Kingsoft Cloud (KC) Q1 2025: AI Revenue Soars 200% as Xiaomi Ecosystem Drives 50% Upside
AI revenue contribution surged to 39% of public cloud, fueled by Xiaomi ecosystem demand and rapid cluster deployment. Margin volatility and enterprise cloud seasonality weighed on profit, but management signals accelerating AI wins and deeper ecosystem integration for the coming quarters. Transitional cost structure and supply chain adaptation remain pivotal as KC bets on AI-led growth and partnership leverage.
Summary
- AI Acceleration Reshapes Revenue Mix: AI business now drives core growth, accounting for nearly two-fifths of public cloud revenue.
- Xiaomi Ecosystem Integration Deepens: Strategic partnership with Xiaomi delivered 50% YoY revenue growth and underpins future AI demand visibility.
- Margin Recovery Hinges on Scale: Near-term margin pressure offset by expectations for operating leverage as AI and ecosystem projects ramp in H2.
Performance Analysis
Kingsoft Cloud posted 11% year-over-year revenue growth, reaching RMB 1.97 billion, with public cloud up 14% and enterprise cloud up 5%. The standout driver was AI-related business, which saw gross billing surge over 200% YoY to RMB 525 million, now representing 39% of public cloud revenue. This shift marks a clear transition toward AI-centric cloud demand, particularly from large ecosystem customers like Xiaomi.
Despite robust top-line expansion, gross margin compressed sequentially by 2.6 percentage points to 16.6%, and adjusted operating margin turned negative at -2.8%, reflecting seasonal project delays and front-loaded investments in high-performance servers to support AI cluster build-outs. Operating loss narrowed YoY but reversed from a profit last quarter. Capital expenditure spiked to RMB 605 million, highlighting intensified infrastructure spend, while cost controls in G&A and credit loss expenses provided some offset. Cash and equivalents remain strong at RMB 2.32 billion, providing ample liquidity for continued AI investment.
- AI Revenue Mix Shift: AI now comprises 39% of public cloud, up sharply from prior periods, signaling a structural change in revenue sources.
- Seasonal Drag on Enterprise Cloud: Enterprise revenue dipped sequentially due to project timing and Chinese New Year effects, underscoring the segment’s cyclical nature.
- Margin Volatility from Upfront Investment: Gross and operating margins declined as accelerated AI infrastructure spending outpaced immediate revenue recognition.
KC’s performance this quarter reflects a business in transition, with AI and ecosystem partnerships offsetting cyclical and margin headwinds, setting the stage for a potentially stronger second half as large projects come online.
Executive Commentary
"AI gross billing reached RMB 525 million, representing a year-over-year increase of over 200%, and a quarter-over-quarter growth of 11%, further contributing 39% of public cloud revenue."
Zhou Tao, Vice Chairman & CEO
"Our non-GAAP EBITDA margin achieved 16.2%, compared with 1.9% in the same quarter last year. It was mainly due to our strong commitment to AI cloud computing development, strategic adjustment of business structure, and our strict control over cost and expenses."
Henry Hu, Chief Financial Officer
Strategic Positioning
1. AI-Led Revenue Transformation
Kingsoft Cloud’s pivot to AI as a core growth driver is now tangible, with AI-related revenue scaling rapidly and comprising a growing share of both public and enterprise cloud. Management’s focus on deploying high-performance clusters and AI training platforms has enabled KC to capture demand from both ecosystem partners and external customers, particularly in model training and inference services.
2. Ecosystem Leverage with Xiaomi
Xiaomi ecosystem revenue grew 50% YoY, now contributing 25% of total revenue. This partnership provides both scale and a pipeline of AI workload, as Xiaomi’s large language model development and deployment increasingly rely on KC’s infrastructure. The collaboration extends to joint product development, such as AI-integrated office solutions for government clients, demonstrating the breadth of strategic alignment.
3. Flexible Capital Deployment and Supply Chain Adaptation
KC diversified its capital approach, combining direct cash CapEx, financial leasing, and third-party resource pooling to fund rapid AI infrastructure expansion. This model enables more agile scaling and risk sharing, but also introduces profit-sharing dynamics that can dilute gross margin, especially as external partners are used for non-core customers.
4. Margin Management Amidst Investment Cycle
Margin compression remains a near-term reality due to fixed personnel costs, seasonality, and front-loaded server depreciation. However, management expects margin improvement as large AI projects and ecosystem demand are recognized in revenue in Q2 and beyond, with EBITDA margin already markedly improved YoY.
5. Industry Cloud and Vertical Solutions
KC continues to build verticalized AI solutions, including healthcare imaging platforms and government AI office integration. These initiatives are designed to deepen stickiness and diversify the customer base, though industry cloud growth was modest this quarter due to project timing and slower public sector cycles.
Key Considerations
This quarter marks a decisive step in KC’s transition to an AI-first cloud provider, with ecosystem partnerships and new capital models underpinning its growth ambitions. However, the operational and financial profile is still adjusting to this new reality, with risks and opportunities emerging across the business.
Key Considerations:
- AI Revenue Mix and Visibility: Sustained AI growth and its rising share of revenue provide forward visibility, but also increase reliance on a few large ecosystem partners.
- Margin Recovery Path: Margin improvement is contingent on timely ramp of AI projects and realization of scale benefits, especially as fixed costs and profit-sharing models weigh on near-term profitability.
- Capital Efficiency and Cash Management: Flexible funding for AI clusters reduces cash burn but introduces counterparty and operational complexity; monitoring CapEx plus leasing trends is critical.
- Supply Chain and Regulatory Resilience: Ongoing chip restrictions and domestic supply chain adaptation pose both risk and opportunity, with KC’s proactive shift to domestic partners a key mitigation.
Risks
Margin volatility and cash flow risk remain elevated as KC invests aggressively in AI infrastructure ahead of revenue realization, while profit-sharing and supply chain constraints may limit upside. Reliance on Xiaomi and a concentrated customer set increases exposure to partner execution and demand timing. Regulatory shifts and chip supply restrictions could disrupt infrastructure plans or raise costs, especially if domestic alternatives lag in performance or scale.
Forward Outlook
For Q2 2025, management signaled:
- AI cluster deployments completed in late Q1 will begin contributing revenue, with Xiaomi-related projects expected to drive sequential growth.
- Operating margin and EBITDA margin are anticipated to improve as top-line expansion from AI projects outpaces cost growth.
For full-year 2025, management did not provide formal revenue guidance but expects:
- Margin profile to improve in the second half as AI and ecosystem projects scale.
Management highlighted:
- AI business penetration and ecosystem demand as leading indicators for margin recovery.
- Continued focus on cost control, R&D efficiency, and flexible capital use to support growth.
Takeaways
KC’s Q1 results highlight an accelerating shift to AI-driven cloud revenue, supported by deepening ecosystem partnerships and rapid infrastructure build-out. The company’s ability to manage margin volatility and execute on large project delivery will be key to sustaining growth and improving profitability.
- AI and Ecosystem Scale: The Xiaomi partnership and AI cluster ramp are set to drive sequential growth and margin rebound as project revenue is recognized in future quarters.
- Margin and Capital Watch: Investors should monitor gross margin trends, CapEx plus leasing spend, and the pace of AI workload onboarding as signals of sustainable operating leverage.
- Supply Chain and Regulatory Adaptation: Continued resilience in chip sourcing and domestic supply chain partnerships is essential to mitigate external risks and maintain infrastructure momentum.
Conclusion
Kingsoft Cloud’s Q1 2025 demonstrates a business in active transformation, with AI and ecosystem leverage driving growth but also introducing new operational and financial complexities. Margin recovery and cash discipline will be critical as the company navigates the next phase of its AI-led strategy.
Industry Read-Through
KC’s results reinforce the centrality of AI workloads in driving cloud infrastructure growth, especially in China’s unique ecosystem-driven market. Strategic partnerships, flexible capital models, and rapid cluster deployment are becoming table stakes for cloud providers seeking to capture the next wave of AI demand. Margin volatility and supply chain adaptation are industry-wide realities, with competitive pricing and profit-sharing models likely to compress profitability in the near term. Providers with deep ecosystem ties and agile capital strategies are best positioned to benefit as AI adoption accelerates across verticals.