Kingsoft Cloud Holdings Ltd annual report, Q4 FY2020

Kingsoft Cloud Holdings Limited — 2020 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F and does not provide a clearly separate fourth-quarter 2020 income statement or cash-flow presentation. Financial statements are prepared under U.S. GAAP; amounts are primarily in RMB, with convenience translations at RMB6.525 per US$1.

Business context

Kingsoft Cloud is a Cayman Islands holding company providing public cloud, enterprise cloud and IoT-smart living cloud services primarily in China. Substantially all operating activity is conducted through PRC subsidiaries and consolidated variable interest entities, or VIEs, under contractual arrangements. The ADSs trade on Nasdaq under “KC,” with each ADS representing 15 ordinary shares.

Premium Customers increased from 243 in 2019 to 322 in 2020.
Public Cloud Service Premium Customers increased from 175 to 191; net dollar retention declined from 155% to 146%.
Enterprise Cloud Service Premium Customers increased from 67 to 124.
At December 31, 2020, the company operated more than 95,000 servers in China and ten other countries and regions.

2020 financial performance

Metric	2020	2019	Change or margin
Total revenue	RMB6,577.3 million (US$1,008.0 million)	RMB3,956.4 million	Up 66.2%
Public cloud revenue	RMB5,166.9 million	RMB3,458.8 million	Up 49.4%; 78.5% of revenue
Enterprise cloud revenue	RMB1,372.7 million	RMB486.3 million	Up 182.3%; 20.9% of revenue
Cost of revenue	RMB6,220.3 million	RMB3,948.6 million	Up 57.5%
Gross profit	RMB357.0 million	RMB7.7 million	Gross margin improved to 5.4% from 0.2%
Operating loss	RMB1,207.3 million	RMB1,143.5 million	Loss widened 5.6%; operating margin was negative 18.4%
Net loss	RMB962.2 million (US$147.5 million)	RMB1,111.2 million	Loss narrowed 13.4%; net loss margin was negative 14.6%
Adjusted net loss	RMB824.4 million	RMB957.6 million	Adjusted net loss margin was negative 12.5%
Adjusted EBITDA	Negative RMB119.1 million	Negative RMB417.7 million	Adjusted EBITDA margin improved to negative 1.8%

Growth was driven by higher usage and average revenue per public cloud premium customer, increased enterprise customer count and larger enterprise projects. Management attributed gross-margin expansion primarily to economies of scale, greater operating efficiency, increased sales of standardized enterprise products, renewals and upsells.

Cash flow, liquidity, debt and capital investment

Cash and cash equivalents were RMB3,424.7 million (US$524.9 million) at year-end, compared with RMB2,023.3 million in 2019.
Short-term investments were RMB2,693.0 million (US$412.7 million), bringing cash and short-term investments to approximately RMB6,117.7 million (US$937.6 million).
Net cash used in operating activities was RMB290.4 million (US$44.5 million), improving from RMB439.1 million in 2019 but remaining negative.
Net cash used in investing activities was RMB4,314.0 million, primarily reflecting RMB5,607.7 million of short-term investment purchases and RMB1,559.9 million of property and equipment purchases.
Net cash generated from financing activities was RMB6,124.2 million, including net IPO proceeds of RMB3,933.4 million and net follow-on offering proceeds of RMB1,876.3 million.
Total bank loans at year-end were RMB352.8 million, consisting of RMB278.5 million of short-term loans and RMB74.4 million of current long-term debt. The long-term loan was guaranteed by Kingsoft Group.
Capital expenditures were RMB1,591.6 million, compared with RMB999.7 million in 2019. Data-center construction commitments were RMB110.8 million, payable within one year.
Accounts receivable increased to RMB2,334.9 million from RMB1,347.5 million, reflecting growth but also creating collection and working-capital risk.

Material changes versus 2019

Revenue growth accelerated the shift toward enterprise cloud: enterprise revenue increased 182.3% and represented 20.9% of total revenue versus 12.3% in 2019.
Gross profitability improved substantially, but operating losses increased because selling and marketing, general and administrative, and research and development expenses continued to rise.
Research and development expense increased 30.2% to RMB775.1 million; IDC costs increased 42.1% to RMB4,058.8 million.
Share-based compensation increased from RMB121.3 million to RMB330.1 million, partly reflecting accelerated vesting associated with the IPO.
Foreign exchange results improved from a RMB39.0 million loss in 2019 to a RMB188.8 million gain in 2020, a material non-operating contributor to the reduced net loss.
Preferred shares were converted into ordinary shares upon completion of the May 2020 IPO. The company completed its IPO and a September 2020 follow-on offering, materially increasing equity and liquidity.
Total shareholders’ equity changed from a deficit of RMB4,197.3 million at year-end 2019 to positive equity of RMB8,240.1 million at year-end 2020.
The company adopted the new lease standard, ASC 842, on January 1, 2020 using the modified retrospective method.
Management stated that the material weakness in financial reporting controls identified for 2018 and 2019 had been remediated as of December 31, 2020, although the company was not yet required to obtain an auditor attestation of internal controls.

Guidance, outlook, risks and unusual items

The filing does not provide formal numerical revenue, margin or profitability guidance. Management expects continued investment in network infrastructure, data centers, technology, research and development, sales, marketing and international expansion. Management also expects costs to increase in absolute terms but to decline as a percentage of revenue if economies of scale and operating efficiencies are achieved.

Profitability and cash burn: The company has a continuing history of net losses and negative operating cash flow and cannot assure future profitability.
Customer concentration: The three largest customers accounted for 28%, 15% and 10% of 2020 revenue; Xiaomi accounted for 10%, and Kingsoft Group accounted for 1.8%. Premium Customers generated 98.1% of total revenue.
Infrastructure commitments: IDC costs, capital expenditures and data-center requirements are significant. A non-cancelable one-year IDC agreement included a RMB240.0 million minimum purchase commitment, fulfilled by December 31, 2020.
COVID-19: Management assessed the direct 2020 operational impact as immaterial, but noted continuing uncertainty regarding customer demand, enterprise projects, credit losses, investments and asset impairments.
PRC regulatory and VIE risk: A substantial portion of the business operates through VIE contractual arrangements because of foreign-investment restrictions on value-added telecommunications services. Changes in PRC law or enforcement could restrict operations, impair control or cause deconsolidation.
China and geopolitical exposure: Risks include PRC regulatory changes, data privacy and cybersecurity requirements, U.S.-China trade restrictions, sanctions, export controls, currency controls and potential restrictions on access to U.S. capital markets.
Audit-access and delisting risk: The filing highlights that PCAOB access to audit work papers in China was unavailable and that the Holding Foreign Companies Accountable Act could ultimately lead to trading restrictions or delisting if requirements are not satisfied.
Related-party dependence: Kingsoft Group and Xiaomi are major shareholders, customers and business partners, creating concentration and potential conflicts of interest.
Unusual accounting items: The 2020 results included RMB330.1 million of share-based compensation, a RMB188.8 million foreign exchange gain, RMB14.3 million of fair-value gains on financial instruments and a RMB164.8 million benefit from changing the estimated useful life of certain electronic equipment from three to four years.
Subsequent transactions: In March 2021, the company agreed to acquire a cloud edge-computing target, with consideration consisting of cash and shares; the transaction was not completed when the financial statements were issued. A separate agreement to acquire 60% of a real-time communications PaaS/SaaS company was completed in April 2021.

Most important facts for investors to verify

Whether revenue growth, enterprise-cloud expansion and gross-margin improvement continue without comparable increases in IDC costs and capital expenditures.
Whether operating cash flow turns positive and whether accounts receivable growth converts into cash collections.
The sustainability of customer relationships and usage, particularly among the three largest customers and related parties.
The amount and recurring effect of share-based compensation and other non-operating gains or losses.
The outstanding balance, refinancing or repayment status of bank loans and the company’s future funding requirements.
The legal and regulatory status of the VIE arrangements, required licenses and PRC data-security compliance.
Progress and costs of the disclosed 2021 acquisitions and any resulting dilution or integration risk.
Whether the previously identified internal-control weakness remains remediated when the company becomes subject to full Section 404 reporting and auditor-attestation requirements.
Future PCAOB inspection and HFCAA developments affecting the Nasdaq listing and ADS tradability.