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Aurora Mobile Limited (NASDAQ:JG)
Q3 2019 Earnings Call
Nov 21, 2019, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, thank you for standing by for Aurora Mobile Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call, Mr. Christian Arnell. Please proceed, Chris.

Christian Arnell -- Investor Relations

Thank you. Hello, everyone, and thank you for joining us today. Aurora's earnings release was distributed earlier today and is available on the IR website at ir.jiguang.cn. On the call today are Mr. Weidong Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Following the prepared remarks, all three will be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plan, believe, estimates, confidence and similar statements. Aurora may make forward-statements in its periodic reports to these U.S. Securities and Exchange Commission in its annual report to shareholders and press releases and other written materials and or assume it's made by its officers, directors and employees to third-parties.

Statements that are not historical facts, including but not limited to these statements are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors which could cause actual results to differ materially from those contained in the forward-looking statements. Further information regarding these and other risks and factors is included in the company's filing with the U.S. Securities and Exchange Commission.

With that, I'd now like to turn the conference over to Mr. Luo. Please go ahead.

Weidong Luo -- Co-Founder, Chairman and Chief Executive Officer

Thanks, operator. Good morning and good evening to everyone on the call, and welcome to Aurora Mobile's third quarter 2019 earnings call. I would like to kick off this call by reviewing our progress and key operating data this quarter.

First, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations reached RMB1.39 million as of September 30, 2019 from approximately 991,000 last September. We continue to see a steady string of new apps using our SDK's during the quarter. We have approximately 40,000 new apps coming on board each month this past quarter.

JVerification continues to generate solid growth momentum since we launched the product since the end of 2018. This quarter, with total of more than 100 paying customers begin using this SDK, which repress growing market interest and its enormous growth potential. Notable customers include [Indecipherable] generated by JVerification SDK's has [Indecipherable], quickly becoming the second largest verification services, service product adopted by a wide range of developers after Push SDK.

Second, cumulative SDK installations increased to RMB30.8 billion as of September 2019 from RMB17.4 billion last September. Third, the number of monthly active unique mobile devices we cover continued to increase, reaching RMB1.34 billion in September 2019 from RMB1.03 billion in September 2018. This was fueled by the increasing number of apps that used our SDK, particularly with the rapid adoption of JVerification SDK. While still in the early stage, our developer service collaboration with Tencent Cloud has reinforced our brand recognition as well as our developer customer acquisition. Lastly, in the first quarter of 2019, we saw the number of paying customers increased to 2,312 from 1,877 a year ago.

Now let me discuss a few highlights from our financial performance during the quarter before letting Shan-Nen go into then more detail a bit later. Starting this quarter, we will begin breaking down revenue into three categories, developer service, SaaS products and target marketing to reflect our core strategy focus of serving app developers.

Total revenue during the quarter was RMB202 million, up 3% year-over-year. Revenues from developer services increased 39% from RMB15.7 million during the same period last year to RMB21.9 million. This was mainly due to growth in the number of customers from 1,170 to 1,675, while our ARPU remained stable. The majority of the growth was driven by our continued penetration into the SDK market with JVerification in particular, senior revenue increased six-fold [Phonetic] sequentially during the quarter.

The top paying vertical include financial services, e-commerce, education, local services and SMS. Revenue from target marketing were down 8% year-over-year. This is due to the following three factors: first on a macro level, the Chinese economy has been softening which has a negative impact on overall ad spending, certain industry specific policy changes were introduced to the market, which led many advertisers to adopt wait and see approach. This directly resulted in more cautious and tightened ad spending by advertisers, particularly in the financial services vertical.

Second, with the economy slowing, fundraising by private company has been very challenging. Companies that rely on this [Indecipherable] for marketing dollars to drive growth are facing difficult times. The risk of companies are coming to too much steps has increased. In order to mitigate this risk, we began strategically slowing the expansion of our targeted marketing business, which have since been very selective in customer acquisition and holding only the large reputable customers, that have strong financial position and up ready to pay.

Further, as we talk about in the Q2 earnings call, in August, we are now in the process of transitioning from a traditional target marketing model to a new SaaS-based model. This transition will impact the way in which we account for revenue and gross margin within our target marketing business line. What this means is that revenue previously accounted for on a gross base are now on a net base under U.S. GAAP. Furthermore, in our traditional target marketing business, with average takeaway of above 15%, which will now be in the 5% to 10% range under this new SaaS-based model. This new SaaS initiative has already generated solid result during the quarter. [Indecipherable] Finance are some of the notable SaaS customer that have already signed up and we expect more KA customers to come on board next quarter.

Let me remind you again of the significant benefit that this SaaS-based model offer us. While this initiative may initially generate slower top line target marketing growth, it will benefit us over the long run with improved gross margins, less working capital requirements and expand the advertising customer base by working with customers, such as [Indecipherable] who can address a much larger.

[Indecipherable], we were only able to capture a slice of direct customers at budget, but we will now have the opportunity to capture the majority of it as they see the enormous benefits that improved our -- we are able to offer. Direct customers were able to use our data package to have then deploy that compares across all major media platform. Our revenue mix has been fairly balanced this quarter with the financial service vertical contributing 30% of total ad revenue, mobile gaming contributing 25%, media and entertainment and other, 18% and the remaining 27% contributed to other vertical including e-commerce, education and auto. In terms of advertising inventory, Tencent GDT contributed 32% in dollar terms.

Lastly for target marketing, I would like to give you an update on live push alliance initiative, I touched upon last quarter. By the end of the quarter, more than 1,000 ads have already embedded our live push SDKs, we expect this number to grow as we progress. In this quarter, we already started to monetize the live push traffic by working with a number of trial customers. The ECPM [Phonetic], we were able to achieve is very satisfactory. I look forward to providing more color and update on how live push is progressing in the quarter ahead. This will significantly expand our overall target marketing gross margin forward.

Now I will turn the call to Fei, who will discuss Q3 performance of three business lines within SaaS products in more details.

Fei Chen -- Co-Founder and President

Thank you, Chris. Combined revenues from SaaS products including financial risk management, market intelligence and iZone demonstrated impressive resilience and growth by increasing 52% from RMB22 million in the third quarter last year to RMB33.6 million. This was mainly due to the strong 18% year-over-year increase in the number of paying customers as well as continued expansion of ARPU, which increased to 29% year-over-year. Year-over-year, all three product lines within SaaS products generated revenue growth of around 50%.

For Financial Risk Management, the top paying customers this quarter included 360 Finance, Zhuofu and [Indecipherable] Credit Consulting. Our strategy remains very consistent. We are focused on catering to the leading players in the banking and the consumer finance markets. This strategy is clearly paying off as reflected in the solid organic growth in both customer numbers and ARPU. It also helped us navigate smoothly in a challenging market environment where it has been impacted by major policy changes. We are also in the process of launching new products to help our customers monitor high risk illegitimate lending apps. Customer demand for this product has grown significantly following initial try our [Phonetic] operations.

Our market intelligence product is growing strongly in both consumer numbers and ARPU -- in both customer numbers and ARPU on both a year-over-year and a sequential basis, new customer acquisition has been particularly strong within the corporate segment. We have one new big corporate customer's such as Sony Mobile, [Indecipherable], Cloud Music, IGE and Starbucks. As a result, revenue contribution from corporate customers also exceeded revenue from fund customers.

And lastly, our iZone business continued to generate solid growth of over 40% year-over-year during the quarter. Top paying customers included [Indecipherable] Auto, EG and China Urban Planning Institute. We see continued solid demand across the real estate, new retail and urban planning verticals.

With that, I will now pass the call to Shan-Nen.

Shan-Nen Bong -- Chief Financial Officer

Thanks, Fei. Since Chris and Fei has already talked about our top line numbers for the quarter. I'll go through some of our other P&L items. Gross margin for Q3 increased meaningfully from -- up to 28.2% from 26.2% last quarter. This is also a direct result of our optimized product mix; developer services and SaaS-based products generate a much higher gross margin and contributed a larger percentage of total revenue during the quarter. The revenue contribution grew from 17% last quarter to 28% this quarter. In renminbi terms, our gross profit increased by 7% to RMB57 million. Total operating expenses increased by 41% year-over-year to RMB111.5 million in particular.

R&D expenses increased 16% to RMB43.3 million. This was mainly due to increases in staff costs, depreciation and amortization and bandwidth costs. Selling and marketing expenses increased 26% to RMB30.5 million, mainly due to increases in staff costs, marketing expenses and lease and office expenses. G&A expenses increased 115% to RMB37.7 million, mainly due to increase in staff costs, professional fees and bad debt allowance of RMB17.8 million. This RMB17.8 million bad debt allowance this quarter, was related to specific companies having difficulties in repaying their outstanding debts to us. The majority of the RMB17.8 million is related to a single e-commerce customer who was not able to raise additional funds from the existing and prospective investors and shareholders, and announced publicly that they could not repay any of their suppliers.

As Chris mentioned, we have been very selective in customer acquisition and we will only work with large and reputable customers. Based on our assessment, at the time of this call, we believe this to be one-off event and related to this specific customer. There are no other material bet on top with this that we are aware of at this time. Our adjusted EBITDA was negative RMB26 million in Q3 '19 compared to negative RMB6.9 million in the same quarter 2018. Excluding the bad debt allowance, our adjusted EBITDA would have been negative RMB8.2 million.

On to the balance sheet items, total assets were RMB971.4 million as of 9/30/2019. The key asset as of September 30th were cash and cash equivalent of RMB420 million. Cash and cash equivalent increased by RMB38 million sequentially. This is a direct result of our disciplined granting of credit turning to customers and collection efforts. Accounts receivable were RMB150 million, prepayments were RMB97 million, fixed assets were RMB110 million, long-term investment were RMB134 million. Total current liabilities increased from RMB164 million as of 12/31/2018 to RMB200 million as of 9/30/2019. The key current liabilities item were accounts payable of RMB22 million, deferred revenue of RMB85 million, accrued liabilities of RMB91 million. As of 9/30/2019, we maintain a healthy level of working capital of RMB501 million. Looking forward, we expect total revenues for the full year 2019 to be in the range of RMB909 million to RMB919 million, representing growth of 27% to 29% year-over-year.

And lastly, before I conclude, I'll give a quick update on the share repurchase plan. As of September 30, 2019, we have repurchased a total of 805,648 ADS since the start of our repurchase program. In the third quarter this year, we repurchased 709,737 ADS at average purchase price of USD3.77, spending a total of USD290,900. We will continue to monitor the need to repurchase depending on the market conditions and the underlying share price.

And this concludes management prepared remarks, we'll be happy to take your question now. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of [Indecipherable] from Credit Suisse. Your line is now open.

Unidentified Participant

Good evening, management. Thanks for taking my question, I have a question regarding the top line revenue. It seems that the reported revenue this quarter is a bit off from the guidance that the management formally give out in the second quarter earnings. Could the management help us to work through the challenges or difficulties that we have been experienced in this quarter to the -- regarding the relatively witnessed in the revenue? And secondly, my question is about the operating costs here, despite the one-time of cost on the G&A line, could the management help us to understand the sales and marketing expense and the research and development expense as a percentage of revenue going forward as we see a relatively spike in this quarter? Thank you.

Fei Chen -- Co-Founder and President

Hi [Indecipherable]. Hi, this is Fei. Yeah. So regarding your first question, regarding the top line, the revenue number, right. So as you can see actually we break the revenue into three segments, the developer service, which grew 39% which is very, very stable, [Indecipherable] very healthy business, it's a typical SaaS business right. And the three SaaS products which also grew over 40% which is also very healthy and that's also very typical SaaS products. The only revenue line that we saw decline is basically the target marketing. So actually, target marketing year-over-year declined about like 8% and the main reason is because actually, Chris mentioned, there are three reasons, right.

So first two is actually due to the macro environment. So we do see some customers -- ad customers they kind of like tightened their ad budgets, this is the one reason. And the second reason yes because we purposely actually do not want to work with some risky customers, we worked with them before because we assess their potential of being like delaying payments or being default like the one-time write-off. It's actually purely due to a single customer called [Indecipherable] you know the customer actually that customer was a star, right, like a few months ago, but now they cannot find the investor to continue to support them, right. So the CEO publicly announced that they don't want to pay their suppliers anymore, right. So we want to avoid this kind of customer in a situation to happen again. So we purposely actually got rid of some business actually we would otherwise conduct in a normal macro situation.

So these two actually -- and the net effect is we lost about [Technical Issues] revenue opportunity. And then actually [Technical Issues] with this the target marketing [Technical Issues] like RMB90 million. So another RMB40 million, actually is a [Technical Issues] So that RMB40 million, you can call it [Technical Issues] the gross revenue. Now since we are doing -- conducting SaaS-model we take like 5% of the take rate so actually that revenue becomes RMB2 million, right. So these two net effects actually you see the reduction of the target marketing business, OK. So I hope this can explain what happened and quantify what exactly happened.

And also regarding your second question, regarding the operating expense, right. So the company actually without the one -- this quarter was actually abnormally higher than the previous quarter. The main reason is because of the [Indecipherable] write-off, right. So if you remove [Indecipherable] write-off the one-time actually this quarter, the cost structure is actually lower than the previous quarter. And, therefore, for current quarter, the fourth quarter, the cost structure, we are pretty much remain similar to the second quarter, and then going forward, actually our company, we have continued to look for opportunities to optimize our cost structure in terms of basically getting rid our people who is not performing. So in terms of the headcount, actually we are looking to like reduce like 20% headcount, OK, in the current quarter. So next year, if you look at the total operating expense level, it should be and most similar to this year's number and it may be even a little bit lower, yeah. So that's the cost structure going forward.

Unidentified Participant

Thank you. Very helpful.

Operator

[Operator Instructions] There are no questions at this time, I would now like to hand the conference back to Chris. Go ahead, Chris.

Christian Arnell -- Investor Relations

Thank you, everyone, for joining our call this evening. If you have any questions or comments, please don't hesitate to reach out to the Investor Relations team. This concludes the call. Have a good night. Thank you.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Christian Arnell -- Investor Relations

Weidong Luo -- Co-Founder, Chairman and Chief Executive Officer

Fei Chen -- Co-Founder and President

Shan-Nen Bong -- Chief Financial Officer

Unidentified Participant

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