Kingsoft Cloud’s Strategic Shift: Embracing AI and Enhancing Profitability in China’s Evolving Cloud Market Landscape

Transformation in Kingsoft Cloud's Approach

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With the rise of mobile internet, cloud computing services have surfaced as the foundational technology of the internet era. In particular, the advent of Artificial Intelligence (AI) has increased the demand for computing power and solutions, presenting a fresh growth opportunity for cloud businesses. In the past couple of years, Kingsoft Cloud, a top independent cloud service provider in China, listed on NASDAQ and HKEX, has steadfastly implemented a strategy focused on "high quality and sustainable development". By adopting AI technology, the company has strengthened its profitability and undergone a total transformation, ensuring it remains competitive in the ever-changing market landscape.

Transformations are taking place here.

Kingsoft Cloud's profitability has seen a massive improvement, backed by its strategy for "long-term and sustainable development." The gross margin has seen a consistent rise from a low single-digit figure to 17%, and the EBITDA margin has gone up to 3% after first turning positive in Q1. The company is also making steady progress towards positive net and operating profits. Notably, the company's revenues hit RMB1.89 billion this quarter, marking not just a 6.5% sequential growth, but also a 3.1% expansion from the previous year. The growth in revenue from high-value-added products and services has helped to balance out the pressure from the company's deliberate adjustments to the CDN services. Currently, the company is in a stage of healthy and sustainable growth.

The recent surge in AI-services' financial input to the public cloud has risen from nothing to around 26%. What sets KC apart in this AI-centric era is their alignment within the Xiaomi and Kingsoft networks. AI income is strongly linked with business within these ecosystems. Xiaomi and WPS AI represent the most common AI applications that present tangible business prospects. Kingsoft Cloud serves as the key conduit for AI computational capabilities within these networks, promoting additional cooperation with Xiaomi and Kingsoft. Consequently, Kingsoft Cloud is well-positioned to gain advantages from its strategic affiliations with Xiaomi and Kingsoft.

In addition to partnerships with Xiaomi and Kingsoft, Kingsoft Cloud has also teamed up with six of the top ten independent Large-Language-Model (LLM) enterprises, as per publicly available funding data. These rapidly expanding LLM firms have been setting up substantial computing clusters in conjunction with Kingsoft Cloud to train their models. The majority of these LLM firms have also collaborated with Xiaomi and WPS AI, providing further chances for Kingsoft Cloud's AI services.

Conversely, Kingsoft Cloud is ready to meet the increasing demand in the robust AI market by ensuring sufficient computing resources. Their total investment in the recent four quarters is approximately RMB3 billion. In addition, their financial status has been reinforced through financial aid from partners like Xiaomi and Kingsoft, including lease financing deals. This backing has minimized the necessity for outside funding and reduced financial expenses, thereby further enhancing profitability.

With regard to Content Delivery Network (CDN) services, they used to be Kingsoft Cloud's main source of income, accounting for more than half of their total revenue. However, after deliberately reducing this low-profit revenue stream that mainly served top clients in the short-form video industry in 2023, CDN services now make up about 19% of total revenues in the second quarter of 2024. This shift in business strategy has made the company less susceptible to the intense pricing competition in the CDN market.