Cloopen Group Holding Ltd

OTC:RAASY

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Cloopen's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. [Operator Instructions]

I'd now like to turn the call over to [Yilin Dai], Cloopen's Investor Relations representative. Please go ahead.

[Unknown Executive]

Hello, everyone, and thank you for joining Cloopen's Third Quarter 2021 Earnings Conference call. The company's financial and operating results were issued in a press release with our Newswire services earlier today and are posted online. You can download the earnings press release and sign up for our distribution list by visiting our IR website.

Participants on today's call will be Mr. Changxun Sun, our Founder and Chief Executive Officer; and Mr. Yipeng Li, Chief Financial Officer.

Management will begin with prepared remarks, and the call will conclude with a Q&A session. Before I hand it over to the Management, I would like to remind you of Cloopen's safe harbor statement in relation to today's call. Except for the historical information contained herein, certain matters discussed in this conference call are forward-looking statements. These statements are based on current trends, estimates and projections, and therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission.

With that, I'm now very pleased to turn the call over to our CEO, Mr. Changxun Sun. Please go ahead.

[Changxun Sun, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Hello, everyone, and thank you for Cloopen's third quarter earnings call. We appreciate your interest. We are excited to announce that we maintained strong top line growth in the third quarter, delivering revenues of RMB276.1 million, representing a 44.3% year-over-year increase. With the rapid revenue growth, our third quarter gross margin also remained robust at 43.5%. Since our IPO, we have strategically focused on our cloud-based CC business and providing SaaS products for marketing and service scenario to our customers. We made great progress executing our strategy during the third quarter and delivered excellent results. This is reflected in our 125.4% year-over-year revenue growth in CC business as the biggest revenue contributor in our group. We also increased the number of large enterprise customers to 219, accounting for 77.4% of our total revenue during the trailing 12-month period ended September 30, 2021.

[Changxun Sun, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted]

Today, I would like to discuss 2 important aspects of Cloopen's business, our CC product development strategy and our technological programs. First, let's talk about our products. In the Chinese market, it is important to differentiate the needs of large enterprises and small to medium-sized enterprises, or SMEs, with respect to sales and product service systems. Large enterprise customers require direct sales. Here, we provide private cloud-based services specific to their industry scenario. For SMEs, we offer standardized SaaS products to support their focus on directing online traffic with follow-up from original sales team to better serve each customer group, we designed 2 distinct product brands. Rong-C formerly called RongCC is specifically for large enterprise customers and our 7moor brand serves SMEs.

Our revenues are mainly derived from 2 categories, marketing and service scenario, the products we offer constantly evolve to meet demand in these categories. We have made great strides in developing products for diverse marketing scenarios. Initially, we offered CPaaS solutions with channels to reach customers, including voice and messaging APIs. We then extended our offering to SaaS. First, providing SMEs with standardized products, including telemarketing services and a text-based chat-bot for late reception under our 7moor brand. We later added Rong-C products to serve large enterprise customers, including our Rong-C contact center, outbound call robot and agent assistance. With these products, we are now fully leveraging our communications and AI technologies, empowering businesses to reach a broader range of potential customers in various marketing scenario reduce costs and enhance their operating efficiency. We also acquired EliteCRM in March 2021, which reinforces our capabilities in vast pool of sales lease and sales process management during the marketing process.

Based on our data foundation, we plan to release our new 2-core marketing cloud of the SaaS product for use by both our large enterprise customers and SMEs. 2-core marketing cloud is designed to help our customers realize public to private domain traffic conversion and private domain user operation. And with the support from our middleware capabilities, businesses can gain a better understanding of their users for remarketing opportunities across private domain users, all of which drives additional marketing efficiency. By providing communication services to tens of thousands of customers, we have accumulated a large amount of industry data and user insights that can help improve primary targeted marketing accuracy for our customers, in compliance with their requirements. Supply impact and SaaS services for leads from the public domain has also given us a deep understanding of our enterprise customers. With our advantage in these 2 areas, we are well positioned to expand our offerings to include marketing SaaS products with a clear sales pathway.

With respect to service scenario, we have served thousands of customers through 7moor customer service cloud and RongCC products that provide functions such as multichannel access, knowledge base, CRM and work order management. In the past, we helped our customers solve their online communication issues with their users. Now many of our customers require work order function solutions as they strive to digitize their after sales workflow management to address their evolving needs and based on existing customer service cloud products, we developed our after sales cloud with functions extending to aftersales and aftermarket, targeting to provide a closed-loop services for enterprise customers with both our customer service cloud and after sales cloud. Our product help businesses realized online workflow management by growth and empowering customer service departments and also covering other related parties, such as the downstream dealerships, service outlets and on-site engineers.

[Changxun Sun, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted]

Having discussed our product development strategy, now let me share with you our progress on technology front. In the third quarter, we continue to ramp up investments in R&D to sustain our core products and technology competence. We also added top-notch talent to further round out our technical team. We established an AI research Institute and AR Engineering Institute, a Big Data Department and Audio and Video Department and a Security Technology Department. Meanwhile, we successfully recruited highly regarded technical experts from leading Internet companies. And are actively collaborating with colleges and universities to develop and recruit talent. Our technology system emphasized 3 of our core capabilities. Audio and Video, Big Data and AI. In the Audio and Video segment, we plan to build our own RTN or real-time network, conforming to the most up-to-date industry architecture standards. This will significantly enhance connectivity performance within tool networks and realize high concurrency and low latency.

In terms of Big Data, we quickly constructed a complete series of commercially applicable Big Data platform solutions in line with industry technology and innovation standards. To advance our AI capability, we have established 2 research institutes and AI research institutes, led by a professor from the prestigious Nankai University and an AI Engineering Institute, led by a leading Internet, company's former chief scientist.

With respect to AI, we focused on natural language processing or NLP, and intelligent decisioning and are also actively exploring computer vision or CV technologies. While enhancing our 3 core capabilities, we are also improving our R&D efficiency. We upgraded our technical architecture to only need a single deployment solution to be compatible with all types of cloud vendors and customers. Furthermore, the local development platform we build will enable accelerated customized developments. These refinements will consistently improve Cloopen's technical strength and R&D efficiencies.

Going forward, Cloopen is committed to becoming a SaaS company that integrates its capabilities in Communication, Big Data and AI to better support business with marketing needs and drive their digital and intelligent transformation. As we continue to refine our products and services to empower companies across industry, we are confident in our ability to create additional value for our shareholders.

That concludes Changxun Sun's prepared remarks. Now we would like to turn the call over to Steven for a closer review of our third quarter financials.

[Yipeng Li, executive]

Thank you, Changxun and Yilin. Hello, everyone, and thank you for joining our call today. Before going through the third quarter financials in detail, I would like to share with you the recent developments. We are excited to announce that we received our first order from the Southeast Asia market. The order comes from one of Thailand's largest commercial banks, marking an important milestone in our overseas expansion plan. With the pandemic gradually receding in this region, we expect our endeavors will progressively bear fruit in the coming quarters. We will continue to expand our customer base in this region leveraging our comprehensive proven product and services as well as abundant experience in serving companies of all sizes across industries in China.

In addition, according to the Bloomberg on China's cloud communications industry, which was recently released by China Insights Consultancy or CIC, China's cloud-based communications market is expected to grow significantly from RMB49.8 billion in 2020 to RMB146.5 million in 2025 at a CAGR of 24.3%. And with a particularly strong impetus from CC and UC&C. As the only company that offers a full scope of product and services covering CC, UC&C and CPaaS among cloud-based medication solutions provider in China, we believe Cloopen has a long runway for growth given our strong momentum. Our belief is supported by CIC data, reflecting our industry-leading year-over-year growth rates in revenues for the company and our CC business for the first half of 2021. We are confident that Cloopen is well positioned to address this sizeable market and unlock its value with our continuous efforts to refine our products and services, enhance our innovation capabilities, optimize our customer mix and expand our global footprint.

We are pleased with our solid third quarter operating and financial performance, despite impact from the after-school tutoring sector. Excluding this impact, our dollar-based net customer retention rate remained sound above 100% for the third quarter of 2021, but lower compared with the previous quarter, primarily as a result of the discontinuation of some low-margin customers using our CPaaS messaging services. As large and medium-sized enterprise customers usually have strong payment abilities and higher user stickiness, we made strategic adjustments to optimize our customer mix during the quarter, resulting in a decrease in total active customers due to a reduced number of small-sized customers.

Now, let's look at our financial results in detail. We recorded revenues of RMB276.1 million during the quarter, up 44.3% year-over-year, mainly driven by the continued growth momentum of our CC business. With an increasing number of large enterprise customers and synergies from EliteCRM, CC business generated RMB130.4 million in revenues, representing a remarkable 125.4% year-over-year increase. In addition, according to the sorry -- Cost of revenues increased by 31.8% to RMB156 million in the third quarter of 2021 from RMB118.4 million in the third quarter of 2020, which was primarily due to increased infrastructure and equipment cost, outsourcing costs and staff costs as the company continues to scale its business.

Gross profit increased by 64.6% to RMB120.1 million in the third quarter of 2021 from RMB72.9 million in the third quarter of 2020. Gross margin was 43.5% in the third quarter of 2021 compared with 38.1% in the third quarter of 2020. The increase of gross margin was contributed by the optimized revenue structure. In the third quarter of 2021, operating expenses were RMB237.8 million, representing a 51.5% increase from RMB157 million in the third quarter of 2020. R&D expenses increased by 66.9% to RMB75.5 million in the third quarter of 2021, compared with RMB45.3 million in the third quarter of 2020, primarily due to an increase in share-based compensation expenses of RMB5.5 million, an increase in the R&D staff expenses of RMB18.5 million, as the company recruited highly regarded experts to develop core features and functions in cloud-based CC solutions and cloud-based UC&C solutions and the increase in technology, service expenses paid to the outsourcing service providers for the development of certain noncore features and functions in cloud-based UC&C solutions.

Sales and marketing expenses increased by 42.3% to RMB82.6 million in the third quarter of 2021 from RMB58.1 million in the third quarter of 2020, primarily due to an increase in share-based compensation expenses of RMB7.5 million and increase in staff expenses of RMB12.6 million, as the company continues to scale its business and reach a wider customer base. G&A expenses increased by 48.4% to RMB79.6 million in the third quarter of 2021 from RMB53.7 million in the third quarter of 2020, primarily due to an increase in personnel cost, as the company continues to build his team, an increase in social insurance premiums as the company had enjoyed a social insurance premiums deduction in 2020 according to the government relief policies during the COVID-19 outbreak and an increase in the provision for doubtful accounts resulting from increase in accounts receivables. Net loss for the third quarter of 2021 was RMB112.2 million compared with RMB93.9 million in the third quarter of 2020. Net loss margin is sharply narrowed by around 10% year-over-year.

For the fourth quarter of 2021, Cloopen currently expects revenues to be between RMB328 million and RMB333 million, representing an increase of 26.8% to 28.7% year-over-year. The above outlook is based on the current market conditions and reflects the company's current preliminary estimates of market and operating conditions and customer demand, all of which are subject to substantial uncertainty.

With that, I would like to open up the call to questions. Operator, please.

[Operator]

[Operator Instructions] First question comes from Tina Hou of Goldman Sachs.

[Tina Hou, analyst]

[Foreign Language] So I will translate in English. So my first question is regarding the CC business, because we saw pretty strong growth in the third quarter. So just wondering, compared to the second quarter of this year, what has -- is there any new development or competition changes in 3Q versus 2Q? And then the second question is regarding the 4Q revenue guidance. If we take 4Q '21 guidance, minus 3Q '21 revenue, then the incremental revenue is about RMB54 million. When we compare this to the 4Q '20 and 4Q '19 numbers, it's actually a little bit lower than the previous 2 years, so wondering what's causing this? And then the third question is please break down the gross margin by the 3 different segments?

[Yipeng Li, executive]

Okay. For the first question regarding the competitive environment for our CC business, we actually continue to enjoy bigger and bigger competitive advantage, especially for our RongCC or Rong-C business lines, focused on the large enterprise customers. Our RongCC business actually increased by over 400% compared to third quarter of last year, especially in the finance industry, we think we are now the -- a very clear frontrunner in the finance industry, we actually had several very big wins in the third quarter. The finance industry right now accounted for almost 70% of our total revenue from RongCC business. So as what I mentioned during the call, based on the CIC report, the revenue increase of our CC business is the top in the business. So I think along -- when we continue to dig deeper into the industries we focused on, especially the finance industry, we will have more expertise and know-how in those industries, and we'll have a bigger actually competitive advantage compared to our competitors.

The second question is regarding the guidelines for the fourth quarter of this year, in terms of the revenue increase compared to third quarter and compare that with the revenue increase for last year and the year before. Actually, the reason why when we look at the total revenue increase for the coming quarter compared to third quarter is a little bit lower compared to the previous years, it's mainly due to the revenue not increase very much or maybe a little bit decrease of our CPaaS business. If you look at our third quarter financial results, the revenue for CPaaS business actually decreased a little bit compared to third quarter of last year. As we continue to shift our strategic resources to higher margin business such as CC and UC&C business, the revenue will probably -- for the CPaaS business will probably remain very flat or even decrease a little bit. So that's the major reason why our revenue for the last quarter of this year compared to the third quarter not increased that much. But for the CC and UC&C business, we are very confident, the very fast increasing trend will continue.

The third question is the gross margin for each of our business. The gross margin for our CPaaS business for the third quarter is 28%. It's roughly the same compared to before. And the gross margin for the CC business is 56% is also roughly the same compared to before. The gross margin for UC&C business for the third quarter is 41%. This is a little bit lower compared to previous quarters. This was mainly due to some of the revenues for UC&C for our CV business in the third quarter involves some of the hardware. So that drives our gross margin for UC&C business down a little bit. But this is more like a onetime thing. So we believe the gross margin for the UC&C business will bounce back in the coming quarters.

[Changxun Sun, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] During the past few months, we see a trend in both domestic and overseas CC vendors that they are all adding the CC product comprehensively. All extending the functions of the traditional CC in mainly 2 categories. The first one is marketing, and the second is after sales and services. These 2 categories are just what we mentioned earlier in the earnings call. We also increased a lot in our R&D investments and established our own version of the marketing and after sales CC product, which is Rong-C and 7moor cloud.

[Operator]

The next question will be from [indiscernible] of Bernstein.

[Unknown Analyst]

[Foreign Language] I have 2 questions. The first is regarding the contact center revenue. I would like to understand what's the split between the 7moor business, the RongCC business and also the EliteCRM that was integrated? And maybe you could help us understand what are the growth rates for these 3 sub-businesses? And the second question is regarding your cooperation with Tencent that you mentioned, could you help us understand a little bit more how the corporation will work? Also because in the recent 3Q earnings, Tencent talks a lot about developing their own CRM business. And I would like to understand whether your products will compete with them or will cooperate with them?

[Yipeng Li, executive]

Okay. For the first question, within our CC business, the RongCC revenue, like I mentioned, during -- when I answered the first question actually, the revenue increased by over 400%. But that, of course, includes the revenue from EliteCRM. The EliteCRM contributed about RMB12 million revenue for the third quarter. So even take those revenue from EliteCRM out, the revenue increase for the entire CC business is still about 100%. And as for 7moor, the revenue increase for 7moor for this quarter is around 35% year-over-year. Yes. So that's the answer to the first question.

As for the second question, we are not competing with Tencent. As you know, Tencent is one of our strategic investors. We work very closely with Tencent. We actually just signed a strategic framework agreement with Tencent during October. And under this agreement, we will work with Tencent Cloud to either Tencent cloud can actually sell our products and services to the final customers or we can work with Tencent Cloud together and combine our products together and offer one solution to the end customers. And we can also offer Tencent the product service solution with Tencent. So in short, we are not competing with Tencent, but rather work with Tencent to deliver our products and services to the final customers.

[Changxun Sun, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] There are mainly 2 categories of CRM. And first one is the CRM managed sales lease, and another is the CRM managing the sales process. Tencent actually don't have its own CRM product. But one of its important portfolio, [indiscernible] is a B2B CRM company, which mainly does the sales process management. And CRM is mainly doing the management of sales leads, which we said that we -- our CRM product is used to manage the public domain traffic -- traffic and the sales lead, but not a direct competitor to [indiscernible] and Tencent.

[Operator]

[Operator Instructions] The next question come from [indiscernible] with CICC.

[Unknown Analyst]

So I have 3 questions. The first one is about -- so also I will ask this in Chinese. The first one is [Foreign Language] And then I will ask it in English. So congratulations on the strong growth of CC solution. We noticed that entered into the framework cooperation agreement with Tencent Cloud in October. Can you give us more color on the future cooperation. And the second one is, we noticed that the number of active customers and dollar-based net customer retention rates decreased slightly compared to second in the quarter. So could you share more information about the number of customers by products. The third question is about the newly obtained order in Thailand. Before this, has deployed overseas expansion plan in Japan, Malaysia and other regions. So how to compete with overseas competitors in terms of product, customer acquisition channels and so on.

[Yipeng Li, executive]

Yes. Okay. For the first question, as for the relationship or our cooperation with Tencent, like I mentioned, Tencent is one of our strategic investors. So we had a lot of synergies with Tencent from our UC&C business, Tencent continues to offer us opportunities in industries such as industrial, manufacturing, energy, governments and for our CC business, like I mentioned, in the last question, we signed a strategic framework agreement with Tencent in October. And within this agreement, we have different ways to work with Tencent. Tencent can either sell our products directly to the end customers or we can combine our products and Tencent's products together and offer a one solution to the end customers or we can offer our technology and service products to Tencent and Tencent will then sell to the end customers. Right now, there are over 10 million of contract value, either signed or in the process of being signed, including the governments or in the insurance industry, in the finance industry, in the manufacturing industry, in the e-commerce industry and so on.

For the second question, as for the active customers for the different product lines of our business, by the end of third quarter, the active customer number is over 12,000 for the trailing 12 months. CPaaS business has about 6,000 active customers. CC business has also about 6,000 active customers and UC&C business has over 100 active customers. We actually mentioned this during the call, the major reason why the number of customers and also the net -- the dollar-based retention rate is down a little bit compared to previous quarters is mainly due to why the impact from the education sector; and 2, we cut off some very small enterprises on purpose so that our ROI or our gross margin will be better off.

The last question is regarding our overseas expansion. Yes, right now, we have operations in Japan, in Malaysia, also in Philippines. As for our competitive advantage in the overseas markets, right now, we noticed that the competition in Southeast Asia market is not as intense as the China market. So our products actually has the advantage compared to other products offered by the other competitors in terms of customer experience in terms of everything. And also, we worked very closely with the telecom operators in the Southeast Asia to look for potential opportunities. We mainly sell our standard products in the Southeast Asia market. And also, we actually enjoy a great advantage in terms of pricing compared to the products offered by those local or other overseas companies in the Southeast Asian market and still have a better gross margin compared to the Chinese market. So those are the advantages we have when we compete in the southeast or in the overseas markets.

[Changxun Sun, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] We also have another advantage over other vendors in Southeast Asia market. The first one is our price is very competitive. Not many local vendors are playing in this market in Southeast Asia. Most of them are -- most of the services are covered by Euro and U.S. companies and their license and services are both very expensive. So our price is very competitive compared to theirs. And the second advantage is that we are looking for those enterprises, those Chinese enterprises, which are also doing overseas businesses that we can provide our products to those companies.

[Operator]

Thank you. Showing no further questions. This will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Yilin, Investor Relations, for any closing remarks.

[Unknown Executive]

Once again, thank you, everyone, for joining today's call. We look forward to speaking with you again soon. Good day, and good night.

[Operator]

This concludes our earnings conference call. You may now disconnect your line. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]