36Kr Holdings Inc. (KRKR) Q2 2023 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen, thank you for standing by for 36Kr Holdings Inc.'s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] After management's remarks, there will be a question-and-answer session. Today's conference is being recorded. I will now turn the call over to your host, Jainan [ph], IR Manager of the company. Please go ahead, Jainan [ph].

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. Pal, please go ahead.

Thank you. Hello, everyone. Thank you for joining our second quarter 2023 earnings conference call. We are glad to note that our primary business segments continue to develop with steady growth in the second quarter of 2023. Our total revenue increased by 3% year-over-year, with revenue from our enterprise value-added services up 17% year-over-year and revenue from our subscription services up 11% year-over-year. Notably, our gross margin rebounded strongly to 55%. We also made great strides in both 2B and 2C businesses as we continue to enhance our high-quality multidimensional content matrix and deeply form [ph] AI empowerment and applications in diverse scenarios across our business segments, we embarked on the new development stage of diversified growth. First off, content, we particularly explore new growth areas for our content ecosystem during the COVID and made great advancements on multiple fronts, including greater industry coverage, content asset accumulation, high-quality customer engagement and our broadening multichannel distribution network. Furthermore, the number of our blockbuster articles kept rising in the second quarter. We had 160 articles [ph] with pageviews exceeding 100,000, fully showcasing 36Kr's leading insights and industry influence. Our consistent creation of high-quality content enabled us to meaningfully expand our user base and enhance long-term user loyalty. As of the end of the second quarter, we had more than 30 million followers, up 21% year-over-year, achieving 9 consecutive quarters of growth. The vertical media we launched, including Waves and the Emergency of Intelligence, achieved continuous impressive outcomes, allowing users to gain deeper insights into booming sectors and equally important, further cementing our leadership in the New Economy sector. We also further solidified our content advantage in our 2C business during the quarter by optimizing the content of Super Review, a product test review program and Youth White Paper, a survey report column, we attracted a broader audience through more appealing content offerings on everyday life. We also enriched our media format through the launch of a live broadcast entitled [indiscernible]. We have also been actively working on audio offerings to bring more listeners more up-to-the-minute business intelligence as well as fun ideas and topics to enjoy each day. I also want to highlight our short video business to an integrated approach to branding, New Economy content and content monetization. We have accelerated optimization of our short video content matrix, transforming it into a new growth region for advertising and marketing. Some of the short videos were created on trending topics were streamed over 1 million times, including Coffee Home [ph], Why Buy When You Can Rent and Elon Musk's Plan on Earth, thanks to their diverse ideas and fresh perspectives that kept our users engaged. As of the end of the second quarter, we had over 8.3 million short video followers, up 42% year-over-year, among which more than 2 million were Bilibili users. We have indeed become a leader among all platform-based official accounts and we stand ready to seize more opportunities for commercialization of cooperation. We also successfully wrapped up the first season of our first long video show Foreseeing 2033 which will soon return for a second season and attracted immerse audience attention, bringing us additional commercialization opportunities with leading companies. As we diversify and strengthening our content landscape with innovative things and formats, we also developed our short video lineup on a wide variety of platforms, including Bilibili, Douyin, Kuaishou, Xiaohongshu, Xigua and WeChat Video Account, partnering diverse groups of users with precise marketing. These initiatives made our content more engaging and empowered more effective, more powerful communication with users. Recently, we entered into a strategic cooperation with Beijing Radio and Television Station to promote the full life cycle synergetic development of long videos from project planning and content production all the way to distribution, promotion and IP commercialization. We also explore more AIGC use big cases for our business during the quarter. Through content production, product innovation, we have been actively integrating pioneering AI technology into our day-to-day operations, including copywriting translation, keyword matching, image generation and intelligent customer service among other functions. In our AI e-commerce store, our first live-streaming sales session hosted by digital humans was a big hit with 160,000 views and a impressive daily GMV exceeding RMB10,000. It was included in Taobao's list of super-sorted [ph] emerging shopping stores. During the 618 e-commerce shopping festival, we were featured on China Central Television and the program was broadcast on multiple channels, including CCTV.com as well as the CCTV App. Our AI marketing success story was again highly recognized by the China Content Marketing Award, a testament to our leadership in AI innovation and applications. On a related note, we recently entered into a strategic cooperation with Baidu, joining hands in broadening AI application across our media platforms, enterprise services and training, driving commercialization and innovation as we empower mutual growth. Our teams are working closely on a diversified AI-powered landscape, including content production and application marketplace showcasing applications powered by large language model, LLM functions, LLM solutions and training programs on AI applications. In summary, as we persistently advance and empower our content ecosystem with AI technology, we propelled our business steady growth, laying a solid foundation for continuous performance improvement. Next, I'd like to review our commercialization progress during the second quarter. In the second quarter of 2023, our total revenue increased by 3% year-over-year to RMB84.36 million. Notably, our advertising revenue reached RMB57 million, basically on par with the same period last year. Our advertising ARPU increased to RMB310,000, up 14% year-over-year. 36Kr provides customers with differentiated content offerings and creative services tailored to the features of each and every brand. Our one-stop marketing solution centered on branding and efficacy provide customers with precise effective marketing promotions, targeting diverse customer groups. In the second quarter, to actively address the need of our customers, we deepened the cooperation with global giants such as Alibaba, JD.com and Huawei and added new accounts to broadening our industry reach. We also signed the Givenchy, our first luxury brand and designed an innovative, engaging flash and content to them. Furthermore, we created diverse promotional content for [indiscernible] household applicants in the form of graphics, texts, videos as well as test reviews and promoted them across numerous online channels through our new media matrix. Our multidimensional targeted approach helped effectively reach their target users, winning us race from the time. Next, our short video business which delivered another quarter of stellar results. In the second quarter of 2023 as Tencent's advertising business partner, we were invited to Cannes and offer extensive onsite coverage at the Cannes Lions International Festival of Creativity. Meanwhile, we released a short-form TV commercial with [indiscernible] tell its low carbon story showcasing strong ESG commitment. Regarding the auto content matrix we launched earlier this year, our WeChat Video Account, 36Kr Auto delivered a short video promotion for BMW during the second quarter, featuring the evolution of the auto industry in the circular economy. With our short video business, we have established a virtuous cycle where our primary content attracts users and increases their stickiness, driving an overall increase in traffic. We then leverage our massive traffic to attract greater advertising interest from even more lending partners. With respect to enterprise value-added services, our revenues were up 17% year-over-year to RMB16.8 million. We greatly increased the number and scale of our events during the second quarter as consumption and offline activities regain steam. We hosted the All-New Summit WISE, integrating venture capital, technology, culture and music teams to create open and relaxed social networking scenarios for the younger generation further enhancing 36Kr's brand awareness and influence. In the meantime, as part of our continued efforts in global expansion and sustainable development, we hosted the WISE 2023 Globalization Value Conference opportunity for vibrance. In addition to our TV business, we continue to effectively reach more high-quality users in our PC business, successfully attracting a wide range of young customers with our lifestyle festival, CityLab. We have also made meaningful progress in developing and expanding our regional business. We successfully staged a various sharing sessions, featuring stylish items in SKP-S shopping malls across Beijing, Chengdu and Xi'an in the quarter, fully reflecting our ability to support innovation among our large enterprise customers. Next, our consulting services. As a shrewd observer providing insights into industry trends, 36Kr Research Institute has always been dedicated to in-depth research on cutting-edge technologies, innovation trends and business tax development. Leveraging massive data analysis and business insights, we provide informed opinions and the guidance on industrial transformation and innovation. In the second quarter, we joined hands with NetEase Cloud Music in releasing the post 20,000 generation long-form audio consumption trend report, providing a valuable reference for the audio content industry as well as strong support for our commercialization in long-form audio consumption. As for subscription services, we made great strides in training programs, substantially increasing our revenue by 11% to RMB10.6 million. In the second quarter, 36Kr Business School cooperated with the University of Oxford to launch [indiscernible] College Postdoctoral Research Program. This program brought top-tier learning experiences to our users through a combination of online and offline initiatives, driving a vast increase in our ARPU to over RMB42,000. Meanwhile, we continue to enrich the high-quality training courses offered through our Venture Capital Class and the Funding Acceleration Camp, further providing high-quality user growth and drawing in place from a wide array of the orders. Last but not least, I'd like to share an update on the 36Kr Enterprise Services Review Platform. While continuously refining core product information, we rolled out multidimensional rankings based on our analysis of data across the platform. Through AI applications and empowerment, we provided users with more precise and efficient overall product information and decision-making support and enabled more interactive user-friendly intelligent customer service. As of the end of the second quarter, the cumulative number of reviews increased by 99% year-over-year. The cumulative number of products on the platform was up 40% year-over-year as the number of merchants on the platform increased by 43% [ph] year-over-year. Commercially, the 36Kr Enterprise Services Review Platform has won lasting customer trust with its high-quality products and services, securing long-term cooperation with SaaS manufacturers in various fields, including [indiscernible]. Looking ahead, the 36Kr Enterprise Service Review Platform will continue to address our customers' needs to better support their digital transformation, making both marketing and customer acquisitions either for enterprise customers. We will play an even more active role in AI integration and application to attain more sophisticated intelligent operations. To sum up, for the second quarter, we delivered solid financial results once again with total revenue of RMB84.4 million, maintaining growth momentum both year-over-year and quarter-over-quarter. Our gross margin also rebounded to the above 55% level. Moreover, we continue to enhance our content influence and build our competitive advantages in the New Economy sector. The number of followers exceeded 30 million, country-wise by nine quarters straight [ph]. We believe the boom of generative AI and LLM has lavished tremendous opportunities on the content industry. Our consistent commitment to innovation, unravelled technology foresight and thorough cooperation with global giants will further empower us as we progressively integrate AI into our business scenarios propelling long-term high-quality growth across all our business segments. With that, I will now turn the call over to our CFO, Ms. Lin Wei, who will discuss our key financial results. The floor is yours, Lin.

Thank you, Pal. 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 continues 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 change 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 of 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. Operator, please go ahead.

[Operator Instructions] Our first question today will come from Jing Chen of CICC.

I have 2 questions. The first is how is the advertising market and the company's business recover in the third quarter? And what is the outlook for the recovery trend afterwards? And the second question is, as offline activities return to normal, what are the company's plans of upgrades to offline activities?

Thank you, Jing. This is Lin. I will answer your first question on advertising. We think as the market recovers, the demand for advertising as expected gradually increase. And the growth of advertisements usually has lagging effect as the macro economy is still in the early stage of recovery. And if you look at 36Kr, our client pool of advertising, we have both big names, big companies, including the Fortune 500 as well as the giant of the Internet names and the big brands. But also on the other hand, we have mostly a lot of new economy clients and usually, they are the mid to -- small to medium-sized companies which usually have a more cautious advertising spending compared to those big names. If you look at our Q2 results, actually, our 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. So that's the Q2 results. And if you look at -- if you are asking our Q3 outlook or the guidance for the rest of the year, we think because we already observed the recovery of the macro economy and we think we have an optimistic view, although we might have a cautiously optimistic view but still optimistic for the rest of the year. And we think our advertising will go back to the upward trend, meaning we will still achieve year-over-year growth for the next 2 quarters for 2023. And hopefully, that answers your question. Thank you.

Thank you, Jing. Let me answer your second question. 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, 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.

And our next question today will come from [indiscernible] of Industrial Securities.

The management just mentioned about the business opportunity brought by AI. So I want -- could you give us more color about more relevant plan about your AI internal use product offering and cooperation with the AI enterprise?

Thank you, Jiajun. Let me answer your questions from 3 perspectives. First of all, we're proud of our consistent nuanced understanding and foresight in terms of generative AI technology. Besides launching our vertical sub-media, the Emergency 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 an intelligent customer service among other functions. By reducing manual efforts and saving time and resources, AI effectively facilitate our cost reduction and efficiency enhancement. I would like to point out that 36Kr was the first ever 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 in broadening AI applications across our media platform, enterprise services and training offerings, driving commercialization and innovation as we empower the manual goals. Our teams are working closely on a diversified AI-powered landscape, including content production, an application marketplace showcasing applications powered by large language model, LLM functions, LLM solutions and training program on AI applications.

Our next question today will come from Lingyi Zhao of SWS Research.

The short video business has been doing really well and what's our plan to further tap into this growth potential?

Thank you, Lingyi. First of all, we will continue to launch diversified content offerings and further expand our 2C products. At present, our short video lineup covers diverse topics, including technological innovation, business insight and lifestyle delighting users with a variety of content options. In addition, multichannel content distribution remains a key focus for us. In addition to posting on short video media platforms, including Bilibili, Douyin, Kuaishou, Xiaohongshu, Xigua and WeChat Video Account, we also actively expanded 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 our 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.

Our next question today will come from Richie [ph] of Sealand Securities.

How did the company achieve a rebound in gross profit margin this quarter?

Thank you, Richie [ph]. This is Lin. I will take your questions regarding gross profit margin. I think the rebound is mainly attributable to our seasonality of our business nature as well as the economy of scale. We have 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%. That's a very big jump. But if you look at our cost, actually, our cost only grew by 5%. That's a very obvious economy of scale. So that's basically the seasonality and the economy of scale contributed to the sequential strong rebound of our GP margin. And also, we -- in Q1, we started off several new content initiatives. For example, we launched our first long-form video program called Broadcasting Foreseeing 2033. That's a long-form video we started to produce in the beginning of the year. So in Q1, we basically haven't started off the commercialization. But in Q2, this program has been very well received by both the audiences and also the -- our advertising customer. So in Q2, we have achieved revenue to cover the cost -- production cost of this program and actually more than cover the cost of this program. So that's why that's another reason contributing to our GP management growth. And looking ahead, we think our GP margin, we will be able to maintain at a high level of 55% or even between 55% to 60% because as we said, we believe our advertising revenue will continue to grow and advertising revenue is a relatively high-margin business and our enterprise value-added services as well as our cleaning business will also grow, that will contribute to higher revenue and hence contribute to higher gross profit and GP margin. Hope this answers your question, Richie. Thank you.

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

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

Thank you.

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