Aurora Mobile Limited (JG) Q2 2020 Earnings Call Transcript

Aurora Mobile Limited  (NASDAQ: JG) Q2 2020 earnings call dated Sep. 10, 2020 

Corporate Participants:

Rene Vanguestaine — Investor Relations Contact Officer

Weidong Luo — Chairman, Chief Executive Officer

Fei Chen — President

Shan-Nen Bong — Chief Financial Officer

Analysts:

Ryan Roberts — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Aurora Mobile, Second Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your host for today, Thank you. Please go ahead, sir.

Rene Vanguestaine — Investor Relations Contact Officer

Thank you, A.J. Hello everyone and thank you for joining us today. Aurora’s earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following their prepared remarks, all three will be available to answer your questions during the Q&A session that will follow.

Before we begin, I’d like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon management’s current expectations and current market and operating conditions, which are difficult to predict and may cause the Company’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and/or factors are included in the Company’s filings with the U.S. SEC. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

With that, I’d now like to turn the conference call over to Mr. Luo. Please go ahead.

Weidong Luo — Chairman, Chief Executive Officer

Thanks operator. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile’s second quarter 2020 earnings call. Before I proceed, may I share with everyone that for the very first time, we have uploaded a quarterly earning deck onto our IR Webpage under Webcast and Presentation section for your reference. You may refer to the deck as we proceed with the call today.

Since the end of 2019, as I highlighted in our last earnings call, we took the initiative to further strengthen our core competency. I am pleased to share that our strategy, decision to focus on Developer Services and Vertical Applications has produced excellent results as of today. Later in this call, Fei Chen and myself, we’ll take turns to elaborate more on this from different angles.

Let’s begin our review with highlights for our key operating and financial performance for the second quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services or our cumulative app installations reached 1.55 million as of June 30, 2020 from approximately 1.29 million last June. This represents an average of 18,000 new apps coming onboard every month during the quarter. We are developers first choice service proved when it comes to Push service in China.

Second, cumulative SDK installations increased by 53% to 40.6 billion as of June 2020 from 26.6 billion in June 2019. This is mainly attributable to both the impacts of developers using our subscription based developer services and the wide adoption of JVerification SDK’s. For instance, the number of monthly active unique mobile devices we covered continued to increase, reaching 1.38 billion in June 2020 from 1.13 billion in June 2019. Lastly, in the second quarter of 2020 we saw the number of paying customers increase to 2,396 from 2,211 a year ago.

Onto the Q2 2020 financial numbers, please refer to our presentation deck for key financial highlights. Our strategic focus to drive our SaaS business, which included Developer Services and Vertical Applications, generated a significant return on investment in this quarter. This businesses record is impressive.

Revenue of RMB66.5 million or 45% growth of year-over-year and quarter-over-quarter and gross profit of RMB50.8 million, a 43% year-over-year and 39% quarter-over-quarter growth given that the overall market environment challenges by the impact of COVID-19 pandemic.

In building on the greater momentum from the first quarter, Developer Services was once again the highlight of the quarter with its impressive performance. We recorded net RMB45.8 million in revenue for Developer Services, a new historical high in terms of quarterly revenue. This revenue includes both Subscriptions and Value-Added-Services, and recorded a phenomenal 127% and 46% revenue growth year-over-year and quarter-over-quarter respectively on the back of increases in both ARPU and customers numbers.

Equally impressive was the gross profit from Developer Services of RMB35 million, which represented 142% and 50% in year-over-year and quarter-over-quarter respectively.

For Subscription Services, we continue to see more customers signing up to our suite Developer Services. New and renewed customers improved, but are not limited to Tesla, Starbucks, China PCAOB, China Broadband, IT Call Center. Subscription revenue was RMB40.7 million, a significant increase of 52% year-over-year, primarily driven by a decrease in both the number of customers by 34% and ARUP of 14%.

Value-Added Services which incurred revenue from Advertisement SaaS and aligned services that also recorded another quarter of impressive results. The revenue for Value-Added Services also resulted in phenomenal growth of 134% quarter-over-quarter or RMB6.4 million in Q1 2020 to RMB50 million in this quarter. We noted that both the ARUP and customer numbers that were grown by more than 50% within the quarter.

Key customers of our Light-Push Services in the quarter included JV. The strong performance was primarily driven by wide adoption of such services by mini program and e-commerce developers.

Here I would like to provide some additional insight on the contribution of the Legacy Target Marketing business. In the second quarter Targeted Marketing Business earnings contributed 49%, a 5% of the revenue and gross profit respectively. This was down significantly from 61% revenue contribution and to 11% gross profit contribution in the last quarter. As on the legacy Targeted Marketing business, their contributions are expected to be significant going forward.

Now, I will turn the call to Fei, who will discuss the Q2 performance of the three business lines within vertical applications in more detail.

Fei Chen — President

Thank you, Chris. The combined revenues from Vertical Application, including market intelligence, financial risk management, and iZone increased by 16% from RMB17.8 million in the first quarter of this year to RMB20.7 million this quarter. Revenues from marketing intelligence product grew by 15% quarter-over-quarter, mainly fueled by growth in the number of customers.

Recently, we launched another product, an iAPP mini-program version that allows customers to obtain insight into different analytics of mini-programs in Chia. In the quarter new investor and founder customers include mainly long funds and also hedge funds and the new corporate customers include BABA, Meitei, Xiaomi, Agriculture Bank of China, etc.

For financial risk management risk management segment, revenue increased by 26% quarter-over-quarter. That was due to the quarter-over-quarter recovery in demand for our products in the financial sector as the market recovers from the coronavirus, and 26% growth in revenue was mainly fueled by the improved in ARUP, which indicates customers are using our service more in the quarter.

And then lastly, our iZone business also showed signs of recovery from the impact of the coronavirus as the shopping malls and the tourist sites reopened during the second quarter. In addition, we saw increase in demand for our iZone product in the property development sector during the quarter.

With that, I will now pass the call to Shan-Nen.

Shan-Nen Bong — Chief Financial Officer

Thanks Fei. Since Chris and Fei have already talked about our topline numbers for this quarter, I’ll go through some of the other P&L items. Despite a tougher than expected business environment in the second quarter of 2020, we managed to grow our gross margin to historic high of 41%, compared with 33% sequentially, and a significant increase from 26% during the same period last year. This record high 41% gross margin in Q2 2020 was a direct result of the following two initiatives that we undertook and we executed it well.

One, we continued to focus and invest in the Developer Services and Vertical Applications. As we have previously shared, the gross margin for our Developer Service and Vertical Application has been in the range of 70% to 76% for the past five quarters. Second, the shift away and the winding down of our legacy Targeted Marketing business, which generally had low single digit gross margin.

As a percentage of revenue Developer Services and Vertical Applications accounted for 51% during the quarter, a significant increase from 17% during the same period last year. Targeted Marketing on the other hand accounted for 49% of total revenue during the quarter, down from 83% during the same period last year.

On gross profit contribution, Developer Services and Vertical Applications accounted for 95% of gross profit, compared with Targeted Marketing which accounted for only 5% of gross profit during the quarter.

I will now recap our achievement for the first half of 2020. One, we have successfully transitioned our business to a SaaS nature high margin business. Our SaaS business, which includes both the Developer Services and Vertical Applications with the majority of our revenue, more than 51% and our profit being contributed by this business.

Second, our SaaS business has executed significant growth trajectory with 33% year-over-year and 35% quarter-over-quarter growth. Third, more impressive was the growth of developer services which recorded a 127% year-over-year growth in the quarter. Fourth, we have recorded a new all-time record high gross margin of 41% in the second quarter. Fifth, we expect that our SaaS business, which includes both the Developer Services and Vertical Applications, will continue to underpin the foundation of our business and provide solid revenue growth and higher gross margin going forward.

Next, on to the operating expenses. Total operating expenses increased by 4% year-over-year to RMB89.8 million. In particular, R&D expenses stayed relatively flat at RMB46 million. Selling and marketing expenses decreased by 12%. G&A expenses increased by 37%.

Based on the solid financial results delivered and contributed in Q1 and Q2 of 2020 by our high and stated gross margin Developer Services and Vertical Applications, we believe that we have now — we now have the right strategy in place to further improve our business and our financial performance going forward. This is evidenced by the following KPI’s.

One, higher percentage of revenue contribution from Developer Services and Vertical Applications; two, continued improvement year-over-year and quarter-over-quarter in gross margin; three, CapEx growing at a much slower pace than revenue and gross profit; four, all of the above resulted in a 40% improvement in our adjusted EBITDA, where it was a negative $18.3 million during the quarter compared to a negative $30 million or $30.3 million in the last quarter.

Onto the balance sheet items. Total assets were RMB879 million as of June 30, 2020. This includes cash and cash equivalent of RMB416 million, accounts receivable of RMB66 million, prepayment of RMB44 million, fixed assets of RMB100 million, long-term investment of RMB213 million.

Total current liabilities was RMB438 million. This include accounts payable of RMB16 million, deferred revenue of RMB98 million, accrued liabilities of RMB85 million and convertible notes of RMB239.

Lastly, before I conclude, I’ll give an update on the share repurchase plan. In the quarter ended June 30, 2020 we did not repurchase any shares. As of June 30, 2020, cumulatively we have repurchased a total of 921,000 ADS since the start of our repurchase program.

And this concludes the management prepared remarks. We’re happy to take your call now. Operator, please proceed.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of Ryan Roberts. Please go ahead.

Weidong Luo — Chairman, Chief Executive Officer

So Ryan, just to recap, your question is relating to sales and marketing expenses for the quarter, right?

Ryan Roberts — — Analyst

Yes, yes.

Weidong Luo — Chairman, Chief Executive Officer

Yeah, I guess because as you know our business, the majority of our sales and marketing is relating to sales, not marketing. So there is slight increase in connection with the increase in revenue for the Developer Service and the SaaS business for Developer Services and Vertical Applications. So those are majority tied to the increase in that particular business.

Ryan Roberts — — Analyst

Okay, but I guess as we look forward here, kind of down the pipe, obviously again with the business model of having less kind of customers to manage in corral, it seems like there should be some levers there for that item. I mean, there should be leverage across all kind of main cost lines here, but it just looks like kind of with the transition we haven’t really seen much of that yet.

I know the kind of sales and marketing has come down a little bit kind of y-o-y, but not very much and I just was expecting kind of as you trim down the sales force you know to manage less accounts that should have improved a bit more. I’m just kind of curious why we’re not seeing that?

Weidong Luo — Chairman, Chief Executive Officer

No, I don’t believe that will be the case, because we do need to have a lot of sales person to — we need a Developer Service segment of the business right, so those are the things that are tied to the marketing and selling expenses. So we do not see a dip. We do not expect to see a dip in selling and marketing expenses while we grow our Developer Service. So it doesn’t go that way.

Ryan Roberts — — Analyst

Okay, so it’s not — I guess head count is going to stay roughly flat. I must have misunderstood in the previous conference call when you were mentioning that selling directly to platforms. Working directly with platforms was less manpower intensive than having your directed targeted marketing business; I must have missed that.

Okay, and then just kind of, maybe kind of sticking with the kind of the cost kind of stuff for a second, I saw working capital came down quite a bit. I just want to get a sense of as you kind of go forward, is that a level you can kind of expect to normalize out or kind of maybe if there’s some more improvement there. Any kind of color you can share on the capital intensity of the new business model, I’d appreciate it.

Weidong Luo — Chairman, Chief Executive Officer

Sure. We do not disclose the cash flow for this quarter by looking at it based on our cash flow statement. For this quarter we did have cash inflow, operating cash inflow of more than RMB50 million and this is by far the best quarter that we have in terms of cash inflow at the operating level.

If you look at the investment that we’re required to make, no we do not expect to have a huge investment in say like service or some like the fixed CapEx anymore. I guess the only, the reason why the working capital this quarter looks a bit smaller is because of the fact that we reclassified the convertible notes from long term liability to short term, because we are required to potentially repay the convertible notes by next April. So its accounting that we adjusted that the classification of the CV.

In terms of cash, so in terms of operating expense, operating cash flow where we’re comfortable at where we are and based on the fact that we are moving into SaaS business, we are no longer required to do what we did for targeted marketing, where we prepaid media, where we have to give credit to our marketing customer. So this SaaS business is good for us operationally and in terms of cash flow, in terms of gross margin, so we are very comfortable with where we are right now.

Ryan Roberts — — Analyst

Got it. Yeah, I was referring more to — I saw the AR came down significantly and also you kind of stretched some AP, some payables a little bit, so that was the cash flow kind of driver. I saw the movement on the converse. Yeah, I understand that. I was just going to get a sense of the overall kind of working capital status and it sounds, where you are as to kind of where you want to be with the level of revenue that you’re doing, which makes sense. Okay, that’s all for me. Thanks, I appreciate it.

Operator

Thank you. [Operator Instructions] As there are no further questions, I would like to hand the call back to Renee for any closing remarks. Renee, over to you for any closing remarks.

Fei Chen — President

Yes, thank you A.J. and thank you everyone for joining our call tonight. If you have any further questions and comments, please don’t hesitate to reach out to the IR team. This concludes the call. Have a good night. Thank you all.

Weidong Luo — Chairman, Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]