Earnings Call: Q4 2020

Mar 23, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Kauai Show 4th Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a Q and A session. Today's conference is being recorded. At this time, I would like to turn the conference over to Heather Di Wu, Director of Investor Relations. Please go ahead, ma'am. Thank you, operator. Good evening, good morning to everyone. Welcome to our Q4 and full year 2020 earnings conference. Joining us today are Mr. Zhu Hua, Co Founder, Chairman and CEO of Kuaishou and Mr. Nicholas Chong, our CFO. Before we start, we would like to remind you that today's discussion may contain forward looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today's announcement and this discussion. The company does not undertake any obligation to update these forward looking information except as required by law. During today's call, management will also discuss certain non IFRS financial measures for comparison purposes only. For a definition of non IFRS financial measures and a reconciliation of IFRS to non IFRS financial results, please refer to the announcement of the results for the year ended December 31, 2020 issued earlier today. In addition, during the Q and A session, we will take questions in both English and Chinese and the 3rd party translator will provide conductive translation. All translations are for convenience purpose only. In the case of any discrepancy, management's statement in the original language will prevail. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on our website atir.kuishou.com. I will now turn the call over to Nicholas. Thank you, Heater. Hello everyone. Thank you for joining our first earnings call today. I am pleased to deliver today's opening remarks on behalf of Suha and Company. I think we all agree that 2020 is a year we will not soon forget. The world was surprised by COVID-nineteen with challenges and uncertainties. At the same time, we also changed how we live. People spend more time online to socialize, be entertained, shop, acquire knowledge and information and more. As a leading content community and social platform, we successfully observed the evolving user needs and the new opportunities that have arisen. We have been able to help people discover a vast world of content that expands their interest and horizons. Beyond that, we have continued to support the digitization of businesses contributing to the overall economic recovery. Coming into 2021, we will continue to provide deep and diverse content offerings, effective service solutions as well as AI powered technology to help people discover their needs and use their talents to improve their lives and their unique brand of happiness, so as to create value for our users and customers. As our users and businesses interact with each other, they become increasingly engaged and generate more and more interactions. This gave rise to a powerful and valuable network effect between our ecosystem. In 2020, we continue enriching our content, product and services and service offerings to discover and serve our user needs, having them actively engage within our ecosystem. As a result, we have seen a substantial increase in our user base as well as robust gains in user engagement. In 2020, the average DAU and MAUs of all our apps and mini program in China was 308,100,000 and 777,000,000 respectively. The average DAU and MAU on Huizhou app in 2020 were $264,600,000 $481,100,000 representing a year over year increase of 50.7% and 45.6%, respectively. The average daily time spent per DAU on Kuaishou App in 2020 increased by 17% to 87.3 minutes from 74.6 minutes in 2019. Our expanding users form the bedrock of our content community and they are the key source of endless creativity. Our growing user engagement is a force that drives our ecosystem's vitality and lays a solid foundation for our long term growth and monetization capabilities. In 2020, we continue to improve the quality, relevant and diversity of our content offerings to address evolving user interests and needs. As part of this ongoing effort, we have purposefully allocated exposure to a broader set of content creators motivating our users to continually create interesting, useful, relevant and meaningful content. This is best demonstrated by the over 25 percent of our average MAU on Kuaishou App in 2020 were content creators. In addition to user generated content, we have committed to providing more high quality professional user generated content and have started exploring new content formats as well as deeper content operations in order to further improve the vibrancy of our ecosystem and grow our user base. We launched version 8.0 of Kuaishou Flagship in 2020, which provided our users with a more immersive content consumption experience through a simpler interface. Together with Kuaishou Express and Kuaishou Concept, our comprehensive suite of products offer dual column thumbnail and swipe up and down personalized feed formats that appeal to users with different needs and preferences. This was positively received by users and resulted in our increased penetration in Southern China. Today, Kuaishou has inspired many to create and has become the platform of choice for content creations and business activities. The massive scale of our users' interactions and their trust greatly enhance our monetization capabilities, which in turn attract more online marketing customers, merchants and other business partners to our platform. In addition, our strong user engagements and advanced technologies allow us to understand our users better and create more efficient and appealing services to our users and customers. For the full year 2020, our total revenue grew significantly to RMB58.8 billion from RMB39.1 billion in 20 19 representing an increase of 50.2 percent. Among which our online marketing services revenue continued its rapid growth with an increase of 194.6 percent, reaching RMB21.9 billion in 2020. As our massive and highly engaged users community make our platform increasingly attractive to online marketing customers. Revenue contribution from online marketing services to our total revenue almost doubled, increasing from 19% in 2019 to 37.2% 2020. Our gross margin also benefited from revenue mix change improving to 40.5% in 2020 from 36.1% in 2019. Online video based advertising is a promising market and online marketing service is regarded as one of the key and strategic drivers for our long term growth. Given the expanding user base and increasing timeshare as well as the superior short video and live streaming online marketing solution we offer which can be featured more dynamic and interactive content in the Sustin way. We have become one of the preferred partners for online marketing customers. Beyond that, we work closely with our business partners to further solidify the foundation of our online marketing services. In 2020, by launching our integrated advertising platform, we were able to empower online marketing customers as well as to enhance and upgrade our competitiveness as a one stop online marketing solution platform. To be specific, our strong user engagement and advanced technology empower us to achieve precise user understanding and sophisticated advertising content development and distribution, which has led to improved advertising efficiency and effectiveness. We introduced an increasing number of powerful and intuitive tools and services to support our online marketing customers, enabling them to reach their target customers more precisely and enhance customer engagement. Furthermore, we reinforced our cooperation with online marketing customers and content creators to deliver unique and customized ad content. At the same time, through refined algorithm and enriched ad materials, our ad content became less disruptive to our users. The overall user experience was further optimized. Within the company, we expanded our sales our own sales team and channel coverage to cover a broader set of industries emphasized on a more diverse set of advertising formats such as branding advertisements and advertising union in addition to short video feeds advertisement. As a result, we enjoyed robust growth in online marketing services. Revenue from online marketing services in 2020 increased by 194.6 percent to RMB21.9 billion from RMB7.4 billion in 2019. Our average online marketing services revenue per DAU in 2020 increased by 95.3 percent to RMB82.6 from RMB42.3 in 2019. In the Q4 of 2020, online marketing services become the largest contributor to our total revenue. As a percentage of revenue in Q4 of 2020, it surpassed the contribution from our live streaming businesses for the first time. We believe that people's needs will be increasingly met online and that live streaming provides an ideal format and the infrastructure through which those needs can be met. Due to his highly social, interactive and immersive nature, as our sales as our scale continues to grow together with the stronger network effect, our live streaming business nurtures our ecosystem and serve more than just a revenue contributor, but a vibrant and solid foundation from which more social interactions and new valuable businesses are derived. For example, we started with entertainment live streaming, then expanded into e commerce live streaming and more recently online gaming live streaming. These opportunities naturally emerge along with the user needs that arose within our platform. Throughout the year 2020, we further expanded our abundant and diverse live streaming content with more premium content such as game events and sports events live streaming as well as enhanced cooperation with more high quality content creators. Recently, we became the exclusive short video corporation platform of snooker competition. In addition to participating in broadcasting and short creation, snooker fans even have the opportunities to be our certified commentator of snooker events, which will significantly enhance the activeness and stickiness of the snooker fans community on our platform. We were also dedicated to developing more interactive features and events to embrace to enhance our live streaming experience and to make our platform fun and as well as accessible to every user. This effort has been highly effective in increasing live streaming user engagement. In 2020, over 1 point 7,000,000,000 live streaming sessions were hosted on Kuaishou App. For the full year 2020, revenue from live streaming increased by 5.6 percent to RMB33.2 billion from RMB31.4 billion in 2019. More importantly, as the result of our diverse content offerings, highly interactive features as well as unique and strong social trust, our user community became even more engaged on our platform and the average 17.8%. On other services which primarily comprise the contribution from e commerce also achieved rapid growth in 2020. The total GMV of e commerce transaction facilitated on our platform was RMB381.2 billion in 2020 representing a 5 fold increase from RMB59.6 billion in 2019. The highly engaged user base and strong social trust on our platform give rise to natural opportunity for transaction between users and our business partners. In 2020, we continue to support the improvement of our e commerce ecosystem as well as to provide more product and services to address our users' needs further enhancing the trust and encourage the interaction among users, merchants and our platform. We have made efforts to better support our merchants. First, we invested in e commerce infrastructure to facilitate transaction by providing various tools to help merchants manage their stores on our platform. 2nd, we incentivized high quality merchants as well as supported medium and long tail merchants by providing training to help them improve their service capabilities and quality. On customer side, through enhanced tools and technologies, we continue to provide users with a seamless experience of product discovery and purchase, helping them to find their needs. We were dedicated to strengthening platform governance, especially quality controls and merchants supervision. As a result, we are pleased to see that the overall customer purchasing experience and satisfaction were further optimized, which is evidenced by the average repeat purchase rate increasing from 45% in 2019 to 65 percent in 2020. By doing this, we attract a brilliant number of superior merchants and further expanded the product categories and offerings on our platform. In 2021, we will continue to reinforce and invest in our ecosystem by continuing and reaching and improving the quality and diversity of our content offerings to attract and retain a massive user base, improving the experience of our users and business partners through improved functionalities, product and services to fulfill evolving user needs. Expanding user reach through precise marketing and promotional activities as well as strengthening our user centric commercialization capabilities by further enhancing technological capabilities and developing more monetization opportunities. We believe platform with stronger social attributes and interactions will enjoy stronger network effects and lay a solid foundation for long term development. As such, we will continue with our mission to be more to be the most customer obsessed company in the world to better serve our users and customers, create value for them and further solidify our leading position as a content community and social platform globally. This concludes Shu Hua's remark. I will now provide a brief overview of our financial results for the Q4 and full year 2020. Let us now start with the performance for the full year 2020. Our revenue for the full year 2020 increased by 50.2 percent to RMB58.8 1,000,000,000 from RMB39.1 billion. The increase was primarily attributable to our online marketing services and other services. As a percentage of the revenue, online marketing services contributed 37.2%, while live streaming contributed 56.5% and the remaining 6.3% was from other services. Cost of revenue for the year 2020 increased by 39.8 percent to RMB35 1,000,000,000 from RMB25 1,000,000,000 in 20 19. Our gross profit increased by 68.9 percent to RMB23.8 billion in 2020 from RMB14.1 billion in 2019. Gross profit margin improved to 40.5% in 2020 from 36.1% in 2019 benefiting from the revenue mix change. Selling and marketing expenses increased by 169.8 percent to RMB26.6 billion in 2020 from RMB9.9 billion in 20 19 increased to 45.3% from 25.2% as a percentage of our total revenue. This increase is primarily due to the increase in marketing, brand promotion and advertising activities. Our administrative expenses increased by 93.8 percent to RMB166.7 million in 2020 from RMB 865,400,000 in 2019. This increase is primarily due to an increase in the headcount of administrative personnel and increased share based compensation expenses to support our business growth. Research and development expenses for the year 2020 increased by 122.4 percent to RMB6.5 billion from RMB2.9 9 billion. The increase is primarily due to increase in the number of research and development personnel as we continue to invest in AI, big data and other advanced technologies. Our fair value changes of convertible redeemable preferred shares were negative RMB106.8 1,000,000,000 in 2020 compared to negative RMB19.9 billion in 2019. This was primarily due to the increase in the valuation of our company. Our loss attributable to the equity holders of the company was RMB116.6 1,000,000,000 in 2020 compared to RMB19.7 billion in 2019. Adjusted net loss for the year 2020 was RMB7.9 billion compared to adjustable net profit of RMB1 1,000,000,000 for year 2019. Adjusted EBITDA for the reporting year was negative RMB3.62 billion compared to RMB3.59 billion in 2019. For the year ended December 31, 2020, our net cash generated from operating activities was RMB2.3 billion and we have cash and cash equivalents, short term time deposits and restricted cash of RMB23.1 billion as of December 31, 2020 compared to RMB5.3 billion as of December 31, 2019. Now let's move to the 4th quarter financials. Our revenue for the Q4 of 20 20 increased by 52.7 percent to RMB18.1 billion from RMB11.9 billion for the same period of 2019. This increase was primarily attributable to our online marketing services and other services including e commerce business. As a percentage of revenue, online marketing services contributed 47%, while live streaming contributed 43 point 6%, and the remaining 9.4% was from other services. Our cost of revenue increased by 32.9% to RMB9.6 billion for the Q4 of 2020 from RMB7.2 billion for the same period of 2019. Gross profit increased by 83.5 percent to RMB8.5 billion for Q4 2020 from RMB4.6 billion for the same period of 2019. Our gross profit margin for the Q4 of 2020 increased to 47% from 39.1% in the Q4 of 2019. Benefiting from the change of revenue mix, our sales and marketing services increased by 58.2 percent to RMB6.8 billion for the Q4 of 2020 from RMB4.3 billion for the same period of 2019. As a percentage of total revenue, our selling and marketing expenses increased to 37.5 percent in the Q4 of 2020 from 36.2% in the same period of 2019. The increase was primarily due to the increase in promotion and advertising expenses such as promotion for Kuaishou Express and other apps and other brand marketing brand market campaign activities, which in line with our strategic decision to invest more in selling and marketing efforts to continue to grow our user base and user engagement, enhance our brand recognition and develop our overall ecosystem. Our administrative expenses increased by 103.4 percent to RMB505.4 percent RMB595,400,000 for the Q4 of 2020 from RMB292,700,000 for the same period of 2019. The increase was primarily due to the increase of headcount of personnel to support our business growth. Our research and development expenses increased by 171.6 percent to RMB2429.7 million for the Q4 of 2020 from RMB894.7 million for the same period of 20 19. This increase was primarily due to the headcount increase as we continue to invest in AI, big data and other advanced technology. In Q4 of 2020, our fair value changes of convertible redeemable preferred shares were negative RMB17.7 billion compared to negative RMB17.1 billion for the same period of 2019, primarily due to changes in the valuation of company. Our loss attributable to equity holders of the company was RMB19.3 billion for the Q4 of 2020 as compared to RMB18 1,000,000,000 for the Q4 of 2019. Adjusted net loss for the Q4 of 2020 was RMB 704,500,000 compared to a loss of RMB 802,800,000 for the same period of 2019. Adjusted EBITDA for the reporting quarter was positive RMB927,300,000 compared to a loss of RMB3.4 million in the Q4 of 2019. This concludes our prepared remarks. We would like now to open the call to your questions. Operator, please go ahead. The first question comes from Eddie Leung with Bank of America Merrill Lynch. Please go ahead. I have two questions. The first one is about the e commerce business. So it has been growing pretty fast. We are wondering whether that helps the online marketing business as well. For example, has there been only online marketing revenue coming from the e commerce sellers or the streaming host? And then secondly, about the user acquisition strategy mentioned in the call, we have seen the user base going to a pretty high level. So just wondering which user segment or which channels the company thinks do you have some opportunities for KRYOSO to penetrate more in order to get more users? So let me first answer your second question about user growth. So in fact, there are a number ways through which our user base can grow. For example, we have the penetration of our KOLs. At the same time, there is also interaction between both offline and offline online and offline. Basically, concerning future growth in user base, there are 3 main different channels or ways. The first is a deep operation of our content. So for different groups of users, we actually differentiate and categorize the content based on their needs and interests. For instance, we offer sports content, game content and so on. And the second way through which we grow our user base is by new categories of content. Last year, we introduced a small drama series or a small theater, which had led to quite good response. In fact, it is an extension or it is a modification based on short video. But then it is about the same story, one single story through this drama series, and it is a new format of content to us. The 3rd channel is through some specific or designated top stars, celebrities or live streaming special events. So this is also one way of growing our user base. And then there is also e commerce service. When e commerce service covers more and more categories, this will also lead to and boost user growth. So of course, we have to continuously deepen our operation in terms of our content and service. Thank you. So let me answer the question about the share of advertising revenue that is a breakdown between e commerce and also the live streamers. I would say that right now we have 2 segments of e commerce advertising revenue and this accounts for 20% of the total and these are related to the e commerce merchants. And for this part of the revenue, it is accounted for in advertising revenue and not e commerce revenue. Thank you. Thank you very much. Thank you. In the interest of time, Thank you. The next question comes from Alex Poon with Morgan Stanley. Please go ahead. I'll translate my question. First of all, congrats on the Hong Kong listing. And my first question is related to you already have some massive user base and time spent on very comprehensive entertainment content, live streaming e commerce in the next few years. We'd like to hear from management how you would like to upgrade or change the Kuaishou app to incorporate more product features, including local services, games, value added services, etcetera? And finally, how would you bring this expertise and experience to overseas markets? Thank you. First of all, let me explain our R and D strategy behind our products. Well, all along, we have been doing R and D behind our products by means of observing the needs of the users in the community. So in this way, we do our R and D work. For instance, a few years ago, when we started to launch the live streaming service, well, that was because we observed that some users started to do live streaming on the Internet. And we realized that actually fans do have the need and interest in all these live streaming sessions. So that's why we started. And then for instance, afterwards, we saw that some live streamers actually sold products during their live streaming sessions. They directed their fans to the Taobao website to buy those merchandise. So we realized that actually buying and selling would be possible during these live streaming sessions. And so that's why we brought in this concept as part of our e commerce business. Because we are a video based platform, so we are able to observe and see the behavior and interaction among users. So that's why our R and D work has been successful. In the future, this kind of proprietary R and D work is still our main strategy for our app. So as what the Morgan participant just mentioned, there are services and games and also social elements on our platform. So we actually use the same way to do R and D work behind all these different elements. And in the future, we are going to continue to observe the needs and interaction and behavior of the user in order to entertain the kind of products and services that we should develop and offer. So just now you asked about what our roadmap is. In fact, our roadmap is based on our R and D work. We did not fix a 3 year roadmap for the future. In fact, we first laid down our R and D strategy and after that, the roadmap will go from there. And then when it comes to businesses with higher degree of maturity, So since this business segment or industry is a bit more mature, then our strategy can also be a bit more certain. For instance, for e commerce, we will actually apply or consider in the future supply chain finance, logistics, needs and requirements and so on when we develop the e commerce business and strategy. So that's how we work out our overall ad strategy. Next question please. Thank you. The next question comes from Alex Liu with China Renaissance. Please go ahead. I'll transfer myself. So first, we're encouraged to see the very good momentum of the e commerce business. Just from a top down perspective, should we consider e commerce live streaming, the business model itself as a time bound business model, so I. E. There will be some GMV ceiling per minute live stream. If that's the case, what kind of innovation should we think about on the e commerce format down the road? Whether is it likely that, quite sure, we'll become more aggressive on search based e commerce going forward? And the second question is on new initiatives. We noticed content platforms started to be more aggressive on local services. How does Quixo think about and position itself on the local service business model? And how does the company management evaluate the investment cycle for this business? Thank you. So in relation to e commerce live streaming, I think it is mainly limited or oriented around relationship and trust. So what we are doing is that we would like to be able to enhance and develop consumers' trust on the live streaming session as well as the live streamer. That is very important. So this year, we have been trying a lot of work to build more trust in this area. So in relation to e commerce, I believe that it is still in a very early stage of development. And in fact, we have quite a lot of work to do. For instance, we have to take care of quality management. We would like to strengthen merchants and also categories. We want to expand the coverage of categories. And all these are some basic fundamental work that we need to do. So at this point in time, I don't think it is the appropriate moment for us to think of, for example, limiting or restricting competition in the market and so on. So there is still a lot of work to be done in the future. We want to expand our coverage such as now. At the same time, we want to enhance consumers' trust on our platform, and we need to enhance our brand awareness. And also, what we may do today is that we can cover as many categories and merchants as possible. Of course, at a certain point in time, we may have to consider shortlisting or screening the merchants. But right now, I think a wider coverage is the key. And then we then have to take care of the supply chain and also products, R and D and so on. Regarding local services, we are in a very early exploratory stage and we are also picking appropriate categories that are appropriate for our platform. Bearing in mind that our platform is a short video based platform, so we will pick the category that is more suitable for the format of short video and also live streaming, so as to better manifest or better have the customer services better realize on our video based platform. The next question comes from Benny Wong with HSBC. Please go ahead. I'll quickly translate myself. Congrats on a very strong, very successful IPO and beginning the journey with a strong set of results. On online marketing revenue, we see a very robust growth, it's almost tripled year on year. So looking forward into 2021, and we also see that your peers have a very optimistic outlook. Can you share with us your outlook and your strategy As user experience is always Kuaishou's number one priority, how do you strike the balance of monetization and user experience, especially if you look at Kuaishou and also Kuaishou Express, that would be great. So this question is about the industry's projection in relation to short video and live streaming. The projected revenue should be bigger than the overall mobile advertising revenue because that is really the focus. So concerning our advertising business revenue from 2019 to 2020, it was up 200%. And then as a percentage or as a share of total revenue, its share increased from 19% to 37%. And so I believe that the share of total revenue from by advertising revenue will go up. And the revenue growth of our advertising business will be bigger than the growth of the overall industry because Kuaishou actually possesses a number of competitive advantages. First of all, we have quite big scale. At the same time, we have many, many sticky users. And we are very attractive because of these elements to the advertisers. At the same time, we will continue to build some new formats of advertising and we will also inject more interaction and interactive elements into the content and format of advertising. For our advertising business, in 2018, we set up an independent or separate team to take care of this business. And then this team is still in building and also enhancement optimization stage. And this year, we are going to increase the overall efficiency of this business segment. So there are several ways in which we can strengthen our advertising revenue as well as actually expand this business segment. 1st of all, by enhancing the operating and business efficiency of this segment. And secondly, we would also like to enhance our overall brand marketing capabilities. Number 3, we will cooperate with advertisers and content creators, especially those very high quality ones. So in this way, we can introduce more new elements and interesting colorful And number 5, we will start to do some brand advertising. And number 5, we will start to do some brand advertising. And number 6, we will do this by means of advertising union. In other words, we will cooperate with various advertisers and working partners in this regard. Is a company which attaches a lot of importance to user experience. So while we want to expand our advertising revenue, we definitely have to maintain and also make sure we can deliver a very excellent user experience. So in other words, we will not just blindly go for a sharp increase in advertising revenue in compromise of user experience. Next question please. Thank you. The last question this evening will come from Natalie Wu with Haitong International. Please go ahead. Thanks for taking my question. So my question is mainly related with the globalization. Can management give us an update on your current active user size in terms of the overseas regions? It would be great if you can also elaborate on the midterm and the longer term blueprint in terms of globalization, in terms of the user target, monetization plan, retail coverage as well as the app metrics, Also how to compete with TikTok? Lastly, wondering how should we think of the related sales and marketing spending in 2021? Thank you. In fact, concerning short video development and also live streaming business, while this is a big direction, which started already 10 years ago. So when it comes to overseas business development, actually, if you compare the development of live streaming in China and overseas, China's development is much bigger and faster than overseas. In many other overseas countries, their live streaming business is still in the very early stage and users do use this kind of app. However, it is mainly a functional or it's mainly for utilization purposes. So it is still in the very early stage, but we think that definitely there will be a lot of opportunities arising. In the long run, we think that there are many opportunities that will come up. So for overseas live streaming and video business, well, if it is to gradually grow and become comparable to that of China, then I think definitely the trend is to extend towards e commerce, games, sports and all sorts of different sharing activities. This year, we will continue to develop overseas business. However, we will exercise a choice in the overseas business and market. We think that in order to achieve growth, definitely we have to invest more and we have to do more work in terms of content and also collaboration. So we think that in developing overseas business, we have to definitely pay attention to the needs of users and also the element of creation is very important. So we have to also do more work to enhance user experience as well. For overseas business, as such, it is still in the very early stage. So, so far, there is still not much commercialization and there isn't really revenue contribution. Thank you once again for joining us today. If you have any further questions, please contact Kuaishou IR team directly or TPG Investor Relations. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.