Ladies and gentlemen, thank you for standing by, and welcome to the Aurora Mobile Q2 2018 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 7th of September, 2018..

On the call today from Aurora are Mr. Chris Luo, Chairman and Chief Executive Officer; Mr. Fei Chen, President; and Mr. Shan-Nen Bong, Chief Financial Officer. Mr. Luo and Mr. Chen will discuss Aurora's business operations and company highlights followed by Mr. Bong, who will go through the financials and guidance.

They will all be available to answer your questions during the Q&A session that follows..

Before we continue, I would like to read you the safe harbor statement in connection with today's conference call. Please note that discussion today by the management will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

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.

Please refer to the company's public filings with the SEC for information regarding potential risks, uncertainties or information provided on this call is as of today. And Aurora Mobile does not undertake any obligation to update any forward-looking statements, except as required under applicable law..

I would now like to hand the conference over to your first speaker today, Mr. Chris Luo, Chief -- CEO and Chairman for Aurora Mobile. Thank you. Please go ahead. .

Thanks, operator. And good morning and evening to everyone on the call, and welcome to Aurora Mobile's Q2 2018 Earnings Conference Call. This is our first earnings report as a public company following our listing on Nasdaq on July 26, 2018.

And we are very pleased to share with you a very strong financial and operational results for the second quarter 2018..

Before we talk about the results for each business lines, I would like to take this opportunity to share with you our various key operating data.

Firstly, the number of mobile apps utilizing at least one of our developer services or the cumulative app installations increased to approximately 888,000 as of June 30, 2018, from approximately 583,000 year-over-year..

Secondly, cumulatively SDK installations have increased to 14.9 billion as of June 30, 2018 from 8.5 billion year-over-year. Thirdly, the number of monthly active unique mobile devices we cover that increased to 971 million in June 2018 from 633 million in June 2017.

Last but not least, in the second quarter of 2018, regarding the number of customers increased to 1,602 from 1,165 a year ago. With the healthy growth of this operating data, the total revenue for Q2 2018 were CNY 165.1 million, which represents an increase of 234% year-over-year, an increase of 31% quarter-over-quarter..

Now let's move on to each business lines. Firstly, developer services. Between the 3 months ended June 30, 2017 and the 3 months ended June 30, 2018, our revenue for developer services increased by 69% from CNY 8.6 million to CNY 14.5 million, which was mainly due to the growth in the number of customers from 715 to 1,005 year-over-year..

Second, let's talk about our data solutions business lines. During this -- during the same period, our revenue from data solutions increased by 268% from CNY 40.9 million to CNY 150.6 million. The significant growth was primarily due to the increase in both the number of customers and the increase in average spending per customer..

I will further share with you on the targeted marketing business under our data solutions. Chen Fei, our President, will later elaborate more on the other data solutions business lines. For targeted marketing business, the revenue has grown 248% year-over-year. This increase was mainly due to both the increase of number of customers and ARPU.

We are increasingly seeing customers devote a larger proportion of their marketing dollars to our platform, which we believe is joint evidence of our ability to provide a substantial higher return on their investment.

As we continue to record strong revenue growth in finance and entertainment verticals, we also saw growing traction in other verticals, including e-commerce and auto industry. We've had new customers wins in e-commerce industry started as JV.

Our sales-only dealers generated about 10% of our targeted marketing revenue, and we expect this part will continue to gain traction in the coming quarters..

Now I'll turn the mic to Fei, who will discuss more on the other business lines within the data solutions. .

Thanks, Chris. For other vertical data solutions, the revenue has increased by 509.7% from CNY 3.1 million to CNY 18.9 million year-over-year. This was mainly due to the increase in both the number of paying customers and the increase in average spending per paying customer.

We see strong growth across all 3 product lines, including financial risk management, market intelligence and the location-based intelligence, as we continue to expand our sales coverage and to make further penetration into these industry verticals..

For risk management, major customer wins included [indiscernible] and a renewal with [ Photon Technology. ] These are all multimillion renminbi deals. For market intelligence product, we continue to see strong momentum in the investors community with more than half of the new contracts signed in the quarter are from hedge funds and large funds.

Investors choose us because they think our numbers are more accurate than our competitors..

Within iZone business, second quarter new business wins are mostly with real estate, property developers, exhibition and the tourism customers.

Our customers in these verticals use our iZone product to their site selection evaluation, analysis of the exhibition in traffic and the traffic nature in tourists sites, such as where visitors are coming from, user profiling..

Now Shan-Nen will share with our financial highlights. .

Okay. Thanks, Fei. And with the revenue growth that Chris and Fei have shared, let me further discuss on the other items on the P&L. And gross margin for Q2 2018 has increased to 28.5% from 19.5% a year ago. In renminbi terms, the gross profit has increased by 411% to CNY 47 million..

Total operating expenses have increased by 69% to CNY 68.7 million year-over-year. In particular, R&D expenses increased by 83% to CNY 31.6 million. Selling and marketing expenses has increased by 48% to CNY 21.6 million. G&A expense has increased by 76% to CNY 15.4 million..

With the operating leverage we managed to achieve year-over-year, the loss from operation has decreased by 31% to CNY 21.7 million. And during Q2 2018, we recorded new interest expense of CNY 1.9 million, and this is offset by government grants recognized of CNY 1.9 million and changes in liability measure at fair value of CNY 9.3 million.

And as a result, the year-over-year net loss has decreased by 61% to CNY 11.8 million..

Onto the balance sheet items. The total current assets has increased from CNY 293 million as of 12/31/2016 to CNY 409 million as of 6/30/2018. The key current asset item as of 6/30/2018 are cash and cash equivalent of CNY 244 million, accounts receivable of CNY 111 million.

And total current liabilities have increased from CNY 117 million as of 12/31/2017 to CNY 352 million as of 6/30/2018..

The key current liabilities items as of 6/30/2018 are convertible notes of CNY 215 million, deferred revenue of CNY 49 million and accrued liabilities of CNY 66 million. As of 6/30/2018, we maintained a healthy level working capital of positive CNY 56 million..

And looking forward, we expect the total revenues for Q3 2018 to be in the range of CNY 180 million to CNY 185 million, representing a growth of 97% to 103% year-over-year..

And this concludes the management presentation for the Q2 '18 results. And back to you, operator. .

[Operator Instructions] Our first question today comes from the line of Piyush Mubayi from Goldman Sachs. .

Congratulations on your listing. A few questions from me. First, could you talk through your own SSP that was launched a couple of months ago, share any progress so far? And if possible, go through the number of apps that have joined any ad revenues you could talk through? That's my first.

Second, any impact of -- on your business from the P2P liquidity issue that we read so much about? Those are my 2 questions. .

So your first question is SSP.

And what's SSP -- after SSP -- number of apps?.

Apps and ad revenues. .

Okay. Yes. So Piyush, actually for the SSP, actually, in the second quarter, actually, we -- as we communicated with you and the investors on the roadshow -- IPO roadshow, basically, that's just the beginning, right? So second quarter, that's really not much contribution from the self-built SSP side.

And we are -- in this quarter, we are continuing to work with a few media mobile apps to fine-tune our SDK with them -- integrate our SDK with them. So this is an ongoing process, and I think that we should give you more updates in the third quarter earnings conference call, okay? And any impact on the business from P2P liquidity progress.

Actually, as we know, actually, our business, our advertising customers, none of them is P2P related. So basically, all of our customers are not affected by the P2P liquidity issue. I mean, it never happened in the second quarter. And in the coming quarter, that's not the issue for us either, yes.

So did I miss any of your questions?.

No. Those are the 2. I could continue. If you could talk about the lending and credit card platform, [ Jidaiguanjia. ] I'm sorry for the pronunciation.

What percentage of total revenue is from the stand-alone app?.

Okay, yes, yes. So you're correct. Actually, our own media, the mobile app, actually in the second quarter generated about 10% of total advertising revenue. And in the coming quarter, in the third quarter, we expect this contribution to increase. .

Your next question today comes from the line of Han Joon Kim from Deutsche Bank. .

I have 2 as well. One, you guys talked about some growth in media and entertainment accounts for your targeted advertising business.

Can you maybe just elaborate a little bit on what kind of penetration into new verticals that you're seeing -- kind of progress you're seeing there? And the second question is related to that as well, in terms of, there seems to be a little bit of loss of consumer sentiment, maybe perhaps in the luxury good segment or whatnot.

But I'm wondering if you're seeing any signs of loss of a consumer sentiment, advertisers maybe pulling back or holding back on advertising spend and kind of anything you see in that space that might kind of devalue your expectations for the second half of the year?.

Baidu and Tencent News and Toutiao. Those are our major key accounts of the entertainment and media verticals who are working with us right now. .

Yes. Actually, they spend a very decent amount of advertising dollars on us. Baidu, actually, in the second quarter, it ranked at the #3 of the -- in terms of the spending among all the advertisers with us.

And for the consumer sentiment, actually, for our business, right, so like in the second quarter, actually, around like 80% and more than 80% is contributed by finance and media and entertainment customers.

And our platform, we are still in the -- we have a lower penetration in terms of total adjustable market and we are still in the hyper-growth phase. So we are not really seeing any slowing down within our customer segment. So -- and also, from the guidance, we offer for the third quarter, again, we will continue to grow our advertising business.

And to us, that's not slowing down. .

Your next question today comes from the line of Thomas Chong from Crédit Suisse. .

I've got a question about the margin trend.

Can management comment about the drivers for our margin over the next couple of years? And any update about the new advertising system would be great?.

Yes. Actually, the second quarter, actually, the margin trend was pretty good, right? So overall the gross margin, we had an increase from the first quarter and primarily, it's driven by, actually, the finance sector. Actually, the margin continued to ramp up from the first quarter as typically first quarter was slower season due to Chinese New Year.

By the second quarter, the financial customers, advertising customers become more aggressive. So that's why we are able to continue to achieve the margin uptrend. As well, we are fine-tuning our model to increase the efficiency.

And going forward, I think, the total gross margin is going to be a function of the different product lines -- the mix of the different product lines as well as the trend of the targeted marketing margin.

And for -- currently, actually, the mix pretty much is continuing to be as we expected in terms of the business contribution for different business lines. And for the margin trend, for the targeted marketing, we expecting to continue to maintain current margin profile. .

Your next question today comes from the line of Bill Liu from Goldman Sachs. .

I have 2 questions. So first one is -- so in the midterm, if we consider the potential competition for advertising dollar with other incumbents in the industry, say, Tencent and Baidu. So what is our view on this because I think they all claim that somehow they have built a comprehensive user profiling and improving ROI each year as well.

So I wonder what is our view on this potential claim? And also, is there any implication on our R&D expense? Second thing is, what is our guidance or thinking on [ SBC ] going forward? It seems the absolute number is not very small, but considering percentage of revenue, so this is probably 1%, 2% of revenue.

So is that line going to increase going forward, because we assume that the company will keep hiring and retain talent in this data science vertical?.

Yes. Okay. So basically, our -- I mean, in the advertising marketing, there are probably more than 1,000, I mean, advertising companies in China. I mean, everyone can [indiscernible] have user profiling, [ with ] editor and can do target marketing.

So -- I mean, the key difference between us and other advertising company is we are definitely own the data. And the data, the quality and the volume is really massive and quality is much much better than the competitors.

So as those data is contributed by 8,000 mobile apps because they are using all surfaces, so we can accumulate the massive use of behavior data and then come out with the user profiling. So we are very confident on providing a higher return on the investment to our customers.

So it's very easy for the advertisers to do apple-to-apple compare because it's very easy. They can -- basically, they can do [ AB ] test with us and other suppliers. So we always achieve a better performance and results. So that's the strong evidence. And in that case, the advertiser will continue to allocating more budget proportion to us.

So that and other evidence that they trust us. And so we can then [ return ] higher returns on the ROI. .

Yes. Bill, on the second question that you asked on the share-based compensation, yes, I think in terms of dollars, it's going to increase going forward. But as a percentage of revenue, we do see a decrease, because of the fact that the revenue has -- will be increasing quite a lot in terms of the growth.

And also, I guess, the important thing is we will be granting option as a responsible way. So I believe this is something that we can manage, and it's not going to be [indiscernible]. .

[Operator Instructions] Our next question comes from the line of Bill Liu from Goldman Sachs. .

I just want to clarify one point. I think Fei, you mentioned just now that given the P2P decreasing issue, we have seen a lot on the news.

Did the management clarify that there's no impact from this to our customers' spending? Or i.e., they have been spending roughly the same amount of budget? Or actually we don't have customers from this P2P lending vertical at all, so we are not being impacted at all.

So could you clarify on that point, please?.

Yes. So currently -- I mean, we have our finance category vertical customers, many are consumer financing customers. I'll give you 2 example, who is looks like [indiscernible]. Those are our top 10 advertisers. They are all backed by the bank with the license one.

So there are no -- their funding is not coming from P2P and they are [indiscernible] are not P2P company. So that's one point. Another point, we don't have any P2P -- pure P2P customer before because in the media -- for the media side, P2P are not allowed to do any online advertising for us.

So we just can't do advertising for those pure P2P advertisers. So we won't. So that's the second part. So basically, we didn't see too much impact on the P2P liquidity issues. However, I mean, there's a little bit of the market sentiment, but I don't think a lot of the budget allocation or issues in this finance vertical. .

Maybe it's impacted to other people, but not to us. .

[Operator Instructions] Since there are no further questions on the line today and that does conclude our conference for today. We thank you all for your participation. You may now disconnect..