Kingsoft Office's second-quarter results were in line with expectations, with accelerating WPS 365 and software businesses driving revenue growth

Overview

This report reviews Kingsoft Office's 2Q26 results. BofA believes results were consistent with the prior profit guidance, with WPS 365, WPS Software, and the personal business jointly driving solid growth in revenue and core profit. Supported by ongoing product upgrades and AI monetization prospects, it reiterates its Buy rating and modestly raises earnings forecasts and the target price.

Core views

Kingsoft Office's 1H26 results were consistent with prior profit guidance. Revenue in 2Q26 grew 25% YoY to CNY1.7bn, mainly driven by rapid growth in the WPS 365 and WPS Software businesses, as well as solid growth in the WPS personal business. Excluding share-based compensation expenses, fund investment gains, and related taxes, core profit rose 24% YoY to CNY507m; core net margin declined by only 0.3ppt YoY to 29.8%. By segment, WPS 365 revenue rose 60% YoY to CNY253m. Growth slowed slightly from 62% YoY in 1Q26, but the report notes that its customer base is still expanding to cover more private enterprises, local SOEs, and overseas companies. WPS Software revenue increased 34% YoY to CNY375m, above 32% in 1Q26, benefiting from government Xinchuang office-software procurement and rising demand for digital and intelligent transformation. WPS personal-business revenue grew 17% YoY to CNY1.04bn, also faster than 14% in 1Q26. In 2Q26, WPS personal business, WPS 365, and WPS Software accounted for 61%, 15%, and 22% of revenue, respectively. On the user side, global WPS MAU devices increased 4% YoY and 1% QoQ to 676m, including 244m in overseas markets; as of end-1H26, cumulative annual paid individual users in China increased 15% YoY to 48.25m. Regarding profitability, the report believes increased customer usage of AI product features caused 2Q26 gross margin to decline 0.9ppt YoY to 83.3%. However, improved expense ratios reflected operating leverage: selling and marketing expenses rose 24% YoY and represented 19.1% of revenue, down 0.2ppt YoY; G&A expenses increased 25% YoY and represented 8.4% of revenue, flat YoY; R&D expenses grew 19% YoY and represented 34.1% of revenue, down 1.9ppt YoY. As a result, operating margin improved 1.4ppt YoY to 20.7%. Based on stronger growth in WPS 365 and WPS Software, BofA raises FY26-28E revenue forecasts by 3%, and raises its FY26E, FY27E, and FY28E EBITDA forecasts from CNY1.8469bn, CNY2.5242bn, and CNY3.0826bn to CNY1.8995bn, CNY2.5963bn, and CNY3.1909bn, respectively. The report raises its target price from CNY336 to CNY340 based on DCF valuation, using a 10.1% discount rate and 4% terminal growth rate; the latter reflects its view that the company has strong pricing power due to its market-leading position. Valuation charts show that since the company's November 2019 listing, its average 12-month forward P/E has been 112x versus 41x currently, and its average 12-month forward P/S has been 31x versus 14x currently. The report reiterates its Buy rating, citing solid revenue growth and attractive AI monetization prospects from continued product upgrades, and believes these factors outweigh market concerns over AI disruption risks. Its growth view also includes more Xinchuang opportunities over the next two years and WPS 365's upgrade into a one-stop AI collaborative-office platform.

Analysis framework

The report first compares actual 2Q26 revenue and core profit with prior profit guidance, then breaks down revenue drivers across WPS 365, WPS Software, and the personal business, and assesses the growth base using user and paid-user data. It subsequently explains profitability changes through gross margin, individual expense ratios, and operating margin, revises FY26-28E forecasts based on business growth, and finally uses DCF valuation to determine the target price.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  Discounted cash flow valuation

  Based on the company's strong profitability and free cash flow, the report discounts future cash flows at a 10.1% discount rate and applies a 4% terminal growth rate to derive a CNY340 target price.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kingsoft Office (688111)

  The office-software company covered by the report; growth in WPS 365, WPS Software, and the personal business is central to the earnings and valuation assessment.

  Strengths

  WPS 365's customer base is expanding; WPS Software benefits from Xinchuang and digitalization demand; paid users in the personal business and the overseas user base are growing. The report believes product upgrades support AI monetization.

  Weaknesses

  Increased use of AI product features caused 2Q26 gross margin to decline 0.9ppt YoY to 83.3%.

  Comparison

  Since its November 2019 listing, average 12-month forward P/E has been 112x versus 41x currently; average 12-month forward P/S has been 31x versus 14x currently.

  Risks

  AI-driven WPS Office user adoption may be slower than expected, Xinchuang demand may be weaker than expected, and other AI software may increase competitive pressure.

Key data

• 2Q26 RevenueCNY1.7bnUp 25% YoY
• 2Q26 Core ProfitCNY507mUp 24% YoY after excluding share-based compensation, fund investment gains, and related taxes
• WPS 365 RevenueCNY253mUp 60% YoY in 2Q26; up 62% YoY in 1Q26
• WPS Software RevenueCNY375mUp 34% YoY in 2Q26; up 32% YoY in 1Q26
• WPS Personal Business RevenueCNY1.04bnUp 17% YoY in 2Q26; up 14% YoY in 1Q26
• Global WPS MAU Devices676mUp 4% YoY and 1% QoQ in 2Q26; including 244m in overseas markets
• Cumulative Annual Paid Individual Users in China48.25mUp 15% YoY as of end-1H26
• 2Q26 Operating Margin20.7%Up 1.4ppt YoY
• FY26-28E Revenue Forecast RevisionRaised by 3%Reflecting stronger growth in the WPS 365 and WPS Software businesses
• Target Price340.00 CNYBased on DCF, raised from 336.00 CNY

Impact & implications

The report believes that WPS 365 customer expansion, WPS Software growth driven by Xinchuang and enterprise digitalization demand, and the personal business's AI monetization and overseas user base collectively support future growth. Although increased usage of AI features has temporarily pressured gross margin, operating leverage from improved expense ratios has still driven an increase in operating margin.

Risks

• AI-driven WPS Office may take time to change users' working methods and habits, and user adoption could be below expectations.
• Xinchuang demand may be weaker than expected.
• Other AI-driven software may pose competitive threats.