Kanzhun Ltd Q4 FY2022 Earnings Call

Thank you, operator. Good evening and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings conference call. Joining me today are our Founder, Chairman and CEO, Mr. Jonathan Peng Zhao, and our Director and 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 not 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 do not undertake any obligation to update these forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For definition of 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 fourth quarter and full year 2022 earnings conference call. The past year has been a tough one for all of us. I would like to express our sincere gratitude to our users, investors, and employees. First, I would like to share with you our performance for the fourth quarter and full year of 2022. Over the past quarter, we recorded calculated cash billings of RMB1.1 billion and GAAP revenue of RMB1.08 billion, which is relatively flat compared to the same period last year. This flat result is not ideal, primarily due to the cumulative effects of the COVID-19 outbreaks over past quarters. The resurgence of the epidemic, especially the surge last December, posed significant challenges to our normal operations in the fourth quarter. In the fourth quarter, we achieved two important milestones. On December 22nd, the company completed our dual primary listing on the Stock Exchange of Hong Kong by way of introduction. Additionally, we became an official partner of FIFA and sponsored the FIFA World Cup Qatar 2022. While our sponsorship did increase our marketing expenses for the period, the broad exposure from this renowned event significantly enhanced and expanded our brand's influence. Despite the rise in expenses, we still achieved profitability in the fourth quarter, with our adjusted net income, excluding share-based compensation expenses, reaching RMB59.5 million. For the full year of 2022, our GAAP revenues amounted to RMB4.51 billion. Our calculated cash billing reached RMB4.61 billion and our non-GAAP adjusted net income, excluding share-based compensation expenses, totaled RMB800 million. Regarding operations, the fourth quarter is traditionally a slow season in the recruitment industry. However, we maintained solid growth momentum with new users. Our MAUs for the fourth quarter reached 30.91 million, up 26% year-over-year, and our DAU to MAU ratio remained stable. Now let me share some details on user growth and business recovery following the Spring Festival, which many of you may be interested in. As work resumed following the Spring Festival this year, we noticed a resurgence in new users that drove many of our core operating metrics to record highs. In the first two months of 2023, our newly verified users significantly exceeded approximately 9 million. The average MAUs on our app for the first two months of 2023 increased by more than 50% year-over-year, with user activities reaching a record high. In February, our monthly active enterprise users hit the highest level in our history, showing strong year-on-year growth. While our total user base is growing rapidly, we continue to enhance user experience on our platform. The average number of job seekers and enterprise users increased through February. To support this growth, we are achieving new efficiencies within our platform's two-sided network through improving algorithm capabilities and deeper insights into our users’ needs and preferences. In terms of our robust user growth, I want to highlight some key trends in this quarter. First, blue-collar users have shown stronger adoption of our platform than white-collar users in both absolute numbers and growth rate following the Spring Festival. Second, users from second and lower-tier cities grew much faster than those in first-tier cities, demonstrating our effective expansion in lower-tier markets. Third, recruitment demand from small and medium-sized enterprises accelerated rapidly, indicating a quicker recovery for these businesses compared to larger enterprises. Fourth, we have experienced a rapid recovery in cash collections, with expectations for all-time high collections in Q1 2023, showing over 45% sequential growth and more than 25% year-over-year growth. Lastly, the urban service industry, which typically involves face-to-face contact, has been a standout sector in the first quarter. Since the Spring Festival, we have seen a more than 40% year-over-year increase in new job postings. Other sectors also showed positive growth trends, including retail, transportation, high-end manufacturing such as new energy and automobiles, and healthcare. Real estate and education have also shown encouraging signs of stabilization and recovery after the Spring Festival. Open positions in sales, marketing, procurement, and other functions reflect improving business activity among enterprises, with recruitment activities from medium and large enterprises gradually increasing post-Spring Festival. These trends indicate an overall economic revival and boost our confidence in growth potential for this year. We remain committed to our social responsibility as a public company. In October 2022, we were once again included in the China's Top 500 Enterprises in Philanthropy List for the second consecutive year. We launched the Barrier-Free Job Search Assistance Service Plan for persons with disabilities in collaboration with the China Disabled Persons' Federation Employment Service and Administration Centre, aiding a total of 121,000 disabled job seekers in 2022. We also recently co-hosted the Annual Spring Recruitment Festival with the Ministry of Education's 24365 Campus Recruitment Service, expected to provide hundreds of thousands of job openings for college students across over 2000 enterprises. Additionally, I want to share that our Board of Directors has approved a new share repurchase program to buy back up to $150 million over the next 12 months to support our long-term share price stability. I will now turn the call over to our CFO, Phil, for a review of our financials. Thank you.

Thanks, Jonathan, and also everyone. Now let me go through the details of our financial results of the fourth quarter and full year of 2022. Let me help you better understand our numbers. Before I begin, please note that all comparisons are on a year-on-year basis unless otherwise stated. Our revenues and calculated cash billings reached RMB1.08 billion and RMB1.1 billion respectively this quarter, staying at the same level with the fourth quarter of 2021, despite the COVID impact. For the full year of 2022, our revenues grew by 6% to RMB4.5 billion. Total paid enterprise customer number for 2022 was 3.6 million, down by 10% compared to 2021, mainly due to the decreases in small-sized accounts affected by the user registration suspension in the first half of the year, as well as COVID outbreaks in the second and fourth quarters. While the paying ratio and ARPU in each quarter stayed steadily at a healthy level. Revenues and the numbers of key accounts and medium-sized accounts maintained good growth momentum and both achieved a record high in 2022. Now let's turn to the cost side. Total operating costs and expenses were RMB1.4 billion in the quarter, up 70% year-on-year mainly due to increases in employee-related expenses, including share-based compensation related to the Hong Kong IPO, and the 2022 World Cup sponsorship. For the full year of 2022, total operating costs and expenses decreased by 12% to RMB4.7 billion. Cost of revenues increased by 35% to RMB202 million in this quarter, primarily driven by the increases in employee-related expenses and server and bandwidth costs as our user base continues to expand and higher security requirements. Gross margin, excluding share-based compensation expenses, was 82.6% for the quarter, down by one percentage point compared to last quarter, mainly because revenue growth in the quarter was impacted by the COVID situation while the majority of the costs remained relatively fixed. For the full year of 2022, cost of revenues increased by 36% to RMB755 million, with an adjusted gross margin of 84.1%, down by three percentage points compared to 2021 due to similar reasons. We are expecting a gradual sequential recovery of gross margins this year along with our revenue growth. Sales and marketing expenses increased by 83% year-on-year to RMB682 million in the quarter, which was primarily due to the marketing campaign of the 2022 FIFA World Cup. For the full year of 2022, our sales and marketing expenses were RMB2 billion, up 3% year-on-year. Excluding the world-class sponsorship expenses, we saw a 46% year-on-year decline in branding and customer acquisition costs in 2022, demonstrating our improved marketing efficiency as a result of stronger brand recognition and user satisfaction. For 2023, we will maintain this effective marketing strategy, while expecting user growth to continue to be robust. Our marketing expenses will be monitored and kept under good control. Our R&D expenses in this quarter increased by 48% year-on-year to RMB294 million, mainly due to the increase of employee-related expenses. For the full year of 2022, R&D expenses were RMB1.18 billion, up by 44% year-on-year for the same reason. G&A expenses in this quarter increased by 108% year-on-year to RMB248 million, primarily due to increases in employee-related expenses and professional service fees related to our dual primary listing in Hong Kong. Excluding share-based compensation and Hong Kong listing related fees, our adjusted G&A expenses in this quarter were RMB123 million, up by 50% year-on-year. And for the full year of 2022, G&A expenses decreased by 64% primarily due to the one-off share-based compensation expenses of RMB1.5 billion recognized in 2021 related to our US IPO. Our simple calculation shows that if we exclude the share-based compensation, World Cup sponsorship, and professional service fees related to our Hong Kong listing, our adjusted operating margin was 20% for this quarter and 19% for the full year of 2022. Net loss in this quarter was RMB185 million, excluding share-based compensation, our adjusted net income for this quarter was RMB59 million. In 2022, we generated positive annual net income of RMB107 million and adjusted net income of RMB799 million. Our net cash generated from operating activities was RMB156 million for this quarter and RMB1 billion for the full year. As of December 31st, 2022, our cash, cash equivalents and short-term investments reached RMB13.2 billion. For our business outlook, for the first quarter of 2023, we expect our total revenues to be between RMB1.25 billion and RMB1.27 billion, a year-on-year increase of 9.8% to 11.6%. As Jonathan just mentioned, our calculated cash billings in this quarter are expected to increase by over 45% quarter-over-quarter and more than 25% year-over-year, which gives us a good start for the year. With our robust user growth and improving signs for the recovery of the economy witnessed so far, we are optimistic about the whole year outlook and feel confident to strive for accelerating business growth. With that concludes my prepared remarks. Now we would like to answer your questions.

Thank you. We will now take our first question. Please stand by. Your first question is from Wei Xiong from UBS. Please go ahead.

Thank you to the management for addressing my questions. My first question is about the recovery trends following the Chinese New Year. Could you provide more insights on the ratio of growth between business users and jobseekers? Additionally, how do we compare the recruitment budget recovery between K customers and SME customers? Secondly, I would like to hear your thoughts on the competitive landscape in 2023. Considering whether competitors will increase their investments as the market reopens, how do we manage the balance between revenue growth and our margin targets for the entire year? Thank you.

Thank you for your question. Regarding your concerns about the situation after the Spring Festival, we recorded historical highs for both our monthly active users and daily active users, showing significant growth in the first quarter. Additionally, our active enterprise user numbers have reached a historic peak, which is not only encouraging but also a sign of good recognition. The ratio of enterprise customers to jobseekers remains around one to nine or one to ten, but we see an improving trend. In terms of enterprise size, small and medium-sized enterprises are demonstrating more flexibility and a quicker recovery speed. If conditions worsen, they tend to respond more rapidly as well. Large enterprises are recovering at a slower pace than SMEs, but they are still in the recovery process. This cautious approach is due more to the careful decision-making of large enterprises, as I experienced similarly in 2008 and 2009 when SMEs also bounced back faster. Regarding your second question about competition, the overall competitive landscape remains unchanged. As you've noted, with the economy's recovery, our peers are planning to invest more in user acquisition this year, and we have already felt that pressure in this quarter. However, we are committed to following our own pace and strategies rather than chasing those trends. Thanks to our high user retention and engagement, along with a reasonable growth strategy, we are aiming to reach a new user growth target of 40 million to 45 million this year. I am confident we can reach that goal without overspending, which will not impact our margins.

Thank you management.

Thank you. We'll now take our next question. Please stand by. And the next question is from the line of Eddy Wang from Morgan Stanley. Please go ahead.

Thank you for taking my question. I have three questions. First, the unemployment rate has been relatively high in February and January, particularly among youth. In terms of labor supply, there seems to be an increase in university and college graduates, while the demand for blue-collar jobs remains strong. How might this mismatch influence the recruitment landscape in China, and how can we adjust our strategy to leverage this situation this year? My second question concerns the reported labor shortage that appears to have diminished after the Chinese New Year, with more labor returning to Tier 1 and Tier 2 cities. Is this something we have also observed on the ground? Lastly, I have a long-term question regarding ChatGPT. There are discussions about the potential replacement of white-collar jobs by ChatGPT in the future. What are your thoughts on this? Thank you.

Thank you for your question. Regarding your first question, there are two types of blue-collar users on our platform. The first one is urban service. In this industry, we have seen significant growth in both users and job postings, so there is no issue with job availability in this sector. For manufacturing, after the Chinese New Year Festival, which is seven to eight weeks post-Spring Festival, we initially observed that job postings were growing at a much slower rate compared to job seeker growth. However, this situation has been improving recently. An interesting metric we track is achievement, which refers to the mutual success between job seekers and employers on our platform. In the manufacturing industry, we noticed that, compared to last year, the average achievement per individual has slightly decreased, but not significantly, while job seekers are putting in much more effort to achieve success. This is the first time I have publicly discussed this metric. The overall achievement results show a slight decline, but job seekers are facing greater challenges in securing jobs, making the job search feel significantly tougher than the outcomes they are achieving. In terms of the mismatch you mentioned, it is a professional concern, with many job seekers unable to find work amidst fewer job openings. This situation poses challenges for our platform. However, we’ve observed that, particularly in blue-collar manufacturing, urban service, and logistics, job seekers display considerable flexibility regarding their skills, ages, and the types of jobs they pursue. They have adapted and switched between different industries to meet their job-seeking needs. As for your last question about ChatGPT, it’s still early to provide commentary on the actual implementation of this technology on our platform, but we are closely monitoring it for potential challenges and opportunities. Our team has started using this technology in certain scenarios, like generating resumes and identifying personal advantages. We're seriously considering its implications, including the valid concern that it could pose challenges for some white-collar jobs, just as automation has affected blue-collar work. This is a potential trend. In the near future, I hope to share more with our users and investors about the value we can create with AIGC technology. I believe this evolution will be rapid, and I am quite confident in it.

Thank you.

Thank you. We'll now take our next question. Please stand by. This is from the line of Timothy Zhao from Goldman Sachs. Please go ahead.

Thank you management for taking my question and congratulations on the solid results and strong outlook for the first quarter. I have two questions. The first is about technology innovation, including the recent advancements in AIGC technologies. Given that R&D expenses accounted for about 20% of revenue in 2022, how should we approach our investment areas for R&D in 2023? Additionally, what impact do we expect these technologies to have on the online recruitment model and on enhancing the efficiency of human capital allocation? Secondly, now that the marketing campaign for the FIFA World Cup has concluded, could management share any insights on the marketing outcomes and what our marketing and branding strategy looks like for this year? Thank you.

Regarding your first question about our R&D investment this year, we will continue to enhance technology investment, but we haven't heavily factored potential AIGC application scenarios and model training into our annual budgeting. Our primary expenses will focus on hiring better and more expensive engineers and computer scientists, along with increasing our investment in hardware. However, as I mentioned, we haven't prioritized AIGC technologies at this stage. I am confident that we have the capability and ambition to further invest in this technology as a large company. About your second question on our sponsorship of the FIFA World Cup, I can say that the results have met our expectations. The strong user growth we experienced in the first two months of this year has led to very efficient digital marketing, resulting in low customer acquisition costs. This isn't due to market price drops or new marketing technologies, but primarily because of the high visibility of our campaign last month, which has been quite successful. Consequently, our brand recognition has improved, and this will continue to reduce our digital marketing expenditures throughout the year.

So I would like to add a little bit to this marketing expense question. First of all, in terms of user growth, 2023 will be a good year for user growth. We use branding as performance-based traffic acquisition advertisement as an approach to acquire new users. Nowadays we put more resources toward branding over performance. So the branding percentage of related expenses continues to rise within our overall marketing expenses. This trend will continue. And looking ahead for 2023, there are no other big branding events ahead. Thus, our overall growth strategy or user growth target for 2023 won't affect our overall margin. I also need to mention that our margin is more linear or more related to our top line growth. We expect that if the revenue can grow higher and faster, then we would like to see further margin expansion for 2023. So, so far we think that we are holding a positive view toward this trend. We believe that margin should improve for 2023.

Thank you. That's very helpful.

Thank you. Due to time constraints, that concludes today's question-and-answer session. At this time, I will hand 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 or TPG Investor Relations. Thank you.

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.