Kingsoft Cloud (KC) Q2 2025: AI Revenue Surges 120%, Lifting Public Cloud to 32% Growth

2025-08-20 | By EarningsIQ Research

Kingsoft Cloud’s Q2 results highlight a decisive pivot to AI-driven growth, with AI-related revenue more than doubling and now driving nearly half of public cloud sales. The company’s multi-pronged approach—balancing ecosystem partnerships, diversified infrastructure models, and targeted industry solutions—positions it to capitalize on robust AI demand, but also exposes it to new margin and supply chain complexities. Management signals confidence for the second half, yet margin stabilization and chip supply remain key investor watchpoints.

Summary

• AI-Driven Growth Model: AI computing revenue now rivals legacy cloud, fundamentally shifting business mix and growth trajectory.
• Margin Pressure Emerges: Infrastructure investments and leasing models weigh on gross margin, despite top-line acceleration.
• Strategic Flexibility Ahead: Leadership expects stronger growth in H2 as new models and ecosystem bets scale.

Performance Analysis

Kingsoft Cloud delivered a standout quarter, with total revenue rising 24% year-over-year, sharply accelerating from the prior quarter’s 11% pace. Public cloud was the growth engine, up 32% YoY to RMB 1.63B, fueled by surging demand for AI computing services. Notably, AI-related revenue soared 120% YoY and now accounts for 45% of public cloud sales, signaling a structural shift in the business model toward intelligent computing. Enterprise cloud also grew, albeit more modestly, at 10% YoY.

Gross margin, however, came under pressure, declining to 14.3% from 16.6% last quarter, reflecting higher costs tied to rapid AI infrastructure expansion and a greater mix of leased compute resources. Adjusted operating loss narrowed YoY but widened sequentially, as credit losses and upfront costs for new AI clusters outpaced efficiency gains. Cash reserves remain robust at RMB 5.46B, supported by recent capital raises and customer prepayments, giving the company flexibility to fund ongoing AI investments.

• AI Revenue Inflection: AI business now nearly matches legacy cloud in scale, with 39% sequential growth this quarter.
• CapEx Intensity: Capital expenditures reached RMB 1.14B in Q2, with full-year spend still tracking toward RMB 10B.
• Margin Compression: Leasing and profit-sharing models are lowering CapEx risk but diluting gross margin, a trend management expects to stabilize.

Overall, Kingsoft Cloud’s results underscore a rapid transformation into an AI-first cloud provider, but also highlight growing pains around profitability and resource allocation as the business scales.

Executive Commentary

Strategic Positioning

1. AI-Centric Business Model Transformation

Kingsoft Cloud’s business model is rapidly shifting from traditional IaaS (infrastructure-as-a-service) to AI-centric cloud services, with intelligent computing now rivaling legacy cloud in revenue contribution. The company’s AI billing growth is not only driving top-line expansion, but also redefining the product mix and customer engagement model, particularly as AI use cases proliferate across verticals like finance, healthcare, and public services.

2. Ecosystem Leverage and Strategic Partnerships

The Xiaomi and Kingsoft ecosystem partnership is emerging as a key growth lever, with ecosystem revenue up 70% YoY and now representing 27% of total revenue. The company is delivering large-scale compute clusters for Xiaomi and integrating resources to deliver high-performance, stable cloud services, cementing its role as the exclusive strategic cloud platform for the ecosystem.

3. Flexible Infrastructure and Procurement Models

KC has diversified its infrastructure strategy, blending self-owned assets, leasing, and a new agent model (where the company builds and operates on behalf of clients) to balance CapEx, risk, and margin. This flexibility enables rapid scaling for large AI projects, but introduces complexity in cost management and margin forecasting as the mix evolves.

4. Industry Cloud and Vertical Solutions

Industry cloud revenue reaccelerated, with notable traction in public sector, healthcare, and financial services. The company is focusing on “zero to one” breakthroughs in select verticals, such as launching the Kingsoft Government AI all-in-one server and deploying AI-driven automation in banking, to build replicable, high-value solutions that drive digital transformation for clients.

5. Supply Chain and Domestic Chip Strategy

Management is proactively managing geopolitical and supply chain risks, by embracing both compliant foreign chips and deepening partnerships with domestic chip makers. While current capacity is sufficient, the company acknowledges that a surge in industry-wide AI demand could strain domestic chip supply, introducing long-term uncertainty for scaling AI infrastructure in China.

Key Considerations

This quarter marks a structural pivot for Kingsoft Cloud, with AI now at the core of both growth and operational complexity. Investors should weigh the following considerations as the company navigates this transition:

Key Considerations:

• AI Scale and Mix Shift: AI’s rapid revenue ascent is fundamentally altering the company’s growth profile and margin structure.
• Margin Stabilization Challenge: Transition to resource pooling, leasing, and agent models reduces CapEx risk but compresses gross margin, with stabilization timeline still uncertain.
• Ecosystem Dependency: Xiaomi and Kingsoft partnerships are driving growth, but also introduce concentration risk and opaque demand visibility.
• Vertical Focus Strategy: Management is prioritizing targeted industry solutions over broad expansion, seeking “zero to one” wins before scaling horizontally.
• Supply Chain Volatility: Chip availability—especially for high-performance AI workloads—remains a potential bottleneck as domestic supply lags global demand surges.

Risks

Gross margin pressure is likely to persist as the company balances rapid AI expansion with evolving infrastructure models, and the eventual margin floor remains uncertain. Geopolitical and supply chain disruptions, particularly around high-end chips, could constrain growth or raise costs if domestic supply fails to keep pace with demand. Ecosystem and customer concentration, as well as execution risk in vertical AI solutions, are additional watchpoints for investors.

Forward Outlook

For Q3 and the second half of 2025, Kingsoft Cloud guided to:

• Stronger revenue growth in H2 versus H1, as large ecosystem projects and industry cloud deliveries ramp up.
• Continued high CapEx intensity, with full-year capital expenditures expected to reach RMB 10B, balanced across self-owned, leased, and agent models.

For full-year 2025, management maintained a constructive top-line outlook, citing:

• Robust AI demand across public cloud, enterprise, and verticals
• Ongoing delivery of large-scale clusters for Xiaomi and industry clients

Management emphasized that margin stabilization will depend on the evolving infrastructure mix, and that supply chain vigilance remains a priority as demand scales.

Takeaways

Kingsoft Cloud’s Q2 results confirm the company’s transformation into an AI-first cloud provider, with intelligent computing now the primary growth engine. However, the pivot brings new operational and financial challenges, particularly around margin management and supply chain agility.

• AI-Driven Revenue Mix: Nearly half of public cloud revenue now comes from AI, making KC’s growth increasingly tied to the success of AI adoption across China’s digital economy.
• Margin Volatility: The shift to leasing and profit-sharing models is compressing margins but reducing CapEx risk—a tradeoff investors must monitor as the business scales.
• Execution Watchpoints: Delivery on vertical AI solutions, ecosystem expansion, and chip supply resilience will determine whether KC can sustain its growth trajectory and return to margin expansion.

Conclusion

Kingsoft Cloud’s Q2 highlights both the opportunities and growing pains of an AI-centric pivot. As AI revenue becomes the core growth driver, the company’s ability to stabilize margins, manage supply chain risks, and deliver targeted industry solutions will be critical for long-term value creation.

Industry Read-Through

KC’s results reinforce the accelerating shift toward AI-driven cloud services in China, with public and enterprise clients ramping investments in intelligent computing across verticals. Margin compression from leasing models and infrastructure diversification is likely to become a sector-wide theme, as cloud providers prioritize flexibility over pure CapEx ownership. Supply chain resilience—especially for AI chips—will be a key competitive differentiator, and industry players with deep ecosystem partnerships or domestic chip access may be better positioned to capture surging demand. For investors, the KC quarter signals that the AI cloud cycle in China is still early, but operational discipline and margin management will increasingly separate winners from also-rans.

KC Technology Cloud Computing Artificial Intelligence China Public Cloud Margin Supply Chain