Xuan Wu Cloud (2392.HK) held its annual analyst briefing online on March 29. During the event, the company's management stated that they anticipate Sales Cloud to experience a significant revenue growth of over 80% this year. Looking ahead, the Sales Cloud is expected to remain the strongest driver of the company's growth, with a projected compound annual growth rate (CAGR) of around 60% over the next three years. In terms of overall revenue, the company aims to achieve a CAGR of 20% in 2023. Furthermore, the proportion of SaaS revenue is expected to continue increasing, with a target of surpassing 50% over the next three years. As for the Sales Cloud within the SaaS segment, the company's next milestone is to achieve a sales scale of over RMB100 million.

According to Xuan Wu Cloud’s financial results in 2022, the company achieved a revenue of approximately RMB1.043 billion, marking a year-on-year growth of 5.2%. Notably, the revenue from AI-related products and services experienced a substantial increase of 73.8% compared to the previous year. The company also maintained a stable cash and cash-equivalent position, ensuring the healthy and orderly development of its overall business, even amidst the challenges posed by the pandemic. Particularly, the income generated from CRM SaaS services increased by 8.4% to RMB474 million, driven by the rising demand for Xuan Wu Cloud's CRM SaaS solutions.

Looking ahead, the company emphasizes its continued focus on top-tier clients in the industry while expanding into new sectors. By establishing benchmark cases with industry leaders, Xuan Wu Cloud aims to replicate its accumulated industry experience among medium-sized enterprises. This approach enables the company to develop replicable, scalable, and extendable business models, leading to rapid and sustainable growth in future performance. Furthermore, in terms of AI applications, Xuan Wu Cloud will continue to deepen its expertise in image recognition analysis and iterative development of deep estimation models. By enhancing the application of image and video recognition algorithms, the company aims to empower intelligent retail scenarios and provide a wider range of application scenarios for its smart CRM services.

Below is the transcript of the Q&A session during the Xuan Wu Cloud's financial performance meeting, compiled by Zhitong Finance:

Q: Recently, concepts like ChatGPT and AIGC have gained popularity, and the market has explored various applications related to these concepts. Can such concepts or technologies be well integrated into the company's business development?

A: Xuan Wu Cloud has made significant preparations in the field of AI. We believe that technologies like ChatGPT or AIGC will usher in a new era for AI. From the perspective of Xuan Wu Cloud, we established our own AI laboratory in 2017 and are currently the only CRM provider in China with full-stack self-developed technical capabilities. Our AI efforts mainly focus on image vision, particularly in image recognition, while ChatGPT is more centered around semantic understanding.

In terms of applications, our core lies in the fast-moving consumer goods (FMCG) retail industry. In fact, we have already applied AI technology in numerous scenarios over the years. Now, our goal is to combine GPT technology with these existing scenarios and explore new ones to enhance our business. Our approach is to integrate AI technology with practical application scenarios, rather than focusing solely on technology for its own sake.

Q: Considering the current macroeconomic background, what are the key drivers of the company's sustained and stable performance growth? In the company's future plans, what is the process of growth and iteration for each business segment?

A: The company primarily provides PaaS and SaaS services, with a greater emphasis on developing our own SaaS offerings. Overall, we aim to maintain relatively stable growth, such as achieving a year-on-year compound growth rate of around 20%, as set in our performance targets. In the PaaS domain, particularly in cloud communication, we see it as a major source of growth. Firstly, we will integrate with more communication media, including the current 5G messaging connection. Secondly, we will expand our presence overseas, specifically in the Southeast Asian market, by venturing into cloud communication PaaS.

Another crucial aspect is SaaS, particularly our second growth curve—Sales Cloud. In the FMCG retail industry, our current market share is around 20-30% with a focus on large clients. Therefore, our important goal for the future is to expand our customer base and achieve a market share of over 50%. We also aim to penetrate into small and medium-sized clients, which represents significant growth potential for us.

Within the product matrix we offer to these clients, including intelligent AIoT solutions such as smart freezers and intelligent boxes, the application of AI and DI represents areas of high value and efficient business growth. In the past year, our AI segment alone achieved growth exceeding 70%. From 2022 to 2025, the compound growth rate of our Sales Cloud will reach approximately 60%. Additionally, we will continuously increase the proportion of SaaS in our PaaS and SaaS offerings, making SaaS the core component of our business. In the SaaS segment, we expect a compound growth rate of over 30%, which will be the main driver of our growth.

Q: Sales Cloud is the only business segment among the four major lines that did not achieve growth. Why did it occur? What scale can this segment reach in the future?

A: Sales Cloud is positioned as our second growth curve, which will remain unchanged. In 2022, it was indeed greatly impacted, particularly due to the COVID-19 pandemic. Our Sales Cloud mainly targets medium and large-sized clients, with Q4 typically being the peak period for Sales Cloud performance. However, due to the lockdown measures in Guangzhou's Haizhu District where our headquarters is located, we were under lockdown for over a month, making it difficult for us to visit clients and affecting contract execution. Additionally, the pandemic had a significant impact on the real-time delivery of our contracts.

Secondly, over the past two years, we have been investing in the research and development of Sales Cloud. Currently, many of our clients are in the trial and scaling-up phase for AIoT freezers, so the revenue from AIoT has not been directly reflected yet. However, since the beginning of this year, Sales Cloud has experienced significant growth. We expect that the growth of Sales Cloud for the whole year will exceed 80%, and we have great confidence in our sales team. Moreover, over the past year, we have made sufficient preparations in terms of technological research and development and strategic reserves for our products. For Sales Cloud, we anticipate maintaining a compound growth rate of around 60% over the next three years, making it our strongest driver of growth.

Q: What scale can the Sales Cloud sector reach in the future?

A: It is anticipated that the Sales Cloud sector will experience growth exceeding approximately 80% this year. The company holds great confidence in the entire Sales Cloud division, owing to the substantial efforts invested in the previous year, encompassing technological research and development as well as strategic product reserves. Over the next three years, the Sales Cloud sector is projected to maintain a compound growth rate of around 60%, positioning it as the most robust driver of expansion.

Q: Will the overall recovery of the domestic economy stimulate the IT spending recovery of fast-moving consumer goods (FMCG) companies and subsequently impact the company's performance? Could the management share insights on industry and company development trends?

A: FMCG possesses a distinctive characteristic wherein over 80% of its sales originate from offline channels. Following the pandemic, the domestic economy has displayed a notably robust recovery, which indeed holds great potential for the entire FMCG industry. However, this recovery requires a certain period of time and has concurrently accelerated industry competition.

Currently, more FMCG companies are becoming aware that digitization can facilitate faster adjustments to their marketing strategies, necessitating the employment of digital means. In this regard, we have also observed that many companies have expedited their pace of digital IT initiatives since the beginning of the year, driven by the objective of enhancing their marketing performance. Our digital business offerings encompass a comprehensive marketing management system, spanning the entire value chain, precisely capable of assisting them in achieving their marketing strategies.

Presently, thanks to the technological advancements in AI, particularly leveraging ChatGPT, FMCG companies have successfully digitized all their channels in this phase. The subsequent phase entails harnessing AI and applying it to data intelligence (DI) services, thereby extracting the value of data originally residing within their business systems. This trend is of utmost significance as it enables the realization of direct and tangible marketing performance.

Q: Can the company provide a general guidance range for its performance in 2023?

A: Firstly, in the future, including 2023, we aim for a compound growth rate of 20% for our overall revenue. Secondly, we anticipate a continuous increase in the proportion of our SaaS revenue, with a target of surpassing 50% over the next three years. Therefore, we will continue to enhance the contribution of SaaS to our revenue. Thirdly, in terms of the Sales Cloud in SaaS, our next milestone is to achieve sales volume exceeding one hundred million, with a compound growth rate of over 60%. Fourthly, our overall gross margin will continue to rebound. With the pandemic behind us, we are highly confident, particularly in the Sales Cloud sector, where we expect to achieve a gross margin level of over 70%.

Q: When mentioning our collaboration with cloud vendors in ChatGPT, is it limited to the marketing cloud domain, or has it expanded to other business domains as well? Regarding the development and positioning of ChatGPT, I'd like to understand what role the company plays in its development.

A: Our collaboration with cloud vendors is actually multidimensional, and we even mutually serve as partners to each other, including Huawei, Tencent, Alibaba, and JD. Firstly, we ourselves utilize some services from these cloud vendors because some of our products are deployed on their platforms, and we also adopt a multi-cloud deployment strategy. On the other hand, we work with many cloud vendors to list our products, covering various dimensions, on their marketplaces. Therefore, cloud vendors are continuously involved in creating industry solutions together.

Secondly, we collaborate to jointly expand into more industries and acquire customers. Therefore, our partnership with cloud vendors is an important and broad channel for us. Additionally, an important aspect to mention is that besides providing SaaS products, our core competitiveness is also based on our own PaaS capabilities. We collaborate with cloud vendors in various ways to enhance our PaaS services' capabilities.

Similar to AI and aPaaS, we also combine the foundational capabilities of marketing vendors and collaborate with them to build our own PaaS services on their technology platforms. Therefore, we have many technical collaborations in place. Additionally, ChatGPT itself is a phenomenal product that primarily focuses on semantic understanding and content generation.

At Xuan Wu Cloud, we have our own conversational chatbots, which can be integrated with ChatGPT's technologies. So, if we were to define our role in the development of ChatGPT, we can say that we are a company that provides scenario-based applications built upon a specific technology. We will deeply explore various industries, particularly the finance and fast-moving consumer goods (FMCG) retail industries, where we have a strong presence. Our technology will be utilized in numerous scenarios within these industries.

Of course, when it comes to models similar to ChatGPT, we also construct our own models specific to industry scenarios. This is the more valuable aspect for us. Additionally, we apply technology in industry scenarios, but we don't focus solely on developing a large-scale model. This is our core positioning.

Q: What is the current utilization of the funds raised through the IPO?

A: Since our listing on July 8th last year, the allocation of the funds raised has remained relatively stable. However, a portion of the funds designated for mergers and acquisitions will be utilized at a later date, accounting for approximately 10% of the total funds. This information was disclosed in our financial performance announcements. The utilization of these funds has been postponed until December 31, 2024. The original allocation plan for the raised funds was as follows: 50% for research and development, 30% for sales and marketing promotion, and 10% for fund replenishment. We have been diligently adhering to the original plan, gradually deploying the funds in a systematic manner.

In 2022, Xuan Wu Cloud executed its investment plan as initially intended, without any alterations. Looking ahead, as we expand our overseas operations and support the international expansion plans of our domestic clients, we anticipate the timely realization of the funds earmarked for mergers and acquisitions.

Q: The company achieved significant revenue growth of over 70% in the AI sector last year. Could you please explain how this improvement was achieved? What are the expectations for R&D investment in AI this year?

A: The primary driver behind the substantial growth in the AI sector can be attributed to our existing clients in the fast-moving consumer goods (FMCG) industry. We primarily focus on image recognition within AI. Many FMCG companies that were previously utilizing our SaaS services have now begun implementing AI. In 2022, approximately 30% of our existing clients incorporated AI into their operations. Additionally, our AI services operate on a pure SaaS model, with charges based on image recognition input or the utilization of an AI image recognition license. Consequently, the usage volume of AI solutions among our clients continues to increase.

We are committed to ongoing investments in AI, particularly in algorithm development. In 2021, we utilized Transformer models from ChatGPT for our own algorithms. At the product level, we continue to introduce new AI-driven scenarios and offerings, such as our AIOT smart freezers. We anticipate that the growth of AI, particularly in areas like intelligent freezers and smart store expansion, will surpass 100% in 2023. Therefore, we will continue to solidify our capabilities in the AI field, empowering our AI business initiatives.

Q: Does the company have any strategic acquisition or international expansion plans for 2023?

A: In the future, Xuan Wu Cloud will consider investing in and acquiring companies that align with our product portfolio and business synergy, particularly technology-oriented firms. This will enrich our product offerings and strengthen our core technological competitiveness. Additionally, we aim to use our listing in Hong Kong as a stepping stone for expanding our overseas operations. Specifically, we have plans to expand into the Southeast Asian market in the telecommunications sector. In the fast-moving consumer goods (FMCG) and retail Sales Cloud domain, we are actively collaborating with partners, including freezer manufacturers and cloud vendors, to expand into international markets. We are also accompanying our clients in their global expansion efforts. Therefore, we are highly committed to considering investment, acquisition, and international expansion plans.