Kingsoft Cloud’s Paradigm Shift: Embracing AI and Enhancing Profitability in the Cloud Computing Landscape

Transformation in Kingsoft Cloud's Model

[This article's content is created by our promotional partner.]

The rise of cloud computing services has been in tandem with the advancement of mobile internet, establishing it as a fundamental technology in the digital age. Importantly, the advent of Artificial Intelligence (AI) has led to an unprecedented need for computing power and solutions, marking a new growth phase for businesses in the cloud sector. Kingsoft Cloud, a leading independent cloud service provider in China, has over the past two years steadfastly pursued a strategy of "high quality and sustainable development". Embracing AI technology, the company has improved its profitability and undergone a comprehensive transformation, ensuring it remains competitive in the constantly changing market.

Transformations are occurring in this place

Kingsoft Cloud has seen a significant enhancement in its profitability, thanks to its strategy of focusing on "long-term and sustainable development." This is evident in the stable rise of its gross margin from a low single-digit figure to 17%. The company's EBITDA margin also increased to 3% after turning positive in the first quarter, and it's on a promising path to achieving positive operating and net profit. Specifically, in this quarter, the company's revenues hit RMB1.89 billion. This represents not just a sequential growth of 6.5%, but also a year-on-year increase of 3.1%. Revenue from high-value-added products and services has also escalated, which has helped to counterbalance the pressure caused by our proactive modifications of the CDN services. The company is now in a phase of healthy and sustainable growth.

The recent surge in AI services has boosted the revenue contribution to the public cloud from nothing to around 26%. What sets KC apart in the age of AI is its role within the Xiaomi and Kingsoft networks. AI earnings are closely linked with the ecosystem business. Xiaomi and WPS AI are the most notable AI applications with evident commercial potential. Kingsoft Cloud serves as the key entry point for AI computational capacity within the network, promoting additional cooperation with Xiaomi and Kingsoft. Consequently, Kingsoft Cloud is well-positioned to gain from its strategic alliances with Xiaomi and Kingsoft.

In addition to partnering with Xiaomi and Kingsoft, Kingsoft Cloud has also collaborated with 60% of the top 10 standalone Large-Language-Model (LLM) businesses, based on publicly available funding data. These rapidly expanding LLM firms have been setting up large computing clusters with Kingsoft Cloud to train their models. A majority of these LLM enterprises have also collaborated with Xiaomi and WPS AI, providing additional prospects for Kingsoft Cloud's AI offerings.

Conversely, in response to the robust demand in the AI market, Kingsoft Cloud has efficiently managed its computing resources. The company's total capital expenditure over the previous four quarters has amounted to approximately RMB3 billion. In addition, financial assistance from partners like Xiaomi and Kingsoft, including finance lease agreements, has strengthened Kingsoft Cloud's financial standing. This aid has lessened the reliance on outside funding and decreased the cost of financing, thereby enhancing profitability.

Regarding Content Delivery Network (CDN) services, previously, they were the primary income generators for Kingsoft Cloud, accounting for more than half of all earnings. Nevertheless, after actively reducing this low-profit income source, which primarily catered to high-end customers in the short-form video sector in 2023, the contribution from CDN services has been adjusted to about 19% of all revenues in the second quarter of 2024. Due to this strategical change in business direction, the company has become less vulnerable to the intense price wars in the CDN market.