Kingsoft Cloud Holdings Limited: FY2021 Form 20-F Summary
Business context and reporting period
This filing is an annual Form 20-F for the fiscal year ended December 31, 2021, prepared under U.S. GAAP. It does not provide a separate fourth-quarter 2021 financial statement. Kingsoft Cloud is a Cayman Islands holding company providing public cloud and enterprise cloud services primarily in China through PRC subsidiaries and consolidated variable interest entities (VIEs). Each ADS represents 15 ordinary shares.
The company reported 3,646,381,840 ordinary shares outstanding at December 31, 2021. Its VIEs generated approximately 88% of consolidated revenue in 2021, compared with 97% in 2020.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | RMB9,060.8 million | RMB6,577.3 million | Up 37.8% |
| Public cloud revenue | RMB6,159.1 million | RMB5,166.9 million | Up 19.2% |
| Enterprise cloud revenue | RMB2,897.8 million | RMB1,372.7 million | Up 111.1% |
| Gross profit | RMB351.3 million | RMB357.0 million | Down 1.6% |
| Gross margin | 3.9% | 5.4% | Down 1.5 percentage points |
| Operating loss | RMB1,812.4 million | RMB1,207.3 million | Up 50.1% |
| Net loss | RMB1,591.8 million | RMB962.2 million | Up 65.4% |
| Net loss margin | 17.6% | 14.6% | Worsened 3.0 percentage points |
| Adjusted EBITDA | Negative RMB522.4 million | Negative RMB119.1 million | Loss increased |
| Adjusted EBITDA margin | Negative 5.8% | Negative 1.8% | Worsened 4.0 percentage points |
| Operating cash flow | Negative RMB708.9 million | Negative RMB290.4 million | Outflow increased |
| Capital expenditures | RMB735.4 million | RMB1,591.6 million | Down 53.8% |
Cash and cash equivalents were RMB4,217.5 million at year-end, and short-term investments were RMB2,491.1 million, for combined cash and short-term investments of RMB6,708.6 million. Total debt included RMB1,348.2 million of short-term bank loans, RMB500.0 million owed under a Kingsoft Group facility, and approximately RMB709.1 million of Xiaomi Group loans. Accumulated deficit was RMB7,458.8 million.
Accounts receivable, net, increased to RMB3,571.0 million from RMB2,334.9 million. The company recorded RMB112.0 million of provision for credit losses in 2021 and reported credit losses of RMB114.1 million within general and administrative expenses.
Material changes versus the prior comparable period
- Revenue growth accelerated in enterprise cloud services, which more than doubled and represented 32.0% of total revenue, versus 20.9% in 2020.
- Public cloud growth slowed to 19.2%, and the net dollar retention rate for public cloud premium customers declined to 114% from 146%.
- Gross margin contracted because the company committed to infrastructure and IDC resources based on expected demand, while actual internet-sector demand was weaker.
- IDC costs rose 25.7% to RMB5,101.5 million, while solution development and services costs increased to RMB678.2 million from RMB37.1 million, primarily reflecting the Camelot acquisition and expanded deployment personnel.
- Research and development expense increased 34.7% to RMB1,043.8 million. Total share-based compensation increased to RMB434.4 million from RMB330.1 million.
- Accounts receivable increased substantially, contributing to negative operating cash flow and higher credit-loss expense.
- The company acquired Shenzhen Yunfan, Beijing Yunshu and controlling interests in Camelot during 2021. Camelot added approximately RMB4,625.1 million of goodwill and RMB1,260.5 million of acquired intangible assets at year-end.
- The company issued 247,475,446 ordinary shares in connection with the Camelot acquisition, increasing dilution and non-controlling interests.
Liquidity, debt and commitments
- Operating activities used RMB708.9 million of cash in 2021, following operating cash outflows in both 2019 and 2020.
- Financing activities generated RMB2,212.5 million, primarily from short-term bank borrowings and related-party loans.
- Capital expenditure commitments for data-center construction totaled RMB46.4 million, scheduled to be paid within one year.
- Bank loans of RMB1,348.2 million were scheduled to be paid within one year. Operating lease payments were RMB110.5 million within one year and RMB211.2 million thereafter.
- Cash availability is subject to PRC restrictions on foreign exchange conversion, dividend distributions, and transfers from PRC subsidiaries and VIEs to the offshore parent.
Guidance, outlook, commentary and risks
Management expects continued investment in infrastructure, research and development, talent, new products and selected industry verticals. The filing does not provide formal numerical revenue, margin, EBITDA or profitability guidance. Management states that costs and expenses are expected to increase in absolute terms, while economies of scale and operating efficiency are expected to improve over time; there is no assurance that profitability will be achieved.
- Camelot integration: Management is integrating Camelot into the enterprise cloud business and cautions that anticipated synergies may not materialize, or may be delayed. Goodwill and acquired intangible assets create impairment and amortization exposure.
- VIE structure: Investors hold securities of the Cayman Islands parent, not direct equity in the PRC operating entities. Changes in PRC law or enforcement could undermine the legality or enforceability of the contractual arrangements or cause deconsolidation.
- China regulatory risk: Cybersecurity, data security, personal information, cross-border data transfer, telecommunications licensing and overseas-listing requirements continued to evolve. The company had not received a cybersecurity review notice or CSRC objection as of the filing date, but substantial uncertainty remained.
- HFCAA and audit access: The PCAOB stated that it could not fully inspect the company’s auditor. The filing warned that ADS delisting and an over-the-counter trading prohibition could occur under then-current rules if inspection access remained unresolved.
- Customer concentration: The five largest customers contributed 50.5% of 2021 revenue; the largest customer contributed approximately 21.9%. Xiaomi contributed 8.5% and Kingsoft Group 1.7% of revenue.
- Operational risks: Cyberattacks, network or data-center interruptions, reliance on third-party bandwidth and servers, price competition, long enterprise sales cycles and customer collection risk could pressure results.
- COVID-19 and macroeconomic conditions: The filing states that COVID-19 had an immaterial impact on 2021 operations, while warning that future outbreaks, restrictions and economic weakness could affect demand, deployment and collections.
- Internal controls: Management and Ernst & Young Hua Ming LLP concluded that internal control over financial reporting was effective, but the assessment excluded Shenzhen Yunfan, Beijing Yunshu and Camelot, which represented 13.8% of total assets and 10.9% of revenue.
- Dividends: The company has not paid dividends and does not expect to pay dividends in the near future.
Most important facts for investors to verify
- Whether enterprise cloud growth and Camelot integration can offset slower public cloud growth and declining public cloud retention.
- Whether gross margin can recover from 3.9% and whether operating and adjusted EBITDA losses narrow without materially higher financing.
- Operating cash flow, accounts receivable aging, collections and credit-loss provisions.
- Debt maturities, related-party financing terms, collateral pledged to Xiaomi Group and the company’s ability to refinance or repay obligations.
- Goodwill and acquired intangible-asset valuation assumptions, including potential impairment sensitivity.
- Completion of internal-control integration for Shenzhen Yunfan, Beijing Yunshu and Camelot.
- Continuing enforceability of the VIE arrangements and the company’s ability to transfer cash from PRC entities to the offshore parent.
- Developments regarding PRC cybersecurity, data-security and overseas-listing approvals, and PCAOB inspection access under the HFCAA.
- Customer concentration and the durability of relationships with Xiaomi, Kingsoft Group and other major customers.