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RAAS Cloopen Group Holding

Participants
Yilin Dai Investor Relations
Changxun Sun Founder and Chief Executive Officer
Steven Li Chief Financial Officer
Huanji Li CICC
Daley Li Citi
Tina Hou Goldman Sachs
Call transcript
Operator

Ladies and gentlemen, thank you for standing by and welcome to Cloopen’s First 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 conference call over to your host today, Yilin Dai [ph], Cloopen’s Investor Relations Representative. Please go ahead.

Yilin Dai

Hello, everyone and thank you for joining Cloopen’s first 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. I will now turn the call over to our CEO, Changxun Sun. Please go ahead.

Changxun Sun

Hello, everyone. Thank you for your time and interest in Cloopen’s development.

We are pleased to report robust first quarter 2021 results with overall performance exceeding expectations.

Our revenues were RMB204.5 million surpassing the top end of our guidance range and representing a 54.4% increase year-over-year. Notably, our first quarter gross margin reached 43% higher than the 40% gross margin for the full year of 2020 as we benefited from the optimized business mix.

In addition, our dollar-based net customer retention rate recovered to 111.6%.

Our value proposition has always been very clear, which is to provide enterprises with intelligent cloud-based products to enable better marketing and customer services so as to improve their customer acquisition efficiency and retention rates.

As I have mentioned in our IPO roadshows, we are proud to be a forerunner among the China-based communication solutions providers to go public and the United States. But this is not our endgame.

We are not satisfied with being an ordinary company.

Our goal is to be a Chinese company with global influence using our SaaS-based tools to help transform the enterprise communications industry.

As we advocated during our IPO, our strategic focus is on leveraging the vast capabilities of our cloud-based contact center, or CC.

Over the last few years, we have extended the boundary of CC from merely a communication channel between enterprises and customers to a more comprehensive tool that includes subsequent customer management mechanism, such as CRM and SCRM. CRM is the software that manages customer information and communication records, whereas as SCRM, or Social CRM, manages private domain traffic and sales processes.

Our CRM product is named as EliteCRM and SCRM product is named as Juco [ph]. Through the extension of the functionalities of the CC and establishment of product interconnections, we can help enterprise customers improve their conversion rates from traffic to sell fleets and ultimately to others, creating value from end-to-end income tax and communications, customer acquisitions, customer retention and satisfaction improvement.

For our product development, we have adopted a cloud-based and AI-driven approach. We attach great importance to AI applications and consistently invest in our artificial intelligence R&D teams, while also exploring new AI-based avenues and use cases. Leveraging our AI capabilities, we are steadily enhancing the value proposition of our products by identifying and accumulating data through facilitating connections and we are helping enterprises utilize data to help intelligent operations ultimately empowering our enterprise customers with smarter customer acquisition and customer service capabilities. With a solid product strategy in place, we have recently made significant advancements.

First, we adjusted our organizational structure to effectively improve sales and operational efficiency. We integrated multiple divisions in four major departments. Based on the characteristics of our customers, each of them has its own core products and a complete product development path. These four departments includes: one, the industrial digital division, which provides the contact center SaaS-based products and industry solutions for large enterprise customers. Two our new marketing services division, which provides standardized contact centers and SaaS-based products for small and medium-sized enterprises.

The third one is the SOE and government smart operations division, which caters to large state-owned enterprises and government agencies providing video and audio capabilities and deep learning based video analysis technology with applications in that such as video surveillance to ensure production safety and intelligent transformation of social governance. The fourth is our overseas division. Having expanded our existing business to Japan, Malaysia and the Philippines, we are enthusiastic about our progress so far in the international market and we will continue to explore further overseas opportunities, aiming to become a truly international company.

While realigning our organizational structure with our customer base, we have also been strengthening our internal team. Most recently, our efforts have included establishing our overseas teams recruiting new sales VP, reorganizing sales teams based on the four customer groups and hiring new technology director to enhance our R&D efforts. Notably, we have also appointed a PhD supervisor from Nankai University as our Chief Scientist.

Second, we have upgraded our brand from [indiscernible] cloud-based communications to [indiscernible] cloud.

Our refined name and brand reflect the expansion from our entry point in cloud-based communications to our current suite of full flash products and services for corporate marketing and customer service, including industrial digital cloud, new marketing services cloud and SOE and government smart cloud. We strive to provide more valuable and multidimensional products to clients in order to strengthen our competitive position. In summary, we have developed a clear product roadmap with key focuses on SCRM in addition to overseas expansion. Through these effects as well as establishment of a highly efficient organizational structure and a strong executive team, we have considerably improved our operating efficiency and are proud to see it reflected in both our operating and financial metrics. Thank you for joining our call. And I look forward to having more discussions with you in the future. I will now turn the call over to our CFO, Steven Li, for a closer review of our progress in integrating EliteCRM and our first quarter financials.

Steven Li

Thank you, Changxun and Yilin. Hello, everyone and thank you for joining us today.

First, let me provide update on our progress of the EliteCRM integration. Since the acquisition announcement, our main task has been focused on integrating products and technologies with our existing platform. It is integrating that integration with room CC was basically completed at the product level and we have started to deliver on many financial products.

As our next step, we expect to complete the in-depth integration and handover more costs to be handled by EliteCRM.

In terms of the integration of AI technologies, we provide the underlying AI technology as well as an interface, so that EliteCRM can utilize this technology and divide it into applications.

We are pleased to see that EliteCRM has already started to leverage our NLP technologies to acquire customers.

We are also excited that the product integration work between EliteCRM and our subsidiary in Japan is almost completed. Since the acquisition of EliteCRM, there have been quite a few new clients, literally in the finance industry that have signed contracts with CC cloud CRM. And further synergies from the acquisition in customer acquisition are evident by the solid pipeline of potential clients for combined CC and CRM.

Now, let’s move to our first quarter financial results.

Our revenues reached RMB204.5 million in the first quarter of 2021, increasing 54.4%. The increase was mainly driven by very strong performance from our cloud-based contact center solutions business, which saw revenues increase 63.4% year-over-year to RMB70.2 million primarily due to an increase in the number of customers.

As I mentioned earlier, cost of revenues increased by 65.6% to RMB116.6 million in the first quarter of 2021 from RMB70.4 million in the first quarter of 2020, which was primarily due to increased telecommunications resources cost, outsourcing costs, and infrastructure and equipment costs as the company continues to scale its business. Gross profit increased by 41.8% to RMB87.9 million in the first quarter of 2021 and the gross margin was 43% in the first quarter of 2021.

Now, let’s look at our expenses. In the first quarter of 2021, operating expenses were RMB238 million, representing a 92.8% increase from RMB123.4 million RMB in the first quarter of 2020. R&D expenses increased by 78.1% to RMB68.7 million in the first quarter of 2021 compared with RMB38.6 million in the first quarter of 2020 primarily due to an increase in the R&D staff expenses for development of core features and functions in cloud-based CC solutions and cloud-based UC&C solutions, an increase in share-based compensation expense of RMB6.1 million and an increase in technology service expenses paid to the third-party outsourcing service providers for the development of certain non-core features and functions in cloud-based UC&C solutions. Sales and marketing expenses increased by 48.7% to RMB68.3 million in the first quarter of 2021 from RMB45.9 million in the first quarter of 2020 primarily due to an increase in share-based compensation expenses of RMB7.7 million, an increase in staff expenses and increase in spending on online advertising campaigns and marketing activities as our company continues to scale its business and reach a wider customer base. G&A expenses increased significantly to RMB101 million in the first quarter of 2021 from RMB38.9 million in the first quarter of 2020 primarily due to an increase in share-based compensation expense of RMB64.7 million relating to share options granted to eligible employees and directors. Certain restricted shares of the company’s founders under the share restriction agreements and ordinary shares issued to management employees for acquisition of active interest in a majority owned subsidiary partially offset by a decrease in bad debt expense resulting from reduced impact on collection of accounts receivable from the COVID-19 outbreak. Net loss for the first quarter of 2021 was RMB171 million compared with RMB47.7 million in the first quarter of 2020. The increase was primarily driven by increases in non-cash items of RMB115.1 million, including the increase in change in fair value of warrant liabilities of RMB21.8 million, the increase of share-based compensation of RMB78.4 million and the decrease in gain from disposal of subsidiaries, which was RMB14.9 million in that amount. Basic and diluted net loss per share was RMB12.76 in the first quarter of 2021.

For the second quarter of 2021, Cloopen currently expects revenues to be between RMB255 million to RMB260 million, which would represent a year-over-year increase of 37.6% to 40.3%. The above outlook is based on the current market conditions and reflects the company’s current and the preliminary estimates of market and operating conditions and customer demand, which are all subject to substantial uncertainty. With that, I would like to open up the call to questions. Operator, please.

Operator

[Operator Instructions] The first question comes from Huanji Li with CICC. Please go ahead.

Huanji Li

Thanks management for taking my questions.

So, in terms of the collaboration with some ecosystem, such as Tencent and domestic telecom carriers, could you give us more color on the partnership? Thank you.

Changxun Sun

All products of Cloopen has entered Tencent’s cloud own product family. And many sectors of Tencent cloud, including a finance, energy and power industrial manufacturing and retail industries are all promoting Cloopen products.

We have already signed or is signing tens of customers with Tencent and there are more in pipeline. Also, we have collaborated with Tencent’s enterprise version of WeChat to better serve our customers and help Tencent develop new customers.

We have also signed strategic collaboration contracts with mobile telecom operators in several provinces regarding development of 5G RTS messages and also promoting our CD products.

We are also exploring the opportunities to have strategic collaborations with big SOEs and IOS companies.

Huanji Li

Thank you.

Operator

The next question comes from Daley Li with Citi. Please go ahead.

Daley Li

Okay, I will translate my question. Hi, management. Thanks for your presentation. I have two questions about your cloud-based CC business. Could you please share some data or general trend for revenue growth by products such as the Tmall cloud or [indiscernible] cloud and CC for first quarter and how is the customer addition or dollar retention trends? Currently, could you share some color on the market competition recently when you get new orders from the cloud-based CC facilities and how do we differentiate ourselves in terms of the products? Thank you.

Steven Li

I will answer the first question and then our CEO will answer the second question.

So, for your first question, regarding our [indiscernible] and room CC, like we mentioned CC increased by over 60% in the first quarter of 2021, so very strong performance. In comparison, room CC is actually increasing faster compared to [indiscernible], because I think we mentioned this before, room CC is focusing on large enterprise customers and large enterprise customers are very fast customers in our business, in our industry in China.

So, there will be many, many more cross-selling and up-selling opportunities for large enterprise customers.

So, as a result, the room CC business for the first quarter of 2021 is actually increasing faster than the 62%, 63%. [Indiscernible] I think, if I remember correctly, I think [indiscernible] is increasing around 50%, but room CC is I think over 70% and we actually expect this trend will continue in the future.

As for the retention rate or the churn rate, the first quarter actually we mentioned the retention rate, net retention rate is back to over 110% as COVID-19, the impact of COVID-19 operator is disappearing.

For [indiscernible], all of the revenue from [indiscernible] are subscription revenues, so these – the net dollar retention rate is for [indiscernible] is roughly the number actually I just mentioned.

While in terms of number of customer remains with us, I think right now is around 75% of the customers for [indiscernible] has remained with us.

For room CC, because room CC is mainly dealing with large enterprise customers, so we almost never lose a large enterprise customer by 98% or 99% of large enterprise customers will stay with us.

Okay. [Foreign Language]

Changxun Sun

We think that we have about six advantages over our competitors.

The first one is that we have – we also have CPaaS product line, which means that we can provide our customers with telecom resources.

However, our competitors they don’t have full suite product, so that they must contract with other mobile operators to provide those telecom resource. And the second is we also have a very strong R&D team.

We have very strong AI capability. And the third one, we think our sales team is larger and better than our competitors.

We have a sales team of over 400 staff. And a fourth advantage, we think that we are already covered all range of customers, we have [indiscernible] for small to medium enterprises and also room CC for large enterprise customers. And the fifth advantage we have we think is we have recently acquired EliteCRM and we can provide the CRM functions to our customers, while our competitors cannot. The last one is that we also have overseas businesses in Japan, Malaysia and the Philippines, but our competitors, currently they just focus in China.

I think in one word, we can provide more to our customers than a pure CC player and industry.

Daley Li

Okay, thank you very much. Thank you very much.

Operator

[Operator Instructions] The next question comes from [indiscernible] with China Securities. Please go ahead.

Unidentified Analyst

I am going to translate myself quickly. I have three questions.

The first one is about the cloud-based CC business. What is expected growth rate of cloud-based CC solutions in the next 2 to 3 years and what is the potential market size if we look for mid to long-term? And my second question is what is the current progress of CRM and can you share with us a bit more about the long-term expansion strategy as marketing does? Also, compared with other CRM SaaS vendors in the market, what are our competitiveness and differences of the product? And my third question is about the dollar-based retention rate, they decrease in the past few years that we have seen a very positive trend in the fourth quarter and how should we look at the trend in the mid to long-term and how much can it reach at this stage? [Foreign Language]

Steven Li

Okay.

So for the first question, we actually had a industry report in our prospectus during our IPO. In that report, I think if I remember correctly by year 2024, the CC market will increase to over RMB35 billion in terms of the overall market size, with the – I think with the new growth rate of around 35%. And for Q1, our CC revenue increased by over 62%, 63%.

So for the next 2 to 3 years, we expect our CC business will increase I think somewhere between 50% to 60%, well above the industry average, because other than CC, as Mr. Sun mentioned earlier, we also have like AI vertical solutions.

We have CRM, SCRM.

We have many, many other product features in addition to the basic CC solution, so we can offer a total solution with many product modules, which our competitors can’t. Yes, so that’s why we think we are – and also the overseas market, we think the overseas market for the next 2 years to 3 years will also become one of the other key drivers for our business.

So in general, that’s why we are very confident our CC revenue will increase in the range of 50% to 60% for the next 2 years to 3 years. And your third question is regarding the dollar based net retention rate.

I think probably as you know, our – this percentage was not very good for last year 2020 due to the COVID-19 outbreak, the COVID-19 thing had a very big – and that’s been impacting our business for last year. But we have, as the COVID-19 outbreak has been disappearing our percentage has come back to the normal level.

As you know, just by the fact that our dollar-based net retention rate for Q1 is over 110% and we expect this percentage will continue to get better in the future.

Changxun Sun

The extension from our CC products to CRM is actually natural and reasonable. And this rationale is to help enterprise with their customer acquisition and to their customer retention.

We have competitive advantage in the following aspects.

The first one is we have more than 13,000 existing customers.

The second one is that we have contact center products, such as AI capabilities and etcetera. We can provide a one stand solution to our customers than a pure CRM professional company. Also, we have established a comprehensive sales team, our sales system respectively for different kinds of customers. The last one is that there are CRM systems targeting B2B or B2C customers and there are two kinds of main competitors currently are doing CRM systems.

The first one is they are doing CRM systems for B2B enterprises, such as SOE and the second is they are doing CRM systems for B2C enterprises, which does consumer products such as [indiscernible].

We have actually targeting different customer base comparing with other major players. We choose the B2C enterprises whose end customers have long position cycle such as finance and trade or cosmetic medicine.

We are confident to become one of the top players regarding our competitive advantage. We would like to add that why we chose the B2C enterprises whose end customers have long position cycle because those have long position cycle there are many operating activities that we can optimize from acquiring the customer to the customer’s final deal.

So, we decided to choose B2C enterprises with long position cycle.

Unidentified Analyst

Okay. Thank you.

Yilin Dai

Thank you. This is our answers to your question.

Operator

Thank you. The next question comes from Tina Hou with Goldman Sachs. Please go ahead.

Tina Hou

So, I have four questions.

The first one is could management [Technical Difficulty] gross margin by CPaaS CC and UC segments? And then the second question is regarding CPaaS.

So during IPO, we mentioned that we would probably not focus too much on CPaaS business, but then now it still have very strong growth.

So, do we have any updated thoughts on CPaaS? And then the third one is regarding in the CRM, when did we integrate the revenue number into the first quarter results? How much was that? And then the last question is regarding the second quarter revenue guidance, because the growth has slowed down from the first quarter percentage.

So, wondering what is the main driver or main reason for that growth slowdown? Thank you.

Steven Li

Okay, yes, I will answer those questions.

So, for the first question, I think the gross margins for our CPaaS for Q1 is around 30%.

So, it is a little bit higher than last year and the gross margin for CC business I think is 58% for the CC business. And the gross margin for the UC&C business is between 50% to 55%.

While actually the reason is I understand your question, the gross margin for Q1 for 2020 is around 46%. The gross margins for the Q1 of this year is 43%. Actually, for Q1 of last year, due to the COVID-19 I think the first quarter of 2020 is probably the quarter that was mostly impacted by the COVID-19 outbreak.

So, the gross margin numbers for that quarter is a not a good – is a very good indicator of the gross margin for the overall business of the company. Like for example, there are probably some revenues or contracts are recognized for revenue in the first quarter of 2020. But some costs may be reported in different quarters, due to the different scenarios related to this COVID-19.

So – but the overall gross margin for 2020 is only a little bit less than 40%. But our gross margins for Q1 has increased for 43%. And we fully expect our gross margin for the remaining quarters of this year or for the whole year of 2021 will be in line with our original expectations.

For your second question, the CPaaS business or you don’t have to seek out CPaaS business, the company’s strategy or strategic focus has been the same compared to before.

As our CEO, Mr. Sun mentioned the CC business will still be the major business focus going forward and that the reason why the revenue for the CPaaS in Q1 increased rather significantly, was mainly due to we have several very big strategic clients who had very big demands for our CPaaS in Q1. And CPaaS in the future will become one of the combinations or one of the total solution offerings of our total CC solution.

So, as a result, we will serve those very large strategic customers. We think that’s the reason why the revenue for CPaaS business for Q1 increased pretty big, but that – we have not changed our strategic focus regarding our overall business.

Your third question is regarding CRM. We actually completed the – or finalized acquisition at the end of March.

So, for Q1 there were almost no revenues recorded from this acquisition for Q1. But we expect starting from Q2, the revenues will be 100% included in our CC business.

So I prefer – last question, we prefer very great for Q1, the revenue thing increased a lot. Part of the reason is, due to as I mentioned earlier, the Q1 of 2020 was probably mostly impacted by the COVID-19 outbreak.

So, that’s why if you compare the revenue increase of Q2 this year versus Q1, the previous quarter, the revenue increased – slowed down a little bit. But in terms of the overall revenue growth rate for the entire year of 2021, so far, we are still very confident that we can achieve the fluctuations we set up at the beginning of this year.

Tina Hou

Thank you very much management.

Operator

Showing no further questions, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Yilin, Investor Relations for any closing remarks.

Yilin Dai

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

The conference has now concluded. Thank you for attending today’s presentation.

You may now disconnect.