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Only long-termists can be friends of time. In the author’s opinion, Kingsoft Office, which is increasingly leaning towards the SaaS model, is one of the representatives of “long-termism”.
Recently, Kingsoft Office (stock code "688111") released its 2023 semi-annual report. The report shows that in the first half of 2023, the company achieved operating income of 2.172 billion yuan, an increase of 21.25% over the same period last year; net profit attributable to shareholders of listed companies was 599 million yuan, an increase of 15.32% over the same period last year; net profit after excluding non-recurring gains and losses Profit was 576 million yuan, an increase of nearly 40% compared with the same period last year.
Looking at the entire software industry, Kingsoft Office’s “report card” is outstanding. The excellent performance has also provided strong support for Kingsoft Office's share price. As of the end of August 2023, Kingsoft Office's market value exceeded RMB 170 billion, making it one of the three software companies in the A-share market with a market value exceeding RMB 100 billion.
Kingsoft Office has been galloping along, and its past achievements are indeed worthy of recognition, but can it maintain high growth in the future? Through further financial report analysis, Data Monkey tried to answer this question.
Low price + local advantage, open domestic office
software market
As a leading domestic office software company, Kingsoft's most famous software, WPS, directly competes with Microsoft Office in the United States.
From the 1990s to the present, office software has been on the market for 30 years. As Microsoft Windows comes pre-installed, it quickly seizes the market, making Office gradually become the industry standard for global office software. For a long time, Office has been so deeply rooted in people's hearts that the words Word, Excel, and PPT have become synonymous with documents, spreadsheets, and slides.
In the face of industry giants, Kingsoft Office's development has experienced a trilogy of "opening high, moving low, and rising again".
Open high. The first WPS 1.0 was born in 1989, earlier than office software. Because WPS solved the problem of DOS systems being incompatible with Chinese systems at that time, this "unique" office software occupied 90% of the domestic market in just a few months.
Go low. After Office entered the Chinese market in 1994 and seized most of the market share, WPS's market share languished and shrunk to single digits.
Get up again. The turning point came in 2005, when Kingsoft Office released the WPS 2005 version, and the personal version was free. Although WPS is not as powerful as office in terms of functionality, its functions are sufficient for daily use by small and medium-sized enterprises or individuals, and the interface is simple, compact and flexible. Therefore, in the three months since the free version was released, the personal version has been downloaded more than 38 million times. WPS penetration rate has increased significantly, with market share exceeding 20%.
In addition, in the era of mobile Internet, Kingsoft Office took the lead in releasing the mobile version and seized the mobile market. And in 2015, Kingsoft Office WPS and one-stop office were released, and subscription services were launched. The launch of the subscription service almost laid the foundation for Kingsoft Office’s subsequent eight years of growth.
WPS, which is rooted in China, is the first choice for domestic government and enterprise office software. Driven by the “localization” of office software in recent years, WPS has almost penetrated into every domestic enterprise and has undertaken many national projects. In the field of government and enterprise office software, Microsoft Office has no advantage at all. In addition, the price of similar WPS products is only one-third of that of office. The combination of low price and local advantages allows WPS to gain a firm foothold in the Chinese market.
The company's operating income increased from 1.13 billion yuan in 2018 to 3.885 billion yuan in 2022; the net profit during the same period increased from 311 million yuan to 1.131 billion yuan, more than tripling in five years, and it can be said to be the most profitable company in China. Office software company.
77% of the income comes from “selling members”.
The trend of cloudification is obvious
Due to the flexibility of "pay-as-you-go" subscription services, it is easier for users to accept them and convert them into paying users. Therefore, in the subsequent operations of Kingsoft Office, subscription service revenue continues to rise, and its proportion of total revenue also increases.
In the first half of 2023, Kingsoft Office's domestic personal office service subscription business revenue was 1.25 billion yuan, a year-on-year increase of 33.24%; domestic institutional subscription and service business revenue was 420 million yuan, a year-on-year increase of 40.38%; the total revenue of Kingsoft Office software personal subscription + institutional subscription was 1.67 billion yuan, a year-on-year increase of 35%, accounting for 77% of total revenue.
In other words, more than 77% of Kingsoft Office’s revenue comes from “selling memberships”.
Source: Kingsoft Office mid-term reports over the years, data ape mapping, Kingsoft Office revenue proportion of various businesses (2023H1 and 2022H1)
Since Kingsoft Office did not disclose the gross profit margin of each business in the 2023 semi-annual report, we refer to the gross profit margin of the 2022 annual report for comparison. The gross profit margin of personal subscription business is 81%; the gross profit margin of institutional subscription is 93%; the gross profit margin of institutional authorization is 94%. Advertising gross profit margin is 72%. It can be seen that the gross profit margin of institutional authorization business is higher than that of institutional subscription business and higher than that of individual subscription business.
In the first half of 2023, the revenue share of the overall subscription business in total revenue increased by 8 percentage points compared with the same period last year. It can be concluded that the growth of the company's operating income and profits in the first half of 2023 is mainly due to the rapid development of personal and corporate subscription businesses, but the overall gross profit margin should be declining. The chart below shows that the year-on-year growth rate of net profit is much smaller than the same period in 2020-2021.
Source: Kingsoft office mid-term reports over the years, data ape mapping
Another hidden conclusion is that the more profitable institutional licensing business is still shrinking, and the public cloud trend is obvious.
B-side authorization means selling software to B-side companies and granting them the right to use the software. In the first half of 2023, domestic institutions’ authorized business revenue was 360 million yuan, a year-on-year decrease of 13.96%. It was the only business among Kingsoft Office’s main business that saw a decrease in revenue.
On the one hand, in 2023, companies will begin to "reduce costs and increase efficiency." SaaS-based subscription business has a price advantage over authorized business, resulting in a decrease in year-on-year revenue from authorized business, which will then be converted into a subscription model, resulting in an increase in B-side subscription revenue.
According to the financial report, orders related to the company's digital office platform continued to grow in the first half of the year, and more than 1,700 new government and enterprise customers (excluding SaaS) were added to the digital office products, driving rapid growth in domestic institutional subscription and service businesses. The number of SaaS paying companies in the public cloud field increased by 54% year-on-year, the renewal rate of paid companies exceeded 70%, and the renewal rate exceeded 100%, driving related revenue in the public cloud field to increase by 100% year-on-year. In terms of personal business, due to the attraction of multi-device cross-terminal interaction, rice husk templates and other functions, the revenue share of personal subscription business is expected to continue to rise.
On the other hand, if we look beyond the economic environment in 2023, we can find that the three consecutive interim reports revealed that WPS ToB's licensing business revenue has declined. The semi-annual report from 2021 to 2023 shows that the revenue in the first half of 2021 was 640 million yuan, accounting for 40.9% of the overall revenue; the authorized business in the first half of 2022 was 420 million yuan, accounting for 23.43%; the authorized business in the first half of 2023 was 361 million yuan, Accounting for 16.63%, the share of institutional licensing business revenue has shrunk by 24% in three years. It is expected that licensing business revenue will continue to shrink in the future.
There are factors such as the transformation from authorization to subscription, as well as factors such as intensifying competition in collaborative office software.
For Kingsoft Office, on the one hand it has to deal with competition from its old rival Microsoft Office in the civilian field, and on the other hand it has to face the eagerness of online collaboration software such as DingTalk, Feishu, Tencent Docs, iFlytek Docs, etc. Against the background of intensified competition, the sales expenses involved in Kingsoft Office's market expansion have also increased. In the first half of 2023, sales expenses will be 476 million yuan, a year-on-year increase of 34%.
In addition, Kingsoft’s office contract liabilities fell by 1.64% year-on-year to 1.703 billion yuan. Contract liabilities are the software company's future revenue recognition, mainly advance payments. Generally speaking, if contract liabilities increase significantly, it indicates that the supply of the company's products or services begins to exceed demand, or is relatively scarce in the market. In the later period, there is a high probability that the company's product sales scale or service demand will increase significantly, and revenue will increase; conversely, there may be product demand saturation or decline. Of course, the small decline in short-term contract liabilities cannot arbitrarily judge the future performance of Kingsoft Office, but when combined with other financial report data, this sign is not very optimistic.
In the first half of 2023, the net cash flow generated by Kingsoft's office operating activities was approximately 600 million yuan, a decrease of 3.46% compared with the same period last year. In the first half of 2022, the net cash flow generated by Kingsoft's office operating activities was 617 million yuan, a decrease of 18.98% compared with the same period last year. Cash flow from operating activities is the most important source of "blood-making" for an enterprise. Compared with the double-digit or even triple-digit growth rate in the previous three years, the blood-making function of Kingsoft's office operating activities seems to have begun to weaken, and it is difficult to make money.
Source: Kingsoft office mid-term reports over the years, data ape mapping
In addition, in the first half of this year, Kingsoft Office disclosed that the monthly active devices of its main products were close to 584 million, of which the monthly active devices of WPS Office PC version were 253 million, leading other domestic office software; the monthly active devices of WPS Office mobile version were 327 million; the monthly active devices of other products of the company were close to 5000000. The number of monthly active devices for the product is so high, but what is the customer conversion rate?
The interim report shows that as of June 30, 2023, the company's cumulative annual number of paid individual users reached 33.24 million, a year-on-year increase of 16.36%. However, paying users account for only 5.7% of the number of monthly active devices. How to convert old users into paying users will be the biggest headache for Kingsoft Office in the future.
Perhaps the introduction of popular features will be a clever move to convert the massive existing non-paying users into paying users. In the first half of this year, one of the most important tasks of Kingsoft Office was the launch of “WPS AI”.
Access Wen Xinyiyan and launch “WPS AI”
In 2023, as ChatGPT completely becomes popular, large models begin to reshape all walks of life, among which office software is one of the subdivisions with the greatest logical changes.
In the first half of this year, Kingsoft Office accessed Wen Xinyiyan through the Qianfan platform, and then quickly launched "WPS AI", which is also the first generative AI application to be implemented in China's collaborative office track. It also positions WPS AI as a large language model application, anchoring the development in the three directions of AIGC (content creation), Copilot (smart assistant), and Insight (knowledge insight). As a ChatGPT-like application in the collaborative office track, WPS AI has been accepted Integrate text, demonstrations, tables, PDF and other product components to meet users' daily office needs in content generation, content understanding, command operations, etc.
On September 5, Kingsoft Office officially announced that WPS AI was officially open to the public. AI capabilities were first applied to WPS smart documents, and more WPS AI capabilities will be opened to other components. Kingsoft Office CEO Zhang Qingyuan said, "With the support of large models such as Wen Xinyiyan, the disruptive transformation of office software has begun. In the future, we only need to tell WPS what we want to do, and the function will be realized directly."
However, not only Kingsoft Office, many domestic and foreign office collaboration software such as Office365 Copilot, DingTalk slash "/", Feishu "My AI", etc. are quickly connected to the large language model, and more office software may be born in the future+ AIGC combination, but how big is the performance difference between them? It's hard for anyone to tell.
In the early homogenization competition, it is still unknown whether WPS AI can win the final victory.
At present, it seems that Office software is one step ahead. As the "funder" who invested in Open AI, Microsoft has obtained the priority to use its advanced AI technologies such as GPT. This has brought many innovations to Microsoft products, such as the application of AI technology in Office software products, namely Office365 Copilot.
Previously, Microsoft announced that Office 365 Copilot would be priced at US$30/month per user, which is a service fee of US$30/month per user based on the price that most enterprise customers have paid. Although it is still in its infancy, specific revenue has not been disclosed. , but Microsoft said it expects to truly generate revenue in the first half of 2024.
In contrast, how to avoid the problem of product homogeneity in the domestic market is an issue that the entire industry needs to explore. Which office software can provide "better" AI services will be the first to break through and win in future competitions.
Overall, Kingsoft Office performed well in the first half of the year against the backdrop of a gloomy economic situation, but its growth is still weak in details. Betting on AI is an important layout for whether Kingsoft Office can achieve the second growth curve of its products. We look forward to the moment when Kingsoft Office will break through and become a leader again.
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Text: Mu Yang / Data Yuan
