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After the Hong Kong stock market closed on August 23 Beijing time, Kuaishou released its Q2 2022 results. The overall performance once again exceeded expectations, and the domestic business operating profit turned positive for the first time. However, behind the excellent Q2 results, there are also some benefits brought by the relatively advantageous situation of the epidemic. Due to the complicated macro environment in the second half of the year (the epidemic is stable, but consumption recovery is slow), and the regulatory impact of live broadcast that has not been reflected yet, the outlook and guidance of the management are still worth paying attention to.

The summary of the conference call will be released to the user research group as soon as possible, and those interested can add the WeChat ID "dolphinR123" to join the group.

Specific operating conditions:

Traffic indicators are not weakened during the off-season, and user stickiness has increased. The overall traffic (total average user time) expansion rate is 39%.
The revenue of the top three businesses exceeded market expectations. Under the pressure of macroeconomic factors in Q2, the live broadcast business accelerated instead of slowing down. This may be due to the offline epidemic blockade, and some marketing budgets were transferred to brand promotion through live broadcast reward methods.

Looking forward to the second half of the year, advertising revenue is expected to see a significant recovery, but at the same time, the live broadcast business may also begin to reflect the impact of new regulatory rules.

The GMV of e-commerce reached 191.2 billion yuan, higher than the company's previous guidance, and the commission rate is 1.11%, which increased month-on-month. In Q2, under the epidemic blockade, Kuaishou has relatively advantages compared with traditional e-commerce platforms. It is expected that the company's goal of 900 billion for the whole year will be achieved.
The proportion of live broadcast revenue sharing has been optimized, and employee compensation and promotion and marketing expenses have unexpectedly declined, which has significantly exceeded the expected loss reduction effect. Finally, the Non-IFRS net loss was 1.3 billion yuan, a year-on-year decrease of 72%. Notably, in Q2, domestic business operating profit turned positive.
In Q2, the net cash outflow from operating activities was 2.3 billion yuan, which improved month-on-month, and some accounts payable were also paid off. Coupled with the capital expenditure of 1.4 billion yuan this quarter, the free cash flow was negative by 3.7 billion yuan. As of the end of Q2, Kuaishou had cash + deposits of 23 billion yuan and some short-term highly liquid financial products of nearly 20 billion yuan, with a total available funds of 41.3 billion yuan. With the trend of reducing losses continuing to improve, there is no cash flow risk for the time being.

Dolphin Analyst's Viewpoint

As previously stated, after the appearance of the inflection point in Q3 last year, Dolphin Analyst did not have too much concern about Kuaishou's short-term fundamentals, and held high confidence in both commercialization release and profit expectations. These are all advantages and growth dividends brought about by the short video race track.

However, while being short-term optimistic, we also need to appropriately lower the market's optimistic expectations for Kuaishou, along with the pressure of regulation (algorithmic regulation, live broadcast regulation), and the acceleration of commercialization for video accounts. From the actual execution situation, the impact of the above-mentioned regulations has not yet fully reflected on Douyin and Kuaishou, such as reward list and anchor PK are still in existence up to now. Therefore, second-quarter results represent the past. The focus should be on management's outlook for the future, especially after regulatory requirements are fully implemented.

In the long term, Kuaishou may be affected by ecological traffic tags. After the industry's growth dividend slows down, Kuaishou still needs to make more efforts to gain more growth from its own competitive advantages.

Currently undervalued, if the management's conference call is optimistic about the outlook for the second half of the year, the short-term performance boost may boost the stock price that has been scared by Tencent's selling rumors in the past.

We will release the management's outlook for the future and subsequent guidance information in the user research group as soon as possible. If you are interested, you can add the WeChat ID "dolphinR123" to join the group.

Detailed interpretation of this quarter's financial report

I. Ecological traffic: The off-season is not relaxed, and high-quality short dramas and live broadcasts highlight high viscosity

In the second quarter, Kuaishou's ecological traffic continued to expand rapidly. Although the monthly active users (MAU) fell seasonally compared to the previous quarter as expected, the daily active users (DAU) still maintained a growth trend, making the user viscosity index (DAU/MAU) jump to 59.2%, accelerating towards Kuaishou's medium and long-term goal of 60%.

In the second quarter, Kuaishou's single-season monthly active users reached 587 million, a year-on-year increase of 16%. The daily active users reached 347 million, a year-on-year increase of 18.5%. In addition, the user duration still maintained at 125 minutes/day. Therefore, the overall traffic expansion rate (daily activity growth rate * daily average user duration growth rate) is 39%. In the current Internet traffic dividend depletion, it fully reflects the platform advantages of short videos.

海豚君 believes that the user retention and stickiness that catches people's attention are probably inseparable from more high-quality short dramas launched in the second quarter, such as "Remarried" and "Gu She Chuan", as well as the debut live broadcast of popular stars. The role of short dramas is not only reflected in improving the overall platform stickiness of users but also in balancing Kuaishou's current user distribution and attracting more active female users in first-tier and second-tier cities. This user group often represents high purchasing power, which means that there will be a decent traffic conversion effect for both brand marketing of businesses and live e-commerce.

From Questmobile data, Kuaishou's traffic expansion is mainly still coming from the Super version, which mainly faces third and fourth-tier markets. However, the downward trend of the main station's monthly active users has stabilized. Apart from that, the daily average time spent by users on both the main and express versions is still growing year-on-year and overall better than Douyin.

"The stronger private domain property brings higher user stickiness and longer usage time, which is the consistent advantage of Kuaishou." Therefore, although Kuaishou is not as good as Douyin in advertising monetization of public domain properties, its e-commerce transactions are not falling behind, especially when the overall purchasing power of Kuaishou users is lower than that of Douyin.

"Maintaining advantages and making up for shortcomings is another reason why the two platforms have completely different directions of version changes this year."

"(1) Douyin" This year, the strategic focus is on e-commerce. Its pure advertising monetization has reached a relative extreme, with a loading rate of over 12%. Therefore, it chooses to enlarge the private domain and friend traffic entrance while improving the priority of the mall entrance and pushing down the recommendation page sorting.

"(2) Kuaishou" The strategic focus this year is advertising. Currently, the ad loading rate is about 7%, and eCPM is relatively low compared to peers, both of which have room for improvement. Therefore, it chooses to highlight the "Featured Page" of the public domain traffic pool to the first-level entrance. In terms of e-commerce, Kuaishou has a new "promote Kuaishou brand" strategy compared to last year, which is to support its own brands of small and micro businesses, and guide "white label" products to evolve into "Kuaishou brand" products.

Dolphin Analyst believes that "Kuaishou brand" is Kuaishou's differentiation competition against Douyin's main brand e-commerce under the fierce attack. After all, Kuaishou's user base is more skewed towards cities below the second and third tiers, and the overall purchasing power is lower than that of Douyin. Large and medium-sized brands or high-end products of the same brand are more willing to promote and trade directly on Taobao and Douyin from the perspective of store broadcasting, while they may prefer to cooperate with live broadcast influencers on the Kuaishou platform. As live streaming e-commerce and local life e-commerce continue to occupy a strategic position on Douyin, such differentiation trends are likely to continue for a long time.

"Second, the overall income exceeds expectations, and the three major businesses have not dragged on."

In the second quarter, Kuaishou's total revenue was RMB 21.7 billion, a year-on-year increase of 13.4%, exceeding the market consensus expectation of RMB 20.7 billion. The second quarter had the worst macroeconomic fundamentals, and the market has already fully expected the short-term performance slowdown. The forward-looking guidance given by the company last month was already good, and the actual results are even better, highlighting the superior growth of short videos in various sub-sectors of the Internet.

"From the perspective of sub-businesses:"

The performance of live streaming business is more outstanding this time, with a year-on-year growth of 19%, but Dolphin Analyst believes that this does not necessarily mean the revival of the vitality of show live streaming. In addition, it needs to be reminded that the platform has not fully implemented the new regulations on live streaming supervision (cancellation of rankings, cancellation of anchor PK), which will have a significant impact on the revenue generated by MCN organizations and business promotion through rankings.
The live streaming revenue of Kuaishou is mainly based on the sharing of gifts given by users to their favorite anchors, of which Kuaishou generally takes 30%-40% of the total revenue. According to market research, 60-70% of the gift income of anchors comes from top one and top two big R users who spend a lot of money. These "big R users" include not only some individual tycoons but also:

(1) MCN organizations that promote the popularity of anchors through rankings;

(2) Businesses that reward anchors for promoting their brands and increasing exposure;

(3) The mutual drainage and ranking between live streaming celebrities.

This means that Kuaishou's live streaming revenue actually includes a considerable amount of buying volume revenue that belongs to the nature of marketing. This is closely related to Kuaishou's feature of "private ownership is greater than public ownership". In the eyes of some businesses, the marketing effect of anchor celebrities' oral promotion is greater than the exposure distribution in the public domain traffic pool. Therefore, some potential advertising revenue is presented through live streaming rewards.

Looking at it in this way, the eye-catching growth in Q2 live streaming is probably not related to the big trend of the declining industry of show live streaming itself, but is related to the epidemic control measures in key cities during the Q2 618 e-commerce festival and the fact that offline marketing was suspended, leading to a considerable increase in the migration of business advertising budgets online.
Breaking down the factors that drive revenue growth, the growth in the scale of paying users is the main driving force. The company mentioned that "Kuai Zhaogong", a blue-collar job recruitment product that has been strongly promoted since the beginning of the year, has contributed a lot to the increase in live streaming activity this time. Especially on the Kuaishou Speed version, Dolphin Analyst's personal experience is that the penetration rate of "Kuai Zhaogong" live streaming room is surprisingly high. The financial report disclosed that the monthly activity of "Kuai Zhaogong" reached 250 million people in the second quarter, basically accounting for 40% of the overall monthly activity, an increase of 90% from the first quarter.
This data is actually very high. Previously, market research data showed that the size of the traditional blue-collar labor market in China was only about 400 million. That is to say, with 250 million monthly active users of "Kuai Zhaogong", the penetration rate has exceeded 60%.
As a new module introduced at the end of last year, "Kuai Zhaogong" has grown rapidly, which not only reflects the current macro environment with greater economic pressure, higher unemployment rate and more active job seekers, but also reflects the high imagination of short video platforms in business expansion.
The smooth implementation of Kuaishou blue-collar job recruitment implies that traditional job recruitment platforms, especially those that focus on local blue-collar job recruitment, such as 58.com, as well as BOSS Zhipin and 51Job, which have growth potential in blue-collar job recruitment in the future, may encounter strong competition from Kuaishou in the future.

2. Advertising revenue mainly reflects the effect of public domain traffic distribution. Generally, advertisers place ads through magnetic golden bulls. The ability of advertising monetization is mainly related to the expansion of Kuaishou's ecological traffic, the release of advertising inventory, and the platform's offering.

Kuaishou's single-season advertising revenue was 11 billion yuan, a year-on-year increase of 10%, which was better than market expectations. As Kuaishou's ecological traffic and user time length expanded in the second quarter, Dolphin Analyst believes that the slowdown in growth is mainly due to the decline in platform offering.

The main reason for the decline in platform offering is the macro environment pressure in the second quarter, as well as the impact of logistics obstruction, causing advertisers to be more cautious about placing ads. In addition, compared with last year, this year has fewer advertising clients in regulated industries such as education, games, and finance.

Compared with the large decline of Focus Media, Tencent Advertising exceeded expectations but still shrank by nearly 20% year-on-year. The double-digit growth of Kuaishou's advertising fully reflects the current preference of advertisers for short video channels, and this is also the key reason why Tencent chooses to accelerate the monetization of video accounts.

3. E-commerce may have a relatively favorable effect during the epidemic. In the second quarter, Kuaishou's revenue from e-commerce and other services was 2.12 billion yuan, a year-on-year increase of 7%. The GMV reached 191.2 billion yuan, a year-on-year increase of 31%, exceeding the previous guidance of 25%. The calculated comprehensive commission rate was 1.11%, which was slightly higher than the 1.07% in the first quarter, and thus also contributed to the incremental conversion of revenue, mainly reflecting the increase in the proportion of Kuaishou's internal e-commerce transactions.

The e-commerce sector exceeded expectations this quarter. Dolphin Analyst believes that although Kuaishou and other traditional e-commerce platforms are all affected by the logistics disruption, Kuaishou actually has a certain relative advantage after the Shanghai unblocking in June.

During the epidemic, offline stores were closed, online e-commerce logistics were subject to control and marketing was affected, resulting in a large amount of backlog of goods for merchants and cash flow being affected. Therefore, after unblocking in June, they urgently needed to sell off the goods. At the same time, in order to quickly increase sales, some merchants had to choose to discount and promote their products. Live streaming e-commerce is one of the few high-growth tracks in the entire e-commerce industry. As a platform with low-priced products and high online traffic, Kuaishou has been supporting traffic for white-label products and traditional brands on the platform in recent years. As a result, after the unblocking, Kuaishou was able to attract more merchants in the short term. According to the company's financial report, it also mentioned that it obtained more traditional brands and included "Kuai brands" merchants in the second quarter, among which the number of "Kuai brands" merchants doubled compared to the previous quarter.

Whether the short-term relative advantage of attracting merchants can be transformed into long-term customer retention still requires Kuaishou to do more continuous work and services. Of course, "creating big-name brand merchants" is also one of Kuaishou's strategic priorities this year, whether it is traditional brands or "Kuai brands" evolved from white-label products. At the Kuaishou Zao Fengzhe Conference at the end of July this year, a data was also announced:

Last year, the turnover of well-known brands on Kuaishou was nearly 100 billion yuan, which is equivalent to 1/7 of the total GMV. As of the end of June this year, the GMV of Dianbo (brand merchants' live rooms) increased by 500% year-on-year, which is enough to show Kuaishou's support and importance to brand live streaming e-commerce.

However, from the perspective of long-term competition, Kuaishou also has its weaknesses. As Dolphin Analyst mentioned before, the overall purchasing power of Kuaishou users is inherently inferior to that of Douyin, Taobao, and JD.com. Therefore, the willingness of large-scale brand merchants to set up Dianbo on Kuaishou is likely to be lower than that of Douyin. Alternatively, they may place these brand's high cost-performance products on Kuaishou to suit the consumption level of Kuaishou users, while still focusing on the middle-to-high-end segments on Taobao or Douyin.

Therefore, in the context of the overall rapid growth of the industry and consumers' greater emphasis on cost-performance, Kuaishou has been able to enjoy many dividends, but it may also lose some of its merchant customers when they have demands for brand upgrades and product specialization.

Therefore, the problem returns to the user ecology, which is also why Kuaishou has been hoping to change the distribution of user profile by continuously investing in creating short dramas and purchasing long video copyright content.

3. Profits exceed expectations: Optimizing live sharing and continuing to cut costs

The pace of Kuaishou's loss reduction in the second quarter also exceeded the market's expectations. After adjustment, the net loss was RMB 1.3 billion, a year-on-year decrease of 72%, and the profit margin was -6%, which was a significant improvement compared to the first quarter's -18%.

However, for Internet employees, equity incentives are the main component of compensation and benefits, so Dolphin Analyst tends to add back the impact of equity incentives expenditure, and look at the core operating profit situation of the main business after excluding items such as investment income and financial income and expenses. Due to the fact that these non-core financial items remained relatively unchanged in this quarter, the trend of Kuaishou's core operating profit optimization is similar to the adjusted net profit, which has significantly improved from -24% in the first quarter to 15% in this quarter.

Reduced losses exceeded expectations, mainly due to:

1. Improvement in gross profit margin due to live streaming split optimization

Compared to Douyin, Kuaishou gives more benefits to the anchor in terms of live streaming tipping split. Especially after introducing the anchor guild, the guild also needs to take a share, and finally only 30% of the total revenue is left for Kuaishou, while Douyin can get 40%, and traditional live streaming platforms can get more than 50%.

As the live streaming ecosystem gradually improves, and the influence of tightening supervision, Kuaishou may also be slowing down its investment in expanding its showroom live streaming business, and starts to require split ratios that are closer to the industry. From the "revenue sharing cost" in the cost, its proportion of total revenue decreased from 34% in the first quarter to 31%.

Dolphin Analyst estimated that Kuaishou's split ratio of anchor tipping revenue may have dropped from 70% in the first quarter to 63%.

2. Reduction in marketing promotion and cost cutting brought about by layoffs.

Kuaishou's three operating expenses in the second quarter all decreased year-on-year, mainly reflecting the effect of layoffs at the beginning of the year. In addition, the contraction of overseas marketing investment and the reduction of users' cash incentives are also the optimization directions for Kuaishou to "tighten its belt" this year.

From the perspective of cost per user acquisition and maintenance (marketing expenses/total user scale), and the user cost index proposed by Dolphin Analyst in the article "Both are "bloody" giant baby diseases, who can recover between Kuaishou and Bilibili?" (costs related to advertising and live streaming content costs and marketing expenses), in the second quarter, while realizing revenue expansion, with stable ecological traffic, flow cost continued to decrease, further confirming Kuaishou's platform barriers.

Longbridge Kuaishou Historical Research:

Financial report quarter

May 24, 2022 Telephone conference "The first quarter performance has reflected some impact of the epidemic (Kuaishou telephone conference minutes)"

On May 24th, 2022, Financial Report Review: "Kuaishou's submission without ambiguity".

On March 30th, 2022, Telephone Meeting: "In addition to reducing costs and increasing efficiency, Kuaishou also has ambitions to carry many industries (minutes of telephone meeting)".

On March 29th, 2022, Financial Report Review: "Kuaishou: Iron Economy starts the "countdown to making money"".

On November 23rd, 2021, Telephone Meeting: "With marginal improvement in the financial report, what changes did management make behind the scenes? (Kuaishou Telephone Meeting Minutes)".

On November 23rd, 2021, Financial Report Review: "Things are different with a change of personnel. Has Kuaishou straightened its back?".

On August 26th, 2021, Telephone Meeting: "Kuaishou: The future focus is on converting more public domain traffic into private domain (telephone meeting minutes)".

On August 25th, 2021, Financial Report Review: "Kuaishou: The long pursuit of the industry's second place".

On May 25th, 2021, Financial Report Review: "Kuaishou: How long can the strategy of spending money to buy traffic last? | Dolphin Research".

On May 24th, 2021, Telephone Meeting: "Kuaishou's Q1 earnings conference call Q&A".

On March 23rd, 2021, Financial Report Review: "Kuaishou's "116.6 billion" has become the question I am asked the most". 2021 Financial Report Review of Dolphin Analyst on January 19, 2021: "Third quarter performance is out. What is the gold content of 50 billion US dollars of Kuaishou?"

In-depth analysis

June 15, 2022: "Kuaishou and Bilibili, both 'big baby diseases' with 'blood loss', which one can recover?"

May 5, 2022: "Breaking the entertainment industry: Exploring Tencent and Bilibili's Boundlessness"

February 24, 2021: "Kuaishou faces many criticisms, how is it still valuable?"

January 26, 2021: "Dolphin Analyst: The underestimated 'iron and steel economy' has potential for Kuaishou's $100 billion market valuation."

January 15, 2021: "Dolphin Analyst: Is Kuaishou guilty?"

Risk disclosure and statement for this article: Dolphin Disclaimer and General Disclosures.

At the first sight of profits, Kuaishou gallops on the road of monetization expectations.