Earnings Call Transcript - KRKR Q3 2023

Operator, Operator

Hello, ladies and gentlemen. Thank you for joining us for 36Kr Holdings Inc.'s Third Quarter 2023 Earnings Conference Call. All participants are currently in a listen-only mode. Following management's comments, there will be a question-and-answer session. This conference is being recorded. I will now hand the call over to your host, the IR Manager of the company. Please proceed.

Unidentified Company Representative, Corporate Representative

Thank you very much. Hello everyone and welcome to 36Kr Holdings third 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 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 this and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the US 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. Pal, please go ahead.

Dagang Feng, CEO

Thank you. Hello everyone. Thank you for joining our third quarter 2023 earnings conference call. During this quarter, we made solid progress across all business segments, resulting in a year-over-year revenue increase of 2.5% as we continuously enhance our content ecosystem and broaden our product and service offerings. We also integrated AI applications more deeply into our operations and the development of generative AI and large language models. These coordinated efforts have led to significant advancements in our commercialization and improved operational efficiency, enabling cost reductions across the company. I will start by discussing our content initiatives and advancements this quarter, followed by a detailed look at our commercialization progress across each business segment. 36Kr's strength lies in our exceptional content creation partners. Through years of dedication, we have built a robust portfolio of premium sub-vertical media. Our diverse content matrix addresses a wide range of trending topics, allowing us to engage various user demographics and provide insights into industry trends. In the third quarter, we consistently delivered high-quality content, with more than 110 articles garnering over 100,000 page views each. We expanded our presence across multiple channels, achieving a 20% year-over-year increase in followers to over 32 million, reflecting 36Kr's significant market influence. Alongside our strong text and image content, we made advances in content variety this quarter, including short videos, long videos, and podcasts. In short videos, we enhanced our lineup with trendsetting content, launching a new series called The Pioneers, which attracted significant attention for its exploration of industry giants. Our vertical medium, 36Kr Auto, continued to thrive, with increases in content quantity and user engagement. By the end of the third quarter, we had over 8.5 million short video followers, including more than 2.5 million active users. In terms of long videos, our show Foreseeing 2033 returned for its second season, with extended episodes providing in-depth discussions with notable industry figures. This flagship project was shared across various platforms, reinforcing our leadership in long video production and showcasing 36Kr's branding strength. We also broadened our audio content lineup with our first live podcast, delivering diverse listening experiences that contributed to building a comprehensive closed-loop content ecosystem. AI technology presents exciting growth opportunities for 36Kr, and we are integrating it into our operations. We improved content production efficiency through AI applications in image generation and data collection. We launched our first unmanned initiative, exploring large language models in finance, and collaborated with industry leaders to deepen AI applications, enhancing our offerings and optimizing report value. This quarter also saw an increase in subscription services revenue, which surged by 62% year-over-year. We enhanced our traditional training courses and expanded our high-quality degree-based programs, including a successful postdoctoral research collaboration with Keble College at the University of Oxford. In summary, we maintained an encouraging growth trajectory in the third quarter of 2023, with total revenue rising by 2.5% year-over-year to RMB97 million. Our advertising revenue increased by 11%, and our subscription service revenue experienced a remarkable 62% growth. Looking ahead, we will continue to leverage our content and brand influence to explore new partnerships and drive sustainable growth. Now, I will turn the call over to our CFO, Ms. Lin Wei, for a discussion of our key financial results.

Lin Wei, CFO

Thank you, Pal. Now, I'd like to walk you through more details of our Q3 financial results. Please note all amount numbers are in RMB unless otherwise stated. Total revenues increased by 2.5% year-over-year to RMB97 million in Q3 of 2023, up from RMB94.6 million in the same period of last year. Online advertising services revenues increased by 11% to RMB71.2 million in Q3 of 2023 compared to RMB63.9 million in the same period of last year. The increase was primarily attributable to more innovative marketing solutions we provided to our customers. Enterprise value-added services revenues were RMB14.2 million in the third quarter of 2023 compared to RMB23.6 million in the same period of last year. The decrease was mainly due to the negative impact of macroeconomic uncertainties. Also, our offline events are not scheduled evenly throughout the year and it turned out there were relatively fewer events during the third quarter. Subscription services revenues increased by 62% to RMB11.5 million in the third quarter of 2023 compared to RMB7.1 million in the same period of last year. The increase was primarily attributable to our continuous efforts to offer high-quality subscription products and training programs to our subscribers. For example, in Q3 we rolled out the postdoctoral research program that we collaborated with the University of Oxford, which was well-received by our high-end subscribers and helped boost our subscription revenues growth during the quarter. Cost of revenues was RMB42.3 million in the third quarter of 2023 compared to RMB35.5 million in the same period of last year. The increase was primarily due to higher fulfillment costs and content costs. Gross profit was RMB54.6 million in the third quarter of 2023 compared to RMB59.1 million in the same period of last year. Gross profit margin was 56% in the third quarter of 2023 compared to 62% in the same period of last year. Operating expenses were RMB77.5 million in the third quarter of 2023 compared to RMB62.1 million in the same period of last year. Sales and marketing expenses were RMB32.4 million in the third quarter of 2023, an increase of 1% from RMB32.2 million in the same period of last year. The slight increase was largely due to the increase in payroll-related expenses, partially offset by the decrease in marketing-related expenses. General and administrative expenses were RMB36.9 million in the third quarter of 2023, a 123% increase compared to RMB16.6 million in the same period of last year. This fluctuation was primarily attributable to certain one-off expenses, including severance payments as we optimized our organization and office lease termination fees incurred in the quarter, as well as the increase in allowance for credit losses. Research and development expenses were RMB8.3 million in the third quarter of 2023, a decrease of 38% from RMB13.4 million in the same period of last year, as we continued to proactively embrace AI technology and streamlined our research and development teams, resulting in a decrease in payroll-related expenses. Peer-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, as well as general and administrative expenses totaled RMB1.4 million in the third quarter of 2023 compared to RMB2.6 million in the same period of last year. Other income was RMB4 million in the third quarter of 2023 compared to RMB5.7 million in the same period of last year. Net loss was RMB18.9 million in the third quarter of 2023 compared to net income of RMB2.5 million in the same period of last year. Non-GAAP adjusted net loss was RMB17.5 million in the third quarter of 2023 compared to non-GAAP adjusted net income of RMB5.1 million in the same period of last year. Net loss attributable to 36Kr's ordinary shareholders was RMB18.9 million in the third quarter of 2023 compared to net income attributable to 36Kr's ordinary shareholders of RMB1.7 million in the same period of last year. Basic and diluted net loss per ADS were both RMB0.45 in the third quarter of 2023 compared to basic and diluted net income per ADS of RMB0.04 in the same period of last year. As of September 30th, 2023, the company had cash, cash equivalents, restricted cash, and short-term investments of RMB116 million compared to RMB136.5 million as of June 30th, 2023. The increase was mainly attributable to small-sized long-term investments in certain new economy entities we made in the third quarter of 2023, as well as net cash outflow from operating activities. If we exclude the previously mentioned one-off payments relating to the optimization of our organization and moving our headquarters office, which altogether amounted to over RMB25 million during the third quarter, our cash position actually would have increased quarter-over-quarter. This concludes all of our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

Operator, Operator

Thank you. Today's first question comes from Shen Zhao with CICC. Please go ahead.

Unidentified Analyst, Analyst

Congratulations on the solid performance in Q3. How does the management view the fourth quarter and next year's advertising revenue trend? Thank you.

Dagang Feng, CEO

The third quarter saw strong and sustained growth in our advertising business, with revenue increasing 11% year-over-year. As the market has begun to stabilize, we noticed a positive rebound in advertising demand compared to previous launches. Our comprehensive branding and performance-based advertising solutions have built significant trust and support among clients, leading to steady growth. Our clients include major Internet companies, Fortune Global 500 firms, and traditional industry leaders. The consistent rise in advertisement placements by these clients resulted in a 20% year-over-year increase in our average revenue per user. We also provide flexible services to emerging industry players to meet their varied advertising and marketing requirements, including graphics, texts, and both long and short videos. Looking ahead to the fourth quarter, we remain cautiously optimistic about our advertising business. To sustain growth, we plan to enhance our content impact, deepen cooperation with advertisers, and actively pursue AI marketing and other new channels to create additional opportunities for growth in advertising.

Unidentified Company Representative, Corporate Representative

Thank you. Next question, please.

Operator, Operator

Thank you. Our next question comes from Lingyi Zhao with SWS Research. Please go ahead.

Lingyi Zhao, Analyst

Congratulations on the good results. I have two questions. The first is about the strong and sustained growth in both long and short video segments. What plans do you have to unlock further growth potential? My second question is regarding the company's gross margin, which remained fairly high in Q3. What has been achieved in terms of cost reduction and efficiency enhancements? Thank you.

Dagang Feng, CEO

We have consistently prioritized content innovation and diversification for short videos. Our lineup covers a wide range of topics from technology and business insights to lifestyle, shared across popular short video platforms like BiliBili, Douyin, and Kuaishou. Our medium, 36Kr, has significantly improved in content quantity and user engagement, experiencing a surge in likes and followers. We have also partnered with leading automakers including BMW and Mercedes-Benz. By the end of the quarter, we had over 8.5 million short video followers, which is a 41% increase year-over-year, with more than 2.5 million of those being BiliBili users. In the rapidly changing social media landscape, short videos have become an essential channel for user interaction and social engagement, gaining popularity among advertisers. Short video ads have shown a higher ARPU compared to other formats, driving our overall advertising revenue. In terms of long videos this year, I hosted a long video show, and the first season has wrapped up with over 250 million views. The second season is currently launching on Youku and Beijing radio and television station. Looking ahead to 2024, we plan to expand our long video offerings, with three to four new programs in development to enhance our content ecosystem.

Lin Wei, CFO

Hi Lingyi, thank you for your question on gross margin and the financials. This is Lin. I will take your question. So, first of all, we continue to take rigorous cost control measures and optimize our cost structure. That's why we were able to maintain our gross margin at a relatively high level, which is 56% in the third quarter. On top of gross margin, I want to highlight further that we are also taking initiatives to improve our operating margin as well. So, to cut our spending, in the third quarter, we have taken several measures. For example, we moved our headquarters office to a relatively lower rental building in the third quarter. Secondly, we continue to increase AI technology, which enables us to streamline our R&D team, resulting in some cost savings on the payroll side. So, if you take a look at our operating expenses in Q3, although there were temporarily some one-off impacts in Q3 because we had to pay some severance compensation as well as terminating the old lease contract, we need to pay some compensation expenses, this hit our third quarter but that's temporary and only a one-off issue. Looking at these initiatives long-term, together will provide us with a spending cut of at least RMB30 million on an annual basis. So, that's quite an improvement on our operating margin. Going forward, we will continue to grow our revenues and embrace AI technology across more diversified business scenarios to cut our costs and further spending. Overall, we will improve our gross margin as well as operational leverage. Thank you.

Operator, Operator

Thank you. And our next question comes from Peipei Qiu with Industrial Securities. Please go ahead.

Peipei Qiu, Analyst

Thank you for taking my question. You’ve mentioned how AI has significantly improved efficiency. Could you provide more details on how AI has contributed to revenue generation? I'd appreciate any insights on the monetization aspects in this area. Thank you.

Dagang Feng, CEO

36Kr has clearly demonstrated its vision and keen insights regarding generative AI. Following last quarter's innovative AI-powered live streaming sales sessions with digital humans in our Taobao store, we collaborated with Alibaba Cloud in the third quarter and utilized its large AI models to create our Asia Games blogger on Xiaohongshu, resulting in significant visibility and engagement. On the advertising side, we are actively exploring and leveraging AI technology to improve marketing effectiveness and develop innovative strategies. This involves generating personalized advertising content and making intelligent decisions based on data analytics. By continuously expanding our presence in AI marketing, we aim to provide our clients with smarter, more efficient, and innovative marketing solutions. Additionally, we partnered with top-tier investors to enhance AIGC applications in analyzing financial statements and reporting on the primary market, offering more comprehensive, agile, and high-quality services to a wide range of companies at exceptional cost benefits.

Operator, Operator

Thank you. Our next question comes from Sealand Securities. Please go ahead.

Unidentified Analyst, Analyst

What specific factors contributed to the rapid growth in the company's subscription services and new growth strategies in this segment?

Dagang Feng, CEO

The rapid growth in our subscription services was primarily driven by the launch of our high-value programs. This quarter, we partnered with Keble College of the University of Oxford to introduce a new degree-based program, significantly increasing our average revenue per user to over RMB68,000. Additionally, we continue to enhance the high-quality training courses available through our venture capital class and funding acceleration cap. Our diverse and engaging course offerings deliver top-tier learning experiences to users, attracting significant interest. Moving forward, we plan to establish more partnerships with leading universities globally on additional international MBA programs, including ones with the University of Oxford, University of Leeds, Queen Mary University of London, and INSEEC Business School in France, providing learners in China with the chance to broaden their careers internationally. Furthermore, with the exciting growth in AI innovation, we have observed a rising demand for learning about and utilizing AI technology. To meet this demand, we are collaborating with prominent AI companies in China to develop AI-focused training programs, helping participants improve their understanding of AI technology and gain practical skills.

Operator, Operator

Thank you. As there are no further questions, I'd now like to turn the call back over to the company for closing remarks.

Unidentified Company Representative, Corporate Representative

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

Lin Wei, CFO

Thank you.

Operator, Operator

Thank you. This concludes this conference call. You may now disconnect your lines and have a wonderful day.