Kuaishou Technology B

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Kuaishou Technology Third Quarter 2022 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management prepared remarks. The English line will be in listen-only mode. And please be noted that we have a recording. I will now turn the call over to Mr. Matthew Zhao, VP of Capital Market and Investor Relations at Kuaishou Technology. Thank you, operator. Good evening and good morning to everyone. Welcome to our third quarter 2022 Financial Results Conference call. Joining us today are Mr. Cheng Yixiao, Co-Founder, Executive Director, and CEO. Mr. Jim Bing, Chief Financial Officer. Before we start, we would like to remind everybody that today's discussion may contain forward-looking statements. which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today's announcement and discussion. The company does not undertake any obligation to update any forelooking information, except as required by law. As for the important information, including the forelooking statement, please refer to the company's public information or the announcement of its third quarter of 2022 results of the period ending 30th of September of 2022, published earlier today on the company's iWebsite. During today's call, management will also discuss certain non-RFIRS financial measures for company's purposes only. And for a definition of non-RFIRS financial measures and a reconciliation of RFIRS and to non-RFIRS financial results, please refer to our results announcement for the third quarter report ended September the 30th of 2022 issued earlier today. For today's call, management will use Chinese as the main language. A third-party interpreter will provide simultaneous interpretation into the prepared remarks session and conceptive interpretation during the Q&A section. Please note that English interpretation is for convenience purposes only. In the case of any discrepancy, management statements in the original language will prevail. Finally, all references to currency, units, in the conference call aren't going to be unless otherwise stated. Now, give the floor to Yixiao. Hello, everyone. Welcome to Kuaishou's third quarter 2022 earnings conference call. The third quarter of 2022 was full of challenges for our company and our organization. Like everyone else, we faced multiple headwinds such as macroeconomic slowdown and resurgence of the COVID-19 pandemic. Amidst these challenges, We continue to achieve breakthroughs in both business operations and financial performance by making our remaining efforts to overcome external difficulties. In third quarter of 2022, our domestic year use increased 13.4% year-over-year to a record high of $363 million. At the same time, operating profits for our domestic businesses in the third quarter remained positive for the second consecutive quarter, increasing by nearly three times compared with the second quarter. Our group suggested EBITDA also continue to improve in the third quarter of 2020. Before going into detail about our business progress in the third quarter, I would like to share with everybody the consideration behind our recent organizational and personnel adjustments and my thoughts now that I'm directly responsible for our e-commerce business. Over the past few months, we have reviewed our organizational capabilities, structure, and personnel with respect to the construction of our commercial ecosystem and made corresponding adjustments to continue shifting our efforts and resources to a sustainable and healthy development of our ecosystem of commerce. We established a company-wide commercial ecosystem committee. We also named a new head of online marketing, appointed an algorithm expert to lead QISO's apps, products, and operations, and upgraded our local services unit into an independent business department. We made these adjustments based on our plan for Kuaishou's future development and transformation. Specifically, the Commercial Ecosystem Committee will facilitate the coordinated development and integration of our monetization avenues, including e-commerce, online marketing, and live streaming. It will promote collaboration and resource sharing among business units, achieving the goal of healthy and sustainable commercialization through in-depth collaboration. Our adjustment with respect to the head of online marketing was intended to better respond to a quickly evolving and increasing tough challenges in the online advertising market. Through the Commercial Ecosystem Committee's coordination, we realized the tremendous potential of integrating our traffic ecosystem and commercialization. Wang Jianwei, our new head of online marketing, is deeply involved in the Commercial Ecosystem Committee and is very adaptive at identifying problems and opportunities. He has also profound customer insights and understanding of traffic monetization. We believe he's well-equipped to dissect complex problems and create synergy between online marketing and traffic and the content ecosystem. In addition, Mr. Yu Yue, as a recommendation algorithm expert and head of the algorithm team, has an in-depth understanding of our community-based ecosystem. Also, our algorithms have always been one of the key drivers for our DAO growth. Going forward, as Mr. Yu Yue takes charge of Kuaishou SaaS products, operations and algorithms, we can further unlock the technological power of algorithms in product operations and our content ecosystem, thereby discovering more business breakthrough opportunities. At the same time, we will seek to reinforce our organization's competency and efficiency by implementing cross-departmental rotation for our mid-level managers. This will help them expand their capabilities and at the same time enhance their abilities to cross-business collaboration through sharing practical experience in different businesses. As for the e-commerce business, you may be curious as to why I'm heading it directly. E-commerce is one of the key growth engines for the future development and the center of our commercial ecosystem. I'm in charge of it directly, not because anything is wrong with the business and its CEO is coming to rescue. On the contrary, we recognize and appreciate the unrelenting efforts that our e-commerce team has made, as well as their outstanding achievements. It is precisely because our e-commerce business has quickly grown to its current size and scale that we need to think about its development direction and model from a long-term perspective. We also need to make right choices that will truly elevate our user experience and promote merchants' healthy development. When it comes to making choices and trade-offs, I'm in a position of strength in terms of courage and confidence than others in our organization. As a result, in addition to my responsibility as CEO to oversee strategy, business decision-making, and organizational management, I will spend most of my time and effort on e-commerce for a considerable period of time. I hope to work with the team so that our e-commerce businesses can play a greater role in crisis commercial ecosystem by better servicing our users and empowering merchants, brands, and co-els. We believe that although the e-commerce industry has entered a mid to late stage of intense competition compared with the traditional shelf-based e-commerce, Content-driven live streaming and short video e-commerce still hold immense potential that can be tapped into through innovation. First, we need to build a merchandise system. Among the three key elements of e-commerce, buyers, merchandise, and platform, we need to continue enhancing our standing and control of the merchandise element. We will build out a merchandise system to strengthen our knowledge in this regard and that cost-effectiveness valuation of merchandise to our traffic allocation logic. At the same time, we will improve our merchandise distribution library to guide and help KOLs to choose the right high-quality products. As a result, we will postpone the official launch of our Shopping Mall service until we further develop our merchandise understanding and control and cultivate our users' mindset and time spent on merchants or brands. Second, we will establish holistic public domain traffic allocation logic. Right now, We allocate traffic relatively independently and evenly for advertising and e-commerce. But we need to consider these two holistically when deciding on traffic allocation. For example, merchants can leverage advertising traffic to make recommendations to potential buyers. Consequently, we will align the advertising traffic allocation mechanism with e-commerce needs and direct traffic with the same end goal. gradually forming a positive cycle from the public domain to private domain. In the meantime, we will strengthen e-commerce's own traffic allocation mechanism through top-down planning. We will pay attention to the competition mechanism and business health indicators and continuously improve our merchandise mix and revenue structure. Third, we will continue to optimize user experience and LTV through algorithms. In the past, Our e-commerce algorithms mainly focus on user interest exploration and the matching between buyers, sellers, and merchandise before orders were placed. Going forward, we will place more emphasis on algorithms' continued contribution along the entire e-commerce value chain, such as enhancing mid- to long-term conversion by monitoring the relationship between long-term high-value users and merchants. In addition, we will incorporate key experience indicators such as the product return and the negative user feedback and complaint rates into our recommendation algorithm to constantly enhance user experience and the overall e-commerce ecosystem. In the future, we'll make persistent efforts in these areas and I will share my strategic thinking on e-commerce business with you from time to time. Next, I will discuss our key business developments in a third quarter. First, user growth and ecosystem construction. In the third quarter of 2022, we achieved high-quality user growth. We seized opportunities during the peak user growth season, including summer vacations to implement our effective user acquisition and retention strategy and achieve a healthy ROI. In the third quarter of 2022, average year use of QysoApp increased by 13.4% year-over-year to reach a new high of $363 million. An average annual use grew by 9.3% year-over-year to a record-setting $626 million. The DAUs to MAUs ratio remained relatively high at 58.1%. Average daily time spent per DAU increased by 8.6% year-over-year to 129.3 minutes, demonstrating robust user sickness and vibrant community activity on our platform. In addition, continuing the momentum from last quarter, our total video views grew at a faster pace compared with total user time spent in the third quarter. Notably, our daily peak video views passed the milestone of $100 billion. Thanks to a refined management and improved efficiency of our user acquisition system, we reached our expected user growth target while continuing to strictly control our investment scale in user growth. Specifically, we expanded our efficient customer acquisition channels through algorithm strategy optimization and retained users at a constantly low cost per DAU by refining our algorithm-based operations to target different users groups. In addition, as we reinforce our differentiated social platform and user mindset, as of mutual followers on Kuaishou app grew substantially by 63.1% year over year in a third quarter to reach a cumulative 23.5 billion. Our original short video content ecosystem is the foundation of our platform. as of September 30th of 2022. We had more than 2 million creators who had more than 10,000 followers each, and our creators had accumulated a total of nearly 300 billion fans. The number of works released by our creators and the total number of generated interactions have both increased considerably. At the end of third quarter, the number of cumulative video uploads on Kuaishou app exceeded 550 billion, and during the quarter, our short videos sparked more than 4 billion interactions on a daily basis, up 40% year-over-year. Meanwhile, strengthened by our supportive policies, the commercial value of our creators' content continues to grow. Over the past year, more than 6 million creators have received traffic support on a scale of 100 million RMB. And in addition, we helped 20 million creators earn revenue every year for three consecutive years. In July, we hosted our annual Photosynthetic Creators Conference. And going forward, we will continue to upgrade our services, resources, and products for creators. We also subsidize outstanding creators through traffic incentives and revenue opportunities to maximize the flywheel effort in the creator ecosystem. We have also been active expanding short video content supply in various verticals. In the third quarter of 2022, we continue to tap into the potential of short plays and explore more diversified themes, such as Benevolence, a portrait of the professional lives of medical staff, which has ranked in more than 170 million streams since its launch. Our sports vertical has been growing in its diversity. For example, the collaboration with NBA, we launched a unique IP in September, the Village Basketball Championship Cup of the Village Basketball Association, which registered 120 million live streaming viewers and 244 million total streams. By organizing village basketball content, we connected grassroots KOLs with top-tier competition events, promoting basketball in rural Chinese areas. As the riders show vertical, our self-produced intergenerational interactive experience reality show, Let's Go Mom, satisfy our users' more diverse video content needs through a narrative and dissemination format that combines long video, short video, and live streaming. When the show ended September 25th, cumulative video views on our platform surpassed 524 million, now generating 94.34 million cumulative interactions. In addition, Our ability to constantly optimize and iterate our content algorithms is a key to enhance the user experience and satisfaction. In the third quarter, we optimize user retention and long-term content consumption satisfaction rates by modeling users' long-term interests. We also use reinforced learning tools combined with the undervised intellectual technology. Meanwhile, we sought to motivate users to break through their information cocoons and further improve the experience by leveraging methods that foster diverse interests and also promote exploration second our progress in commercialization at each of our business lines in the third quarter of 2020 revenue from online marketing services was 11.6 billion rmb up 6.2 percent year-over-year macroeconomic headwinds compounded by various external factors have challenged the online advertising industry as a whole and we are no exception Due to the muted rebound in the advertising market, year-over-year revenue grew from the online marketing services decelerated, with third-party advertising particularly impacted in the third quarter. As customers slashed their marketing budgets, we sought to unlock users' commercial intent by constantly improving our product commercialization and utilizing content and user labels. Users' commercial intent then feedbacks to our content recommendations thereby establishing a virtuous cycle of user content and commercial ecosystem. With these efforts, our monthly active advertisers increased by more than 65% year-over-year in the third quarter. We also continuously improve advertising ROI on our platform through algorithm optimizations. And as such, the advertiser retention rates continue to increase. As our e-commerce business expands, the advertising services that we have provided our native e-commerce merchants have maintained healthy growth momentum, Thanks to our platform's massive traffic and high conversion efficiency of our closed-loop ecosystem, we encourage advertisers who are leading live streaming consumption but below average in short video consumption to increase the short video usage and vice versa. By doing so, we promoted native advertising merchants' combined usage of short video and live streaming. As a brand advertising, we capitalized on customized promotion projects such as August 28th Car Shopping Super Festival, and the Blooming Chinese Ingredients Beauty and Skincare Promotion Event. These promotional projects serve to explore brand advertising tailored to advertisers' specific needs and to open more possibilities for advertisers to increase their marketing effectiveness. Our product iteration and enhancements, Advantage in Traffic, Content, and Killwell ecosystem were key efforts and efforts. Recently, we established a service team for various industry verticals with deeper insights into industry characteristics and more data analytics, Along the value chain, we aim to meet the precise needs of advertisers in different industries. We also aim to improve our overall service capabilities and drive higher ROI for advertisers, ultimately boosting our overall commercialization efficiency. In the third quarter of 2022, our e-commerce business grew at a faster pace than the market and continued to gain market share. Our e-commerce GMV reached 222.5 billion RMB, up by 26.6 percent year over year. On the supply side, we attracted more merchants by leveraging our traffic advantage, conversion efficiency, and our constantly improving promotional policies. In the third quarter, new merchants joining our platform increased by nearly 80% year-over-year. We also enhanced our merchant empowerment system through strengthened merchant services and governance, which in turn improved the operational capabilities. Meanwhile, more efficient Traffic allocation strategies and more precise buyer-seller and product matching allow us to actually increase the conversion efficiency and the operational environment of our platform. As a result, the number of active merchants on our platform grew at a high double-digit rate year-over-year in the third quarter of 2022. In addition, we made progress in helping the new merchants with co-starts by establishing a dedicated traffic pool for the startup merchants, which is including high traffic efficiency quarter-over-quarter. We also consolidate service provider resources to facilitate rapid merchant growth and sales ramp up. Furthermore, we have been identifying new efforts in brand e-commerce. We continue to foster distinctive quiet brands to bolster their operational service capabilities through dedicated traffic and also supported policies, providing customers with products and services with a high value experience ratio. Powered by these initiatives, a number of quiet brands grew by double-digit growth over quarter over quarter in the third quarter of 2022. accounting for an increasing large share of e-commerce GMB. In addition, we have bought in more well-known brands and teamed up with established brands to launch Super Brand Day during the August 18 brand promotions. Our brand merchants' GMB increased by 192% year-over-year. On the consumption side, we're constantly emphasizing the trust-based community advantage to elevate users' shopping experience. With trust as our cornerstone of our e-commerce ecosystem, we upgrade our user review system to improve feedback collections, monitoring, and handling. and more effective by identifying users and scenarios with super experiences. These allow us to build up the positive and proactive service capabilities, cultivating user mindsets, and recognizing of the utmost user protection on our platform. We also integrated our shop experience scoring system in a third quarter to help us discover high-quality merchants. With a widened coverage of our user system, including trusted purchase, we effectively improved our sales service fulfillment on our platform and increased our repeated purchase rate by 1.1% in the third quarter of 2022. Furthermore, our e-commerce preparation and also penetration and coverage and conversion deepened further, driven by continuous upgrades in our merchant supply content and merchandise user matching. In the third quarter, we focused on expanding users consumption is now risk beyond traditional live stream and to show video to boost the user activity. Meanwhile, we offered the payer shopping guidance across the different merchandise categories, as well as more refined subsidy processes. This drove number of monthly active e-commerce paying users to only 100 million and third quarter along with the continuous expanding our pool quarter over quarter. Regarding traffic use and matching, we have also strengthened our public domain traffic efficiency to create a dual engine model driven by both public and private domains. We increased accuracy of merchant user matching by in-depth exploration of the user experience. And also, thanks to Zephyr, the GBV of the public domain e-commerce live streaming and short video nearly doubled in September compared with that of the June. In third quarter of 2022, our live streaming business discovered and delivered a stronger performance that exceeded our expectations. Our revenue increased by 15.8% year-over-year to 8.95 billion RMB, driven by the continued requirements to our live streaming operation. We further increased diversity and also entertainment value of our interactive features in live streaming and fulfill users' social needs. Meanwhile, we built a user life cycle management mechanism to improve our live stream paying ratio in the third quarter of 2022. Our monthly paying ratio continued to expand year-over-year, and average MPUs for the live streaming rose by 29.3% year-over-year to 59.6 million on quiet apps. And also, on the supply side, our collaborative strategy with the talent agencies continued to evolve and become more diverse. Through joint operations and onboarding external streamers, talent agencies have become more deeply involved in our live streaming ecosystem, increasing the number of monthly active streamers that manage by more than 200% year-over-year and third quarter. Empowered by talent agencies, the live streaming frequency and average daily income of the streamers in joint operations increased by about 10%, relatively preparing the growth in both scale and total income for streamers managed by talent agencies. In addition, we further expanded the contextualized live streaming user scenarios such as quiet hire, ideal housing, and quiet date, providing users with a richer live streaming content and meeting their service needs in more scenarios. Finally, an update on our overseas business. Building a solid foundation with every penny well spent remains our guiding principle. Filled by our constant adherence to ROI-based growth, strategy, and disciplined spending, we achieved effective and healthy user growth, and our user retention continued to improve in the third quarter of 2022. And the average time spent per DAU in OBSIS market remained a high level of over 60 minutes. Drastically, the key markets have been focusing on the Brazil and Middle East and Indonesia. In Brazil, cultivating user mindset through a differentiated content strategy that diversify internal results and initial results to build on this success, we are expanding the number of content verticals to further enrich the content ecosystem as we're enforcing the virtuous cycle between content generation, consumption, and creative monetization. With respect to monetization capabilities, thanks to our commercialization team's continuous optimization of product and service capabilities and our efforts to promote quiet brand awareness among the advertisers, our revenue from advertising services grew rapidly. For live streaming, we have constructed a more comprehensive set of ecosystem infrastructure, even in collaboration with Italian agencies to further diversify content supply and enhance the content quality, and hosted diverse operating activities across various regions, all of which have proven a continuous increase in live streaming revenue. Going forward, we also actively explore cooperation opportunities with local e-commerce partners. By simultaneously increasing revenue and controlling expenses, we seek to further enhance the operational efficiency of overseas businesses and gradually reduce negative impact on our group's overall financial performance. In conclusion, looking back to our performance and looking forward, we have and will always uphold and practice our core belief at Kuaishou Being customer obsessed, despite the many internal and external challenges faced, creating value for creators and customers is the starting point and endpoint for everything that we do. We firmly believe that we study to improve our commercial ecosystem through unremitting efforts. We will undoubtedly create sustainable value for our users, partners, employees, and shareholders. This concludes my prepared remarks. Thank you. Next, our CFO, Mr. Jin Bing, will discuss companies' financial performance. Thank you, Vishal. And hello, everyone. We will have a closer look at our financial performance for the third quarter of 2022. Despite the ongoing macro headwinds, we continue to drive healthy traffic and top-line growth while sustaining the upward trend in profitability. Our domestic business delivered operating profit for the second consecutive quarter, which reached 375 million RMB, with a quarter-over-quarter increase of nearly three times. Meanwhile, enhancements to our monetization capabilities in an overseas market and our ROI-based approach to user acquisition and retention spend narrowed our operating loss margin with our international business. Our revenues for the third quarter grew by 12.9% year-over-year to R23.1 billion. This increase was mainly driven by revenue growth in our online marketing services, e-commerce business, and live streaming business. Revenue from online marketing services reached 11.6 billion RMB in the third quarter of 2022, up 6.2% year-over-year, which was largely driven by growing advertisers on our platform. We are constantly working to improve the effectiveness of our ad products and services as such drive ROI for advertisers' partners. This allows us to achieve positive growth in an on-search and macro environment. In particular, as the e-commerce business on our platform expands, The advantage of our closed-loop system in the conversion efficiency and traffic has become even more evident, underpinning the resilience and healthy growth of our online marketing services provided to our e-commerce merchants. Other services revenue for the third quarter of 2022 increased by 39.4% year-over-year to 2.6 billion RMB, mainly due to the strong growth in e-commerce revenues. To leverage in our unique trust-based e-commerce models, to attract and empower more merchants, including both well-known brands and quiet brands, and expanding user consumption scenarios beyond traditional live streaming to short video and more. We gain further market share in e-commerce and our e-commerce GMB increased by 26.6% year-over-year to 222.5 billion RMB in the third quarter of 2022. revenue from live streaming grew by 15.8% year-over-year to 8.9 billion RMB. This was primarily attributed to the continuous improvement in both our live streaming content quality and user content matching efficiency, which boosted the average live streaming MPUs by 29.3% year-over-year to 59.6 million. Our cost of revenues for third quarter of 2022 increased by 3.7% year-over-year to 12.4 billion RMB, representing 53.7% of our total revenues. The year-over-year increase was mainly due to the increase in revenue-sharing costs and relative taxes, which were in line with our revenue growth. We partially offset this by optimizing the efficiency of our bandwidth usage and reduction of bandwidth expenses and server custody costs. Gross profit for the third quarter of 2022 reached 10.7 billion RMB, growing 28.5% year-over-year. Gross profit margin in the third quarter of 2022 was 46.3%, improving 4.8 percentage points year-over-year and 1.3 percentage points quarter-over-quarter. Our year-over-year increase in gross profit margin was primarily a result of further optimization of bandwidth and server efficiency, which drove a decrease in the ratio of bandwidth and depreciation to revenue. The quarter-over-quarter improvement in gross profit margin was mainly due to the reduction in other costs. Selling and marketing expenses decreased by 17.1% year-over-year to 9.1 billion RMB for the third quarter of 2022, or 39.5% of total revenues. This marks a significant improvement from the prior year period in which sales and marketing expenses were 11 billion RMB, or 53.8% of total revenues. as we adopted more disciplined and efficient user acquisition and retention methods while sustaining strong traffic growth. Research and development expenses for third quarter of 2022 were 3.5 billion RMB decreased by 16.2% year-over-year, primarily due to the decrease in employee benefit expenses, including the related share-based compensation expenses. Administrative expenses for third quarter of 2022 were 1.1 billion RMB increasing by 16% year over year, primarily due to the increase in employee benefit expenses, including share-based compensation expenses. Our operating loss for the third quarter of 2022 continued to narrow, improving to 2.6 billion RMB from 7.4 billion RMB in the third quarter of 2021 and 3.1 billion RMB in the second quarter of 2022. As a result, Our operating margin expanded by 24.8 percentage points year-over-year and 2.8 percentage points quarter-over-quarter, improving from negative 36.1% in the third quarter of 2021 and negative 14.1% in the second quarter of 2022 to negative 11.3% in the current reporting quarter. Adjusted net loss for the third quarter of 2022 was 0.67 billion RMB narrowing substantially from 1.3 billion RMB in the second quarter of 2022 and 4.6 billion RMB in the third quarter of 2021. This resulted in the adjusted net margin improvement from a negative 22.5% in the third quarter of 2021 and negative 6% in the second quarter of 2022 to negative 2.9% in the third quarter of 2022, representing an increase of 19.6 percentage points year over year and 3.1 percentage points quarter over quarter. We maintain a healthy balance sheet with cash and cash equivalents, time deposits, restricted cash, and wealth management products of 43.5 billion RMB as of September 30th of 2022. In conclusion, we will further monetize our massive user traffic that is continuing to grow by promoting tighter integration between our user content and commercial ecosystems and providing expanded opportunities for advertisers and merchants. We also continue to focus on the cost control and operation efficiency to advance our domestic businesses operating profit and close the gap on our loss in the overseas businesses, which will further enhance our resilience and brings us closer to our goal of long-term sustainable profitability. It concludes our prepared remarks. We will now open for questions. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, please press star 1 on your telephone. If you would like to cancel your request, please press the pound or hash key. 我们现在进入问答环节。 第一道问题是来自 Credit Suisse的 Kenneth Fung. The first question comes from Kenneth Fung from Credit Suisse. 请提问。 Please ask your question.

我想請教一下這管理層,廣告組在投放預算以及信心的恢復的情況如何呢? 我們應該怎麼看待廣告市場在未來6到12個月的趨勢? 以及在宏觀不確定的情況以下,我們公司會如何應對呢? 我繼續翻譯一下。 Thank you very much for taking my questions and congrats on the solid quarter. I have a question on advertising monetization. What have management seen so far from advertisers? in terms of their budget and sentiment. How should we think about the advertising market outlook for the next 6 to 12 months? Amid the challenging macro, any active measures that we are doing? Thank you.