36Kr Holdings Inc. Q1 FY2023 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for 36Kr Holdings Inc. First Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. I would now like to turn the conference over to your host, Jiaochen Yen, IR Manager of the Company.

Thank you very much. Hello, everyone, and welcome to 36Kr Holdings first quarter 2023 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 on 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. Lin Wei. Mr. Feng will start the call by providing an overview of the company and performance highlights of the quarter. 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 these 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's earnings press release and this conference call include discussions 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 amount numbers are in RMB. I will now turn the call over to our Co-Chairman and CEO, Mr. Dagang Feng.

Thank you. Hello, everyone. Thank you for joining our first quarter 2023 earnings conference call. As the pandemic's impact faded away, we are delighted to report stellar financial results, delivering double-digit revenue growth in the first quarter of 2023. Our total revenue reached RMB 55.5 million, up 12% year-over-year, with extensive growth across all three of our primary business segments. Our Advertising revenue reached RMB 41.9 million, up 11% year-over-year. Our Enterprise Value-Added Services delivered revenue of RMB 10.0 million, up 7% year-over-year. Revenue from our Subscription Services jumped 36% year-over-year. These achievements across the board are the direct result of our consistent efforts in forging ahead with content, product, and technologies, ushering in a new phase of high-quality business growth. Let me start with content. As we expanded our content coverage to new industries, we continued to focus on leading enterprises and major events while increasing our output of exclusive reports, offering users a holistic and insightful professional content experience. The number of our blockbusters is on the rise. In the first quarter, we had around 160 articles with page views exceeding 100,000, many of which covered heated topics and had more than 200,000 page views, including a story featuring Robin Li, founder of Baidu, an article on TikTok CEO Shou Zi Chew's face-off with the U.S. Congress, and a piece covering the 24 hours after Silicon Valley Bank collapsed, which hit over 200,000 page views. These thought-provoking articles showcased 36Kr's leading insights and industry influence. Our enhanced content influence also contributed to significant growth in our user base. As of the end of the first quarter, we had more than 29 million followers, up 22% year-over-year. Since the beginning of 2023, we have been closely following the latest developments in booming industries, including generative AI and large language models. In response to current trends, we launched a new WeChat account that merges intelligence to provide in-depth coverage on AI transformations across multiple industries. In the first quarter, we also rolled out PowerOn, a WeChat account focusing on the evolution of the auto industry. These two verticals have laid a solid foundation for us to advance our ongoing initiatives in AI and the EV sector, enhancing our growth potential. Additionally, many long-anticipated industry events are underway. 36Kr has covered the latest developments on-site through multiple channels, such as breaking news, photo galleries, and on-site video reports. Notable examples from the first quarter include CES, MWC, and AWE. Specifically, we leveraged our firsthand perspective of the Shanghai Auto Expo to deliver comprehensive in-depth reports on the exhibition, new car model comparisons, and various auto enterprises. We also utilized this opportunity to upgrade 36Kr's auto content metrics with our PowerOn WeChat account and other WeChat video accounts. These channels not only delivered rich insightful content to users but also allowed us to tap into the EV market's strong growth momentum and massive potential. I also want to highlight our short video business. In the first quarter of 2023, we continued our excellent content generation and production capabilities, driving a surge in user numbers. Our short video followers exceeded 8 million, a remarkable 42% year-over-year increase. 36Kr became the first-ever industry pioneer in using AI technologies to create an e-commerce store throughout the entire process. The AI Taobao store LumiWink is now operational, and the AI-designed products are popular. For instance, our original video showcased the opening of Taobao with AI robots, featuring key steps of 36Kr's experimental opening of our Taobao stores using AI technologies, including product design and copywriting. This original video was listed as hot and trendy by various platforms, attracting over 35 million clicks and more than 80,000 likes. The combination of know-how expertise and AI technologies diversified our revenue-generating channels, unlocking more value for our company. In addition, we made major strides in long video content production and recently launched our first talk show for 2023, conducting in-depth interviews with industry leaders, captivating audiences with fascinating insights into the future. Looking towards 2033, we are leveraging our content dissemination network with long video platforms and TV channels to enrich our content landscape, encouraging synergies among diverse formats, including long- and short-form videos as well as text, graphics, and audio mediums. In terms of products, we improved the 36Kr Venture Capital platform's ability to notify and approach end users, including entrepreneurs and investors, in the first quarter. Additionally, we upgraded a featured mini program by enhancing operations and recommendations for specialized enterprises and popular deals. The platform's key indicators all increased, including matching fees paid and platform traffic. In the first quarter of 2023, the 36Kr Venture Capital platform efficiently connected over 5,000 tech start-ups with funding investors, providing valuable support for their growth. Before I move on to commercialization, let me briefly update you on our AIGC initiatives. Over the years, 36Kr has paid close attention to advanced tech developments. As AIGC technologies evolved, we leveraged their fit with content production and actively applied generative AI text to our business, integrating these technologies with our content ecosystem and product R&D. We focused on integrating AI text into various areas and utilized AI text to open the Taobao store for higher production efficiency and increased revenue. This enterprise service revenue platform adopted AIGC text to provide our users with precise overall product information and decision-making support. We also implemented chatbot technology for efficient customer service. In summary, we strengthened our content ecosystem, accumulated product advantages, and increased our capabilities with AI text during the quarter. These advances consistently boosted our commercialization capabilities and enabled steady revenue growth. Next, I'd like to share the details of our commercialization progress. In the first quarter of 2023, our total revenue increased by 12% year-on-year to RMB 55.5 million, achieving growth across all three of our primary business segments. Our Advertising revenue reached RMB 41.9 million, up 11% year-over-year. The number of advertising customers grew to 147, up 9% year-over-year, with ARPU increasing to RMB 285,000, up 2.3% year-over-year. Leveraging our deep understanding of customer brand positioning, we offer one-stop marketing solutions centered on branding and expertise. In the first quarter, many tech giants and Fortune 500 companies renewed their annual service contracts with us. At the same time, we expanded our customer base among small and medium-sized enterprises. We received recognition from global giants like Amazon, Meta, and Tesla for the notable results achieved from our globalization initiative campaigns. For instance, for Meta, we invited experts in global business expansion to exchange ideas about brand globalization. We ventured into new industries, partnering with Gree, which created potential revenue upside. We also renewed contracts with top brands, confirming our advertising and marketing expertise. Our short video business delivered another stellar quarter, launching popular programs that drew recognition from various advertisers. With respect to Enterprise Value-Added Services, we experienced growth in various businesses as pandemic restrictions eased, driving revenue up 7% year-over-year to RMB 10.0 million. To capitalize on the rise of AI and large language models, we hosted the WISE 2023 AIGC Summit, enhancing 36Kr's industry influence. In integrated marketing, we expanded our service content, providing diversified offerings, which facilitated further expansion of our customer base. We also entered into agreements with renowned companies, increasing our integrated marketing revenue. Our Subscription services also optimized our membership system, increasing revenue scale by 36% year-over-year. We focused on developing growth-oriented entrepreneurship courses, increasing class frequency, which raised the ARPU of our individual subscription services to RMB 150,000. Last, I'd like to share an update on the 36Kr Enterprise Services review platform. In the first quarter of 2023, we optimized its product library, increasing classification accuracy to over 95%. While enhancing the platform functions, we revamped interfaces to improve accessibility. The conversion rate from platform business to profile creation nearly doubled year-over-year. We adopted AIGC text to generate product descriptions, improving operational efficiency significantly. This quarter, we implemented our next iteration of commercialization for the platform, reinforcing our integrated service capabilities and successfully building a business model for lead generation and commission services. As we embark on our journey in 2023, we are excited to welcome a new era of growth and development. The latest AI models provide significant catalysts for growth. 36Kr will benefit from this opportunity and aim for disruptive growth across our segments. We are committed to enhancing high-quality content, exploring product innovation, and applying innovative technologies to drive revenue growth and profitability, generating sustainable value for shareholders, customers, and society. With that, I will now turn the call over to our CFO, Ms. Lin Wei.

Thank you. Now I'd like to walk you through more details of our first quarter 2023 financial results. Please note, all amount numbers are in RMB unless otherwise stated. Total revenues were RMB 55.5 million in the first quarter of 2023, an increase of 12% compared to RMB 49.6 million in the same period of last year. Online Advertising Services revenue increased 11% year-over-year to RMB 41.9 million in the first quarter of 2023, primarily due to more innovative marketing solutions and a gradual recovery in market demand. Enterprise Value-Added Services revenue increased 7% year-over-year to RMB 10 million in the first quarter as we developed various proactive enterprise-level services for our customers. Subscription services revenues increased 36% year-over-year to RMB 3.6 million in the first quarter of 2023, mainly due to our efforts in providing high-quality subscription models. Cost of revenues was RMB 32.4 million, compared to RMB 23.9 million in the same period last year, primarily due to higher fulfillment and content costs. Gross profit was RMB 23.1 million in the first quarter compared to RMB 25.7 million last year, with a gross profit margin of 42%. The decrease was mainly due to the resumption of offline events and training courses, which accrued higher costs of fulfillment and some new content we produced, such as the video program. We expect gross profit margin to rebound to the 50% range as commercialization kicks in and revenues grow. Operating expenses were RMB 63.6 million in the first quarter compared to RMB 33.4 million last year. Sales and marketing expenses were RMB 31 million compared to RMB 29.7 million last year, primarily due to increased payroll-related expenses. G&A expenses were RMB 17.2 million compared to negative RMB 10 million last year, impacted by the release of allowance for credit losses in the prior period. Excluding those financial items, G&A expenses actually decreased by about 25%. Research and development expenses were RMB 15.5 million, up from RMB 13.8 million last year. Share-based compensation totaled RMB 1.9 million, compared to RMB 4.1 million last year. Other income was RMB 1.2 million, down from RMB 40.3 million in the prior year due to a gain from the disposal of a subsidiary in the previous period. Net loss was RMB 39 million compared to net income last year. Non-GAAP adjusted net loss was RMB 37.1 million compared to non-GAAP net income last year. As of March 31, 2023, the company had cash and cash equivalents of RMB 170 million compared to RMB 185 million as of December 31, 2022, due to the payment of bonuses and a small investment. This concludes our prepared remarks. We will now open the call to questions.

Your first question comes from Jing Chen from CICC.

I have two questions. The first is about how the advertising business is recovering in the second quarter and during the 618 e-commerce festival. What is the outlook for the recovery of the advertising market and the company's advertising business? My second question is regarding the plans to further develop the growth potential of the short video business, considering its strong growth in the past.

In the first quarter, we were pleased to observe a recovery in our advertising business, with a year-over-year revenue increase of 11%. Demand for advertising gradually improved as the market began to recover. This year's advertising performance during the 618 grand promotion outperformed 2022. We successfully integrated advertising into our platform, and we are cautiously optimistic about the overall advertising industry for the second quarter and the full year of 2023. The post-pandemic recovery has taken more time than anticipated, and we need additional time to assess it. We plan to offer more attractive and differentiated advertising products and services to support the growing new economy sector, including enhancements to our short video offerings. We believe 2023 brings both opportunities and challenges, and our advertising business is on course for solid growth. We have launched a series of original short videos on various topics, amassing over 8 million short video followers by the end of the first quarter. Additionally, we are introducing innovative offerings like our long video program, Foreseeing 2033, which features in-depth interviews with industry leaders. AIGC technology offers significant opportunities for the company to diversify its content exploration.

Your next question comes from Lingyi Zhao from SWS Research.

Essentially, first quarter GP margin decreased both year-on-year and quarterly. How should we understand the changes in margin this quarter? Could you also share some outlook on long-term changes in GP margin?

That's a really good question. I think there are several reasons resulting in the gross margin fluctuation. First of all, as the pandemic receded, we resumed many offline businesses, which resulted in more offline costs compared to a year ago. Secondly, we produced new content columns that also accrued costs. Variable costs were recognized immediately rather than amortized over the year. Lastly, Q1 is usually our lowest seasonality during the year. Overall, I believe the Q1 gross margin is a one-off scenario rather than a recurring level, and gross margin will come back in the coming quarters.

Your next question comes from Rui Yin from Sealand Securities.

What measures are we taking to enhance customer loyalty or increase customer payment rates?

I will briefly answer your question. In terms of customer numbers and engagement, we have rolled out three major measures. First, our content is our major competence. We continue to expand our service content, increasing coverage of top players and advancing exclusive reports. Second, we are proactive on the product side, with short-form and newly launched long-form videos becoming key components of our metrics. Lastly, we are expanding geographically, now having a headquarters in Shenzhen and 12 regional offices in major cities, actively penetrating into low-tier cities and the government side.

Your next question comes from Peipei Qiu from Industrial Securities.

Could you provide more details about your strategy or plan for using AI? Are you currently utilizing any large models in your daily content production, and what kind of financial benefits can we anticipate from this application?

The general content of the new economy sector aligns well with 36Kr's AIGC technologies. We benefit in various ways from integrating AIGC technologies across different business areas. AIGC text improves efficiency and reduces costs throughout our operations. We have successfully lowered overall costs, and the integration of AIGC text enhances our content production. 36Kr has become the first industry leader to use AI text to create an e-commerce store from start to finish, featuring AI-designed products. This technology presents e-commerce opportunities and growth potential. We will continue to deliver high-quality content driven by AIGC technologies and integrate these advancements into our content production.

Your next question comes from Shaw Kang Chen from Great Wall Securities.

As we resumed hosting offline events and activities, we optimized our business school product design and training programs. The launch of high ARPU training courses significantly enhanced our subscription services. We expect to see sustained growth from these initiatives.

Thank you all for participating in today's call. If you have any further questions, please feel free to contact our Investor Relations team. Thank you again.

This concludes this conference today. You may now disconnect your lines.