Aurora Mobile Limited — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed April 3, 2019. Although the request specifies 2018 Q4, this is an annual report. The filing does not provide a clear standalone fourth-quarter income statement or cash-flow value. Financial statements are prepared under U.S. GAAP.
Business context
Aurora provides mobile app developer services and data solutions in China, including targeted advertising, financial risk management, market intelligence and location-based intelligence. It reported approximately 1.04 billion monthly active unique devices in December 2018 and derived 99.4% of FY2018 revenue through its China VIE, which it consolidates through contractual arrangements rather than direct ownership.
Key financial metrics
Amounts below are rounded; FY2018 U.S. dollar equivalents are as reported.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | RMB714.1m (US$103.9m) | RMB284.7m | +150.8% |
| Data solutions revenue | RMB654.0m; 91.6% of total | RMB245.9m; 86.4% | +166.0% |
| Targeted marketing revenue | RMB572.8m | RMB221.2m | +159.0% |
| Developer services revenue | RMB60.1m | RMB38.8m | +54.9% |
| Gross profit / margin | RMB197.1m / 27.6% | RMB71.3m / 25.1% | Margin +2.5 percentage points |
| Operating expenses | RMB289.9m | RMB163.8m | +77.0% |
| Operating loss | RMB92.8m (US$13.5m) | RMB92.4m | Broadly unchanged |
| Net loss | RMB66.2m (US$9.6m) | RMB90.3m | Loss narrowed; net-loss margin improved to 9.3% from 31.7% |
| Operating cash flow | Use of RMB97.9m (US$14.2m) | Use of RMB75.5m | Cash burn increased |
| Investing cash flow | Use of RMB139.2m (US$20.2m) | Use of RMB28.6m | Higher investment spending |
| Cash and cash equivalents at year-end | RMB576.6m (US$83.9m) | RMB208.2m | Increased |
| Total assets / liabilities | RMB992.1m / RMB390.4m | RMB359.5m / RMB117.2m | Both increased substantially |
RMB216.2m (US$31.4m) of convertible notes was recorded as a non-current liability at year-end; the notes have US$35m principal, are zero-coupon, and mature in 2021. They are convertible at an initial US$11.7612 per share, subject to adjustments. Current assets were RMB803.7m and current liabilities RMB163.8m. The company reported shareholders’ equity of RMB601.7m, following conversion of preferred shares and its 2018 IPO.
Changes, outlook and notable items
- Revenue growth was led by data solutions, particularly targeted marketing. Management attributed the increase to more customers and sharply higher data-solutions spending per customer. Gross margin recovered from the 2017 decline, but remained below 2016’s 32.1%.
- Operating expenses rose to RMB289.9m, including R&D of RMB134.4m, sales and marketing of RMB83.9m, and general and administrative expenses of RMB71.6m. Share-based compensation rose to RMB24.6m from RMB8.3m.
- The net loss narrowed despite a nearly unchanged operating loss. FY2018 included a RMB21.3m gain from the change in fair value of a derivative liability associated with the convertible notes, as well as higher interest expense of RMB7.1m. These items materially affect comparison of net loss with operating performance.
- Financing cash flow was RMB614.9m, primarily reflecting IPO proceeds; the company reported approximately US$68.0m net IPO proceeds. By year-end it had used US$17m for technology, infrastructure, R&D and potential acquisitions, and US$2m for general corporate purposes, including sales and marketing and repurchases.
- Management said cash on hand should meet current and anticipated general corporate needs for at least 12 months, while also expecting continued spending on R&D, sales and marketing, infrastructure and public-company costs. It provided no quantitative FY2019 revenue, margin or profitability guidance.
- Receivables increased to RMB141.9m, and receivable days rose to 48 from 37. The filing attributes this partly to expanded credit terms. The allowance for doubtful accounts was RMB9.3m, up from RMB3.5m.
- The company authorized a US$10m share-repurchase program through May 19, 2019; it repurchased 69,455 ADSs for about US$0.5m by year-end. A March 2019 acquisition of MLINK assets and liabilities for RMB8m was disclosed as a subsequent event.
- Two labor-dispute lawsuits were pending at year-end, with approximately RMB300,000 in aggregate damages sought. The filing also reports underpayment of some PRC employee social-insurance and housing-fund contributions, with accruals recorded.
Principal risks and controls
- Data privacy, cybersecurity and evolving PRC rules could constrain data collection, use or commercialization, or lead to penalties. The company depends on app developers for data access and on publishers for advertising inventory.
- The VIE structure is central to operations and legally uncertain; PRC authorities could challenge the arrangements, licenses or the company’s ability to consolidate or benefit from the VIE. The filing notes that the Foreign Investment Law adopted in March 2019 could add uncertainty.
- A material weakness in internal control over financial reporting—insufficient personnel experienced in U.S. GAAP and SEC reporting—remained unremediated as of December 31, 2018. Management expected remediation by year-end 2019. Management separately concluded disclosure controls were effective; the auditor did not audit or opine on internal-control effectiveness.
- Other key exposures include continued operating losses and cash burn, reliance on advertising revenue, competition, foreign-exchange and capital-conversion restrictions, and limits on moving funds from China. The company has no business-interruption or general third-party-liability insurance.
- The founder’s Class B shares carry ten votes each; the filing reports 77.2% of voting power for the founder as of February 28, 2019. The company does not expect to pay dividends in the foreseeable future.
Investor verification priorities
- Confirm the sustainability and quality of targeted-marketing growth, including customer concentration, advertiser renewals, publisher access and margins after ad-inventory costs.
- Track receivable aging, collections, bad-debt provisions and working-capital needs as revenue expands.
- Reconcile net-loss improvement with the derivative fair-value gain, accretion and convertible-note accounting; assess potential dilution or repayment at maturity.
- Review progress in remediating the reported material weakness and the company’s subsequent internal-control disclosures.
- Assess the legal, regulatory and cash-transfer implications of the VIE structure, data practices, licenses and PRC restrictions.
- Verify use of remaining IPO proceeds, post-year-end acquisition performance, related-party dealings and execution of the repurchase authorization.