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PostsMARS Observation | Fourth Paradigm Q2 Earnings Report - The Eve of AI Agent, Never Short of Challenges and Opportunities
At the beginning of the year, Manus was introduced. Despite facing considerable skepticism and criticism from the outside world, Manus still demonstrated a more advanced form of AI, showcasing its ability to handle multi-task processing requests based on human natural language instructions, following the era of ChatBot chatbots.
On August 21, 4Paradigm released its 2025 interim performance report, with revenue of 2.626 billion yuan in the first half of the year, a year-on-year increase of 40.7%, and a net loss of 43 million yuan, narrowing by 71.2% compared to the same period last year.
About the Business
As an early explorer of AI machine learning and financial AI Agents, 4Paradigm has reached the edge of profitability for AI SaaS and has the potential to become the first AI Agent company to achieve PMF.
The simplest way to judge the quality of a TOB business model is to observe whether its products dominate among top KA clients.
In a pure seller's market, clients will make various customization demands on SaaS providers. While this may bring short-term revenue and profits, over time, the company's pre-sales consulting and post-sales implementation teams will inevitably grow, and the unsustainability of customization remains an unavoidable issue for SaaS companies.
Although all SaaS companies aim to avoid this phenomenon, in real business environments, frontline decision-makers in marketing and product lines are reluctant to give up this revenue, as it constitutes a major source of their commissions and bonuses.
As a result, companies gradually fall into strategic missteps, as small-scale customization markets bloat their organizational structures, diverting them from long-term strategic choices.
4Paradigm's interim report shows that its core business, [Prophet AI Platform], accounts for 81.8% of total revenue, up 71.9% year-on-year, while customization businesses [4Paradigm SHIFT] and [4Paradigm AIGS] further declined, accounting for only 14.1% and 4.1% of group revenue, respectively, indicating a shift toward healthier and more sustainable revenue streams.
About R&D
R&D expenses are not always better when higher. Annual computing clusters costing hundreds of millions are not friendly to small and medium-sized SaaS companies without actual business support.
Major cloud computing businesses have a natural advantage in the AI era. While other manufacturers need to purchase or rent computing power, major players can simply reallocate their own resources.
According to the financial report, R&D costs increased by 5.1% to 890 million yuan, mainly due to higher cloud resource consumption driven by client demand. Overall R&D spending remained stable, with an R&D expense ratio of 34%, down 11.5% year-on-year, within a reasonable range.
About Declining Gross Margin
A gross margin of 37.7% is not high in the industry, down from 42.3% in the same period last year, primarily due to increased hardware procurement costs for DeepSeek all-in-one machines.
Some investors are pessimistic about this, but in actual sales, clients purchasing hardware beyond core services—based on trust and industry trends—is not necessarily a bad thing for the company.
When reading a SaaS company's financial report, what matters is not the polished numbers but the real business needs reflected behind them.
About Increased Sales Costs
Many friends have sent me photos of 4Paradigm's billboard ads at airports, and the growth in implementation and maintenance staff due to increased project revenue is also a necessary optimal choice for SaaS companies.
Compared to Feishu, backed by ByteDance's substantial marketing budget, 4Paradigm has far fewer resources. The TOB sector is a business model with almost no organic traffic. A reasonable increase in sales and marketing expenses is acceptable as long as overall revenue continues to grow rapidly.
About the Two Placements in the First Half
I was not yet a shareholder during February's placement, so I'll focus on the July share subscription agreement with Wuji Capital.
Wuji, headquartered in Abu Dhabi and Hong Kong, is a global long-term investment institution. This year, besides 4Paradigm, it also invested in another AI company, SenseTime.
SenseTime is one of the few SaaS companies transitioning from AI 1.0 to 2.0. Both 4Paradigm and SenseTime have strong technical foundations, but SenseTime initially focused more on customized solutions and is now exploring AGI general models.
Although both are in the AI space, SenseTime leans toward infrastructure, while 4Paradigm emphasizes the commercial value of Agent applications.
Wuji Capital's investment in both companies aligns with its strategy for comprehensive AI sector coverage and long-term holdings at relatively undervalued prices.
For 4Paradigm, the cash flow from these placements must be used wisely. Frequent share issuances can discourage small investors. Optimizing business structure and improving efficiency remain key challenges.
About Innovation Segments
Whether it's consumer-facing businesses or collaborations with Jiunian Technology and HyperStrong in stablecoins and AI energy, all are in early-stage development. These are promising sectors, but execution is key.
AI smart glasses will not be a major revenue source for 4Paradigm anytime soon. Their primary role is to expand image data inputs for future world model inferences.
In contrast, AI financial risk control in stablecoin businesses is a better fit for 4Paradigm, offering a clearer path to a second growth curve.
Summary
Overall, this is a decent interim report, addressing many legacy receivables from last year while balancing short-term revenue and long-term strategy.
Focus on the progress of innovation businesses and the Prophet Platform, and look forward to more good news from AI Agents.
August 22, Mars, Qinghe.
$PHANCY(06682.HK)
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