36Kr Holdings Inc. Q2 FY2020 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for 36Kr Holdings Inc.'s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the conference over to your host, Yolanda Liu, IR Manager of the company. Please go ahead, Yolanda.

Thank you. Hello, everyone, and welcome to 36Kr Holdings' second quarter 2020 earnings conference call. The company's financial and operational results were released via Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.36kr.com. Participants on today's call will include our Co-Chairman and CEO, Mr. Dagang Feng; and our CFO, Ms. Jihong Liang. Mr. Feng will start the call by providing an overview of the company and performance highlights of the quarter in Chinese, followed by English interpretation. Ms. Liang will then provide details on the company's financial results before opening the call for your questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with US SEC. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Please note that 36Kr's earnings press release and this conference call include discussions of the unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. 36Kr's press release contains a reconciliation of unaudited non-GAAP measures to the unaudited GAAP measures. And please note that all amount numbers are in RMB. I will now turn the call over to our Co-Chairman and CEO, Mr. Feng. Please go ahead.

Thank you and hello, everyone. Thank you for joining us for the second quarter 2020 earnings conference call. In the second quarter of 2020, while the COVID-19 pandemic began to be better managed in China, we and our clients faced significant uncertainties because containment measures were not fully lifted. Many clients have yet to restart their marketing plans and promotional activities, which has delayed their demand for our services. In response, we actively adjusted our operations to align with changing market dynamics and identified new opportunities stemming from our clients' evolving needs. Despite these challenges, we were pleased to see progress in our content efforts. Our average monthly pageviews reached 499.2 million for the 12-month period ending June 30, 2020, reflecting a strong year-over-year growth of 43.6%. Our live streaming programs and newly produced short-form video content have gained significant traction. Although we have not included viewership in our monthly page views yet, this new content format has received a very positive reception. During the quarter, average user time spent on our live streaming and short-form video content was strong, particularly given the serious nature of our business-related offerings. We are focusing our efforts to capitalize on the rising popularity of these content categories, especially in the coming years, and strengthening our position as a leading content platform for the new economy. Regarding our revenue streams, as mentioned, due to the ongoing effects of COVID-19, many clients have not yet restored their marketing plans and demand for our services, resulting in relatively soft year-over-year performance in our advertising, enterprise value-added services, and subscription services. However, compared to the previous quarter, revenue from our online advertising services saw a growth of 48.9% in the second quarter, indicating increasing demand from TMT companies and highlighting our brand's strong influence within the new economy sector. For our enterprise value-added services, we have utilized creative approaches in developing solutions for our clients, such as live streaming events. For instance, our CMO summit in collaboration with Twitter attracted a wide range of Chinese companies expanding internationally, generating a total viewership of 3.52 million on third-party platforms and over 283,000 interactions on our own platform. Additionally, we partnered with Huawei for the Huawei Developer Challenge 2020, livestreaming contest events that provided a platform for startups to showcase their innovative capabilities while helping Huawei identify potential partners for its ecosystem. Our multi-channel live streaming of such events has brought significant visibility to our corporate clients and many young companies, assisting them in efficiently acquiring consumers and building valuable business connections. In light of the shifts caused by COVID-19, we have been assisting local governments in digitizing their processes and boosting regional economies. Through our service solutions like online marketing and virtual roadshows, local governments can effectively present their services and attract investments and talent. These innovative solutions have been well received, leading to new governmental collaborations. As of the second quarter, we provided services to approximately 30 administrative departments across seven provincial capital cities, resulting in repeat business. In the second quarter, our subscription services have not fully resumed offline courses, which normally charge higher fees. However, we saw a substantial recovery in demand, with increased client registrations for our featured V-club courses. We also launched creative initiatives like our 8-minute Conference aimed at conference subscribers, especially those in new consumer sectors such as senior services, packaging, fashion, medical aesthetics, and maternal and infant care. Our programs enhance brand visibility and products for our corporate clients while offering new options to a broader audience, including Gen Z and seniors. Furthermore, following the introduction of our mini business administration program in the first quarter, we successfully launched its first offline course, the 36Kr Healthcare Innovative Class, which attracted numerous elite healthcare enterprises and professionals. As healthcare was a primary focus in the first half of 2020, we organized various activities fostering constructive communication and collaborations among industry players and investors. Our subscription services will continue to target individuals capable of driving business demand and creating more opportunities for our enterprise services. Turning to our overseas business, despite the evolving global pandemic and shifting international dynamics, we have made notable progress in our international operations with higher quality content production and significant traffic growth. In July, 36Kr Japan launched Connect.Japan, a subscription-based platform offering comprehensive enterprise data analysis, detailed research reports, and tailored consulting services for individuals and companies in Japan. Our partnership with the South China Morning Post will provide objective content reports and marketing solutions for Chinese businesses expanding internationally. In summary, although COVID-19 has been better controlled in China, macroeconomic uncertainties persist, leading to relatively subdued client demand in the second quarter. In light of these challenging conditions, we have maintained diligent operations with proactive strategic adjustments and innovations in our services to adapt to the new normal. It is encouraging that our engaging content remains highly popular among users, driving robust traffic to our platform. We have also seen a recovery in demand for our services, underscoring our strong brand presence and the trust of our clients and partners. Motivated by this trust, we are committed to supporting new economy participants in the current market, addressing their emerging needs with innovative solutions. We are confident we can navigate short-term challenges and achieve greater success together in a promising new economy filled with potential. I will now turn the call over to our CFO, Ms. Jihong Liang, to discuss our key financial results.

Thank you, Mr. Feng. And hello, everyone. As Mr. Feng mentioned, the enduring impact from the COVID-19 pandemic has presented us with a challenging second quarter of 2020. Our soft year-over-year top line performance for the quarter reflects relatively lower demand as clients postponed their marketing events and promotional activities while waiting for pandemic containment measures to be further eased. Nevertheless, revenue from our online advertising services and subscription services delivered substantial growth, which indicates gradual recovery. We believe that future measures and underserved demand for enterprise value-added services will continue to cultivate in the new normal. Regarding our internal operations, we deployed more stringent cash management policies, such as requiring prepayments for certain projects and swiftly connecting with quality clients to collaborate with. These measures have helped us maintain healthy cash flows and manageable account receivables. We are pleased that our efforts paid off well as we maintained a solid balance sheet position and, for the first time, achieved positive operating cash flow in the second quarter of 2020. Moreover, we have made prudent investments in technologies and new devices to prepare for a changing market environment, which we believe is critical for our future growth. As a unique enabler for new economy participants, we will continue to explore, identify, and understand new demand and meet our clients across enterprises, governments, institutional investors, and individuals while leveraging our brand influence, business connections, and extensive service experience coupled with new methods and technology. We are relentlessly providing effective solutions to support our clients to recover growth and thrive. And now, I'd like to walk you through more details on our second quarter of 2020 financial results. Total revenues were RMB 76.7 million in the second quarter of 2020 compared to RMB 118.1 million in the same period of 2019. Online advertising services revenues decreased by 29.9% to RMB 31.3 million in the second quarter of 2020 from RMB 44.7 million in the same period of 2019. Enterprise value-added services revenues decreased by 28.6% to RMB 42.6 million in the second quarter of 2020 from RMB 59.7 million in the same period of 2019. Subscription services revenues were RMB 2.7 million in the second quarter of 2020 compared to RMB 13.7 million in the same period of 2019. Cost of revenues was RMB 54.4 million in the second quarter of 2020 compared to RMB 78.7 million in the same period of 2019. Gross profit was RMB 22.2 million in the second quarter of 2020 compared to RMB 39.3 million in the same period of 2019. Operating expenses were RMB 99.4 million in the second quarter of 2020 compared to RMB 71.9 million in the same period of 2019. The increase was mainly due to increases in general and administrative expenses and sales and marketing expenses in the second quarter of 2020. Sales and marketing expenses were RMB 39 million in the second quarter of 2020 compared to RMB 25.8 million in the same period of 2019. The increase was primarily attributable to an increase in share-based compensation expenses and promotion fees. General and administrative expenses were RMB 50.9 million in the second quarter of 2020 compared to RMB 38.9 million in the same period of 2019. The increase was primarily attributable to an increase in the allowance for doubtful accounts and professional fees and was partially offset by the decrease of share-based compensation expenses. Research and development expenses increased by 32.2% to RMB 9.6 million in the second quarter of 2020 compared to RMB 7.2 million in the same period of 2019. The increase was primarily due to increased technology expenses related to technology procurement, device maintenance, and testing. Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, and general and administrative expenses in total were RMB 12.6 million in the second quarter of 2020 and RMB 27.9 million, which included the effect of re-designation of ordinary shares to convertible redeemable preferred shares, amounting to RMB 26.8 million, in the same period of 2019. Other expenses were RMB 2 million in the second quarter of 2020 compared to other income of RMB 0.9 million in the same period of 2019, primarily attributable to the increase of share of loss from equity method investments. Income tax expenses were RMB 85,000 in the second quarter of 2020 compared to RMB 0.2 million in the same period of 2019. Net loss was RMB 79.3 million in the second quarter of 2020 compared to RMB 31.9 million in the same period of 2019. Non-GAAP adjusted net loss was RMB 66.7 million in the second quarter of 2020 compared to RMB 4 million in the same period of 2019. Net loss attributable to 36Kr Holdings Incorporated's ordinary shares was RMB 79.5 million in the second quarter of 2020 compared to RMB 183.5 million, which included the accretion on redeemable non-controlling interests, accretion, and re-designation effect of the convertible redeemable preferred shares in the same period of 2019. Basic and diluted net loss per share were both RMB 0.078 in the second quarter of 2020 compared to RMB 0.641 in the same period of 2019. As of June 30, 2020, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB 197.9 million compared to RMB 264.2 million as of December 31, 2019. To be mindful of the time of our earnings call, for the first statement of 2020 financial results, I encourage listeners to refer to our earnings press release for further detail. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

The first question comes from Kenneth Fong with Credit Suisse.

Thank you, management, for addressing my question. I'm interested in the overall advertising demand. Could you share which verticals performed particularly well and which ones were weaker in the second quarter? Additionally, what is our outlook for overall demand in the third quarter and the second half of the year? Thank you.

Thank you so much, Kenneth. I think in the second quarter, due to COVID-19, our advertising revenue decreased actually year over year by 49%, while the number of advertising clients increased during the quarter. By leveraging our brand and service strength, we consistently promoted our services, especially among TMT companies. And anyway, from the containment of the pandemic further in China and the subsequent gradual recovery of the economy in the first half of the year, the number of TMT companies purchasing our advertising services increased by 13.7% year-over-year. Especially those companies experienced booming demand during the lockdown period, such as online business, education, entertainment, etc. On the other hand, we observed that, in general, TMT companies have been cutting their budgets. However, we had more collaboration with the top TMT players. Then let's look at the demand recovery for the relatively traditional industry corporate clients. The demand recovery tends to be slower due to the ongoing global threat of the pandemic. These factors generally postponed collaboration with these clients. But for the local companies in traditional industries, we actively extended our collaboration with companies that suffered less from the pandemic, while deepening our partnership with retention clients. Looking forward, amid the pandemic, we witnessed remarkable resilience for the TMT new economy companies, such as the industry sectors we mentioned before. Meanwhile, the traditional companies that suffered more from the pandemic are actually seeking transformation through innovation. So, for us, we have been actively collaborating with companies that experience booming demand during the pandemic to monetize their growing demand for marketing and promotion. We also serve more government clients, as we discussed earlier. We expect demand from these two types of clients will continue after the pandemic is contained. Furthermore, with the gradual recovery of the economy and various favorable policy support, we expect recovered demand from clients in the automotive and financial industries as well as offline consumption sectors to gradually come back. However, it appears that the global overall pandemic situation is still evolving. Demand for multinational corporate clients has not been restored yet. But we have gradually restarted discussions on collaborations with these kinds of clients. So, that's our outlook for the third quarter and the second half of 2020. Thank you.

And the next question comes from Vincent Yu with Needham & Company.

I have two questions. One is about the live streaming initiative. Can we share any updates regarding the live streaming initiative that 36Kr rolled out? The second question is about gross margin. How should we think about the gross margin for the remaining balance of the year?

Let's pause here for a moment so I can provide a translation for the first question regarding our live streaming programs and updates. In the second quarter, we made strides in these new content formats. We further invested in developing our own self-operated short video and live streaming platform. Simultaneously, we're upgrading our official accounts on leading third-party platforms. In July, our self-operated platforms hosted a total of 236 live stream programs, including virtual summits, roadshows, and knowledge-sharing panels, averaging 12 programs each weekday. Total viewership in July increased from June. The average daily time spent per user engaging with our live streaming and short-form video content performed well, particularly given the serious nature of our commercial content. Additionally, we are pursuing strategic partnerships with major TMT companies to enhance our content influence online and seize opportunities for substantial user growth. As for our gross profit margin, our disciplined cost control has led to improvements in the gross profit margin of our advertising, enterprise value-added services, and subscription services this quarter. With the pandemic gradually coming under control in China and containment measures easing, we are hopeful for continued gross profit margin improvement in the second half of 2020. However, given the still-fluid global pandemic situation, we are carefully monitoring developments and adjusting our business strategies accordingly.

And the next question comes from an unidentified participant with CICC.

Thank you, management, for addressing my inquiries. I have two questions. First, with the control of the COVID-19 pandemic, how has the recovery of enterprise customers in various structures and industries progressed in the second quarter? Second, in light of potential structural changes in customers resulting from the pandemic, what is your strategy for the company's future development? Thank you.

Okay, I'll just do the translation for the first part. Regarding our enterprise value-added services, the number of our enterprise VAS clients from traditional industries increased year-over-year in this quarter due to the impact of COVID-19 and evolving demand. We focused on expanding our client base in the consumer industry to enhance their exposure. Although the number of our enterprise value-added services clients from the TMT sector decreased year-over-year, the corresponding average customer price increased, demonstrating the attractiveness of our services to top enterprises. Besides clients from the online entertainment sector, who benefited from pandemic containment measures, we also recognize a growing demand for our enterprise services from clients in mobile device industries. Additionally, our enterprise value-added services are gaining traction among local governments. The increasing demand reflects our brand influence as we expand our service offerings geographically and shows the initial positive results of our swift and active adjustments in our operations. During this challenging time caused by the pandemic, we provided integrated online and offline comprehensive solutions tailored to the needs of these government clients. We anticipate continued demand from government clients after the pandemic is contained. With the gradual recovery of the overall economy under favorable policies, we also expect demand to resume from automotive and real estate clients for our integrated online and offline solutions. As we discussed in our last earnings conference call, we believe COVID-19 will have a short-term impact on our advertising business while causing a structural influence on enterprise value-added services. We have shared our projections regarding client demand recovery for the second half of 2020 in response to Kenneth's question. Looking ahead to the second half of this year, we will continue to leverage our service strength and resources to further expand our services to clients across a wider range of industries. On the other hand, we will solidify our data and technology capabilities for our enterprise services.

And the next question comes from Brian Lee with AMTD.

We understand that your business is closely tied to the primary market, and the US Senate has recently passed the Holding Foreign Companies Accountable Act. What will be the impact on the primary market in China, and what implications does this have for the company's business? Thank you.

This macro-level environment is something we want to discuss. Although this act has a global impact, the primary markets in the Chinese economy remain very active and healthy, which is advantageous for our business and various streams. As newcomers to China's economy and a serving platform, we closely monitor developments about this bill. After the Senate passed this act in May, we promptly organized a live stream on our platform, featuring experts from a prominent US legal firm to provide background and analysis of the bill's potential effects. Despite this legislation, we observed that many Chinese companies successfully went public in the US market in June. We will continue to monitor the situation and maintain a positive outlook.

And the next question comes from Jay Dong with TH Capital.

Thank you for taking my question. I have two inquiries. The first one is about the first topic. The second is about how we can continue to produce more high-quality content in the future. Thank you.

As everyone knows, we started our business by providing content, which we consider the foundation of all our business streams. We have continued to improve our content capabilities and solidify our leading role as a content provider. The increasing share of user-generated content in recent years reflects a portion of our content development. With the growing popularity of short-form video and live streaming among our audience, we have focused on capturing more opportunities in these emerging media formats since 2020. We not only launched our own short video and live streaming programs but also actively manage our official accounts with high-quality content on other popular third-party platforms. We will persist in this approach. This illustrates our commitment and ongoing efforts in content creation. Thank you, Jay.

And as there are no further questions now, I'd like to return the call to the company for any closing comments.

Thank you so much, everyone. Earlier today, we released our earnings on our IR website, so feel free to contact us via our IR website, or you can also contact our investor relations firm. Thank you so much for your time today. Have a good night. Bye.

This concludes this conference call. You may disconnect your lines at this time. Thank you.