Kuaishou: Continued environmental pressure in the second half of the year, focusing on content e-commerce (2Q24 conference call minutes)

The minutes of the 2Q24 performance conference call for $ KUAISHOU-W.HK can be referred to for financial report analysis in "The Decline of Anchors, Is Kuaishou Slowing Down Too?".

I. Business Review

In a highly competitive environment in the second quarter, the company's revenue and profit continued to grow. Progress was made in AI+ content + commercial ecology + organizational efficiency, leading to platform growth. Revenue reached 31 billion RMB, gross profit margin was 55%, adjusted net profit was 4.7 billion RMB, and profit margin was 15.1%.

1. AI Models

In terms of large models, the company has built a large model infrastructure that supports training with trillions of parameters. The AI product matrix includes: Kuaishou Large Model, Visual Generation Large Model, and Recommendation Large Model. Significant progress was made in the Visual Generation Large Model in Q2, initiating comprehensive testing of "Keling" AI. Additionally, the WenShengTu AI model "Ketu" has been open-sourced to encourage collaborative and prosperous ecosystems.

In the first half of the year, nearly 20,000 merchants on the Kuaishou platform optimized operations with the AI matrix. In Q2, AIGC marketing material sales from advertisers peaked at 200 million RMB in a single day.

2. Users and Content Ecosystem

DAU was 395 million, up 5.1% year-on-year, MAU was 692 million, up 2.7% year-on-year, with an average daily usage time of 122 minutes.

DAU/MAU improvement: By optimizing hot comment sorting in the comment section and other measures, an active community atmosphere was created, improving user retention rates.

Algorithm support for content creators, differentiated vertical operation strategies to create high-quality content showcasing platform features for users. For example, during the Olympics, the "Kuaishou Village Olympics" mass sports event attracted over 135,000 on-site viewers and over 520 million online live views, with a total exposure of over 6.4 billion across the internet.

Relying on "Keling AI," short dramas launched the first domestic AIGC original fantasy micro-drama "Shanhai Qijing," which garnered over 50 million views within 2 weeks of its release.

In the search business, Q2 continued to optimize the "search after watching" function, introducing a single-column style in search result presentation, further increasing search user penetration. Q2 search monthly active users reached 500 million, with a +20% year-on-year increase in daily search volume.

3. Advertising

In Q2, consumer sentiment was weak, but the company grew by 22% year-on-year. The intelligent marketing solutions were optimized, linkages were deepened, ad bids were increased to drive revenue growth. The algorithm continued to support exploration of user interests and optimization of matching efficiency, increasing the effective user reach of advertisements.

Significant growth in external loop advertising in Q2, with accelerated growth compared to Q1, especially in media information, e-commerce platforms, and local life industries. For paid short drama marketing in the media information industry, the company continued to improve user experience through deepening native linkages, combined with intelligent subsidies to increase user payment scale, promoting rapid growth in paid short drama marketing spending, with daily spending on paid short dramas more than doubling year-on-year In terms of intelligent delivery, in the second quarter of 2024, the penetration rate of the company's external circulation marketing product Universal Auto X (UAX) continues to increase across various industries, with customers using UAX for marketing accounting for over 30% of the total consumption of external circulation marketing.

Q2 internal circulation marketing service revenue also achieved steady growth, thanks to the company's continuous optimization of intelligent delivery product strategies and capabilities, enabling merchants to use the full-site promotion solution or intelligent hosting products for marketing promotion, accounting for 40% of the total consumption of internal circulation marketing. For small and medium-sized merchants, the company attracts their investment flow through major marketing events, and provides simple automated marketing solutions through bundled products to enhance the stability and efficiency of self-service investment by merchants, driving a 60% year-on-year surge in investment consumption by small and medium-sized merchants in the second quarter of 2024.

In terms of brand marketing, the company has collaborated with fashion media to create unique marketing initiatives, attracting leading brands in the fields of beauty, food and beverage, clothing, 3C products, etc., through the diverse presentation of Eastern aesthetics and trend culture, intangible cultural heritage and avant-garde art. In addition, the company's Kuaishou Xingmang short drama has received repeat naming from major brands including Tmall, with the sponsorship revenue of Kuaishou Xingmang short drama in the second quarter of 2024 growing more than 20 times year-on-year.

4. E-commerce

Despite facing challenges in consumer demand in the domestic e-commerce business, the rapid changes in consumption trends and e-commerce infrastructure continue to drive e-commerce growth. In the new trend, relatively lower-tier cities will become the mainstream market with the largest population base and greatest potential. The company aims to help consumers discover affordable and good products for themselves on Kuaishou through trusted anchors and content. The company is committed to building a long-term healthy ecosystem of influencers, continuously promoting diversified omni-channel operations such as brand and merchant self-broadcasting, pan-category shelves, and short video e-commerce.

In the second quarter of 2024, the GMV of the e-commerce business increased by 15% year-on-year to RMB 305.3 billion. From the demand side, in the second quarter of 2024, the monthly active buyers of e-commerce increased by 14.1% year-on-year to 131 million, and the monthly active user penetration rate reached a new high of 18.9%. The company adheres to a user-first strategy and rapidly captures and responds to rapidly changing consumer preferences through precise industry tactics. Specifically, the company will continue to focus on the continuous iteration of new customer acquisition and activation measures, and further expand the coverage of the user base through product and subsidy strategies, encouraging repeat purchases by users.

From the supply side, the average monthly active selling merchants in the second quarter of 2024 increased by over 50% year-on-year, mainly due to the company's strong promotion of new merchants' cold start, growth, and long-term operations, while empowering old merchants' omni-channel operations. Especially for small and medium-sized merchants, the company provides a launch plan with up to billions of traffic resources for newly onboarded merchants throughout the year, in conjunction with the "Fu Yao" plan, to help new merchants rapidly expand their business scale from the initial cold start.

Furthermore, the company helps merchants improve their omni-channel operation capabilities through new initiatives such as the New Merchant Fan Growth Plan and the short-video linkage model. In terms of influencer strategy, the company recommends high-quality products to influencers through internal referral links, helps middle-tier influencers with product selection through external agencies, especially targeting middle-tier influencers' fan profiles for targeted recommendations. At the same time, the company enriches influencers' marketing strategies through AI technology, marketing tools, and fan operation tools, lowers the threshold for influencers' e-commerce live streaming, and encourages user participation in live streaming interactions Enhancing the platform's merchant matching capabilities.

In terms of brand merchants, the company has prioritized projects such as trade-in programs, membership operation services, and the construction of major brand channels to enrich the diverse range of brand products on the platform. During the 618 promotion period, the GMV of consumer electronics and home furnishing brand merchants increased by over 83% year-on-year, further enhancing the perception of high-quality and low-priced branded products.

In the e-commerce sector, the GMV of general merchandise e-commerce continued to grow significantly in the second quarter of 2024, accounting for over 25% of the total GMV. During the 618 promotion period, the order volume of general merchandise e-commerce increased by 65% year-on-year, becoming an important growth point for e-commerce business.

The average daily sales growth rate of merchants on the Q2 mall exceeded 50% year-on-year, while the average daily buyer growth rate exceeded 70% year-on-year. From the user's perspective, the average number of product cards viewed per user and the scale of product searches on the company's mall have grown rapidly year-on-year, strengthening the consumer mindset of browsing and searching on Kuaishou Mall. The introduction of large models has also enhanced the company's ability to identify user shopping intentions, with the GMV of search e-commerce in the second quarter of 2024 increasing by over 80% year-on-year.

Furthermore, Kuaishou Mall launched sales hosting services, integrating platform-wide traffic to reduce the operational threshold for merchants and provide them with a reliable sales channel. In addition, the GMV of short video e-commerce continued to grow rapidly in the second quarter of 2024, with a year-on-year growth of nearly 70%. Merchants use short videos to attract potential users before live streaming, and extend the sales cycle of popular products through short videos after live streaming, further enhancing the linkage between short videos and live streaming.

5. Live Streaming

In the second quarter of 2024, the revenue from live streaming business decreased by 6.7% year-on-year to RMB 9.3 billion. The company continues to iterate on refined operational models to achieve a healthy and positive live streaming ecosystem. On the supply side, the company has established regional teams to introduce high-quality new guilds through precise industry promotion and influential offline promotion.

As of the end of the second quarter of 2024, the number of signed guild institutions increased by nearly 50% year-on-year, and the number of signed guild anchors increased by 60% year-on-year. At the same time, the company continues to promote new categories such as group broadcasting and large stages, efficiently driving guilds and anchors to engage in group broadcasting business, becoming a core growth point for the live streaming business.

The company is committed to attracting mid-level anchors, enhancing interactive live streaming gameplay, encouraging anchors to produce high-quality content, and providing users with more reasons to engage with the company's platform. As the official short video partner of CrossFire and King of Glory professional leagues, the company effectively attracts more audience attention through the "short video + live streaming + community" ecosystem.

As an example of empowering traditional industries with the "live streaming+" model, in the second quarter of 2024, the company's fast recruitment business saw a daily average increase of over 130% in resume submissions and a matching rate increase of over 150% year-on-year; the Ideal Home business saw a 9-fold increase in daily average lead scale.

6. Overseas Business

In the second quarter of 2024, the company continued to deepen its local operations in core overseas markets through advanced content supply, operational capabilities, and marketing initiatives. Under the ROI-driven growth strategy, the company continues to refine the operation of traditional marketing channels and explore new growth paths These measures have driven stable growth in average daily active users in core overseas markets such as Brazil and Indonesia. In particular, the daily active users in Brazil increased by 15.4% year-on-year, with a slight increase compared to the previous period. In terms of overseas business content operation, the company continues to introduce high-quality content creators, enrich content supply, and enhance community ecosystem vitality.

At the same time, by optimizing algorithms, strengthening traffic mechanisms, and implementing diverse monetization measures, the company has gradually strengthened the positive flywheel effect of content production, consumption, and creator monetization. In the second quarter of 2024, the average daily usage time of daily active users in core overseas markets is close to 80 minutes, a 5% year-on-year increase.

In terms of monetization capability, overseas revenue reached RMB 1.1 billion in the second quarter of 2024, a 141.4% year-on-year increase. The company's overseas online marketing team has actively expanded customers in various industries by optimizing product capabilities and enhancing customer experience. Therefore, the year-on-year growth of online marketing revenue for overseas business exceeds 200%, with a continuous increase compared to the previous period. With the improvement of overseas monetization efficiency, the operating leverage effect continues to be released. In the second quarter of 2024, the operating loss of overseas business was RMB 277 million, a 64.5% year-on-year decrease.

II. Q&A

Q: The company's development in AI large models, including future development strategies and commercialization plans.

A: We initiated a new strategy last year, set clear strategic goals to ensure maintaining a leading position in the domestic industry in future AI technology breakthroughs, combining and empowering existing business scenarios, and striving to bring business advantages through disruptive technological innovations to change the market landscape.

Over the past year, we have steadily made progress, continuously achieving phased results, while optimizing the performance of large models in various aspects, strengthening the application of large models in content production and understanding, content recommendation, e-commerce, and online marketing in various business scenarios.

In 2024 Q2, we made a milestone breakthrough in the field of AIGC. In terms of visual generation large models, our self-conscious video generation large model received wide acclaim from users at home and abroad after the internal test of Ling was opened. Ling adopts a 3D spatiotemporal joint attention mechanism, which can better handle complex spatiotemporal movements, simulate large-scale physical movements based on real-world physical rules, generate videos, and demonstrate movie-level quality dynamic effects, breaking the limitations of traditional video production technologies.

Recently, we have also launched a membership payment system to global users, upgraded model effects, provided users with a better experience, and made positive progress in exploring user payment models.

Furthermore, our 175 billion-scale large language model currently surpasses GPT4.0 in the Chinese scene. Our multimodal large language model has also reached the level of GPT4v in video content understanding, laying a solid foundation for the expansion of application layer capabilities in the future.

Recently, our WenShengTu large model TuGu officially announced open source. As the most knowledgeable WenShengTu model in Chinese, TuGu has surpassed Midjourney V5 through multiple iterations and comprehensive improvements We pay more attention to the application of large models in commercial scenarios, based on the construction of video and live script generation using fast large models, overlaying advertising clues with digital human technology to help commercial advertisers generate high-quality videos and live content at low cost, and improve conversion efficiency.

In the first half of 2024, nearly 20,000 merchants on the Kuaishou platform used large models to achieve intelligent operations, and the daily average consumption of AIGC materials reached 20 million in June this year, demonstrating the huge potential of large models in commercial products.

In terms of future development strategies in the AI field, we will focus on developing specialized language models at the level of business scenarios to significantly reduce the inference cost of models.

In the field of visual generation models, we will continue to upgrade large models to further improve model performance and maintain industry leadership.

In terms of commercial monetization of intelligence, in addition to strengthening global membership fee operations, we will also explore more possibilities for B-end cooperation monetization, striving to achieve a substantial commercial monetization scale as soon as possible.

Furthermore, we look forward to the significant improvement in the efficiency of commercial recommendation algorithms brought by large models, providing stronger support for the growth of online marketing service revenue.

We will firmly execute the AI strategy, empower existing businesses while striving to create new business models to contribute more value to the group.

Q: In terms of e-commerce, in the fierce industry competition, how can e-commerce platforms, especially in terms of supply, enhance growth momentum for small and medium-sized merchants, and what are the strategies for the second half of the year for e-commerce?

A: From the supply side, with the rapid development of e-commerce, we have seen more and more new merchants coming to Kuaishou, as well as more mature merchants growing on Kuaishou.

In the second quarter of 2024, the monthly average number of active selling merchants increased by more than 50% year-on-year, mainly benefiting from our strong promotion of the cold start growth and long-term operation of new merchants, while helping old merchants achieve comprehensive operations. Through the Sail Plan with up to hundreds of billions of vv, we provide 100% traffic guarantee for newly settled merchants.

When high-quality merchants grow to a certain level, we will continue to invest more than 70 billion vv in traffic through the Fuyao Plan to further enhance the scale of merchants and help them achieve breakthroughs in distribution. At the same time, through the Douyin Plan, new merchants who reach the corresponding threshold within the first 90 days of their first sale will enjoy incentives such as entrepreneur bonuses and magnetic golden cows, maintaining the confidence of new merchants in the early stages of operation and providing them with deterministic traffic support.

Regarding the e-commerce strategy for the second half of the year, after the market baptism of the 618 promotion, both e-commerce platforms and merchants are facing the challenge of a slowdown in short-term domestic consumer demand. In the current environment of weakened traffic dividends, e-commerce businesses need to better position themselves in terms of content and commercial efficiency.

As the main participants in content e-commerce platforms, we believe that live e-commerce platforms are better at increasing personalized operations from various aspects such as merchant policies, data capabilities, and marketing capabilities, providing a variety of product choices to attract consumers to explore non-deterministic e-commerce demands and stimulate purchasing behavior Looking ahead to the second half of the year, we will stabilize and vigorously develop the foundation of content e-commerce and social e-commerce, focusing on the core value of live streaming rooms and short videos. We will fully leverage the main role of content scenes in attracting and activating e-commerce users, while also incorporating more user videos on the shelves. We will strengthen the construction of a long-term healthy influencer ecosystem, fully leverage the core advantages of top influencers and large live broadcasts, simultaneously enhance the cultivation and operation of mid-tier influencers, jointly build a low-price mindset for users in live streaming rooms, drive large-scale operations in live streaming rooms, enhance the efficiency of resource conversion in live streaming rooms. We will also enhance the explosive power of content scenes, pay more attention to the operational mechanisms of content scenes, including models such as bringing back popular products through short videos before, during, and after live broadcasts, allowing consumers to buy low-priced goods across all platforms and domains.

Regarding the shelf scene, in addition to increasing the GMV scale, we will focus on strengthening product supply and richness, upgrading search matching efficiency, and continuously improving the user experience and subsidy efficiency of the shelf scene through operational and algorithmic efforts, gradually establishing the mindset of users actively using a wide range of shelf products. We believe that through these strategies, we can continuously tap into the e-commerce needs of 700 million Kuaishou users, maintaining the differentiation advantage and unique value of Kuaishou's e-commerce business in the industry.

Q: Opportunities for online marketing business in the second half of the year

A: In the first half of the year, through refined industry operations and leveraging large-scale model capabilities, we provided intelligent marketing solutions for online marketing clients.

In the first half of the year, online marketing service revenue achieved a year-on-year growth of approximately 25%, continuously increasing market share.

Looking ahead to the second half of the year, we will continue to promote the optimization and deepening improvement of intelligent marketing products, empower online marketing clients in various industries to conduct long-term operations on the Kuaishou platform through content management, e-commerce management, and local operations. At the same time, leveraging major marketing events such as Double 11, to achieve further breakthroughs in operations.

Industries with content attributes such as short dramas, novels, and mini-games naturally align with Kuaishou as a content platform, enabling the integration and symbiosis of content and marketing, providing significant nourishment. For example, in the first half of this year, we created a native link for paid short dramas, allowing users to complete payments and watch short dramas within the Kuaishou app, enhancing both user content consumption experience and marketing client investment flow, operational conversion efficiency.

In the second quarter, the customer base for paid short dramas on Kuaishou increased by over 300% month-on-month, and the number of short drama episodes increased by over 30% month-on-month. This content management model and product capability based on native links have gradually been replicated in industries such as novels and mini-games, and are expected to bring substantial marketing investment increments in the second half of the year.

Furthermore, there is still significant room for growth in areas such as short video-driven live streaming rooms for internal circulation merchants and direct placements for external circulation merchants. In the second quarter, the marketing investment consumption for short video-driven live streaming rooms increased by over 20% year-on-year. Moving forward, we will enhance the effectiveness and conversion efficiency of short video-driven live streaming room placements from the perspectives of capability optimization and traffic support, providing incremental space for marketing consumption.

For self-investment by external circulation merchants, there has been a significant improvement in the past six months. In the future, we will optimize product chain improvements including payments, enhance payment conversions, and meet the diverse operational needs of merchants In the local operation aspect, against the backdrop of the transformation of consumption structure, we have observed a huge demand from Kuaishou users for local life services, which has also brought new increments to local life businesses. In the second quarter, the marketing expenditure of local businesses increased by over 60% year-on-year, with strong demand in industries such as legal consulting services and home decoration services.

In the second half of the year, we believe that leveraging products such as digital human live streaming and in-app native news capabilities will continue to significantly improve the efficiency of local life businesses, leading to further growth in marketing expenditure.

Q: What is the positioning and goal of the local life business?

A: At the Kuaishou Ecological Development Conference in December 2021, it was announced that a strategic cooperation agreement was reached with Meituan. After nearly three years of polishing, both parties believe that the cooperation has achieved results exceeding expectations. For example, in June this year, the GMV of Meituan merchants on the Kuaishou platform increased by over 38 times year-on-year, and the number of orders increased by over 10 times.

Based on the foundation of previous cooperation, we have recently renewed a new three-year strategic cooperation agreement, further strengthening the breadth and depth of cooperation. Firstly, in terms of cooperation scope, the cooperation will be expanded to cover hundreds of cities and thousands of stores nationwide. Secondly, in terms of cooperation depth, the supply provided by Meituan to Kuaishou will expand from group-buying products to vouchers, member products, flash sale items, and other marketing products. In the future, it will continue to expand to categories such as comprehensive travel.

We believe that with the supply advantages of Meituan, we can quickly expand the coverage of local merchants and products on Kuaishou, providing Kuaishou's loyal users with a more diverse and complete local life service experience.

Considering our recent business progress, let me also talk about the positioning and goals of the local life business.

The local life market is large, the industry is fragmented, and the online penetration rate is relatively low with a high ceiling. We hope to leverage Kuaishou's advantages in lower-tier cities, focus on the value for users and merchants, and find our unique positioning.

On the user side, based on users' preferences for relevant local content, we will accurately recommend local goods and services that meet individual needs, while optimizing platform operational capabilities. Under the joint layout strategy of Kuaishou and merchants, we aim to establish in users' minds the ultimate value for money on the platform, meeting users' local consumption needs in various scenarios. This is our original intention in doing local business, and it has never changed.

We are also pleased to see that users are gradually establishing a mindset for Kuaishou's local life. The average daily paying users in the second quarter continued to grow steadily, with a month-on-month growth rate of 37%.

Kuaishou has a large user base in new lower-tier markets and an active social ecosystem. In the opportunity of consumption structure transformation, we believe we can provide merchants with lower-cost, higher conversion rate marketing and operational solutions. In the second quarter, our supply ecosystem further enriched. The number of added supply and daily active selling items increased by 22% and 33% respectively month-on-month. A better conversion rate, of course, is inseparable from the construction of our high-quality content. With a rich pool of influencers on the platform, guided by policy support and incentives for traffic distribution, influencers produce high-quality local life content. In the second quarter, short video and live streaming recommended CPM increased by 42% and 37% respectively, driving rapid growth in platform payment GMV.

Our goal is to steadily and effectively develop the local life business, with improved efficiency and controlled loss scale, to better meet user needs at the core, empower merchants, and ultimately realize user and business value.

Q: Regarding the outlook for medium to long-term profitability, the company's adjusted net profit margin in Q2 was 15.1%. What is the company's expected profitability in the medium to long term, and will our recent investments in AI have an impact on the company's profitability?

A: After achieving positive adjusted net profit in the first quarter of 2023, the company has seen six consecutive quarters of absolute growth in adjusted net profit and an increase in adjusted net profit margin, reflecting our continuous improvement in operational efficiency and profitability. This quarter, we achieved an adjusted net profit of 4.7 billion RMB, with an adjusted net profit margin of 15%, reaching the target of a 15% adjusted net profit margin one year ahead of schedule.

Thanks to the continuous optimization of our revenue structure, the increasing proportion of high-margin online marketing services and e-commerce business, effective control and optimization of revenue-sharing costs, and continuous improvement in server and bandwidth efficiency through technological innovation, our gross profit margin this quarter exceeded 55%, reaching a new high for the third quarter.

In terms of sales expenses as a percentage of revenue, by implementing high-quality growth strategies and achieving steady growth in user traffic while maintaining overall user growth and retention costs relatively stable, we have seen robust growth in user traffic. However, in the short term, our promotional investments in various businesses including e-commerce commercialization and local life will increase to further strengthen user awareness and lay a better foundation for driving revenue and e-commerce GMV growth.

Regarding research and development expenses as a percentage of revenue, there will be some incremental investment in AI, but the impact on the percentage of revenue is minimal.

In the medium to long term, we believe that with the improvement of the revenue structure and further enhancement of operational efficiency, including the gradual reduction of losses and profitability in new businesses such as overseas business and local life, we are confident in achieving the medium-term target of a 20% adjusted net profit margin.

In terms of the overall impact of AI investments on profitability, in the short term, our investments in AI large models will not significantly affect the group's profitability. In the long term, AI can also continuously enhance the value of AI-related investments to the company's business development through empowering existing businesses and innovative business scenarios.

Improving quality and efficiency is a long-term strategic mechanism of the company. In the formulation and implementation of every strategic decision in the future, relevant considerations will be included, and the AI strategy will give us more confidence in expanding revenue growth and improving quality, continuously enhancing and improving long-term profitability.

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