Kuaishou Technology B

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quasar Technology second quarter and interim 2026 Financial Resource 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 and IR at Kuaishou Technology. Thank you, operator. Good evening and good morning to everyone. Welcome to Kuaishou Technology second quarter and interim 2026 financial conference call. Joining us today are Mr. Cheng Yixiao, co-founder, chairman, and CEO, and Mr. Jin Bing, our CFO. Before we start, please note that today's discussion may contain forward-looking statements which involve a number of risks and uncertainties. Actual results and outcomes may differ from those discussed. The company does not undertake any obligation to update any forward-looking information except as required by law. For all important information about this call, including forward-looking statements, please refer to the company's public information where the second quarter and interim 2026 results announcement ended at June 30th, 2026, issued earlier today. During today's call, management will also discuss certain non-IFRS financial measures. These are provided for additional information and should not replace IFRS-based financial results. For a definition of non-IFRS financial measures and a reconciliation of IFRS to non-IFRS, Financial Results and Related Risk Factors, please refer to our second quarter and interim 2026 results announcement. For today's call, management will use Chinese as the main language. A third-party interpreter will provide a simultaneous English interpretation in the preparatory remarks session and a Q&A and a consecutive interpretation during the Q&A session. Please note that English interpretation is for convenience purposes only. In case of any discrepancy, management's original statements will prevail. Lastly, and last otherwise stated, all currency units mentioned are in RMB. I will now hand the call over to Yixiao. Hello, everyone. Welcome to Huaxia's second quarter 2026 earnings conference call. In Q2, amid a complex macroeconomic environment and industry competition, we remain committed to our long-term vision and strategic AI investments, and we achieve high-quality growth. In Q2, the average DA use on the Huaxiao app reached 412 million. Total revenues increased by 1.4% year-over-year to 35.5 billion RMB. Revenues from our core commercial business, including online marketing services and other services, primarily e-commerce and clang AI, increased by 7.4% year-over-year. Adjusted net profit reached 3.9 billion RMB with an adjusted net margin of 11%. Overall, profitability remains stable, further demonstrating the resilience of our business operations. Now, I'll elaborate the progress of each segment in Q2. are a strategy in progress of our larger video generation model, Kling AI. In Q2, Kling AI continued advancing its vision of empowering everyone to craft capability stories with AI. Through model breakthroughs, product feature upgrades, and a global creative ecosystem expansion, Kling AI reinforced its global leadership in multimodal video generation. Kling AI launched its native 4K video output in Kling AI 3.0 series As the industry's first video generation model to support native 4K output, it enables one-click generation of cinema-grade 4K video. Designed for film, TV, and advertising professionals, it delivers high-resolution visuals without complex post-production, achieving industrial-grade cinematic visual effects. Kuling AI also released the 3.0 Turbo model, which can maintain stable, high-quality dynamic output and precise audio-visual sync while improving creative efficiency and reducing production costs. Kuling MCP and Kuling CLI were officially launched as well, enabling AI agents to dispatch Kuling AI for batch content creation and expanding its use case in workflow automation and intelligent orchestration. Culling AI continues to empower professional content creation with its technical innovation and creative achievements, earning broad industry recognition. At the 2026 Cannes Lions, two advertising videos generated by Culling AI won one silver line and two bronze lines, demonstrating recognition of its creative capabilities by one of the world's premier creative awards programs. At the 2026 Beijing International Film Festival, multiple Kling AI-created works, including Paper Smartphone, were selected for the AIGC section. Stroke of Genius, with Liu Cixin serving as Literal Supervisor, won the annual Featured Work in Shortplay Micro Shortplay Award, highlighting Kling AI's strengths in empowering professional filmmaking and content creation. Driven by model breakthroughs, continuous product enhancements, and deeper penetration, Ke Ling AI's commercialization maintained a strong growth momentum. In Q2, Ke Ling AI generated a revenue of over 850 million RMB, up over 200% year-over-year, continuing to lead a global AI video commercialization. In Q2, we made a solid progress advancing the research and application of our general purpose large models. We released Ke-E VL 2.0, and I've created a multi-model model that enables deep perception across 256,000 ultra-long contexts and delivers nearly lossless reasoning for long video temporal understanding. It also became the first Koei-based model with a built-in agent collaboration mechanism demonstrating the potential for code parsing and a tool invocation. We introduced Agent X, a self-evolving AI agent for industrial recommendation systems that autonomously handles recommendation model and strategy design, performance evaluation, and knowledge accumulation, significantly improving iteration efficiency of our recommendation algorithms. It enables recommendation systems to autonomously drive recommendation model and strategies design, evaluate performance, and accumulate insights, significantly boosting the iteration efficiency in our recommendation algorithms. In Q2, we developed scenario-based agent capabilities for generating marketing materials across our online marketing services. . . . . . . integrated skills across key internal system began serving all employees. By June, over 92% of employees were using our AI agents, and the AI code contribution rate among R&D engineers reached 60%. Meanwhile, Wenqing, our enterprise-grade large model platform, integrates high-performance model inference, cost-efficient model customization, and fully management service. Wenqing supports Huaxiao's internal AI use cases and also external Enterprise clients with large model infrastructure. On Open Router, a global AI model aggregation platform, several vending hosted open source models ranked among the top by API call consumption. Second, user growth and a content ecosystem. In Q2, average use on the Quasio app reached 412 million. Average AMA use reached 797 million. We leverage AI-powered smart placement to improve user acquisition efficiency and boost retention among new and reactivity users. We consistently refine our traffic management to better serve our highly active core users. We also continue to emphasize our social features. Users with mutual followers engaging in private messaging grow over 15% year-over-year. We also optimize the Quasio app's core features, comprehensively elevating the user experience through systematic improvement We believe in the power of community and remain committed to strengthening our differentiated, high-quality content ecosystem. In June and July, we leveraged the World Cup buzz to launch our native IP, Huaishou World Cup Fans Trophy. Beyond covering trending topics, we launched original events, including the Huaishou XY Style FC and Dream Chasers Youth Football Tournament. Yixiao Cheng, Hua Su, Bing Jin, Hoi Lam Yip using a joint operation model to deliver more high-value content to users. We used an e-commerce live streaming model to secure live broadcasting rights for the 2026 CBA season. We also introduced a paid live streaming model for online music performance. In April, we hosted a TOP concert, generating over 10 million RMB in sales, achieving a synergy between content and commercialization. This model also driven grassroots sports events, achieving a notable regional scale, especially in northwest China. Third, online marketing services. In Q2, revenue from online marketing services reached a 20.6 billion RMB, up 4.4% year-over-year. Our non-e-commerce marketing services continued expanding across content consumption, lifestyle services, and AI applications. Supported by our Omni domain traffic synergy strategy and dedicated programs for brand merchants, e-commerce marketing services remained resilient. We also continue deepening AI applications across the full marketing services lifecycle. In Q2, the content consumption, lifestyle services, and AI applications continued to drive year-on-year growth in our non-e-commerce marketing services revenue. In content consumption, AI lowered production costs and reduced creation barriers, driving rapid short-play supply growth that catered to a broader user preferences. This enriched our content ecosystem and boosted related marketing demand. By June, short-play supply on Kuaishou, both live action and AI-generated, had grown over five-fold from January. In Q2, short-play-driven marketing spend grew over 100% year-over-year. In lifestyle services, we deepen our presence in sub-verticals like comprehensive and local services while exploring incremental growth opportunities. We also optimized the deep conversion capabilities, enhanced the full stack leader-driven marketing solutions, and launched a user cohort exploration AI agent. These efforts helped clients to more effectively identify high-intent users, improving lead quality and conversion. In AI applications, we worked closely with the clients to align ad placement with in-app conversion, helping them to improve user retention and conversion. This further strengthen our competitiveness in capturing ad spend from AI application clients. For e-commerce marketing services in Q2, we strengthen our Omni domain traffic synergy across e-commerce and commercialization business to improve merchant traffic matching efficiency. We conducted a more granular merchant segmentation with tiered operations, tailoring product strategies to address merchants' core needs. We also took a content supply side approach by managing marketing materials, including incentivizing first launch content and increasing recommendation diversity. These initiatives optimized the e-commerce marketing material content mix, enabling high-quality content to reach relevant traffic more efficiently and improving our long-term commercial ecosystem. Despite macro and merchant challenges, we remain committed to traffic support for high-quality merchants. The T2000 brand initiative launched in Q4 last year has delivered promising early results. Brand merchant marketing spend outperformed our broader e-commerce marketing in Q2. Its revenue contribution continues to grow. At the product level, our net Transaction ROI product continued to evolve by enhancing omni-scenario transaction bidding capabilities and refining bidding mechanisms and model strategies. Client penetration rose from 45% in Q1 to 55% in Q2, effectively helping merchants reduce return rates. In Q2, we continued optimizing AI applications across industry-specific scenarios, improving client marketing placement efficiency and strengthening our capacity to capture incremental marketing budgets across sectors. In content consumption through content understanding, user matching, and a smart placement, AI helped quality content reach users more efficiently. In lifestyle services, AI is applied to marketing material generation, digital human live streaming, conversational business operations, user intent identification, and deep conversation prediction. These help merchants lower costs across content creation, placement, and customer services. Number four, our e-commerce business. In Q2, we advanced our strategy across three areas, growing our paying user base, expanding supply, and deepening e-commerce and commercialization traffic integration. We optimized our merchant ecosystem and mix, strengthened brand and new merchant acquisition and their growth, growth synergies between e-commerce and commercialization. During the quarter, we focused on growing high-quality buyers, While active paying users remained largely stable quarter over quarter, as the users' omni-domain consumption habits continued developing, we strengthened our private domain advantages by aligning traffic across diverse scenarios. This enabled a content-driven product recommendation, shelf-based conversion, store repurchases to reinforce one another in a positive growth cycle. We also enhanced cross-scenario synergies and optimized the subsidy efficiency, driving balanced growth across content-based and pen-shelf-based scenarios. On the supply side, in Q2, we continued onboarding new merchants and advancing brand expansion through cost reduction, efficiency improvement, growth incentives, product empowerment, and operational support. We helped the new and small and medium-sized merchants grow while further improving our merchant mix. We launched our upgraded Starlight initiative, offering tiered support programs for brand merchants, large merchants, industrial zone merchants, and SME merchants, helping more merchants scale faster. Supported by these initiatives, newly onboarded merchants grew year-over-year and rose nearly 10% quarter-over-quarter. New merchants achieving scaled growth in their second month rose nearly 30% year-over-year, reflecting continued improvements in new merchant quality. On the brand merchant side, self-operated GMV from T2000 brands maintained strong year-over-year growth, while their contribution to Omni domain GMV steadily increased. Marketing spend on the brand and commercialization also grew rapidly year-over-year, further boosting brand merchants' contribution to the both overall e-commerce GMV and online marketing revenue. By industry leveraging content-based e-commerce trends, merchants counting tea, alcohol, and health products, beauty, and cosmetics, and fresh food continued growing, unlocking structural growth opportunities. We continue to improve our catalog ecosystem structure, enhancing content supply quality, We deepened collaboration with the top tier KOLs, increasing support for mid-tier KOLs in our strong verticals like 3Rural and NME, and improved the consistency of existing KOLs performance, reinforcing our e-commerce content foundation. By integrating KOL resources with the distinctive product offerings nationwide, we deepened our penetration in industry zones and launched content marketing initiatives like product origin, tracking, live streams. These efforts strengthened the synergy content and supply, empowered KOLs and improved the merchants conversion. We also expanded our KOL base through in-platform incubation, talent agency partnerships, and External Acquisition. To boost the streaming frequency, we refined our incentive policies. In Q2, the number of streamers with over 10,000 followers grew year-over-year, while KLF streaming frequency continued to increase steadily. On the distribution pool development, we leveraged the AI to enhance product capabilities, creating a more targeted system, further boosting the vibrancy of our distribution system. In Q2, active KOL distribution penetration continued rising year-over-year, and merchant KOL merchants' matches grew over 20% year-over-year. In Q2, throughout the full lifecycle of merchants, we continued optimizing AI capabilities across e-commerce scenarios, helping merchants reduce costs, improve efficiency, and driving intelligent operations. These initiatives validated AI's evolution from a productivity tool into a comprehensive business execution solution. In Q2, over 850,000 merchants used our free AI business tools across product selection and listing, marketing material creation, business analysis, smart placement, and AI-powered customer service. These AI tools provided merchants with end-to-end operational support and capability enhancements. Next, our live streaming business. Q2, live streaming revenue reached 8.7 billion RMB. We focused on supply side health and leveraged AI to empower live streaming products, driving ecosystem quality and product integration. On the supply side, we launched the Confluence Initiative, providing streamer acquisition incentives, early stage growth support, and ecosystem governance to steadily expand the supply of new streamers from talent agencies and improve their early traction efficiency. We also strengthened independent streamer operations, focusing on identifying high-value independent streamers to solidify our live streaming supply foundation. We also encourage the top streamers to expand into Group 5 live formats, leveraging their traffic and influence to enrich high-quality live streaming content supply. On the product and technology front, AI further empowered live streaming rooms powered by clean AI. AI gives with customizable special effects continue to evolve, offering more formats and capabilities and boosting users' willingness to pay. In Q2, AI gives a send to buy users past 6 million. AI-driven content understanding continued optimizing our live streaming recommendation strategies, enabling more precise matching between streamers and users, supporting paying users' growth. Intelligent live streaming gift recommendation and ranking features based on real-time multimodal signals improve the user's payment experience and efficiency. AI tools like AI interaction of systems and digital avatar solution will further refine improving streamer service efficiency. Finally, our overseas business progress. In Q2, we remain committed to high-value growth strategies, strengthening our overseas foundation in profitability, long-term operation, and localization. On traffic and content, we maintain refined user acquisition in host local content and expanded community creator networks, fostering an engaging atmosphere around real-life scenarios and deepening content consumption among core users. For overseas online marketing services, we capitalize on major events, such as the Fista Honita and the World Cup, driven by AI, in-depth ROI analysis, user group insights, innovative product features, and industry-specific strategies. We helped marketing clients capture key marketing periods and achieve rapid growth. We also unlocked the monetization potential in short plays and other content formats. Together with our marketing services capabilities, this formed a dual engine growth model while accelerating expansion into growth sectors such as e-commerce, Our e-commerce, e-commerce, GMV, and order volume continue solid year-over-year growth in Q2. At the same time, we drove growth in average order value through product mix optimization and quality supply while maintaining solid operational efficiency and profitability. Looking ahead to second half, the middle growing external challenges will remain steadfast in advancing our core AI strategy, leveraging our technological and ecosystem strength to navigate headwinds while we'll face short-term revenue pressure and heavy investments, AI investments, We will maintain our long-term focus and continue expanding the commercial exploration of AI to empower crisis content and commercial ecosystems. As we pursue near-term breakthroughs and high-quality growth over the long term, we remain committed to creating long-term value for our users and platform partners. That concludes my prepared remarks. Next, I will hand it over to Junbing, who will review the company's financial update for the second quarter. Thank you, Yixiao, and hello, everyone. In Q2, we continue to deeply integrate AI technologies across our business scenarios. As a result, we achieved high-quality growth throughout our overall business amid a complex environment. The comprehensive application of AI has become an engine driving the company's long-term development. It'll continue to empower our content ecosystem, enhance user experience, our providing merchants and advertisers with end-to-end intelligent business operation tools. For our platform partners, these capabilities helped to reduce costs and improve efficiency. It also injected a new growth of momentum into our business. In Q2, the group's total revenues reached 35.5 billion RMB, adjusted net profit reached at 3.9 billion RMB in the second quarter, with an adjusted net margin of 11%. The group's overall profitability remained at a healthy level. Now let's take a closer look. Our total revenue grew 1.4% year-over-year to 35.5 billion in Q2. The increase was mainly driven by growth of our online marketing services and acclaimed AI business. Online marketing services revenue increased to 4.4% to 20.6 billion in Q2 from 19.8 billion in the same period last year. This growth was primarily attributable to deepening application of AI in online marketing services, which effectively enhanced our clients' marketing placement efficiency, driving more marketing spend. Revenue from other services, including e-commerce and clean AI business, reached 6.2 billion in Q2, up 18.5% from 5.2 billion in September last year. The increase was mainly driven by continuing expansion of our clean AI business. As clean AI achieved breakthroughs in model capabilities, continuous product enhancements, and deeper penetration across professional creative scenarios, its commercialization continued to maintain strong growth momentum. In Q2, our live streaming revenue was $8.7 billion. We consistently cultivated high-quality content, leveraged AI-powered product innovations, and enhanced the quality of our ecosystem to develop a rich and healthy live streaming ecosystem and diverse high-quality content. Cost of revenue increased to 10.7% year-over-year to $17.2 billion in Q2, accounting for 48.4% of our total revenues. The increase was mainly due to high revenue sharing costs and related taxes in line with our revenue growth. Based on the Evolve, our gross profit was 18.3 billion in Q2 compared to 19.5 billion in the same period last year. Gross profit margin was 51.6% compared to 55.7% in the same period last year. Turning to expenses in Q2, selling and marketing expenses were 9.9 billion compared to 10.5 billion in the same period last year. Selling and marketing expenses decreased to 27.9% of total revenues from 30% in Q2 last year, primarily attributed to the lower spending for promotional activities. R&D expenses increased to 34.7% a year to 4.6 billion, accounting for 12.9% of total revenues. The increase was mainly due to increased investments in AI, including related training costs. Administrative expenses were 895 million, Yixiao Cheng, Huaxia Zhao, Hua Su, Bing Jin, Huaxia Zhao, Hua Su, Bing Jin 30th, 2026. Net cash generated from operating activities in Q2 was 5.9 billion. Additionally, we actively leverage and deliver on our commitment to shareholder returns based on market conditions. As of today, we had repurchased approximately 1,970 million Hong Kong dollars, or around 43.3 million shares, representing about 1% of our total shares of sitting for 2026. Looking ahead to the second half, As Yixiao mentioned, amid external challenges, we expect to face near-term challenges. As pressure on revenue and our continued investment in AI both weigh on profitability, we will continue to uphold our technology-driven, user-centric self-philosophy while maintaining deeply focused on our users' needs. We remain staunchly committed to advancing AI and leveraging our leading AI technologies to further empower our content ecosystem and commercial value chain. At the same time, we will apply prudent financial displaying to reduce costs and improve efficiency. This will further strengthen the company's core competitiveness mode and create long-term value for our users, partners, and shareholders. That concludes our preparatory box. Now we can open for the call for Q&A. And the phone of UPS. Please ask your question.

请提问。 谢谢管理员介绍我的提问。 也恭喜我们有一个非常稳健的主业 还有肯定的非常强劲的增长。 Thank you management for taking my questions and congrats on the very stable cooperation and robust growth of Kerlin. I have a question regarding Kerlin competitive landscape and the iteration direction. Recently, multiple video generation large language models have been updated successively. So how should we view the current competitive landscape of the video generation models and what is Kerlin competitive strategy? Thank you.

Thank you, Renjia. The global video production channel is a huge market with a value of $1.5 billion. The AI video production model has a great potential for penetration. We believe that the AI video production channel is currently a turning point in the development of the industry. Many players rely on their own platform ecology, vertical scenarios, and technical skills to compete. They continue to expand in advertising, e-commerce, Yixiao Cheng, Huaxia Zhao, Hua Su, Bing Jin, Hoi Lam Yip