Xiaodan Zhang: My first question is regarding the AI strategy. So the company has been actively investing in AI for the past year. So could management give us some color on the market competency of your AI related products and solutions as well as on this year’s CapEx plan and revenue expectation? And my second question is on gross margin. So KC has achieved significant gross margin improvement last year, partially attributable to the change in your revenue mix. So as your CDN business adjustment is approaching the end, what do you think of the gross margin improvement pace going onward?
Haijian He: I think in terms of the margin expansion, I think there are three fundamental drivers for the margins. I think you pointed out correctly. The first one, obviously, is the continuous mix change of the CDN business versus others. So as you’ll see that the CDN business itself actually going through a cycle, but right now, we are in a kind of more stable period that we are going to see a potential stability of the CDN revenue contribution as well as the client usage patterns that will contribute naturally to our margin expansion. I think that’s contributed one-third of the margin improvement. The second thing I also want to mention, probably didn’t notice or want to point out is, so our measures and the new management initiatives, for example, including renegotiation, supply chain contracts with our suppliers to cutting down the cost basis that actually is not happening on one day or a single month of the year, as you can expect.
It actually span over, for example, the full year from last year. And those contracts and the repricing on a cost basis will be effective on a rolling basis, right, from January to December of last year. And you’re actually extrapolating those trends towards 2024. Those good benefits and the positive impact from the renegotiation and the lower cost basis will actually carry the continuous benefits to our margin and cost into 2024. I think that part will contribute in the second one-third of the margin expansion. The third is, also, you probably didn’t notice, is really about we actually, as Zou Tao mentioned in the prepared remarks is getting the better quality of the projects, not only about the cloud project itself, but also on the enterprise side as well as those verticals, including the financial service, healthcare and certain high quality public cloud projects as well.
And those projects, as we sign into the contract, some of them are still in the backlog and that will be unleashed and delivered in 2024. And in history, especially in 2023, we’re actually seeing the good experience and good trends that those enterprise cloud projects, the single level contract revenue contribution has expanded from, let’s say, mid-single-digits in history a few years ago to double-digits. And right now, we are seeing those trends actually continue to be improved. So the enterprise cloud margin expansion and high quality initiatives and the strategy we’ve set since 2022 has already seen some good results. So this part actually contributing the last one-third of the margin expansion. So to conclude, I think we do see a positive trend, even though I understand, Xiaodan, your concern may be in Q4, you do see a very good Q-on-Q jump of the margin about 3 percentage points.
But I think we are in the very good momentum and in a confident way that in Q1 and going forward, given the three reasons I just mentioned, our gross margin will continue to be seeing good results going forward.
Unidentified Company Representative: So allow me to also translate for Mr. [Doton] for the first question. The first question is about the competitive of our AI products. So, as you correctly commented, indeed in the last year, we have comprehensively worked very hard on expanding our AI business. However, it would be hard and less prudent for me to directly comment on the competitiveness of our AI product versus other of our peers. However, I would say that because of our unique positioning of our neutrality and independence, we have, if you look at it from the results, we have becoming a preferred choice of cloud service provider by a large amount of independent AI, a large language model AI companies. And that is exactly because we don’t do our large language model and build our large language model ourselves.
And therefore, in this round of opportunities, we have seen as a result, we’re already covering a significant number of independent AI companies becoming our customers. And you also asked about the future investment in terms of CapEx. I would say that the rule of thumb is we will be continuing to investing based on the demand and the pipeline of the customers we have. However, the specifics as regards to the specific amount and specific dollar amount and the tempo of such investments is relatively difficult for me to comment at this stage.
Operator: We are now going to proceed with our next question. And the questions come from the line of Daley Li from Bank of America Securities.
Daley Li: I have two questions. First one is about the AI business. Could you share some color about the supply and demand trend recently? And how do we see the growth drivers for the AI, data center AI, public cloud business going forward and the key drivers? And essentially — my second question about the margin trend. Looking into 2024, how do we see the margins such as the adjusted EBITDA margin and some costs like share based compensation cost trend?
Zou Tao: So, yes, you mentioned that the situation of demand for GPU chips more than supply, which has been the key thing for last year. And that is why during the past year, we have also been trying our best to meet the clients, our customers’ demand. While the situation this year, there’s no changes, right. On one hand, the production of some made in China chips have been alleviating to some extent of the issue. However, we have also seen other factors, especially geographic tension factors deteriorating the situation. So overall speaking, we see that since the AI market is still booming and demand continues to increase, the overall theme of the demand and supply balance is still that the demand is largely not exceeding that of the supply.
