36Kr Holdings Inc. Q3 FY2022 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for 36Kr Holdings Inc.'s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a 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 call over to your host, Yang Li, IR Manager of the company. Please go ahead.

Thank you very much. Hello, everyone. And welcome to 36Kr Holdings third quarter 2022 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. Participants on today's call will include our Co-Chairman and CEO, Mr. Dagang Feng, and our Chief Financial Officer, Ms. Lin Wei. Mr. Feng will start the call by providing an overview of company performance highlights of the quarter in Chinese, followed by an English interpretation. Ms. Wei 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 U.S. 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 this and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please note that 36Kr earnings press release and this conference call include a discussion of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. 36Kr's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. And please note that all numbers are in RMB. I will now turn the call over to our Co-Chairman and CEO, Mr. Dagang Feng. Feng, please go ahead.

Thank you. Hello, everyone. Thank you for joining our third quarter 2022 earnings conference call. In the third quarter of 2022, we maintained steady growth across our business highlighted by our fourth consecutive quarter of profitability. This strong performance amidst COVID-19 resurgences and macroeconomic headwinds was largely thanks to our focus on boosting our influence and advancing commercialization. As new jobs empower the new economy sector throughout the third quarter, we continue to optimize our resources and build barriers to competition with our content ecosystem, setting the stage for our ongoing excellent performance. To start, I would like to share with you some of this quarter's innovations in brand influence and commercialization. First, let's look at content; we are committed to creating value with our high-quality content. It is the cornerstone of our development and a powerhouse that propels continuous expansion of our brand influence, bolstered by our content platform strategy focused on PGC and UGC. We have enriched our content offerings and created a multi-dimensional content ecosystem encompassing pan-commerce and pan-life content. In this quarter, we continued to produce engaging professionally-created content, with the number of our articles with over 100,000 page views climbing to over 155,000. Among them, several articles on pan-business and pan-life topics triggered heated discussion, driving views up to 300,000 and even beyond 800,000 in some cases. In addition, several of our original articles were recommended by significant outlets in the third quarter, leading to daily pageviews of over 1 million for several consecutive days. I'd also like to highlight an insightful article written by our secondary market analysts in the third quarter, which generated huge buzz and over 800,000 views. Furthermore, our brand-new media outlet 36 Carbon, launched only six months ago, achieved nearly 200,000 views with in-depth coverage, getting the outlet off to a flying start, which significantly boosted our visibility in the low-carbon sector. As for our UGC model, we implemented a breakthrough innovation in the third quarter by optimizing operations for the 36Kr app's latest post feature, establishing a discussion forum for our shared content, creating space for penetrating the content creation circle. This specific core user retention while also drawing attention and responses to our content substantially reinforced users’ engagement. In addition to our engaging text and graphic content, video content proved to be one of our most effective tools for increasing user diversity. We unleashed vibrant activity in our short video and live streaming content during the third quarter, with several of our short videos achieving over 1 million streams. Among them, our regional content on the topic of the truth about how hospitals make money gained more than 4 million views on Bilibili. Additionally, 36Kr received two gold medals and one copper medal at the China content marketing award for its excellence in content production and dissemination, highlighting the industry's recognition of 36Kr's original content generation and commercialization capabilities, as well as our brand influence. As of the third quarter of this year, our short video followers exceeded 7.4 million, while our followers on Bilibili surpassed 1.5 million at the end of October, making us a leader among institutional accounts on Bilibili. Regarding live streaming, our Youth Watch and CEO Tips programs continue to pump out fresh content, with coverage of new topics. Together, they completed 25 live streaming sessions in the third quarter. Notably, Youth Watch established cooperation with retail video accounts to launch a specialized column, setting a new record in the number of streams generated. Beyond our UGC and PGC content, we also explored data accumulation and community operations during the quarter, leveraging our experience in primary and secondary markets to launch the 36Kr Venture Capital platform. This platform capitalizes on our data mining resources to continuously empower early-stage projects to secure financing. As of now, the platform has attracted over 10,000 startup companies and over 1,500 institutional investors, including big names such as Matrix Partners and Plum Ventures, with 1,000 weekly connections facilitated on average. As the saying goes, fortune favors the brave; the 36Kr Venture Capital platform marks a pivotal point for us as we expand beyond media services to data tools and funding facilitation services, enhancing visibility and exposure for high-quality startup companies and connecting them with investors. Powered by these efforts and achievements, as of the end of this quarter, the number of our followers grew by 18.6% year-over-year to 26.7 million. We have also noted consistent improvements in our brand influence and user engagement, which have laid a solid foundation for our commercialization initiatives. With that, let's now turn to the commercialization progress of our main businesses. First, our advertising revenue increased by 20% year-over-year, evidence of brands appreciating our effective brand marketing. Thanks to our continuous service innovations coupled with our CSR program, the number of our customers rose by 20% year-over-year, while ARPU held steady at last year's level in the third quarter. We continue to create new advertising content and formats for brands targeting fee and consumers. For example, we made a commercial video for a hybrid electric vehicle entitled the truth about oil resource depletion featuring our fresh perspective, winning rave reviews from customers. Our vertical sub-media outlets, particularly for youth, also continue to gain brand influence, boosting this commercialization potential by connecting content formats from various channels including text graphics and consumer feedback to meet the varied needs of our diverse customer base. Regarding commercialization, multiple well-known companies including iQiyi, Huawei, Jingdong, and Zhihu became repeat customers in the third quarter, and we established new partnerships with Bon Way, STEPVR, and other New Economy brands. While serving the New Economy sector is a key differentiator and advantage for 36Kr, we have also continued to innovate and offer our services to more traditional industry customers. For instance, we established in-depth cooperation with a sports brand to operate their brand strategy in preparation for their new product launch, skillfully integrating product testing of similar products with our detailed, informative industry-specific content, helping XTEP cement their strategy for becoming a world-class Chinese running shoe brand. This collaboration, which included industry content, product videos and product launches, was a force for 36Kr and represents a potential new tool in our arsenal for empowering traditional consumer brands. We are confident that as we continue to refine and enhance our services, we will attract more traditional brands seeking influential and creative partners in their marketing strategy. In addition, we recently entered into a strategic cooperation with FutureCar, a leading North American media platform focusing on the automotive industry. Through authorized content sharing and mutual commercialization support, the two parties will jointly tap into opportunities in the global new energy vehicle sector. This marks an important expansion of 36Kr's global business footprint and commercialization prospects in the North American market. Regarding our secondary market products, we teamed up with Guotai Junan Securities during the quarter to share our insights into the real asset industry's current situation and future investment trends through the 36Kr Capital program. Meanwhile, we established partnerships with renowned companies such as New Hope Group, ClouDr, Linmon Media, and Jenscare to provide empowerment services in market value management and brand management. Also within 36Kr's cell phone sector and market business, we set up a joint venture in the third quarter with a well-known U.S. financial media company. Going forward, the JV will focus on offering marquee value management services for Hong Kong-listed companies. Turning to our value-added enterprise services, we continued to provide high-quality services for clients in this quarter by integrating online and offline formats to mitigate the impact of COVID-19 on their business. As a result, we've established cooperation with more enterprise and government clients, increasing our number of customers by 26%. The revenue from this segment also increased by 4.7% year-over-year. One notable success was the heavyweight IT Forum we've hosted at the China Fund Partners Summit. Through our communications with a substantial number of startups and investing institutions, we have developed a deep understanding of both the current situation and future outlook across broad-based industries. We capitalized on these advantages to analyze the key structures impacting the development of R&D plans from industry, policy, and market perspectives, helping local firms gain deeper insights, adapt to changes, and capture opportunities in the new investment era. In addition, we concluded our WISE New Economy Kings conference last week with Long China innovation as this year’s theme. We invited New Economy professionals, including entrepreneur Wang Shi, economist Guan Qingyou, and Charles Li Xiaojia, entrepreneur and former Chief Executive of the Hong Kong Stock Exchange, to conduct in-depth discussions on trending industries, attracting total exposure exceeding 4.5 billion across all audiences. Through our offline activities, we continue to extend our consulting services and value-added enterprise services in the third quarter. For our consulting services, our 36Kr research institutes continued to deepen industry insights and publish compelling industry research reports, enhancing their brand influence. During the quarter, we expanded our customer base with additional government agency clients in Beijing, Chengdu, Shenzhen, Hangzhou, and Chongqing, as well as renowned enterprises, including Lenovo, Baidu, ByteDance, and P&G, elevating the commercialization of this business. Our content operations agency services continue to explore content services, mobilizing standardization of our app to enhance service efficiency and quality. At Huawei developer conference 2022, 36Kr was granted the excellent technology content partner award for providing agency operations services for Warner Brothers. In addition, we have attracted new partners and established collaborations with various eminent financial institutions and enterprises, including Shanghai Pudong Development Bank and Huatai Securities, thanks to our high popularity and word-of-mouth effect. At the same time, we continue to make progress in our regional business expansion. With our two headquarters in Beijing and Shenzhen, we focus on expanding our presence through our 12 core regional offices in Guangzhou, Sichuan, Chongqing, Jiangsu, Zhejiang, Hubei, and Shaanxi. Alongside growing regional customer diversity, revenues from enterprise clients are also increasing rapidly, operating by more than 50% and contract sets by over 60% year-over-year. Adding local enterprises to our client roster has improved the balance of our government and enterprise clients, clearly reflecting the effectiveness of our lower-tier market expansion strategy. Notably, our regional office in Jiangsu organized its first WISE event during the quarter, establishing a benchmark as we build regional influence of our vertical segments and explore regional commercialization opportunities. Regarding our subscription services, on top of our existing traditional process, we upgraded our curriculum during the third quarter and enhanced our customer base. We partnered with well-known companies, including Microsoft China and Mengniu, to provide internal training as we build out a complete curriculum subscription service that will bring us more commercialization opportunities going forward. Next, I'd like to share our latest accomplishments regarding our enterprise service review platform. According to recent data, the digital economy has become a key driver of China's economic development, accounting for 40% of China's GDP and rising, representing our second growth engine and commercialization breakthrough. The enterprise service review platform is dedicated to empowering the thriving sub-industry. In the third quarter, our enterprise service review platform reported exceptional performance across multiple operating metrics, as well as making great progress in functionality improvements, user acquisition, innovation, and commercialization. First, the enterprise service review platform is meeting rapid growth in operational data, with monthly active users rising more than 12-fold year-over-year to exceed 1 million. The number of authentic user reviews also surged, growing by almost 10-fold year-over-year and 54% quarter-over-quarter to exceed 50,000. We showcased 7,300 pieces of mainstream software on the platform this quarter, up 59% year-over-year, and the number of software displayed on our platform is now approaching 1,000, up 328% year-over-year. The product's functionality improvements are based on the underlying data of software products. We've implemented a labeling system for software evaluation, allowing users to write reviews by choosing appropriate labels, which improve review efficiency and effectiveness. In the meantime, we upgraded the rate control system for review verification to increase review authenticity and reliability. We also elevated buyer experience by enabling profile viewing on the page of our app. Finally, we revamped our business portal in the Baidu mini program, leading to peak daily unique visitors of over 5,000, just two months after its launch. As for our innovations in customer acquisition, in addition to continuously optimizing our consumer profile system and granting promotions in various regions, we launched an exclusive enterprise service team event on the enterprise service review platform. We invited experts from leading enterprises in popular industries with an interest in digitalization, such as catering and new consumption, to explore industry solutions in real industry scenarios. This event deepened participants' understanding of digital transformation from a practical point of view. Additionally, we've strengthened the content capabilities on our enterprise service review platform in the third quarter by combining professionally generated content and enterprise service review products with the user-centric approach. We leveraged the unique value of IP content in guiding industry trends and forging professional connections. Not only through our deal growth dialogue program and digital growth program, we focus on real business cases and user reviews to elevate user experience and commercial value of enterprise products from a user perspective. Lastly, we have also made significant strides in the commercialization of our enterprise service review platform. To date, our enterprise service review platform has received orders with a combined value of over RMB 10 million. It has also established strategic cooperation with Lenovo, a Fortune Global 500 company, to provide in-depth marketing services to Lenovo's SMB unit. Specifically, leveraging the data we have accumulated via the enterprise service review platform, we deliver valid marketing and qualified leads, assisting Lenovo’s SMB units in processing customer acquisition. Meanwhile, by jointly developing a program for specialized, sophisticated, differentiated, and innovative companies to acquire massive traffic from small and medium-sized enterprises, we have amplified Lenovo's efforts with a powerful new tool to enhance their brand influence. This collaboration marks an important milestone in the commercialization path of our enterprise service review platform and sets a benchmark for future cooperation with more recognized companies. We have established other benchmark cases through brand promotion of well-known SaaS vendors, building a flywheel for the enterprise service review platform through IP growth. Looking back at the third quarter, despite the COVID-19 resurgences and macroeconomic challenges that weighed on everything in the industry, we remained focused on optimizing our content ecosystem, service system, and operations while also driving our commercialization. These efforts contributed to our encouraging financial performance in the third quarter highlighted by our double-digit revenue growth year-over-year and profit for the fourth consecutive quarter. Moreover, we continue to break new grounds with our second growth engine, the enterprise service review platform, leveraging rapidly improving operating metrics and daily commercialization results. Looking ahead, we will continue to hone our unique competitive advantage to maintain our business vitality and resilience. Riding the wave of industry upgrades and digital transformation, we will unlock greater commercialization potential for new growth avenues in the new economy sector to create more value for users, shareholders, and investors.

Thank you, Feng, and hello, everyone. Despite the lingering challenges in the external environment, we are very pleased to have extended our strong growth momentum into the third quarter with another quarter of double-digit top-line growth alongside an 11.5% year-over-year increase in total revenues. Notably, our advertising businesses continue to grow, increasing by 20% year-over-year, while our enterprise value-added services also recorded solid growth of 5% year-over-year. In addition, thanks to our consistent and effective efforts to optimize our cost structure and operating efficiency, our gross profit margin and operating margin both improved year-over-year in the third quarter of 2022, and we delivered a fourth consecutive quarter of profitability. Our resilient diversified portfolio of products and businesses, bolstered by our content capabilities and multinational ecosystem, positions us to achieve sustainable growth and generate long-term shareholder value as we move forward. Now, I'd like to walk you through more details of our third quarter 2022 financial results. Total revenues were RMB 94.6 million in the third quarter of 2022, an increase of 11.5% compared to RMB 84.9 million in the same period last year. Online advertising services revenues increased by 20% year-over-year to RMB 63.9 million in the third quarter of 2022, primarily attributable to more innovative marketing solutions we provided to our customers, as well as proactive sales strategies we adopted to navigate the challenging environment during the quarter. Enterprise value-added services revenues increased by 5% year-over-year to RMB 23.6 million in the third quarter of 2022 as we continuously and proactively developed various new enterprise-level services for our customers. Subscription services revenues were RMB 7.1 million in the third quarter of 2022 compared to RMB 9 million in the same period of last year, due primarily to some of our offline training programs being canceled or delayed due to the resurgence of COVID-19. Our cost of revenue was RMB 35.5 million in the third quarter of 2022 compared to RMB 37.3 million in the same period of the previous year. Gross profits increased by 24% year-over-year to RMB 59.1 million in the third quarter of 2022, compared to RMB 47.6 million in the same period of last year. Our gross profit margin was 62% in the third quarter of 2022 compared to 56% in the same period last year. Operating expenses were RMB 62.1 million in the third quarter of 2022, a decrease of 23% compared to RMB 80.3 million in the same period of last year. Sales and marketing expenses were RMB 32.2 million in the third quarter of 2022, a decrease of 9% from RMB 35.5 million in the same period of last year. This decrease was primarily attributable to the decrease in share-based compensation expenses and marketing expenses. General and administrative expenses were RMB 16.6 million in the third quarter of 2022 compared to RMB 3.9 million in the same period last year. The decrease was primarily attributable to the reduction in allowance for credit losses. Research and development expenses were RMB 13.4 million in the third quarter of 2022, compared to RMB 13.9 million in the same period last year. Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, as well as G&A expenses totaled RMB 2.6 million in the third quarter of 2022, compared to RMB 4.9 million in the same period last year. Other income was RMB 5.7 million in the third quarter compared to RMB 1.5 million in the same period of last year. This fluctuation was primarily attributable to income generated from write-offs of accounts payable in the third quarter of 2022 after the company fulfilled all applicable notifications and other risk barriers were eliminated. Net income was RMB 2.5 million in the third quarter of 2022 compared to a net loss of RMB 31.3 million in the same period of the previous year. Non-GAAP adjusted net income was RMB 5.1 million in the third quarter of 2022 compared to a non-GAAP adjusted net loss of RMB 26.4 million in the same period last year. Non-GAAP net income attributable to 36Kr's ordinary shareholders was RMB 1.7 million in the third quarter of 2022 compared to a net loss of RMB 30.5 million in the same period last year. Basic and diluted net income per share and per ADS were RMB 4.2 cents in the third quarter of 2022 compared to a basic and diluted net loss per ADS of RMB 74.4 cents in the same period last year. As of September 30, 2022, the company had cash, cash equivalents, and short-term investments of RMB 164 million, compared to RMB 194.3 million as of June 30, 2022. The decrease was mainly attributable to net cash outflow from operating activities, as well as certain long-term investments in several new economy startup companies made in the third quarter of 2022. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

Thank you. And our first question will come from Peipei Qiu of Industrial Securities. Please go ahead.

And I will translate my question. So we've learned from your financial report that the enterprise review platform developed rapidly across multiple operation metrics. Could you share with us more about your monetization and timelines for this business in the coming years, more about the mid and long-term strategy?

Since the beginning of this year, we have been trying to optimize our enterprise service review platform's operations and explore commercialization opportunities based on our operational data. Our platforms' primary metrics have all improved rapidly year-over-year, including monthly active users. Daily active users, the number of real reviews, and the number of pieces of showcased software. Our year-over-year basis of enterprise service review platform grew by over software to exceed 1 million. The number of real reviews increased by almost 10-fold year-over-year and 54%, quarter-over-quarter to over 50,000. We also showcased 7,300 pieces of mainstream software, up 59% year-over-year. Additionally, our enterprise service review platform approached 1,000 year-over-year with an increase of 328%. In terms of commercialization, we established cooperation with Lenovo in the third quarter to empower customer acquisition and brand management, marking an important milestone in our enterprise service review platform's commercialization model. Regarding future plans, we will leverage the existing data on our enterprise service review platform to convert more leads for delivery. For the next quarter, we will initiate a new product functionality. We will continue to collect users’ real reviews and combine basic product data and expert opinions to issue personalized industry selection reports and product evaluation reports to help users make informed product selection decisions. We think this will significantly enhance our services and the value of commercialization. At the same time, from the perspective of SaaS providers, we will continue to enrich our industry solutions and industry case base, develop case-based products, and reach out to decision-makers by various means such as product functions, articles, and live broadcasts, thereby forming industry consensus and helping improve the efficiency of product selection. Regarding commercialization, we'll continue to build benchmark cases and extend our collaboration models with leading well-known enterprises, ultimately maximizing our commercialization scale and operational efficiency. Despite popular perceptions, COVID-19 flare-ups have actually facilitated the development of comprehensive digital transformation. Therefore, we expect that if we maintain focus on the functionalities of enterprise review platforms in 2022, we will see considerable growth in commercialization for 2023.

The next question comes from Lingyi Zhao of SWS Research. Please go ahead.

Congrats on the great results. And thank you for taking my questions. I’m Lingyi Zhao from SWS Research. My first question is, how do we expect the growth potential after the relaxation of control measures? And how about expected goals? And my second question is, could you please comment on outcomes from the recent WISE conference and what adjustments have been made for offline activities for December and next year? Thank you.

Hi, Lingyi. Thank you for your question. This is Lin. I guess I will address your first question since it pertains to financial guidance for next year. As for the lifting of pandemic control measures, that's an excellent signal of our success. All of our businesses will benefit across the board, but in terms of timing, some businesses will benefit earlier than others. Specifically, advertising will be the number one business factor to benefit from this since in the business world, expectations or confidence matter most. The lifting of control measures will give businesses a very good expectation or confidence boost to begin marketing again and customer acquisition, thereby accelerating their growth. I believe advertising will be directly tied to macroeconomic recovery. I expect our advertising business will be the first to benefit from this. Based on our performance in the first three quarters of 2022, advertising growth rates have been between 10% and 20%. Moving into next year, I anticipate it will outpace 2022’s performance, potentially reaching 15% to 25%, or even higher. For our enterprise value-added services, which mainly comprise offline events and certain consulting businesses as well as our subscription business, that will also benefit from macro conditions, but that will occur a bit later than the advertising sector. Overall, I expect all three major businesses will benefit in the long run.

After overcoming numerous challenges, we successfully hosted this year's WISE conference. We prepared various contingency plans for this conference. We adopted a hybrid model with both online and offline components in Beijing and Hangzhou, inviting up to 100 distinguished guests, including well-known entrepreneurs and investors as well as representatives from government agencies. Our conference attracted over 4.5 billion viewers across online and offline audiences and collaborated with over 50 mainstream media outlets. From a commercialization perspective, the main parts of the conference taking place in Beijing were combined with activities in Hangzhou, resulting in slight impacts on revenue from offline activities due to COVID-19. We are satisfied with the commercialization results as of this year, and anytime or web conferences remain our focus moving forward. We will also hold customized offline events focusing on local clients' needs, such as enterprises and commerce. As we enter next year, with COVID-19 restrictions being lifted, we plan to increase the frequency of major industry events and tailored events and will also produce more proprietary events, resulting in increased offline revenue compared to 2022.

The next question comes from Jing Chen of CICC. Please go ahead.

I will translate myself. My question is about the short video business. Can you provide more details on the future plans for its development and commercialization?

Our short video business is a significant strategy for us. We used to focus more on customer services and now the short video will serve more end-customers, which will help us acquire more collaborations from end brands while also gaining more attention from users. From the perspective of end users, the short video business has received frequent recognition from the industry in the past year. For example, 36Kr recently won two gold medals and one copper medal at the China Content Marketing Award, one of the most prestigious awards in the industry, recognizing our excellence in original content production and content marketing capabilities. Additionally, our followers on Bilibili surpassed 1.5 million by the end of October. Many of our original videos have garnered a high number of views, such as our original content on the topic released at the end of November, racking up over 4 million views on Bilibili. It's also crucial to note that in the institutional media sector, we rank very highly, particularly in Bilibili. As for commercialization, short video revenue now accounts for about 15% of our total advertising revenue, an increase compared to the same period last year. Short video formats effectively enhance our average revenue from advertising customers and widen the range of advertisers we can serve.

There are no further questions. I would like now to turn the conference back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact 36Kr's investor relations with the contact information provided on our website.

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