Kanzhun Ltd Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Kanzhun Limited Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Wenbei Wang, Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good evening and good morning, everyone. Welcome to our second quarter 2023 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 does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison only. For a 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 second quarter 2023 earnings conference call. I would like to express our gratitude to our users, investors, and supporters who have been with us during these challenging times. First, I want to share our performance for the second quarter of 2023. We reported a GAAP revenue of RMB1.49 billion for the quarter, which is a 34% increase year-over-year. Our calculated cash billings were RMB 1.62 billion, up 65% year-on-year. We achieved a net income of approximately RMB310 million, and our adjusted net income, excluding share-based compensation expenses, increased by 135% year-on-year to around RMB570 million, marking the best quarterly performance in the company’s history. The BOSS Zhipin business model and our organization, developed over more than a decade, have once again demonstrated strong profitability. In the second quarter, our user growth trend continued from the first quarter, with newly verified users reaching 14 million. The average monthly active users on the BOSS Zhipin app rose to 43.6 million, an increase of 65% year-on-year. Among our users, blue-collar individuals and those from second- and lower-tier cities grew at a faster rate, thanks to our efforts to increase our presence in these areas. For enterprise users, our average monthly active users hit an all-time high this quarter, driven by growing demand from blue-collar industries, small and medium-sized enterprises, and lower-tier cities. Recruitment demand surged in sectors like catering, hospitality, tourism, beauty, and logistics. Our average daily active job postings in the urban service industry surpassed 1 million for the first time, establishing us as the largest job offering platform. Revenue from blue-collar users contributed over 32% of our total revenues this quarter, and contributions from second- and lower-tier cities went beyond 50% for the first half of the year. We have consistently informed our investors about our investments in algorithms and products to enhance service capabilities across diverse user groups, leveraging our understanding of shifting demands. Our efforts have positioned us well to benefit from the growth of blue-collar workers and SMEs this year. Going forward, we will continue our commitment to innovation and improvement in this area. We believe that in a mature enterprise services market, people are willing to pay for genuine value. By the end of the second quarter, our paid enterprise customers for the trailing 12 months rebounded and entered a fast growth phase, reaching a record high of 4.5 million, up 18% year-on-year and 13% quarter-on-quarter. This quarter presented challenges, yet we have observed positive operational updates recently. Following the graduation season in July, overall recruitment demand on our platform recovered swiftly and has shown a sustainable upward trend since early August. The blue-collar urban service sector continued to excel across all areas, while white-collar positions have stabilized and begun to recover, particularly in personnel, finance, administration, operations, and manufacturing roles. Consequently, the number of our active enterprise users has reached a new yearly high and set a record for our corporate history. This positive trend improves the supply to demand ratio on our platform as the ratio of job seekers to enterprise users continues to enhance. I want to thank all the investors who recognize our strengths and continue to support us. I’ll now hand over the call to our CFO, Phil, for a review of our financials. Thank you.

Thanks, Jonathan. Hello, everyone. Now let me walk through the details of our financial results for the second quarter of 2023. In this quarter, we reached record-breaking results across different sets of operational and financial figures, including MAU, revenues, total paid enterprise customers, profitability metrics, and operating cash flows. Driven by our robust user growth and healthy user engagement, our revenues maintained rapid growth momentum and hit a new high at RMB1.49 billion, representing a solid 16% quarter-on-quarter growth and a 34% year-on-year growth. Moreover, our calculated cash billings reached RMB1.62 billion, up 65% year-on-year. Total paid enterprise customers in the 12 months ended July 30, 2023, reached 4.5 million, up 13% quarter-on-quarter, a record-high and back to fast-growing trend. Our operating costs and expenses for this quarter were RMB1.31 billion, up 26% year-on-year. Excluding share-based compensation, our adjusted operating costs and expenses increased by 18% year-on-year to RMB1.05 billion in this quarter. Adjusted operating margin is 29.2% for the quarter, up by 8.8 percentage points year-on-year. Cost of revenues was RMB270 million, up 55% year-on-year, representing a gross margin of 81.8%, up by 1.1 percentage points compared to the last quarter. The gross margin started to bottom out from the first quarter, and this trend is mainly due to sequential revenue growth in the second quarter. Our sales and marketing expenses were RMB472 million, up 18% year-on-year. Adjusted sales and marketing expenses were RMB408 million, up 12% year-on-year. This increase was primarily due to increased headcount in the sales department. Notably, brand advertising and customer acquisition costs remained relatively stable compared to the same period last year, while our trailing 12 months paid enterprise customers and MAU increased by 18% and 65% year-on-year, respectively, demonstrating our continuously improved marketing efficiency. Our R&D expenses increased by 19% year-on-year to RMB366 million, and our adjusted R&D expenses remained stable compared to the same period last year. Adjusted R&D expenses as a percentage of revenue reduced in the quarter, showing a continuously improving trend sequentially. Our G&A expenses increased by 27% year-on-year to RMB203 million, and adjusted G&A expenses increased by 14% to RMB126 million, representing 8% of total revenues. Excluding certain one-off expenses, the percentage of adjusted G&A expenses to total revenue showed a downward trend since 2022, benefiting from our improving operating efficiency. Net income was RMB310 million, and adjusted net income reached RMB568 million, more than double compared with the same period last year and hitting a record high. Our adjusted net margin reached 38%, up 16 percentage points year-on-year and 19 percentage points quarter-on-quarter. Net cash provided by operating activities was RMB764 million, up more than 3 times year-on-year and hitting our record high. The significant increase was primarily due to the 65% year-on-year growth of calculated cash billings. As of June 30, 2023, our cash, cash equivalents, time deposit and short-term investments were RMB12.8 billion, and the long-term fixed-income investments were RMB2.0 billion, totaling RMB14.7 billion. We are confident that our outstanding cash generation capabilities and ample cash reserve will support our commitment to further business expansion. For the third quarter of 2023, we expect our total revenues to be between RMB1.53 billion and RMB1.56 billion, with a year-on-year increase of 30% to 32%. Some level of uncertainty is still ahead as there is still a whole month of September before the quarter ends. However, we are pleased to witness an encouraging growth trend led by the improved recruitment demand since the beginning of August, especially in online standalone purchases from SMEs. As the autumn recruitment season approaches, which is normally a high season, we are also expecting better recruitment demand from larger companies in the coming months. That concludes our prepared remarks. We would now like to answer questions. Operator, please go ahead.

Thank you. Our first question comes from Eddy Wang with Morgan Stanley. Your line is now open.

Thank you to the management for addressing my question. I have two inquiries. The first concerns blue-collar recruitment. As Mr. Jonathan noted, while there is an increase in demand for white-collar roles reflected in job postings, what macroeconomic improvements or other factors do you believe will influence this demand for white-collar recruitment? We know that blue-collar demand is currently stronger than white-collar. Do you think this recruitment landscape dynamic in China will have a lasting effect on the competitive environment of online recruitment platforms? My second question pertains to the new annual subscription enterprise users. Are these users from companies that have previously used other online platforms and have been drawn to us, or are they entirely new businesses joining our platform? Thank you.

Thank you for your question. I'll address the second question first. Over the past five to six years, when a new customer starts to sign contracts with any online recruitment platform, there is always assistance available to help them transition to a customized setup. We facilitate the entry of many new users, who have not previously utilized or paid for online recruitment services, into this field. I believe that most of our annual contract customers are derived from our unique clients, with a smaller share coming from competitors. In the second quarter of this year, our offline annual contract customers mainly converted from our online paying customers. However, we have observed an increasing trend of customers switching from other online recruitment platforms to ours. From an operational standpoint, this isn't just a straightforward transition; rather, customers are allocating their budgets across several partners. Regarding your first question, the fixed external commission needed for recovering white-collar recruitment demand plays a significant role. One mechanism is that recovering industries are extending into others, facilitating their recovery. For instance, sectors like culture, sports, entertainment, media, new energy, automobiles, and aftermarket are exhibiting positive recruitment trends that could influence other industries and inform recovery strategies. Another mechanism is that, over time, we will see more tangible evidence supporting market recovery, boosting confidence and increasing recruitment activities. For example, earlier in the year, large corporations were recovering at a slower rate than SMEs, possibly impacted by confidence and projections. However, since the second quarter, we've noticed that enterprises with over 10,000 employees and medium-sized businesses with 500 to 1,000 employees are recovering much more rapidly. Concerning your question about supply and demand and the potential for a structural imbalance, while we have seen a decrease in recruitment demand in sectors like real estate and the Internet, I do not believe it is significant enough to establish a lasting structural imbalance. That concludes my response.

Thank you. Our next question comes from the line of Timothy Zhao with Goldman Sachs. Your line is now open.

Thank you to the management team for addressing my question. I have two inquiries. First, in the current market where there are more job seekers than available positions, what strategies do we have to enhance ARPU and the proportion of paying enterprise users? Are there other monetization opportunities we are exploring for our large user base? What is our forecast regarding the number of paying customers and ARPU trends for the latter half of this year? If we analyze it by SMEs, offline billing, and white-collar versus blue-collar categories, how do we expect these segments to evolve in the second half? Secondly, what guidance does management have regarding the operating profit margin for the second half? That would be very helpful. Thank you.

Thank you for your question. In the first and second quarters of this year, we anticipate that many job seekers will face challenges in finding employment, while companies will find it easier to recruit. However, we have been very cautious about starting any monetization efforts for job seekers in this environment and have taken no action. For enterprise users, our count of paid enterprise customers over the last 12 months is 4.5 million, which represents more than 2 million paid enterprises—this is a small fraction compared to the over 15 million enterprises in China. We have learned from our successful experience with blue-collar workers and in lower-tier cities this year that our business model is highly adaptable. Therefore, we are continuing to onboard more customers to our platform and convert them into paying customers. Concerning new monetization product initiatives, we believe that if we deliver significant value at scale, we should be able to develop more new monetization products. That is part of our ongoing efforts, so please be patient for the results. As for the trends in average revenue per user, our CFO will address that question.

Thanks, Timothy, for your questions. Regarding the number of paid enterprise customers, in the quarter, we did record a very healthy rebound in the number of paid enterprise customers. This metric was back to 4.5 million for the trailing 12 months' paid enterprise customers. In recent months, we have witnessed a quick increase in small medium-sized enterprise users paying to use our service. This is the main driver behind the increased numbers. Their purchase of our services is mostly through online self-serve purchases, contributing to our overall revenue increase but dragging the overall ARPU slightly. In terms of large enterprises, this year's ARPU compared to prior years has decreased, but sequentially, we are seeing their ARPU recovering. Thus, we have continuously seen their ARPU increase since the beginning of this year. For sectors, blue-collar, particularly urban services from lower-tier cities, contribute significantly to the paid customers. The quick rebound of paid enterprise customers reflects, firstly, signs of recovery across various sectors of the economy, and secondly, our recruiting services provide good value propositions to those businesses. Regarding the company's margin, in this quarter, we have seen faster revenue growth in the first and second quarters. Future revenue streams should continue to rise while major cost and expense items are capped, resulting in a healthy operating margin with upside potential. This comment applies more to the mid- to long-term, where we expect the operating margin to steadily improve with good top-line growth. In the short term, margins will be subject to seasonality and one-off events.

Thank you. That's all of our answers to your questions. Operator, please proceed to the next question.

Thank you. Our next question is from the line of Yu Bai with Haitong International. Your line is now open.

Thank you to management for addressing my questions. I have two for today. The first one concerns our recent recovery trend. As Jonathan mentioned, we've seen some positive indicators from enterprise users in August. I would like to know if this is in line with our usual seasonality or if something unusual is happening this year. Additionally, what does the recovery momentum look like for our key accounts? It would be helpful if management could provide any operational metrics like engagement ratio, paying ratio, ARPU, etc. That was my first question. My second question is more general. We recognize that the macro environment this year appears weaker than anticipated. What is currently our top strategic priority for the next few months and for next year as well? Also, what areas might we consider holding back on for better opportunities in the future? Thank you.

Thank you for your question. In terms of the online recruitment market, two key periods are noteworthy: Golden March and Silver April, as well as Golden September and Silver October, both of which are influenced by market conditions. Specifically, from August onward, there will be a notable surge in recruitment demand driven by larger companies. For graduates from top universities expected to finish in July 2024, many large companies will begin their recruitment efforts between September and November of this year. Alongside this seasonal trend, recruitment demand is steadily recovering in line with the economy. Recent data indicates that in August, the daily active number of enterprise users reached an all-time high, and all sizes of companies—large, medium, and small—are seeing rapid improvements. While I cannot definitively attribute this to either seasonality or economic recovery at this point, the overall trend is quite promising. Regarding the recovery of key accounts, it is evident that for businesses with over 500 employees, the volume of new job postings is increasing at a faster rate compared to those with fewer than 500 employees. As for our strategy, I would like to highlight several priorities for this year: First, in line with our NPS, we aim to expand our market share. Our trailing 12-month count of paid enterprises exceeds 2 million, which is just a small portion of the 15 million enterprises in China, presenting a significant opportunity ahead. Our second priority is to continue investing in technology, both in applications and fundamental sciences. The notable growth we have experienced in blue-collar and lower-tier cities this year is largely due to our ongoing technology investments, which enable us to seize opportunities. I believe that sustained investment in technology and fundamental sciences is vital for adapting to market changes. Thank you for your questions.

Thank you. Our next question comes from the line of Wei Xiong with UBS. Your line is now open.

Thank you, management, for addressing my questions. First, I would like to follow up on the pace of recovery in enterprise hiring demand. Considering the prolonged period of macro uncertainties and enterprises prioritizing cost controls, will this situation persist, causing enterprises to take longer to resume headcount expansion once stability returns to the macro environment? Secondly, given our strong cash position and profitability, could I receive an update on the progress of our share buyback program as well as management's views on shareholder returns? Thank you.

Thank you for your question. I will begin with small and medium regular micro-enterprises. For small businesses with only 10 employees, when two need to be hired, they simply bring on two more to keep operations going. Similarly, small and medium-sized enterprises will recruit as needed. In contrast, large companies tend to be more cautious and slower regarding their hiring budgets. I can give you two examples. First, large companies have been less active in layoffs, and this trend has been decreasing over time. Second, many large companies are simultaneously laying off and hiring talent, allowing them to eliminate expensive, lower-quality roles while bringing in cheaper, higher-quality employees. It is currently uncertain when we can expect all businesses, regardless of size, to start aggressive recruitment. On the topic of share repurchases and capital allocation, Phil will address that question.

Last year, we initiated our first tranche of the share buyback program, amounting to RMB150 million, which we fully utilized by year-end. This year, we announced a new round of share repurchase program in Q1, also sized at RMB150 million. We have just started executing a portion of this plan and will continue in the future. Considering our high cash positions, good profitability, and positive free cash flow, we appreciate our shareholders' continued support and will seek ways to enhance shareholder returns. The company is currently conducting research to identify appropriate methods to increase shareholder value, so we ask for your patience.

Thank you. That concludes our question-and-answer session. I will turn the conference back to Wenbei for any additional or closing remarks. Thank you once again for joining us today. If you have any further questions, please contact our team directly. Thank you.

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