Thank you for standing by, and welcome to the Kingsoft Cloud Holdings 3rd quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Ms. Nicole Shen, IR Manager. Please go ahead.
Thank you operator. Hello everyone, and thank you for joining us today. Kingsoft Cloud 3rd Quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on global newswire services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou, and the CFO, Mr. Henry He. Mr. Zou will review our business strategies, operations, and the company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer your question during the Q&A session that follows. There will be consecutive interpretations for your convenience and reference purpose only. In case of any discrepancy, management's statement in original language will prevail.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U.S. SEC.
The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zou Tao. Please go ahead. Thank you.
Hello, everyone. Thank you all for joining Kingsoft Cloud's Third Quarter 2022 Earnings Call. Since taking on the CEO role in August, I have been leading the company through a systematic review of our strategy, business and financials. During the quarter, we continued to implement various initiatives in a solid and a down-to-earth manner. First, we continued to invest in technology, focused on our core businesses and revised our original vision for cloud services. Second, we continued to review and evaluate our customer base and project portfolio, strengthen cost control to achieve a better balance between revenue growth and profitability. At the same time, we continued to strengthen our ecosystem synergies, explore high-value business opportunities, and pursue a path of high-quality development.
[Foreign language] We achieved solid financial performance in the quarter. Our total revenues were RMB 1.97 billion, in line with our guidance. Adjusted gross margin improved significantly to 6.3% from 3.6% in the second quarter. Our operating cash flow has been positive for two consecutive quarters, indicating that our business adjustment and cost control efforts are starting to yield initial results.
[Foreign language]
In terms of business, we adhere to the conviction of building success based on technology, continued to focus on building key product capabilities on the IaaS and PaaS layers. These efforts were recognized by Frost & Sullivan, LeadLeo Institute in its China Data Management Solutions Market Report, published in the third quarter of this year, in which Kingsoft Cloud Data Management Solutions ranks among the leaders of the market for innovation, competency and growth performance. Meanwhile, IDC's latest edition of China Software Defined Storage Tracker 2022 H1 ranked our enterprise level storage solution KingStorage as top four in China's software defined object storage market.
[Foreign language]
In terms of ecosystem collaboration, we stepped up our technological cooperation with Kingsoft Office to achieve enhanced cloud document processing, including authentication, encryption and proofreading. Leveraging our cloud computing capabilities, we helped Kingsoft Office strengthen the business logic layer for cloud document processing and thereby further improved their end user experience.
[Foreign language]
In terms of different business scenarios, we continue to focus on our core industry verticals, replicating our successful lighthouse projects, and apply to customers in the respective sectors. In public services space, we built a smart cloud solution for a municipality leveraging our hybrid cloud and distributed cloud storage technology, among others, to enable and facilitate the management of economic affairs in a coordinated and integrated manner. In financial services sector, we validated our data governance services capabilities, particularly in data lake and metadata management in various projects for major commercial banks. We will continue to replicate such success with more clients in the industry. In the healthcare sector, we are about to complete the capacity expansion projects for the medical image cloud in regions including Sichuan and Chongqing. A testament of our ongoing support and monetization to address our customers needs to expand and upgrade their existing projects.
[Foreign language]
Overall speaking, we will continue to invest in technology, focus on core businesses, and enhance the foundation and the structure which enables sustainable, high quality development. Under the backdrop of the wave of digitalization, we aspire to penetrate deep in verticals of strategic choice and offer our customers safe, robust, and efficient cloud computing services.
[Foreign language] CFO Henry [Foreign language]
I will now pass the call over to our CFO, Henry, to go over our financials for the quarter. Thank you.
Thank you, Tao Zou, and welcome everyone for joining the call. Now I will walk you through the financial results for the third quarter of 2022. We have actively taken measures to improve efficiency, demonstrating our strong commitment to pave the path for profitability. This quarter, our adjusted growth margin has improved considerably and continuously from the lowest point of 1.2% in the fourth quarter of 2022 to 3.6% in the second quarter this year, and further to 6.3% in the third quarter. Our operating cash flow has been positive for the past two quarters consecutively, and we have achieved RMB 100.9 million net operating cash flow this quarter. Our total revenue was RMB 1,968.8 million in Q3.
Within that, revenues from public cloud services was RMB 1,349.0 million. While increased by 4.4% compared with Q2, it represents a 20.2% decrease compared to the same period in 2021. The change was primarily due to the company's proactive scaling down of CDM business, with its gross billing decreasing by about 28% on a YOY basis. Revenues from enterprise cloud services was RMB 622.0 million, which is relatively stable compared with Q2 2022, as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China. While proactively applying more selective criteria to project screening to strive for better profitability and cash flow. Our cost-saving measures are well on track within our plan.
Total cost of revenues decreased by 20.6% year-over-year and remain stable quarter-to-quarter at RMB 1,846.4 million. IDC costs decreased significantly by 23.6% year-over-year from RMB 1,410.9 million to RMB 1,087.3 million this quarter. Depreciation and amortization costs increased by 26.9% from RMB 200 million in the same period of last year to RMB 253.7 million, while remain stable compared to last quarter. It is in line with our revenue mix adjustments as we moderated the procurement process of service of public cloud. Solution development and services costs increased from RMB 160 million to RMB 443.1 million this quarter.
The increase was mainly due to the consolidation of Camelot since September last year. Fulfillment costs and other costs were RMB 31.9 million and RMB 39.3 million this quarter. The adjusted gross profit of this quarter was RMB 124.7 million, representing adjusted gross margin of 6.3%. The significant gross margin improvement was mainly due to the effect of cost control measures and strategic adjustments of our revenue mix. In terms of expenses, excluding share-based compensation, total adjusted operating expenses was RMB 577 million. Within that, adjusted R&D expenses was RMB 231.6 million, increased from RMB 190.8 million from last quarter as we remain focused on our technology development.
Adjusted selling and marketing expenses was RMB 125.5 million compared with RMB 120.1 million last quarter. Adjusted G&A expenses increased slightly from RMB 196.0 million last quarter to RMB 219.9 million, which is partially due to the one time of expenses of a Hong Kong listing project. Net loss margin was 40.7% this quarter and adjusted net loss margin was 24.8%. The adjustments was mainly due to the foreign exchange loss of RMB 218.9 million caused by the significant fluctuation of US dollar RMB exchange rates, which is totally a non-cash item impact on the P&L items.
As of September 30, 2022, our cash and cash equivalents and short-term investments amounted to RMB 5.3 billion, providing us with significant, sufficient liquidity for operations. The capital expenditures for this quarter was RMB 253.3 million, which primarily consists of payments for service, which we ordered previously. The decrease of CapEx was in line with our proactively scaling down CDN business. We expect to keep our total CapEx within RMB 1.5 billion for the full year of 2022. In terms of share repurchase program, regarding our $100 million share repurchase program within a 12-month period as approved by the board and announced in March this year, we have been duly executing. Since the release of our Q2 earning results up to November 18, we bought a total of 10. 41 million ADS shares for roughly about $23.92 million.
Going forward supported by our ample cash reserve of about RMB 5.3 billion. We expect to continue to execute from time to time as way to mandated repurchase program. This effort fully demonstrates our board and management strong commitment and full confidence in the long-term business prospects of the company. As we thrive to reward our shareholders for their support. We believe our share price will eventually reflect company true value. Finally, we submitted the application for Hong Kong new primary listing on July 27th, 2022. As always, the listing and potential timing is subject to regulatory approvals. Looking ahead, although we are still implementing our strategy initiatives, including business repositioning and cross-country efforts on an ongoing basis, such adjustments have already yield positive preliminary results as reflected in a clear improvement of the profit margin in Q3.
We expect our total revenue to be between RMB 2 billion and RMB 2.2 billion for the fourth quarter of 2022, representing a quarter-over-quarter increasing of 1.6%-11.7%. While these forecasts and comments above are based on our current and preliminary views of the market and operational environments which are subject to change, we firmly believe that given the time, the effects of our ongoing strategic initiatives will continue to amplify and reflect on our financial in the mid-to-long term. Thank you.
Thank you. This concludes our prepared remarks. Thanks for your attention and we are now happy to take your questions. Please ask your question in both Chinese Mandarin and English if possible. Operator, please go ahead. Thank you.
Thank you. If you wish to ask the question, please press star, then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick up your handset to ask your question. Your first question today comes from Thomas Chong with Jefferies. Please go ahead.
[Foreign language] Q4， the revenue guidance, [Foreign language] Thanks management for taking my questions. My first question is about the recent outbreak of COVID as well as the uncertainties of the macro environments. How should we think about the near term as well as 2023 outlook when we do the budgeting process? Number two is about the Q4 revenue guidance. Can management comments about the trend for public and enterprise cloud during the quarter? Thank you.
[Foreign language]
Thank you Thomas. On your, on your second question, regarding the Q4, as we mentioned, we do see, first point, we do see a relatively expected recovering curve on the top line, right? Starting from last quarter and carry from this quarter and Q4 sequentially. The total revenue will be improving trend in Q4. In terms of the mix, given we have almost complete the initiatives on the CDM business adjustments on the priorities in terms of investments and the client mix. I think that provide us with a relatively stable base to project the public cloud revenue in Q4.
Because of that, I think in Q4, our public cloud as a total, we'll see a sequential marginal improvement on the top line, but the profitability on the line of the public cloud will continue to see the positive contribution for the company's total growth margin in Q4. On the enterprise cloud side, as we mentioned, I think if you really looking back from Q1, Q2 and this quarter, and as Zou mentioned, part of the Q2, due to the COVID measures in Beijing City, that preventing us from some of the project biddings and deployments and execution in Q2, which was around about April and May and sometime in partial June and July. We do actually tried our best in Q3 this time to accelerate the deployment execution.
So, hopefully, some of the flagship projects, including a few important projects that we discussed and disclosed earlier, for example, some of the provision level healthcare cloud, hopefully we can be deployed and fulfill the execution in Q4, and that will carry with the revenue booking in Q4. With that, I think our enterprise cloud, you may see a relatively a little step up of the revenue of enterprise cloud in Q4 as part of the total revenue contribution. Overall, my feeling is right now, I think the sequential improvement on both top line and the growth margin will be two important priorities for management team. While we will need to continue to make sure that our cost control measures of expenses life will carry forward, hopefully will be have some benefits in Q4 and Q1 starting from next year as well.
It will take some time, but I think some of the initiatives we already implemented in place, just we need to have the time clock and see the benefits going forward. Thank you, Thomas.
Thank you. I think it's just a translation of what Mr. Zou responded to the first question. The COVID situation has been going on for years, and honestly speaking, it has been impacting the overall society significantly, across all verticals, including us. Like you rightly pointed out, we are also observing, and, you know, trying to see what the next step might be. As you might be aware, in recent days and weeks, the situation in Beijing is becoming more severe. To abide by the government rules, we have only 20% of the workforce currently working in the office. As you know, there has been one situation like this back in April and May. It's really difficult to predict or to comment the situation.
What we can do is to abide by the rules promulgated by the government. However, I think from a strategy perspective, in light of the uncertainty, in potential uncertainty in future years, from a strategy perspective, what we can do is to maintain a robust and relatively defensive approach. What I mean by that is exactly what we commented in the prepared remarks, which is, no longer blindly pursuing top-line growth but to switch to pursuit of sustainability and path to profitability. As you have seen, the growth margin in the third quarter has already improved, quite a lot from 3.6% - 6.3%.
We believe that by abiding by that relatively conservative and robust strategy, we'll be able to navigate through the potential uncertainties in the years to come. As to your question of our budgeting, we're currently going through the process of making a comprehensive budgeting, currently going through the first round of review and compiling the numbers. We expect to have more clarity towards the end of December or the beginning of January. Unfortunately, we don't have much more like data to share at this stage. Thank you.
Thank you.
Your next question comes from Xiaodan Zhang with CICC. Please go ahead.
Dou Dou, Henry, Nicole, [Foreign language] Non-GAAP EBITDA margin [Foreign language] Q3 [Foreign language] Non-GAAP EBITDA margin [Foreign language] CapEx [Foreign language] My first question is regarding our Non-GAAP EBITDA margin which dropped slightly quarter on quarter in Q3. I just wonder, do you expect a delay in terms of the timing for Non-GAAP EBITDA margin breakeven? Secondly, what is our CapEx plan for the next two-three years? Are there any foreseeable plan to further extend the useful lives of the servers as some of the overseas peers extended that from four-six years? Thank you.
Henry He. Happy to take on those three questions on the financial related matters. The first question is regarding the EBITDA breakeven. We do acknowledge that the EBITDA on sequential basis will actually drop a little bit marginally. We noted that. There are a few things on the line. First of all, if you look at the total expenses on a dollar value, actually our sales, marketing, and R&D expenses actually was quite stable. So there's no major changes on that. However, the booking of certain G&A expenses, due to for example, the Hong Kong fuel primary listing projects that we actually need to pay certain fees, as you may understand, that actually also eating up the bills as well. And also given this year, we do have certain cost-cutting, for example, optimization of human capitals of the company.
We need to pay certain compensations for the people. They may choose other career tracks for things like that. We did a batch of that arrangement in Q3, especially towards the end of Q3. So the savings on the salary has not been reflected on expenses in Q3, while we need to pay even more for the compensation for the peoples that they choose other career tracks. So, in and out, you see actually the fluctuation and even an increasing on certain expenses items. But I think these are the right thing to do for the company. And the benefits on the cost savings on expenses will be gradually released in Q3, and I think for some time starting from Q1 next year. So that's actually quite clear on th
I think it does make sense for the U.S. peers to extend that. Given we do adopt a very conservative financial policy, we do not have any plan at this moment to extend our D&A policy. Even though we understand extending from four years to five year or even six year, we will have a relatively good impact on the growth margin because we have a lower D&A expenses. At this moment, we do not have any plan to revise that policy. We may reserve that if we see other Chinese players change the policy. It's going to be uplift to our growth margin and a reduce the D&A expenses. Thank you.
Thank you. That's very helpful.
Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. The next question comes from Joel Ying with Nomura. Please go ahead.
[Foreign language] Hi. I'll translate myself. Regarding the margin improvement, can you talk about, you know, situation, where it come from public cloud, enterprise cloud, and will it be sustainable into the first quarter and going forward? Thank you.
Thank you, Joel. Yeah, on the GP margin, you touch upon a few things. The improvement, the breakdown, the root causes and the sustainability. It's a very broad scope actually. I think I'll start with the reasons first. There are a few things we actually start to work on since Q4 last year. It's not actually happening only this quarter. There are a few things involved, as you may remember. First of all is, we kind of cutting some losses for certain loss-making clients. Number two, we optimize the product mix, right?
Try to make the computing, the storage, some of the big data solutions, and certain more high value added products and more profitable products, we invest a bit more, right? I think these are the second reason. We start to do that from Q1 this year. The third reason is the improvements and the screening of the products. As Tao Zou mentioned in the CEO remarks, we actually, starting from this quarter, have adopted a very comprehensive approach to analyze the returns on each products and different ratings internally for different clients, etc. We can prioritize and select the right projects we're working on. Some of that has already yield a good result for this quarter as well.
The last reason is actually, if you remember last year, we do kind of learn our experience and the lessons. We bought a little bit too much of the servers, and we ordered a little bit too much of the bandwidth and it cannot be returned. They're eating up on the growth margin last year, especially the second half. This year we have changed our process to evaluate the procurement process to make sure that we do not overorder, and we can use them wisely. I think these are the kinda four different things that help the growth margin can improve for this quarter, to see the results.
Even though we did something last year, it's going to be a good time to see the results. Speaking about the mix, I think that both public cloud and the enterprise cloud have contributed to the incremental RMB 60 million of the margin improvement. Because as you know, given the base of the public cloud and the enterprise cloud is actually quite balanced and we cannot lose any of that. It's both important. On the sustainability, I think the first three reasons, as I mentioned, will carry a long way. It's going to be. Hopefully, we can see a better margin, you know, in Q4 and sometime, you know, carry over to next year as well.
Certain enterprise cloud projects, as you know, we're booking the revenue only at completion, but some of the cost we already booked. Hopefully in Q4, at the peak time of enterprise cloud delivery, you will see additional step up on enterprise cloud contribution. If you, if you wanna break down the reason for Q4, let's say going forward, I think enterprise cloud will be a relatively more important compared with public cloud in Q4, given the timing of delivery on that. Thank you, Joel.
Thank you.
The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.
[Foreign language] Thank you management for taking my question. My question will be about the outlook for 2023. As we understand this year is the transition year in terms of our business adjustment and also there is impact from the macro environment as well as COVID. Could management share some thoughts on how we should look at the demand of overall cloud industry in China and also for our revenue growth, when should we see an inflection point in terms of cloud revenue year-on-year growth into 2023? Thank you.
[Foreign language] Henry He [Foreign language]
Okay. Just very quickly responding your question. The first point is as I commented previously, we're currently undergoing the first round of budgeting for the next year, and we currently do not have a comprehensive picture, which we will be able to have towards the end of this year, to share more color to the market and to the investors. The second thing is although that being said, I think I can share with you some of my thoughts towards the macro situation and our strategy in response to that. The first is, given the pandemic situation and the control measures within China, we have been changing the guiding principle, as I commented from revenue from the pursuit of revenue growth to profitability, which is also a change that we have been increasingly observing within the sectors.
The second point being the, there still remains significant uncertainty to the COVID control measures that will come, and also including the uncertainties of what could the country's overall economic planning after the Two Sessions in 2023 is gonna be. We all generally adopt a conservative and defensive approach, and this approach including some of the following measures. Number one, we will exit some of the projects and customers and transactions that have not been profitable for a long time for the long term. Secondly, we'll be looking at our customer base and adjust the customer base structure. In particular, in the past, some of the largest customers have been commanding a large share of revenue contribution, and have impacted to our financial performance, and we might decrease that revenue contribution, and increase the revenue contribution coming from the waist and shoulder level kind of customers.
Thirdly, in terms of enterprise cloud services, we will continue to dig deeper into the strategically selected verticals, as we have done in the past, but also cautiously explore new verticals that are highly beneficial for the cloud industry, for example, the electric vehicle industry. That's some of the thoughts that I can share with you at a macro level. Thank you.
Yeah, thank you. Thank you, Timothy. Also, at one point as well, while we are, you know, follow the markets and the client demands carefully, and while we are looking for, as you do as well, for the next kind of acceleration or the V-shaped acceleration of the demand from clients, we have a capacity on the cash reserve as well. As you can see that we already deliver a net positive on operating cash flow side, this quarter, and hopefully, you know, for next quarter and going forward, we can continue to do that. We remain relatively robust on the cash balance.
While we're investing carefully on the potential new verticals that will carry relative faster growth, as Tao Zou mentioned, for example, the new energy EV cars and other verticals as well. I think we do not worry too much about the timing because we have enough cash and we can wait for the market to come back and work with the right clients. I think that's actually one more point I just wanna say as well. Thank you.
Thank you. That's very helpful.
There are no further questions at this time. I will now hand the call back to Ms. Shan for any closing remarks.
Thank you, operator. Thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Goodbye.