In the first quarter, the performance of the cloud giants continued to be stable, and they still sat firmly in the front row. As a representative of small and medium-sized clouds, Kingsoft Cloud also released its financial report for the first quarter of 2023 on May 23. The continuous improvement of profitability has become the most eye-catching feature throughout the article. a sum.
As the AI big model opens a new "Pandora's box", the cloud market is also undergoing tremendous changes.
But can AI become the "master key" for cloud vendors to open the door to profitability? Perhaps we can get the answer from Kingsoft Cloud's financial report.
Profitability continues to improve, Kingsoft Cloud is the "proud" of small and medium-sized clouds
According to financial report data, Kingsoft Cloud achieved a total revenue of RMB 1.864 billion in the first quarter of 2023, a decrease of 14.2% from RMB 2.1738 billion in the same period in 2022.
In terms of business types, public cloud services as the core business achieved a total revenue of 1.153 billion yuan in the first quarter, a decrease of 16.4% from 1.380 billion yuan in the same period in 2022. The industry cloud service realized a total revenue of 710 million yuan, which was also a decline compared with the same period in 2022, a year-on-year decrease of 10.4%. In addition, the income from other parts is RMB 800,000.
The decrease in total operating income and total income of each segment was mainly due to the reduction in the scale of CDN services and the company's stricter selection of industry cloud projects. The reason why Kingsoft Cloud will reduce its scale and be more cautious in project selection is due to the continuous downturn of the market in recent years, the potential of the Internet industry has been consumed, and its demand for public clouds is also declining. On the one hand, the rapid growth of demand for public cloud stocks in the Internet industry is difficult to sustain.
In terms of breakdown, the demand for public cloud from e-commerce, audio and video, online games, and online education is decreasing. Correspondingly, the market growth rate of IaaS+PaaS has already declined significantly as early as the first half of 2022, which is 18% lower than the growth rate of 48.7% in the first half of 2021. It can be seen that the demand has decreased, and the corresponding market growth rate has also slowed down significantly.
On the other hand, the large-scale incremental demand driven by new business is also relatively limited. For example, 5G, IoT, AR/VR and other sectors have not generated a large amount of demand for public cloud resource consumption. Among them, the Metaverse sector is still in the exploration stage, and it is even more unable to stimulate demand growth. After all, the premise of driving demand growth is that the public cloud itself has strong integration and integration capabilities, and can integrate more cloud services, computing rules, and storage resources.
But this cannot be accomplished overnight, and requires long-term hard work to grow with the industry. Therefore, the decline in the overall revenue of Kingsoft Cloud is indeed justifiable.
Fortunately, Kingsoft Cloud's gross profit margin continued to improve in the first quarter, reaching a new high of 194 million yuan, an increase of 142.8% over the same period in 2022; the corresponding gross profit rate was 10.4%, compared with only 3.7% in the same period of 2022.
Among them, the gross profit of public cloud services was RMB 24.8 million, a significant improvement over the same period last year. The corresponding gross profit margin was 2.1%, compared with negative 3.4% in the same period last year. In addition, compared with the 127 million yuan in the same period last year, the industry cloud service also showed a significant increase, achieving a gross profit of 169 million yuan, and the corresponding gross profit rate also increased from 16.1% in the same period last year to 23.8%.
The substantial increase in gross profit and gross profit margin in the first quarter was mainly due to the company's strategic adjustments to its revenue mix and the implementation of effective cost control measures. Looking at cost control in detail, IDC cost reduction should be the main reason. Because the revenue cost of Kingsoft Cloud is mainly composed of IDC (Internet Data Center) costs, depreciation and amortization expenses, and staff expenses. Among them, IDC costs account for the largest proportion, usually accounting for more than 70%.
Among them, operating costs decreased by 20.2% from RMB 2,093.9 million in the same quarter of 2022, Internet data center costs decreased by 21.4% year-on-year to RMB 872.4 million, depreciation and amortization costs decreased by 8.7% year-on-year, and solution development and service costs decreased year-on-year 11.0%.
The continuous improvement of gross profit shows that the competitiveness of the company's products in the market continues to increase, and it also means that consumers are willing to pay a higher price than similar products. It can also be speculated that the direct cost of production of enterprises is gradually decreasing. The effect of scale is gradually becoming apparent, and so is cost reduction and efficiency increase.
At the same time, the continuous improvement of profitability will also strengthen and consolidate the confidence of investors, thereby attracting more funds to support the long-term development of the enterprise. In addition, cloud computing is an asset-heavy industry that needs to invest a lot of capital and other resources. Gross profit continues to improve, and long-term funds are gradually sufficient to form a virtuous circle, which is also more conducive to the future development of Kingsoft Cloud.
Immediate improvement is a dimension, and the key is to go to the next level. In the current cloud service market, how can Kingsoft Cloud stand out from the "encirclement" and "big mountains"? This is a thought-provoking question.
Highlighting the "tight encirclement" starting from the hybrid cloud, what are the odds of Kingsoft Cloud winning?
The "big mountain" standing in front of Kingsoft Cloud is the common problem of all cloud vendors - how to make money. As an asset-heavy industry, cloud computing needs to build huge data centers around the world. High investment is unavoidable and has become a key factor that "drags down" profits, but it is also a must for companies that want long-term development.
Coupled with small and medium-sized cloud vendors, there is a certain gap between the overall scale, financial strength, and R&D reserves of cloud giants. At this time, what else can Kingsoft Cloud do to highlight the "encirclement"?
The answer may be hidden in the market. In recent years, the degree of enterprise cloudification has continued to deepen, and the process of digital intelligence in the entire industry is also accelerating. All walks of life rely more and more on cloud services, but some industries switch between public cloud and private cloud because of their special needs. Here we take AI, biopharmaceuticals, chips, and new energy as examples. Public clouds cannot be used in these fields due to technical and security issues, and hybrid clouds have emerged as the times require.
A hybrid cloud is a cloud environment that combines a single or multiple private clouds with a single or multiple public clouds. Users can avoid the disadvantages of public cloud and private cloud at the same time, store confidential data in a more secure private cloud, and at the same time use low-cost, high-performance public cloud to obtain data.
Additionally, hybrid cloud can reduce storage costs. This is because the cost of cloud storage is lower than the cost of equivalent local storage. Secondly, when expanding business capacity, you can use the "buy-and-go" public cloud to quickly expand the business, without purchasing and deploying local ICT facilities; after the business volume recovers, you can release public cloud resources, thereby reducing costs.
At the same time, hybrid cloud can also improve availability and accessibility. Public clouds are usually deployed in multiple data centers across the country or even around the world, and users can access cloud services from almost anywhere. In contrast, the hybrid cloud improves the availability and accessibility of the business.
Most notably, hybrid cloud also facilitates business innovation. Users can first use the public cloud to complete the development and testing of new services, reducing the cost of failure, so that users can focus more on the business itself without worrying too much about exceeding the usage limit of ICT resources. At the same time, users can easily obtain and try a series of new services and new tools on the public cloud for their own use, without first deploying the same tools and services locally, which is conducive to the innovation of users' own business.
Not only that, the hybrid cloud with obvious advantages is also supported by policies. The 14th Five-Year Plan clarified the development route of the cloud service industry focusing on hybrid cloud, and the development direction of "cultivating industry solutions, system integration, operation and maintenance management and other cloud service industries focusing on hybrid cloud". Hybrid cloud has gradually become the focus of many service providers and customers in the industry.
According to China Electronics News, it is estimated that by 2023, the scale of China's hybrid cloud market will exceed 100 billion yuan, reaching 112.38 billion yuan, a year-on-year increase of 55.6%. In the future, with the continuous maturity of hybrid cloud-related technologies and the continuous enhancement of the ability to provide consistent services and innovative services for enterprises, the hybrid deployment model of cloud computing will be respected by more and more industries, and the application scenarios will continue to expand.
Public cloud and private cloud alone can no longer meet the increasingly complex user needs. Hybrid cloud not only has obvious advantages but also is supported by policies, and the market size continues to grow. Most importantly, compared with mature public clouds and private clouds, hybrid clouds are still It belongs to a relatively new track, and the gap between cloud vendors has not yet opened up too much. Therefore, Kingsoft Cloud can use the hybrid cloud as the next focus.
Judging from the information on the official website, Kingsoft Cloud’s “sense of smell” is sensitive. Up to now, related products have been launched. The products and services displayed on the official website have already been equipped with hybrid cloud storage, which is subdivided into Kingsoft Cloud Distributed Object Storage, Kingsoft Cloud Cloud distributed file storage, Kingsoft Cloud distributed block storage.
At the same time, the "China Software-Defined Storage (SDS) Market Quarterly Tracking Report, 2022Q4" released by IDC shows that Kingsoft Cloud Object Storage's 2022 annual market ranking jumped to fourth place.
Finding a new starting point is one thing, and how to make good use of this "new discovery" is another. Both public cloud and hybrid cloud are sectors with high investment and high barriers. However, Kingsoft Cloud’s R&D expenditure in the first quarter of 2023 was RMB 215.4 million, compared with RMB 255.5 million in the previous quarter and RMB 24.66 billion in the same period in 2022. Both yuans fell.
What's more, in this period when the growth rate of the cloud service market is declining, leading cloud manufacturers continue to increase investment in product research and development. They have shifted from being keen on pursuing scale and revenue to pursuing profit and high-quality development. The in-depth adaptation to the needs of various industry lines has continuously enriched the dimension of cooperation with ecological partners.
The attitude of leading manufacturers must be learned, but it is more important to seek change and innovation. "Head-to-head" is not the solution, so we should keep up with the trend, keep abreast of the demand, and achieve quality improvement, cost reduction and efficiency increase by looking for new growth points.
Based on this, Kingsoft Cloud and Intel have carried out in-depth cooperation. The cooperation between the two parties has not only laid a solid foundation for the landing of the product, but also significantly improved the availability and stability of the entire storage system, and also maximized the release of hybrid cloud storage innovation. bonus. The idea of "win-win cooperation" should continue. In this high-investment, technology-heavy cloud service industry, it is an eternal theme to accurately grasp market demand and insist on strengthening technology research and development.
Not just hybrid cloud, in the cloud computing landscape, AI public cloud may reach the highest growth rate in 2024, as high as 180%. After 2024, the growth rate will remain above 100%, which cannot be ignored. This is another great opportunity for major cloud vendors. The industry will explore and compete in AI native, AI infrastructure, AI engineering and commercialization.
epilogue
The continuous improvement of Jinshan Cloud's gross profit is the accumulation of "quantity", but the further increase of market share is the breakthrough of "quality". Find a breakthrough in the market demand, if you can't follow suit, then "overtake on a curve".
With the acceleration of enterprise cloudification and the rapid growth of the AI public cloud market, whoever can help enterprises transform and upgrade faster and seize new territory is expected to further grow in the cloud service sector. Kingsoft Cloud still has a long way to go in the future.
Author: Jing Song
Source: Hong Kong Stock Research Institute