Kingsoft Cloud Seeks U.S. Investment From IPO (Pending:KC)

Quick Take

Kingsoft Cloud Holdings (KC) has filed to raise $100 million in an IPO of its ADSs representing ordinary shares, according to an F-1 registration statement.

The firm provides a range of Internet and enterprise public cloud services.

KC has grown revenue quickly but barely makes any gross profit and is losing money and burning cash at a high and increasing rate.

I’ll provide an update when we learn more about the IPO’s pricing from management.

Company & Technology

Beijing, China-based Kingsoft was founded to provide enterprises with complementary cloud services as an alternative to their on-premise information technology systems.Kingsoft is a spinoff from Hong Kong-listed Kingsoft Corporation (HK:3888).

Management is headed by Chief Executive Officer Mr. Yulin Wang, who has been with the firm since 2012 and was previously EVP at Phoenix New Media Limited and COO at CNEC.

Below is a brief overview video of the Kingsoft Cloud antivirus system:

Source: languy99

The company’s primary offerings include:

  • Compute

  • Networking

  • Storage & CDN

  • Database

  • Data Analysis

  • Security

Kingsoft has received at least $1.1 billion from investors including parent firm Kingsoft, Xiaomi and FutureX.

Customer Acquisition

Kingsoft is the largest independent cloud service provider in China and focuses its efforts by industry vertical: gaming, video and financial services.

The firm seeks marquee customers in each vertical to be able to demonstrate its capabilities and market more efficiently to other prospects in the vertical.

Selling and marketing expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:

Selling & Marketing

Expenses vs. Revenue

Period

Percentage

2019

8.0%

2018

8.6%

Source: Company registration statement

The Selling and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and marketing spend, was a very strong 5.3x in the most recent reporting period.

Market & Competition

According to a 2020 market research report by Allied Market Research, the market for cloud services of all types reached a value of $265 billion in 2019 and is expected to reach $928 billion by 2027.

This represents a forecast 16.4% from 2020 to 2027.

The main drivers for this expected growth are a large and continued transition by enterprises worldwide from on-premises systems to cloud environments and ongoing innovation in cloud system offerings by service providers.

A Frost & Sullivan report commissioned by Kingsoft shows the expected growth of various sectors in China as shown in the chart below:

Financial Performance

Kingsoft’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue

  • Little gross profit and low gross margin

  • Large and growing operating losses

  • High and increasing cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2019

$ 568,295,000

74.2%

2018

$ 326,201,765

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2019

$ 1,108,000

-103.8%

2018

$ (29,469,118)

Gross Margin

Period

Gross Margin

2019

0.19%

2018

-9.03%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2019

$ (164,258,000)

-28.9%

2018

$ (144,033,088)

-44.2%

Net Income (Loss)

Period

Net Income (Loss)

2019

$ (166,755,000)

2018

$ (257,193,235)

Cash Flow From Operations

Period

Cash Flow From Operations

2019

$ (63,074,000)

2018

$ (56,339,706)

Source: Company registration statement

As of December 31, 2019, Kingsoft had $290.6 million in cash and $358.2 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was a negative ($206.6 million).

IPO Details

Kingsoft intends to raise $100 million in gross proceeds from an IPO of its ADSs representing ordinary shares, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

approximately 50% to further invest in upgrading and expanding our infrastructure;approximately 25% to further invest in technology and product development, especially in artificial intelligence, big data, cloud technologies and internet of things;approximately 15% to fund the expansion of our ecosystem and international presence; andapproximately 10% to supplement our working capital for general corporate purposes.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are J.P. Morgan, UBS Investment Bank, Credit Suisse and CICC.

Commentary

Kingsoft is seeking U.S. public investment after apparently tapping out its investment opportunities with its parent firm and Xiaomi.

The company’s financials show a firm that is growing revenue quickly but producing very little gross profit and generating large losses and cash burn.

Selling and marketing expenses as a percentage of total revenue are low and dropping as revenues increase; its Selling and marketing efficiency rate is 5.3x, a strong multiple.

The market opportunity in Asia for providing a suite of cloud services to enterprises is large and expected to grow markedly in the year ahead, as businesses continue a historic transition from on-premises systems to the cloud, so the firm has strong market tailwinds in its favor.

While we await management’s proposed terms for the IPO, the financials are a significant sticking point, especially with such low gross profit.

U.S. technology firms can produce strong gross profit results, so in that respect I’m concerned about KC’s ability to make a path toward profitability any time soon.

I’ll provide a final opinion when we learn more IPO details from the company.

Expected IPO Pricing Date: To be announced.

Gain Insight and actionable information on U.S. IPOs with IPO Edge research.

Members of IPO Edge get the latest IPO research, news, and industry analysis. Get started with a free trial!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.


*