. We believe we will benefit from our long-term thinking and achieve continued and sustainable growth. Now, let me walk you through our performance across our major verticals. I'll start off with public cloud. Despite the challenging market environments, we still achieved faster growth than the industry average this quarter. Leveraging our neutral position, bringing solutions and premium customer experience, we made significant progress, expanding our customer base and diversifying our products and services portfolio, especially for multi cloud deployments. As mentioned in our last earnings call, Meituan, China's leading local lifestyle service platform has become our new premium customers for public cloud services. Together with other newly engaged premium customers, their data usage increases contributed to our public cloud revenue growth. Following our success with Meituan in Q2, we continued to expand our customer base among top internet companies. We are proud to announce that Pinduoduo, one of the largest e-commerce platforms in China have become our new customer in Q3. We believe such new customer engagement trend will continue and will drive our growth in public cloud services. We proved ourselves to be agile and move quickly to engage with emerging high quality premium clients amidst the regulation changes. We engaged with Shouqi car-hailing, a leading player which has been rising amidst the shifting competitive landscape. We delivered a full suite of hybrid cloud solutions, including computing resources, DevOps and Big Data products at the path level. In the pan-internet space, we further diversified our offering beyond the video and gaming. We continue to provide public cloud storage services to Qunar.com, one of the leading online travel platforms in China. On top of this, we provided them with more products, such as containers, big data solutions, and bare metal servers. On gaming front, we are highly recognized by customers for our full cloud services, including [indiscernible]. We signed an agreement with IGGGAMES to support their proprietary blockbuster mobile game, The Clues 2. We help them plan and design their cloud architecture to support game deployments, which resulted in a stable and smooth gaming experience for tens of millions of concurrent players. On product and technology front, according to the 2020 China Financial Grade Distributed Database Market reports that was published in September by Frost and Sullivan, an internationally authoritative survey agency, our DragonBase database was placed in the Leaders quadrant of their profit radar. Along with other two leading competitors in China, our product was recognized for its visionary technology, excellent product performance, and outstanding monetization. This once again demonstrates the recognition our core PaaS product command in the industry, including among top global industry research firms. Earlier this year, our Big Data Cloud products were also placed in the leaders quadrant by Frost & Sullivan in their 2020 China Data Management Solutions Market Reports. At the same time, we continue to ramp up our investments in cutting edge technologies. According to IDC, 50% of data will be processed at the edge by 2023. During this quarter, we improved our app storage capabilities and developed edge storage nodes in Jiangsu province in September, providing strong support for various edge applications. Moving to the Enterprise Cloud segment. Going digital has become essential for many businesses and industries to adapt to new norms. In the financial services sector, we continue to expand our client base and deepen our collaboration with our customers. On the central bank level, we won a bid to build a big data cloud platform to support China's new digital RMB. After winning contracts from Huaxia Bank and China CITIC Bank in Q3, we furthered our cooperation with another top commercial bank and helped it migrate its middle office to the cloud. Our solution enables the smart management of their underlying business data and lead to a 65% efficiency improvement in their big data capabilities and development. As we announced back in August, we agreed to acquire Camelot as a part of our efforts to build out our enterprise cloud service business. Now that we have officially joined hands with Camelot, we will be able to cover all the top 20 banks in China. We will fully consolidate Camelot's SaaS products and solutions into our product portfolio, especially in the risk management, financial compliance and anti-money laundering areas, which have been offered to more than 240 financial institutions. In the health care sector, we have been pioneering new lighthouse projects in Jiangsu and Hubei provinces, among other provinces. In Q3, we kicked off the delivery of the Jiangsu Province medical imaging cloud. This project will be the first to enable provincial level medical image data sharing expected to connect more than 30 hospitals by the end of this year. Once put into operation, it is estimated that the project will save billions of RMB in medical insurance each year. We're very proud to be able to create such positive social impact together with our customers. We're also making steady progress with our Big Data Cloud project in Hubei province. Meanwhile, we also made significant progress in our health care ecosystem. In one case, we have been cooperating with a leading health care data solution provider. This cooperation has already introduced us to many premium customers, including Ruijin Hospital, which is the fourth largest hospital in China and the largest in Shanghai. Building on this foundation, we plan to expand our collaboration and strengthen our branding resources and service capabilities with more hospitals in China. In the public services sector, we were selected for Phase 4our of Beijing City Cloud projects. The total contract value is approximately RMB85 million. This marks the fifth year in a row that will provide services for the same project, exemplifying our ability to secure repeated revenues. In addition, we also quickly replicated our successful experience with public services clouds to other parts of China, and one bid for projects from cities in Anhui province and Shandong province, to name a few, which are all in delivery face. We won the bid to be the exclusive provider of an urban cloud infrastructure for city in Hubei province. With contract value around RMB36 million, we will leverage our leading cloud computing and data big data technologies and facilitate the intelligent transformation of the city's public service systems. We also started cooperating with the Shenzhen Big Data Research Institute. With strong policy support, the Institute will integrate big data research resources in Shenzhen, the Greater Bay Area and further across China to facilitate the nationwide advancement of big data applications. Despite some disturbances from the pandemic and power shortages, we are steadily carrying out our project. We're also making progress with new bids and our backlog continues to increase. Within our Enterprise Cloud segment, the integration of Camelot is well underway. As we mentioned in Q2, Camelot has delivered centers in most major cities across China. We have selected six cities to be initial pilot cities for integrated project delivery. In the finance services sector, we have started engaging with nearly 10 banks that Camelot has introduced to us. Our integrated team will provide delivery and services directly to these customers. In terms of ecosystem cooperation, Xiaomi, Kingsoft Group and WPS have all started working with Camelot in various aspects. We will focus our efforts on the finance, health care and public services sectors and we have started with consulting and planning services in the hope of developing a fully integrated one stop suite of solutions. In terms of regulatory backdrop, we have been paying close attention to all new regulations and policies, including the draft regulation on protecting Internet data security that was published by the Cyberspace Administration of China for public opinion. The regulations have yet to be finalized and the effective date is still uncertain. But as we have always emphasized, we manage our business operations in the localized approach within each jurisdiction, and continue to deliver solid progress with data security, privacy, and ESG programs. Unlike companies that possess data of millions of individual users, we focus on serving enterprise customers. In addition, we have fully complied with regulatory requirements, including around data classification and data security. So now, we have successfully obtained ISO 27001, ISO 27017 and ISO 27018, which are the worldwide recognized standards and certification in terms of data security, and personal information protection management systems. I will now pass the call over to our CFO, Henry to go over our financials for the third quarter. Thank you.

Thank you, Yulin. Now I walk you through our financial performance for the past quarter. Our total revenue reached RMB2.41 billion in Q3, representing approximately 40% year-over-year growth, which is consistently higher than the growth of the major peers in mainland China. Revenue from public health services was RMB1.69 billion, a quarter-over-quarter increase of RMB135.2 million, representing the seventh consecutive quarter revenue increase since our IPO. There were a number of drivers. First, our existing client base remain stable, including our top three clients, in particular. Our neutral position makes it possible to avoid any potential conflicts of interest with our customers, and we have been able to grow together with our customers. Second, we continue to engage with new premium customers. In Q2 this year, Meituan, China's leading internet conglomerate has become our new premium customers for public health services. With the trend continues, we are proud to announce that Pinduoduo, one of the leading largest e-commerce platform in China has become our new premium customers in Q3. This new client case exemplify choosing. Number one, the multiple cloud strategy is gradually more accepted by the market. Number two, these efforts have to diversify our customer base and derisk the top client concentration risk. And also, clients from non-video related vertical will also help grow our computing business and contribute to the public cloud incremental high quality revenue growth. Lastly, we were able to dig deeper into the needs of our clients. As Yulin mentioned earlier, we are providing a more diversified portfolio of products and technology through cross-selling, including containers, edge computing and PaaS solutions. Revenue from enterprise cloud services was RMB726.9 million, representing approximately 78% year-over-year growth. We’ve seen a rapid growth in demand in enterprise cloud markets. As demand grew rapidly in enterprise cloud market, we build more flagship projects in the financial services, health care and public service sectors, and replicate our success to more customers. As a result, our client base continues to grow steadily. In the short-term, however, deliver our enterprise cloud projects in some regions in mainland China was affected by the recent wave of pandemic. Although we can deliver a technology support of some projects remotely, our team has been unable to deliver on site tasks at some of our client own datacenter due to travel restrictions. In addition, in Q3, some of our projects were also delayed due to power shortages or limits by local authorities. As a common practice, for enterprise cloud, we implement our public cloud technology to enterprise cloud product environment in the whole IDC centers. Although our public cloud [indiscernible] were not affected by power shortages, some of our customers saw temporary disruptions to their own private IDC center. This shortened the time available for our team to deliver projects on site and caused certain delays. However, we're happy to see currently the situation has been improving in the process. In line with a strong top line growth, cost of the revenue grew 44% year-over-year to RMB2.33 billion. IDC costs, the largest cost component representing approximately 60.7% of total cost of revenue, grew 33.1% year-over-year to RMB1.41 billion. IDC cost consists of cabinets and bandwidth costs. The costs increased by RMB155.4 million on a sequential basis, which is due to the preemptive storage of underlying resources. Depreciation and amortization costs increased by 28% to RMB200 million, representing approximately 8.6% of the total revenue. Adjusted gross profit was RMB92.2 million compared with RMB114.8 million in the same period of last year. Our adjusted gross margin for this quarter was 3.8% compared with 6.6% in the same period of last year. We would like to offer a bit more color of this short-term volatility. To support the growth of the public cloud business, cloud company typically purchases servers and lease the data centers in advance based on the forecast of demand from our clients and the market in general in the beginning of every year. However, as many of the audience may have seen, starting from mid of this year, the IT demand from many internet clients in China are growing, but slower than previously market forecasts beginning of this year. Therefore, the underlying infrastructure resources has not been fully utilized as targeted. And incremental investment of resources made earlier this year may not be fully monetized in the short-term towards by end of this year, which may impact our business. Due to this reason, for example, the increase of RMB155.4 million in IDC costs this quarter impact our gross margins this quarter. Our business model and client base remain very robust. And we believe the utilization pattern will naturally be optimized as we see our public cloud demand continue to grow. Total non-GAAP operating expenses were RMB451.2 million, representing a 50.3% increase from Q3 last year, mainly due to the ongoing investments in our business and the remain our competitiveness. We have provided our core team with competitive compensation and therefore increased personnel expenses. Excluding share-based compensation, adjusted R&D expenses were RMB231.6 million, representing an increase of 51.3% year-over-year. As a percentage of total revenue, it increased slightly from 8.9% in Q3 last year to 9.6% this quarter. Adjusted selling and marketing expenses increased by 37.4% to RMB114.3 million. As a percentage of total revenues, a decrease -- a little bit from 4.8% in Q3 last year to 4.7% this quarter. Adjusted G&A expenses were RMB106.3 million. As a percentage of revenue, it increased from 3.7% in Q3 last year to 4.4% this quarter. Although the level among the lowest in the peers. Accordingly, our adjusted EBITDA loss was RMB140.7 million. Adjusted EBITDA margin was negative 5.8% this quarter, compared with negative 2.5% last quarter. A quarter-over-quarter decrease was due to the decrease in gross profit, the increase in personnel expenses, and one-time off related Camelot transaction expenses. Our adjusted net loss was RMB363.8 million with adjusted net margin at negative 15.1%. As of September 30, 2021, we had sufficient cash and cash equivalents amounting of approximately RMB6 billion. During this quarter, capital expenditures was RMB96.6 million. Since Q4 last year 2020, [indiscernible] supply chain pressure, we have purchased the sufficient service in advance to support our business growth. Based on our current operation and in pursuit of higher operational efficiency, we will make a very disciplined approach with capital expenditures for the second half of this year. In addition, the service delivery and payment cycle also led to a relatively low CapEx in Q3. However, we do think the full year CapEx will be at a similar level compared with last year. In addition, we have received great endorsement from regulators as evidenced by obtaining unconditional approval for the Camelot transaction from the National Anti-Monopoly Bureau aka SAMR State Administration for market regulation of China. The approval process was completed within one -- about one month time, which is significantly faster than the regular review timeframe, especially considering today's market regulation environment. In October, we submitted F3 filings regarding the registration of shares related to the transaction, we have now completed transaction and it began integration of the two teams. Camelot bring us over 500 premium customers and a wealth of industry know-how, especially in industries such as Internet, financial services, consumer retail and manufacturing, among others. Camelot has delivery hubs in multiple key cities across China. Their local teams will deliver future enterprise cloud projects directly and improving our execution capabilities of the whole company. We believe significant synergies will be further unleashed into next year. Looking ahead, we expect our total revenue to be between RMB2.63 billion and RMB2.83 billion for the fourth quarter of 2021, representing a year-over-year increase of 37% to 47%. This is based on our current and preliminary views on the market and operational conditions, which are subject to change. Lastly, we held our first Investor Day event after IPO on October 21 this year. Representative from our key accounts clients, ecosystem partners, industry soft leaders join our senior executives and discussed industry trends and our recent developments, including senior executives and clients from National Health Commission, China Construction Bank so Cuban, Camelot and among others to share diverse perspectives. We are committed to improving our business transparency, bring sustainable values to our stakeholders and delivering long-term value to our shareholders.

This concludes our prepared remarks. Thanks for your attention. We're now happy to take our first question. Please ask your question in both mandarin and English, if possible. Operator, please go ahead. Thank you.

[Operator Instructions] Your first question comes from Brian Gong from Citi. Please ask your question.

I will translate myself. Good evening management. Thanks for taking my questions. My question is regarding the enterprise cloud. I understand our enterprise cloud segment was impacted by power shortage and the pandemic, given pandemics largely under control and the power shortage largely eased, have we seen any accelerating projects delivery? Should we see enterprise cloud revenue growth to go back to normalized level for next year? And what growth level we should expect? Thank you.

Okay. Okay, so the response from the CFO -- from the CEO, Mr. Wang Yulin is that as you rightly pointed out, there are two key factors affecting our industry cloud segments, which one is the power shortage or curtailment. The other is the pandemic. In terms of the power shortage, as you know that in Q3 that it was the main factor. And in our two business segments, respectively, I'll talk about that. So in the public cloud segments, because the IDC is enjoying relatively high rate of protection and priority and then most of them have reserve or backup power generators. So those who are not affected -- negatively affected. But in terms of enterprise cloud, industrial cloud [ph] because of the IDCs in most cases, the private IDCs which are designated by the customers. So it's generally case by case and have been affected by the power shortage. I have to agree with you that currently the power shortage situation has largely been alleviated. However, we do see that in the mid-term to long term, the carbon emission control will continue -- the pressure will continue to be there. And there might be more policies in relation to IDC construction and IDC power consumption. But in any case, the power shortage we expect in the short-term has been alleviated. And then we're able to progress our delivery for enterprise cloud in Q4. The second factor about pandemic. Obviously, it is still going on in some cities, because of the very stringent measures the government takes, which causes the delay of our delivery. However, we do see that overall speaking, the demand in industry, our enterprise cloud remains very strong, our backlog continue to grow. While there's impact to delivery, we also have proactively tried to find solutions to this impact. One is we have been proactively utilizing the Camelot local teams, which are distributed across China to help with delivery and increase delivery efficiency. The second part is that we proactively manage our timetable of delivery and try to make up for some of the time that was lost because of the power shortage and pandemic control. But overall speaking, we do see the industry cloud to enjoying a very high growth rate coming from the demand, this very strong demand. Thank you.

Thank you. That's very helpful.

Our next question comes from Liping Zhao from CICC. Please ask your question.

Good evening, management. I have three questions here. We've seen a cool down in public cloud space this year. And so my first question is what's your opinion in next 2 to 3 years market growth and what will be company's organic growth drivers and targets to achieve. And second question, this year, our gross margin has seen some pressure caused by upfront infrastructure and our delay in revenue recognition. My question is, when do the utilization rates to catch up and what's your budget for next year's CapEx? And lastly, we do wonder how is the collaboration with ByteDance going so far? Thank you

Okay. Just to quickly translate for the reference. So in relation to your question about the growth prospects in public cloud and enterprise cloud, I start with public cloud. Obviously, we have noted that this year, the public cloud demand has decelerated. And from our perspective, we think it's due to two reasons. One is that there was a high base. It was actually a high base for last year as a result of the pandemic. So the demand for cloud service has surged a lot and actually shifted to a great extent. But obviously, that is not a new factor for this year. Now, the second reason is like, as you have all noticed, that since the beginning of this year, actually even till now, new regulations have been coming out from the government to regulate a lot of the customers and industries that we engage with. And accordingly, our customers in such industries will need to come through those new regulations and to be compliant, which we believe takes some time. But we do think that this is going to be a short-term impact, as the regulations become more and more clear, and more feasible from the government perspective. But also looking at the long-term picture, we do see that these customers have already started to make new arrangements in new potential verticals or markets in the spaces of entertainment, video and gaming. And this, we have to see that this actually happened together with the further penetration of 5G technology. And we're seeing the new concepts like the metaverse and the hardware, in terms of those -- for those applications has been launching and increasing in volume, the technology iteration has also been -- in accelerating. We do think that the internet sector is a cyclical sector, which we do think that in the future, 1 to 2 years to come, we're entering into a new large cycle, which will reasonably expect to have a higher growth rate than average growth rate of the sector. As you [indiscernible] ourselves, we actually have engaged a significant amount of new customers in this quarter and amid the market headwinds, as mentioned before. And we believe those are really benefiting from our neutrality, and also from the multi cloud deployment trend, whereby we have essentially become the top choice for customers, whenever they want to engage a new cloud vendor. And we think that's our customer base in terms of volume and the depth of relationship remain robust. And then that serves as a very strong fundamental for the company. In terms of industry cloud, as I answered, in the first question that was asked by city, the market demand remains very strong. We think the demand of digitalization is actually in the elastic. And for long time to come, we also expect this demand to remain strong and also in the verticals that we have chosen to be focused on, we'll continue to tap this benign cycle of gaining more customers and developing our advantages and as a result of that, increasing our revenue. In terms of your third question of cooperation with ByteDance, we actually have a very long-term partnership and cooperation history with ByteDance actually starting from the -- basically the eruption, explosive growth of short video clips in China. That includes a lot of applications like [indiscernible] which essentially made ByteDance -- essentially made us a trusted partner of ByteDance, that is a very solid relationship with them. And as you have also seen, that we have signed the comprehensive partnership agreements with Volcano Engine, which is under the ByteDance umbrella, where we are working to explore ways to combine our advantages in terms of our capabilities, and nationwide delivery capabilities with Volcano Engine to create a win-win situation. And more recently, the cooperation we have with a software that's called Alien, which is the identity authentication software, where we have been tweaking and trying to find ways to promote the application of the software. So, and -- beyond the two companies, you can look at a wider zoom out into our ecosystem partners. There's also a cooperation between WPS and Kingsoft and ByteDance. So I would say that across our two ecosystems, we have always maintained multi dimensional and strong relationships with ByteDance. Thank you.

Thank you, Yulin. I will take on a second question very briefly, a few points. First of all, you probably also [indiscernible] this year, the pricing environment, especially not only on the supply side, but also our clients has been very stable. So when we look at our major products, our products, our contribution margin, or gross margin has been very stable. So that's actually not the reason that affecting our gross margin in Q3. Point number two, if you also know that in most of the enterprise service or 2B [ph] industry in China, the procurement arrangement will be negotiated on an annual basis, which means that right now we're already in Q4. So we're already getting into the process to negotiate the pricing, terms, volume and quality and all the key terms with our majors suppliers. And we are right now in the process to collecting the IT budgeting inside information from our key accounts. That's why we do believe next year we can do a good kind of analysis and matching the demand and the supply and further improving the utilization. So that's why I think the mismatch on the resource side can be gradually mitigated by the end of this year. So for next year, given it is going to be new annual contract for some of the key clients, and also some of the key vendors as a supply, so the pricing and gross margin impact can be further mitigated. So there's going to be a short-term impact. Point number three. For next year, as you're asking about CapEx, even for the same dollar, we will definitely prioritize that into high quality potential revenue streams. So when we look at the dollar, when we consider to spend on CDN service, rather than the CPUs, the high end CPUs or the GPU will for next year, prioritize that into the high quality procurement arrangement. And we believe that will indirectly and directly converted into a potential of a high quality revenue stream going forward. And also, if you remember, in the recent Investor Day, actually, Intel has been partnered with us to host the Investor Day events that actually also have good information that we are partnering with a key vendors and we're going to have a direct arrangement with the key vendors to secure the high quality fundamental infrastructures. And the last point, I think for next year, we also will continue to build our own infrastructures. In the recent quarter, we have closed very successfully on time for the Tianjin Data Center for the first phase. For the second phase, for another [indiscernible] cabinets, I will -- we will basically plan for starting to plan for next year and that we're adding to a new revenue stream for the public clouds revenue opportunity. So as a summary, we are second in a row to see net incremental revenue or 100 million of the public cloud business, I think that will naturally to mitigate the impact of the mismatch and of the IT resources and it will gradually improving the gross margin going forward. Thank you.

Thank you. Your next question comes from Thomas Chong from Jefferies. Please ask your question.

Thanks management for taking my questions. My first question is regarding our new customers for this year. We have added Meituan and Pinduoduo, the Internet giants. Just want to get a sense about their revenue contribution over the next couple of years as they ramp up in Kingsoft cloud? And my second question is regarding our long-term assumptions in terms of the revenue and the margin, as well as the mix between appropriate and enterprise cost. And on the near-term side of the story, given that the Beijing [indiscernible] effects, a lot of the different business, just want to get a sense about -- any color about the contribution coming from Beijing or any qualitative color would be great. Thank you.

So thank you very much for the question. And I think, as you pointed out, the larger internet names, like you mentioned, Meituan and Pinduoduo and Juhu, the multi-cloud deployment for them is an inevitable choice, both from a technology perspective and from a business or commercial perspective. And as mentioned Kingsoft's Cloud, as professional and neutral cloud provider were also they’re inevitable and top choice. We do think, currently, the revenue and growth of these customers have been very stable. And unfortunately, we don't have like detailed numbers as for a percentage of revenue, but we do see them to continue to grow very stable and on the good trends. Now, in terms of the macro environment, uncertainty that I mentioned, also split into public cloud and enterprise cloud spaces and to discuss briefly, respectively. In the public cloud space. as mentioned, I do think it's going to be a short-term impact. And once this is over, it is going to enter into a larger business cycle, where we expect to see growth to accelerate. In the industry cloud space, the demand remained very strong. And two of the affecting factors, one is power shortage, and the other is pandemic. The power shortage has already been largely been resolved. The pandemic impact has been alleviated. Our way to fight this negative impacts are leveraging Camelot's local teams to try our best to catch up with the progress and to deliver revenue. Now, as I mentioned before, the impact on Beijing actually, because we're locally based in Beijing. So we do not really have any material impact in the Beijing projects, due to the pandemic control measures. Thank you. And I leave the margin questions to -- for Henry to answer. Thank you.

Thank you, Yulin. Thank you, Clark. Very quickly on the margin. So first of all, I want to mention that we still keep the same intention to deliver improving margin profile for the long-term. So both gross margin and non-GAAP EBITDA margin, one of the priorities, while we think about next year's budget. So that's why, as I just mentioned, when we think about the demand, think about supply side, think about the pricing environment and also how we optimize our personnel expenses. These are the key priorities for next year's budgeting process as we are doing today. So that's why we probably at this moment, for this earning call will not give a very clear guidance for the EBITDA margin, breakeven timing. But as some of the audience may remember, we did have intention to have that margin improvement to be delivered in the near-term. And this is first point. The second point, I think, given the high quality revenue opportunities is also our key areas to focus for next year. So when we think about capital expenditures, and how they're converted into the revenue opportunity and how that impact both on gross margin and D&A expenses, we did a very -- we will do a very thorough analysis and looking at that impact for the margin improvement. So as a result, we want to say at this moment is, I think for next year, hopefully we'll see on an annual basis, both gross margin and non-GAAP EBITDA margin, we'll see improvement compared with this year on an annual basis. I think we remain confident on that objective. However, the timing and scale of that, hopefully we can communicate once we complete the prudent budgeting process for next year. Thank you.

Thank you.

We will take the final question from Kyna Wong from Credit Suisse. Please ask your question.

Thank you for taking my question. The first question is actually we are looking for more visibility or idea from the company on the path and capability enhancement in the future. I mean, even after our cooperations with ByteDance. And the second question is about what kind of IDC policy change that may impact the public cloud? Obviously, the IDC suffers from the render as well or your own business like enterprise cloud. So thank you.

So in terms of tax capabilities, in fact, our tax capability in terms of particular verticals, for example, financial services, health care and big data capabilities, we have actually becoming more and more leading in the -- among our peers. And also we have seen increasing revenue percentage, and the promotion of margin it has brought to us to our business. Now, we do believe that we will continue to increase our investment and development of PaaS capabilities in those areas, in those verticals that we choose to focus on. However, we don't think this is in any way in conflict with our cooperation with Volcano Engine or ByteDance. In relation to your question about IDC policy, we do not really think any policy changes will have any material impact to the public cloud IDCs. As explained earlier, we do think that the public cloud IDCs generally have relatively high standards, and they have been built according to the latest government policies and guidelines, including the IDCs that we built ourselves, and then we do not think they're going to be negatively affected. In terms of the IDCs for enterprise cloud customers, the impact mainly came because of the abruptness of the policy change from the government, i.e. the power shortage. And we do think that in the future, they will be able to adjust to any policy changes in that space as well. Thank you.

At this point, I would now like to hand the call back to Nicole Shan for the closing remarks.

Thank you, operator, and once again thanks everyone for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Bye, bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.