► A large run-up on MAUs and favorable financial performances in year 2019 and Q1 2020.
► A significant increase in market recognition in China came through advanced cloud services in WPS office tools.
Kingsoft’s online office business has become a bright spot during the pandemic as telecommuting demand plummets. The monthly active users (MAU) on WPS, the main product of the company, had a year-over-year run-up of 36.28%, to the amount of 447 million. Created three decades ago with setbacks and struggles endured along the way, Kingsoft Office finally found its developing approach in this oligopolistic market.
In general, Kingsoft Office is on the right track and is expected to have an encouraging growth spurt in both the near and farther future.
Kingsoft Office provides Office tools and services both through PC and Cloud, in which the cloud will be the main developing emphasis with the function of cloud storage and collaborative office. Profits come from the subscription from institutions and individuals, customized services and advertisement promotion. The business model for institutions is the combination of subscription and licensing, and for individuals, which is the main user base for Kingsoft Office, it is the advertisement and subscription model, with most of the basic functions complimentary but payment needed for advanced features.
Competitiveness
With decades of experiences in the office field, Kingsoft Office has the compatibility on multi-resolution with 13 core technologies held by WPS. First introduced in 1989, WPS Office has deep understanding on local markets and competitive technology benefits. Here is what Kingsoft can provide in meeting modern office needs.
First, WPS can support all the main operating systems, including Windows, IOS, Linux – and even Chinese homebred operating systems. This deep adaption outperforms that of competitors, especially compared with MS Office and Google Docs. The integrated compatibility works perfectly with Chinese government offices and public institutions, and provide high-level protection on information safety.
Second, with the early action and insight on the mobile office market, Kingsoft Office started its strategic distribution in 2011, with a focus on analyzing customers’ demands and application scenarios. It successfully and rapidly launched the mobile series for WPS. MS Office entered the market 2 years later with a market share still lower than Kingsoft Office.
Third, Kingsoft Office has built its own protection within the industry. With the combination of all four units that haven’t been achieved by either MS or Google, the high recognition in China, AI application, differentiation based on the users’ needs and the cooperation with up and downstream industries via useful functions such as e-signatures, Kingsoft Office is maintaining its position, and also challenging for the leadership in the industry simultaneously.
Fourth, WPS has better adaption on the domestic office market from in-depth research on local users, and lower costs but more resources and advanced models available online compared with MS Office and Google Docs. Furthermore, Kingsoft developed multiple customized solutions for companies with different sizes and industries.
With the increase in total numbers and adhesiveness of users, coupled with the expansion of the office market, subscriptions to WPS are expected to contribute more to revenues.
Business map
Kingsoft Office is focusing its future developments on four dimensions: upgrades on WPS office software, AI applications, cloud services and globalization, among which the cloud services will be the key driver for future expansion.
Cloud services
The cloud services provided by WPS Office consist of cloud storage, shared-editing, privatization deployment and advanced cloud resources and models. The cloud will be the top developing direction for Kingsoft, which intends to provide well-rounded cloud solutions on Office tools and services.
Currently, the Chinese cloud market is led by Alibaba Cloud and Tencent Cloud, with Baidu and JD struggling to catch up. But when narrowing to the cloud application in the office field, Kingsoft has its own superiority. The value chain of Xiaomi, one of China’s leading electronics and software firms, is also a good model for Kingsoft Cloud to follow, building vertical solutions for enterprise customers.
This year, the pandemic will be an opportunity for Kingsoft to explore the public cloud service market. With the office closed, people starting to work from home, the cloud storage and the shared-editing functions became necessary. Also, the increase in the number of devices people is using, including mobile phones, PC, tablet computer, etc., speeds up the file synchronization needs, which reflects a large potential in the private cloud services market.
In this dimension, Kingsoft is transforming itself into a service-provider from being a tool-provider, through its office software cloud services research project and Internet value-added services project.
WPS office software
Not only equipped with this cost-efficient way on customer attraction, but Kingsoft Office never stops to polish its products to create customer stickiness, in which context it is taking more and more market with MAU sharply runs up. When compared with its largest competitor, MS Office, WPS has almost same functions equipped that sufficient for most of the users, but easier to share and synchronize online.
With the increasing complexity in data and contents, the demands form office user is rising and diversifying, which required a high level on collaboration and compatibility. The C-side upgrade project is intended to solve all these problems, significantly improve the efficiency for users and explore the potential market further.
Another project under this direction, the safety upgrade project, is becoming more and more important with the society’s emphasis on the information security nowadays. Kingsoft will keep strive to work on risk averse in software industry.
Globalization
46 languages have versions of WPS Office with more than 220 countries and regions covered, and the MAU for overseas terminals exceeded 100 million at the end of 2019. In exploring the overseas market, Kingsoft has three main emphases: 1) Targeting an increasing MAU, the company earns profits through advertisements and paid membership in terms of emerging markets such as India and Indonesia. 2) Choosing some advanced C-side services, such as switching between PDF and Word in the Western market where users have higher acceptance rates in subscriptions. 3) Focusing on marketing on the B-side in the Belt and Road countries.
AI application
AI has been applied in multiple industries, especially for software, which can significantly improve the efficiency by collaborating the man and the machine. With the intention of transformation to a diversified service provider, Kingsoft Office is investing in the AI field to better meet customized demands, which will ultimately bring more paying users.
Financials
In the first quarter in 2020, Kingsoft Office reported a 30.9% increase in revenue and a 130.9% surge in net income, to CNY 110 million. The operating cash flow soared to CNY 132 million from the same period last year of negative CNY 2.93 billion. Though it experienced a drop in licensing business, the company had a run-up on subscriptions. The MAU reached 447 million, which is an equivalence to the 35.64% increase of the growth for entire year of 2019. Though the large part of the jumps in profit and MAU were driven by the telecommuting under the pandemic, Kingsoft can still benefit from this since more users had experienced the products, thus leading to a higher customer adhesiveness.
Getting rid of the unrecurring success in Q1 2020 due to the telecommuting under the pandemic, Kingsoft Office handed over a satisfying answer in 2019. The revenue soared 39.92% to CNY 311 million and gross profit soared 37.99% to CNY 1.35 billion compared to 2018. Net income attributed to listed shareholders is also increasing steadily, with a year-over-year jump of 28.9% to CNY 401 million. The MAU rate of main products had a year-on-year run-up of 32.6%, to the amount of 411 million. Among the three main business lines, the subscriptions, licensing and promotion, the subscriptions are expected to contribute more to the total sales.
In terms of the reason for the relatively slow growth in net income compared to the growth of revenue, this comes from the emphasis in research and development with a R&D expense ratio of 37.91%, thus producing a lag in cash-out. The SG&A ratio is 8.59% in 2019, remaining constant with last year. R&D expenditure was concluded in SG&A only before 2016. In general, the expense is controlled and stable.
The return on Equity and return on Invested Capital of Kingsoft Office increased steady through 2016 to 2018 but run down in 2019, which was mainly because of the capital raised from IPO diluted by the ROE and ROIC.
Challenges
Though Kingsoft Office has been vigorously developing in recent years, MS Office still dominates the market, with a high user-stickiness. Coupled with the intense competition in Office software market, with new entrants such as Shimo, Youdao and Tencent, how to maintain its position and even break out is becoming the top challenge for Kingsoft.
Currently Kingsoft Office is seeking a transformation on the C-side, from advertising-driven revenue to being subscription-driven. However, based on the consumption habits and low acceptance rates on paid services in the Chinese market, the growth from subscription users may underachieve in the near future.