Kingsoft Cloud Holdings Limited (NASDAQ:KC) Q1 2022 Earnings Conference Call June 8, 2022 8:00 AM ET

Company Participants

Nicole Shan - Investor Relations Manager
Yulin Wang - Chief Executive Officer
Haijian He - Chief Financial Officer

Conference Call Participants

Thomas Chong - Jefferies
Sophie Chang - CICC
Kyna Wong - Credit Suisse
Joel Ying - Nomura
Alex Yao - JP Morgan
Thompson Wu - UBS
Timothy Chow - Goldman Sachs

Operator

Good day and thank you for standing by. Welcome to Kingsoft Cloud's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

And now, I like to turn the conference over to Ms. Nicole Shan, IR Manager of Kingsoft Cloud. Thank you. Please go ahead.

Nicole Shan

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's first quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on GlobeNewswire services.

On the call today from Kingsoft Cloud, we have our CEO, Mr. Yulin Wang; and the CFO, Mr. Haijian He. Mr. Wang will review our business operations and the company highlights, followed by Mr. He, who will discuss the financials and the guidance. They will be available to answer your questions during the Q&A session that follows.

There will be consecutive interpretations. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management's statement in the original language will prevail.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the Section 21-E of the Securities Exchange Act of 1934 as mandated and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U.S. SEC.

The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB.

It's now my pleasure to introduce our CEO, Mr. Yulin Wang. Please go ahead.

Yulin Wang

[Foreign Language] Thank you, Nicole, and thank you all for joining our 2022 first quarter earnings call. In the first quarter, we generated RMB2.17 billion in total revenues, which was an increase of 20% year-over-year and above the high-end of our revenue guidance range. Our public cloud services revenues reached RMB1.38 billion, remaining stable year-over-year and our enterprise cloud services revenues reached RMB792.5 million, up 89% year-over-year.

[Foreign Language] As previously communicated, starting from the second half of 2021, the Internet sector faced pressures from market headwinds, new regulations and the epidemic. For public cloud services, traffic driven demand continued to grow, but at a pace slower than before as Internet companies focus more on high quality development.

In response to the market change, we initiated our strategic adjustments in the fourth quarter of last year. We have proactively downsized our CDN services and allocated more resources to core cloud services, including computing, storage and enterprise cloud, facilitating their fast growth.

We are pleased to say that we had completed the strategic adjustments planned for this quarter, which started to bear fruit. Gross billings from core cloud services increased 61.2% year-over-year and exceeded our guidance. The proactive downsizing adjustments of the CDN services is progressing in an orderly manner. In Q1, the gross billings for CDN services decreased 20.2% year-over-year.

In terms of profitability, our initiatives to cut costs and improve efficiency have delivered substantial results with our adjusted gross margin improving to 3.8% from 1.2% in the fourth quarter of 2021. In future quarters, we expect to continuously evaluate and dynamically optimize resources allocation enhancing business agility and promoting gradual improvements of profitability.

[Foreign Language] Since the beginning of March, the COVID resurgence across China and the corresponding prevention measures adopted significantly slowed down market demand and severely interrupted offline business operations. For us, in response to the continued slowdown of the traffic driven demand in Internet sector, we proactively scaled down CDN services, while the growth of computing services among public cloud services remained strong as gross billings of computing achieved 45% year-over-year growth.

As a result, our public cloud services remain stable as a whole. In terms of our enterprise cloud services, the market demand potential remain enormous. However, the epidemic did cause delays in bidding, delivery and acceptance checks of cloud projects. On customer fronts, benefiting from our premium customer strategy and the robust business operations such customers enjoy we're able to maintain stable relationships with our existing premium customers, while strengthening our efforts to expand our customer base with industry vertical leaders.

For example, in the first quarter, we teamed up with Camelot to sign our first partnership agreement with Genki Forest, a fast growing beverage brand in China. Overall, in the short-term, we still face challenges from the macro environment. For this year, we plan to focus on quality growth, margin improvements, and core industry verticals. In the long-run, we believe that the ongoing trends for digital transformation where enterprises increase cloud adoption to drive efficiency and save costs remains intact and will keep driving massive demand for our business.

[Foreign Language] Now on to our public cloud services. Internet companies have been transferring more non-traffic driven business operations from their internal on-premise environment onto cloud services. Therefore, computing services growth remains strong. We'd also like to mention that on the gaming front, with the recent release of several gaming licenses, we are actively engaging with our gaming customers on their incremental cloud service needs and are making progress in our cooperation with season game along with another top gaming company to support the launch of their new games.

[Foreign Language] Moving to enterprise cloud services, enterprises and institutions across the board have been increasingly turning to cloud at the natural choice of digital transformation. However, the epidemic has disrupted the pace of such demand causing delays to project time lines and increases in delivery costs. To mitigate the impact, we are implementing higher project quality standards and margin thresholds.

In the public services sector, we won the bid to build a one-stop rental housing e-platform for [indiscernible] Industrial Development Holdings Park. The platform allows users to – of various roles to operate, manage, and supervise the affordable rental housing services for the city. As a leading cloud company with core technology capabilities, we continue to take part in the national project transporting data from eastern regions to western regions for storage and calculation or in Chinese [Foreign Language]. Besides the pilot project for the Xinyang cluster in Gansu computing hub, which is one of the 10 national clusters, we expect to seize more opportunities in big data and computing projects.

[Foreign Language] In the financial services sector, we continued to dive deeper into top customers' need for cloud services in multiple scenarios, deliver industry lighthouse projects, and keep perfecting our solutions offering. With Camelot joining us, we further expanded our coverage of top financial services customers. We now serve 90% of China's top 20 banks and have been continuously adding cooperation dimensions. Take some of our key account projects, for example.

During this quarter, in banking space, we won't bid to provide data management and cloud infrastructure products to ICBC Technology to jointly build a unified financial service and management platform. In the insurance space, we will provide public cloud services to China Life Insurance, a leading insurance company in China. This represents an important landmark project as it pioneers insurance companies transitioning from on-premise deployment to hybrid cloud environments by improving their recognition of public cloud.

[Foreign Language] In the healthcare sector, digitalization upgrade has become a key topic for medical institutions, regional healthcare networks, and smart health cities since COVID started. Healthcare Cloud Solutions needs to address several challenges, including the magnitude of data size, complicated structure, high storage requirements for image data, and varying digitalization levels among regions.

Our robust and stable digital cloud infrastructure provides the foundation for the value maximization of data assets. And cloud service companies like us have proved to be an essential component of the digital upgrade for the healthcare industry. As the epidemic research in Shanghai and Jiangsu province since March, we took a quick action and urgently deployed our teams together with cloud infrastructure resources to support local containment efforts.

We set up a cloud infrastructure dedicated to Kunshan of Suzhou City for academic containment. The infrastructure enables data collection, aggregation, governance, analysis, integration, and sharing, providing high quality and stable data support. In Hubei Province, following our success with the healthcare project in Hubei Province and Wuhan City, we won another project to build an information system for special disease prevention and control, where we will be building a middle platform.

[Foreign Language] In conclusion, the complex economic environment and epidemic resurgence this year have put pressure on the short-term growth, but thanks to the strategic adjustment since Q4 last year, we have laid solid foundation for mid-to-long term revenue expansion and margin improvement.

Cloud computing carries long term potentials. Looking ahead, we will adhere to our strategic direction and pursue steady and high quality development, while improving our business stability and profitability. We will fully leverage our technological strength to provide stable and efficient cloud services to our premium customer base.

[Foreign Language] I will now pass the call over to our CFO, Haijian to go over our financials for the first quarter. Thank you.

Haijian He

Thank you, Yulin, and welcome everyone for joining the call. Before turning into the financial detail, I would like to walk you through the following highlights for the past quarter. First of all, our total revenue reached RMB2.17 billion in Q1, above the high-end of our guidance, which range from RMB2.05 billion to RMB2.15 billion that represents a growth of 20% year-over-year. Within that, our core cloud services, including computing, storage, and enterprise cloud services increased by 61.2% year-over-year this quarter.

Second, we are pleased to see that we have been making significant progress in our cost control strategy execution. The adjusted gross profit for this quarter increased by 152% quarter-over-quarter to RMB83.6 million. Adjusted gross margin increased largely from 1.2% in previous quarter to 3.8% this quarter. Adjusted EBITDA margin narrowed from negative 10.5% in the previous quarter to negative 7.1% this quarter.

As we introduced in last quarter, as the new technology budgets from Internet sector clients in general have been increasing at a slower pace than expected. Starting from second half of last year, the demand to us has been softened and affect our resource efficiency connected to the bottom line.

In response to the market change, since Q4 last year, we proactively downsized our CDN services and allocated more resources to our core cloud services. We have taken active cost control measures and improved overall operational efficiency. Even though we are still facing the challenging macroeconomic environment, we believe we are on track to achieve quarterly adjusted EBITDA margin breakeven in Q4 2022.

Third, as of March 31, 2022, we had cash and cash equivalents and short-term investments amounting to RMB5.6 billion, providing us sufficient liquidity for operations. The CapEx for this quarter was RMB622.4 million. The increase was primarily due to the procurement of high performing service, which [cater into] [ph] our increasing demand from our core computing services, as well as the cash payment for the service we ordered last quarter.

For the full-year 2022, we expect to keep our total capital expenditure plan in the range of RMB1 billion to RMB1.5 billion. We've firmly executed our high quality development targets and allocated online server resources prudently to our core cloud service growth. Last, our Board of Directors has recently authorized the company to repurchase up to US$100 million of our ordinary shares in the form of American depository shares during a 12-month period.

Today, we are pleased to announce that we have entered into a share repurchase program, which is demonstrating our strong confidence in the company growth and a commitment to generating long-term value to our shareholders.

I will now go through our financials in detail. Revenues from public cloud remained stable year-over-year at RMB1.38 billion this quarter. It was primarily due to 45.1% year-over-year growth of our computing services and offset by 20.2% year-over-year decrease of our CDN business, which proactively narrowed down.

In terms of enterprise cloud services, even though the COVID-19 has disrupted delivery of certain offline products, market demand from traditional enterprises and organizations remain strong. Our enterprise cloud services achieved a solid increase of 89% year-over-year to RMB792.5 million.

In terms of cost control and optimization, we have achieved effectiveness this quarter. Total cost of revenues decreased by 20% quarter-over-quarter to RMB2.09 billion. The IDC cost decreased by RMB221.6 million from last quarter to RMB1.11 billion this quarter. It remained consistent of bandwidth and cabinets cost and a decreased trend was in-line with our adjustment of CDN business.

Solution development and services cost decreased by 8% quarter-over-quarter to RMB476.0 million. It consists of payments to our solution design, development, and services personnel. Depreciation and amortization costs increased by 10% quarter-over-quarter to RMB246.1 million. Fulfillment costs were RMB184.5 million this quarter and it represents the cost of purchasing technologies, products and the services from third-party to fulfillment, the demands of our solutions.

Other costs were RMB76.9 million this quarter. In terms of expenses, we have completed the preliminary organizational optimization and efficiency improvement. Resulting personnel expenses decreased compared with Q4 last year. Excluding share-based compensation and D&A, total adjusted operating expenses were RMB532.2 million, increased sequentially by 9.6% from RMB578.7 million in Q4 last year. Within that, adjusted R&D expenses were RMB221.7 million, compared with RMB246.2 million last quarter.

Adjusted selling and marketing expenses were RMB127.6 million, compared with RMB161.2 million last quarter. Adjusted G&A expenses remained stable at RMB174.0 million. As of March 31, 2022, we had sufficient cash and cash equivalents and short-term deposits of RMB5.6 billion.

During this quarter, capital expenditures were RMB622.4 million. The increase was mainly due to the increasing purchase of high-end performance services to meet the incremental demand from strategic core services of computing and storage. We expect our full-year CapEx will range from RMB1 billion to RMB1.5 billion, which will be prudently allocated to meet the demand from our core cloud services.

Meanwhile, we have released our ESG, Environmental, Social and Governance Report for 2021 along with our Annual Report in early May. I would highlight that nominating the corporate governance committee of the Board were primarily responsible for overseeing ESG initiatives at a [poor level] [ph], and the company has appointed its first independent female Board of Directors, enhancing gender diversity and workplace inclusivity.

Looking ahead, we keep focusing on a balance between revenue expansion and margin improvement. We expect our total revenue to be between RMB2.0 billion and RMB2.2 billion for the second quarter of 2022, representing a year-over-year increase of about negative 8% to positive 1.2%. It is mainly due to the offline fulfillment delay of enterprise cloud business in the middle of the short-term COVID-19 resurgence. We will continue to embrace opportunities post pandemic.

We are also in the view that our profitability will keep it upward trend. The adjusted gross margin will continue to be higher in the second quarter, compared with Q1. Under the stable market condition assumptions, we believe we are on track to achieve quarterly adjusted EBITDA margin breakeven by Q4 2022.

All of these forecasts and comments above are based on our current and preliminary views of the market and operational conditions, which are subject to change. In addition, based on the capital market condition, we have already commenced a share repurchase program, which was authorized by the Board in March to purchase up US$100 million of the shares during the 12-month period. We were closely hearing from the feedback from shareholders and delivered lots of value to all shareholders.

Finally, we are moving forward with our Hong Kong Stock Exchange listing plan and we are on track with this progress. We seek to maintain independent listing status in both Hong Kong and the U.S. to maximize protection of our shareholders. Given the recent positive progress in the negotiation on the final [U.S. audit incorporation] [ph] combined with fluctuation in the global capital markets, we will carefully monitor and proactively adjust our execution timeline to safeguard the interest of our existing shareholders.

We will closely monitor the market and the regulatory dynamics and proceed prudently at the right time. The final listing decision and timeline are subject to both regulatory approvals and market conditions. Thank you.

Nicole Shan

Thank you. This concludes our prepared remarks [indiscernible]. And we are now happy to take your questions. Please ask your questions in both Mandarin and English if possible. Operator, please go ahead. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong

[Foreign Language] Thanks management for taking my questions. My question is about the Q2 revenue guidance. Can management comment about the monthly trend that we are seeing in April, May, and June, respectively? And given right now, we have already passed the first week of June, just want to get a sense about our confidence level in terms of the guidance? Under what scenario would we be hitting the low-end and the high-end, because I think the low-end we are talking about negative growth? So, just want to get some color about our thoughts at this point. Thank you.

Yulin Wang

[Foreign Language] So thank you very much for your question. So, essentially, the second quarter is mainly impacted by the COVID situation. And as you can see, I just elaborated according to the two services. In terms of public cloud services, we think the impact is limited. There is some small impact for the increased amount in our data centers in the Eastern China and Northern China for their increasing business operations, but it's not any material impact.

The impact on the other hand on the enterprise cloud side is relatively large, especially in Q2 because basically the control measure in terms of the scope and the timing that expense have exceeded our expectation. and that situation has impacted the bidding, the implementation, the deployments, and the delivery of our enterprise cloud projects. But as far as we can see is that, since the end of last week, some of the projects that are ongoing, we have already started to resume some of those projects that has been impacted. And we're still having several weeks towards the end of June.

So, we are trying to catch up with the time to meet the progress target as much as possible. So, that leads us to the guidance that Haijian has provided towards the end of the prepared remarks. Thank you.

Operator

Thank you. Our next question comes from the line of Sophie Chang from CICC. Please go ahead.

Sophie Chang

This is Sophie from CICC, and thanks management for taking my questions. So, we've heard about the news of headcount cutting across many top tier Internet companies. I just wonder like many of which our KC’s key customers, so do we expect any change in their demand? And how will the dollar value of those core customers change? And accordingly, shall we expect any headcount adjustments within KC? [Foreign Language]

Yulin Wang

[Foreign Language] Thank you very much for your question. So, in terms of public cloud, we know that the market is predominantly focusing on the Internet conglomerate, which some of them are our customers. So, for the changes and adjustments that you mentioned, actually, we had already expected that and what we see that's happening in this quarter are exactly unfolding according to what we had expected. And as mentioned in expectation of those changes, we had proactively downsized our CDN business due to the increased volatility of the CDN business.

Now by adjusting downwards the CDN supply, we're able to command a more profitable business, which again is consistent with our expectation. And another part of the non-CDN business for those customers of ours is that when they are focusing on reduction of their cost, it is also an incentive for them to increase the cloud adoption, which is good for their cost savings. And therefore, we are observing increased amounts for non-CDN business cloud usage.

And certainly, we also have made progress in the first quarter in terms of new customers for public cloud services. In the enterprise cloud space, I know you didn't particularly ask that, but as we discussed earlier is mostly impacted by the COVID situation and [indiscernible] measures.

And for the second question, you asked about the KC headcount adjustments. Since the completion of acquisition of Camelot last year, we have started the integration with Camelot, which includes the integration of the employees, which has largely been completed by the end of last year. So, as of now, we have a combined headcount of roughly 10,000 people for KC and Camelot combined together and we expect that number to remain relatively stable or with a small decline throughout this year, but largely stable. Thank you.

Operator

Thank you. Our next question comes from Kyna Wong from Credit Suisse. Please ask your question.

Kyna Wong

[Foreign Language] The first question is actually a follow-up question that I wanted to figure out more detail about the impact on the enterprise cloud, because I – perhaps some projects cannot be completed by the end of this year due to the pandemic impact in the first quarter and second quarter, and/or some that is actually impacted by the adjusted budget from the government or like [provisions] [ph] of this project. And the second question is about the public cloud industry trend because we do see some landscape change here. And I wanted to hear the sharing from the management? Thank you.

Yulin Wang

[Foreign Language] Thank you very much for your question. And I think to answer the first question about the COVID impact, essentially the impact pretty much concentrated on the enterprise cloud side. And for the public cloud side, the impact does not have any material – the COVID situation does not have any material impact to the [short business] [ph], especially we do think maybe there is actually some short-term uplifting of the public cloud usage just for that COVID factor per se.

And for the enterprise cloud side, for the first quarter actually the impact is limited because it's mainly after the Chinese spring festival that impact start to show the resurgence of the COVID situation started to take place, but the second quarter impact was almost covering the full quarter, so it's relatively severe.

So, there are two kinds of situations. One is that some of the projects that's already in process and we're essentially seeing delays on those projects. And for those sort of projects because we're currently still in June and the early June, we think if we take a look on a full-year perspective, we do think there is still time to catch up with the time that's lost during the quarter due to the control measures.

And for second type, which is essentially the bidding process that's got delayed during the control measure, we think that according to our communication with prospective customers, there's no material change in that respect, especially in terms of public service customers and healthcare customers within the risk of missing the full-year guidance currently as we can see it, it's not material.

So, we think generally speaking, full-year basis we're still on track to deliver the full-year guidance right now. We don't think of any necessarily to adjust for that guidance for the enterprise cloud business.

Now, for the public cloud side, our communication with our [key three main customers] [ph], those Internet customers included has been very smooth and we have a very open and smooth channel for communicating with them. So, despite all the changes and challenges that you mentioned, those are things that's not part of our expectation. For both the, as you can see, and also evidenced by the numbers that we just disclosed in the first quarter, for both existing customers and new customers, there has been a relatively faster growth for the usage of the non-traffic driven demand.

So, that's something nice to know. And also in terms of competitive dynamics, we think that for the industry verticals that we're focusing mainly, the financial services, the Internet, the public service and healthcare, the barrier to entry in those particular verticals actually are relatively high. And we think after this many years of operation, our competitive edge has been reinforcing.

So, we think we do not see really material change in the enterprise cloud compared to that dynamics. Thank you.

Haijian He

Kyna, if I may also, happy to offer a few more data points to help [indiscernible]. First of all, if you remember, in the recent disclosed annual report, our dollar retention rate for the public cloud clients for last year was around 114%. So even considered active decrease of the CDN revenue contribution, but this number is doing a [rolling basis] [ph] into the Q1 this year, we still believe it's above 100%.

So that actually has a base of the growth of the revenue opportunities for across the board of the public cloud clients. And the second point is, if you look at our [previous mix] [ph] of the revenue of the CDN versus computing business, in Q1, our computing business itself actually delivered a very solid growth around 40% on a year-over-year basis. I think this number is also above the industry average in Q1, especially in the very difficult market conditions.

So, if you're putting the two numbers together, you may see a relative [indiscernible] the fundamental demand of the computing demand from our Internet client base, actually pretty okay. And if you cross check the number with our covered expenditures, in Q1 this year, we spent about RMB600 million, you can tell that the money we spent basically the servers and high-end infrastructures already started to producing revenue in Q1 immediately.

So, if there is a lot of risk on issues regarding the demand for clients and our CapEx expenditure will not be converting to the revenue so quickly and efficiently in Q1, especially for the storage and computing business. I think these are the few numbers you probably can help and form a foundation of the growth, especially from computing and storage and relatively high-end business from public cloud clients. Thank you.

Kyna Wong

Thank you. Thanks, very helpful.

Operator

Thank you. Our next question comes from Joel Ying from Nomura. Please go ahead.

Joel Ying

[Foreign Language] I have two questions. My first question is about CDN business. Can we release the CDN business as a percentage of total public cloud for 1Q 2022? And second one is, for short-term because of the public cloud market situation, maybe we're focused on enterprise market, enterprise cloud, but into a long-term, I guess, we are still based on the [two-wheel] [ph] strategy, we are focused on both public and enterprise cloud and put the R&D into both sector to deliver business, am I understanding correct? Thank you.

Haijian He

Yes, sure. Joel, happy to take on the first question. There are a few important considerations when we think about planning and budgeting. We want to use the opportunity to balance not only the CDN revenue contribution, but also the top line concentration risk as well. So, there are few important dimensions we will track on an annual basis. First of all, for 2022, we are assuming no single client will be contributing more than 20% of the total revenue of Kingsoft Cloud.

And the point number two is, we want to assume around 25% or around that range of the CDN business as a total revenue of Kingsoft Cloud financial year 2022. So, when we look at that strategy in Q1, I think we're happy to see that the CDN revenue as a contribution of total revenue of Kingsoft Cloud has decreased from historically, let's say, above 50% right in historical years to around 30% already below 30% in Q1.

So, the trend is very clear. And in the [following quarters] [ph], I think the absolute dollar value of the CDN revenue will remain relatively stable because it will affect our total efficiency of the network and infrastructure, but as a percentage of total revenue, we'll see gradually coming down in the next few quarters, but I think the two important dimension numbers, as I mentioned in the beginning will be important guidance when we think about the whole year mix of the combination. Thank you.

Operator

Thank you. Our next question comes from Alex Yao from JP Morgan. Please ask your question.

Alex Yao

[Foreign Language] So, my question is to follow-up the enterprise cloud demand in this year. Based on your observation, is the budget allocation to adopt enterprise clouds very strong demand from the corporate with or without the COVID impact or with or without the economic slowdown impact? They will be very strongly committed to the adoption of the cloud or put another way, digitization of their own business or do they have more flexibility on cloud adoption? And if the top line is facing pressure from macro, from COVID impact they are likely to slow down the budget allocation to adopt those cloud solutions. And I guess the answer has a lot to do, will they be able to see immediate efficiency improvements or more monetization right after their adoption of these cloud solutions or are they still in the, kind of narrow stage to figure out how to use the cloud solution to make the efficient – make the operation more efficient? Thank you.

Yulin Wang

[Foreign Language] So, just to add on, one of the prior questions, which was about whether we continue to do the two wheel kind of driven business model going forward? And the answer is, for sure certainly. And for the public cloud side, we see that the demand continues to be actually very strong being driven by the cost reduction incentive for those customers or driven by the multi-cloud demand. So, we continue to be committed to this type of business.

And for the enterprise cloud side, it actually differs across the verticals that we're specializing. For example, in financial services sector, although the sector has been developing for many years and we have, as just mentioned in the prepared remarks, I've been covering 90% of the top 20 banks in China, there actually continues to be in the elastic demand from those customers. And that demand comes from the demand and requirement for technology and for their business.

So, it's not even related to their budgeting. So, this is [indiscernible] demand, and we can – also evidenced by the fact that the COVID doesn't have any impact to this, kind of project. And the second one in healthcare industry, which as you can understand, it actually increased – the COVID situation actually increased demand for healthcare projects. And that also increased the granularity of a lot of the healthcare institutions and government agents and management process and thereby driving more projects as well.

For public services side, from our communication with the potential customers, we haven't really heard about the efficiency of budgeting and therefore changing or cancellation of those projects. So, that's basically the situation. Thank you.

Operator

Alright. Thank you. Our next question comes from Thompson Wu from UBS. Please ask your question.

Thompson Wu

[Foreign Language] My first question has its relationship with what Alex just asked about, a lot of investors are asking, how China's macro situation will impact enterprise and cloud adoption over the long-term, if there is any impact? And then if so, what verticals specifically? And then the second question is, asking on behalf of investor on the call, he/she would like to know what full-year guidance the company has given beyond reaching an adjusted EBITDA breakeven point in fourth quarter, has the company given full-year 2022 guidance? Thank you.

Yulin Wang

[Foreign Language] Okay. So, we think that we understand that because the market really care about macroeconomic situation in China, from our experience, for our company, in the public cloud services side, our customers are mainly Internet sector customers. We feel like it's not going to be materially impacted, as well as the general policy of development remains stable, but what we can experience our business for the [public outside] [ph] remains robust and with strong growth.

So, we are relatively optimistic with that. And on the enterprise cloud side, the – as mentioned just now, there hasn't been any significant sign of central customers canceling our projects or canceling or changing materially their budget. And we also see that the government have some incentive macroeconomic policies for the second half of the year and we expect there might also be a wave of opportunities for us to seize.

So that's – admittedly the COVID control measures in the second quarter have had some impact, but those impacts are mainly about the pace and uncertainty for that particular period of time. And we don't think that – so overall speaking for enterprise cloud part of the business, we remain optimistic.

Haijian He

Yes, thank you, Thompson. On the second question on the [buckets] [ph] of the profitability, you’re right. I think we are expecting to hit the quarterly breakeven of the non-GAAP EBITDA margin in Q4 of 2022. And as we also mentioned, we are already in week one of June, so in Q2, I think our gross margin will be likely higher than Q1 2022 and hopefully we can keep upward trend in general of the gross margin.

On the second part, given we're doing a lot of work on the cost control mix and the diversification of the clients, so hopefully, our core cloud services, including computing storage and [enterprise] [ph] as a whole, the total revenue of that bucket will be generally grow at a higher pace compared with the industry average and the major peers.

And the third, while we are not providing official guidance for the full-year total revenue, but as CEO Yulin mentioned, I think we are executing on track of our total budget internally. And while there is a one-time and a quarterly impact in Q1 given the COVID-19, while hopefully on a full-year basis, will remain the same in terms of the total target internally and we're executing that based on that and there's no change of the total budget. Thank you.

Operator

Great. Thank you. Our final question comes from Timothy Chow from Goldman Sachs. Please ask your question.

Timothy Chow

[Foreign Language] Thank you management for taking my question. My question is on the cost control side, especially as we see in the first quarter, there was a big [QonQ] [ph] decline in IDC cost, how much further declines can we expect from IDC cost for Q2 and full-year? And what other cost control initiatives are we going to implement for the rest of this year? Thank you.

Haijian He

Yes. Let me share very quickly on this [indiscernible]. I think we do – even in a very short period of time, we do see a great solid trend on the results. So, you're right, we're approximately saving about RMB200 million on IDC costs. As you know, within the IDC cost item, there are leasing expenses we paid to rent the cabinets, and they are the bandwidth costs, which are a majority of the portion under the IDC cost.

So, the major reason was our adjustment of the CDN business strategy since Q4 last year, but going forward, we are still assuming there are few things we're working on will have further leverage to decrease the IDC costs, including their better planning of rental of the IDC locations, including our budgeting and more advanced technology to saving the energies, including a few initiatives we are taking to optimize the downloading and upstreaming of the bandwidth capacities and [indiscernible] working on that.

I frankly don't think that D&A costs will go down because as you know we're spending the CapEx to buying high performance GPUs and infrastructures. I think assuming that is a good CapEx that will drive the good revenue, so the D&A expenses I don’t think were affecting a lot and that mathematically will not affect the EBITDA margin, as you understand, because the D&A expenses was adding back.

The fulfillment cost and development of the solutions, those two items in giving further integration with the Camelot will may have further room to reduce the cost of those two items. And that two items will also affect given we are selling more recurring business and products we're also converting into a higher margin, as we are seeing there are a few important times, especially in the financial services and healthcare, while doing already the Phase II and Phase III.

So, the initial fulfillment and R&D expenses will be reduced given the scalability and the recurring basis of those revenue. Regarding the R&D, I think we may have some potential room to see a dollar value decrease going forward, while we continue to spend time and resources on the core strategy and technologies. The sales and the marketing and the G&A, I think will remain relatively flat, but I think the G&A will also have some flexibility to adjust on that.

So, we have a very strict prudent internal approach to navigate and prioritize a few different initiatives, but I think those things will be unfolded in the next few quarters, but majority of the work has been completed and already in place. Thank you.

Operator

Great. Thank you very much for all your questions. So, I'll now turn the call back to Nicole for closing remarks.

Nicole Shan

Thank you, [Amber] [ph] and thank you once again for joining us today. If you have any further questions please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Thank you.

Operator

Thank you. This does conclude our conference for today. Thank you for participating. You may all disconnect.