Kingsoft Cloud's AI business is on fire. The Chinese cloud company reported first-quarter results on Wednesday that topped analyst estimates, driven by a massive 90% surge in AI cloud gross billings. But there's a catch: all that AI growth is costing a lot of money, and margins are feeling the heat.

The company, which counts Xiaomi (XIACY) and the Kingsoft ecosystem as key partners, posted quarterly revenue of 2.70 billion Chinese yuan ($391.96 million), up 37.2% from a year earlier. That beat the analyst consensus estimate of $324.78 million. Revenue dipped 2.1% from the previous quarter, which management attributed to seasonal weakness in enterprise cloud.

Public cloud services revenue jumped 47.5% year over year to 1.996 billion Chinese yuan ($289.4 million), fueled by AI demand. Enterprise cloud revenue rose 14.7% to 707.4 million Chinese yuan ($102.6 million), but fell 17.6% sequentially due to the Chinese New Year holiday and project delivery timing.

Here's where the story gets interesting. Adjusted gross profit actually improved to 351.4 million Chinese yuan ($50.9 million) from 327.7 million a year ago. But the adjusted gross margin — the percentage of revenue left after direct costs — shrank to 13.0% from 16.6% a year earlier and 17.1% in the previous quarter. The culprit? Higher server costs, expansion of the AI business, and upfront costs tied to certain customers and future revenue.

The adjusted operating loss widened to 59.8 million Chinese yuan ($8.7 million) from a loss of 55.8 million a year earlier. On a per-ADS basis, the adjusted loss was 11 cents, slightly better than the 12-cent loss analysts had expected. The company ended the quarter with 4.90 billion Chinese yuan ($710.9 million) in cash and equivalents.

CEO Tao Zou sounded optimistic about the AI opportunity. He noted that rapid adoption of AI coding tools and AI agents is driving demand for both model training and inference services, creating broader opportunities across the cloud-computing industry. AI cloud gross billings surged 90.1% year over year to 1 billion Chinese yuan in the quarter, accounting for more than half of public cloud revenue for the first time. Token-service revenue in April increased 53-fold from January levels — a staggering growth rate that shows how fast the AI wave is building.

The company also deepened its ties with the Xiaomi and Kingsoft ecosystems, with related revenue climbing 68.9% year over year, supported by Xiaomi's investments in AI and its "human-car-home" smart ecosystem.

But all this growth requires serious capital. CFO Yi Li said the company plans to continue investing heavily in AI infrastructure as demand remains strong from large-language-model developers, autonomous driving companies, robotics firms and internet platforms. AI-related capital expenditures and leased assets totaled nearly 3 billion Chinese yuan in the first quarter alone. For the full year 2026, management expects total AI infrastructure spending to reach between 15 billion Chinese yuan and 20 billion Chinese yuan — a massive commitment that will keep pressure on margins in the near term.

Li also said management expects cloud-computing pricing trends to remain favorable, as supply-chain constraints and strong AI demand continue supporting higher industry pricing. That's a hopeful sign for margins, but the heavy upfront spending means investors will need patience.

Kingsoft Cloud shares were up 1.61% at $13.24 at the time of publication on Wednesday. The market seems to be cheering the revenue beat and AI momentum, even as the cost story unfolds. For a company riding the AI wave, the question is whether the investment will pay off before margins get squeezed too thin.