Aurora Mobile Limited (JG) Q3 2020 Earnings Call Transcript

Aurora Mobile Limited  (NASDAQ: JG) Q3 2020 earnings call dated Nov. 25, 2020

Corporate Participants:

Rene Vanguestaine — Investor Relations Contact Officer

Weidong Luo — Co-Founder, Chairman and Chief Executive Officer

Fei Chen — Co-Founder and President

Shan-Nen Bong — Chief Financial Officer

Analysts:

Ryan Roberts — Navis Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Aurora Mobile Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. [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, Mr. Rene Vanguestaine. Thank you. Please go ahead, sir.

Rene Vanguestaine — Investor Relations Contact Officer

Thank you, AJ. 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. Securities and Exchange Commission. 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 over to Mr. Luo. Please go ahead.

Weidong Luo — Co-Founder, Chairman and Chief Executive Officer

Thanks, operator. Good morning and good evening to everyone on the call. Welcome to Aurora Mobile’s third quarter 2000 earnings call. Before I proceed, I would like to take this opportunity to remind everyone that we have uploaded a quarterly earnings deck on our IR webpage for your reference. You may refer to the deck as we proceed with the call today as it contains useful financial information in addition to those we have in the press release.

Let’s being our review with highlights of our key operating and financial performance for the third quarter of 2020. First, the number of mobile apps utilizing at least one of our Developers Services or the cumulative APP installations reached 1.65 million as of September 30, 2020 from approximately 1.39 million a year ago. An average of 12,700 [phonetic] new apps came on board every month during the third quarter. Quarter-over-quarter we still see the great number of mobile APP developers joining us, and we are truly humbled yet encouraged by this trend.

Second, the number of monthly active unique mobile devices we cover continued to increase, reaching 1.39 billion in September 2020 from 1.34 billion in September 2019. Lastly, in the third quarter of 2020, we saw the number of paying customers increased to 2,405 from 2,312 a year ago.

Onto the Q3 2020 financial numbers. Please reference to our presentation deck uploaded to our IR webpage for the key financial highlights.

I would like to begin with a discussion of SaaS business, which includes only the Developer Services and Vertical Applications business, because it’s appropriate, relevant and helpful for investors to understand how the underlying SaaS business are performing now.

At the beginning with the quarter ending March 31st, 2021, we will only have this SaaS business. Our SaaS business continue to record impressive result in this quarter with revenue of RMB65.6 million, an 18% growth year-over-year and gross profit of RMB49 million, a 16% growth year-over-year.

On SaaS business basis, the total revenue grew 18% year-over-year, mainly due to the strong 99% growth in Developer Services, partially offset by the decline in Vertical Applications, which have been impact by COVID-19. It’s worth noting that customer demand for Vertical Applications has gradually recovered from the second quarter of this year and revenues from Vertical Applications have been sequential growth for two consecutive quarter. On a quarter-over-quarter basis, revenue remained relatively stable at RMB66 million.

On SaaS business basis, gross profit has — also saw solid growth of 16% year-over-year to RMB49 million for the quarter ended September 30, 2020 due to the same reasons as what happened with the revenue chain. Also, on SaaS business basis, gross margin for this quarter was 75%, stable year-over-year and quarter-over-quarter. We expect pro forma gross margin to maintain about 60% range going forward.

In the third quarter, we continued to extensively explore various industrial verticals, focusing on helping mobile APP developers with operations, growth and monetization by leveraging our professional, efficient, secure and stable services and greater operational and analysis capability.

During the quarter, we launched a one-stop operational platform for APP developers, helping them to improve user engagement, retention, and conversion, as well as achieve greater efficiency, leverage on intelligent user acquisition tools to further refine their operations.

Recently, we also signed strategic cooperation agreements with leading platforms across great variety of industry verticals such as finance, insurance, weather, internet tools, gaming, fresh food e-commerce, and online education to drive user growth and traffic, and improve user experience. For example, we have already signed agreements with Ping An Bank, Data Center of China Life, Moji Weather, WiFi Masterkey, Lilith Games, Missfresh, and 17zuoye, and other well-known companies.

Now, I will turn the call to Fei, who will discuss the Q3 performance in great detail.

Fei Chen — Co-Founder and President

Thanks, Chris. Let me start the discussion of different revenue streams within the SaaS business. Since the first quarter of 2020, Developer Services was once again the star performer for the third consecutive quarter. For the quarter ended September 30, 2020, we recorded RMB43.7 million in revenue for Developer Services, which represented 99% growth on a year-over-year basis. The significant revenue growth in Developer services was fueled by the 26% and the 58% growth in customer number and ARPU, respectively.

For Subscription Services, we continued to see more customers signing up to our suite of Developer Services. New and renewal customers include, among others, McDonald’s, China Mobile Hunan province, Tianjin and Anhui. Subscription Services revenue was RMB30.2 million, a significant increase of 38% year-over-year, primarily driven by increases in both the number of customers by 23% and ARPU by 12%.

Value-added-Services, which include revenues from JG Alliance services and Advertisement SaaS, have also recorded another strong quarter. While our Subscription Services satisfies APP developer’s operational needs, our JG Alliance services help APP developers with their user traffic monetization needs.

As the APP market become incrementally competitive and the user growth becomes stagnant and costly, that urgent need for APP developers to monetize the existing user base in order to survive. Our JG Alliance services come to the market at the very right time to exactly serve this monetization purpose. We expect tremendous growth potential in this business.

The revenue from Value-Added Services was RMB13.5 million in this quarter compared to zero revenue from the same quarter a year ago. On the supply side, recently, we have signed up a few hero APPs with over 10 million DAUs in China, such as WiFi Masterkey and others joining our JG Alliance traffic network.

The total number of DAUs within our network has already exceeded 100 million in the third quarter, reaching a major milestone since we launched the service less than a year ago. The endorsement of these hero APPs has proven the great value and the market acceptance of our JG Alliance products to help the mobile APP to further monetize their APP traffic.

On the demand side, mini program developers have become the largest traffic consumer of JG Alliance. With the increasingly expansion of the mini program ecosystem, mini program developers are no longer satisfied with limited traffic supply, such as those within WeChat, and they urgently need additional external traffic to meet their huge user acquisition needs.

Our JG Alliance’s massive traffic resource and innovative advertising formats can effectively meet their user acquisition needs. Therefore, whether it is from the supply side or the demand side, JG Alliance gives us full confidence that this business will become a growth engine to drive our overall growth in the foreseeable future.

Here, I would like to provide a brief update on the legacy Targeted Marketing business. In the third quarter of 2020, Targeted Marketing business continued to wind down according to plan. It only contributed 40% of revenue, down from 49% of revenue in the second quarter of 2020, and up 4% of total gross profit, down from 5% of total gross profit in the second quarter of 2020. As previously mentioned, we will wind down this business by end of this year. Therefore, starting from first quarter of 2021, the revenue booked will be 100% SaaS business, which include only Developer Services and Vertical Applications.

Now, let’s move on to the discussion of Vertical Applications. The combined revenues from Vertical Applications, including market intelligence, financial risk management and iZone, increased by 6% from RMB20.7 million in the second quarter of this year to RMB21.9 million.

Revenues from our marketing intelligence product remained relatively stable between the quarters. The revenue this quarter was again equally contributed by both the investment funds and the corporate clients. New corporate include the Ping An Bank, Huawei, [Indecipherable] and SoftBank.

For the Financial Risk Management segment, revenue increased by 6% quarter-over-quarter as this business continues to recover from the impact of COVID-19. We are seeing quarter-over-quarter increased demand for our products in the financial sector, mainly by banks and licensed financial institutions, with particularly strong ARPU growth of 17%.

And lastly, our iZone has shown solid growth of 29 [Technical Issues] quarter-over-quarter, driven by a 60% improvement in ARPU. As China recovers from COVID-19, we do see increased demand for our location-based intelligence products across different industry verticals.

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

Shan-Nen Bong — Chief Financial Officer

Thanks, Fei. Since Chris and Fei already talked about our top line numbers for this quarter, I’ll go through some of the other P&L and balance sheet items.

We are very pleased that the increased contribution percentage-wise year-over-year and quarter-over-quarter by Developers Services and Vertical Application has pushed our gross margin for this quarter to an all-time high. This historic high gross margin of 46% — 47% in Q3 2020 is a result of our commitment and success in investing, growing and executing well on both the Developer Services and Vertical Applications businesses.

Onto the operating expenses. Total operating expenses decreased by 14% year-over-year to RMB96.2 million. In particular, R&D expenses increased by 5% to RMB45.6 million, mainly due to increased depreciation and administrative expenses.

Selling and marketing expenses decreased by 8% to RMB28 million, mainly due to reduction in balance sheet cost as a result of lower headcount and less marketing expenses due to COVID-19 pandemic restrictions.

G&A expenses decreased by 36% to RMB24.1 million, mainly due to reduction in bad debt provision, where we made specific provision for one customer last year. No such material provision was needed for this quarter.

I believe the healthy gross margin trajectory along with a good control over operating expenses will continue into the next quarter and beyond. Usually, a solid foundation for us to further improve our financial performance in the future.

Onto the balance sheet items. This solid operating and financial results mentioned above are also reflected in our — on our balance sheet. We have a stringent credit policy and collection efforts. Accounts receivable turnover days have decreased significantly from 84 days in Q3 2019 to 45 days in Q3 2020. The deferred revenue balance, which represent cash collected in advance from customer has increased by 29% year-over-year to RMB110 million as of September 30, 2020.

Our operating cash flow has now been positive for two consecutive quarters with cash improved this quarter of more than RMB30 million. In addition, our cash and cash equivalents, restricted cash and short-term investment balance was at a healthy level of RMB437 million as of September 30, 2020. But we believe we are in a very solid financial position to further invest in and expand our high margin SaaS business going forward.

Total assets were RMB859 million as of September 30, 2020. This includes cash and cash equivalent of RMB437 million mentioned above, account receivables of RMB42 million, prepayments of RMB40 million, fixed asset of RMB90 million, long-term investment of RMB210 million.

Total current liabilities were RMB453 million as of September 30, which include accounts payable of RMB16 million, deferred revenue of RMB110 million, accrued liabilities of RMB95 million and convertible notes of RMB232 million.

Beginning from this quarter, we will start providing the quarterly SaaS business revenue guidance. For the fourth quarter of 2020, the company expects the SaaS business revenues to be between RMB74 million to RMB78 million, representing quarter-over-quarter growth of approximately 13% to 19%. This Q4 SaaS busines revenue outlook is based on the current market conditions and reflects the Company’s current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

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

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

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, we will now begin the Question-and-Answer session. [Operator Instructions] Thank you. We have the first question from the line of Ryan Roberts. Please go ahead.

Ryan Roberts — Navis Capital — Analyst

Good evening. Thanks for taking the question, and congratulations on kind of building up the SaaS. And that continued progress, that’s great to see. And also, thank you very much for the improved transparency, I’d like to applaud that. I think that’s very meaningful and helpful for the market to understand more what’s going on with the business. Thank you for that.

So, my question really actually is of course going to be on the SaaS business. One of things we think about and have talked about in the past is kind of the growth trajectory, and as we get more to a pure SaaS business kind of in Q1 of next year. I just want to kind of maybe get a bit more discussion on kind of I guess the growth trajectory.

So, I look at the SaaS business kind of from sequentially, the revenues look kind of flattish. I realize year-over-year obviously it’s pretty significant. But looking at the sequential, it looks less, less so through Q3. And I want to get a sense of looking kind of into Q4, maybe obviously there’s some — you’re looking for some growth there, but maybe kind of a bigger picture view into ’21, what are we — what should we be looking for as kind of the growth drivers? It sounds like the Push Alliance is definitely an interesting area, but I also want to kind of get your sense of what you’re looking to, to see, to tap the growth driver to — for the year ahead.

Fei Chen — Co-Founder and President

Hey, Ryan, hi. This is Fei. So, regarding the SaaS business performance in the second quarter, we are seeing a flattish performance sequentially. The major reason is that’s actually when you compare the Value-Added Services, actually there is a slightly little bit decline in the third quarter compared to the second quarter, right?

So, in the earnings deck, actually on the Page 2, I explained what is the reason behind it. It’s mainly because in the second quarter, we benefit from a couple of customers who had a strong eCommerce kind of like demand due to 618 promotional activities, and so eCommerce was particularly strong. And also, in the second quarter, there’s a sort of — because we just started the business in — at the end of last, last year, right, so like the second quarter is still in the process of ramping up.

So, the — basically, the customers, the advertising customers, actually they are not a very diversified customer base, right? So, we have given to the customers. So, if a single customer who outperform, might skew the performance little bit. So that’s why you are seeing actually the second quarter was seemingly — has a better performance than the third quarter. But since the third quarter actually, we have I think diversified our customer base and diversification is still going on in the fourth quarter.

So, you also noticed our guidance for the fourth quarter, right, SaaS business. You are going to see a sequential growth of 13% to 19%. That also — that actually reflects our expectation for the Value-Added Service which we have a strong quarter-over-quarter growth momentum. Because of that, we are able to guide this sequential growth. Okay. So, I hope that can address your questions.

Ryan Roberts — Navis Capital — Analyst

Well, maybe if I can kind of drill out maybe, and I take on board it’s — maybe it’s a little early, but just we were thinking about the transition kind of away from Target Marketing, which is going to be done at the end of this year, and then we’re looking at kind of pure SaaS model next year; should we be looking for the growth driver there? Is that more the BaaS segment which is effectively I guess the kind of the Push Alliance? Is that kind of where we should be seeing kind of lot of growth that as that picks up? Or alternatively, maybe you could just share some thoughts on again where you see kind of the explosive growth flowing through the next year would be great.

Fei Chen — Co-Founder and President

Yes. So actually, we had a number of discussions before. So actually, the growth driver surely will be — will be the Value-Added Service, right? And because of the nature of the — of the supply and the demand, it’s mainly on the supply side. As long as we get enough supply, we have a more APPs joining our traffic network, generate more DAU for us, then we will be able to drive the revenue growth rapidly. So internally, we also have a very high expectation for the growth trajectory for next year for this business and we believe we will achieve triple digit growth compared to this year.

So, this year in total, in total for this business line, it’s roughly about somewhere between RMB50 million to RMB60 million. But next year, we are looking at a triple-digit growth for this business. It’s mainly we have a very strong pipeline of the traffic — of the APPs who is going to join our network, and we just recently announced the — actually, the addition of WiFi Masterkey, right? So, WiFi Masterkey is in the — country is in the initial stage of ramping up. It hasn’t been included in the 100 million DAU we announced in the prepared remarks.

So WiFi Masterkey, as you know, it itself alone generates close to 100 DAU, right? So that actually, all these kind of like the supply, the pipeline, gives us a very strong confidence that we are able to deliver triple-digit growth for next year for this business, right?

For the other SaaS business like Subscription, it’s going to — as I mentioned before, it’s going to follow traditional SaaS kind of like growth trajectory, 40% to — 30% to 40%-ish growth, mainly driven by the increase in number of the customer as well as we are introducing new functionalities of our products, right, offering, so which can help the ARPU as well. So basically, that’s a function of both these improvement.

And for the Vertical Applications, actually you’ve already seen the sequential recovery in the second quarter and the third quarter compared to the first quarter, right? First quarter, we hit the bottom, but now we are recovering from the bottom. So on a sequential basis, you will continue to see the growth from this business. But coming — going back to the same level as we experienced last year, it may take a couple of more quarters, a couple of more quarters.

Yes, so that’s the overall SaaS business, the three major business lines, the trends there, the trends we are seeing and the color we are able to offer.

Ryan Roberts — Navis Capital — Analyst

Okay, thank you. That’s helpful. And then just one kind of housekeeping thing. I think in the prepared remarks we were discussing GPM, you expect that to stay around 60%, is that right, is that what you said?

Fei Chen — Co-Founder and President

So, Ryan, can you repeat? We didn’t get you.

Ryan Roberts — Navis Capital — Analyst

Sorry. Yes. During your prepared remarks, I think we’re discussing the gross profit margin, and you said kind of on a normalized basis, it should — I think you said 60%, six-zero. Did I get that correctly?

Fei Chen — Co-Founder and President

Yes, Ryan, actually, if you see the pro forma, the gross margin, meaning just looking at the SaaS business, right? So, over the past years, actually, it’s always very stable between 70% to 80%. It’s like bouncing around 75%, right? So since the start of next year, the first quarter, because we no longer have targeted marketing, so our — the corporate gross margin will be — we are basically coming 100% from the SaaS business, right? So you can expect the gross margin to be above 70% since the beginning of next year.

Ryan Roberts — Navis Capital — Analyst

Got you. Yes, that was going to be my question, the delta there between 75% SaaS and kind of the lower number I thought, okay. And then maybe kind of one last thing, just kind of to box it all in, so if we think about it, obviously the revenue growth, we’re talking about SaaS, it obviously sounds very attractive, and the stronger gross margin additionally points to kind of a more explosive kind of growth profile. But then if you look at opex, I noticed that you guys have kept that pretty tight, and kudos for doing that kind of during this year, especially kind of as challenging as conditions have been.

I’m wondering, kind of once you transition kind of into Q1 ’21, should we be looking for a change in kind of the cost structure as you become more of straight SaaS business or kind of maybe how should we be thinking about those costs which ultimately obviously drive profitability as you move into ’21?

Fei Chen — Co-Founder and President

Yes. So, in terms of cost structure, actually we are not going to dramatically change the cost structure next year compared to this year, right? We have a slight increase as normal, because every year the employee expecting a certain amount of the salary increase, right? So, we will keep the increase within that range. But certainly, we are also trying to continuously hire better talent and try to basically optimize current workforce, right, so remove some nonperformer. So in my model, actually, I would expect only about 10% to 15% increase of opex compared to this year in 2021.

Ryan Roberts — Navis Capital — Analyst

Okay. That’s very helpful. Okay, well, that’s — I think that’s all from my side. Actually, maybe if I could, sorry, sneak in one last one. In terms of the balance sheet, it looks like yet again the receivables, kind of what you guys had been talking about last year when you began the transition of less working capital, that looks like that’s definitely playing out as we see AR come down.

I’m just kind of curious again, as you move into the SaaS — more into the SaaS era, I suppose, should we be expecting some of that to continue to change? I suspect you mentioned before deferred revenues, a lot of that is going to be paid upfront kind of business — sorry, deposit upfront. So I’m just kind of curious how we should be looking at the balance sheet as it continues to kind of evolve the new model? Maybe, Shan-Nen, maybe that’s one for you.

Shan-Nen Bong — Chief Financial Officer

Yes, Ryan. We do not see any deterioration of balance sheet condition once we switch to SaaS business. Probably as you know, majority of our SaaS business customers are in the prepaid mode, so we do not expect to see a huge increase in AR because we switch from — target other old business into new business.

On the contrary, we do expect to see deferred revenue to increase, which we have demonstrated for the past two quarters, has been increasing quarter-over-quarter simply because of the fact that under SaaS business, we do collect money in advance from customers. So, I don’t see — I do not expect us to have any AR issue going forward.

Weidong Luo — Co-Founder, Chairman and Chief Executive Officer

Yes. So currently, AR calculation, we still have the Targeted Marketing business involved, right? So once the Targeted Marketing business is completely gone — as you know, Targeted Marketing has a longer AR. So once that business is gone, for our 45 days of AR we achieved in the third-quarter 2020, we think there’s still room for improvement. So, we are aiming to get anywhere between 30 to 40. I think that’s a good AR days we are trying to manage, okay? So that’s our target.

Ryan Roberts — Navis Capital — Analyst

Got you. Yes. Sorry, I didn’t mean to indicate that there was a deterioration for the AR was coming —

Shan-Nen Bong — Chief Financial Officer

Yes, it’s not deterioration. Actually, we are continuing to improve.

Ryan Roberts — Navis Capital — Analyst

Exactly. It makes a lot of sense. Okay. So that’s all from me, guys. Thanks. Appreciate the color. Thanks again.

Fei Chen — Co-Founder and President

Thank you.

Weidong Luo — Co-Founder, Chairman and Chief Executive Officer

Thank you, Ryan.

Operator

[Operator instructions] As there are no further questions, I would like to hand the call — sorry, we have a follow-up again from Ryan Roberts. Please go ahead.

Ryan Roberts — Navis Capital — Analyst

Sorry, guys. Just maybe one more on the buyback. I noticed kind of in the release, you mentioned there have been no buyback activity kind of in Q3. Wondering if you can maybe give us an update kind of maybe post Q3.

And additionally, can you maybe give us a sense of how you’re looking at kind of capital allocation maybe as you kind of — as you get some of the, yes I guess balance sheet kind of hurdles to convert effectively, taken care of it some point soon. How you’re thinking about the capital allocation as you kind of enter the more cash-generative SaaS kind of model?

Fei Chen — Co-Founder and President

Yes. So Ryan — so actually, with the SaaS business, you are right, Ryan, we are collecting more cash day-by-day. And quickly, we might reach the breakeven point. And once we have enough cash, actually, we certainly — besides the organic growth, we would think about the nonorganic acquisition, right, to acquire some of the upcoming or kind of like a proven product in the marketplace, right, with a small team, but they have a good product.

But for those SaaS players, what they are missing is they don’t have a sales force, they don’t have the customer base, right? So, we have a very robust sales infrastructure. We have the system to deliver those innovative products into the market, right?

So, I think we should actively leverage our advantage and to basically — to look for opportunistically such kind of opportunities, right? So by doing so, we can accelerate our growth trajectory, yes.

Ryan Roberts — Navis Capital — Analyst

Thanks. And any kind of color or discussion maybe on the buyback kind of strategy?

Fei Chen — Co-Founder and President

Buybacks.

Shan-Nen Bong — Chief Financial Officer

No, I don’t think there’s any immediate plan to buy back as such. Because as you say, we’re trying to get more expansion in terms of the growth of SaaS business. So there’s no immediate plan to repurchase right now.

Ryan Roberts — Navis Capital — Analyst

Okay. Thanks a lot, guys. Thank you.

Shan-Nen Bong — Chief Financial Officer

Thank you.

Operator

Thank you. As there are no further questions, I would like to hand the call back to Rene.

Rene Vanguestaine — Investor Relations Contact Officer

Thank you, AJ. 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 and thank you, again. Good bye.