Earnings Call Transcript - KRKR Q4 2022

John Anding, IR Representative

Hello, everyone. And welcome to 36Kr Holdings fourth quarter and fiscal year 2022 earnings conference call. The company's financial and operational results were released earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.36kr.com. Participants on today's call will include our Co-Chairman and CEO, Mr. Dagang Feng, and our Chief Financial Officer, Ms. Lin Wei. Mr. Feng will start the call by providing an overview of company 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 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 earning press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. And please note that all amount mention numbers are in RMB. I will now turn the call over to our Co-Chairman and CEO, Mr. Dagang Feng.

Dagang Feng, Co-Chairman and CEO

Thank you. Hello everyone. Thank you for joining our fourth quarter and fiscal year 2022 earnings conference call. 2022 was a year full of challenges. Against the backdrop of uncertainties brought by the COVID-19 resurgence and macro headwinds, we delivered solid performance. Our full year revenue reached RMB322 million, growing 2% year-over-year, with a profit of RMB22.64 million. Making our first full year profit since our listing, thanks to our fine operations and the professional expertise we have acquired over our years of dedication to the new economic sector. Driven by our dual engine strategy filled with content and products, we have developed a diversified business model and comprehensive content ecosystem focusing on business, technology, and lifestyle. We will continue innovation across our content, product and services. Next, I'd like to share a more detailed progress update on each of our segments in 2022. I will begin with the enrichment of our financial performance. We continue to elevate our content generation capabilities through our users’ diverse needs with high content planning across a variety of public. In 2022, we launched a series of sub-vertical media, including Digital Kr, Kr Carbon, Hardcore Kr, and Waves, providing insights across popular fields in the investment circles such as digitalization, dual carbon, and ESG, hardcore technology, and specialized innovative companies. We also created user-centric content verticals based on topics related to the younger generation's lifestyles, including Oh! Youth, Super Review, and Career Bonus, achieving differentiated user coverage. Meanwhile, we produced a varied array of content programs including 'CEO Tips', still proceeding in 2033, Long China 50, and Super Factory, facilitating broad dissemination of new economic content. These efforts enabled us to keep producing a considerable number of blockbuster articles throughout the year with nearly 700 articles racking up page views exceeding 100,000. The launch of this sub-vertical media also brought us revenue upside amounting to tens of millions of RMB. For instance, diving deeper into the enterprise digitalization field with Digital Kr, we will expand our presence in this huge market worth hundreds of billions of RMB. Waves, another popular program from the sub-vertical, will also raise our revenue by increasing our influence among financial institutions. Furthermore, we made continuous efforts to launch content in diverse formats, including text, graphics, short form video, audio, and live training through both our own platform and external channels by working with new media platforms such as Weibo, Zhihu, Toutiao, Douyin, Bilibili, Xinhua, Weixin among others. We have built a multidimensional content dissemination system with comprehensive coverage and full access to users and new economy players, enhancing our content influence. On a related note, 36Kr has always prioritized the application of artificial intelligence technology in content production and aggregation and has adopted the latest AIGC and ChatGPT technologies in our content ecosystem. Recently, we were invited as one of the first batch of companies to partner with Baidu's ChatGPT-style ERNIE Bot ecosystem. We believe this partnership will further elevate our content production efficiency and quality, thereby enhancing user interaction and stickiness. Second, about new user expansion. Our diversified content ecosystem has continuously grown our user base. In terms of user numbers, as of the end of 2022, the number of our followers exceeded 28 million, up 23% year-over-year, of which short video followers accounted for 7.75 million, rising by 43% year-over-year. User quality remains robust, broadening our array of products and rising investment in entrepreneur-related sectors, which encouraged normal and young individuals chasing their dreams. Furthermore, we have effectively certified user loyalty and engagement with our high-quality professional content. Third, regarding our new IT innovation, we have continuously pioneered industry benchmark ITs in the new economic sector along with our flagship New Economy Conference in 2022. We created X360, Entrepreneurial Carnival, and China Investor Summit, maintaining the miracle of innovative IT that efficiently empowers startup companies to connect with investment institutions. Moreover, the creation of our unexpected and marvelous series of IT which integrated consumption and entertainment drove end-user growth and customer acquisition for enterprises. Not only did the marvelous IT make a successful foray into the low-experience market in 2022, but it also created new experiences in the event sector. Currently, we work with hundreds of CEOs, government representatives, and investors throughout these events to unlock opportunities in the local new consumer industry, which also helps enhance our brand influence and service systems, penetrating deeper into the region. Fourth, there is innovation in digital tools. In November 2022, we launched the services of the Kr Venture Capital platform, reaffirming our commitment to expanding media boundaries and further developing digital tools and services. By integrating information and data, we provide standardized solutions and precise financing exposure, facilitating the discovery of high-quality early-stage projects, while offering our management services to connect projects with potential investors. Now, this Kr Venture Capital platform has calculated tens of thousands of outstanding projects, of which 80% have finished at least one round of financing, having attracted the attention of over 1000 investors from hundreds of top-tier investment institutions. We are completing up to 1000 venture capital measures per week on average. Currently, our venture capital platform is still in the product refinement stage. We expect to begin commercialization in the second quarter of 2023. To give you a point of reference, a similar product PE Data along with PE DataMax have achieved annual revenue exceeding RMB60 million. Therefore, we believe that the 36Kr Venture Capital platform, with its integrated functionality and expanded resources connections, will pose to bring us considerable revenue upside. Last but not least, product upgrade. Chinese productization was an important theme for us in 2022, and as such, we integrated and upgraded some of our relatively mature product series. For example, the 36Kr Research Institute continues to expand its industry coverage with a consistent focus on vertical development. Capital trends and policy orientations will also enhance its research depth and professional level, helping other companies as a whole improve their customer acquisition and commercialization performance through a distinct product portfolio and clear customer positioning. Related to Kr Business School, it is a business training product we revamped in 2022. We designed its venture capital class and related training programs to provide training for small and medium-sized enterprises in various stages of development and connect them with capital and other resources contributing to their sustainable development. During the COVID-19 outbreaks in the second half of 2022, 36Kr Business School held training sessions and public courses on refinancing in various class formats, contributing significantly to our commercialization revenue. We have observed that the thriving venture capital market is fueling increased demand for entrepreneurship training. In fact, some of our peers have reached RMB100 million in annual revenues in this area. For 36Kr, we plan to launch a wide variety of courses and expand sales channels in 2023 to realize greater growth. I also want to specifically highlight that we continue to upgrade and iterate our platform product, Services Kr Enterprise Service Review platform in 2022. In addition to creating a quadrant encompassing product databases, user review libraries, paid industry-person databases, and knowledge graph libraries, we have fully refined its industry product evaluation system and standards. The platform fosters deep connections between sellers and buyers, helping enterprises acquire customers more effectively and enhance their brand influence. In summary, we have built on our enriched ecosystem, accumulated product advantages, and enhanced our operational capabilities throughout 2022, consistently strengthening our commercialization capabilities. This empowered us to steadily grow our revenue and realize our first full-year profit since listing. Next, I'd like to share the details of our commercialization progress. We’ve seen solid results across all of our business segments in 2022. Our advertising revenue reached RMB222 million, up 8% year-over-year. The number of our advertising customers grew to 532 with stable year-over-year growth. We continue to leverage the advantages of our advertising business centered on branding and advocacy, while also exploring new scenarios and solutions for content marketing and commercial integration. Along with graphics and texts, we tap into innovative advertising formats such as short video, live streaming, and retargeting, offering customers a diverse selection of media-rich products. In terms of industry expansion, we broadened our advertiser base in 2022 to include the medical industry, health and wellness, banks, and other financial institutions. We formed partnerships with leading industry players, including Johnson & Johnson, among others. Notably, our short video revenue in 2022 more than doubled year-over-year to reach tens of millions of RMB on a full-year basis, accounting for 17% of total advertising revenue. Our short videos have raised massive user traffic with high-quality original content, attracting the attention of numerous young users and advertisers. Many renowned companies have become repeat customers of our short video advertising services. In the fourth quarter, we customized a mini variety short video for the Honor 80 smartphone, featuring a range of young opinion leaders, talk show actors, hosts, and travel bloggers, highlighting the product's functions and features. With respect to enterprise value-added services, we hosted nearly 30 industry summits covering hot topics, including new technology, new energy, and new consumption. During the COVID-19 outbreak, we adopted an integrated online-offline format, leveraging video and live streaming among other formats to connect more new economy players through digital conferences. Notably, our live event achieved total exposure exceeding 4.5 billion, while X360 and Enterprise Carnival, our new IT event, reached 350 million views from simultaneous live streaming across 24 platforms, demonstrating our strong influence and service capabilities in the new economy. Regarding consulting services, our full-year revenue grew by 70% year-over-year in 2022. 36Kr recently published various reports, serving many local government customers, and established in-depth collaborations with known enterprises, including Volkswagen, Group China, Chuxing.com, Ctrip, JD.com, NetEase, Higher Capital, and Beijing ZhongAn Fund. We continue to progress on the scope of our original expansion. Thus far, we have built a regional operating network across six countries and cities, establishing mutually beneficial relationships with both local governments and enterprises. This has enabled us to empower new economy players as they expand regionally and enter lower-tier markets. In 2022, the number of our original customers increased significantly, creating a more balanced mix of government and enterprise customers, laying a solid foundation for exploring the wider enterprise value-added services market in the future. As for our subscription services, our full-year subscription revenue amounted to RMB28 million in 2022, rising by 1% year-over-year. Not only did the number of our institutional and enterprise subscribers grow, but individual subscription services also saw substantial increases due to the rising popularity of our 36Kr Business Group’s new courses. Last but not least, I'd like to share an update on our second growth engine, the 36Kr Enterprise Service Review platform. In 2022, we remained focused on growing our platform's influence and optimizing its service system regarding product functions. We launched enterprise service review reports to compare products and recommend models based on users' actual needs, while generating independent objective data analysis, ranking reports, and charts to optimize users' decision-making scenarios efficiently. We refined the enterprise service review platform's search function by adding search paths for product functions and articles, thereby increasing the accuracy of user research. Additionally, we improved our product chart algorithm and its connectors to help users better understand product information, user reviews, and industry rankings, elevating convenience and usability. Through relentless efforts in our online and offline operations, we'll achieve rapid growth in the enterprise service review platform's operating matrix across the board as of the fourth quarter of 2022. The number of leads has grown 700% compared to the same period last year, and the cumulative number of products on the platform exceeded 8,000, a year-over-year increase of 52%, with the total number of reviews surpassing 60,000, an increase of 200% year-over-year. The number of merchants on the platform exceeded 1,200, double the number in the same period of 2021. Additionally, in terms of commercialization, the enterprise service review platform's contracted sales exceeded RMB10 million, with clients from an extensive array of well-known suppliers. We also established strategic marketing cooperation with Volcano Engine under its brand, as well as the SMB unit of Lenovo, a Fortune Global 500 company in 2022. Looking ahead, the Enterprise Service Review platform will serve a growing cohort of enterprises in need of digital transformation upgrades, amplifying our commercialization capability. As we progress into 2023, we have observed many positive market signals emerging, and investor confidence continues to strengthen accordingly, leading to increasing business vitality throughout the new economy sector. We anticipate greater commercialization opportunities afforded by the economic recovery as we explore immediate boundaries and build a richer portfolio of products and services. We expect to see continued revenue growth and deliver another full-year profit in 2023 as the pandemic's impact lightens. We believe we are well-positioned to consistently realize more of that potential and provide enterprise value, distinguishing ourselves as we accompany and empower our new economy partners while creating long-term sustainable value for society and shareholders along the way.

Lin Wei, CFO

Thank you. Now I'd like to walk you through more details of our fourth quarter and fiscal year 2022 financial results. Total revenues for the fourth quarter of 2022 were RMB96.6 million, a sequential increase of 2%. Total revenues for the full year of 2022 were RMB322.5 million, a year-over-year increase of 2% compared to the full year of 2021. Our online advertising services revenue was RMB62.2 million in the fourth quarter of 2022 compared to RMB76.4 million in the same period of last year. The decrease was mainly due to relatively weak advertising spending caused by the negative impact of COVID-19 control measures and infections across China during the quarter. For the full year of 2022, our online advertising services grew by 3% year-over-year to RMB221.6 million. The increase was primarily attributable to more innovative marketing solutions we provided to our customers, as well as proactive sales strategies we adopted to navigate the challenging environment during the year. Enterprise value-added services revenue was RMB25.4 million in the fourth quarter of 2022, compared to RMB30.3 million in the same period of 2021. For the full year of 2022, our enterprise value-added services were RMB72.6 million compared to RMB74 million in the previous year. The 2% decrease was primarily because some of our offline events were delayed or downscaled due to disruptions from COVID-19. Subscription services revenue was RMB8.9 million in the fourth quarter of 2022 compared to RMB9.6 million in the same period of 2021. The decrease was primarily attributable to the negative impact of COVID-19. For the full year of 2022, our subscription services revenue was RMB28.2 million, representing an increase of 1% compared to RMB28 million in the previous year. This increase was primarily due to our continuous efforts to offer high-quality subscription products to our subscribers during 2022. Cost of revenues was RMB47.6 million in the fourth quarter of 2022, compared to RMB40.7 million in the same period last year. The increase was mainly due to higher accounting costs related to the expansion of our commercial-oriented content program. For the full year of 2022, our cost of revenues was RMB137.8 million, compared to RMB128.8 million in the previous year. The increase was mainly due to the rise in content-related costs, partially offset by a decrease in the costs of our offline events. Gross profit was RMB48.9 million in the fourth quarter of 2022, compared to RMB75.6 million in the same period of last year. For the full year of 2022, our gross profit was RMB184.6 million, compared to RMB187.9 million in the previous year. Gross profit margin for the full year of 2022 was 57.3% compared to 59.3% in the previous year. Operating expenses were RMB69 million in the fourth quarter of 2022 compared to RMB61.6 million in the same period of last year. For the full year of 2022, operating expenses were RMB229.2 million compared to RMB282 million in the previous year. Sales and marketing expenses were RMB32.8 million in the fourth quarter of 2022, a decrease of 16.5% from the same period of last year, primarily due to a decrease in marketing-related expenses. For the full year 2022, sales and marketing expenses were RMB122.1 million, a contraction of 15% compared to the previous year. General and administrative expenses were RMB21.7 million in the fourth quarter of 2022, compared to RMB9.6 million in the same period of last year. The increase was mainly due to the release of allowances for credit losses recognized in the fourth quarter of last year. For the full year of 2022, G&A expenses were RMB52.1 million compared to RMB98.6 million in the previous year. The decrease was primarily due to the release of allowances for credit losses and the decrease in professional fees. This release of allowances for credit losses was mainly due to improved collection of accounts receivable. Research and development expenses were RMB14.5 million in the fourth quarter of 2022 compared to RMB12.6 million in the same period of 2021. For the full year of 2022, our research and development expenses were RMB55 million compared to RMB47.5 million in the previous year. The increase was primarily due to the rise in payroll-related expenses as we bolstered our R&D capabilities for new products and services. Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses, as well as G&A expenses totaled RMB4.6 million in the fourth quarter of 2022 compared to RMB4.1 million in the same period of last year. For the full year 2022, the total amount of share-based compensation expenses was RMB13.9 million compared to RMB15 million in the previous year. Other expenses were RMB1.2 million in the fourth quarter of 2022 compared to other income of RMB1.5 million in the same period of last year. For the full year 2022, other income was RMB67.5 million compared to other income of RMB3.6 million in the previous year. The increase was mainly due to gain arising from the disposal of a subsidiary and investment income from fair value changes of long-term investments, as well as income generated from write-offs of accounts payable. Net loss was RMB21.5 million in the fourth quarter of 2022 compared to net income of RMB15.4 million in the same period of 2021. For the full year 2022, our net income was RMB22.6 million compared to net loss of RMB19.6 million in the previous year. This is the first time we achieved full-year profitability since our IPO in 2019. Non-GAAP adjusted net income was RMB16.9 million in the fourth quarter of 2022, compared to non-GAAP adjusted net income of RMB19.6 million in the same period of last year. For the full year 2022, non-GAAP adjusted net income was RMB36.5 million compared to non-GAAP adjusted net loss of RMB75.6 million in the previous year. Net loss attributable to 36Kr ordinary shareholders was RMB20.8 million in the fourth quarter of 2022 compared to net income attributable to 36Kr's owner shareholders of RMB14.6 million in the same period of last year. For the full year 2022, net income attributable to 36Kr owner shareholders stood at RMB21.9 million compared to net loss of RMB89.6 million in the previous year. Basic and diluted net loss per ADS was RMB 0.498 in the fourth quarter of 2022 compared to net income per ADS of RMB0.356 in the same period of last year. For the full year 2022, basic and diluted net income per ADS were both RMB 0.53 compared to basic and diluted net loss per ADS of RMB2.2 in the previous year. As of December 31, 2022, the company had cash, cash equivalence, restricted cash, and short-term investments of RMB184.9 million compared to RMB164 million as of September 30, 2022. The increase was chiefly attributable to positive cash flow from operating activities, partially offset by long-term investment in a new economy startup company made in the fourth quarter of 2022. This concludes all of our prepared remarks today. We will now open the call to questions.

Operator, Operator

The first question today comes from Jing Chen with CICC. Please go ahead.

Jing Chen, Analyst

As the improvements in the environment, what are other companies' priorities and plans for this year? Thank you.

Dagang Feng, Co-Chairman and CEO

As we mentioned many times before, we will continue to enrich our content ecosystem and tap into more vertical industries such as artificial intelligence, new electric vehicles, and industry capital. Also on our product front, apart from our existing advertising and enterprise value-added services, we will explore several new product initiatives. For example, the 36Kr Enterprise Service Review platform, as our second growth engine, will be refined, and we will continue to pursue commercialization. The 36Kr Business School will enrich course designs to empower more small and medium-sized companies. This training product has been proven by our peers to have a market potential of RMB100 million. Also, the 36Kr Research Institute will enhance its professionalism and industrial coverage, providing more in-depth reports to more enterprises. And of course, we will clearly invest in AIGC technology; we will continue to advance the application of AIGC technology in the production and aggregation of high-quality content to further improve our content production efficiency and through AIGC personalized dialogue functions, strengthen our user interactions and stickiness.

Operator, Operator

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

Lingyi Zhao, Analyst

The advertising industry is the full size of the economy. What changes have taken place in the roadmaps of advertisers to invest recently? Can you tell us about the degree of economic recovery and prospects based on the advertising business? Thank you.

Dagang Feng, Co-Chairman and CEO

Based on the Q1 2023 current situation, our ad business is already recovering steadily. However, it will take some time for advertising to return to a relatively high level while market confidence continues to recover. We have witnessed that many of our clients have regained their confidence in ad placement, but they still have a limited budget for their advertising. This is why I feel it takes time for us to recover to a relatively high level. Based on market feedback and actual business performance so far, the entire advertising industry has been recovering at a steady pace. The initiatives in some public industries such as automotive and e-commerce have been very active in brand promotions and marketing activities, with relatively stable placement budgets. In Q1 2023, we made further progress in both commercialization channels and industry coverage. For instance, we completed JD.com's first commercialization order and achieved our first breakthrough in the luxury goods sector. As such, we expect a fair level of growth overall in advertising both in Q1 and the full year 2023. Looking ahead at the full year 2023, we remain optimistic as business activities and people's daily lives return to normal in the post-pandemic era. We anticipate a significant rebound in our ad business overall.

Operator, Operator

The next question comes from Rui Yin with an unidentified securities firm. Please go ahead.

Unidentified Analyst, Analyst

Hi management. I have two questions. The first question is about the enterprise value-added business segment. Will future growth come more from the increase in the number of paying companies or the increase in the level of corporate payments? What new actions will the company take for the enterprise added service segments this year? And my second question is about the margin ratio. How should we expect the company's expense ratio and profit margin this year? Thank you.

Dagang Feng, Co-Chairman and CEO

Actually, during the past years, both the number of our clients and our pool have increased significantly, and we believe it will grow this year as well. On our pool side, we will provide diversified underpriced value-added services, including offline events, consulting services, and integrated agency operations services to foster growth in this segment. Regarding the number of clients, we will tap into broader vertical sectors and penetrate lower-tier markets through our 12 or more regional offices. In 2023, we will also leverage more products to develop our enterprise value-added services. In addition to the 36Kr Enterprise Service Review platform, we will also launch the 36Kr Venture Capital platform as well as the 36Kr Research Institute to further grow our business.

Lin Wei, CFO

I think this is your first time to join the earnings call of 36Kr. We warmly welcome you. I will answer your second question regarding the expense ratio and the margin. For the full year of 2022, our gross margin stood at a relatively stable level of 57%. I believe that in 2023, we will be able to maintain that level or even achieve further gross margin expansion, because, as our CEO just mentioned, given the AIGC and the more AI-related technology applications, we will be able to achieve higher operational efficiency and some cost-saving effects in our business. Secondly, I would like to highlight that the margin expansion, as well as operating margin and gross margin, will come more from revenue rebound and revenue growth. Although in 2022, we are proud that we achieved a positive 2% growth, that ratio will be much higher in 2023. Additionally, our cost structure and expense structure have been very stable, given that it will not be a linear growth pattern as revenue grows, which means we will have a lot of leverage. As a quantitative implication, if we say that in 2023, our gross margin can stabilize at around the 60% level, then our expense OpEx ratio will be around 50%, leading to an operating margin of around 10%. There might even be some upside if our top line or revenue can grow at a much higher growth rate than in 2022. I hope that answers your question, Rui.

Unidentified Analyst, Analyst

What is the business connection between the company and AIGC or GPT large models? What is the plan for AI? Thank you.

Dagang Feng, Co-Chairman and CEO

Actually, content production, quality, and efficiency have always been our priority, and we have been adopting AIGC for quite some time. Content execution and classification are key components of AIGC technology. By applying AIGC, 36Kr can classify articles in various fields using labeling, optimizing the accuracy of user research. Furthermore, for some in-depth articles, AIGC will summarize content to facilitate users' efficient understanding while also improving the user experience. On product launch, using the 36Kr press review platform as an example, AIGC technology will assist users in obtaining detailed information such as press and user evaluations of products more efficiently, enabling them to understand products more accurately and make better purchasing decisions. Additionally, AIGC helps us provide better customer service through more effective user interactions and communications. According to our initial analysis, AIGC has helped improve user interaction by 90% and tripled our current production efficiency. Recently, we became one of the first batch of companies to join Baidu’s ChatGPT's ERNIE Bot ecosystem. We have achieved the code for internal testing and are launching the first run of our internal test, with no doubt that 36Kr will be the first mover in applying AIGC technology in our content production and global expansion. Thanks for your questions.

Operator, Operator

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

Unidentified Company Representative, Unidentified Title

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

Lin Wei, CFO

Thank you and see you next time.

Unidentified Company Representative, Unidentified Title

Thank you, operator. Thank you, everyone.

Operator, Operator

This does conclude our conference for today. Thank you for participating. You may now disconnect.