Earnings Call Transcript - KRKR Q2 2022

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for 36Kr Holdings Inc.’s Second Quarter 2022 Earnings Conference Call. At this time, all participants are in 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, Yang.

Yang Li, IR Manager

Thank you very much. Hello, everyone. And welcome to 36Kr Holdings second 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 the company and the 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 earning 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. Feng, please go ahead.

Dagang Feng, Co-Chairman & CEO

Thank you. Hello, everyone. Thank you for joining our second quarter 2022 earnings conference call. In the second quarter of 2022, against the backdrop of economic challenges, we delivered robust financial performance, with double-digit growth in terms of revenue and a continued increase in gross margin. We achieved profitability for the third consecutive quarter, which can be attributed to our powerful brands influencing our business, strong resilience, and vitality. High-quality content has always been our most prominent advantage and the backlog of our business developments. In the second quarter, we continued to optimize our content ecosystem and innovate our content columns and formats. While we refine our content platform strategy, we still focus on PDs and DC. We are expanding our content into more industries with a diverse perspective, calculating an effective content ecosystem that helps us expand our reach to a wider, high-quality user base. Let’s take a closer look at some of our 2022 accomplishments in content during the quarter. First, our content refinement has contributed to more than 150 articles with over 100,000 views each, leaving us at the forefront of the industry. In the second quarter, our articles gathered readership over 100,000 views each due to the trending economy, following the latest dynamics of popular industries, resonating deeply with users and attracting nearly 300 million views, sparking animated discussions across the internet. Second, we launched our series of innovative media in China, which significantly improved the reach of our content while meeting the needs of a more diverse area of users and customers. For example, we launched the Long China 50 Series. In May, we selected and showcased 50 of the new economy's most representative companies, all of which are critical players and deserving of recognition for their accomplishments in an effort to empower them to become a force in driving the economy’s recovery. We also launched a host of programs as our sub-media targeting different workflows, including KR Carbon, Race, Digital KR, and Free Bonus to improve the breadth and depth of our content within various topics and perspectives. That is why our content resonates with more working user groups. Finally, we recently launched a new channel targeting specialized, differentiated, and innovative content to help people stay informed of the latest industry trends. On a related note, I would like to highlight that through our premium content, we continue to enhance our secondary market product influence among the wider public through our various niche columns such as KR-Go, KR-Intelligence, and Week Four. We will cover topics from various perspectives, providing data-driven professional analysis and thought-provoking interpretations of multiple companies and capital markets, offering insights into company performance and trading trends, and attracting a massive number of new followers through KR Finances. For example, our analyst reports on the impact of capital loss in coffee refresh and tourism during the May Day holiday received recognition from many users and professionals, laying a solid foundation for our commercialization efforts. Meanwhile, our rich media formats, including our STEPVR live streaming products, are growing more mature. In the second quarter, our short videos attracted over 7 million followers cumulatively, including multiple panel videos produced by 36Kr that ranked over 1 million views each on Bilibili. For example, our database on vocational growth in China attracted a total of 2.64 million streams and 150,000 live views across internet platforms. Thanks to our high-quality content, we ranked number 5 on Bilibili’s video chart in June and we are also the only optimization on the list that is not affiliated with the Chinese government authorities. Regarding live streaming, we actively integrated our existing resources and leveraged the influence of our WeChat video account to create a new IP entitled KR Planning Live Stream Room, focusing on user engagement. We held a total of 16 live streaming sessions in this quarter, covering topics such as enterprise aging options and how companies can withstand the challenges in the capital markets. This event capitalized on 36Kr's column radio resources to lead us to nuanced content scenarios and service models. As we diligently strive to build and refine our content ecosystem, we achieved consistent growth in our page views, with the number of our total followers exceeding 25 million, an increase of 20% year-over-year and an improved endorsement of our premium content influence. Meanwhile, we have been strengthening our wealthy community to aggregate users and enhance user engagement, optimizing our closed-loop ecosystem. In summary, our related columns and refinement of content and our development of innovative products and services resulted in another quarter of excellent performance. Not only did we post solid double-digit year-over-year growth in total revenues and ongoing improvements in gross margin, but we also achieved profitability for the third consecutive quarter. Next, I’d like to share the progress we have made in commercialization across our business segments. Our advertising business continued to thrive, up 12% year-over-year in the second quarter. This growth reflects the resurgence of the economy and macroeconomic challenges. We achieved year-over-year growth above the industry average, clearly indicating that 36Kr remains an indispensable partner for advertisers and marketers. During the quarter, we capitalized on 36Kr's omnichannel presence and multidimensional services to continue expanding our customer base, increasing our number of advertisers by 13% year-over-year. We are empowering customers from both traditional industries and the new economy to innovate creatively and operate their brand marketing. Among traditional industry customers, mainly in the automobile and real estate sector, we continued to promote brand and content on the 36Kr platform despite disruptions from the pandemic, including our notable marketing collaboration with the renowned automotive manufacturer Beijing Hyundai, marking a new high in contract sizes among our advertisers from the automotive industry since 2021. With respect to our collaboration with the new economy and technology industries, we leveraged our expertise to provide innovative marketing solutions for more customers, especially those restructuring their fee and consumer bases. Following our initial kickoff of commercialization at the beginning of this year, we experienced positive growth in the second quarter, achieving 278% sequential growth in contract size. During the second quarter, we collaborated with well-known companies including Intel, Reveal, Chango, Icon, and others, providing marketing solutions across a wide variety of new industries such as science and technology, healthcare, new consumption, and the internet. During the second quarter, amidst the backdrop of complex macroeconomic events, both large and small companies across all sectors faced various challenges and changes. In May, we initiated the Seeking the Live program to fulfill our social responsibility to assist small- and medium-sized enterprises in maintaining their brand’s visibility amid the market downturn. By optimizing our product portfolio, we experienced a marked increase in customers while maintaining our average revenue per user at a relatively stable level. Our flagship video products alongside our fee and content metrics, including Super Review and OUS, have advanced our commercialization progress. In the second quarter, we promoted these products to traditional commercial banks, such as the Bank of China, using our platform to advance 36Kr’s Super Review. Leading content hours among customers has proven to be a useful format for us to effectively attract more advertisers and enhance our monetization efficiency. Turning to our value-added enterprise side, regrowth enabled us to maintain our enterprise value-added service revenues at a stable level compared to last year. In terms of offline activities, we proactively transitioned consulting services to an automated online-based scenario during the quarter, partially mitigating the overall impact from the pandemic and related control measures. Additionally, our consulting services and Integrated Marketing Services performed remarkably well during the quarter. In July, we held an online brand event at 66 Kr as a companion absorber for enterprises plus verticals, inviting numerous conference and investor representatives from various industries to share their significant insights and offer the most authentic voice of China’s new generation of entrepreneurs. Given the current uncertain environment, 36Kr ran an online ceremony for entrepreneurs to enhance connections within the venture capital community and facilitate collaborations among all parties. We partnered with Quico and Intel to promote the ceremony, achieving user exposure of 350 million. Regarding regional business expansion, while first-tier cities, such as Beijing and Shanghai, were under strict control due to the pandemic, our regional offices in Chaoyang and Chengdu, as well as Guangdong, were a boon to our business. For instance, our regional offices orchestrated preparatory IP events like The Marvel of Space of Baotou Summit, bringing together local governments and over 100 new consumption enterprises and investment institutions, building a bridge of communication between supply and demand to accelerate the development of the new construction industry in the Baotou area. The debut of 36Kr's Marvelous IP series in Chaoyang and Chengdu was well received, showcasing that 36Kr’s influence and service system has taken root in these regions. We gained over 200 enterprise clients as a result of this event, with 18 projects in progress worth RMB10 million, in addition to potential forward-looking orders. Furthermore, through our approach combining industry insights and data analysis, 36Kr Research Institute tracks the latest developments of popular industries and produces frequent high-quality research reports, enhancing content dominance and improving customer loyalty. At present, aside from a vast number of local government lines on the coverage side, 36Kr Research Institute is also offering consulting services to a wide range of renowned companies, including Alibaba, Baidu, Tencent, Beisen, Julie Medical, Celmaster, P&G and Slentex. Moving on to our Integrated Marketing Services. During the quarter, we continued to make positive progress in our content operation agency services. For instance, through our recent partnership with Quanta Securities, 36Kr will provide content support in agency operations for the Quanta app. Following our partnership with China Mortani and Shanghai Puto Development Bank, our collaboration with Fatec Securities represents another exploration of our financial agency operation capabilities, which will lay the groundwork for us to replicate this operational model with additional securities companies in the future. Regarding subscription services, we implemented innovative upgrades to our subscription service system in this quarter, leading to a 58% year-over-year increase in revenue from subscription services. We are currently conducting quality capital collaborations with the Wuxi Municipal Government for industry collaborations and integrations, demonstrating the value of the customized membership service we provide for our institutional clients. Furthermore, despite postponements of certain courses in our individual subscriptions due to the pandemic, we have made breakthrough progress in several star subscription products, such as the business plan building camp and the funding acceleration camp since July. Lastly, I’d like to share the latest progress of our Enterprise Service Review Platform. During the quarter, we continued to rapidly enhance our major operating metrics, achieving substantial commercialization progress. Our monthly active users rose more than 18 times year-over-year to nearly 900,000, and the number of authentic reviews climbed 17 times to over 32,000, up 56% sequentially. Meanwhile, we optimized the platform's business coordination, functional layouts, and user experience, resulting in more than double the number of customers willing to leave their information on the platform compared to the beginning of the second quarter. We showcased over 6,600 pieces of mainstream software on the platform, up 84% year-over-year and nearly 20% quarter-over-quarter. Since our merchant-oriented features were launched in September 2021, over 850 merchants have established a presence on our platform, increasing nearly 30% quarter-over-quarter. In terms of commercialization, 36Kr's Enterprise Service Review Platform reached strategic collaboration with Volcano Engine this quarter, focusing on functions and features of a diversified portfolio of products, including cloud computing, Big Data, and SaaS applications. Additionally, through product-level support on our Enterprise Service Review Platform for Volcano Engine, we are providing targeted access to specific customer groups. Furthermore, 36Kr will collaborate with Volcano Engine to produce and disseminate various formats of content, such as live broadcasts and in-depth interviews. Taken together, this strategy will enhance customer awareness and solidify Volcano Engine’s unique positioning in the SaaS market. Despite the challenging external environment, including the pandemic and macroeconomic uncertainty, we achieved double-digit growth in total revenue and profitability for the third consecutive quarter. Our robust financial results again demonstrated our business model's resilience, as well as massive development potential. This solidifies our business foundation while marking an inflection point for our company value. Simultaneously, our Enterprise Service Review Platform, as a growth engine has achieved strong growth in all major operating metrics, along with its commercialization, expanding our service boundaries and unleashing more business potential. As we continue to serve as a companion and enabler of the new economy, 36Kr remains committed to its aspirations and will continue to empower its partners with high-quality content, a live and innovation-driven content ecosystem supported by dedicated and effective services, while striving to enhance the operational efficiency of Chinese enterprises. Moving forward as a companion and enabler of the new economy, 36Kr will continue to empower more industry participants to achieve high-speed development, capitalizing on the wave of digital transformation, confident that we can create substantial value for more users, customers, and investors.

Lin Wei, CFO

Thank you, Feng, and hello, everyone. Against the backdrop of the pandemic and macroeconomic uncertainties, we achieved solid topline growth in the second quarter, with a 13% year-over-year increase in total revenue and the third consecutive quarter of profitability, a strong testament to our business resilience and vitality. Notably, our advertising revenues continued to grow, up 12% year-over-year to RMB57.8 million, outpacing the overall market. In addition, through our multiple efforts to navigate the impact of stringent COVID-19 prevention measures, we were able to maintain our enterprise value-added services revenues at a stable level, while our subscription services revenue recorded remarkable growth of 58% year-over-year, as we proactively executed certain services through online and virtual channels. Moreover, as we continually optimize our cost structure and operational efficiency, we further improved our gross profit margin to 62% in the second quarter, up 5 percentage points year-over-year. Regarding our cash position, we again generated positive operating cash flow in the second quarter. Our cash, cash equivalents, and short-term investments increased by over RMB20 million quarter-over-quarter and over RMB40 million year-over-year, respectively. Looking ahead, we will continue to hone our core capabilities and explore diversified growth avenues to drive monetization, while strengthening our longstanding commitment to cultivating a compelling value proposition for more customers, users, and investors. Now, I’d like to walk you through more details of our second quarter 2022 financial results. Total revenues were RMB81.7 million in the second quarter of 2022, an increase of 13% compared to RMB72.1 million in the same period of last year. Online advertising services revenue increased by 12% year-over-year to RMB37.8 million in the second quarter of 2022. The increase was primarily attributable to more innovative marketing solutions we provided to our customers and the proactive sales strategies we adopted to navigate the challenging environment during the quarter. The number of advertising customers increased by 13% year-over-year, while the average revenue per user (ARPU) remained largely stable during the quarter. Enterprise value-added services revenue stood at RMB14.3 million in the second quarter of 2022, largely flat compared to the same period last year. We managed to sustain our enterprise value-added services at a steady level, despite the resurgence of the pandemic during the quarter. This was mainly due to our proactive execution of certain services through online and virtual channels. Subscription services revenues totaled RMB9.5 million in the second quarter of 2022, compared to RMB6 million in the same period last year. The increase was mainly driven by our continuous efforts to offer high-quality subscription products to our subscribers. Cost of revenues reached RMB30.8 million in the second quarter of 2022, compared to RMB30.7 million in the same period last year. Gross profit increased by 23% year-over-year to RMB50.9 million in the second quarter of 2022, compared to RMB41.4 million in the same period last year. Gross profit margin was 62% in the second quarter of 2022, compared to 57% in the same period last year. The improvement stemmed from economies of scale achieved through our revenue growth, as well as the optimized cost structure due to more services being delivered online during the quarter. Operating expenses amounted to RMB64.6 million in the second quarter of 2022, down from RMB75.3 million in the same period last year. Sales and marketing expenses were RMB27.4 million in the second quarter of 2022, compared to RMB33.4 million in the same period of last year. The reduction was primarily due to the decrease in payroll-related expenses, share-based compensation expenses, marketing expenses, and business travel-related expenses. General and administrative (G&A) expenses were RMB23.8 million in the second quarter of 2022, compared to RMB29.9 million in the same period last year. The decrease was primarily driven by lower allowance for credit losses and professional fees, partially offset by an increase in payroll-related expenses. Research and development expenses were RMB13.4 million in the second quarter of 2022, up from RMB12 million in the same period of last year due to increased payroll-related expenses as we strengthen our research and development capabilities, particularly for our 36Kr Enterprise Review Platform. Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, as well as G&A expenses totaled RMB2.6 million in the second quarter of 2022, compared to RMB3.3 million in the same period of last year. Other income amounted to RMB22.7 million in the second quarter of 2022, compared to other expenses of RMB0.4 million in the same period last year. This fluctuation was primarily due to investment income arising from fair value changes of long-term investments and an increase in government grants received in the second quarter of 2022. Net income for the second quarter of 2022 was RMB9 million, compared to a net loss of RMB34.3 million in the same period last year. Non-GAAP adjusted net income was RMB11.6 million in the second quarter of 2022 compared to a non-GAAP adjusted net loss of RMB31 million last year. Net income attributable to 36Kr Holdings' ordinary shareholders stood at RMB8 million in the second quarter of 2022, compared with a net loss of RMB34.1 million in the previous year. Basic and diluted net income per ADS were both RMB0.195 in the second quarter of 2022, compared to a basic and diluted net loss per ADS of RMB0.834 in the same period last year. As of June 30, 2022, the company had cash, cash equivalents, and short-term investments of RMB194.3 million, increasing by RMB23.2 million compared to the previous quarter and by RMB44.7 million year-over-year. This increase was primarily attributable to cash inflow from operating activities. This concludes our prepared remarks today. We will now open the call for questions. Operator, please go ahead.

Operator, Operator

Thank you. And today’s first question comes from Lingyi Zhao with SWS Research. Please go ahead.

Lingyi Zhao, Analyst

Let me translate my questions into English. The first one is since the third quarter, the impact of COVID in the first half subsequently eased. How about the recovery of the company’s various business? The second question is, recently, 36Kr has held several offline summits and we have noted that more summits have been scheduled. What are your expectations and arrangements for offline activities in the second half of the year? My third question is, Enterprise Service Review Platform officially announced a one-step marketing service collaboration with ByteDance. Could you give us more color on this cooperation progress? Thank you.

Dagang Feng, Co-Chairman & CEO

We are currently observing some improvement in advertising business in the third quarter compared to the same period last year. Compared with last year, we have made several efforts to improve the vitality of our advertising business this year. First, we have expanded our coverage across industries this year, such as in Jilin province, digital transformation, and so on, bringing new business opportunities in the third quarter and the second half of the year. Second, after more than a year of experimentation, short video and QC columns have attracted more advertisers while further expanding our reach among fee-end users. So finally, we will continue to optimize our product portfolio as we have done. We will collaborate with our advertising clients to navigate these challenging times and grow our advertising revenue. Hence, our advertising is more a combination of branding and effects, but even under macroeconomic pressures, the demand for brand advertising still exists. As for offline business, during the first half of this year, many of our offline events were delayed or transitioned to online formats due to the impact of the pandemic, which did affect revenue. However, we are confident in the control of the pandemic in the second half of the year and have planned many events in our pipeline. For instance, we have the Go Global Forum, Super Automation Forum, New Media Trans Forum, and an exciting series culminating in the end-of-year grand event conference. Even if there is a resurgence of the pandemic affecting offline events, we still have the capability to prepare online forums. For example, our flagship IP event, 36 Under 36, was held as a fully online event and performed excellently in terms of both influence and monetization. Therefore, we remain cautiously optimistic on the revenue front. For our subscription services, we have seen a certain proportion of growth in institutional subscriptions primarily because we continue to innovate in our membership system and enhance connections between investment institutions and enterprise customers. In terms of individual subscriptions, many courses were delayed in the first half of the year due to the pandemic. However, since July, 36Kr business school has successfully conducted several offline courses with relatively high average revenue per user. We anticipate a certain increase in the third quarter and in the second half of the year. This concludes the response to your first question. Now regarding your second question about offline events, we believe the dynamics will be manageable in the second half of the year, and many offline summits will take place as planned. We will launch a series of events related to our key IPs, such as end-user summits and the end-of-year grand live conference, as well as various industry forums. Even if pandemic resurgence leads to stricter control measures in the second half of the year, we already possess mature capabilities for operating online events, and we will also serve the online audience. Our regional offices will expand business to propel growth, and our efforts in regional business will help reshape many IPs, such as The Marvel series. This concludes the response to your second question. As for our collaboration with Volcano Engine, we will focus on the functions and features of a diversified portfolio of Volcano Engine’s products, including cloud computing, Big Data, and SaaS applications. We will build our product library on our Enterprise Service Review Platform for Volcano Engine, providing targeted access to specific customer groups. Moreover, to enhance customer awareness and brand influence, we will collaborate with Volcano Engine to produce and disseminate various formats of content, such as live broadcasts and in-depth interviews. Volcano Engine has established its presence on the Enterprise Service Review Platform, and we are assisting them with overall operations on the platform, as well as content production and handling certain sales leads and customer information. We have upgraded our collaboration with several well-known SaaS suppliers and will continue to provide service to them, including offering sales leads for our plans to expand collaboration with more service providers. We will approach this from two angles: first, through industrial parks and businesses in lower-tier markets, covering more SaaS products and inviting more providers to join our platform, making it more comprehensive while accumulating more potential customers via operation and maintenance of merchant-oriented features. Second, by enhancing operational efficiency and optimizing the process for customers leaving their information for sales leads. We will improve conversion rates and attract more providers to collaborate with the 36Kr Enterprise Service Review Platform, leveraging our customer base in the enterprise service industry to begin working with service providers through forums, trimming, and consulting, followed by in-depth services like acquiring more valuable fleets. This concludes my response to your third question and thank you.

Operator, Operator

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

Peipei Qiu, Analyst

I will translate my question. The first question is about advertisement. Given that the economy is expected to stay at a low level for a relatively longer period, could you provide more details on the growth trajectory of your enterprise clients in that sector and what we can expect for the coming two quarters? The second question is, could management elaborate on your plans for growth and monetization in short video platforms? Thank you.

Lin Wei, CFO

Hi, Peipei. Thank you for your question. Yes, you can observe that in Q2, we delivered another very strong quarter of advertising revenue growth, and compared to others, this is a remarkable success. The reason being, if you check our ARPU and the number of advertisers disclosed in our earnings release, our number of advertisers grew by 13%, and the ARPU for the first time in many quarters slightly declined by 1%. This is because, as mentioned by the CEO during our prepared remarks, we launched the Seeking the Life program, which in Chinese means we actually adjusted our product portfolio and pricing structure in the second quarter, offering more favorable pricing for customers, especially SME advertising clients. That's why you can see that while the number of advertisers grew strongly, ARPU remained at a stable level, only slightly declining by 1%. If we look at our advertising breakdown by industry, the top sectors are hardcore technologies, internet services, and enterprise services, alongside intelligent manufacturing and new consumer businesses. This variety is indicative of our proactive sales strategy that I just detailed for Q2. Regarding your second question about short-form video and our new product columns, these have been significant drivers for the growth of advertising revenue in Q2. More and more advertisers are gravitating towards short-form video; previously, they mainly used articles on our platform. However, they are now increasingly utilizing short-form videos and our new columns. For example, we partnered with Intel and Icon for advertising, as well as various internet brands this quarter. To give you some perspective, the contribution from short-form video revenue accounted for less than 10% at the end of last year, but by the end of Q2, this contribution had risen to around 15%, indicating the rapid development of short-form video within the company. I hope this answers your questions, Peipei. Thank you.

Operator, Operator

And our next question today comes from Jing Chen with CICC. Please go ahead.

Jing Chen, Analyst

I will translate myself. Congratulations on the strong financial performance in a challenging environment; the company has strong content capabilities. Are there any considerations for improving the monetization capability on the user side? Thank you.

Dagang Feng, Co-Chairman & CEO

Our current year-end monetization primarily reflects our individual subscription business, especially through the 36Kr business school. The 36Kr business school has established several products, such as the recently completed business plan building camp and finance acceleration camp. These courses focus on high-value offline training targeting startup founders. Additionally, we also offer low-cost online training courses, such as KR Lab, focusing on content geared towards skill improvement. Moving forward, we will provide core content in the form of open classes and small groups to develop a corresponding membership service system, offering courses on essential skills like business management, investment, and household management for entry-level employees, professionals, and high-net-worth individuals. Thank you.

Operator, Operator

Thank you. I am showing no further questions. I’d like to turn the conference back over to the company for closing remarks.

Yang Li, IR Manager

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.

Operator, Operator

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