When people seek out an alternative to MS Office, they often opt for WPS, the flagship product of Kingsoft Office.
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Kingsoft Office (KSO, 688111:SH) might be a name less recognizable than WPS Office, the company’s office document processing software. Though spun off from the corporate parent Kingsoft Software (03888:HK) in 2019, the company is the origin of the whole Kingsoft story.
The article is a guidebook of KSO’s development, market position and business performance.
Introduced in an earlier piece, the founder Qiu Bojun (求伯君) founded Kingsoft in Shenzhen, China and published Word Processing Software (WPS 1.0) in 1988. WPS had taken over 90% of the market share in China, said the corporate Chairman Lei Jun in an interview. The great success of WPS 1.0 made Kingsoft into a big name in the Chinese software industry. Prior to Microsoft Office’s (MSO) break-in and prevailed software piracy in the mid-1990s, WPS had been doing well in the early 1990s.
Being a cornerstone product of Kingsoft, the office document kit WPS has been upgraded four times during the product lifespan. From the DOS version WPS 1.0 to the current WPS Office, it evolved into a product that can compete with MSO on a global scale, though MSO still holds the stake. For big enterprises, Microsoft is their favorite because it is powerful in building an inclusive enterprise IT environment to meet corporate needs, not just document processing. But for small- and medium-sized businesses, WPS set can satisfy document processing needs.
Besides SMEs, China-based KSO is a trusted business partner for government, state-owned enterprises (SOEs), and companies in the domestic market. The company claimed that more than 50% of China’s Fortune 500 companies purchased its products and services and all five national commercial banks (ICBC, ABC, BOC, CCB and BOCOM) and over 85% of SOEs are its clients.
Except for the dominant position in government and SOE document processing market, KSO sees a healthy growth in product subscription: revenues generated from product subscription increased from CNY 6.4 million (USD 0.91 million) in 2016 to CNY 68 million (USD 9.71 million) in 2019, CAGR 120%. During the same period, paid-user MAUs rose from 0.78 million to 12.02 million, which accounted for 2.92% of the total MAU rate in December 2019.
The average revenue per paying user (ARPPU) was CNY 54 in 2019. Based on the paid-user MAU in 2019 and a 3-yr CAGR of 149%, the paid-user MAU may rise to around 15 million at the end of 2020 and yield revenue from the section to more than CNY 85 million. However, the COVID-19 influence might be stronger than we expected. KSO offered free services during the pandemic, which boosted the MAU but lowered ARPPU. For a long run with increasing enterprise services penetration and improved user retention, KSO can reach CNY 100 million in subscription revenue in 2-3 years.
Cloud document services is also the driver pushing the increment in the subscription as well. Supported by its sister company Kingsoft Cloud (KC:NASDAQ), KSO offers cloud-based document function, competing with MSO 365 in China while G Suite is not accessible in the market. Cloud-based products optimize user experience like ‘save-as-you-go’ and ‘open-at-anywhere’ and thereby increase user stickiness. Plus, add-on services including drive space extensions, premium account functions will help to raise ARPPU accordingly. KSO’s membership plan, Daoke.
As a competitor of MSO, its parent company is also a head-to-head player of MS to some extent. Both companies have cloud services, gaming, office software and other similar business units.
MSO’s revenues from business-end users are six times the number of consumer-end users in F2019 – USD 27.4 billion vs. USD 4.3 billion. The multiple could be a benchmark to project KSO’s revenue in the future, but we need to consider the difference in Chinese and American markets’ user preferences. The penetration of enterprise services is lower in China but is increasing steadily; enterprise purchasing may be substituted by individual payments, especially in SMEs.
A gross margin of 80% is an average for typical SaaS industry companies. The rule applies to KSO. In 2017-2019, the company’s gross margin is 88.2%, 86.2% and 85.6% respectively. During the same period, its net profit margins were 28.5%, 27.5% and 25.4%. The financials look sound and meanwhile, KSO maintained high R&D costs in 2017 – 2019: it spent 35.3% 37.8% and 37.1% of the revenue of the year. Coming to the end of 2019, around 68% of its employees were engineers or technicians.
The high input in R&D firms is the core competency for a SaaS firm, helping to make its global footprint. Kingsoft set up the first overseas joint venture Kingsoft Japan as early as in 2005 to serve the Japanese market and WPS has been a popular product in Japan, competing with MSO. It is undeniable that MSO dominates the global market, but for SMEs, MSO and WPS are equivalent in functionality – for less concentrated industries, WPS is in a better position because of its price advantage. MSO takes the giants and KSO has the SME pool. But the question of how to gain more appreciation from MSO’s giant clients will still be a harsh game for WPS – after all, giants contribute more cashflow than SMEs.
By now, KSO has made WPS available in 40 more languages to provide services to a wider world map. Being a leader in the Chinese office software industry, KSO is one of the ‘cloudiest’ companies providing SaaS products with support from Kingsoft Cloud. Beyond cloud-based services, mobile-end products, tailored autogenerated document templates, collaborative document editing and such must-have functions became available, which offer users more reasons to stay with the product. With increasing MAUs and keeping a good position in the local market, China-based KSO has the potential to be valued in tens of billions of yuan.