External loop advertising growth benefits from refined operations (Kuaishou 3Q23 earnings conference call)

Summary of the 3Q23 Earnings Call of KUAISHOU-W.HK, for more details, please refer to " Stop nitpicking! Kuaishou is "changing fate" like crazy"

1. Management Statement

In the third quarter of 2023, we continued to drive healthy and sustainable operational growth, expanding our user base, content creators, marketing clients, and merchants. With the continuous growth in revenue across all business lines, our profitability has also improved, achieving a net profit of RMB 2.2 billion at the group level under international accounting standards, and an adjusted net profit of RMB 3.17 billion on a MoM basis.

1) User Growth and Ecosystem Development

Firstly, in terms of user growth and ecosystem development, in the third quarter of 2023, with efficient user growth strategies, abundant high-quality content supply, and continuously optimized algorithms, we achieved high-quality growth in user scale and platform traffic. In the third quarter, domestic DAU increased by 6.4% YoY, reaching a historical high of 387 million. At the same time, domestic MAU increased by 9.4% YoY, reaching a historical high of 685 million. In the third quarter, the average daily usage time per DAU reached 129.9 minutes, with a 6.9% YoY increase in total user usage time. The total daily VV of short videos and live broadcasts in the third quarter also approached 100 billion.

2) Online Marketing Services

In the third quarter of 2023, despite the challenges posed by the macroeconomic environment and the confidence of marketing clients, we achieved growth that outperformed the industry through product upgrades, technological advancements, and algorithm capabilities in commercialization, as well as deepening operations in segmented verticals. In the third quarter, online marketing service revenue reached RMB 14.7 billion, a YoY growth of 26.7%, accounting for 52.6% of total revenue. At the same time, the number of active marketing clients in the third quarter increased by over 140% YoY.

In the third quarter of 2023, the recovery trend of external ads continued, with an improved YoY growth rate compared to the second quarter, especially in the media information, education and training, and healthcare industries. We deepened industry-specific operations. For example, in the education and training industry, we tapped into the needs of certain advantageous Kuaishou user groups and leveraged marketing clients' advertising budgets. We strengthened the delivery of commercialized native materials, providing users with a better content consumption experience and delivering better conversion results for marketing clients. In the third quarter, the consumption of external circulation-oriented native marketing materials increased by over 30% MoM. In the third quarter of 2023, the MoM promotion and marketing expenditure on the platform increased nearly fivefold. In terms of efficiency improvement, we upgraded our intelligent hosting products to enhance the stability of small and medium-sized merchants' investment flow. In particular, through live streaming hosting and product hosting, we increased the ROI for merchants, providing more opportunities for small and medium-sized merchants to grow and enhancing their willingness to invest on the platform. In the third quarter of 2023, the MoM promotion and marketing expenditure through live streaming hosting increased by more than nine times.

3) E-commerce business,

In the third quarter of 2023, we continued to enrich the supply and improve the conversion efficiency of buyers through refined operations. Our GMV far exceeded industry growth, with a YoY growth rate of about 30%.

In terms of supply, more merchants have growth demands in the current macro environment, embracing the traffic dividend of our platform and penetrating the mass consumer group. The number of new merchants joining the platform remained high in the third quarter. At the same time, we improved the opening rate through a more refined merchant grading and support policy system, resulting in a YoY growth of about 50% in the average monthly sales of merchants.

In the third quarter, the GMV of brand products, including fast brands, further increased YoY. Self-broadcasting by well-known brands achieved remarkable results, with a YoY GMV growth of over 100% and an increasing growth rate.

4) Live streaming business,

the revenue from live streaming business in the third quarter of 2023 increased by 8.6% YoY to RMB 9.7 billion. This is due to the continuous improvement of our high-quality supply, the continuous improvement of user consumption experience, and the continuous optimization of the live streaming ecosystem. On the supply side, we have established a regional guild operation system to improve operational refinement and help enhance the operational capabilities of guilds, thereby driving the supply of high-quality content from new and mid-to-long-tail anchors. In the third quarter, the number of contracted anchors in guilds increased by over 40% YoY, and the average daily live streaming time of anchors increased by nearly 30% YoY. At the same time, we continue to expand diversified supply, develop innovative tools based on entertainment live streaming scenes, introduce and support high-quality developers through the live streaming open platform, and reduce the threshold for anchors to start live streaming. Combining the internal and external industry ecosystem, we enhance the supply and capacity of grid multi-person live streaming, providing more high-quality content and gameplay.

5）Overseas business,

In the third quarter of 2023, we continued to implement a focused strategy in core market regions, with DAU and user engagement steadily increasing in these markets. We continue to improve the supply of diversified content categories such as entertainment and sports, and provide more traffic tilt to mid-tier creators. At the same time, we deepen localization operations to meet the consumption needs of local users. Based on this, we deepen monetization, continuously improve operational efficiency, and significantly reduce the YoY increase in expenses. The revenue from overseas business in the third quarter reached RMB 652 million, more than double YoY. Through continuous cost control and efficiency improvement, the overall operating loss of overseas business in the third quarter decreased by 62.4% YoY, and the MoM operating loss also narrowed further.

6）Financially,

Revenue:

In the third quarter of 2023, the total revenue of the group reached RMB 27.9 billion, a year-on-year increase of 20.8%. The revenue growth was mainly driven by our core business areas, including online marketing services, e-commerce, and live streaming.

The revenue from online marketing services in the third quarter reached RMB 14.7 billion, an increase of 26.7% compared to the same period in 2022. This growth was attributed to the increase in platform traffic, diversified online marketing product portfolio, and fine-tuned operations based on industry attributes, which led to an increase in the number of marketing clients, especially e-commerce merchants. At the same time, we continued to deepen our fine-tuned operations in vertical fields, focusing on the needs of marketing clients and improving content production efficiency. In terms of internal circulation marketing services, we are committed to focusing on and nurturing the growth of small and medium-sized businesses by improving marketing effectiveness. We have launched comprehensive promotion products and upgraded intelligent hosting scenarios to meet the needs of more small and medium-sized businesses.

The revenue from other services in the third quarter reached RMB 3.5 billion, a 36.6% increase compared to the same period in 2022. This was mainly due to the continuous growth of e-commerce GMV, with a year-on-year increase of 30% in GMV this quarter, as well as the growth of independent active buyers and active merchants. Our fine-tuned operational strategies have helped maintain a high number of new merchants joining our platform. Meanwhile, we have expanded our brand range, improved the user shopping experience, and further increased buyer conversion rates.

In the third quarter, the revenue from live streaming business reached RMB 9.7 billion, an increase of 8.6% compared to the same period in 2022. This was mainly due to our continuous enrichment of content offerings, ensuring that users can enjoy diversified live streaming content. At the same time, the optimization of the live streaming ecosystem has also improved the internal experience of live streaming.

Costs:

In the third quarter of 2023, the sales cost increased by 8.6% year-on-year, reaching RMB 13.5 billion, accounting for 48.3% of the total revenue. This increase was mainly due to the increase in revenue sharing costs resulting from revenue growth, as well as the increase in depreciation of fixed assets, usage rights assets, and amortization of intangible assets, partially offset by the decrease in bandwidth costs and server hosting costs.

The group's gross profit in the third quarter of 2023 reached RMB 14.5 billion, a year-on-year increase of 35%. The gross profit margin for the third quarter was 51.7%, an increase of 5.4 and 1.5 percentage points compared to the same period and the previous quarter, respectively. The significant improvement in gross profit margin was mainly attributed to the strong revenue growth and effective cost control.

Expenses:

In the third quarter of 2023, sales and marketing expenses decreased by 2.1% year-on-year to RMB 8.9 billion, accounting for 32% of the total revenue, down from 39.5% in the same period last year. The decrease in sales and marketing expenses was mainly due to more restrained and efficient spending on user acquisition and retention.

Research and development expenses in the third quarter decreased by 16% year-on-year to RMB 3 billion, accounting for 10.6% of the total revenue, down from 15.3% in the same period last year. The decrease in research and development expenses was mainly due to a reduction in employee welfare expenses, including equity-based compensation.

Q1: How was the overall performance and progress of Singles' Day? How sustainable is the growth of e-commerce business compared to other industries, and what are the driving forces behind it?

A1: Looking back at this year's Singles' Day, the overall performance was better than expected. Given the current market and consumer environment, we are very satisfied with the promotion of Singles' Day. This year, we upgraded our product capabilities, simplified the merchant registration process, and provided official product selection services. By improving the explosive traffic mechanism and utilizing data-driven tools, we built a productized bridge between merchants and the platform. Additionally, we helped merchants hatch explosive products and achieve GMV growth through various traffic plans and intelligent subsidy strategies. Our operational and marketing capabilities have also been continuously enhanced. This year, the pre-sale scale of Singles' Day was larger, involving a wider range of merchants, and offering a more diverse range of categories and SKUs. By locking in user demands in advance, the pre-sale GMV increased by 84% year-on-year. In the mall's featured sections, we leveraged benchmark explosive products to tap into users' pursuit of extreme cost-effectiveness in shopping.

As for the mall, during this year's Singles' Day, we opened up first-tier entrance traffic, enriched the product mix, reinforced product infrastructure, and created unique marketing scenes. The GMV of the mall grew rapidly during the event, accounting for about 10% of the total GMV. In the future, the mall will serve as a complementary field for content e-commerce, mainly targeting users with shopping mindsets in the e-commerce sector to strengthen their repurchase habits and meet their definite shopping needs, further increasing purchase frequency. On the supply side, the continuous deep integration of content and product shelves, leveraging the content advantage and differentiation of our platform, strengthens the content construction of product cards. At the same time, by creating rich marketing scenes, we aim to constantly enhance users' shopping mindset.

Regarding the high growth, sustainability, and driving factors of Kwai Shou's e-commerce business, I would like to share some thoughts on the underlying logic:

Firstly, the Chinese e-commerce market has not reached a zero-sum game stage yet, and there is still room for growth. Kwai Shou plays an important role in this by targeting differentiated user demographics that are more mainstream and lower-tier. Although these demographics have relatively limited channels to access information, their pursuit of quality life and affordable products has always existed. Moreover, their consumer loyalty is higher, which aligns with the trust-based e-commerce and community atmosphere of Kwai Shou. With the help of Kwai Shou, we hope to continuously create and satisfy the demands of mainstream consumers.

Secondly, there is still significant growth potential on the supply side. Many brands and industry merchants have mature online operation capabilities and the willingness to invest resources, but their development on Kwai Shou is still in the early stages. As our platform rules become more reasonable and transparent, and the infrastructure and business environment for merchants continue to improve, the desire to cooperate deeply with Kwai Shou is constantly strengthening. For example, in the home furnishing category, the number of merchants with monthly active sales on Kwai Shou increased by over 80% year-on-year in the third quarter, driving GMV growth beyond the platform's overall growth. In the future, whether it is in top categories such as women's clothing or home furnishings, or in categories like sports, outdoors, and general merchandise, the supply side will continue to innovate as user demands become more diverse and refined. We are confident that Kwai Shou will become an important online channel for merchants to drive growth. There is also growth potential in different fields. By synergizing with content consumption scenarios through content e-commerce, we can enhance insights into user demands, improve matching precision and conversion efficiency, and the expansion and construction of broad product shelves will also contribute to enhancing repurchase.

As for the driving factors of future growth in Kwai Shou's e-commerce business, we are confident in continuous improvements in user purchasing frequency and converting more buyers. The current penetration rate of double-digit MPU (Monthly Paying Users) still has room for improvement, and the enrichment of brands and categories will continue to drive growth in average order value.

Q2: The earnings report mentioned that the external loop had faster growth in this quarter compared to the second quarter. Can you share which industries performed well? Which industries may still face pressure? What are the main growth strategies in the future?

A2: In the third quarter of 2023, we deepened the refined operation in various industries and made solid progress, especially in the media and information, education and training, and health industries. Specifically:

In the media and information industry, the growth of paid short videos was good. The consumption of paid short videos on Kuaishou has been increasing month by month this year, with a year-on-year growth of over 300% and a MoM growth of nearly 50%. This is due to our continuous optimization of the paid short video mini-program and payment links, as well as the rapid increase in the supply of paid short videos supported by platform policies.

The education and training industry is mainly driven by adult education. We have conducted in-depth operations for key customers and also focused on Kuaishou's advantage user groups, such as middle-aged and elderly education, which has attracted incremental marketing budgets from clients.

As for the game industry, which is of great concern, the consumption of mini-game advertisements on Kuaishou increased by nearly 40% compared to the same period last year. This is mainly due to the optimization of conversion rates for various links in the mini-program and increased support and incentive policies for agents. Compared to other industries, e-commerce platforms and the transportation industry have been affected by the budget cuts of key clients in media advertising, resulting in a decrease in consumption compared to the same period last year. However, in the fourth quarter, driven by the promotion of the Double 11 shopping festival, the daily consumption of e-commerce platforms increased by 30% compared to the previous month. As for the transportation industry, although some platform-type clients have reduced their advertising budgets, the advertising efforts of automobile manufacturers have increased, leading to a significant improvement in the health and diversity of their business structure.

Regarding the future growth strategy of external marketing, we believe that it is necessary to carry out refined operations in different industries. For industries with a high online conversion rate, we need to continuously improve conversion efficiency through data infrastructure algorithms and product optimization. For industries with a moderate online conversion rate, we need to strengthen the synergy between commercial and organic traffic through the construction of marketing materials and enhance the ROI of marketing clients through incentive policies.

For industries with a low online conversion rate, we need to explore industrial operation, tap into more user demands with fast-paced characteristics, and leverage clients' advertising budgets. In addition, we will actively reduce the production cost of marketing materials through AI technology and improve post-link conversion effects through multi-round dialogue capabilities, empowering the growth of external marketing.

Q3: How are the new businesses, such as Kuaishou Local Life and Kuaishou Recruitment, progressing?

A3: After a year of exploration and operation, our local life business has a clearer strategy and goals, and has made good progress. The daily GMV in the third quarter increased by about 5 times compared to the first quarter. We continue to stimulate users' exploration of food, drink, entertainment, and other needs through content seeding, while providing ultimate cost-effectiveness and reliable platform services. By fully utilizing Kuaishou's differentiated user base, we have helped various businesses achieve rapid growth.

Specifically, the supply side of the local life ecosystem was more prosperous in the third quarter, with the number of active merchants increasing by over 150% compared to the previous month. We have expanded our focus on operating cities to 16, including newly opened cities like Shenyang. Kuaishou not only has user advantages but also has developed a large number of resources from businesses with strong growth demands, successfully creating platform phenomena and popular cases. In terms of categories, we continue to consolidate the food service category, cultivate users' local life awareness on Kuaishou through frequent consumption, and actively expand into more segmented categories including comprehensive travel. Currently, non-food GMV accounts for nearly 40%.

The rapid expansion of cities and categories is inseparable from the support of influencers. In the third quarter, through influencer product operations and policy guidance, we have expanded the scale of influencers, continued to support them in building their fan base, producing high-quality content, and optimizing the entire growth chain for influencers. The daily active users of the influencer distribution plaza increased by more than double compared to the previous month. At the same time, through activities such as the "Fei Niao Plan," we have created multiple benchmarks to support the conversion of nearly 3 million new customers and achieve over 200% GMV growth compared to the first quarter for the Kuaishou brand. The prosperity of the ecosystem also relies on more refined operations and traffic strategies.

This quarter, we have iterated our product engine, focusing on cost-effectiveness, efficiency improvement, and application scale, with GPM as the guiding principle. We have optimized the closed-loop chain of live streaming, short videos, and search, and through more refined traffic and subsidy strategies, we efficiently stimulate and meet users' consumption demands, improve platform management capabilities, establish a ToB system and a ToC user protection system, and enhance consumers' trust in the platform. In response to the continuous exploration and satisfaction of user demands, the average daily number of payment users in the third quarter increased by approximately 260% compared to the first half of the year. In the fourth quarter, our main goal is to convert more local users, continue to deepen operations in existing key cities, refine merchant and influencer operations, continue to create explosive products to expand incrementally, and strengthen user perception of cost-effectiveness through more efficient subsidy and traffic strategies, thereby continuously expanding our business scale.

The Fast Recruitment business also maintained rapid development momentum in the third quarter, with the number of active merchants increasing by over 120% YoY and the average daily number of resume submissions increasing by over 200% YoY. On the supply side of job positions, we actively expanded the platform's scarce job positions, iterated exclusive recommendation models, and improved the precise matching capability of the recommendation model. In addition, we continue to explore commercialization, helping businesses with a large demand for recruitment to overcome recruitment bottlenecks through measures such as enriching product lines, optimizing matching efficiency, improving customer experience, and establishing a sales system.

Q4: Can the management team introduce our current cash management policy? Do we have any plans to further increase share repurchases and dividends in the future?

A4: Thanks to the company's sustained profitability and refined capital management, we saw a significant inflow of cash from operating activities in the third quarter, reaching approximately RMB 7.7 billion, with both MoM and YoY growth. As of the end of the third quarter, cash and cash equivalents amounted to approximately RMB 11.3 billion. If we consider other funds that can be practically applied in cash management, such as deposits, prepayments, and financial assets, the total amount of available funds in a broad sense was approximately RMB 55.4 billion at the end of the third quarter, an increase of approximately RMB 5 billion from the end of the second quarter. Since the end of the second quarter of 2022, the total amount of available funds has been on a growing trend.

Regarding the company's cash management policy, we have always adhered to a prudent principle, with safety as the primary consideration, while also considering the liquidity and profitability of funds. Based on our confidence in the company's operating conditions and cash flow, as well as to reward shareholders, we announced a HKD 4 billion share repurchase plan in May this year.

As of now, we have repurchased approximately HKD 907 million worth of shares under the share repurchase plan, with a cumulative repurchase of approximately 15.88 million shares. Going forward, we will continue to reasonably arrange the pace of share repurchases based on market conditions. As for dividend plans, they depend on a series of factors, and if there is any progress, we will synchronize with the market in a timely manner.

Q5: Can the company share the latest progress in AI? And what are the current applications of large-scale models?

A5: We launched a new AI strategy at the beginning of this year and set strategic goals to ensure that we remain in the top tier domestically in the face of possible breakthroughs in new technologies. We aim to combine and empower existing business scenarios, strive to achieve a leading advantage in the market through self-disruptive technological innovation, and change the market landscape. From the current actual progress, it is in line with our expectations.

Specifically, our language models, Kuaiyi (13 billion, 66 billion), have reached a leading level in the industry in terms of scale. We have also started the development of language models and multimodal models with a scale of over 100 billion. In addition, we have also launched the Wenshengtu large-scale model, which has powerful text understanding, rich detail depiction, and diverse style transformation capabilities. It can generate a variety of open-style, exquisite, and creative paintings based on open text.

We are also accelerating the landing of large-scale models in various scenarios. On the content consumption side, relying on the Wenshengtu model, we have introduced AI complete comment function in the short video comment section. Users can input various creative texts to generate a large number of styled images with just one click, making it more convenient to engage in interesting interactions in the comment section. Recently, we have also started internal testing of AI Xiaokuai accounts, providing users in the short video comment section with various AIGC services based on short video application scenarios, such as interactive Q&A, image generation, strategy retrieval, and copy modification.

On the content supply side, Kwai's video editing product, Kuaiying, and its functional shooting product, Yitian Camera, have already possessed various AIGC creative capabilities, allowing creators to easily convert photos or videos into content with different styles and effects, and automatically generate copy that fits the content context. In the commercialization scenario, our large-scale models are also being widely used in the generation of marketing material creative short videos, digital human broadcasting and interactive dialogues in Kwai's recruitment and real estate live streaming.

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