Kingsoft Cloud’s Strategic Transformation: A Paradigm Shift Towards AI and Sustainable Profitability

Transformation in Kingsoft Cloud's Framework

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The advent of cloud computing services has coincided with the rise of mobile internet, establishing itself as a critical technology in the age of the internet. The arrival of Artificial Intelligence (AI) has significantly increased the need for computing power and solutions, marking a period of growth for cloud businesses. Kingsoft Cloud, a top independent cloud service provider in China, has been implementing a strategy of "high quality and sustainable development" over the past two years. This strategy involves the adoption of AI technology to boost profitability. The company has seen a total transformation, keeping its competitive advantage in the constantly changing market.

Transformations are occurring here.

Kingsoft Cloud's profitability has seen a boost, guided by its strategy of "long-term and sustainable development." The company has experienced a consistent rise in gross margin from a low single digit to 17%, and an EBITDA margin increase to 3% after it turned positive in the first quarter. It is also on the right path towards positive operating and net profit. Specifically, in this quarter, the company's revenues have hit RMB1.89 billion. This is not only a sequential increase of 6.5%, but also a year-on-year growth of 3.1%. The growth in revenue from high-value-added products and services has counterbalanced the pressure caused by intentional adjustments to the CDN services. The company is now in a phase of healthy and sustainable development.

The latest wave of AI services has seen a significant rise in its contribution to public cloud revenue, jumping from nothing to around 26%. KC's distinct position within the Xiaomi and Kingsoft ecosystems is what sets it apart in this AI age. The success of AI revenues is closely linked to the ecosystem business. Xiaomi and WPS AI serve as prime examples of AI use cases with transparent commercialization prospects. Kingsoft Cloud plays a pivotal role as the key entry point for AI computing power within this ecosystem, promoting additional cooperation with Xiaomi and Kingsoft. Consequently, Kingsoft Cloud is well-positioned to reap the benefits of 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 independent Large-Language-Model (LLM) businesses, based on publicly available funding data. These rapidly expanding LLM enterprises have been setting up extensive computing networks with Kingsoft Cloud to develop their models. The majority of these LLM firms have also partnered with Xiaomi and WPS AI, providing additional opportunities for Kingsoft Cloud's AI services.

Conversely, in response to the robust demand in the AI market, Kingsoft Cloud has adequately equipped itself with the necessary computing resources. Over the last year, it has spent approximately RMB3 billion. In addition, financial assistance from partners like Xiaomi and Kingsoft, including lease financing deals, has fortified Kingsoft Cloud's fiscal stability. This aid has lessened the reliance on outside funding and decreased financing expenses, thereby enhancing profitability.

When it comes to Content Delivery Network (CDN) services, they used to be the primary source of income for Kingsoft Cloud, accounting for more than half of its total revenue. However, after deliberately reducing this low-profit revenue stream, which catered to leading clients in the short-form video industry in 2023, the contribution of CDN services was re-adjusted to around 19% of total revenues in the second quarter of 2024. This strategic shift in business concentration has made the company less vulnerable to the intense pricing competition in the CDN market.