36Kr Holdings Inc. Q2 FY2023 Earnings Call

Thank you very much. Hello everyone and welcome to 36Kr Holdings second 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 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 the company and 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'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. Please go ahead.

Thank you. Hello, everyone. Thank you for joining our second quarter 2023 earnings conference call. We are pleased to see that our main business segments continue to grow steadily in the second quarter of 2023. Our total revenue increased by 3% compared to last year, with revenue from our enterprise value-added services rising by 17% and revenue from our subscription services up by 11%. Importantly, our gross margin improved significantly to 55%. We also made significant progress in both our B2B and B2C operations as we enhance our high-quality multidimensional content matrix and integrate AI across various scenarios in our business, entering a new stage of diversified growth. Regarding content, we explored new growth areas for our content ecosystem and made substantial advancements in several aspects, including broader industry coverage, content asset accumulation, high-quality customer engagement, and expanding our multichannel distribution network. Additionally, the number of our blockbuster articles continued to rise, with 160 articles generating over 100,000 pageviews, demonstrating 36Kr's leading insights and industry influence. Our ongoing creation of high-quality content allowed us to significantly grow our user base and improve long-term user loyalty. By the end of the second quarter, we had over 30 million followers, an increase of 21% from last year, marking nine consecutive quarters of growth. Our vertical media, such as Waves and the Emergence of Intelligence, has produced consistently impressive results, providing users with deeper insights into emerging sectors while reinforcing our leadership in the New Economy. In our B2C segment, we further solidified our content advantage by optimizing the content of Super Review and Youth White Paper, attracting a wider audience through more engaging content. We also enhanced our media formats with a live broadcast and are actively developing audio offerings to deliver timely business intelligence and engaging topics to our listeners. I want to emphasize our short video business and our integrated approach to branding, New Economy content, and content monetization. We have quickly optimized our short video content matrix, transforming it into a new growth area for advertising. Some of our trending short videos garnered over 1 million views, demonstrating our ability to engage users through diverse and fresh perspectives. By the end of the second quarter, we had more than 8.3 million short video followers, a 42% increase year-over-year, with over 2 million of them being Bilibili users. We have become a leader among platform-based official accounts and are ready to capitalize on further commercialization opportunities. We successfully concluded the first season of our long video show Foreseeing 2033, which attracted significant audience interest and opened up additional commercialization opportunities with major brands. As we diversify and strengthen our content offerings with innovative ideas and formats, we expanded our short video lineup across various platforms, forming partnerships with diverse user groups for targeted marketing. Recently, we partnered with Beijing Radio and Television Station to support the full lifecycle development of long videos, from project planning and production to distribution, promotion, and IP commercialization. Moreover, we explored more AI-generated content use cases during the quarter, integrating pioneering AI technology into our operations for tasks like copywriting, translation, keyword matching, image generation, and intelligent customer service. Our AI e-commerce store hosted a successful live-streaming session with digital humans, achieving 160,000 views and impressive sales, which earned us recognition during the 618 e-commerce shopping festival featured on China Central Television. In summary, we are committed to advancing our content ecosystem with AI technology, which supports our steady business growth and lays a foundation for ongoing performance improvements. Now, let's discuss our commercialization progress in the second quarter. Our total revenue for the second quarter of 2023 increased by 3% year-over-year to RMB84.36 million. Notably, our advertising revenue reached RMB57 million, roughly comparable to last year, while our advertising ARPU grew to RMB310,000, up 14% year-over-year. We provide customers with tailored content offerings and creative services. Our comprehensive marketing solutions focus on branding and efficacy, offering precise promotions targeted at various customer groups. In the second quarter, we deepened collaborations with global leaders like Alibaba, JD.com, and Huawei, and welcomed new accounts to expand our industry reach. We also signed our first luxury brand, Givenchy, and created engaging content for them. Additionally, we produced diverse promotional materials for household goods in various formats and distributed them through our new media channels. Our targeted marketing approach effectively reached intended users and garnered positive feedback. Our short video business also performed exceptionally well. As Tencent's advertising partner, we were invited to the Cannes Lions International Festival of Creativity and showcased a short-form TV commercial highlighting its strong ESG commitment. Our 36Kr Auto division launched a short video promoting BMW, outlining the evolution of the auto industry in the circular economy. The cycle of our primary content drawing in users and increasing their engagement leads to greater traffic, which we leverage to attract more advertising partners. In our enterprise value-added services, revenues rose 17% year-over-year to RMB16.8 million. We significantly increased the number and scale of events during the second quarter as offline activities regained momentum, hosting the All-New Summit WISE to create networking opportunities for the younger generation and raise our brand awareness. In our consulting services, the 36Kr Research Institute has focused on in-depth studies of cutting-edge technologies and business trends. We published a long-form audio consumption trend report in partnership with NetEase Cloud Music, providing valuable insights for the audio content industry. For subscription services, we saw a significant 11% revenue increase to RMB10.6 million. We collaborated with the University of Oxford to launch a new College Postdoctoral Research Program, providing our users with premier learning experiences and significantly boosting our ARPU. We continue to enhance our training courses through our Venture Capital Class and Funding Acceleration Camp to promote high-quality user growth. Lastly, I'd like to share an update on the 36Kr Enterprise Services Review Platform. We rolled out multi-dimensional rankings based on our data analysis. With AI support, we provided users with improved product information and decision-making assistance, as well as user-friendly intelligent customer service. By the end of the second quarter, the cumulative number of reviews grew by 99% year-over-year, with an increase of 40% in products and a 43% rise in merchants on the platform. The 36Kr Enterprise Services Review Platform has gained enduring customer trust through its quality products and services, forging long-term partnerships with SaaS providers in various sectors. Moving forward, we will continue to address our customers' needs as we enhance their digital transformation, facilitating marketing and customer acquisition. We will play an even more significant role in AI integration to achieve advanced intelligent operations. In summary, for the second quarter, we delivered strong financial results once again with total revenue of RMB84.4 million, maintaining growth both year-over-year and quarter-over-quarter. Our gross margin also rebounded above 55%. We continue to enhance our content impact and build competitive advantages in the New Economy sector, with our follower count exceeding 30 million for nine straight quarters. We believe that the growth of generative AI and large language models offers tremendous opportunities in the content industry. Our commitment to innovation and collaboration with global leaders will further empower us as we continue to integrate AI into our business, driving sustained high-quality growth across all segments. With that, I will now turn the call over to our CFO, Ms. Lin Wei, to discuss our key financial results. The floor is yours, Lin.

Thank you. Now I'd like to walk you through more details of our second quarter 2023 financial results. Please note all amount numbers are in RMB unless otherwise stated. Total revenues increased by 3% to RMB84.4 million in the second quarter of 2023, up from RMB81.7 million in the same period of last year. Online advertising services revenues were RMB57 million in the second quarter of 2023 compared to RMB57.8 million in the same period of last year. The slight year-over-year decrease was primarily attributable to the lagging effect of the macro economy which is still in the early stage of recovery. Enterprise value-added services revenues increased by 17% to RMB16.8 million in the second quarter of 2023 as we continuously developed various proactive enterprise-level services for our customers. Our offline events business achieved notable growth during the quarter as the reopening continued and we hosted several successful conferences and summits. Subscription services revenue increased by 11% to RMB10.6 million in the second quarter of 2023 compared to RMB9.5 million in the same period of last year. The increase was primarily attributable to our continuous efforts to offer high-quality subscription products to our subscribers. Cost of revenues was RMB37.6 million in the second quarter of 2023 compared to RMB30.8 million in the same period of last year. The increase was primarily attributable to higher fulfillment costs and content costs. Gross profit was RMB46.7 million in the second quarter of 2023 compared to RMB50.9 million in the same period of last year. Gross profit margin was 55% in the second quarter of 2023 compared to 42% in the previous quarter and 62% in the same period of last year. As we forecasted on our Q1 earnings call, our GP margin rebounded strongly as expected and was back to the above 55% level. On a year-over-year basis, the slight decrease was primarily attributable to the resumption of offline events and offline training courses which usually occur at higher costs. Operating expenses were RMB65.1 million in the second quarter of 2023, slightly increasing by 1% compared to RMB64.6 million in the same period of last year. Sales and marketing expenses were RMB33.9 million in the second quarter of 2023, an increase of 24% from RMB27.4 million in the same period of last year. This was primarily attributable to the increase in payroll-related expenses and business travel-related expenses. G&A expenses were RMB17.7 million in the second quarter of 2023, a 26% decrease compared to RMB23.8 million in the same period of last year. The decrease was primarily attributable to the decrease in payroll-related expenses, share-based compensation expenses, professional fees, and allowance for credit losses. Research and development expenses were RMB13.6 million in the second quarter of 2023, slightly increasing from RMB13.4 million in the same period of last year. This was primarily attributable to the increase in payroll-related expenses as well as bandwidth and server expenses, partially offset by the decrease in share-based compensation expenses. Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, as well as G&A expenses totaled RMB1.8 million in the second quarter of 2023 compared to RMB2.6 million in the same period of last year. Other income was RMB4.8 million in the second quarter of 2023 compared to RMB22.7 million in the same period of last year. The decrease was primarily because the company recognized approximately RMB18.5 million of investment income arising from fair value changes of long-term investments in the second quarter of last year. Net loss was RMB13.7 million in the second quarter of 2023 compared to net income of RMB9 million in the same period of last year. Non-GAAP adjusted net loss was RMB11.9 million in the second quarter of 2023 compared to non-GAAP adjusted net income of RMB11.6 million in the same period of last year. Net loss attributable to 36Kr's ordinary shareholders was RMB13.9 million in the second quarter of 2023 compared to net income attributable to 36Kr's ordinary shareholders of RMB8 million in the same period of last year. Basic and diluted net loss per ADS was both RMB0.335 in the second quarter of 2023 compared to basic and diluted net income per ADS of RMB0.195 in the same period of last year. As of June 30, 2023, the company had cash, cash equivalents, restricted cash, and short-term investments of RMB136.5 million compared to RMB169.8 million as of March 31, 2023. The decrease was mainly attributable to net cash outflow from operating activities, which include approximately RMB10 million cash payments related to the company's move of its headquarters to a lower rental office building in Beijing. This concludes all of our prepared remarks today. We will now open the call to questions.

Thank you. This is Dagang. I will answer your first question on advertising. We think as the market recovers, the demand for advertising is expected to gradually increase. The growth of advertisements usually has a lagging effect as the macro economy is still in the early stage of recovery. And if you look at 36Kr, our client pool for advertising includes both big names like Fortune 500 companies as well as new economy clients which usually consist of small to medium-sized companies that tend to be more cautious with their advertising spending compared to the big names. If you look at our Q2 results, actually, the number of advertising customers decreased compared to a year ago, but our advertising ARPU grew strongly compared to a year ago. So net-net, the advertising revenue is basically on par from a year ago. Regarding our Q3 outlook, we have an optimistic view for the remainder of the year. We believe advertising will return to an upward trend with year-over-year growth for the next two quarters of 2023. This year, we designed a launch a variety of offline events. We were pleased with the number of events we hosted as well as the commercialization achievements gaining momentum on both fronts. In the meantime, with creative initiatives through events like our All-New Summit WISE and our 2C lifestyle festival, CityLab, we will greatly enhance the skill and influence of our offline events. Meanwhile, 36Kr Business School programs were also in full swing as we continue to enrich the content and format of the new online courses offered through our Venture Capital Class and Funding Acceleration Camp. We launched an all-new degree-based program in partnership with the University of Oxford, driving a vast increase in our ARPU to over RMB42,000. Thank you, Jiajun. Let me answer your question from three perspectives. First, we're proud of our consistent nuanced understanding and foresight in terms of generative AI technology. Besides launching our vertical sub-media, the Emergence of Intelligence, we also hosted our WISE 2023 AIGC Summit in the second quarter. By continuously offering the latest developments, special reports, and in-depth interpretation of AI, we have inspired the public with a steady stream of insights and stimulating ideas. Second, we have been actively integrating pioneering generative AI into our day-to-day operations, including copywriting translation, keyword matching, image generation, and intelligent customer service among other functions. By reducing manual efforts and saving time and resources, AI effectively facilitates our cost reduction and efficiency enhancement. I would like to point out that 36Kr was the first industry pioneer in using AI technologies to create an e-commerce store on Taobao, launching live-stream sales sessions hosted by digital humans, and we were exclusively featured on CCTV with multiple follow-up initiatives. In addition, we recently entered into a strategic cooperation with Baidu, joining hands to broaden AI applications across our media platform, enterprise services, and training offerings, driving commercialization and innovation as we empower mutual goals. Thank you, Lingyi. First of all, we will continue to launch diversified content offerings and further expand our 2C products. Currently, our short video lineup covers diverse topics, including technological innovation, business insights, and lifestyle, delighting users with a variety of content options. Additionally, multichannel content distribution remains a key focus for us. Apart from posting on short video media platforms, including Bilibili, Douyin, Kuaishou, Xiaohongshu, Xigua, and WeChat Video Account, we also actively expand our reach across social media platforms. We are pleased to see the number of our short video followers surpass 8.3 million, up 42% year-over-year, among which more than 2 million were Bilibili users. Regarding commercial cooperation for creative brand marketing, we signed additional customers from a wide array of industries. Revenue from this segment doubled year-over-year, accounting for more than 20% of our total advertising revenue.

Thank you, Richie. This is Lin. I will take your questions regarding gross profit margin. I think the rebound is mainly attributable to the seasonality of our business nature as well as the economy of scale. We've mentioned several times on our previous calls that our cost structure is largely fixed. That means when our revenues grow, there is not such a linear relationship between our revenue growth and cost growth. So if you look at our Q2 revenues, our sequential revenue growth was almost 52%. However, our costs only grew by 5%. That's a very obvious economy of scale. So that contributed to the sequential strong rebound of our GP margin. Additionally, in Q1, we started several new content initiatives. For example, we launched our first long-form video program called Broadcasting Foreseeing 2033, which had minimal commercialization in Q1 but generated sufficient revenue in Q2 to cover its production cost. This is another reason contributing to our GP margin growth. Looking ahead, we believe our GP margin will be maintained at a high level of 55% or even between 55% to 60% as we expect advertising revenues to continue to grow, which is relatively high-margin, alongside growth in our enterprise value-added services.

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

Thank you.

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