The Chinese version of 'Twilio' - the leading cloud communication Ronglian Yun has arrived!

The Chinese version of 'Twilio', backed by institutions, has received multiple rounds of investment from Sequoia Capital China.

Since its launch in 2013, Ronglian Cloud has achieved rapid growth in performance and has become the largest cloud communication service provider in China.High-quality and high-potential track, combined with first-mover advantage, has led institutional investors to be bullish. Sequoia Capital China has made multiple investments.

Before going public in the United States, Ronglian Cloud completed a Series F financing of $0.125 billion in November 2020, led by China Venture Capital Fund for State-owned Enterprises (referred to as 'CVCF') with participation from New Oriental Industrial Fund and other institutions. Tencent also participated in this round of financing through its investment entity Image Frame Investment (HK) Limited.

Although Twilio has not achieved profitability, its success has confirmed the potential of this track and the feasibility of its business model. In summary, The charm of cloud communication lies in high growth, high gross margin, and high stickiness.

Growth: China's leading on-demand payment cloud communication

With the rapid development of mobile internet, cloud communication is favored by enterprises due to its cross-platform, flexible and scalable, and low cost characteristics.

Yuntongxun mainly provides three types of services to customers: CPaaS (Communications Platform as a Service), Cloud-based CC (Cloud Customer Service and Cloud Contact Center), and Cloud-based UC&C (Instant Messaging Cloud Platform, Video and Conference).

Source: Yuntongxun IPO Prospectus

According to CIC data, China's cloud communication market reached 35.7 billion RMB in 2019 and is projected to grow to 101.5 billion RMB by 2024 at a compound annual growth rate of 23.3%. Yuntongxun's revenue in 2019 was 0.65 billion RMB, making it the leader in this field in China based on revenue.

With the future increase in cloud communication penetration and gradual market consolidation, Yuntongxun still has a lot of room for growth.

Gross profit: overall stability, CPaaS business gross profit margin has improved.

Previously, telecom operators generally required prepaid consumption, while Ronglian Cloud integrates the communication needs of enterprise users and pays monthly based on the usage of messages and calls. More than 70% of the cost is paid to communication operators according to the unit price and actual usage specified in the annual contract.

The gross profit margins for the first three quarters of 2018, 2019, and 2020 were 37.6%, 41.1%, and 40.5%, respectively, which still has a certain gap compared to Twilio's over 50% level. Currently, Ronglian Cloud still relies on CPaaS for more than half of its revenue, and this part of the phone and messaging usage is highly dependent on telecom operators with weak bargaining power. However, with the increase in scale, the gross margin of this business has improved.

Source: Company prospectus.

In the future, with the improvement of CPaaS business bargaining power and the increase in the proportion of high gross margin income from Cloud-based CC and Cloud-based UC&C, Ronglian Cloud's gross profit level is expected to improve.

In terms of net income, SaaS companies are generally in the early stage and need to face high customer acquisition and marketing expenses as well as research and development investment. Ronglian Cloud's cumulative loss from 2018 to September 2020 was 543 million yuan.

Stickiness: Over 70% of revenue comes from 1% major clients, and the optimization of client industry structure is in progress.

In 2017, Twilio caused market concerns because its largest customer Uber switched to self-built cloud communication platform, but Twilio proved that even with Uber's declining revenue, other customers quickly made up for this gap.

According to the Ronglian Cloud's prospectus, as of September 30, 2018, 2019, and 2020, the company's active customer numbers were 10,245, 11,537, and 12,048 respectively. The number of large customers (annual consumption amount above 0.1 million US dollars) steadily increased, with corresponding contributions to revenue from large customers being 70.7%, 73.3%, and 75.7%.

From the official website, customers cover various industries such as finance, internet, and government enterprises. The financial industry includes major banks like China Minsheng Bank, Shanghai Pudong Development Bank, as well as internet finance companies like Lufax, Ansheng Tianting.

In terms of Dollar-Based Net Expansion Rate, in 2018, 2019, and the 9 months ending September 30, 2020, expansion rates were 135.7%, 102.7%, and 94.7% respectively.This is mainly due to Ronglian Cloud proactively terminating some related cooperation amidst China's strengthened supervision of P2P online lending platforms. The decrease in 2020 was partly due to outflows from small-scale customers under the impact of the epidemic.

Currently, Ronglian Cloud is still in the early stages of rapid development, actively acquiring customers. With the optimization of customer structure and continuous acquisition of high-quality major customers, future stickiness is expected to rebound and stabilize.