Users don't pay for technology, but they pay for "productivity that they can't live without."

On March 19, Jinshan Office (688111. SH) announced its 2024 financial results. According to the financial report, the company's revenue was 5.121 billion yuan, a year-on-year increase of 12.40%; net profit attributable to owners of the parent company was 1.645 billion yuan, a year-on-year increase of 24.84%.

For an office software company, this is a pretty impressive financial report. After all, the number of online office users in China has become saturated. Kingsoft Office is still able to achieve double-digit growth, which is really rare.

But another number, WPS AI, has more than 19.68 million monthly active users, which makes "Kingsoft Office's revenue and profit increase" seem less "eye-catching".

Essentially, it's a contest of two valuation models — one that calculates the present in earnings reports, and one that bets on the future of the AI user pool. When Kingsoft Office uses AI to redefine the user's payment logic, Kingsoft Office itself has also opened up its business potential.

1. What is the basis for growth?

For us ordinary users, the product that Kingsoft Office is most familiar with is its C-end product WPS Personal Edition.

This part of the business has always been the basic business of Kingsoft Office, contributing more than 60% of the revenue. As a fundamental business, its C-end products will contribute revenue of 3.283 billion yuan in 2024, a year-on-year increase of 18%.

In other words, if you want to get more revenue from your personal business, the core breakthrough point is how to increase the lifetime value (LTV) of users, and how to convert the potential business value of the free user pool into a landable subscription revenue growth rate.

The answer given by Kingsoft Office is to rely on AI.

AI enhances the product stickiness and willingness to pay of C-end users and B-end users. Value-added services such as AI writing assistants and reading assistants drove the number of paying users to 41.7 million, a year-on-year increase of 17.49%.

In other words, a large number of users have chosen to become paid members of WPS because of the emerging AI value-added services.

You must know that 2024 is not a big year for AI applications to achieve closed-loop landing, and AI will receive wider attention during the Spring Festival in 2025. Therefore, this achievement is remarkable, and it is fully expected that the penetration rate and growth rate of AI users will be increased by 2025.

If WPS personal is the basic disk of Kingsoft Office, then WPS 365, the B-end business, is the growth point of Kingsoft Office. As an independent subject, it made its debut in financial reports, with revenue of 437 million, a year-on-year increase of 149%.

The reason for the growth of the B-end business is also attributed to AI-driven.

The core of the B-end business is whether you can do everything at once. Document authoring, collaboration between different departments and employees, instant communication between employees, and management of data assets.

One of the selling points of WPS 365 is unified tools, unified collaboration, and unified management. After AI deeply integrates document processing and collaboration systems, this selling point has been recognized by more enterprise users.

WPS 365's built-in WPS AI Enterprise Edition not only supports document expansion, polishing, summarizing, formula generation and other functions, but also covers attendance, contract analysis, and sales data statistics.

Users can also seamlessly switch between document editing, instant messaging, and video conferencing on the same interface, support communication while writing, and even directly invoke AI functions in the email or OA system to reduce cross-platform operations. In addition, if enterprises want to switch large models, they can switch models with one click according to their needs, without the need for docking and debugging by themselves.

Businesses are more rational buyers than individuals. Once real cost reduction and efficiency increase can be achieved, the willingness of enterprise customers to pay is very high.

As a result, AI-driven customized services have attracted a number of leading customers in the industry, including China Resources Group, China Railway, Haier, etc., covering finance, manufacturing, education and other fields.

Second, AI is the real new engine of growth

Kingsoft Office can quickly realize the commercialization of AI, and a very important reason is that Kingsoft Office has invested in technology for a long time.

As a technology company, Kingsoft Office's R&D expenditure has maintained a long-term proportion of more than 30% of its revenue, and two-thirds of its employees are R&D positions. Among them, in 2024, Kingsoft Office will invest 1.696 billion yuan in R&D, accounting for 33% of revenue, and R&D personnel will account for 67%.

These R&D investments and R&D personnel mainly flow to AI-related fields, including self-developed government affairs models, multi-modal document parsing engines, and the transformation of the underlying architecture adapted to the HarmonyOS system.

The cross-validation of these three sets of data shows that Kingsoft Office is now an AI company.

Kingsoft Office's AI strategic roadmap is exceptionally clear and focused, as it has natural application scenarios. It does not participate in the arms race of general-purpose large models, but relies on the office needs of 632 million monthly active users to create "the most office-friendly AI".

Embed AI capabilities into user action flows "seamlessly". For example, if a user writes a report material with WPS, and the writing is stuck halfway, he can directly click "AI Continue". Users don't even need to copy these words into the interface of DeepSeek and Doubao to directly help write a paragraph.

Or if the user feels that the writing is not formal enough, or not lively enough, they can just click on the corresponding option, and the user does not even need to enter any prompt words.

This lazy operation greatly lowers the threshold for users to use AI functions. You don't need to change your usage habits to immerse yourself in the significant efficiency improvement brought by WPS AI.

The accumulation of user behavior data can also trigger the flywheel effect.

Whether it is an individual user or an enterprise user, if AI helps users form their own exclusive databases, then the cost of user migration will be greatly increased, and they will naturally continue to pay.

The so-called user stickiness means that the cost and cost of user leaving are much higher than the subscription fee paid by the user. And when the product evolves into a "digital organ" that users can't give up inseparable, business transformation will naturally come naturally.

For example, Kingsoft Office's personal knowledge base products, which have been tested internally, can achieve a closed loop of "writing, storage, management, and use" compared with many knowledge bases in the industry, and the scenario is relatively complete. The all-in-one experience is of great value to users.

Today, when a user opens WPS, what he gets is no longer a simple writing/form/presentation tool, but an intelligent entrance to the enterprise knowledge base, a digital hub for government processes, and a data archive for personal career development.

By continuously increasing investment in AI technology, Kingsoft Office is reconstructing the user payment logic: the user group that used to be cautious about subscribing to basic functions has significantly increased the payment conversion rate driven by AI value-added services.

3. Revaluation

WPS went from a traditional office software to an office base. This extremely high user stickiness brought about by AI is not only the continuous growth of paying users, but also the visible change is that the sales expenses are also greatly reduced.

Even if you don't need to advertise, users will take the initiative to pay.

Kingsoft Office mentioned in the investor survey that the 20 million or so AI paying users are achievements made with little active promotion. The data also supports this: compared with 2023, the sales expense ratio of Kingsoft Office in 2024 has decreased by 1.87 percentage points.

The more users pay, the more they are willing to pay. This scalability is the key to leveraging the jump in valuations.

The history of the tech industry proves that all businesses that succeed in breaking through must answer two questions:

First, has the user irreversibly changed their behavior as a result of technology?

For the current Kingsoft office, this is the obvious answer. Once AI rewrites, AI polishes, AI generates outlines, and AI formulas are used in WPS forms, it is difficult for users to go back.

In addition, Kingsoft Office continues to expand AI scenarios, for example, the AI functions used by users in the past are mainly focused on text generation, PPT design, data analysis and other functions. With the improvement of large model capabilities, Kingsoft is now focusing on improving its tabular data processing capabilities to meet the needs of user data analysis and BI technology.

The paid features of traditional office software are often just to unlock some low-frequency features such as new fonts or converting PDF to Word. However, with the help of AI technology, users can now be directly freed from work tasks that would otherwise need to be done in person, improving work efficiency and quality.

For users, easy-to-use AI is equivalent to hiring a low-cost but easy-to-use workforce. At this time, the AI membership fee is a great value.

Second, has the capital market adjusted its valuation scale as a result?

Faced with its 632 million monthly active users, 19.68 million AI usage, and high growth of government and enterprise customers, a single valuation model can no longer accurately capture its value potential when these users start to contribute additional fees.

According to the price-earnings ratio method, Kingsoft Office should use the PE multiple of AI to value instead of traditional software.

If it is valued according to the user value method, with the precipitation of users' personal data, because of the intervention of AI, both the number of people who pay and the willingness to pay may increase exponentially.

If you value it in terms of discounted free cash flow (DCF), there are challenges in setting parameters because of the intervention of AI. The sustainable growth rate will increase because of AI-driven + paying user penetration. However, the dividend release period of AI technology is longer, and the period of rapid growth should also be extended, rather than the conventional 5 years.

As for the price-to-sales ratio (P/S) method, then the calculation should also be split, and it should be taken into account that AI has improved the growth space of revenue, after all, compared with Microsoft Copilot, Kingsoft Office's ARPU value still has a lot of room for improvement.

In short, this combination of "AI capability + scale user + business conversion" has formed a multiplier effect on valuation, and the capital market needs to reconsider the reasonable valuation of Kingsoft Office.