Aurora Mobile Limited (JG) Q1 2019 Earnings Call Transcript

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Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Aurora Mobile First Quarter 2019 Earnings Call. At this time, all participants are in listen- only mode. Presentation shall be followed by question-and-answer session. (Operator Instructions)

I must advise you that this conference is being recorded today, Thursday, the 6th of June, 2019.

I’d like to hand the conference over to first speaker for today, Mr. Christian Arnell. Thank you. Please go ahead.

Christian Arnell — Investor Relations

Thank you, Operator. Hello everyone and thank you for joining us today. Aurora’s earnings release was distributed earlier today and is available on the IR website and at ir.jiguang.cn. On the call today from Aurora are Mr. Chris Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President and Mr. Shan-Nen Bong, Chief Financial Officer. Following the prepared remarks, all three will be available to take your questions during the Q&A session that follows.

Before we begin, I’d like to remind you that this conference contains forward-looking statements. These statements are made under the the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intend, plan, believes, estimates, confidence and similar statements. Aurora may also make forward-looking statements in periodic reports to the US Securities and Exchange Commission and its annual report to shareholders and press releases and other recent materials and other Aurora statements made by its officers, Directors or employees, third parties.

With that I’d now like to hand the call call over to your first speaker Mr. Luo. Chris, go ahead.

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

Thanks Operators. Good morning and evening to everyone on the call and welcome to Aurora Mobile’s Q1 2019 earnings call. Today I am very pleased to share with you our first quarter results in the 2019.

To kick off this call, I would like to take a few minutes on various key operating datas that we have achieved in this quarter. Firstly, the number of mobile apps utilizing (Technical Difficulty) other accumulative app installations now reached 1.165 million as of March 31st, 2019 from approximately 785,000 year-over-year. For quarter-over-quarter basis, we continue to see a steady string of new apps of approximately 30,000 new apps a month, using developer services, SDK. The notable customer win in this quarter included (inaudible).

For our new product JVerification since launching end of Q4 last year we have gained strong interest from the developer community. A few thousands of customers are currently in testing period, including (inaudible). Secondly, the accumulative SDK installations increased to RMB22.7 million at RMB7 billion as of March 2019 from RMB30.1 billion year-over-year. Today, the number of monthly active union mobile devices we cover has continued to increase to 1.07 billion in March March 2019 from 125 million in March 2018. Lastly, in the first quarter of 2019 we have seen the number of paying customers increased to 1951 from 1348 a year ago.

With a healthy and steady growth of these operating data, the total revenues from Q1 2019 were RMB230.5 million, which represents an increase of 82% year-over-year. On RMB, further breakdown is of (inaudible) Within the three months ended March 31st 2018 and three months ended March 31st 2019, our revenues from developer services basis increased by 47% for RMB12.5 million to RMB18.3 million, which was mainly due to the growth in the number of customers from 894 to 1,275 year-over-year, while others remained stable. Second, our data solutions business analysis, temporarily, our revenue from data solutions increased 86% or RMB140 million to RMB212 million. The 86% growth was primarily due to the increase in both the number of paying customers and the increasing average spending per customer. For targeted marketing business, the revenues have grown 90% year-over-year. This increase was mainly due to the both the increase of number of paying customer and ARPU. Our targeted marketing business, which is purely performance based continue to expand its customer base as well as increase customers wallet share which generated sequential growth in nine consecutive quarters since we launched this business more than two years ago.

We continue to get more of advertising dollars from customers through the delivery of higher ROI. Year-over-year, the ARPU has increased about 28% for targeted marketing, a strong evidence of customers are shifting more advertising projects to ours. During the first quarter, which is traditionally a low and challenging quarter for the entire advertising market in China due to Chinese New Year, we’ve managed to record healthy revenue growth. Our strategy to broaden our advertising customer verticals continue to be (inaudible) and we have seen solid results. The highlight of this quarter is that revenue mix is more balanced with financial accounting for less than 40% of total ad revenue, down from 50% last quarter and mobile gaming continues to gain momentum, account for 16% of total revenue, up from 10% in fourth quarter.

Media and entertainment vertical continue to grow nicely quarter-by-quarter with 30% our ad revenue contribution, the others mainly education, e-commerce, auto and this settlement accounts for more than 50% auto ad revenue. Customer retention in the quarter remains very high. For the top 20 paying advertising customer in fourth quarter, we had zero customer attrition during this quarter.

Now media source. For the first quarter of 2019, self owned SSP contributed approximately 15% of inventory and in this quarter Tencent’s GDP accounted for above 40% of the total advertising inventory on dollar term, similar to that in the fourth quarter of 2019.

Now as in quarter three, we will share with you on the Q1 performance of other operating results. Fei Chen?

Shan-Nen Bong — Chief Financial Officer

Thank you Chris. The combined revenues from other vertical solutions including financial risk and management, market intelligence and iZone have increased by 64% from RMB15 million to RMB25 million year-over-year. This was mainly due to the strong increase in the number of paying customers which increased by approximately 50% between the period as well as continued expansion in ARPU. We see strong growth across all three product lines.

For financial risk mismanagement, the top paying customers in the quarter include 360 Finance, Bank of China consumer finance and the Pufa Bank. Our strategy is to continue to focus on the leading players in the banking and the consumer financing area as we believe these customers will have long-term business sustainability regardless of how policy and the market environment change over time. For market intelligence product, more than half of revenue is contributed by investor customers. We have started to generate the great momentum in corporate account in past quarters as our products become more influential to corporate customers. Our iOS product has also launched a new marketing version called iMarketing. This product help advertisers and ad agencies to identify suitable media to place targeted ads based on specific user profiles. We expect that this product to help us penetrate the margin to corporate account by leveraging a large base of advertising customers we’ve already built in our targeted marketing business. iZone business again more than doubled in the quarter year-over-year. The revenue growth is primarily driven by more customer wins across various industry verticals including government urban planning institutions, real estate, tourism and retail. We expect the future growth continue to come from more customer wins.

Now Shan-Nen will share with you our financial highlights.

Thanks, Fei. Let me take you through on the discussion of other P&L items.

Gross margins for the Q1 2019 has remained fairly consistent at 27.5% compared to 27.4% a year ago. In renminbi terms, the gross profit has increased by 83% to RMB63.3 million. The total operating expenses have increased by 70% to RMB94.2 million year-over-year, in particular R&D expense has increased by 75% to RMB43 million. This was mainly due to the increase in staff costs, bandwidth and cloud costs and depreciation charge of the service.

Selling and marketing expenses have increased by 55% to RMB27 million mainly due to the increase in staff costs due to headcount expansion. G&A expense has increased by 80% to RMB24 million, mainly due to profession fee, better provision and expenses related to listing company status. On the adjusted EBITDA, it has decreased 53% from negative RMB15.9 million in Q1 ’18 to negative RMB7.4 million in Q1 ’19.

Onto the balance sheet items. Total assets has increased from RMB992 million as of 12/31/2018 to RMB1 billion as of 03/31/2019. The key asset item are cash and cash equivalents including short term deposits of RMB118 million, totalling RMB465 million. Accounts receivable of RMB208 million, pre-payments of RMB89 million, fixed assets of RMB113 million, long-term investment of RMB81 million. Total current liabilities has increased from RMB169 million as of 12/31/2018 to RMB206 million as of 03/31/2019. The key current liability items are accounts payable of RMB37 million, deferred revenue of RMB65 million, accrued liabilities of RMB99 million. And as of 03/31/2019, we maintained a healthy level working capital of RMB583 million.

And looking forward, we expect the total revenue for Q2 2019 to be in the range of RMB285 million to RMB295 million, representing a growth of 73% and 79% year-over-year.

Lastly before I conclude, an update on the share buyback plan. As of 03/31/2019, cumulative number of 306,794 ADS has been repurchased, of which 237,339 ADS amounted to $1.6 million has been repurchased during first quarter of 2019 at an average purchase price of $6.94. We will continue to monitor the need to repurchase depending on the market conditions and the underlying share price.

And this concludes the management presentation for the Q1 2019 results. Now back to you, operator.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Bill Yu of Goldman Sachs. Please go ahead.

William Yu — Goldman Sachs — Analyst

Thank you. Thank you all for taking my question and congratulations on expanding the business scope to cover more verticals. I have two questions. First one is about our targeted marketing. So we heard from the industry peers citing back a pressure on advertising inventory and I wonder have you seen a similar trend and does that have any potential benefit to your potentially media cost, because as I understand you purchased the inventory from say including XiaoGuoTong and other inventory suppliers.

My second question is about our accounts receivable. So I noticed that in our G&A expense, this quarter we said there’s a bad debt provision of RMB3 million. And also I noticed there is as percentage of revenue our account receivable have increased from sequential basis. So I just wonder could you give us some color on this line, especially is there any seasonality about this in Q1? Thank you.

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

Yeah. So for your first question Bill, actually the media inventory actually, we don’t see any impact it to our business whether it’s on the positive side or on the negative side, because for us, we are basically advertising, right. So if the media caused the increases, the cost to our peers will increase and for us as well as we can deliver the same level of ROI, better performance, we are fine with that. So media, we don’t see any media impact to us at all.

And therefore the second question, I think for the bad debt, I would ask Shan-Nen to explain to you.

Shan-Nen Bong — Chief Financial Officer

Hi Bill, for the bad debt that we have charged to the P&L this quarter, all of them are general provision, which means that none of them has gone back or gone bad actually. So it is just a matter of we applying the same provision policy and probably in the first quarter of this year is a Chinese New Year period, so lot of accounts not get paid, because of debt is simply because of timing, it was not because of the fact that debt has gone bad.

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

Also for the AR provision, actually accounts receivable, the increase is mainly due to like part of the reason is the seasonality in the first quarter, typically because of a Chinese New Year. So the payment period is kind of like a drag longer than usual. And the second reason is because our growth in the online gaming, the online gaming we grow very strongly because in the Chinese New Year actually the gaming especially after the new licenses have been issued and and other gaming companies say start to dollar, which also benefited us as well. For the gaming industry, customer typically they pay a longer period of time than the other industry vertical and also this activity happened after the Chinese New Year. So it’s purely because the cutoff date for the — to calculate accounts receivable is end of March, but we are receiving money right now, actually in April or May, so that’s why it’s simply because the timing difference that we do expect that the accounts receivable datas to decline this quarter.

William Yu — Goldman Sachs — Analyst

Thank you. That’s very clear.

Operator

Thank you. The next question comes from the line of (inaudible) Gu of Credit Suisse. Please go ahead.

Unidentified Participant

Thanks management for taking my question. Congratulations on another solid quarter. I have one follow-up question on your outlook for the second quarter top line. As we see some of the peers of the online advertising industry, are we seeing weak second quarter guidance for the top-line because of the macro headwinds plus some of the oversupply issue. Could management further elaborate the resilience in our second quarter revenue guidance? Thank you.

Shan-Nen Bong — Chief Financial Officer

Yeah. So as we received our peers guidance is relatively weak due to the macro economy and the weak advertising market, but at our targeted marketing business is basically a performance based and for those advertisers who care more about the performance rather than before, they don’t carry ROI rights. So which is I think that’s good for us. So even from Q1, you can see more of that remaining advertisers they are shifting more advertising budget to us. So I think they are going to cut some branding or marketing dollars and shift the marketing budget to performance advertising channel like us. So I think we benefit from the macro issues. So in this case, we still see very strong momentum in Q2. So that’s why we give the guidance, as Shan-Nen tell you, so that.

Yeah. Also as you know actually the Q2 already have too much of the operating performance in the pocket anyway in our pocket. So we have pretty good visibility and the confidence to give you this guidance, given Aurora continue the momentum.

Unidentified Participant

Sure. Thank you.

Operator

Thank you. (Operator Instructions) Next question comes from the line of Ryan Roberts of NAVIS Capital. Please go ahead.

Ryan Roberts — NAVIS Capital Group — Analyst

Good evening management. Thanks for the opportunity to ask the question. So, mine is also kind of following up on the bad debt. I realized that’s just a provision, it’s not kind of a writedown yet. So, my question was kind of on that charge. Was there any particular sector customer or any industry verticals something like that you can give us some color on or alternatively, you said that was a timing thing with respect to the end of Q1. Have any of those accounts become current since the reporting date of the 31st? Thanks.

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

Yes, Ryan. We don’t see any particular concentration on particular, what they call, across the board. And simply because of the timing in terms of how we collect and when the customer pays during the Chinese New Year period. And back to your second question, yes, we did see more collection in second quarter and as such we reached our provision balances in Q2.

Ryan Roberts — NAVIS Capital Group — Analyst

Got you. So it sounds like those charges have been reversed. Is that kind of what you’re saying materially or versus that’s what you’re saying?

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

It is not a reversal. When comps 630 will reassess what the total balance that we need and we see what it is that a charge — is that a net charge or net increase or decrease. So until such time we do this assessment at 630. Yeah, we do not know what the final number is yet. But we do see a lot of those customers who do not pay in the first quarter started to pay because of the Chinese New Year period has gone past.

Ryan Roberts — NAVIS Capital Group — Analyst

Okay. Yeah, I was just curious if again, those specific bad debt expenses had been worked out like those accounts had become current, but it sounds like you assessed that at the end of the quarter, understood. Okay.

Then, maybe next question is kind of on the ARPU trend. I see kind of for target marketing. I saw from the remarks that management discussed a bit on how that’s trending up about 30% nearly YoY. One of the questions I want to ask about that was, are we digging deeper into the cohorts? If you have some of that kind of color, customers who’ve been, let’s say, using your services for a longer time, what kind of a change in ARPU is seeing for them, kind of more mature customers who’ve been using the service for a while, you mentioned deeper wallet share. Can you give us some more color on that please?

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

For customer who has been with us for longer period of time, actually most of them, they are like the financial customers because financial is the sector we have entered for the longest period of time. And for those customers actually once they become stable stage, actually they’re kind of like the ARPU, kind of like the frustrates depending on the seasonality, right. So for example in the first quarter, of course, the financial guidance, the ARPU is going to be smaller than the fourth quarter. But that said, we have the new vertical such as the gaming, that vertical the customers — new customer and a number of new customers they actually increased the debt spending very significantly and that kind of helped to increase the overall ARPU increase here.

Ryan Roberts — NAVIS Capital Group — Analyst

Okay, yeah. It seems like with you have customers using the advertising services for longer, but I understand the mix, how that change is kind of on a quarter-to-quarter basis. Okay. And maybe, so just lastly on the guidance again for the Q2 guidance. Are you emphasizing more customer acquisition or alternatively ARPU, kind of when you’re looking at the guidance, is that kind of how you split that in terms of the overall priority for driving revenue growth?

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

I think that depends on the customers in different verticals, right. So for I think it’s going to be a function of both. Like for target marketing, I think we still continue to see the ARPU expansion and therefore other verticals like the iZone or market intelligence, those ARPUs are pretty stable. So it’s going to be mainly driven by numbers of new customers. And similarly for the fastest in the development service, the ARPU has been very very stable, very, very constant over the past few years. So it’s going to be simply by driven number of new customers, new paying customers.

Ryan Roberts — NAVIS Capital Group — Analyst

Got you. Okay. And maybe one last question sorry I’ll stack this on. Was there any kind of update in headcount you can provide?

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

Yeah. The headcount actually remained pretty stable in the first quarter compared to compared to the fourth quarter last year, but the second quarter we are because after Chinese New Year and that’s like a hiring season. So we start to pick up a few dozen have continued to increase overall for this year the headcount increased compared to last year is very limited and we are trying to optimize our talent.

Ryan Roberts — NAVIS Capital Group — Analyst

Got you. Understood. Thanks for the questions. Thank you.

Operator

Thank you. We got a follow up question from Bill Yu of Goldman Sachs. Please go ahead.

William Yu — Goldman Sachs — Analyst

Sure. Thank you. Just quickly a follow-up about the business mix regarding our self owned SSP. I recall Chris mentioned that already 15% of the target marking revenue. I’m not sure if I catch that number correctly. So comparing that to one year ago I recall we launched the self owned SSP back in Q2 last year. So Q1 is so we have almost zero mix with versus 15% mix now. I just want to understand what is the margin impact from this self owned SSP initiative because I think our gross margin has been fairly stable in the past couple of quarters. Thank you.

Shan-Nen Bong — Chief Financial Officer

Yeah. So self owned SSP currently accounts for 15%, OK. So in terms of margin impact self owned SSP actually typically has a higher margin than the third-party SSP. Self owned SSP the margin is typically between 20% to 30%. Well, the third party SSP is around like 15%, right. So it does have a positive impact to the margin but that said the margin is also a function of the mix of different advertiser of vertical. For example, the gaming vertical typically the margin is lower. That’s why you have benefits from self owned SSP which helps the margin, but the gaming makes the margin tougher a little bit. So on a blended basis actually the margin remains very stable over the last quarter here.

William Yu — Goldman Sachs — Analyst

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Thank you. This is the end of a question-and-answer session of our conference call. Thank you for participating. You may now all disconnect.

Duration: 29 minutes

Call participants:

Christian Arnell — Investor Relations

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

Shan-Nen Bong — Chief Financial Officer

William Yu — Goldman Sachs — Analyst

Unidentified Participant

Ryan Roberts — NAVIS Capital Group — Analyst

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