(RAAS) Q2 2021 Earnings Call Transcript

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 (RAAS)
Q2 2021 Earnings Call
Aug 11, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Cloopen's second-quarter 2021 earnings conference call. [Operator instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host today, Ilin Dai, Cloopen's investor relations representative.

Please go ahead.

Unknown speaker -- Investor Relations

Hello, everyone, and thank you for joining Cloopen's second-quarter 2021 earnings conference call. The company's financial and operating results were issued in a press release via Newswire services earlier today and are posted online. You can download the earnings press release and sign up for our distribution list by visiting our IR website. Participants on today's call will be Mr.

Changxun Sun, our founder and chief executive officer; and Mr. Steven Li, chief financial officer. Management will begin with prepared remarks, and the call will conclude with a Q&A session. Before I hand it over to the management, I would like to remind you of Cloopen's safe harbor statement in relation to today's call.

Except for the historical information contained herein, certain matters discussed in this conference call are forward-looking statements. These statements are based on current trends, estimates and projections, and therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission. With that, I'm now very pleased to turn the call over to our CEO, Changxun Sun. Please go ahead.

Changxun Sun -- Founder and Chief Executive Officer

[Foreign language]Hello, everyone, and thank you for joining Cloopen's second-quarter earnings call today. We are excited to see strong performance in the second quarter with revenues coming in at RMB 273.9 million, representing a 47.9% year-over-year increase and beating guidance once again. Our second-quarter gross margin remained robust at 43.1%. Most importantly, our non-GAAP net loss narrowed to RMB 26.4 million, reflecting a significant 58.4% quarter-over-quarter decrease.

Our dollar-based net customer retention rate remains steady at approximately 110% in the three months ended June 30, 2021. In the second quarter of 2021, our high-margin Contact Center and unified communications businesses contributed more than 50% of total revenue for the first time, with CC revenue more than doubling on a year-over-year basis.[Foreign language]We noticed a recent announcement made by Zoom to acquire Five9, an industry-leading provider of CC services in the United States, for approximately USD 14.7 billion concentration. Like Cloopen, a leading industry player in China providing CPaaS solutions to large enterprise customers from banking, insurance, automotive, and other industries. Five9 provides CPaaS solutions to large enterprise customers in the U.S.

This transaction is a clear signal that Cloopen's strategic plan, heavily focused on CC business, is on the right track. We are excited to be expanding our footprint in this fast-growing market with huge opportunities, evidenced by the year over year doubling of our CC business revenue this quarter. This jump was primarily driven by CPaaS solutions provided to a number of large enterprise customers. We believe our CC business will deliver even greater value going forward.

Cloopen will continue to develop its CPaaS business, targeting large enterprise customers as key growth drivers for sustainable revenue. We also focus heavily on product development. As we empower clients with communication tools, we also add value with the product strategy of providing fast solutions to assist companies featured with B2C business model and new marketing. We aim to look at this from our clients' perspective by developing products that can help execute closed-loop marketing scenarios, including customer acquisition, sales conversion, user operations, sales management, efficient marketing, and repeat purchasing as well as decision aiding.[Foreign language]Data security has become a hot topic of discussion, and we are aware of the general public's growing concern regarding data security.

Cloopen prioritize the security of its client's data and provides multiple security solutions, including specialized of private cloud and local deployment to satisfy different data security needs. For large enterprise customers, we mainly provide services through private cloud with data stored at client's end to which Cloopen does not have access. For our clients served through public clouds, we desensitize conversation records and text messages for three to six months and strict compliance with mass -- operators requirements and client's inquiry needs but we do not collect or use personally identifiable information. In addition, we utilize high-quality data encryption and strictly control data access, and our service contracts contain clear personal data protection disclaimer clauses.

In the long run, we will continue to enhance our data security practices, ensuring our ability to provide best-in-class data security solutions and solidifying our leading position in the SaaS sector. While we have achieved solid progress in product and services as well as technology enhancement, our business is also growing steadily through strategic cooperation with leading enterprises such as Tencent, with whom we have a partnership on Tencent Cloud. Tencent Qidian, which is Tencent Cloud's SCRM platform, and WeCom. Our CC products are now available on Tencent Cloud's joint development product platform.

We have begun receiving orders for UC products through a partnership with Tencent Cloud for a wide range of industries, including manufacturing, energy, and social governance. Furthermore, our 7moor Cloud will connect with WeCom's customer service interface, for which new products are expected to be officially launched in the third quarter. As our cooperation with industry peers broaden, our market position will be further enhanced. That concludes Changxun's prepared remarks.

Thank you all for joining our call. Now we would like to turn the call over to Steven for a closer view of our integration with [Inaudible] and our second-quarter financials.

Steven Li -- Chief Financial Officer

Thank you, Changxun and Ilin. Hello, everyone, and thank you for joining our call today. We are delighted with our robust results this quarter. Revenues displayed higher quality with our high-margin businesses, including our cloud-based Contact Center solutions and cloud-based unified communications and collaboration solution business, now contributing about 57.4% of the total revenue.

Our dollar-based net customer retention rate remained sound at approximately 110% in the three months ended June 30, 2021. Our integration with EliteCRM yielded remarkable results, including a stronger product pipeline and more large enterprise customers. As we enrich and refine our products, expand our customer base and bolster profitability, we are confident in our ability to deliver stable long-term growth and consistently create value for our shareholders. First, I'd like to talk about our integration with EliteCRM.

We completed integration with EliteCRM on a product level and more in-depth level in the second quarter. The strategic synergies of the EliteCRM acquisition began to materialize as manifested by roughly RMB 13.7 million revenue attributable to the integration during the second quarter. EliteCRM's solid industry series and vast technological capabilities in CRM and CC strengthen the application layer of our cloud communications infrastructure, complementing our existing business portfolio. Next, let's look at our financial metrics for the second quarter.

We recorded impressive results this quarter, beating our projections with revenues totaling RMB 273.9 million, a 47.9% year over year increase. The increase was mainly driven by the strong performance of our CC business, which grow significantly at 105.1% year over year and contributed around 40% to our revenues. Our CC business has been driving results to our diverse enterprise customers, and especially, increasing number of large enterprise customers. We have approximately 13,000 active customers as of June 30, 2021, and most of which are small and medium-sized companies.

However, our roster of large enterprise customers is growing steadily with 205 customers at the end of the second quarter. Our customer concentration rate is very low, enhancing our overall stability. Cost of revenues increased by 36.8% to RMB 155.8 million in the second quarter of 2021 on a year-over-year basis, primarily due to increased telecommunications resource costs, our sourcing costs, and the staff costs as the company continues to scale its business. Gross profit increased by 65.4% year over year to RMB 118.1 million and the gross margin remained stable at 43.1% during the quarter.

Now moving on to operations expenses. In the second quarter of 2021, operating expenses were RMB 214.5 million, representing a 65.6% increase from RMB 129.5 million in the second quarter of 2020. R&D expenses increased by 69.1% to RMB 62 million in the second quarter of 2021, compared with RMB 36.6 million in the second quarter of 2020 due to an increase in share-based compensation expenses of RMB 3.2 million, an increase in R&D staff expenses for a development of core features and functions in cloud-based CC solutions and cloud-based ULC solutions and an increase in technology service expenses paid to the outsourcing service providers for the development of certain non-core features and functions in cloud-based UC&C solutions. Selling and marketing expenses increased by 56.2% to RMB 72.8 million in the second quarter of 2021 from RMB 46.6 million in the second quarter of 2020, primarily due to an increase in share-based compensation expenses of RMB 6.6 million and increase in staff expenses as the company continues to scale its business and reach a wider customer base.

G&A expenses increased by 72.3% to RMB 79.7 million in the second quarter of 2021 from RMB 46.2 million in the second quarter of 2020, primarily due to an increase in share-based compensation expenses of RMB 28.4 million, primarily relating to share options granted to eligible employees and directors and the restricted ordinary shares issued to management employees for business acquisition and the increase in social insurance premiums as the company benefited from social interest premiums deduction in 2020 according to the government relief policies during the COVID-19 outbreak. Net loss for the second quarter of 2021 was RMB 105.6 million, compared with RMB 62.2 million in the second quarter of 2020, with the increase primarily driven by increases in noncash items of RMB 53.8 million, including the increases in share-based compensation of RMB 38.1 million and impairment loss of long-term investments of RMB 15.7 million. For the third quarter of 2021, Cloopen currently expects revenues to be between RMB 275 million and RMB 278 million, representing an increase of 43.8% to 45.3% year over year. The above outlook is based on current market conditions and reflect the company's current preliminary estimates of market and our rating conditions and customer demand, all of which are subject to substantial uncertainty.

With that, I would like to open up the call to questions. Operator, please.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Mark Li with Citi. Please go ahead.

Mark Li -- Citi -- Analyst

[Foreign language]Hi. This is Mark Li from Citi. Congratulations on the strong results. I want to ask, I noticed for the CC business, this quarter, the growth has been quite strong.

Could you share about the breakdown for long CC and 7moor? And also, if we exclude the EliteCRM contribution, what could be the organic core growth? And also could you share about like the new clients that you get in Q2 of the industry?

Steven Li -- Chief Financial Officer

OK. This is Steven. For the revenue increase, between 7moor and UCC, like we mentioned before, UCC is increasing much faster compared to 7moor. I think for this quarter, the long CC base is increasing much bigger than 100% for the second quarter.

And as for 7moor, I think the increase for 7moor is roughly around 40% to 50% for this quarter. Just one reminder, and this is actually also for your second question, the revenue for UC&C included the about CNY 30 million revenue generated from EliteCRM. So that if we take this revenue from EliteCRM out, then the increase for our CC business for the second quarter is still over 80%. While as for the number of -- or the examples of new customers added for this quarter, I will pass this question to our CEO.[Foreign language]

Changxun Sun -- Founder and Chief Executive Officer

[Foreign language]Our growth in CC mainly relies on two factors, one is our superior sales and marketing team and another is our continuously enriching product and functional models. Our target is to improve the customer acquisition efficiency and retention rate for clients. So we currently provide all the services, including customer acquisition and sales conversion, sales and marketing. The new customers in Q2 is mainly customers from banking, brokers, and other financial situations.

The specific name is not very -- convenient to reveal at this time.

Operator

Thank you. The next question comes from Mira Lee with CICC.

Mira Lee

[Foreign language] The first one is regarding CC business. We see a strong growth of CC business in the second quarter. So could you update more information about the progress of CRM and SCRM business? And my second question is regarding the online education sector, which has experienced some fluctuations recently. So what is the impact of the online education industry in our business? And the second -- and the third question is we noticed that the number of active customers have decreased slightly compared to the first quarter.

So could you share more information about the number of customers by product such as CPaaS, long CC and two more? And my last question is could you give us your breakdown of gross margin in terms of the three segments? Thank you.

Changxun Sun -- Founder and Chief Executive Officer

[Foreign language]The integration of EliteCRM with industrial digital division is very smooth currently. The strong complementarity between products and customers have begun to emerge and -- last year contributed over 13 million revenue in the second quarter. We believe that later on, the synergy in this business will become more apparent. The SCRM business of Cloopen is still in its initial phase, and we are both doing SCRM and the new marketing services division, which named before 7moor and in our industrial digital division.

For 7moor, it's [Inaudible] SCRM has already established its first version in the second quarter and began to have some revenue in this quarter. And long CC, we'll focus on insurance, automotive and banks, these three industries, and we target to establish its first demo in the third quarter.

Operator

Was there a follow-up?

Unknown speaker -- Investor Relations

And the second question for CICC analyst is --

Steven Li -- Chief Financial Officer

OK. Yes. I'll answer the other remaining three questions. The second question is regarding the recent policies on the education sector.

What impacts for our business. As of now, the impact is really not there yet. So for our CC business, we have been operating as normal. But we expect there will be some minor impact for our business probably during the second half of the year.

As we mentioned during the call, we focus on a lot of different industries. We don't rely on certain industries. The revenues from education sector account for above 8% of our total revenues. So we would expect there will be some minor impact.

But since we have been doing very good in other industries, so our target for this year is to -- is still the same as the beginning of the year. The third question is regarding the small decrease in terms of our total active customers. While actually, the reason for this very small decrease is because we took out some very small customers, who are -- in terms of ROI, who are really not worse for the company investing a lot of resources into those very small customers but like we mentioned during the call, the number of large enterprise customers, who are the major revenue contributor, have been increasing for the past several quarters. We expect this trend will continue into the future.

And the very last question is regarding the gross margin for each of our business line. The gross margin for our CPaaS business for Q2 of 2021 is roughly 27% and the gross margin for the CC business is around 55 -- 56% and the gross margin for our UC&C business is actually higher compared to previous quarters. It's about 52% for the second quarter of 2021.

Mira Lee

OK. Thank you.

Operator

[Operator instructions] The next question comes from Tina Hou with Goldman Sachs. Please go ahead.

Tina Hou -- Goldman Sachs -- Analyst

[Foreign language]

Steven Li -- Chief Financial Officer

OK. I will answer the first three questions and I think for your last question, we need to take a look, yes. So the first question is regarding the CC revenue -- especially the long UCC revenue. Yes, like I mentioned, our -- the main reason for the increase of our CC business is due to the large enterprise customers due to the long UCC business.

And in terms of recurring revenue or the licensing and the product revenue. Right now, it's about half and half. And the [Inaudible] to be honest, the -- as of now, most of the large enterprise customers are still much more -- prefer to have a tailor-made private cloud-based solutions compared to public cloud-based solutions, especially considering the recent policies regarding the data security issued by our government. So I think for us, we will continue to come up with solutions that's most suitable for -- to meet the demands of our large enterprise customers to protect their data security.

And at the same time, we will -- to get as much revenue as possible from the public cloud recurring model. The second question is regarding the breakeven timetable. As we have been mentioning this for -- since our IPO, I think right now considering the market conditions and the environment stage of our -- of China's cloud-based communication business, the No. 1 priority for the company is still to get more market share.

So the -- in terms of the breakeven point, I think we are mostly concerned with the improvements of our productivity.I think that's the -- that's evidenced by the -- our financial results for the second quarter. You can probably see our product -- our operating efficiency and productivity have been improving very significantly. So as a result, we expect our breakeven point will come probably sooner than what you mentioned during the call, but we can't give a very clear timetable in terms of where we can get to breakeven point on a quarterly basis. The third question is -- what's the third question? The third question is regarding the general expenses.

Well, I think there are two reasons on the -- in terms of why the general expenses as a percentage of total revenue decreased a lot for the second quarter. And first of all, as we -- as the company gets to a certain level, we will continue to invest in sales and marketing to expand our sales team in order to gain more customers and also we need to continue to invest in the R&D perspective, continue to add more features to our products. But in terms of our G&A function, I think it will be very stable in the next two to three years. And I think another reason is there are some onetime costs, either related to the acquisition of some minority holdings or in terms of our ability to IPOs are not happening for this quarter.

So I think those are the two reasons why the G&A percentage of total revenues decreased for this quarter. And the very last question, Ilin will answer the very last question.

Unknown speaker -- Investor Relations

Yes. The increase in the numbers of shares outstanding is mainly because of two reasons. So the first one is because EPS is calculated on a weighted average of outstanding shares based on a time basis. So because we got listed in February, so we issued 46 million new shares in February 9th.

And also on the day we listed, our preferred shares are turned into common shares. And the preferred shares are not calculated in EPS before, so it led to a huge increase in the number of outstanding shares from -- in second quarter. And our fully diluted number of shares should be around 350 million. It will be just a little higher than 320 million in certain projects.

Tina Hou -- Goldman Sachs -- Analyst

[Foreign language]

Operator

Did that conclude the answer to the question?

Unknown speaker -- Investor Relations

Yes.

Operator

Thank you. Thank you. Showing no further questions, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Ilin, investor relations for any closing remarks.

Unknown speaker -- Investor Relations

Once again, thank you, everyone, for joining today's call. We look forward to speaking with you again soon. Good day and good night.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Unknown speaker -- Investor Relations

Changxun Sun -- Founder and Chief Executive Officer

Steven Li -- Chief Financial Officer

Mark Li -- Citi -- Analyst

Mira Lee

Tina Hou -- Goldman Sachs -- Analyst

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