Kingsoft Cloud Holdings Limited (KC) Q4 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Kingsoft Cloud Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Nicole Shan, IR Manager. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's fourth quarter and full year 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on the GlobalNewswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou; and our CFO, Mr. Henry He. Mr. Zou will review our business strategy, operations and the company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive integration, our integrations are for your covenants and reference covers only. In case of any discrepancy in management statement in our 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 21E of the Securities Exchange Act of 1934 as demand 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 and related to on that well 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 underlie except as required under attributable by law. Finally, please note that an otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zou. Please go ahead.

[Foreign Language] Hello, everyone, and thank you all for joining Kingsoft Cloud's Fourth Quarter and Fiscal Year 2022 Earnings Call. 2022 was an extraordinary year in many ways, and we're pleased to have successfully navigated the various challenges we faced in the complex and dynamic environment. As I took on the CEO role, we have remained committed to our strategy for high-quality, sustainable growth while continuing to building success based on technology. We have also implemented cost reduction and efficiency initiatives, which have resulted in steady improvements to our profitability. I am pleased to highlight some of our notable results with it. In Q4, we saw a remarkable increase in our adjusted stock profit, reaching RMB 169 million, representing a fourfold increase year-over-year. Adjusted gross margin increased to 7.9%, rising by a significant 6.7% from the same period last year. Furthermore, our net operating cash inflow amounted to RMB 370 million, marking the third consecutive quarter of positive net operating cash flow since Q2 of last year. We also recorded a quarterly free cash inflow for the first time, which is an important milestone for us. These impressive results demonstrated our strong business resilience and provided a solid foundation for us to stabilize restarts and emerge even stronger. Now I would like to provide some updates on our progress in 3 areas, namely public cloud, enterprise cloud and research and development. I'll start with public cloud services. In Q4, revenues from this business remained stable at RMB 1.35 billion, representing a slight increase from the third quarter. We fine-tuned our positioning and incremented differentiated strategies for key account customers and midsized customers with key account partners, we strive to maintain a balance between revenue and profitability While delivering the ultimate service experience to establish a superior word-of-mouth reputation for our full stack solutions. We leveraged this strong reputation and the scalable core capabilities we have developed to serve key account customers to expand our cost business opportunities with midsized customers. This approach allowed us to gradually reduce our dependence on key account customers while driving revenue growth and profit enhancement in our public cloud business. During the past half year, we carried out a systematic review of more than 200 companies from above 10 industries and signed more than 30 new midsized customers with high growth potential. Thanks to these strategies, the revenue contribution from our top 3 public cloud partners has been not declined, while the revenue contribution from midsized customers continues to increase steadily. As a result, we have improved our customer mix while maintaining stable revenue growth in the public cloud business. Moving on to Enterprise Cloud Services. Revenue increased by 26.4% quarter-over-quarter to RMB 790 million in Q4. We remain steps in executing our high-quality and sustainable growth strategy and further clarified and institutionalized our project management best practices will fundamentally enhance our enterprise cloud business quality. This effort centered on 4 key initiatives. First, we focus on accumulating and enriching our core offering of proprietary products and solutions capabilities. Second, we continued to enhance the revenue share of our proprietary products and solutions across our projects. Third, we targeted industries and customers with high potential lifetime value catering to their evolving needs and grow with them. Lastly, we further enhanced our project execution to improve customer experience and reduce costs. These initiatives not only generated a relatively high estimated margin for enterprise cloud projects in the current financial period, but will also drive sustainable margin expansion in the long run. Taking the public services sector, for example, we focus on the public service cloud model and developed a benchmark system consisting of cloud products, services and operations. In Q4, we completed a smart city upgrade project for the Public Services and Big Data Management Bureau of [Cervi] municipality for the province in which we deployed our core proprietary enterprise cloud solution, Galaxy Cloud. We are also carrying out a number of other projects, including the Beijing Water Authority Public Services Cloud and the [indiscernible] Public Cloud, further sharpening our competitive advantages and business scale in public services. In the health care sector, we continued to enhance our 5 major models, namely the regional health care cloud model, medical image cloud model, integrated health care organization model, regional integrated model and smart capital model. During the quarter, we completed the second phase capacity expansion projects for the health care cloud in the [indiscernible] new area and the medical image file of the Chongqing Health Commission. This showcases our ability to provide continuous ongoing support for enterprise cloud partners using our market-leading products, solutions and services. In the financial services sector, we further deepened cooperation with state-owned banks and major commercial banks by focusing on providing financial big data support and operational capabilities. In addition, while retaining a stable existing customer base, we strengthened our project deployment partnership with Kaman, particularly enhancing our synergies and cross-selling in the banking segment. In terms of technology, we continued to advance our core strategy of building success based on technology. In third quarter of 2022, we developed the Beijing Wuhan dual research center strategy, and we executed well in the fourth quarter. We aim to sustainably enhance our R&D capabilities while maintaining a disciplined R&D budget. We doubled the number of R&D funds in the Wuhan Research Center within just 3 months of its launch in December 2022, and we expect to grow the headcount there to more than 1,000 over the next 3 years, injecting momentum into our R&D initiatives and helping cement our industry leadership. We strive to deliver the ultimate user experience across our core products and technology categories, including cloud holds cloud-native enterprise cloud infrastructure, enterprise storage and big data cloud platforms, and we benchmark ourselves against the top-tier players in the cloud industry. For example, we recently launched our seventh-generation cloud host, as well as new versions of our container services and serverless cloud functions, delivering significant performance improvements. We added 79 key operating features, including various [indiscernible], test solutions and operational management assumptions to the upgraded version of Galaxy Cloud, significantly enhancing the competitiveness of our flagship enterprise cloud product. We also upgraded the data collection, data integration and hybrid architecture deployment capabilities of our big data cloud platforms and engine solutions. In addition, we significantly enhanced our product compatibility with various operating systems, databases and chips. Since the debut of GPT 3.5, we have been closely following its development and actively exploring relevant business opportunities. First, GPT models require massive computing power and vast group of data making cloud computing a natural fit for this technology and an essential enabler for use cases, including both training AI models and applying them to various scenarios. The years of collaboration with leading AI companies we have developed a market-tested solutions that can be rapidly deployed on demand. Second, major Internet cloud service providers generally are developing their own CPG businesses, whereas we remain a neutral player. This means we can serve a wider range of partners and a natural advantage that the market is beginning to recognize. Third, the application of GPT models, especially in traditional industries, which relatively underdeveloped IT capabilities will require extensive preparation work unique to each company, including consulting and planning, process reengineering, customized development, installation and deployment and ongoing maintenance. Our strong and wide-ranging IT support and deployment capabilities will enable us to capitalize on such huge opportunity in this market. Overall, looking back at the challenges we faced in 2022, we are gratified that our proactive strategic adjustments enabled us to achieve positive initial results and strengthening our conviction that we are on the right track. Looking ahead, in the face of new challenges and opportunities, we will pursue high-quality and sustainable development no matter how the environment changes and roll up our sleeves to create sustainable value for our customers, shareholders, employees and the society. I will now pass the call over to our CFO, Henry, to go over our financials for the quarter and full year 2022. Thank you.

Thank you, Tao Zou, and welcome, everyone, for joining the call. Before diving into the financial details, I will walk you through a quick summary for the fourth quarter 2022. First of all, with our strong commitment to improve profitability, we have taken comprehensive measures from all sectors, including proactive adjustments to our CDN services, strategic restructuring of customer mix, prudent sanitized cloud selection and a strict control of fixed assets and operational expenses. Since the third quarter of 2022, our adjusted gross margin has been increased for 5 consecutive quarters, increasing from 1.2% in the fourth quarter in 2022 to 3.6% in the second quarter last year, 6.3% third quarter and a further to 7.9% this quarter. Adjusted gross profit increased by 408% year-over-year to RMB 168.5 million this quarter. We disposed certain underutilized service based on the current customer demand and record loss on disposal of properties and equipment. However, we believe this is helpful for our long-term development and gross margin expansion. Non-GAAP EBITDA margin profit was negative RMB 245.1 million, impacted by nonrecurring Hong Kong IPO listing expenses of RMB 94.9 million and a loss of disposal of properties and equipment of RMB 208.8 million. Non-GAAP EBITDA margin was negative 11.5%. However, it's excluding the IPO expenses and the loss of disposal of properties and equipment expenses, our non-GAAP EBITDA margin would have been negative 5.7%, compared with negative 10.3% last quarter and a negative 4.7% in the same period of 2021. Second, our operating cash flow has been positive for the past 3 quarters consecutively, and we have achieved RMB 370.4 million net operating cash inflow this quarter. Thanks to our prudent control over capital expenditures, free cash flow, as measured in net cash generated from operating activities minus capital expenditures, was RMB 259.6 million, marking the first quarter of the positive free cash flow, demonstrating our strong commitment and the successful execution of our cash management. Third, our cash and cash equivalents and short-term investments was RMB 4.7 billion by December 2022. Considering the improvement of our profitability, our scaling down of capital expenditures and cash inflow of operating cash flow, our cash reserve is well positioned and sufficient to support us walking through the challenge here and provide flexibility to further business development. Lastly, our total revenue was RMB 2,131 million this quarter. Revenue from public cloud services was RMB 1.34 billion, remained stable compared with last quarter. Revenue from Management Cloud was RMB 785.9 million, increased by 26.4% quarter-over-quarter. With a more balanced and healthy business mix, we believe we are well positioned to start a new journey for our sustainable long-term development, being able to allocate more resources to expand our mid- to long-tail customer basis and high-quality non-Internet companies. Now I will go through our financial in detail. Our total cost of revenue decreased by 25.2% year-over-year to RMB 1,969.1 million. IDC costs decreased significantly by 20% year-over-year from RMB 1,321.9 million to RMB 1,057.6 million this quarter. Depreciation and amortization costs increased by 6.4% from RMB 227.2 million in the same period last year to RMB 241.7 million this quarter. Solution development and services costs decreased from RMB 497.2 million to RMB 465.8 million this quarter. The decrease was mainly due to the synergies from overlapping headcount reduction within catalog and into cloud on the COVID-19 impact and other synergy initiatives on the demand side in last December. Fulfillment costs and other costs were RMB 155.6 million and RMB 48.3 million this quarter. Adjusted gross profit of this quarter increased by 400.08% to RMB 168.5 million, representing adjusted gross margin of 7.9%. The significant gross margin improvement was mainly due to the impact of cost-control measures and the strategic adjustments of our revenue mix. In terms of expenses, excluding share-based compensation, our total adjusted operational expenses was RMB 729.7 million. However, still impacted by Hong Kong IPO exiting expenses of RMB 94.4 million. The disposal of fixed assets of RMB 28.8 million. Within that, adjusted R&D expenses was RMB 239.4 million, remained relatively stable compared with RMB 231.6 million from last quarter. Adjusted selling and marketing expenses was RMB 118.4 million, compared with RMB 125.5 million last quarter. Excluding the lifting expenses and disposal of fixed assets of RMB 123.7 million, adjusted G&A expenses increased slightly from RMB 219.9 million last quarter to RMB 248.2 million. We have taken various measures to cut down expenses, including, but not limited, to the following aspects. First of all, we will review weekly the variable operational expenses, especially in marketing and administrative expenses. Second, we streamlined headcount management within the firm and review our cost strategy and adjusting for fees and other structure of personnel. Third, along with the scaling down of certain customer CDS services, we probably may improve the efficiency of underlying resources. We also did post certain fixed assets and scaling down benefit costs as well. Net loss margin was negative 24.5% this quarter, and adjusted net loss margin was negative 25.9%. The adjustment was mainly due to the foreign exchange gain of RMB 132.3 million caused by fluctuation of U.S. dollar RMB exchange rates, which is a noncash impact. As of December end 2022, our cash and cash equivalents and short-term investments was RMB 4.7 billion, providing us sufficient liquidity operations. During the fourth quarter, we have repaid certain loans within the group and the banks to reduce our interest costs. The capital expenditure for this quarter was RMB 110.8 million, which primarily consists of payments for service. In terms of share repurchase, regarding our USD 100 million share repurchase program within a 12-month period as approved by the Board of Directors announced in March 2022. Since the release of our second quarter results up to the year-end of 2022, we bought a total of 12.3 million ADR shares for the cost of roughly USD 29.2 million. Going forward, we still have authorization from the Board of Directors and the flexibility to continue execution from time to time as way to the mandated repurchase program. These efforts fully demonstrates our Board and management's strong commitment and confidence in the long-term business development of the company. Finally, we have successfully finished the new primary listing on the main board of Hong Kong Stock Exchange by the way of introduction on December 30, 2022. In March 2023, we have been selected and included into Hong Kong Composite Index, Shanghai-Hong Kong Stock Connect and Shentel-Hong Kong Stock Connect at the same time. Private listing in Hong Kong has helped us broaden our investor base and open up new investment channels. Our teams have been communicating more frequently and broadly with domestic investors, and we have seen more active trading patterns since we joined Hong Kong Stock. Looking ahead, although we are still implementing our strategic initiatives, including business repositioning and cost control efforts on an ongoing basis, such adjustments have already yielded positive preliminary results as reflected in a clear improvement of profit margin in Q3 and Q4. We expect our total revenue to be between RMB 1.85 billion and RMB 2.05 billion for the fourth quarter of 2023. While the forecast and comments are based on our current and preliminary views on the market and operational conditions, which are subject to change. We firmly believe at given time, our potential positive impact of our ongoing strategic initiatives will continue to amplify and reflect our financials in the mid- to long term. Thank you.

This concludes our prepared remarks. [indiscernible] This answer contains both Mandarin and English, if possible. Operator, please go ahead.

[Operator Instructions] We'll now take our first question. This is from the line of Brian Gong from Citi.

[Foreign Language] I will translate myself. I have 2 questions. First is regarding the enterprise cloud. Regarding the 3 verticals, how should we see the demand this year? Last year, the delivery was impacted by cold wave. So this year, should we see faster growth? And how should we balance the growth -- revenue growth and the margin? And the second question is about China GBT. The total trust mentioned as individual cloud provider, we have some advantages in China. But in China, for those Internet giants who have capability to develop large language models, they all have their own cloud service. So if the auto price users, they use their language, large language model, will those users more -- have more intention to use those [indiscernible] cloud services?

[Foreign Language] So as you rightly pointed out, so we are noticing that right now, we are going through the opening up phase after the COVID period. And the country is also reverting back to the model of business development. And admittedly, last year, they had the COVID situation and relevant restrictions did have impact to our deployment and delivery of our industry of our enterprise cloud business, and some of the planned deployment that was originally planned to be completed in Q4 last year were actually delayed this year. But if you look at the situation now, although we haven't disclosed the particulars and the concrete numbers of the specific 3 verticals that you mentioned, we do remain highly confident about our operating metrics in our enterprise cloud, including revenue, including gross profit and including our operating margin, and we expect to have significant improvements in those metrics. And secondly, I would like to clarify in our pursuit of high-quality and sustainable growth does not necessarily mean that we do not pursue growth. For every customer and for every project, what we do is to evaluate whether that customer and that project centered around the core cost business and whether that brings about profitability to us. In other words, if some of the customers and projects, even if we evaluate them from a longer time period, and it will not bring about profitability to the company, and this is actually not a high-quality project and not high-quality development. So the point I would like to mention, and I would like to highlight is that in the past, we have been overly of emphasizing the growth. And now what we need to do is to replace that overly emphasis on growth to high-quality and sustainable growth, which is of strategic value to us. Just to briefly hand it to CEO. So we have announced in the sense of [indiscernible] and the facility companies that we will not send a lot of general resources or working on the big language model ourselves. Because we have a very clear value proposition, which is we're providing solutions to our TV customers. And therefore, working on cash model is not significant strategic value to us. However, the platform companies or the platform Internet companies, they have the core capability and they have development numbers and therefore, a more curable studio of such big models. However, in relation to your question, who use our services and products, I have 2 main things. One is that, although the larger technology companies, the technology giant, have their relative advantages we mentioned just now, but it does not necessarily mean that those models need to be developed the research and developed by such giants. OpenAI is a good example, which is not a technology giant. However, generated the best in class such model. And then the second is that -- so as -- also as we discussed in the prepared remarks. Because of our neutrality, these venture teams that are in smaller companies because of the potential contract interest with major Internet clients. We also choose the service of us relevant those Internet-based Internet giants based to cloud service providers. And then the second proposition I would like to say is that although in the short period of time, we do think that it is unlikely that the big language model, the GPT in China to develop to a level similar to that of the GPT 4.0 in the United States. However, it does not necessarily mean that smaller models that do not present real value and applications in the wide industries in China. For example, we're already seeing a lot of small models with parameter number amounting to 6 -- RMB 10 billion, having very vivid and comfort applications in various industries. And for those application scenarios are basically also our potential business opportunities. So to sum up 2 of the potential business opportunities that is the current weight activity process for us. One is the venture teams from smaller companies who work on those models. And secondly is the application of such models and small models, which we might also call industry models their application into the traditional companies with relatively underdeveloped IT capabilities, which will help them to apply such models in their day-to-day operations.

[Foreign Language] Hello, Brian. The first question you're asking about probably [indiscernible] information. I think, first of all, if you look at our Q-on-Q growth, if you remember last quarter, we created about RMB 600 million revenue for the prior 3 verticals in total. But I'd probably encourage you to look at into the sectors. Because in Q4, we delivered around RMB 784 million revenue, which is actually on a net to net on a Q-on-Q basis, it's about RMB 180 million increase. And if you remember, in December last year in Beijing, as everyone probably remember, people on station at home and the city was basically affected by the COVID and pandemic in December last year. So if you put that into context, you will see that given that we have a solid relationship with our customers and we have a lot of constraints from an operational perspective, but we're still increasing on a quarterly basis. that actually prove our capability in a difficult time of execute, deliver and bolting on revenue on enterprise card, which actually demonstrate our technology and the client relationships. The second point I also want to mention is while on this quarter, we didn't provide a color on the backlog, and I appreciate you didn't ask that question, but we are hoping that going forward, we'll disclose more information, especially in the backlog and new signing on the contracts on the enterprise cloud revenues. But I'm happy to provide some color is if we see the backlog at this moment, at this time, the backlog we have today will fully cover our potential budget for the NPS Cloud in the year 2023 for this year. And we're still in Q1, so we're hoping we'll be increasing the backlog this year. And we do have the confidence that we're going to move into the more balancing of the growth and quality model, but the potential and the capability of the growth, we do have that confidence in our hand. And the third point, we also didn't mention that in the prepared remarks, given we focus on the vertical and the customers, the repeating the percentage of the repeating customers in Q4 and Q3 last year has been increasing quite a lot, which means that even though you see about RMB 700 million revenue on a quality basis, but the percentage of that number coming from the same customer, but the different phases of projects increasing quite a lot and also give us a base that for next year and this year, next year, we can have the potential incremental revenue build on a solid basis. And hopefully, for the next time in a quarterly earnings calls, we can help provide some color on the backlog as well as the percentage of customers going forward. We have that plan for the budgeting disclosure process going forward hopefully will be helpful.

We'll take out next question. This is from the line of Timothy Zao from Goldman Sachs.

[Foreign Language] I have 2 questions. First, could management share your outlook on the public cloud demand in 203? And between the big enterprise speaking companies and the small SMEs, which kind of companies do you think have a bigger amount on public health for this year? And secondly, we saw that last year, a company has very good execution on profitability in both gross margin and EBITDA margin. Could management share your updated outlook for the gross margin and EBITDA margin for -- A –Tao Zou : [Foreign Language] Just quickly translate for CEO. So as it relates to your first question, because I think the public cloud services and products are really just centered around some of the core components, including computing, storage and a network. So I do not necessarily think that demand has to do like different and have to do with the size of the enterprise that we serve. So everything really depends on the particular application scenario and the business situation of our customer enterprise. So for example, we would have our video company customers with their core demand coming from our CDN and storage business, and we will also have customers, for example, like in the AI industry that would really demand the computing at the core demand. So that is the general response I have to translate your first question.

Thank you. I’ll take on the second one. So before I go in there about the 2023 target, I just want to lay out the 3 major reasons for 2022. First of all, for the PP&E, we booked on balance sheet, we did try our efforts to reduce redundancy and other kind of misallocation of the revenue and the resources. So that’s actually the effort has been taken for 2 or 3 quarters since the middle of 2022. And I don’t think those are going to be the onetime off impact because, one, to increase the utilization ratio for the assets and resources, those benefits on the gross margin will be gradually released over time. So that will build first layer of the margin expansion for this year. Second of all is given we – as a team, we’re together to change the combination of the customer base. So right now, as our CEO mentioned, our midsized client base has been increasing sequentially as a total percentage of total revenue. And I would say that the pricing and the profitability from those buckets of the customer definitely much better than we are serving a single client basis, right? So that’s going to be 2 benefits, reduce the [indiscernible] risk, but also improving profitability as a whole. And those benefits were built in the second layer or the gross margin for 2022. And the third, obviously, is the variable expenses control, as I mentioned in the prepared remarks. Very basic since the travel expenses accommodation, how we pay people and how we change the mix of incentives, the cash plus the stocks and a lot of things like during the past year. And I would say that only part of the benefit has been reflected in the Q4 number because we see a lot of things return in Q4. And hopefully, those change our policy on expenses, including the share-based compensation, including cash foes so and so forth will be reflected in Q1, Q2 going forward in 2023 in the new year. So as a result, our operating expenses and operating margin will be better than last year. The reason is gross margin is lifted and the variable cost is reduced. So while I’m sorry I cannot give you a very clear numerical target of the EBITDA margin and operating profits, but I would say 2 things. First of all, we are hoping to increasing our gross margin percentage on a sequential basis quarter-over-quarter. So hopefully, you can see the expansion, very stable, I would say, stable relatively in the next 2 quarters, the point number 1. Point number 2 is, given we controlled expenses and the variable cost. So hopefully, we can be more visible and can be faster to reach the breakeven profitability of the EBITDA margin for this year. I think these are the 2 major objectives for us. But if you’re asking about operational margin and breakeven net margin side, I think we obviously will see the balance of the growth, and we also need to very nimble to make investments on our CapEx and also on the growth side to make money and put our investment to serve our high-quality customers. So we do not prevent the opportunity to give us a little kind of flexibility to balancing on the operational margin and EBITDA margin. So hopefully, we can be more visible to getting to a point that our EBITDA margins will be breakeven in a more kind of foreseeable future. Thank you.

We'll now take our next question. Please stand by. And this is from Allen Li from JPMorgan.

[Foreign Language] Let me quickly translate my question. My question is regarding the CapEx. We preinvest in CapEx in past few years. But due to all kinds of macro headwinds, our overall utilization rate seems not very high and it also negatively impacted our margins. So looking into this year, given the potentially huge opportunity generated by AI industries, so how should we think about our CapEx plan in 2023? And we will take a more proactive approach or a reactive approach in terms of AI-related CapEx investing?

[Foreign Language] So as [indiscernible] pointed out, with the new generation AI technology named the GPT eruption or disruption, we have had actually already preempted actions in terms of reserve in both technology and resources. However, I would summarize our attitude as cautiously optimistic rather than blindly pursuing this potential opportunity. Because based on our experience with a larger generation of AI industry trajectory, we do think that currently, the market is tends to be or seems to be overheated and we expect it to actually enter into a more sustainable but slower growth kind of boat. What we will continue to do in this, we'll adopt a kind of approach like run with small steps and with quick iteration. I also want to point out that in terms of the hardware, there's also the more [indiscernible], which essentially means that the development and -- the development and upgrade of such hardware, we're actually going to give up. So we do not see if it makes a lot of sense to massively affording the last generation of such chips and servers. Thank you.

[Foreign Language] I'll probably put some additional color on this question as well. So if you remember on the year IPO 2020, we spent about RMB 1 billion on the CapEx. So first of all, I'll mention point is as a company, we do have capacity and experience to managing spending RMB 1 billion, whatever with purpose, and we do have a very experienced team. And we do know the supply chain. And also, we have a good partnership with our ecosystem partner, including our shareholders, [indiscernible] group as well as Xiaomi, managing the complexity of buying those big chunk of assets at a reasonable price given the past experience. That's the first point. The second point is, I think your question is coming from more about investments, not only about products. If you look at the investment, we're putting into 2 buckets. The team, the technology R&D team, which our senior people as a team managing today, we have quite a lot of very experienced engineering programmers. And those expenses is not a CapEx. And expenses are booked on our P&L income statement. And as we mentioned, we spent over RMB 1 billion every year on those expenses and R&D investment. So I think we do not hesitate to invest into R&D and products. So I think that's very clear. However, if you are looking into the cash flow item on the capital expenditures, which I want to say, also going to have a different model because as our CEO has also mentioned, we see the great financial opportunities were coming from both Internet clients as well as implementation and application of the user cases from a lot of diversified and non-iconic clients, especially from traditional enterprises. And those business model will not pursue Kingsoft Cloud on capital because they will build their own environment and providing the whole computing capabilities. And we call it as an OpEx model. So I think we are not going to wait to see those good business opportunities, but we will balance out. We need to spend money ourselves on our IDC or we build a computing environment and help our enterprise cloud clients use the AI capability and then using their money to create revenue. I think those are the 2 choices we both have our hand and is not costing ourselves on 1 side. And the last point I would put us way is I think the question is not really about whether to spend a lot is about who is band for. So I think selecting the right clients is also very important. I think it's our eco partner, including our shareholders, for example, Xiaomi and the Ting Hong Cloud Kinsa office to build for the office software [indiscernible] the EV cars. We will go 100% to make investment and spend CapEx. However, for the company and the customers which do not fall into the criteria that mentioned, repeating customers counting technology, we'll probably will be step back a little bit. So I think this last question about who we spend money for, also very important. And hopefully, it's helpful for you.

Thank you. And at this point, I would now hand back to Nicole Shan for closing remarks.

Thank you, operator. Thanks, everyone. This concludes our earnings call. Thank you again for joining us today. If you have any other customers, please feel free to contact us. Look forward to speaking with you the next quarter. Have a nice day. Bye-bye.

This does conclude the conference for today. Thank you for participating, and you may now disconnect.