Kanzhun Ltd Q3 FY2022 Earnings Call

Thank you, operator. Good evening and good morning everyone. Welcome to our third quarter 2022 earnings conference call. Joining me today are our Founder Chairman and CEO Mr. Jonathan Peng Zhao and our Director and the CFO Mr. Phil Yu Zhang. Before we start, we would like to remind you that today's discussion may contain forward-looking statements which are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors may not be under the company's control which may cause actual results, performance or achievements of the company to be materially different. The company cautions you not to place undue reliance on forward-looking statements and does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management would also discuss certain non-GAAP financial measures for comparison purposes only. For non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhipin.com. With that, I will now turn the call to Jonathan, our Founder, Chairman and CEO.

Hello everyone. Welcome to our third quarter 2022 earnings conference call. On behalf of the company and our employees, I would like to express our sincere gratitude to our users, investors and friends for your ongoing trust and support. First, I'd like to share with you our performance for the third quarter. In this quarter, we reported GAAP revenue of RMB1.82 billion with quarter-on-quarter growth of 6%. Our calculated cash billings were RMB1.24 billion, a sequential increase of 26.4%. Benefiting from our enhanced brand recognition and continuous improvement in marketing efficiency, we maintained rapid growth in our user base while further improving our profit margin to achieve adjusted net income for the third quarter, with gross share-based compensation expenses, achieving a quarter-on-quarter growth of 25%, reaching RMB377 million. In this quarter, our user base has been increasing rapidly. As of September 30, the newly verified users reached 14 million. Verified users refer to job seekers who posted at least one job expectation or enterprise users who posted at least one job position. This is compared to the more than 8 million newly verified users as of August 15, which we discussed in our last earnings call. We continued our user growth sustainably within this quarter. Our average MAU this quarter reached 32.4 million, hitting a record high. The company's efforts to constantly improve technology and user service capability over the past year have started to bear fruit. Let's take a look at some numbers. First, the average monthly number of successful mutual communications between job seekers and enterprise users hit a record high in this quarter, representing a more than 20% year-on-year growth rate, and our MAU grew by 12.5% year-on-year. The DAU ratio remains stable. Another number is that each individual user's achievement, either a job seeker or an enterprise user, is still steadily growing. Overall, my impression for the third quarter is that we experienced a reboot in both users and growth. There are two key factors: On one hand, compared to the second quarter, many cities started to recover from the COVID impact. Another factor is that we began acquiring new users by the end of June. One data point to consider is that our calculated cash billings achieved a 26.4% increase compared to the second quarter. Additionally, our average MAU in the third quarter recorded a sequential growth of over 20%. The performance of blue-collar and gold-collar users has been particularly gratifying. The revenue of the urban service industry—sorry, the cash billing of the urban service industry for the third quarter recorded a 28% year-on-year growth. The average DAU of our gold-collar workers for this quarter also increased by approximately 40% year-over-year. Safety operations have always been the most essential cornerstone driving the development of our company. In the third quarter, we continued to improve our safety capabilities in three aspects. The first is technical security. In September, we were awarded by the China Academy of Information and Communication Technology, the first data security management capability certification in the online recruitment industry. The second is user security. As of October 31, our verification team has conducted field visits and inspections for over 500,000 companies. The third aspect is operational security. We submitted applications in Hong Kong in early October, aiming to ensure sustainability of capital market conditions. For the last quarter through now, since the beginning of September, the resurgence of COVID-19 has negatively impacted our business and slowed down enterprise recruitment demand. However, we have observed that recruiting activity among enterprises will recover quickly once the situation is effectively controlled, as evidenced by our experience in July and August. We have also seen some opportunities as industries undergo structural changes. For example, internet and network-related positions, including technology, product, design and operations, have become key drivers in the digital transformation of traditional industries. The high-end manufacturing industries, such as new energy, automobiles and semiconductors, have been growing rapidly, and the active job positions in September increased by more than 40% year-over-year. Despite the short-term turbulence, we remain quite confident in our long-term growth, supported by our high-efficiency business model. Our core strength lies in the extreme efficiency of our job hunting and recruitment model, which is suitable for people in various regions and industries. While our service continues to grow in first-tier cities and among white-collar workers, significant growth potential remains in lower-tier cities and within blue-collar segments. We have found ourselves as the official Asia-Pacific region partner for the 2022 Qatar World Cup. This partnership allows us to effectively expand our brand presence through this high-profile and widely covered event, especially among blue-collar workers and in lower-tier cities. Historically, user growth has always been a primary driver of our business's long-term sustainable development. Our platform has a robust scale effect and can support more accurate matching within a larger population. We remain focused on achieving rapid user growth, expecting to gain an additional 100 million users in the next three years. We are quite confident in this goal, believing it will be the most effective driver for our business development. While economic cycles may exist, there are nearly no cycles in enterprises' efforts to serve their customers with sincerity and agility. We remain true to our core values and original aspirations, consistently doing the right thing. We have followed this principle throughout the third quarter and will continue to do so going forward. With that, I will turn the call over to our CFO, Phil, for a review of our financials. Thank you.

Thanks, Jonathan. Hello, everyone. Thank you for joining our earnings call today. Before I begin, please note that all amounts are in RMB and all comparisons are on a year-on-year basis unless otherwise stated. In this quarter, our business began to recover, backed by strong user growth. Our calculated cash billings recorded a fast rebound with over 26% sequential growth to RMB1.24 billion. Our total revenues, however, were impacted due to the performance in previous quarters caused by new user registration suspensions and the COVID resurgence in the second quarter. Total revenues recorded a 6% year-over-year growth and a 6% quarter-over-quarter growth to RMB1.18 billion. The number of total paid enterprise customers in the trailing 12 months ended September 30 slightly decreased to 3.73 million, down 1% from 3.77 million as of June 30. However, the number of total paid enterprise customers in the third quarter increased by 15% compared to the second quarter, mainly due to the increase in small-sized accounts, driven by our active enterprise user growth in the relatively mild recovering macro conditions. Revenues from small-sized accounts contributed to a higher sequential recovery compared to other accounts, demonstrating that this SME segment, which we particularly specialize in, is more resilient in the face of economic downturns. Our customer base, which includes various-sized companies, is balanced and healthy, allowing us to absorb impacts during economic downturns and benefit more swiftly from the recovery of the macro environment. Moving on to the cost side, total operating costs and expenses for the third quarter increased by 16% year-over-year to RMB1.04 billion. Excluding share-based compensation, total operating costs and expenses increased by 9% year-over-year to RMB879 million in the quarter. The cost of revenues increased by 30% year-over-year to RMB201 million, primarily driven by increased server and bandwidth costs in line with growing user traffic and increased employee-related expenses as we continue to strengthen our security-related personnel. Sales and marketing expenses decreased by 5% year-over-year to RMB397 million, mainly due to decreased marketing expenses resulting from improved brand recognition and marketing efficiencies. R&D expenses increased by 39% year-over-year to RMB419 million due to increased technology-related staff. G&A expenses increased by 27% to RMB156 million, largely due to a higher headcount and increased share-based compensation expenses. Our overall human-related costs remained stable compared to last quarter, and we have enhanced cost control in line with prevailing market conditions. Excluding share-based compensation expenses, our adjusted net income for the quarter was RMB377 million, with an adjusted net margin of about 32%, rebounding back to record historical levels in the third quarter of last year. Net cash generated from operating activities was RMB367 million for the quarter, representing a 36% year-on-year growth. As of September 30, 2022, our cash, cash equivalents and short-term investments increased to RMB13.9 billion, positioning us well for future growth. Looking ahead, as the near-term resurgence of COVID-19 cases continues to be high across China and affects the recruiting demand of enterprise users, we expect our total revenues to range between RMB1.05 billion and RMB1.09 billion in the fourth quarter, which indicates a slight year-on-year decrease of 3.8% to 0%. Given that we still have the whole month of December before the quarter ends, some uncertainties remain ahead. However, as Jonathan just mentioned and as observed from our third quarter results, user growth is crucial to our business. Our market-leading position and competitive edge have further strengthened since the resumption of user registration in recent months, and our user base continues to expand. The online recruitment market in China has shown good potential for growth. With the effectiveness of our model intact, we are confident in navigating the current headwinds and maintaining sustained growth in China's human resource technology markets. That concludes our prepared remarks. Now we would like to answer questions. Operator, please go ahead.

Thank you. Our first question comes from Eddy Wang from Morgan Stanley.

I have two questions. First, if we consider that the reopening process is to gradually happen in early spring, how do you think the recruiting activities will pick up quickly? Or do you expect that it will take maybe 1 or 2 months of lead time before these enterprise users post their jobs? The second question is, if we expect that the reopening will gradually happen next year, what’s our expectation in terms of your sales, marketing, and customer acquisition costs? We believe that some of the other online recruitment platforms will also spend money to acquire new customers. Considering all this competition and considering that we have quite an ambitious new user acquisition plan in the next 3 years, how do you think the level should be? And what kind of margin should we expect for 2023?

Thank you for your question. Regarding your first question about the reopening and the recovery speed for enterprise recruitment. Based on my observations over the past years, the majority of enterprises can recover very quickly with some limited exceptions, such as very large mega enterprises, as they may require more time to readjust their expectations for growth, revenues, expenses, marketing, human resources, and headcount. However, for SMEs, they generally recover at a much faster pace. Regarding your second question about our marketing plans for next year, we anticipate that our marketing efficiency for the digital market will not decrease. As I mentioned earlier, we are planning for over 100 million new users in the next 3 years. If everything proceeds normally, we expect around 40 million newly registered users next year, and that is the current consensus. We will not allocate extra budgets for this. In terms of branding, as you already know, we have sponsored the World Cup this year, and we have not planned for any major marketing events this year. Thus, next year will be a normal year. My expectation is that marketing expenses as a percentage of revenue next year will remain stable, and this will not affect our margins.

To add a little bit about the reopening, our cash revenue would like to gear up our accounting revenue as we require time to book the revenue; therefore, we expect our accounting revenue to gradually align with cash collections as the reopening progresses. There is a delay effect, so please keep that in mind. At the beginning of the recovery, we should focus on cash revenue, and our accounting revenue will gradually catch up.

Our next question comes from the line of Timothy Zhao from Goldman Sachs.

I have two questions. First, considering December is when many big enterprises sign or renew contracts with us, could you share some insights into the status of these large contracts? What percentage of enterprises may have upselling potential? Second, regarding branding activities around the World Cup, could you share how we should think about the ROI behind these branding activities, especially since other recruitment platforms are also conducting similar branding activities? How should we compete with them, and what is our differentiation?

Thank you for your question. Regarding the signing of annual contracts at year-end, we’ve observed since the fourth quarter that we are happy to report that we have virtually signed all our key accounts. In terms of upselling, our net dollar retention rate for our key accounts is still above 100%, a trend that's consistent with our historical results even under the current circumstances. Regarding the sponsorship for the World Cup, being a young company with an average employee age around the mid-20s, our team is passionate about football. You may have seen coverage showing that global population has surpassed 8 billion, showcasing the significance of football as a cultural phenomenon. For the last World Cup in Russia, over 650 million Chinese viewers followed the event. I believe this year’s Qatar World Cup will have an even larger audience, potentially reaching 700 to 800 million viewers. If each viewer watches 4 to 5 games during the tournament, that amounts to approximately 4 billion total views featuring our advertisements. Thus, the visibility gained through our advertising during the World Cup presents an appealing business opportunity. While I recognize that several peers are pursuing similar advertising strategies, I believe this gives audiences and customers more choices, allowing them to select the platform that best suits their needs. This wraps up my answer to your questions; thank you.

I’d like to add that we regard brand advertising as an investment rather than a mere expense, as the returns can be more significant due to its long-lasting effectiveness compared to traditional traffic acquisition costs.

Thank you. Operator, let's move on to the next question.

Our next question comes from the line of Wei Xiong from UBS.

I have two questions. First, looking into the first quarter of next year, typically a strong seasonal period for the recruitment market, could management elaborate on plans for user acquisition, marketing, and promotions? Do we have a target for user growth in this peak season, and how should we view margin levels in the first quarter? My second question is, given that large enterprise customers may exhibit more resilient recruitment budgets compared to SMEs, is the company considering shifting focus towards key customer relationships amid macro uncertainties? What are the latest thoughts regarding progress in the mid-to-high-end recruitment segment?

Thank you for your questions. As for our marketing plans for the first quarter next year, our World Cup campaign will conclude on December 18, and the Spring Festival starts January 22 next year, leaving only five weeks in between. By the end of January, people will return to work, triggering the traditional recruitment cycle. Thus, the timing of our World Cup campaign aligns well with this. Given the intensity of the marketing during the World Cup, we firmly believe its effects will carry over into the Spring Festival. Therefore, our marketing strategy post-Spring Festival will not necessitate additional funding; we expect to benefit from the World Cup campaign. Additionally, we are highly focused on the reopening process, and our marketing efforts will be integrated with this reopening. As such, we won't plan any major marketing events with substantial market impacts in the first quarter of next year. Regarding your second question about large account relationships, we don’t currently plan to direct our resources specifically toward key enterprise accounts over SMEs, but I assure you we will not neglect the needs of our key account customers.

For market statistics, more than 90% of the enterprises in China are small and medium-sized companies. Our company composition reflects this pattern, with over 80% of our enterprise customers falling into the small-to-medium-sized category. These SMEs represent crucial components of our business. As mentioned, we will continue to serve them effectively and provide them with improved services. However, we also recognize the importance of paying attention to our key accounts because our business structure is meant to be balanced.

Thank you. Now we move on to the next question.

Thank you. Our next question comes from the line of Natalie Wu from Haitong International.

I have two questions. First, regarding the number of paid enterprise users, there's been a slight decrease to 3.7 million this quarter. Can management share insights into the active and inactive enterprise numbers this quarter? How did those change on a year-on-year and quarter-on-quarter basis? Additionally, how should we view the paying conversion ratio? How much of this decrease pertains to the pandemic, company-driven cleaning actions, and natural churn? My second question relates to the blue-collar segment. How much revenue does the blue-collar business currently generate, as well as related MAU and paid enterprise figures? What are the future growth expectations for this segment, and could the blue-collar business potentially outpace white-collar growth in the reopening scenario?

Thank you. I’ll address the paid enterprise customer question first. The 3.73 million number accounts for the trailing 12 months of paid enterprise customers. This decrease was primarily due to the COVID impact observed in the second quarter, which had a notable effect on our paid enterprise customers at that time. Starting from the third quarter, we see a swift recovery in paid enterprise customer growth quarter-over-quarter. However, due to the trailing 12-month metric, the previous quarter still influenced the overall total. The quarter-over-quarter growth indicates strong signs of a booming business. However, since early September, the resurgence of COVID measures has adversely impacted our active enterprise customer numbers. In terms of the paying ratio, it has remained stable among active enterprise customers throughout the second and third quarters as well as in October and November. Thus, the primary impact stemmed from the number of total active enterprise customers, directly linked to the COVID control measures. We expect to see a strong comeback for active enterprise customers once COVID restrictions ease. Regarding the blue-collar business, at present, the MAU accounts for roughly 30% of our total users, with blue-collar revenue contributing approximately 26% to our total revenue in the third quarter.

Additionally, I'd like to provide some data on the logistics industry, where we have seen a 20% year-on-year growth in cash billings. For other service industries, a year-on-year growth of 28%, while our total cash billing only grew by 1% compared to last year. This highlights that the blue-collar sector has experienced significant growth. We are confident in our goal of acquiring an additional 100 million new users over the next three years, with two-thirds of that being traditional blue-collar workers, including those in logistics, urban services, and manufacturing, among others.

One more thing to mention is that we’ve noted that we resumed user growth from the end of June. Traditionally, mid-year is not the peak season for blue-collar jobseeking. Typically, peak season starts post-Spring Festival, which is when we anticipate increased blue-collar user engagement and customer growth.

Due to time constraints, that concludes today's question-and-answer session. At this time, I will turn the conference back to Wen Bei for any additional or closing remarks.

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.