tech

SaaS is encountering a cold winter, a market narrative that has persisted for over a year. This can be seen from the performance of many SaaS companies in the secondary market that have reported losses. Considering the relatively immature SaaS market environment in China, the continuous investment in early-stage product research and development as well as sales costs, the complexity of large customer needs and their preference for customization, the weak payment capacity of small and medium customers, and the differences in various types of SaaS software, Chinese SaaS companies have inadvertently stepped into countless pitfalls.

SaaS companies like Kingdee have been reporting losses since 2020, with the losses expanding over the past three years. According to data compiled by Tai Media, from 2020 to 2023, the losses attributable to Kingdee International's equity holders were 335 million yuan, 302 million yuan, 389 million yuan, and 210 million yuan, respectively. The main reasons for Kingdee's losses in recent years have been the development of new businesses and the investment in sales and administrative expenses for market expansion.

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On August 15, Kingdee International announced its financial report for the first half of 2024, ending June 30, 2024. During the reporting period, the loss attributable to the company's equity holders was approximately 218 million yuan, narrowing by 23.2% compared to the previous year.

At the performance meeting, Xu Shaochun, Chairman of the Board and CEO of Kingdee Group, pointed out that the transition to the cloud requires a process, and the golden decade for Chinese enterprise software SaaS has arrived. He expressed full confidence in Kingdee's ability to turn a profit by 2025.

Lin Bo, Executive Director and CFO of Kingdee Group, stated that the expected target of reaching the company's break-even point by 2025 remains unchanged. The company's financial situation in the first half of this year also demonstrated performance resilience. Moreover, the company has a high ratio of Annual Recurring Revenue (ARR) to contract liabilities, and as long as the renewal rate does not decrease, the company's future revenue growth is expected. At the same time, the company will invest more cautiously and strengthen the control of various cost expenses.

During the reporting period, the group recorded revenue of approximately 2.87 billion yuan, a year-on-year increase of 11.9%; the gross margin continued to improve, rising from 61.9% to 63.2%; the loss attributable to the company's equity holders was approximately 218 million yuan, with a year-on-year reduction of 23.2%; sales costs were 1.055 billion yuan, a year-on-year increase of 8.0%; operating profit was 317 million yuan, with an operating profit margin of -11%, an increase of 4.1 percentage points compared to the previous year.

To this end, Kingdee has adopted "subscription priority, AI priority" as the core of its new strategy. From a product perspective, Kingdee's revenue is mainly composed of three parts: cloud service business, traditional ERP business, and other investment property management businesses.

In recent years, Kingdee has continued to deepen its cloud transformation, focusing on the development and promotion of cloud subscription products, and actively and gradually reducing traditional ERP license sales. These measures have brought continuous growth to the cloud business revenue, and the proportion of cloud business has been increasing year by year. Since 2020, Kingdee has included ARR for cloud subscription services in its financial reports, marking the beginning of a higher-quality cloud subscription model development phase for its cloud transformation.

During the reporting period, cloud service business revenue increased by 17.2% year-on-year to 2.39 billion yuan, accounting for 83.2% of the group's revenue; Kingdee's cloud subscription service Annual Recurring Revenue (ARR) was approximately 3.15 billion yuan, a year-on-year increase of 24.2%; contract liabilities related to cloud subscription services achieved a year-on-year increase of 28.2%.

It has been calculated that from 2016 to 2023, the annual compound growth rate of Kingdee's cloud services has reached 35.6%. During the period from 2020 to 2023, Kingdee's ARR grew from the initial 1 billion yuan to 2.86 billion yuan, with a slowdown in year-on-year growth rate.During the reporting period, the contract liabilities related to cloud subscription services achieved a year-on-year increase of 28.2%.

Contract liabilities refer to liabilities arising from commitments made in a contract that have not yet been fulfilled, that is, amounts received that will be recognized as revenue after the services are provided. The growth potential of contract liabilities actually indicates the complexity of the long-term acceptance process and contract terms required when software companies sign contracts. This also implies that Kingdee Cloud has a portion of relatively certain potential revenue in the coming year, which needs further verification in the second half of the year.

At the product level, from 2018 to the present, Kingdee has successively launched product segments such as Starry Sky, Cangqiong, Xinghan, and Xingchen. Kingdee Cloud • Xingchen, aimed at small and micro enterprises, integrates business, finance, and taxation; Kingdee Cloud • Starry Sky, aimed at high-growth enterprises, provides integrated capabilities of research, production, supply, sales, and service, as well as deep integration of business and finance, while also providing support for going global; Kingdee Cloud • Xinghan, aimed at large enterprises' SaaS, expands in the fields of human resources cloud CoreHR, financial cloud (including treasury products), and EPM (Enterprise Performance Management); Kingdee Cloud • Cangqiong, aimed at super large enterprise customers, and upgraded to a new generation of enterprise-level AI platforms.

During the reporting period, Kingdee Cloud • Cangqiong and Kingdee Cloud • Xinghan together recorded cloud service revenue of approximately RMB 546 million, a year-on-year increase of 38.9%, and the contract signing amount increased by about 63% year-on-year; the cloud subscription ARR of Kingdee Cloud • Cangqiong and Kingdee Cloud • Xinghan increased by 29% year-on-year, and the net amount renewal rate (Net Dollar Retention) was 97%. During the period, Kingdee signed contracts and won bids with many state-owned enterprises and Fortune 500 companies, including China National Petroleum and Chemical Corporation, China Aviation Group, Dongfeng Motor Corporation, Tongwei Co., Ltd., Beijing Enterprises Water Group, Longfor Group, China Merchants Shekou, Haihua Group, Lingnan Group, etc.; the total amount of new contracts signed exceeded RMB 900 million, and 275 new customers were signed.

Kingdee Cloud • Starry Sky achieved revenue of approximately RMB 1.054 billion, a year-on-year increase of 14.3%; the subscription ARR increased by 24% year-on-year, and the net amount renewal rate (Net Dollar Retention, NDR) was 95%. The number of customers reached 42,000, and 611 new national and provincial specialized and innovative enterprises were signed, including Yue'an New Materials, Beijing Automation Equipment Co., Ltd., LUMI United, Asia Jie Technology, Zhongke Xingtu, Zhongke Weizhi, etc.

In the small and micro market, Kingdee Small and Micro Financial Cloud achieved revenue of approximately RMB 588 million, a year-on-year increase of 17.3%, and the subscription ARR of the small and micro financial cloud increased by 31% year-on-year; among them, Kingdee Cloud • Xingchen's revenue increased by 70.8% year-on-year, and the net amount renewal rate (Net Dollar Retention, NDR) was 92%.

On the other hand, Kingdee has also launched AI innovation applications, including the super intelligent AI management assistant Cosmic. Currently, financial and human resources AI applications have been verified in large enterprises such as Hisense Group, Wens Foodstuff Group, China Jinmao, and C&D Corporation.

Kingdee Group President Zhang Yong pointed out at the performance meeting that AI is valuable only if it can help customers reduce costs and increase efficiency; otherwise, it is just an embellishment. Kingdee's current investment is more in the application of AI in scenarios and the combination of existing product capabilities. This year's strategic goal is to empower products with AI and achieve disruptive innovation of scenarios with AI native. There are already some verified customers in AI scenarios, although AI currently contributes very little to the overall revenue of Kingdee's products, but in the future, all Kingdee products will turn to AI, which is a very important strategy.

Kingdee is also increasing its focus on overseas customers and building up strength for serving overseas. From the perspective of customer needs, security and compliance are the top priorities for Chinese enterprises to go overseas, including privacy protection and data security, as well as the strict financial and tax compliance faced by state-owned enterprises going overseas. Kingdee has successively established branches in Hong Kong, China, Macao, China, Singapore, and other places, and has established data centers; in Malaysia, the Philippines, Thailand, Vietnam, Bangladesh, South Africa, and other countries, it has built a partner system to provide localized service support for Chinese enterprises going overseas.

Continuous cloud transformation, increasing overseas and AI, Kingdee's path is not an isolated case, but is becoming a common choice for domestic SaaS/ToB software enterprises. However, the challenges brought by going overseas and AI may be greater than imagined, including building an overseas team, understanding customer needs to design new product capabilities, and these implicit costs will become new problems faced by SaaS in the future. How to find a balance between cost investment and customer benefits is an important issue faced by all SaaS enterprises.