36Kr Holdings Inc. Q4 FY2020 Earnings Call

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

Thank you very much. Hello, everyone, and welcome to 36Kr Holdings' fourth quarter and the fiscal year 2020 earnings conference call. The company's financial and operational results were released 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.

Thank you. And hello, everyone. Thank you for joining us today. Before we begin, I would like to extend my sincere gratitude to all of our stakeholders for your continued support over the past year. 2020 was an extremely unusual year for the whole world and also for our business. As with many companies, we encountered varying degrees of challenges and macroeconomic uncertainties stemming from the widespread impact of the COVID-19 pandemic. Thanks to the proactive responses from our supporters and other exceptional employees and their timely adaptation to changing market dynamics, we believe we have weathered the storm having seamlessly overcome these short-term obstacles. Our fundamentals are evolving to be stronger, and we’re entering 2021 from a position of strength as we return to more normal business activities. First of all, we’re proud to have concluded 2020 with strong traffic momentum in the fourth quarter across our core platforms and the major third-party platforms, thanks to consistent delivery of high-quality content and diverse distribution channels. Our total average monthly page views reached a new record high of 630.2 million for the full-year 2020, increasing 48.1% from the prior year and 11.3% sequentially. This stellar performance marks our 11th consecutive quarter of PV growth and further validates that our ever-growing and engaging PGC and UGC content are resonating well with our expanding audience.

Thank you, Yolanda. Hello, everyone. As Feng indicated, the lingering impact from the COVID-19 pandemic expanded into our fourth quarter performance. However, revenue from our online advertising services and subscription services delivered sequential growth, which we see as a good sign of a gradual demand recovery. Given the challenging environments and the lessons we learned, we have seen activity in business operations in order to achieve long-lasting efficiency. Notably, our gross margin increased by 400 basis points to 42% in the fourth quarter of 2020 from the third quarter. We also realized positive operating cash flow for the third consecutive quarter, exemplifying the resilience and agility of our business model. Additionally, we continue to see quarter-over-quarter improvements in our accounts receivable after we made our prepayment policy adjustments and tightened requirements for the selected quality clients as we enhance our core trends in industry-leading content production capabilities and broadened monetization channels. Basically, we are well-positioned to serve new economy participants and grow alongside them. Now, I will go through more detail on our fourth quarter of 2020 financial results. Our total revenue was RMB 121 million in the fourth quarter of 2020 compared to RMB 323 million in the same period of 2019. Online advertising services revenue decreased by 54% to RMB 69 million in the fourth quarter of 2020 from RMB 150 million in the same period of 2019. The decrease was mainly caused by the declining demand from certain advertisers and the expansion of stricter credit policy for customer selection. Enterprise value-added services revenue was RMB 41 million in the fourth quarter of 2020, compared to RMB 154 million in the same period in 2019. The decrease was mainly caused by the reduction in revenue from integrated marketing services as the company decreased investments in certain business areas. Subscription services revenue was RMB 11 million in the fourth quarter of 2020, compared to RMB 18 million in the same period of 2019. The decrease was mainly caused by the decline in revenue from individual subscriptions as some of the offline training courses were canceled due to the negative impact of COVID-19. Cost of revenues was RMB 71 million in the fourth quarter of 2020 compared to RMB 166 million in the same period of 2019. The decrease was primarily caused by the decline in revenue. Gross profit was RMB 51 million in the fourth quarter of 2020, compared to RMB 156 million in the same period of 2019. Operating expenses were RMB 127 million in the fourth quarter of 2020 compared to RMB 107 million in the same period of last year. The increase was mainly due to the increase in G&A expenses in the fourth quarter of 2020. Sales and marketing expenses were RMB 35 million in the fourth quarter of 2020 compared to RMB 15 million in the same period of 2019. The increase was mainly caused by an increase in payroll-related expenses and the share-based compensation expenses. G&A expenses were RMB 82 million in the fourth quarter of 2020 compared to RMB 47 million in the same period of 2019. The increase was mainly due to an increase in the allowance for doubtful accounts, partially offset by the decrease in share-based compensation expenses. R&D expenses decreased by 12% to RMB 9 million in the fourth quarter of 2020 compared to RMB 10 million in the same period of 2019, with the decrease mainly due to reduced share-based compensation expenses. Share-based compensation expenses recognized in cost of revenue, sales, marketing, R&D expenses, and general admin expenses totaled RMB 9 million in the fourth quarter of 2020 compared to RMB 36 million in the same period of 2019. Other expenses amounted to RMB 10 million in the fourth quarter of 2020, which includes a loss of RMB 15 million from equity method investments and an income of RMB 5 million from government grants, compared to other income of RMB 2 million in the same period of 2019. Income tax expenses were RMB 4 million in the fourth quarter of 2020, compared to RMB 20 million in the same period of 2019. The increase was mainly due to the increase in the allowance for deferred tax assets. Net loss was RMB 19 million in the fourth quarter of 2020, compared to an income of RMB 32 million in the same period of 2019. Non-GAAP adjusted net loss was RMB 81 million in the fourth quarter of 2020 compared to an income of RMB 68 million in the same period of 2019. Net loss attributable to 36Kr Holdings Inc. ordinary shareholders was RMB 91 million in the fourth quarter of 2020 compared to an income of RMB 99 million in the same period of 2019, which includes operational returnable non-controlling interest, accretion, and redefinition effects of convertible redeemable preferred shares. Basic and diluted net loss per share was RMB 0.09 in the fourth quarter of 2020 compared to a basic and diluted net loss per share of RMB 0.1 and RMB 0.03 in the same period of 2019. As of December 31, 2020, the company had cash and cash equivalents, restricted cash, and short-term investments of RMB 209 million compared to RMB 264 million at the same time last year. To be mindful of the length of our earnings call, for the fiscal year of 2020 financial results, I will encourage listeners to refer to our earnings press release for further details. This concludes all of our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

Thank you. Our first question comes from the line of Credit Suisse. Your line is open. Please go ahead.

Good evening management. Thanks for taking my question. I just have a quick one. I wanted to ask about ad demand by vertical. How did it trend in the fourth quarter? Thank you.

Thank you for your question. Directly on the customer demand side, our multinational customers have been affected the most, leading to delayed budgets for advertising. However, since Q3, the advertising mix from some customers began to recover, particularly in the automotive sector. At the same time, quite a few Chinese consumer brands, which we actively reached out to in the second half of 2020, are showing their growing demand for our platform. Another characteristic of our new economy customers is that they have shown resilience during and after COVID-19, as their own businesses continue to grow. This contributed to increases in the number of customers and average customer price this year, especially among the large corporations and super unicorns. To share some insights on industry distribution, the top five in 2020 were consumer entertainment, enterprise services, 3C, and e-commerce. Additionally, we also saw strong demand growth for our advertising services in the AI and online education industries. So to sum up, we achieved nearly 36% sequential growth from the previous quarter. If we refer back to last quarter, we saw a sequential growth that had already achieved 63% in Q2, demonstrating a consecutive recovery in our advertisement segment. Thank you.

Thank you. Our next question is from the line of Vincent Yu of Needham & Company. Your line is open. Please go ahead.

Thank you management for taking the question. The first question is about the 2021 outlook. Can management share some insights on the fiscal year 2021 outlook and where do we see the most potential in terms of revenue growth and where are we investing the most? The second question is can management share some insights on the shift in revenue mix in the first quarter, which was quite drastic. What drove this shift, and is this going to be the new normal going forward? Thank you.

Thank you so much, Vincent, for your questions. I believe these two questions are well-linked. Regarding our outlook for this year, I think for us and for most companies in China and globally, 2020 was a very challenging year. From the macroeconomic perspective, the evolving market dynamics made us think about our business from a longer-term perspective. In the short term, we proactively made multiple adjustments in our operations. In the short and medium term, we may remain focused on our video-oriented strategy, addressing broader markets for both private and public sectors. We expect a decrease in our enterprise value-added services this year; however, we believe it's extremely important for our longer-term development. For our advertising sector, we anticipate continued recovery this year, similar to our performance in Q3 and Q4. As the offline activity restrictions are fully lifted, I believe our offline businesses will also continue to restore and strengthen. On the investment side, we will keep investing in our technology and data capabilities to support the evolution of our enterprise value-added services and subscription products, as well as innovate new products. To sum up, we foresee that our main driver will still be enterprise value-added services. As for the second question, the structural change you noted in our fourth quarter revenue mix is mainly due to the pandemic's impact on offline activities and the prudent adjustments we made. In the previous year, enterprise value-added services contributed around 50% of total revenue, while advertising accounted for 44.7%. These structural changes, driven by the pandemic, primarily affected our enterprise value-added services, leading to a decrease in revenue for those services in Q4. However, this adjustment has also resulted in higher gross profit margins and continued improvement in our operating cash flow. Thank you for your two questions.

Thank you.

Thank you. Our next question is from the line of CICC. Your line is open. Please go ahead.

I will translate for myself. In 2020, the pandemic did have an impact on offline activities. What was the progress of offline Enterprise Services recovery, and what is the outlook for 2021? Thank you.

Thank you for your question. As we mentioned earlier, since late August 2020, we started hosting offline events in Shanghai as domestic restrictions were lifted. These events were highly praised. Again, in early December in Beijing, we successfully hosted our featured WISE 2020 Conference, which received high praise from the industry and participants alike. We extended the agenda and guest invitations for WISE, which contributed to achieving a record high in both online and offline engagements. Although we extended the scale of our conference, we still retained the ability to hold these offline events effectively. Following the popularity of the WISE Conference, we hosted another offline event in Shanghai focused on culture and connecting emerging Chinese consumer brands with potential consumers. Looking forward to this year, provided there are no new outbreaks, we believe there will be strong recovery. Our WISE series will expand across a wider range of industries and regions, including the upcoming GPLP Conference and the WISE Featured Industry Summit to be held in Shenzhen soon, alongside launching more 2C IP initiatives in Shanghai, Beijing, and other cities this year. To summarize, we’re enhancing our capability to serve reference in New Economy participants better with more offline initiatives. Thank you, Josh, for your question.

Thank you. Due to time constraints, that concludes today's question-and-answer session. Now I'd like to turn the call back over to the company's closing remarks.

Sorry for the time limitation. That’s it for us today. Thank you once again for joining us. If you have further questions, please feel free to contact us at 36Kr Investor Relations through the contact information provided on our website. Thank you all.

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