Kingsoft Cloud’s Strategic Evolution: From Cloud Services to AI Innovation, a Paradigm Shift Fueling Sustainable Growth

Transformation in Kingsoft Cloud's Model

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The advent of mobile internet has gone hand in hand with the rise of cloud computing services, which have become a fundamental technology in the digital age. The surge in Artificial Intelligence (AI) has sparked an unprecedented demand for computational power and solutions, ushering in a new era of growth for cloud-based businesses. Kingsoft Cloud, a top-tier independent cloud service provider in China and listed on NASDAQ (KC) and HKEX (3896), has successfully pursued a strategy of superior quality and sustainable growth over the past two years. By embracing AI technology, the company has boosted its profitability, undergone a total transformation and managed to stay competitive in a rapidly changing market.

Transformations are taking place here.

Following a strategy of "sustained and long-term growth," Kingsoft Cloud has managed to improve its profitability. This is evident in the stable rise of its gross margin from a mere single digit to 17%, and its EBITDA margin reaching 3% after becoming positive in the first quarter. The company is on the right path to achieving positive operating and net profit. Importantly, this quarter saw the company's earnings rise to RMB1.89 billion, marking not only a sequential growth of 6.5%, but also a year-on-year increase of 3.1%. The company has seen growth in revenue from high-value-added products and services, which has helped counterbalance the pressures from the voluntary adjustments made to the CDN services. The company is now in a stage of healthy and enduring growth.

The most recent wave of revenue from AI services to the public cloud has surged from nothing to roughly 26%. What sets KC apart in the age of AI is its integral role within the Xiaomi and Kingsoft networks. The profits from AI are closely linked to business within these ecosystems. Xiaomi and WPS AI represent the most common AI applications with evident potential for commercial use. Kingsoft Cloud is the key conduit for AI computational capacity within this 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 partnerships with Xiaomi and Kingsoft, Kingsoft Cloud has also collaborated with six of the top ten standalone Large-Language-Model (LLM) companies, as per publicly available financial data. These thriving LLM businesses have been setting up expansive computing clusters with Kingsoft Cloud for model training. A majority of these LLM firms have also teamed up with Xiaomi and WPS AI, thereby providing additional prospects for the AI services of Kingsoft Cloud.

Conversely, due to the high demand in the AI market, Kingsoft Cloud has efficiently organized their computing resources. The company has spent approximately RMB3 billion in capital over the last year. Additionally, financial aid from partners like Xiaomi and Kingsoft, including lease financing deals, has strengthened Kingsoft Cloud's monetary standing. This backing has lessened the requirement for outside funding and decreased financing expenses, thereby enhancing profitability.

Historically, the primary source of income for Kingsoft Cloud was their Content Delivery Network (CDN) services, accounting for more than half of their total earnings. However, in 2023, the company strategically reduced these low-profit revenue streams, which primarily catered to leading clients in the short-form video sector. Consequently, by the second quarter of 2024, CDN services only comprised around 19% of the company's overall income. This strategic shift has made the company less vulnerable to the intense price wars in the CDN market.