Xu Shaochun, smashed 60 billion with one hammer
It was a difficult march.
In August 2014, at the company's anniversary celebration, Xu Shaochun, chairman and CEO of Kingdee International Software Group, dressed as a pirate captain, picked up a sledgehammer and smashed the customer's server, officially announcing the establishment of Kingdee's "ERP Cloud Service Division" and sounding the clarion call for the company to enter cloud services. In 2017, he simply smashed the "ERP" again, announced that he would say goodbye to the old business of traditional software, and upgraded Kingdee's "cloud ERP" to Kingdee Cloud.
As a system that is crucial to the management of medium and large enterprises, ERP is a foreign product imported from abroad and has been completed by foreign software giants in China's market education. But at that time, ERP software was expensive and difficult, so angry that Liu Chuanzhi, the founder of Lenovo Group, said: "Enterprises are waiting for death if they don't go to ERP, and they are looking for death if they go to ERP." ”
This also creates an opportunity for domestic enterprises that are interested in this area, thus opening the journey of domestic ERP software to conquer the city.
"UF in the North, Kingdee in the South". In the decade after 2000, Kingdee became a well-known name. It and another software leader, UFIDA, have joined hands to break out of the monopoly situation of overseas ERP companies. But now, when the cloud era comes, more and more enterprise application systems are replaced by cloud services, and management software companies have no choice - that is, to embrace cloud computing.
Therefore, Xu Shaochun waved a sledgehammer and launched the company's cloud transformation. Three years ago, Xu Shaochun made a commitment to "rebuild" Kingdee with the cloud model in 2023.
Now, the three-year period is coming to an end, and Kingdee's cloud transformation is about to be handed over: Kingdee, which has accounted for nearly 80% of its cloud service revenue, has transformed into an enterprise managed cloud SaaS (software as a service) company, and its cloud business has grown by more than 30% for three consecutive years. But Kingdee is still waiting for the capital market to recognize its future profitability and valuation: in the past three years, Kingdee has lost more than 1 billion yuan, and in two and a half years, the company's stock price has been "cut off on the knee".
If you don't transform, you will "die ten times and have no life", and if you don't transform, you will "die nine times and live a life". Can Kingdee break out of its cocoon and become a butterfly again and be reborn?
Kingdee's transformation and "eight consecutive smashes"
It is said in the industry that a Kingdee entrepreneurial road is half the history of China's software development.
In the 90s of the last century, after multinational software giants SAP and Oracle entered the Chinese market, the ERP concept began to be popularized. In 1998, SAP released the "Lighthouse Plan" in China to promote ERP to leading enterprises in various industries, and successfully absorbed joint ventures and multinational enterprises such as FAW-Volkswagen and Kodak in China, as well as a number of outstanding domestic enterprises such as Lenovo and Haier. Under the light of the "lighthouse", SAP China has more than 300 customers in three years.
According to IDC's report, in 2000, the total sales of domestic management software market reached 5.87 billion yuan. In the ERP software market sales, foreign ERP software brands account for 81.6%, of which SAP accounts for 30% of the market share and Oracle accounts for 7%.
The vast number of domestic enterprises were in a dilemma at that time. On the one hand, overseas ERP products have standardized business processes and a high degree of internationalization, which meet the requirements of enterprise internationalization and seeking overseas capital support; on the other hand, the contradictions such as insufficient localization of overseas products and difficulty and cost of ERP are prominent.
In order to break this situation, in 1998, eight domestic financial software companies jointly held a press conference in Beijing to announce their entry into enterprise management software. Kingdee also launched the company's second transformation to develop an ERP system.
▲ (2000, Xu Shaochun, founder, chairman and CEO of Kingdee Group)
At that time, Kingdee had already made a name for itself in the financial software industry. In order to enter the new track, in 1999, Kingdee recruited Tian Rongju, who was once the core figure of UFIDA's ERP technology, as CTO, and the following year, Huang Xiaojian, who was the vice president of SAP China, also joined Kingdee. In 2002, Kingdee acquired Kaisi, the first ERP supplier in China, and obtained its ERP products that were in the process of research and development.
Unlike other software vendors, Kingdee's customers have always been mainly growing enterprises, and they are known as the "king of small and medium-sized enterprises" by the market. Xu Shaochun later wrote a book called "ERP Changing China". In his book, he wrote: "In the transition economic environment, many high-growth Chinese enterprises will definitely be born, so the mainstream of Chinese enterprises is these growth enterprises." According to IDC data, as of 2017, Kingdee has ranked first in the market share of China's small and medium-sized enterprises for 13 consecutive years.
Kingdee's position as a leading enterprise management software has been laid down step by step. In February 2001, Kingdee International was listed on the Growth Enterprise Market of the Hong Kong Stock Exchange, becoming the first private software company to be listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. Three months later, Yonyou Network also landed on the Shanghai Stock Exchange. In the domestic management software market, a pattern of UFIDA, Kingdee and Inspur has been formed.
Since 1998, after 20 years of conquest, the domestic ERP brand has regained the initiative. According to data from Tianfeng Securities, by 2018, the overall proportion of domestic manufacturers in China's ERP market was about 69%, of which UFIDA accounted for the highest 31%, followed by Kingdee with 12%.
However, 10 years after its listing, Kingdee began to show fatigue, and the model of selling ERP software has reached the ceiling. In 2012, Kingdee came to the "darkest moment", and in the interim financial report of this year, Kingdee suffered its first loss after listing, with revenue falling by 7.6% year-on-year and a net loss of 226 million yuan.
The software industry is once again at a crossroads. After 2010, with the explosive growth of the Internet and cloud computing, enterprise offices gradually moved to the cloud. At the same time, with the increase in market penetration, the growth rate of the global ERP market has begun to slow down gradually. Among the established software companies, overseas SAP and Oracle have also carried out vigorous cloud transformation.
Xu Shaochun began to think about Kingdee's third transformation. This time, he once again kept up with the changes in the industry, betting on the mobile Internet and cloud computing - going to the cloud and delivering enterprise management software in the form of SaaS.
But compared with the previous one, Kingdee's transformation requires more courage. At that time, new SaaS projects were emerging, and major Internet companies were also entering the game to seize the enterprise service market. As a traditional management software manufacturer, Kingdee is tantamount to "starting from 0 to 1" to develop and polish products and grab customers.
The arrow is on the string and there is no turning back. Xu Shaochun simply picked up the sledgehammer and showed his determination to the whole industry.
In fact, on the 2014 Youth Day before the server was smashed, Xu Shaochun smashed the personal computer and said that he wanted to realize mobile office. In 2017, he smashed his boss chair and symbolic "ERP", announcing that he would say goodbye to the company's traditional software business and upgrade Kingdee's "cloud ERP" to Kingdee Cloud. On May 8, 2021, at the Kingdee Annual Summit, Xu Shaochun picked up the hammer and smashed the hand that represented the "neck" of the enterprise by the old concept and platform, and released the Kingdee Cloud Sky PaaS platform v4.0.
Later, "smashing" almost became a reserved program for Kingdee's annual activities, but what Xu Shaochun smashed became more and more abstract. On Youth Day in 2018, he smashed the wall and proposed the concept of "unmanned accounting", and later he also smashed a "chimney", a cocoon, and a "hand" that symbolizes a stuck neck... This is Kingdee's famous "eight consecutive smashes".
Broken, for the sake of standing. Under the guidance of technological innovation and the success of the SaaS model in the United States, Xu Shaochun also decided to promote Kingdee's cloud transformation further, and the original "ERP" of Kingdee was replaced by the concept of "EBC (Enterprise Business Capability)".
At present, Kingdee has formed a structure based on a series of cloud service products. Kingdee Cloud Services mainly includes three main types of products, including Kingdee Cloud Sky and Kingdee Cloud Xinghan for large enterprises, Kingdee Cloud Star for medium-sized enterprises, and Kingdee Cloud Xingchen and Jingdou Cloud for small and micro enterprises.
But this is also the most difficult turnaround Kingdee has made so far. From announcing the establishment of the ERP Cloud Service Division in 2014 and getting a taste of cloud services, to announcing comprehensive cloud transformation in 2021, and then becoming a pure SaaS company in 2023, Kingdee has gone through nearly 10 years. Now, Kingdee Cloud is finally about to hand in the papers.
Once engaged in cloud transformation, it has lost money for three consecutive years
In 2021, Xu Shaochun made a military order: to completely "recreate a Kingdee" with the cloud model in 2023.
The three-year period is approaching, and at present, more than half of this goal has been achieved. At present, Kingdee's revenue composition is mainly divided into three parts: cloud service business, traditional ERP business, and other investment property operation business. According to the financial report data released by Kingdee International, as of the first half of this year, Kingdee's revenue was 2.566 billion yuan, a year-on-year increase of 16.81%, of which the revenue from cloud business has reached 79.5%, nearly 80%.
On October 11 this year, Kingdee handed over another "report card" of cloud business in the third quarter. As of September 30, 2023, the annual recurring revenue (ARR) of Kingdee Cloud subscription services was approximately RMB2.67 billion, representing a year-on-year increase of approximately 40%.
In the first three quarters of this year, among the three categories of Kingdee cloud services, Kingdee Cloud Sky & Xinghan, Kingdee Cloud Starry Sky, Kingdee Cloud Xingchen and Kingdee Jingdouyun achieved a net renewal rate (NDR) of 105%, 95%, 90% and 86% respectively.
Unlike traditional software license sales, SaaS companies often use a software subscription payment model, so ARR and NDR have also become important indicators to measure their valuation in the capital market. ARR is a measure of a company's revenue, and NDR is one of the most important indicators of customer retention, with more than 100% NDR meaning that the company's existing customers are not only able to renew their contracts, but also continue to increase their consumption of products and services. The industry believes that the NDR is more than 120%, which is an important indicator of an excellent SaaS company.
At last year's annual report meeting, Kingdee International used ARR as its growth target: the company will achieve a three-year compound growth rate of 50% from 2021 to 2023, and the ARR of Kingdee Cloud will reach 3.3 billion yuan by 2023.
Judging from the current performance, Kingdee Cloud has great hope to achieve this goal. However, ARR continues to grow, especially the good performance of the renewal rate of large customers, and Kingdee's cloud transformation performance currently looks remarkable.
But the capital market did not give corresponding enthusiasm for this. After the results were released, after two days of stock price gains, Kingdee International's share price began to fall. As of November 6, Kingdee International's share price closed at HK$12.02 per share, which was a high in nearly a month, with a total market capitalization of nearly HK$41.8 billion, but it has fallen 37% from the year's intraday high of HK$19.16 set on January 5 this year.
Kingdee's revenue growth has been achieved at the expense of profits.
In fact, in 2020, Kingdee announced that it had achieved more than half of its cloud business revenue, exceeding the revenue of its traditional ERP software. In this year, the company's share price rose against the trend, and once reached a high of HK$39.50 in February 2021, with a total market capitalization of nearly HK$100 billion.
However, it is precisely from 2020 that Kingdee's performance has turned from profit to loss, and it has started three consecutive years of losses. From 2020 to 2022, Kingdee International's total revenue was 3.356 billion yuan, 4.174 billion yuan and 4.866 billion yuan respectively, and the net profit attributable to the parent company was -336 million yuan, -302 million yuan and -389 million yuan respectively, with a cumulative loss of more than 1 billion yuan in three years. From 2017 to 2019, before Kingdee suffered a loss, the total net profit for three years was only 1.095 billion yuan, and now all of it has been lost.
The "source" of Kingdee's losses is its cloud business. During the same period, the operating losses of Kingdee's cloud service business were RMB607 million, RMB695 million and RMB561 million respectively.
In the first half of this year, Kingdee International continued to lose money, with a net profit attributable to the parent company of -283 million yuan. However, Kingdee said that due to the company's long-term development of the cloud subscription model and the improvement of operating quality, the loss has narrowed compared with the same period last year.
At the same time, Kingdee International's overall gross profit margin is also gradually declining, with 65.81%, 63.09% and 61.61% from 2020 to 2022, respectively. It is worth noting that Kingdee's gross profit margin was still 81.5% in 2017, and it remained at about 80% in the next two years, and this indicator only began to decline sharply after 2020.
The increase in the proportion of cloud computing business not only did not quickly make Kingdee take off, but became a drag on the company's performance. The reason for this is that in order to achieve rapid transformation, Kingdee has invested heavily in R&D and market expansion in the past three years.
From 2020 to 2022, Kingdee International's R&D costs totaled approximately RMB3.601 billion. In the past three years, Kingdee International's sales and promotion expenses have also continued to grow, from 1.425 billion yuan in 2020 to 2.027 billion yuan, with a total of more than 5.19 billion yuan in the three years. The administrative expenses in the past three years have also exceeded 1.38 billion yuan.
You must know that from 2020 to 2022, Kingdee International's cumulative revenue is only about 12.4 billion yuan, and the above three expenses have exceeded 10.2 billion yuan, accounting for more than 80%.
In the first half of this year, Kingdee International's marketing and promotion expenses, administrative expenses, and research and development expenses continued to grow as a whole, reaching RMB1.142 billion, RMB239 million, and RMB744 million, respectively, representing a year-on-year increase of 8.8%, 2.1%, and 6.6%. However, the company also said that while its revenue maintained rapid growth, the proportion of the above three expenses in the company's overall revenue declined across the board.
At the same time, a large number of small and micro customers have also become a major reason for Kingdee's increase in revenue but not profit.
As of the first half of this year, Kingdee Cloud, Sky & Xinghan, which represent large enterprise markets, recorded a total revenue of approximately RMB393 million, representing a year-on-year increase of approximately 38.3%. The NDR is 108%. Kingdee Cloud Star, which represents the market segment of medium-sized enterprises, achieved revenue of approximately RMB922 million, representing a year-on-year increase of approximately 17.3%. The revenue of small and micro financial cloud services, which represent the small and micro enterprise market, was approximately RMB501 million, representing a year-on-year increase of approximately 31.8%, of which the revenue of Kingdee Cloud and Stars increased by approximately 152.9% year-on-year, and the NDR increased to 89%.
Judging from the revenue data, a large number of small, medium and micro enterprises are still supporting the revenue of Kingdee Cloud. However, the life cycle of small and medium-sized enterprises is generally not long, the fluctuation is large, and the willingness to pay is not strong, and from the NDR indicators of Kingdee, the renewal rate of small and medium-sized enterprises, especially small and micro enterprises, is not ideal.
Tapping into key customers has become Kingdee's top priority. According to the research report of Zhongtai Securities, during the first three quarters of the reporting period, Kingdee signed contracts with a number of large domestic enterprises, including well-known enterprises such as Sinochem, Minmetals International, Dongfeng Motor, Shandong Gold, Swire Port Machinery, Jiangsu China Tobacco, Fuyao Glass and Beixin Group. However, in contrast, large enterprise customers are still one of Kingdee's shortcomings. In the first half of 2023, the total number of contracted customers of Kingdee Cloud Sky and Xinghan is 741, and the number of Kingdee Cloud and Star customers has reached 34,000, while the number of Kingdee Cloud and Star customers for small and micro enterprises is simply not disclosed.
Kingdee's continued investment in the expansion of key customers will also put more pressure on sales expenses.
The market is generally patient with high-tech companies. The early SaaS giant salesforce also lost money for five consecutive years from 2012 to 2016. In China, it will take time for enterprises to pay for SaaS software. In contrast, the growth of enterprises is more worthy of attention.
However, when to reach the inflection point of profitability is still an unavoidable problem for Kingdee. Lin Bo, executive director and chief financial officer of Kingdee Group, said that it is estimated that Kingdee will have a profit break-even point until 2025. This also means that the profitability pressure brought about by Kingdee Cloud's transformation will continue to be on the company's head for at least two years.
▲ (Kingdee International's stock price chart in the past 5 years.) Source/Straight Flush)
For this "old" company, there is a lack of enthusiasm in the capital market. Since reaching the high point of the stock price in February 2021, due to the influence of internal and external factors, Kingdee International's share price has begun to fluctuate and fall, and the current stock price has almost "cut off the knee" compared with two and a half years ago, with a decline of more than 70% and a market value of more than HK$60 billion.
Almost "accidentally injured" by Huawei
Although cloud transformation has not brought profit returns to Kingdee in recent years, industry insiders know that the "cloudification" of enterprise management software is the general trend. In the cloud market, in addition to large manufacturers such as BAT, giants such as Huawei and Inspur are also increasing the expansion of enterprise cloud services.
It is worth mentioning that in March this year, Huawei said that it had made its own management system MetaERP software, which triggered the market's expectation of Huawei's entry into ERP. On March 20, Yonyou Network in the A-share market fell to the limit, and Kingdee International, which is listed in Hong Kong, closed down 18.77% on the same day.
Although domestic enterprise management software manufacturers have achieved a counterattack, they still have to face an embarrassing situation. In 2021, the scale of the mainland ERP market will reach 38.5 billion yuan. According to the report released by Alibaba Cloud Innovation Center and Whale Zhun Research Institute, domestic ERP software has accounted for nearly 70% of the overall market, but in the field of high-end ERP commonly used by large enterprise groups and multinational enterprises, foreign companies are still king: SAP, Oracle, IBM and other foreign manufacturers account for more than 60% of the market, of which the highest market share is SAP, reaching 33%, followed by Oracle 20%;
At that time, when domestic ERP manufacturers were still in their infancy, foreign manufacturers occupied a number of large enterprise customers with technology and first-mover advantages. Now, in order to truly occupy the "high ground" of management software, realize domestic substitution, and break the monopoly of foreign enterprises in the high-end ERP market is a challenging proposition for domestic manufacturers.
Huawei used Oracle's management software in 1995 and iteratively upgraded to the core ERP system on this basis. However, in 2019, Oracle interrupted the upgrade service of Huawei's ERP. In response to this change, Huawei has set up a team of thousands of people and invested nearly 10 billion yuan to build a fully self-developed MetaERP. This move was once interpreted by the market as Huawei's intention to "leverage the high-end ERP market pattern".
However, Huawei later refuted the rumors that the MetaERP system was only for internal use, and it was a "misreading" to enter the ERP market, and Kingdee also played the role of a core partner in it. However, for manufacturers such as Kingdee, the fierce response from the secondary market is enough to stimulate them - in order to meet the needs of enterprises of Huawei's size, the market still lacks sufficient confidence in the capabilities of domestic ERP products and services, as well as the transformation and innovation capabilities of established enterprises.
At the same time, when Kingdee's cloud transformation was not yet complete, ChatGPT triggered a wave of large models, and new technological changes swept in, especially the software industry.
The application of large models is a revolution in the way of interaction. The emergence of the general model has impacted the way software is customized, and the emergence of MaaS (Model as a Service) has also brought changes to the future business model of SaaS companies.
For Kingdee, the opportunity to embrace new changes and achieve corner overtaking seems to be coming again.
In August this year, Kingdee officially released the large-scale model capability platform - Kingdee Cloud Sky GPT. As part of the Kingdee Cloud Sky PaaS platform, it provides engineering and technical solutions for enterprises to use large model capabilities, and provides professional vertical models in various fields while accessing general large model capabilities such as Baidu Wenxin Yiyan.
Different from other large models, Sky GPT also released the industry's first financial large model. According to Kingdee's "Sky GPT+X" plan announced at the same time, in the future, it will continue to launch AI assistants covering supply chain, manufacturing and other fields. It can be seen that Kingdee is trying to build a new ecosystem based on cloud and large model services in the new era.
However, Kingdee, which was the first to "go to the cloud", was one step slower than UFIDA in the era of large models. Before Kingdee held the press conference, Yonyou Network took the lead in launching YonGPT, a large enterprise service model, at the end of July. It covers enterprise finance, human resources and business, and is a multi-field integrated and multi-form comprehensive enterprise service model. After 30 years of competition, the two giants are now facing each other again on the vertical large-scale model track.
The opportunities of large models also contain great challenges. The R&D and application of large models require huge computing costs, which also puts forward higher requirements for enterprise R&D investment and infrastructure. At a time when the ability of domestic general large models still needs to be improved, the development of vertical industry large models also requires the support of strong technical capabilities and data resources of enterprises themselves.
The general trend of domestic software substitution also provides a once-in-a-lifetime opportunity for domestic cloud service companies to take off. Once the transformation of the software leader represented by Kingdee is successful, it will set a new benchmark for the industry. However, Kingdee, which has not yet shaken off losses, also needs a new story to boost the confidence of the capital market.
Author | Yang Jie
Edit | Sun Chunfang
Operations | Liu Shan