Aurora Mobile Limited (NASDAQ: JG) Q1 2020 Earnings Call Transcript

Aurora Mobile Limited (JG) Q1 2020 earnings call dated Jun. 11, 2020

Corporate Participants:

Christian Arnell — Investor Relations

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

Fei Chen — Co-Founder and President

Shan-Nen Bong — Chief Financial Officer

Analyst:

Ryan Roberts — Navis Capital Partners — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile First 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]

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

Christian Arnell — Investor Relations

Thank you. 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 follows.

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 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 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, and welcome to Aurora Mobile’s first quarter 2020 earnings call. This first quarter of 2020 has proven to be a challenging one for many companies, including us. Firstly, the quarter is typically a seasonally weaker one, due to the Chinese New Year holiday. This year, the COVID-19 outbreak adversely impacted this seasonally slow period even further across China. Many businesses were temporarily shut down or delayed restarting their operations for many weeks as the pandemic unfolded. Despite the slower-than-expected period, we ramped back up to 100% capacity by the middle of March, in line with most of our customers who resumed normal operations in mid-to-late March.

During this period of temporary disruption, we took the initiative to further strengthen our core competencies. This included narrowing our focus on Developer Services, improving operational and technical efficiency, streamlining internal procedures and reinforcing our commitment to delivering exceptional customer service. With these initiatives now in place, we believe we will emerge from this pandemic stronger than ever and ideally positioned to better adapt to the current uncertainties that hang over the market.

With that in mind, let’s begin our review on our key operating and financial performance for the first quarter of 2020. First, the number of mobile apps utilizing at least one of our developer services, or the cumulative app installations, reached 1.49 million as of March 31, 2020 from approximately 1.170 million last March. This represents an average of 16,000 new apps coming on board every month during the quarter. This was an impressive achievement considering the difficult and challenging operating environment during the first quarter.

Second, cumulative SDK installations increased by 64% to 37.2 billion as of March 2020 from 22.7 billion in March 2019. Third, the number of monthly active unique mobile devices we cover continued to increase, reaching 1.36 billion in March 2020 from 1.07 billion in March 2019. This was fueled by increasing number of apps that used our SDK, particularly as JVerification SDK becomes more widely adopted across the market. Lastly, in the first quarter of 2020, we saw the number of paying customers increase to 2,211 from 1,951 a year ago.

Now, before I go over our financial performance, let me quickly provide an update on our Developer Services’s revenue classification. Beginning from this quarter, the revenues from Advertisement SaaS and Light-Push services, which help developers grow and monetize their user base, will be separately classified as Value-Added-Services under Developer Services. No changes are made to other revenue classifications. Our strategic focus remains to drive the growth of Developer Services and SaaS products. Over time, we expect the revenue and gross profit contributions from Targeted Marketing to be less and less significant.

Onto the financial numbers, our core businesses, including Developer Services and SaaS products, continued to see healthy 15% year-over-year revenue growth and 20% year-over-year gross profit growth despite the impact from the pandemic and lower seasonality. Our strategic transition away from the low-margin and high-risk Targeted Marketing business that we started in the third quarter 2019 has gone very well with Targeted Marketing now only contributing about 12% of our total gross profit. Such transition has reflected in our revenue decline by 45% from RMB230 million in first quarter 2019 to RMB126 million in the current quarter. Our growth of revenue and profitability is no longer dependent upon this legacy Targeted Marketing business.

Developer Services once again was the highlight of the quarter with an impressive performance. Developer Services, which includes both the Subscription and Value-Added Services, recorded a solid 72% revenue growth year-over-year on the back of increase in both ARPU and customers. For Subscription services, we continued to see more customers signing up to obviously our Developer Services. New customers included are not limited to China Pacific Insurance, [Indecipherable], IKEA China, and Shanghai Pudong Bank. We also launched our live version of private cloud service catering to customers who need our private cloud setup across the entity.

Subscription revenue grew by 37% [Phonetic] year-over-year, primarily driven by an increase in the number of customer by 41%. In Q1 2020, we saw more customers signing up to our fee-based JVerification services. They include, but are not limited to [Indecipherable]. Cumulatively, we now have more than 2,000 apps using these services with aggregate DAU existing 130 million. The growing demand by app developers to use our JVerification product, along with JPush, have contributed to that continued growth in this segment.

Value-Added Services, which include revenue from Advertisement SaaS and Light-Push services, which we did not offer during the same period last year, grew strongly. Market adoption for our Value-Added Services has exceeded our expectations. The average monthly revenue from Value-Added Services was approximately RMB2.1 million in the first quarter of 2020. This has since doubled in April, and we expect the strong revenue growth momentum to continue into Q2. Key customers of the Light — of our Light-Push services in the quarter include [Indecipherable] and AliPay.

Next, as we transition away from Targeted Marketing business, revenue from this segment was down 51% [Phonetic] year-over-year and now account for only 61% of total revenue compared with 81% a year ago. Despite accounting for 61% of revenue, margin contribution from this business account for only about 12% of our total gross profit. As we mentioned in previous quarters’ earnings call, this is a business we want to transition away from. This coronavirus outbreak has accelerated this transition. We expect both the revenue and margin contribution from the Targeted Marketing business to further decline in coming quarters.

Now, I will turn the call to Fei who will discuss the Q1 performance of the three business lines within SaaS products in more details.

Fei Chen — Co-Founder and President

Thank you, Chris. The combined revenues from SaaS products, including financial risk management, market intelligence and iZone, decreased by 28% from RMB24.8 million in the first quarter of last year to RMB17.8 million this quarter. Revenues from our market intelligence product grew by 26% year-over-year, mainly fueled by strong growth in the number of customers. Recently, we launched our iAPP overseas version, where customers now can ascertain deep insights into app analytics in the Southeast Asia and India markets. New investor and funding customers in the quarter include [Indecipherable] and the new corporate customers include Uber, Baidu and Huawei.

For financial risk management, revenue declined year-over-year by 47%. That was attributable to decreases in both the number of customer and ARPU year-over-year. The impact of coronavirus has taken a toll on the overall business environment in China. The financial sector was more adversely impacted than other business sectors. With the significant decline in lending activity in first quarter of 2020, demand for our financial risk management products also fell. Nevertheless, we did manage to sign a few new contracts with leading financial companies such as JD Finance, Ningbo Bank and Jinshang Bank during the quarter. Business in this sector has since stabilized in second quarter.

And lastly, our iZone business recorded 31% decline in revenue year-over-year. As expected, with the social distancing and travel restrictions imposed since the outbreak of coronavirus in late January, mainly daily activities such as traffic congestion through tourism sites and shopping malls were temporarily impacted. This resulted in weak demand to analyze location-based data during the quarter. Since the beginning in April, we have begun to see an uptick in demand for our iZone products. As businesses gradually return to normal, we believe that demand for our iZone product in the real estate, tourism and the retail sector will rebound quickly.

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

Shan-Nen Bong — Chief Financial Officer

Thanks, Fei. Since Chris and Fei has already talked about our top line numbers for the quarter, I will go through some of our P&L items. Despite the tough business environment in the first quarter of 2020, we managed to maintain our gross margin at 33%, flat sequentially and a meaningful increase from 27.5% during the same period last year. This was a direct result of our focus shift away from the traditional Targeted Marketing business first announced in Q3 2019. Our focus is now on growing our high-margin SaaS businesses, namely Developer Services, which include both the Subscription and Value-Added Services and SaaS products.

As a percentage of revenue, Developer Services and SaaS-based product accounted for 39% during the quarter, a significant increase from 19% during the same period last year. Targeted Marketing, on the other hand, accounted for 61% of revenue during the quarter, down from 81% during the same period last year.

On gross margin contribution, Developer Services and SaaS products accounted for 88% of gross profit compared to Targeted Marketing, which is no longer our strategic focus, accounting for only 12% of gross profit during the quarter. With the growth in high margin contribution and importance of Developer Services and SaaS products over the quarters, we believe we have identified and built a higher-quality, more resilient and sustainable business model that can support and fuel our margin growth and profitability in the future.

Next onto the opex, total operating expenses decreased by 1% year-over-year to RMB91 million [Phonetic]. In particular, as reported in the previous quarter, in late 2019, we have reduced our headcount by approximately 120. As a result, we achieved some savings in terms of staff costs in Q1 2020. In hindsight, this has proven to be a wise decision. R&D expenses decreased by 3% to RMB41 million, mainly driven by decreases in costs and personnel costs, but was partly offset by increase in depreciation of servers. Selling and marketing expenses decreased 7% to RMB25.2 million as COVID-19 restricted travelers [Technical Issues]. G&A expenses increased 8% to RMB26.5 million, mainly due to increases in staff costs and bad debt provision.

Our adjusted EBITDA was negative RMB30 million during the quarter, compared to negative RMB7.4 million a year ago.

Onto the balance sheet items, total assets were RMB884 million as of March 31, 2020. This includes cash and cash equivalents of RMB383 million, accounts receivable of RMB107 million, prepayment of RMB54 million, fixed assets of RMB109 million, long-term investment of RMB170 million. Total liabilities were RMB175 million as of March 31, 2020. This includes accounts payable of RMB18 million, deferred liabilities — deferred revenue of RMB89 million, accrued liabilities of RMB68 million. As of March, we maintained a healthy level of working capital of RMB397 million.

Lastly, before I conclude. I’ll give an update on the share repurchase plan. In the quarter ended March 31, 2020, we did not purchase any shares. As of March 31, 2020, cumulatively, we have repurchased a total of 921,000 ADS since the start of our repurchase program. And the company today announced that its Board of Directors has approved a new program under which the company may repurchase up to $10 million of its shares over the next 12-months. And the company plans to fund these repurchases from existing cash balances.

And this concludes the management prepared remarks. We’re happy to take the call — take the question now. Christian, back to you.

Christian Arnell — Investor Relations

We’re ready to begin the Q&A, operator.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Ryan Roberts from Navis Capital. Please ask your question.

Ryan Roberts — Navis Capital Partners — Analyst

Hi. Good evening. Management, thanks for taking the question. I just want to actually — maybe, this is more for Shan-Nen, kind of get a sense of the — with the new kind of disclosure that you’ve changed for Q1 to make sure I’m understanding the line items you called out kind of in those prepared remarks, please. So it looks like, I guess, Developer Services and SaaS was about RMB49 million, and Targeted Marketing was about RMB77 million. Can you give us a breakdown of the — of that RMB49 million? I think on the script, you guys were mentioning what’s in there like SaaS and BaaS and something else. Give us more clarity on what that is, please?

Fei Chen — Co-Founder and President

Ryan, I just want to clarify your question. You want to have a further breakdown of the revenue numbers?

Ryan Roberts — Navis Capital Partners — Analyst

Yeah. With the new kind of the new segment disclosure, it’s not — I just want to verify that’s — my understanding is correct. So I think — yeah, if you could run through that, that’d be great.

Fei Chen — Co-Founder and President

Yeah. So, Ryan, actually the Developer Services, the subscription part is RMB25 million.

Ryan Roberts — Navis Capital Partners — Analyst

Okay.

Fei Chen — Co-Founder and President

And on the Developer Service, the Value-Added Service is RMB6.4 million.

Ryan Roberts — Navis Capital Partners — Analyst

Okay.

Fei Chen — Co-Founder and President

And for the SaaS products, it’s RMB17.8 million, and Targeted Marketing is RMB77 million.

Ryan Roberts — Navis Capital Partners — Analyst

Got you. Okay. And the — okay, got you. And then you mentioned kind of in the remarks that you’ve seen some kind of a better-than-expected, I suppose, momentum on the BaaS segment, kind of, I think you mentioned in April. Here we are now in June, but halfway through June, can you give us a sense of how Q2 is tracking please?

Fei Chen — Co-Founder and President

Yeah. At least a double. [Speech Overlap] Yeah, more than double.

Ryan Roberts — Navis Capital Partners — Analyst

Got you. So, that’s for the BaaS on a monthly basis. Can you give us a sense of how the rest of the business is doing, kind of you’ve been back in the office?

Fei Chen — Co-Founder and President

Actually, on a quarterly basis, it should more than double.

Ryan Roberts — Navis Capital Partners — Analyst

Okay. So, is that for the entire segment that the Developer Services and SaaS segment or you mean just — is that just BaaS?

Fei Chen — Co-Founder and President

BaaS, BaaS.

Ryan Roberts — Navis Capital Partners — Analyst

Just BaaS, okay. And then, can you give us a sense of how the rest of the business is kind of recovering and maybe tracking kind of now we are kind of post-COVID or getting to a point where maybe post-COVID, how things are shaping up? I think you had everyone back kind of in the office for a little bit now. I’m just kind of curious what you’re seeing, any kind of color you can offer and that’d be great.

Fei Chen — Co-Founder and President

Yeah. So, yeah, let me talk about business line by different business line, right. So for the Developer Services, the Subscription business, as you know, this is a very sticky, stable business. And we continue to see positive growth, okay, in the second quarter, okay, which is within our expectation. And BaaS, as I said, it should more than double from the first quarter. And then, for the SaaS products, the recovery is a little bit slower than the other business and this business should slightly increase from the first quarter, okay.

And therefore, the Targeted Marketing, as we mentioned, this is not our strategic focus anymore. So over time, this business will gradually go down and at a certain point of time, we might completely wind down this business, right. But in the second quarter, the revenue and the margin contribution in terms of the absolute dollar amount should be slightly smaller than the first quarter. So net-net, basically, you will see both the revenue growth, as well as meaningful margin — gross margin growth from first quarter.

Ryan Roberts — Navis Capital Partners — Analyst

Got you. Okay. That’s actually — that’s very helpful. And if we look at like maybe how the rest of the year is tracking and I know it’s obviously early to kind of think about second half, but I’m curious people you’re — that you’re talking to and kind of activity you’re seeing, can you give a sense of how your second half is looking? We’re hearing from the other people in the market that second half is looking increasingly, I guess, better than perhaps it look, maybe I don’t know a couple of months ago. I want to get a sense of what you guys are seeing.

Fei Chen — Co-Founder and President

Yeah. Currently, we feel very comfortable about the outlook of the second quarter. From macroeconomic perspective, we think it’s healthy. Business has resumed to normal, okay. And specifically to our business, right, like Developer Services, that should continue to grow very nicely in the second quarter, because if you look at even in the first quarter, actually, we achieved very good numbers for the Developer Services, the Subscription business, right. We — even in the first quarter, we had a 41% year-over-year growth, not to mention the second half of this year. So, we are very confident about the Subscription business.

And for the Value-Added Services, I think this business is — we’re already seeing the strong ramp-up, right, quarter-over-quarter triple-digit growth, and we are very confident the growth momentum will continue. And we expect a significant revenue contribution as well as margin contribution from this part of business in the second half.

And for the SaaS business in the second half, we think the recovery should already be completed by the end of second quarter. In third quarter and the fourth quarter, we should see financial risk management, as well as the iZone. These two business, we saw decline in the second quarter, right — in the first quarter, but the thing has come back to normal, and we should expect the revenue pickup from these two segments. And for the market intelligence, actually, that business in the first quarter, we — even under the coronavirus, we saw a very nice double-digit growth, right. And this growth, we are continuing in the second half.

And for Targeted Marketing business, actually, this legacy business, as I mentioned, it becomes less and less relevant regardless — in terms of — to our revenue — to our margin contribution, right. So, probably in the — some point of time in the third quarter or fourth quarter, you will see this business is going to be removed from our disclosure. So, net-net, we are very confident about second half. I think in the first quarter, we reached a low point, and we are very confident about the growth trajectory for both the revenue as well as the margin from first quarter.

Ryan Roberts — Navis Capital Partners — Analyst

Got you. Thanks for such a detailed answer. If I could just tack on one real quick one, just a follow-up if you allow. On the margin, you just mentioned, it looks like for Developer Services and SaaS that kind of — I guess everything ex-Targeted Marketing, looks like the gross margin was around 74% and about 6% or so for kind of Targeted Marketing. Fitting kind of the earlier discussion, you guys were giving us on earlier calls about how shifting to this newer model, SaaS model billing is going to be margin accretive. Sort of double check my — that was — that math is roughly on — roughly correct. And also, just get a sense of how the margin should be tracking as this transition kind of completes or let’s say, progresses further later in the second half? Thanks, Fei.

Fei Chen — Co-Founder and President

Yeah, you’re right. Actually, your math is very accurate. It’s similar to mine. So non-Targeted Marketing actually on a blended basis, all those business, they pretty much share similar margin profile. Gross margin profile is about like 74%. It might have some small fluctuation from quarter-over-quarter around the 75%-ish, that’s the right number to think about. And for the Targeted Marketing business for the first quarter, it is 6%, right. But since this business is not going to grow and the non-Targeted Marketing business is going to grow in revenue, right, so you should expect the growth — the overall, the Company’s gross margin to improve meaningfully in the second quarter compared to the first quarter. And as the growth continue to kick in for the non-Targeted Marketing business in the second half, the margin should continue to grow on a quarterly basis. Ideally, actually, if you remove Targeted Marketing business, right, today, we will have 74% of gross margin, that’s the direction we are aiming towards.

Ryan Roberts — Navis Capital Partners — Analyst

Got it. Understood. Thank you very much. Appreciate it.

Operator

[Operator Instructions] As there is no one in the queue now, I will close the question-and-answer session. I will now hand the call back to Christian Arnell for closing remarks.

Christian Arnell — Investor Relations

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.

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

Thank you.

Fei Chen — Co-Founder and President

Thank you all.