Kuaishou Technology B

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Kuaishou Technology Third Quarter 2023 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. This English line will be in listen-only mode. I will now turn the call over to Mr. Matthew Zhao, VP of Capital Market Investor Relations at Kuaishou Technology. Thank you, operator. Good evening and good morning to everyone. Welcome to our third quarter 2023 financial results conference call. Joining us today are Mr. Chen Yixiao, co-founder, executive director and CEO, as well as Mr. Jin Bin, chief financial officer. Before we start, we would like to remind you 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 this discussion. The company does not undertake any obligation to update any forward-looking information except as recorded by law. During today's call, management will also discuss certain non-IFRS financial measures for comparison purposes only. For definition of a non-IFRS financial measures and a reconciliation of the IFRS to non-IFRS financial results, please refer to our results announcements for the three and nine months ended September 30th, 2023 issued earlier today. So for today's call, management will use Chinese as the main language. The third-party interpreter will provide a simultaneous English interpretation in the prepared remark session and consecutive interpreting during the Q&A session. Please note that English interpretation is for convenience purposes only. In the case of any discrepancy, management statements in their original language will prevail. I will now hand the call over to Yixiao. Hello, everyone. Welcome to Q&A's third quarter 2023 earnings call. In the third quarter of 2023, we continued to foster the growth of our healthy and sustainable operations, expanding our base of users, content creators, marketing customers, and merchants. We continued our growth momentum with steady revenue increases across our various business lines. Accordingly, we achieved a group-level net profit of 2.18 billion RMB and adjusted a net profit of 3.17 billion RMB. Our profitability was bolstered by our robust revenue growth across each of our core online marketing, e-commerce, live streaming business segments, as well as our ongoing optimization efforts that improved our operating efficiency. For example, we consistently increased our server and bandwidth utilization efficiency by leveraging advanced technologies. Our server and bandwidth cost as a percentage of our revenue has consistently decreased over the last few quarters. To further optimize our cost efficiency, our own in-house data center, the Kuaishou Smart Cloud Data Center in Wulanchabu, Inner Mongolia, was officially launched in July 2023. It's now one of the largest data centers in China, serving high-performance computing power for big data and AI technology investments. Our proprietary hyperscale data center is designed to house 300,000 servers, making it well-equipped to support the rapid growth of our business, as well as our ongoing development goals. Before I go into depth about our third quarter business development, I'd like to update you on a recent senior level appointment. As you may have noticed, last week I've stepped down as the head of e-commerce business. Thomas Jenway is now leading both the e-commerce business and at the commercialization business, reporting directly to me. Having led the e-commerce business for over a year, I gained valuable insights into the synergies between our traffic and a commercial ecosystem. Together with the team, we've built a robust foundation for e-commerce sustainable long-term growth. I believe Thomas' appointment will help maximize the synergies between the upstream and downstream business. My role will now pivot to focus wholly on the CEO position. Here, I will concentrate on questions overarching long-term goals, including corporate strategy, organization development, and exploring new industry opportunities. I will also focus on optimizing the synergy between the traffic ecosystem and the monetization system from a holistic perspective. During the past two years that Thomas oversaw the commercialization business, he demonstrated exceptional insight into the dynamics of products, our content ecosystem, traffic operations, and monetization. Under his leadership, the company's online marketing revenue has grown rapidly in high double digits. Looking ahead, we expect Thomas' dual role to strengthen cooperation and synergy between the two business units, fortifying the organization and improving monetization efficiency, thereby contributing to the long-term prosperity of Kuaishou's commercialization ecosystem. Next, I'll discuss our key business developments in Q3. First, user growth and ecosystem construction. In Q3, we maintain high-quality growth across both our user base and traffic, owning to our efficient user growth strategy, extensive high-quality content offerings, and continuous algorithm optimization. Average DAUs and MAUs on the Kuaishou app continued their record-breaking growth momentum during the third quarter, reaching 387 million and 685 million, respectively, representing year-over-year increases of 6.4% and 9.4%, respectively. Average daily time spent per DAU on the Kuaishou app was 129.9 minutes in Q3, and our total user time spent grossed 6.9% year-over-year. Moreover, the average daily total video views of our short videos and live streaming content reached nearly 100 billion. We have prioritized the efficiency and quality of our user growth, achieving consistent ROI improvement. This resulted in further decrease in our average user acquisition cost in Q3, both quarter-over-quarter and year-over-year. Specifically, we intensified our efforts to promote and distribute high-quality original content, including short plays, which led to robust user retention, Meanwhile, by offering high quality vertical content such as the summer star wish party we acquired new users, while also increasing engagement of our existing users. We're also actively exploring new innovative acquisition channels. For instance, we extended our reach to younger demographic through live streaming courses provided by top university to the public. We have been committed to fostering a differentiated social media platform that inspires users to develop social connections and relations. As of the end of Q3, pairs of mutual followers on the Kuaishou app reached $32.2 billion, representing a year-over-year increase of around 40%. In addition, in Q3, average daily interactions, including likes, comments, reposts, and et cetera, on the Kuaishou app exceeded $9 billion. We are dedicated to encouraging high-quality original content creation, supporting the development of diverse content genres, promoting high-quality content featuring distinctive Kuaishou characteristics. In sports content, as the official broadcaster of the short video sharing platform of the 19th Asian Games Hangzhou, Kuaishou provided users with a panoramic view of the game's rich content and innovative interactive experience with cutting-edge live streaming technology. During the Asian Games, daily views peaked at around 230 million with 63.1 billion video views of the Asian Games-related content. In terms of short plays, we launched a total of 85 Project Astro short plays During the summer vacation period of these 21 short plays surpassed 100 million views, covering various genres, including Asian style, urban, youth, and family. While solidifying our ability to produce blockbuster short plays, we have steadily upgraded our monetization capabilities. In Q3, marketing sponsorship revenue from Project Astro short plays surged by more than 10 times compared with the previous quarter. In September, we launched a 2023 back-to-school season campaign. In the Penn Knowledge vertical, collaborating with 61 skilled professors and 149 renowned experts, we introduced high-quality educational resources to users through short videos plus live streaming contributing to inclusive education. With respect to our search business, we introduced the Kuaishou AI Dialogue function. This is the first intelligent Q&A product based on the large language model in the short video and live streaming industries. This innovation brings an intelligent Q&A and attacks creation functions to users within search scenarios, improving users' intelligent search experience. In Q3, Search's average monthly users exceeded 470 million. The number of average daily researches on our platform reached over 600 million. The number of daily search inquiries peaked at more than 700 million. We're also accelerating the commercialization of our search service. search marketing revenue growth by over 120% year-over-year. Moving to our monetization progress, first look at our online marketing services. In Q3, despite the ongoing challenges stemming from the macroeconomic conditions and the slow recovery of marketing customers' confidence, we achieved exceptional online marketing revenue growth, outperforming the industry. This was mainly driven by praise to our commercial products, technology development in our algorithms, and deeper operation in various vertical industries. Specifically in Q3, our revenue from online marketing services reached $14.7 billion, growing by 26.8% year-over-year and accounting for 52.6% of our total revenue. The number of active marketing customers in Q3 increased by more than 140% year-over-year. In Q3, our external marketing services continued to recover, and the year-over-year growth rate accelerated compared with Q2. Notably, we made substantial progress in industries such as meeting information, education, and training, and healthcare. We've been focused on refining industry-specific operations. For example, in the education and training industry, we identified the needs of specific high-quality users on our platform, prompting marketing customers to allocate more budgets on our platform. By extending the score of negative, of native marketing materials, we aim to enhance users' content consumption experience and boost the conversion rates for marketing customers. In Q3, the consumption of external native marketing materials increased by more than 30% quarter-to-quarter. In addition, we introduced an AIGC tool to produce marketing material, boosting the efficiency of marketing customers' productivity, which has substantially reduced production costs. In terms of brand marketing, we leveraged our sponsorship of Hangzhou Asian Games to explore customized brand marketing strategies that align with marketing customers' individual needs. To that end, we created custom IPs tailored to diverse scenarios We also utilized our advantages in traffic content and our KOL ecosystem, creating additional marketing opportunities for marketing customers. For instance, inspired by the concept of Asian Games plus technology, we invented a marketing campaign for China Mobile with the theme of National Champion Dream Asian Games Mobile Journey. This campaign, which integrated online and offline activities, which showcased in six cities, achieving more than 960 million exposures. Marketing services revenue from native e-commerce merchants maintained robust growth in Q3, benefiting from the increase in the sale of our e-commerce business. Specifically, we focused on the customer composition, traffic alignment, and efficiency improvement. In terms of the customer composition, we emphasized the growth of small and medium-sized merchants within our ecosystem. Our priority is to incrementally improve how we cultivate these merchant customers, build attraction for their business, and provide an increased policy support for their traffic and operations Our Omni business platform marketing solution effectively enhanced the synergy between the marketing and e-commerce traffic, amplifying the long-term value of merchants' investment in Omni domain traffic in Q3. Marketing customers' spending from Omni platform marketing solution increased by nearly 5% compared with Q2. In terms of efficiency improvement, we increased the stability of ad placement for small and medium-sized merchants with our upgraded smart hosting products. Live streaming hosting and merchandise hosting were particularly effective in amplifying merchants' ROI by increasing the opportunities for small and medium-sized business to make sizable revenue leaps on a platform. This, in turn, has strengthened the business' willingness to allocate funds to ad placements on Kuaishou. In Q3, our marketing customer spending through smart hosting increased by nearly 9.25%. Second, our e-commerce business. Despite Q3 traditionally being the low season for e-commerce, and our customer confidence are still in the process of recovery. We continue to demonstrate a unique resilience advantage in our e-commerce business. This was attributable to short videos being a more efficient form of content delivery and also to our clear and distinctive e-commerce strategy, which centers on trusted-based e-commerce relationships and enabling consumers to discover cost-effective goods through reliable streamers and content. In Q3, we further enriched our merchandise and enhanced buyer conversion efficiency through our refined operations. As a result, our GMV growth has significantly outpaced the industry, increasing by around 30% a year over year. In terms of supply, more merchants are seeking growth opportunities and embracing the benefits our traffic brings to increase their mass market penetration given the current macroeconomic environment. The number of newly onboarded merchants remain at a high level during the third quarter. Meanwhile, we optimized our tiered operations for merchants. We also enhanced the policy support to improve the live streaming penetration rate and the number of monthly active merchants on our platform, increased by a promising 50% year-over-year. Specifically, in Q3, we introduced targeted high-potential merchants in major industry zones in 14 cities, offering practical courses to help them rapidly increase their business scale. We also intensified our efforts to promote our case studies and enhance our influence in these industry zones. Additionally, we've implemented a tiered and categorized approach to operate and support new merchants. Based on their content and merchandise capabilities, we provide a differentiated empowerment system, access to co-starter resources, as well as traffic support. This reduces the operational challenges for merchants. In Q3, the percentage of merchants with GMV leaping to all tiers ranging from 50,000 to over 2 million increased significantly quarter over quarter. Regarding brand merchants, we're placing greater focus on supply diversity and the brand merchants environment. We have enriched our brand offerings through various channels such as outlet stores and exclusive shops, resulting in continuous and rapid growth in the number of new brands on our platform. We are consistently improving the merchant environment by providing full support to merchants throughout the process, including attracting brands, co-stars, self-operation, as well as distribution. We fully utilize the stream initiative and the brand traffic project to enhance the brand's traffic acquisition app capabilities Meanwhile, we are continuously improving our traffic matching efficiency by creating marketing IP, such as the brand flash sales. We further fortify our user mindset while improving conversion efficiency. In the third quarter, GMV proportion from brands, including quiet brands, continue to increase year over year. Among these, well-known brands self-operated live streaming achieved impressive results, with the GMV growing by 100% year over year, furthering their increased growth rate on the consecutive quarter basis. In terms of KOLs, we place a greater emphasis on the overall health of the ecosystem. We expanded to shorter views and shelf-based e-commerce realms, lowering the operational barriers for KOLs. We have consistently strengthened our distribution channels, improved the merchandise collection efficiency, refined our operations for the growth and development path of mid-tier and long-tail KOLs. The proportion of mid-tier and long-tail KOLs in the overall KOL-related GMV has gradually increased by over 20% at the beginning of 2021 to nearly 50% in Q3. In terms of monetization, KOLs are showing higher acceptance of a receiving commission from distribution. This is not only due to the unique community atmosphere of Kuaishou, but also in the increasing variety of distributable merchandise. The platform provides more process-matching services, and the pairs of KOL-matching merchants on our platform continue to rise quarter over quarter. Overall, merchants at KOLs are collaborating more effectively through the stream initiatives, mutually benefiting coexisting, collectively building on the Kuaishou e-commerce system. The ecosystem's health also depends on the platform infrastructure development. In Q3, scoring system for merchandise, merchants' experience and KOA reputation played crucial roles in differentiating quality merchants by helping them gain more traffic and reducing exposure for underperforming merchants. We continuously optimized the scoring system by introducing more positive indicators to add value when users are making shopping decisions, reinforcing user trust in platform, enhancing conversion efficiency, and promoting repeat purchases. With regard to algorithm optimization, we have adopted a hypermodal approach to improve the scale and efficiency of e-commerce traffic as you grow across the board. At the same time, we'll continue to promote the content and services ranking mechanism by increasing the algorithm weight of both store and kiosk scores. With respect to the expansion of e-commerce service scenarios, we'll further strengthen our short video and the shelf-based realms. Short videos have a consistently proven Effective in recommendations, cultivating fans, funneling traffic to live streaming, as well as fostering real-time transactions. We are continually improving the quality of a short video e-commerce content and a conversion efficiency by combining the highlights from live streaming and precise recommendations. Short video GMV score by more than two-fold year-over-year in Q3, making the fifth quarter of consecutive growth. Within shelf-based e-commerce, our search skill has continually expanded it. and the peak DA used using Kuaishou Search for e-commerce purposes increased by 25% of quarter-over-quarter to over 100 million. Meanwhile, we'll continue to optimize user search experience and improve our capabilities to capitalize on user demands in Q3. Search GMB grew by nearly 70% year-over-year. In terms of the shopping mall, we increased the traffic on playing users' homepage and the shopping tab on the homepage. We also improved the paying ratio and the user experience by leveraging our differentiation strategy, such as making merchandise information vivid and detailed, This further enhanced the user retention and reduced product returns and negative reviews by more deeply integrating the shopping mall with content and refining our inventory operations. We were able to take a deeper dive into the exploration and aggregation of paying users' demands, which enabled us to carry out more targeted measures to attract merchants. We also continuously explored new marketing and operating scenarios to provide merchants with more predictable business opportunities. In Q3, shopping mall GMV continued to grow a quarter, and shop-based e-commerce GMV accounted for nearly 20% of total GMV. The continuous prosperity of supply and ecosystem further drives the users' demands. In Q3, our average monthly paying users reached nearly 120 million, with both absolute number and penetration rate increasing from Q2's peak season. These increases benefited from our refiner subsidiary and inventory strategy and diverse activities on the platform, including the deep penetration of the money-saving monthly cart, Improving conversion efficiency of paying users and repeated purchase intention. Leveraging the optimized efficiency of the smart subsidy, channel management, user empowerment projects. The quality of users on our platform, especially the quality of new users, improved significantly. And the frequency of monthly orders continued to grow steadily. Third, regarding our live streaming business, in Q3 2023, our live streaming revenue grew by 8.6% year-over-year to $9.7 billion. The increase was attributed to consistently improved high-quality live streaming offerings, better user consumption experience, and continued optimization of the live streaming ecosystem. On the supply side, we established a regional talent agency operating platform to enhance talent agencies' operating capabilities, as well as drive new user acquisition for streamers and high-quality content supply for small and medium-sized streamers. In Q3, the number of streamers managed by talent agencies grew by over 40%. While streamers average daily live streaming time increased by 30% year-over-year, meanwhile, continually expanded our diversified supply by developing innovative tools based on the entertainment live streaming scenarios and attract high-quality developers through our live streaming open platform while lowering the entry barriers for streamers. Across both internal and external industry ecosystem, we have successfully increased the supply of multi-host live streaming, bringing users to more high-quality content. We are firmly committed to building a long-term, healthy, and sustainable live streaming ecosystem while continuously Advancing our popular content verticals and nurturing streamers in September of 2023, we initiated the National Art and Heritage Program to create additional culture IP by providing substantial traffic support and professional training to streamers on our platform who cover traditional Chinese opera, folk music, and folk art. Meanwhile, we continue to facilitate AIG-C scenarios, including virtual human live streaming, and empowered by underlying technological technologies. capabilities like real-time capturing, visual effects, and etc. These capabilities boost the efficiency of our business innovation by reducing labor and time costs. Furthermore, as a benchmark case of our live streaming cloud services empowering traditional industries, the average daily resume submissions during Q3 are quite high, grew by over 200% year-over-year, driven by summer vacation and campus recruitment in autumn this year. We also lowered the entry barrier for merchants leveraging AIGC in our smart customer service. Additionally, ideal housing covered more than 120 cities nationwide with cumulative gross transactions values surpassing $14 billion in Q3. Finally, in terms of our overseas business progress, in Q3, we continue to advance our strategy focused on key Overseas market, DAUs, and the user time spent in key overseas markets steadily increased year-over-year. We further diversified our content vertical offerings in the entertainment and sports industries, providing traffic support to meet tier creators. Simultaneously, we deepened our local operations, catering to local users' specific consumption needs. Building on this foundation, we intensified our monetization efforts, continued to improve operating efficiency, which significantly reduced our use growth costs year-over-year. In Q3, total revenue of our overseas business reached a 652 million RMB, more than doubling year-over-year. By continuously optimizing our operating efficiency, we achieved a 60.2% year-over-year decrease in overall operating losses overseas in Q3, which also further narrowed the quarter-over-quarter. On the online marketing services front, we focus on key industries, optimizing marketing efficiency to unlock the commercial potential of various users across different demographics. In Q3, we increased the number of marketing customers of our overseas business by over 200% quarter-over-quarter. ensuring ongoing customer quality improvement while expanding our customer base. In addition, we optimize our brand and marketing conversion and increase the advertising inventory. In Brazil, for example, we have extended marketing resources to more well-known brands, such as Amazon and McDonald's. In terms of live streaming services, we continue to promote local operations in overseas markets and focus on tapping into high-value paying users, leading to continuous increases in paying users penetration rate for live streaming services in Q3. This... In conclusion, despite facing numerous challenges in the third quarter of 2023, we have made significant progress across our core business lines through a deepened focus on refined operations. This concludes my prepared remarks. Thank you. Next, our CFO, Mr. Jinbin, will discuss the company's financial performance for Q3. Thank you, Yixiao. Hello, everyone. In Q3, 2023, we delivered a robust financial performance. Our group level net profit increased quarter over quarter, reaching 2.18 billion RMB, marking our second consecutive quarter of delivering an IFRS net profit since our IPO. This remarkable achievement can be attributed to our consistent growth across our core business, coupled with our persistent efforts in financial management and refined operational efficiency. This display and management of our costs and expenses continues to unlock operating leverage that enhances our sustainable profitability. At the same time, while fostering high-quality user growth in Q3, our average CEUs and MAUs continue to climb, reaching historical highs. This underscores our ability to improve user retention through an array of high-quality content and algorithm optimization. By combining effective traffic monitoring strategies with improved user experience, we're recognizing the increasing value of our user ecosystem moving towards an era of profitability. Now, let's take a closer look at our financial performance for Q3 2013. In Q3, our gross revenue grew by 20.8% year-over-year to 27.9 billion RMB. The increase was driven by growth across each of our core business, including online marketing services, e-commerce, and live streaming. Revenue from our online marketing services increased by 26.7% to 14.7 billion RMB for Q3 from 11.6 billion RMB for the same period of 2022. This growth came from an increasing number of marketing customers, especially from our e-commerce merchants driven by the increased traffic on our platform and our diversified marketing product portfolio, as well as our industry-specific and refined operations. We continue to deepen our refund operations for vertical industries, focusing on marketing customers' needs and improving the content production efficiency. In terms of marketing services for native e-commerce merchants, we focus on nurturing the growth of small and medium-sized merchants by improving effectiveness as introducing Omni platform marketing solution and upgrading products of smart hosting services to reach more demands of them. Our other services revenue increased by 36.6% to 3.5 billion RMB for Q3 from 2.6 billion in the same period of 2022, led by our growing e-commerce business and its increasing GMB. During the quarter, e-commerce GMB grew by 30% year-over-year due to an increased number of active merchants and inactive e-commerce paying users, as well as our refund operation strategies. We maintain a high number of newly onboarding the merchants, we also expanded the range of brands, improving the user's shopping experience and further increased the conversion rates. Revenue from our live streaming business increased by 8.6% to 9.7 billion RMB for Q3 from 8.9 billion RMB in the same period of 2022. The increase was driven by our continuous efforts to enrich our content supply, enriching our users' access to diverse live streaming content. For Q3, our cost of revenues increased by 8.6% year-over-year to 13.5 billion RMB, representing 48.3% of our total revenues. This increase was mainly due to increased revenue sharing costs and related taxes, which is in line with our revenue growth, as well as depreciation of property and equipment and right-of-use assets and amortization of intangible assets. This increase in cost of the revenues was partially offset by decreases in bandwidth expenses and server custody costs. Gross profit for Q3 grew by 35% year-over-year and 3.7% quarter-over-quarter to 14.5 billion RMB. Gross profit margin reached 51.7% in Q3. expending by 5.4 and 1.5 percentage points year-over-year and quarter-over-quarter, respectively, benefiting from our top-line strength and effective cost control measures. Moving to expenses, selling and marketing expenses for Q3 decreased by 2.1% year-over-year to 8.9 billion RMB, accounting for 32% of our total revenues, down from 39.5% in the same period of 2020 to largely due to our more disciplined and efficient spending on user acquisition and retention. Research and development expenses were 3 billion RMB for Q3, decreasing by 16% year-over-year, accounting for 10% of total revenues in the quarter, dropping from 15.3% in the same period of 2022. The decline in RMB expenses was mainly the result of decreased employee benefit expenses, including related share-based compensation expenses. Administrative expenses decreased by 15.3% year-over-year to 945 million RMB for Q3, accounting for 3.2% of total revenue, down from 4.6% in the same period of 2023, primarily due to decrease in employee benefit expenses, including related share-based compensation expenses. Group level net profit for Q3 rose to 2.2 billion RMB compared to a net profit of 1.5 billion RMB in Q2 and a net loss of 2.7 billion RMB in Q3 2022. Group level adjusted net profit rose to 3.2 billion RMB compared with adjusted net profit of 2.7 billion RMB in Q2 and adjusted net loss of 672 million RMB in Q3 2020-2022, demonstrating our substantially improved profitability. We maintain a strong balance sheet with cash equivalents, time deposits restricted to cash, and a wealthy management product of 55.4 billion RMB as of September 30, 2023. Owing to our enhanced monetization capabilities and working capital management efficiency, We generated a positive operating net cash flow of 7.7 billion RMB for Q3 2023. As we look ahead, our primary focus remains anchored in the development of our content and ecosystem. With an emphasis on user growth strategies, we'll continue to strengthen our business capabilities through a system of e-commerce and marketing services. Creating a powerful flywheel effect to that propels our growth forward, leveraging the foundation of our enriched content supply and community vitality. We aim to foster deeper connections with our users. making our experience even more engaging. We believe that by staying true to our core strategies, we can enhance and deepen our positive competitive mode. We can see the growth opportunity and sustain rapid growth. That concludes my prepared remarks. Now we're open for questions.

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