The Chinese version of “Twilio” - Cloud Communications Leader Rong Lianyun is here!

The Chinese version of “Twilio” with strong institutions has been supported by Sequoia for many rounds

Rong Lianyun's performance has grown rapidly since it went live in 2013.It has grown into the largest cloud communication service provider in China. A high-quality, high-potential racet+first-mover advantage has made institutional investors optimistic. Sequoia Capital has invested in multiple rounds in China.

Before going to the US for an IPO, Rong Lianyun completed Series F financing of US$125 million in November 2020, led by China's State-owned Venture Capital Fund (“China Venture Capital Fund”) and followed by institutions such as New Oriental Industrial Fund. Tencent also participated in this round of financing through its investor Image Frame Investment (HK) Limited.

Although Twilio has not been profitable, its success has validated the track's potential and the viability of its business model. In summary,The appeal of going to the cloud for communications is high growth, high gross profit, and high stickiness.

Growth: Pay-As-You-Go Cloud Communications Leader in China

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

Ronglian Cloud mainly provides customers with three types of services: CPaaS (Communication Platform as a Service), CPaaS (Cloud Customer Service and Cloud Contact Center), and Cloud UC&C (Instant Messaging Cloud Platform, Video and Conference).

Source: Rong Lianyun's prospectus

According to CIC data, China's cloud communications market reached 35.7 billion yuan in 2019, and will grow at a compound growth rate of 23.3% to 101.5 billion yuan in 2014. Meanwhile, Rong Lianyun earned 650 million yuan in 2019. In terms of revenue, it is already a leader in this field in China.

As the penetration rate of cloud communication increases and the market gradually integrates in the future, Rong Lianyun still has a lot of room for growth.

Gross profit: Overall stable, the gross margin level of the CPaaS business has increased

Previously, operators generally required pre-recharge before consumption, but Rong Lianyun integrated the communication needs of enterprise users and paid monthly according to the usage of SMS and calls. Over 70% of the cost side is payment to the communication operator, according to the unit price specified in the annual contract and actual usage volume.

The gross margins for 2018, 2019, and the first three quarters of 2020 were 37.6%, 41.1%, and 40.5%, respectively. There is still a certain gap with Twilio's level of over 50%. Currently, more than half of Rong Lianyun's revenue still relies on CPaaS. This part of the phone and SMS usage is highly dependent on the operator, and bargaining power is weak. However, as the volume increased, the gross margin of this part of the business improved.

Source: Company prospectus

Rong Lianyun's gross profit level is expected to improve in the future as the bargaining power of the CPaaS business increases and the share of high gross margin revenue in the CPaaS business increases.

In terms of net profit, SaaS vendors are generally in the early stages. Facing high customer acquisition marketing expenses and R&D investment, Rong Lianyun's cumulative loss for the past three years from 2018 to September 2020 was 543 million yuan.

Stickiness: 1% of major customers contribute more than 70% of revenue, customer industry structure optimization in progress

In 2017, Twilio raised market concerns because Uber, the largest customer, switched to a self-built cloud communication platform, but Twilio proved that even though Uber's revenue declined, other customers quickly made up for this gap.

According to Rong Lianyun's prospectus, in 2018, 2019, and September 30, 2020, the number of active customers of the company was 10,245, 11,537, and 12,048, respectively. The number of major customers (with annual spending over 100,000 US dollars) increased steadily, and the corresponding revenue contributions of major customers were 70.7%, 73.3%, and 75.7%, respectively.

Judging from the official website, customers cover industries such as finance, the Internet, government and enterprise. The financial industry covers major banks such as Guangfa Bank and Pudong Development Bank, and also includes Lujin Bank and AXA Tianping Internet Finance.

Based on the net expansion rate (Dollar-based net expansion rate) of the US dollar, it achieved 135.7%, 102.7%, and 94.7% in 2018, 2019, and the 9 months ending September 30, 2020, respectively.This is mainly due to China's tightening supervision of P2P online lending platforms. Rong Lianyun voluntarily terminated some related cooperation, while the decline in 2020 was the outflow of some small-scale customers due to the impact of the pandemic.

At present, Rong Lianyun is still in the early stages of rapid development and is still actively acquiring customers. With the optimization of the customer structure and the continuous acquisition of high-quality large customers, stickiness is expected to rise and stabilize in the future.