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Tao Zou

(interpreted) Hello, everyone. Thank you and welcome all for joining Kingsoft Cloud's fourth quarter and fiscal year 2024 earnings call. I am Zou Tao, CEO of Kingsoft Cloud.
This quarter, our high-quality and sustainable development strategy continued to bear fruitful results. Our non-GAAP operating profits achieved profitability for the first time, and a series of our key financial performance measures reached all-time highs.
First, our revenue growth rate has climbed to a new level, building on the 16% year-over-year growth in Q3. We achieved total revenue of RMB2.23 billion this quarter, doubling year-over-year growth rates to 30%, leading the industry's growth rate. Among this, public cloud revenue grew by 34% year over year, and enterprise cloud revenue grew by 23% year over year, achieving a balanced development with dual growth engines.
Second, our profitability improvements accelerated. This quarter, we achieved both revenue growth and profitability improvement, marking a turnaround from the company's long-standing history of operating losses and marching towards the goal of net profit breakeven.
Non-GAAP operating profits turned positive for the first time, with non-GAAP operating margin reaching 1.1%, representing a 12-percentage-point improvement compared to a loss of 10.9% year on year. Non-GAAP gross profits reached a record high of RMB427.7 million, up 63% year over year.
Non-GAAP gross margin was 19.2%. Our non-GAAP EBIDTA margin also reached a new high at 16%, representing a year-over-year increase of 17.7 percentage points and a sequential increase of 6.3 percentage points. These are gratifying results of our comprehensive efforts to improve revenue quality, optimize business structure, and implement multiple cost reduction and efficiency enhancement measures simultaneously.
Third, we continue to lead our transformation with AI. This quarter, our AI-related business achieved the growth billing of RMB474 million, representing nearly 500% year-over-year growth and 31% year over -- quarter-over-quarter growth. Its contribution to public cloud revenue further increased to 34%.
Fourth, as the sole strategic platform of the Xiaomi Kingsoft ecosystem, we continue to fully embrace the opportunities brought by the AI era within the ecosystem. Thanks to the unique historical opportunities driven by Xiaomi EV, mobile phones, IOT devices, smart manufacturing, and WPSAI initiatives, this quarter, our revenues from Xiaomi Kingsoft ecosystem amounted to RMB493 million, up 78% year over year, with its share of total revenues further increasing to 22%.
Now, let me walk you through the key business highlights for the fourth quarter of 2024. In terms of public cloud services, revenues reached RMB1.4 billion this quarter, representing a year-over-year increase of 34%. Capitalizing on the opportunities presented by Xiaomi's human, car, home smart ecosystem and the WPSAI penetration, as the sole strategic cloud platform within the Xiaomi Kingsoft ecosystem, we are seeing strong growth potential in the AI era.
In December 2024, the shareholders approved a significantly increased revenue contribution from Xiaomi and Kingsoft from 2025 to 2027 to a total of RMB11.3 billion, representing 10 times the amount in 2023. This quarter, revenue from Xiaomi and Kingsoft increased by 76% year over year, and we're steadily advancing and executing our business cooperation as we expect the growth momentum to continue in 2025.
Meanwhile, our AI-related business continues to gain momentum as well. This quarter, the gross billing of AI-related business reached RMB474 million, increasing by 31% sequentially and contributing 34% of public cloud services revenue, leading the industry.
Both Xiaomi Kingsoft ecosystems and external AI customers increased their usage. And we made breakthroughs in customer acquisition, including large language model customers and expansion in use cases including AI application for internet company customers.
In the era of AI cloud computing, with in-depth industry insights, advanced R&D investments, and substantial computing power, we have been highly praised in terms of customer service, technology capabilities, and quality assurance by our customers and industry experts.
Moreover, our competitive strengths have gained recognition by top tier in the industry. In this wave of intelligent computing cloud, the company's market share and industry reputation have significantly improved, securing a top position in the industry.
(technical difficulty)

Operator

Please stand by while your speakers reconnect. Speakers, you may proceed.

Tao Zou

In terms of enterprise cloud services, revenue amounted to RMB822 million, increasing by 22.7 year over year. In public services space, we promote solutions with standardized operations, leveraging a foundation of model capabilities, big data, and collaborative office tools.
This quarter, we completed the construction of the Wuhan Optics Valley cloud platform, where as a joint operating partner, we will be fully responsible for the regional informatization, operation, and maintenance, strengthening the management and application development of data resources so as to achieve the unified planning, construction, and management of digital optics value.
In digital healthcare space, in December 2024, we completed a significant milestone of the system construction of Yichang Central Hospital. And the KDX, which stands for Kingsoft Cloud Data X data [middle] platform, has been put into operation.
We adopted a cloud native microservice architecture to solve the multi-campus business collaboration and real-time data integration difficulties of Yichang Central People's Hospital with a unified data platform supporting more than [8,600] data operations.
In addition, in collaboration with Kingsoft Office, we jointly developed an electronic medical record product based on WPS which has supported 61 medical departments' daily operations of the hospital.
In terms of products and technology, we uphold the principle of building success based on technology and innovation, focusing on delivering best-in-class customer experience across our core product offerings. This quarter, we continued to enhance the product capabilities of our intelligent cloud computing services.
We launched the ninth generation cloud server, which efficiently supports high-performance computing use cases, such as AI, machine learning, and inference. It also effectively meets the demands of large scale databases, real-time data analysis, and has strengthened data security and encryption processing.
We officially released a proprietary training and inference platform, namely [Singlio] platform, which supports customers' needs for development, training, and customizing images. Meanwhile, our intelligent computing network has significantly reduced the troubleshooting time for large model training from hours to minutes, ensuring service stability.
We will continue to strengthen our intelligent cloud computing products and technologies to provide customers with stable and fast computing services. In addition, both our public cloud and enterprise cloud solutions use cases have achieved compatibility with deep seek.
In summary, led by the high quality and sustainable development and strategy, our fundamentals have substantially improved, and we have entered into a new era of healthy growth.
Looking ahead, we aim to simultaneously expand our revenue scale and improve profitability, deepen cooperation with Xiaomi and Kingsoft ecosystem, comprehensively understand and explore AI opportunities, thereby continuously creating value for our customers, shareholders, employees, and other stakeholders.
I will now pass the call to our CFO, Henry, to go over our financials for the fourth quarter 2024. Thank you.

Haijian He

Xie xie, Tao Zou. Thank you, Mr. Zhou, and thank you all for joining the call today. We are very pleased to conclude 2024 with strong financial performance. I will now walk you through the financial results for the fourth quarter of 2024.
I would like to highlight the following four areas of the progress. Regarding the performance of this quarter, first of all, we overturned from loss to profit in non-GAAP operating profit for the first time since our inception in 2012, demonstrating our strong execution in our high quality and sustainable development strategy in the past two years.
Second, our revenue has been growing for three consecutive quarters year over year. And this quarter, we outpaced all other listed public internet cloud companies and achieved a very good [peak] growth rate of 30% in total revenue, reaching RMB2.2321 billion.
Third, our AI growth billing increased by around 500% year over year to RMB474 million, accounting for as high as 34% of the public cloud revenue. It has achieved a three-digit year-on-year growth for six consecutive quarters.
Fourth, last December, our shareholders approved the revenue from connected parties of Xiaomi and Kingsoft Group for the next three years of RMB11.3 billion, around 10 times over the revenue of 2023., providing solid support for companies' revenue and profit growth.
We believe we are well on track to support our ecosystems' fast-growing demand and to build up solid cloud infrastructures to support ecosystem AI development. Particularly in this quarter, we are very pleased to see that our revenue from Xiaomi and Kingsoft increased by 76% year over year, verifying the effectiveness of our ecosystem strategy.
In terms of outlook, we have been firmly executing our AI strategy and the Xiaomi Kingsoft ecosystem strategy. Going forward, we're expecting our improvements in both revenue scale as well as profitability.
First of all, we believe the revenue growth of both public cloud and enterprise cloud will accelerate in 2025. Second, we expect our profit profile will continue to expand. And we expect to deliver a positive non-GAAP operating profit in the full year of 2025.
Now, let me dive into the details of our financials. Total revenue of this quarter was RMB2.2321 billion, reflecting a 29.6% year-over-year increase. Of this, revenue from public health services were RMB1.4098 billion, up 34% from RMB1.052 billion in the same quarter last year.
This growth were primarily driven by a significant increase in AI-related business whose growth billing reached RMB474 million. Revenues from enterprise cloud services reached RMB822.3 million, up from RMB670.3 million in the same quarter last year, primarily driven by increased demand in select verticals and growth in the Camelot IT services.
Total cost of revenues was RMB1.8062 billion, up 22.9% year over year, which was in line with our revenue expansion. IDC cost dropped by 2.6% year over year from RMB740.4 million to RMB721.5 million this quarter, reflecting the strategic scaling down of our CDN services and a better rack utilization.
Depreciation and amortization costs increased from RMB146.9 million in the same period last year to RMB343.1 million this quarter, mainly due to the depreciation of newly acquired GPU servers. Solution development and the service costs rose by 10.8% year over year from RMB502.9 million to RMB557 million driven by expansion in Camelot personnel to support revenue growth.
Fulfilment costs and other costs were RMB102.4 million and RMB82.2 million this quarter, respectively. We have recorded a higher growth rate in our gross profit than the industry. Our adjusted gross profit for the quarter of RMB427.7 million, up 63% increase year over year, with an adjusted growth margin of 19.2%.
On the expenses side, excluding share-based compensation and impairment of long-lived assets, our total adjusted operating expenses were RMB446.4 million, a decrease of 9.8% year over year and 9.1% quarter to quarter.
Of which, our adjusted R&D expenses were RMB169.6 million, narrowed by 27% from last quarter. Adjusted selling at the marketing expenses were RMB107.8 million down from RMB110.6 million last quarter, Representing 4.8% of total revenues.
Adjusted G&A expenses were RMB169.1 million, slightly increased compared with last quarter due to fluctuation of credit loss. Our adjusted operating profit for the quarter turned into profit worth RMB24.4 million comparing it with a negative RMB187.6 million in the same period of last year.
Our non-GAAP EBITDA profit was RMB359.7 million compared with negative RMB27.7 million in the same quarter last year. Our non-GAAP EBITDA margin achieved 16.1% compared with negative 1.6% in the same quarter last year.
We believe that our strong commitment to AI cloud computing development, strategic adjustments of business structure, and our strict control over costs and expenses bear fruits. And we are all well on track to further improve our profitability as well as scalability. As of December 31, 2024, our cash and cash equivalents was total RMB2.6488 billion, providing a strong liquidity position to support operations and AI investment.
Meanwhile, with a healthy accounts receivable arrangements for AI business in this quarter, we have achieved a net inflow of operating cash flow, reaching RMB570.2 million. We are able to generate cash internally and organically and support part of our further capital expenditure.
Looking ahead, we remain committed to the principle of high quality and sustainable development. We expect an accelerated revenue growth on an annual basis and a higher and a more stable profitability in the coming years. Thank you.

Nicole Shan

This concludes our pre prepared remarks. Thanks for your attention. And we are now happy to take care of questions. Please ask your question in both language, Chinese and English, if possible. Operator, please go ahead. Thank you.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Zequan Zhang, CICC.

Zequan Zhang

(spoken in Chinese) So thanks, management, for taking my questions. And my first question is regarding the industry outlook.
So could management share your views on how the recent industry trends in AI are impacting the supply and demand structure and also the market landscape of the cloud computing industry? And what opportunities and challenges does Kingsoft Cloud face?
And secondly, could management provide an update on the 2025 capital expenditure plan? And what measures will the company take to address the possibly more stringent supply side restrictions? Thank you.

Tao Zou

(spoken in Chinese)

Tao Liu

(spoken in Chinese)

Okay. Allow me to quickly translate. So Mr. Zou Tao mentioned that DeepSeek by itself is still a general large language model. But the reason that it has caused such widely received discussion is because it has proof that the technology company in China can also achieve such impact in the world, can also achieve such heights in terms of technology and the products, and therefore, has helped the revaluation of Chinese technology companies.
And secondly, as we all know, the fact of DeepSeek -- the advantage of DeepSeek is that it's greatly decreased the deployment cost. And this, for Kingsoft Cloud, is also a beneficial factor. As we have seen, this round of D6 heat has also caused the Kingsoft Cloud share price to increase a lot.
So I have actually talked about this back in 2023, where I used to say that the event of AI has essentially removed the glass ceiling of cloud business. And therefore, the release of this, [the car one], actually will accelerate the deployment of large language models in China.
And therefore, more enterprises and more individuals will start to use large language models. And then therefore, it is a wider pushing power for the advancement and development of AI and cloud industry in China. And Kingsoft Cloud as an active and proactive participants of the market who will definitely benefit from it.
So in summary, I would say that this is essentially a broader education to individuals and industries about the strategic value of large language models and of AI. So -- and therefore, people are increasingly getting to know Kingsoft Cloud as well in that regard.
And secondly, as our SVP, Liu Tao, mentioned, so from technology perspective, the events of these six has achieved optimization and optimization in engineering methodologies, which enabled the lowering of costs and increasing the penetration of the applications.
We have been seeing a lot of potential customers, both from the governments and enterprises, as well as from the internet space, have increasing application and adoption of AI and DeepSeek models.
And secondly, the DeepSeek success has essentially increased the application of enhanced learning in the large language model and AI industry in China in general. So we're seeing increasing competition and increasing technological improvement in the in the AI space in China. So that includes enhanced learning as well as multimodal use cases. Thank you.

Haijian He

Thank you, [Sophia]. This is Henry. Happy to answer your second question regarding the capital expenditures. I understand it's a very important one for many of the investors and analysts.
So probably, there are probably a few points I want to address here. First of all, before I go into the numbers, I want to mention, our total investment into AI is comprised by two parts. First part is our OpEx, which primarily spending to the data centers which include the racks rentals, electricity payments, and all the related expenses.
And on this part, Kingsoft Cloud adopts a very efficient assets like model, which means that we don't have to spend a huge amount of money upfront to build the warehouse and the real estate properties ourselves. But we have a very good partnership with the long-term arrangements, for example, with telecom companies and other IDC companies which can reduce our leverage and increase efficiency. So it is the first part.
And the second part, which is our capital expenditures, we buy efficiently, acquire the necessary computing powers, i.e. the servers and other network equipment. So basically, it's A plus B. So I can share some numbers.
In the past four quarters, we have already spent on the part A, which is OpEx on the data centers, around RMB2.9 billion on the AI data center. And we spent, on part B of the capital expenditures, around RMB5 billion to RMB6 billion to acquire the necessary computing equipment and the network equipment.
So if you're putting those two numbers together, in addition to the research and development investment as well, so in the past probably four quarters, we spend around RMB8 billion to RMB10 billion in total. Going forward, I think for the entire investment into the capital expenditures and also the OpEx going forward, I think the RMB1 billion -- sorry, the RMB10 billion total AI investment for the full year 2025 is just a start.
So my third point is, given the strong important support from our shareholders, including both Xiaomi and Kingsoft Group, as we have already disclosed and approved by the shareholders in December 2024, we have arranged the leasing and other off-the-balance-sheet arrangements to support our ongoing and growing investment into AI on both OpEx and CapEx.
And we also want to remind the audience that the existing cash on our balance sheet is not the limit of our capacity into AI investment because of the leasing and other alternative financing arrangements we arranged directly with our shareholders. So I think we are in a good position with a strong demand.
We basically on par to increase the investment. And I think given the revenue growth rate, we have already delivered above the industry average. I think our spending will also catch in pace and maybe also accelerate and above industry average going forward, especially for 2025. Thank you.

Nicole Shan

Thanks. Operator, next question, please.

Operator

Thank you. Brian Gong, Citi.

Brian Gong

(spoken in Chinese) Thanks, management, for taking my question and congratulations on the solid results. Regarding the expectation for 2025 revenue growth, could you share your thoughts and break down the drivers and how much growth we expect for AI-related revenue and how much revenue contribution from Xiaomi and Kingsoft Group?
And our second question is regarding margin. With -- our margin formed quite well in the first quarter. And can management share your thoughts on our long-term profitability trend? Thank you.

Haijian He

Thank you, Brian. This is Henry. Happy to share some color. So as I mentioned in my prepared remarks, I think a few things, I just want to emphasize.
First of all, in Q4 2024, the 30% top line on the YoY growth has exceeded even the top players in the industry. I think that demonstrates all the verticals, including both public cloud and enterprise cloud; and within the public cloud, AI and the non-AI, are all growing at a very healthy rate.
Without this fundamental support, it is very difficult to achieve this high growth rate. So that's actually the first point I want to mention.
The second part is, given -- we already completed our business strategy adjustments in the first half of 2024. We do have a very healthy split in the mix of the climate structure. And as you may know that, for example, the CDM business used to contribute much higher rates. And right now, it's only probably 10% to 15% or even lower going forward in terms of how you kept looking at that.
So I think our growth has been built on a very solid foundation. So that's why in the prepared remarks, I also mentioned that the growth rate -- the keyword for 2024 is acceleration on the full annual basis. And AI is going to be a very important driver, but other verticals, as I mentioned, in different product lines will contribute healthy growth going forward as well.
So it is actually the first question I just want to share. The second part, regarding the margin, while we don't have the official guidance for the margin, but as you can see, our growth margin has been improving very consistent for the past few quarters.
And also, I also want to mention our operating cash flow in the past three quarters, starting from Q2 2024, has been also positive as well. That is going to be a very important leading indicator for our margin expansion.
And given the AI contribution of an entire margin profile, especially for the EBITDA and OP side, we think the EBITDA and operating profit will grow at more fast pace compared with the gross margin. And we're happy to see that our EBITDA margin actually already exceeded the industry average and maybe on the top tier of industry peers.
So I think the EBITDA margin improvements, which is also a leading indicator of the OP cash as well as the free cash flow, will drop down to the operating profit side. So I think our intention from management is two things.
First of all, our intention is to keep a healthy, steady pace of margin expansion for all three key indicators, from gross margin, EBITDA margin, and OP margin. And the EBITDA margin and the OP margin will be accelerated and improved a little bit faster than the gross margin.
And the third point, given the cash flow is also important and we are going to keep a very close eye on cash flow margin expansion, that will also give us a good momentum and the support to recycle the cash to input the investment into the new incremental AI investment. I think these are probably the few points I just want to mention. Thank you, Brian.

Operator

Thank you. [Linlin Yang, GF Securities].

Linlin Yang

(spoken in Chinese) My first question is about the AI inference. How do you think about the demand of AI inference and how much contribution will it be?
And my second question is, after the equipment in the legacy public cloud business is fully (technical difficulty) will it continue to generate revenue? What is your outlook for this part? Thank you.

Tao Zou

(spoken in Chinese)

Okay, allow me to very quickly translate. So for those demands of inference outside of the Xiaomi and Kingsoft ecosystem, what we have been seeing is -- on one hand, as I was responding to the DeepSeek question earlier, the advent of DeepSeek obviously accelerated the application of large language models and AI to various sectors.
So we have been seeing a huge amount of increasing in customer numbers as well as the strong desire and willingness for them to adopt and apply AI applications. However, on the other hand, well, if you look at the number of -- the amount of actual business, for example, for one single customer, we might be needing a cluster of 128 units or 256 units or even 512 units cluster.
This kind of single customer demands, we have not been seeing yet. So in summary, the trend of penetration of AI and DeepSeek is very clear for inference, but we think it still might take some time for that to be shown on the financial statements.
Now secondly, for your question about the inference demand within the Xiaomi and Kingsoft ecosystem, the answer is that it's going to be very strong. Essentially, all of the products and services across the Xiaomi ecosystem, including the cell phones and IOTs, including the electric vehicles, all of them are going to be supported by AI and large models.
And for -- on the Kingsoft side, regardless -- needless to say, actually, the Kingsoft Office AI, the WPS AI user accounts has also been increasing quite strong.

Haijian He

Thank you, Yang Linlin. So regarding the question of asset and depreciation, this is Henry. Happy to offer also some colors.
So I think first of all, if our audience and investors do some analysis and comparison, Amazon, AWS, including Google and Microsoft, are all using five years of D&A policy for the servers and computing powers. So Kingsoft Cloud, we are conservative in terms of managing the financial policies.
So right now, regardless of the servers type and equipment, we are using four years of D&A policy, which means that we basically -- if we compare with five year, we actually overestimate certain costs. In turn, there's a potential to release certain profitability down the road. So that's actually my first point.
My second point is in the late of 2023 and early 2024, we already at that time forecast that the industry will have a major shift from the traditional ICE to the AI cloud. So by that time, we did a full round of internal review of the asset distribution and our internal resources and we decided to really filter out certain assets from CPUs and the traditional assets.
So we did the asset impairments and some of the changes and provisions of asset valuation. And right now, all the assets on the balance sheets, including the RMB5 billion capital expenditures required for the computing power in the past few quarters which is currently sitting on balance sheet, are all healthy. And the revenue and the profit of generating assets and it actually can match with our revenue incremental opportunities.
So I think right now, we do have a healthy asset balance sheets on the left hand side and also have a good potential to improve the shareholder return and the profitability and the cash on the return, especially OP cash on the return on the right hand side. So I think we are in a very good balance on the left to the right, and we can improve the foundation of our business model and efficiency going forward. Thank you.

Nicole Shan

Thank you. Operator, next question, please.

Operator

Thank you. Wanqing Yu, CLSA.

Wanqing Yu

(spoken in Chinese) I'll translate the question. We've seen that prices for high-performance AI service have been falling in 2024, while inference services are relatively well supplied. And how will this affect our pricing strategy for GPO cloud revenue and its impact on our AI cloud revenue and earnings? Thank you.

Haijian He

Thank you, Wanqing. First of all, thanks for the very good question. And as you know, on this quarter, we deliver probably -- I say probably, I put a big disclaimer, but maybe true -- the highest growth rate in the industry for all the public companies in the internet sector which has cloud business.
And number two, given the gross profit, we're already reaching probably also on the top tier across all leading players on this quarter. So you may understand that we want to remain relatively consciousness about our business secrecy and very sensitive information. So we don't want to hurt investor interest because we share too much information on our success tips.
So on that backdrop, what I can share is I think we do have a higher margin compared with traditional CPO-centric ICE services. So I think it's kind of first topic, first point.
The second point is, depends on the client demands, we do have a good mix of all kinds of different computing formats which can fit into the client demands. And we're charging them as the demand goes up, so it's a supply/demand which actually favor Kingsoft Cloud as a very important supplier in this current market.
And the number three is the pricing on the GPU, as you know, is actually linked to a core production requirements of all our major clients. They use AI and computing as the important production and productivity tool and important embedded functions in their workflow.
So in that sense, as you understand, it's always about value. So I think our value proposition has been lifted from a traditional ICE services which may have a limited ceiling of profitability to a much higher potential in the current market.
Because the GPU -- because the GPU AI services become so important for our clients internal workflow and for their final products, so they are willing to pay a much higher fee and the pricing because of the necessity of the technology value.
So putting all things together, as I mentioned, I think we do have a very different pricing model for the AI-related services which are higher than the GPU and the traditional AI. And we already shift our strategy from a traditional IT cloud services company to an AI cloud and a solution services company going forward.
So I think that's actually providing very fundamental different changes and approach for the pricing. But as I mentioned, because the pricing is so sensitive and right now, we are doing so good compared with the industry average, so we don't want to say too much regarding our strategy because it is confidential, as you may understand. Thank you.

Nicole Shan

Thank you, Wanqing. This concludes our earnings call today. Thank you all once again for joining us. 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.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.