Earnings Call: Q1 2021

Jun 1, 2021

Earnings release

Hello, ladies and gentlemen. Thank you for standing by for 36KR Holdings Incorporation's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Jing Li, IR Manager of the company. Please go ahead, Jing. Thank you. Thank you very much. Hello, everyone, and welcome to 36KR Holdings' Q1 2021 earnings conference call. The company's financial and operational results were released early 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.36ir.com. Participants on today's call will include our Co Chairman and CEO, Mr. Dada Gong Feng and our Vice President of Finance and Capital Markets, Mr. 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 of 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 well 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 36 Care's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non GAAP financial measures. 36 Care's press release contains a reconciliation of the allogeneic non GAAP measures to the allogeneic GAAP measures. And please note that all amount numbers are in RMB. I will now turn the call over to our Boardwalk Chairman and CEO, Mr. Da Dongfeng. Paul, please go ahead. Thank you. Hello, everyone. Thank you for joining us today. As we venture further into 2021, China's economy is gearing up for a new normal as it steadily emerges from the COVID-nineteen pandemic. In this context, we are certainly regaining growth momentum and focusing our core competencies as the leading platform for new economy growth focused business content and service offerings in China. With continuous long term investments in our content, products and technology, we believe we are well positioned to see the immerse commercialization opportunities in the digital transformation of traditional enterprises, the rise of enterprise service market, the further integration of private equity and public equity market and the shift towards short form video across digital content industry for the unlocking values to our customers, users and investors. During the Q1, events again delivered record setting performance in total user traffic with average monthly PVs jumping to a new high of 829,300,000, representing a 75% year over year increase and a 32% sequential decline. This strong metric represents a 12th consecutive quarter of PV growth, underscoring our exceptional ability to generate new econic content, appealing to a broader and growing audience space. Echoing the growth in our traffic and user engagement, demand from advertisers continued to demonstrate growth momentum in the Q1. We are delighted to achieve a 55% year over year jump in advertising revenue amid increase in both the number of advertising customers and average revenue per advertising customer compared with the same period of 2020. Our existing and emerging advertising segment both recovered at a fast pace, preparing us toward a more comprehensive marketing service model. In addition to multinational corporations, domestic brands and Internet giants, our advertising quintile has covered more verticals such as healthcare, artificial intelligence and social networking. We are present to see 36 Care is increasingly become the go to partner for fast growing new economy companies as well as elite brands. During the Q1, we continued to refine our content platform and our product offerings, which are the foundation of our commercialization. Our content platform strategy remains intact as we are dedicated to further strengthening our content quality, depth and diversity through both PGC and UGC. Our professional produced content continues to enjoy high popularity and a paralyzed word-of-mouth effect. We published the numbers insightful analysis reports, timely market updates as well as self working editories and commentaries every single day. As a content platform, we also endeavor to attract and cultivate more quality content creators and continuously expand our content genres in order to cover more niche markets and the size of broader user demographics. In addition to our proprietary platform, we continue to leverage external resources to expand our user reach. We now work with almost all major third party platforms, including WeChat, Weibo, Douyin, Kuaishou, Bilibili and most recently Xiaofeng Shu. In the Q1, there were over 160 pieces of content published on 36 ks WeChat official accounts that have gained readership of over 100,000 times each. In addition, our newly launched WeChat accounts are used customized for the younger generation and their lifestyle and business trends is well received by the audience with a fast growing number of followers. Furthermore, we are handling our capabilities in video and audio content formed to broaden our offering metrics and resonate with a wider user base, especially the younger generation. During the Q1, our live streaming and short form video content initiatives continue to fuel additional user traffic growth. Specifically, our self produced video content gained further traction with over 4,400,000 followers on the 3rd party traffic platforms at the end of Q1, up 53% sequentially. They attracted more than 647,000 followers on Bilibili with our video content garnering over 60,000,000 total views. On Zouyin, our KR Finance account attracted around 3,600,000 followers spurred by our high performance trendsetting video content. Recently, we also created a content distribution account on Xiaohongshu, and we are excited to have witnessed fast forward growth on this new channel as our short form video content continues to gain popularity. In terms of commercialization of video content, we have entered into collaborations with a variety of elite brands, including Elite, Jinan, Huawei and HP for video marketing services. Moreover, we are expanding our audio based content, integrating multiple forms including text, image, video, audio and live streaming, all of which are aimed to providing customers with a comprehensive area of content marketing solutions. On the product front, in the Q1, we continue to upgrade our 36 care app in an effort to cultivate our organic and proprietary user growth. We added new ROI desktop widget features to the 36 tier app, providing users with a more accessible and easy to use way to discover and browse content. We also enabled a new test function on our 36 tier app for users to access live streaming content on our own mobile app to deliver a smoother content viewing experience across our platform. For the Q1 of 2021, the average content consumption per person of the 36 pair app increased by nearly 40% on year over year basis. Last but not the least, we recently launched a brand new public active markets product. Over the years, 36 Care has accumulated rich experience and expertise in serving new economy companies and private active market participants. It's a natural extension to provide services for the professional public active market sector and building on our proven accomplishments. We believe we can replicate this success with relevant public FPO market content and grasp new opportunities in this tremendous market. Our content and service offerings across pre and post FPO companies exhibited rapid growth with positive market feedback. This strong performance reinforces confidence in our ability to drive growth in this promising field. I would like to share some color on progress we have made with new initiatives across enterprise services business space. We are excited to have made meaningful strides in our enterprise service review portal. Beta launched last year in a B2B digital destination to discover and select enterprise service in China. The review portal has showcased over 3,000 enterprise service applications as of March 31, 2021. More specifically, the Revu platform launched the ranking of business intelligence software on a rolling basis in spring 2021, featuring leading companies and industry experts in the BI space and promoting comments on various BI products from hundreds of enterprise customers. We also arranged exclusive meetings for BI software brands and enterprise customers to facilitate potential procurement transactions. In addition, we are working diligently to extend our value added enterprise service offerings to more cities and regions in China to ride the wave of digital transformation. We are confident that our geographic expansion initiatives will bolster our ability to scale up our enterprise services, especially in partnership with local governments and value chain resources. In this spirit, during the Q1, we pivoted to develop the collaborative opportunities between enterprises and local governments in Henan, Shandong and Hunan. To date, we have expanded our footprint into 12 cities, including burgeoning MAX cities like Hangzhou, Chongqing, Chengdu and Guangzhou, and we plan to expand to more of our provinces over time. These efforts supported our capabilities to build up a multi facet and dynamic enterprise service ecosystem, inspiring new economy driven development across the nation through our engaging and valuable content as well as our comprehensive service offerings. The development of the Internet in China has been fueling changes in economic system as digital technologies have been refining redefining more and more economic activities. This included digital information, digital merchandise and digital finance as well as an increasing share of business activities going digital. The COVID-nineteen crisis has especially accelerated digital transformation across a wider range of business activities. We believe that within the next 20 years, our economic activities will aggressively go digital. Our Internet companies and the traditional companies will eventually evolve to new economic companies. We see huge opportunities emerging in the digital transformation journey across the world. And keeping this in mind, we are poised to set up our strategic efforts to grasp the growth potential. On May 11, we hosted our China Fund Partner Future Summit in Shenzhen, attracting hundreds of mainstream investment institutions, which included 1st tier LPs, international investment bankers and globally well known active funds. This flagship summit featured a keynote on the dynamic opportunities and the challenges facing venture capital and active markets, bringing insights to our customers and users. And on May 12, also in Shenzhen, we hosted the 2021 Wise Innovation Leader Conference. Dozens of industry KOLs, leading companies and analysts attending the events. Focusing on themes surrounding new technology, new consumer and new healthcare sectors. Moving on to our subscription services. With a firm commitment to serving the 6 major communities of China's new economy, our subscription services have successfully engaged enterprises, governmental agencies and capital across the country. For example, our iconic membership product, Ali Speedway Star Class brings direct resource support from the government for staff. This type of support was put in practice during the quarter in Tianjin during the Q1 in Tianjin and Futian Guangdong. In summary, looking ahead to 2021, we believe demand for 36 Hair and its diverse service offerings from a growing base of new economy participants will continue to thrive in the fast evolving digital business contest. As a go to content and service platform in the Chinese new economy space, This will continue to diversify our products and service offerings as well as boost our community and user base. While exploring new growth avenues to enhance monetization. We are confident that our long term fundamentals position us well to forge ahead in new business development. With that, I'll now turn the call over to our VP of Finance and Capital Markets, Ms. Lin Zeng, who will discuss our key financial results. Please go ahead, Lin. Thank you, Paul, and hello, everyone. Our first quarter results got the year off to a solid start. As Paul mentioned earlier, the rebound in market demand underpinned a strong 58% year over year growth in our advertising revenues in the Q1. Also, as we continued to shift our resources and focus towards higher margin businesses, we saw substantial year over year increase in both gross profit and gross profit margin. In addition, net loss net of substantially in this quarter compared to the same period of last year. Going forward, we remain dedicated to building on our content strength and growing monetization channels to seize immense new economy opportunities. Now I'd like to walk you through more details on our Q1 2021 financial results. Online advertising services revenue increased by 58% to RMB33.2 million in the Q1 of 2021, compared to RMB21 1,000,000 in the same period of last year. The increase was primarily attributable to the strong recovery and growth of market demand in the Q1 of 2021. Enterprise value added services revenue were RMB6.9 million in the Q1 of 2021 compared to RMB42.8 million in the same period of last year. The decrease was primarily because we continuously shifted our focus toward higher margin businesses and starting from this quarter, we ceased to act as a principal in certain low gross margin businesses and only acted as an agent. As a result, revenues of such businesses were recognized on a net basis from this quarter onward. To increase comparability of operating results and help investors better understand our business performance and operating trends, we introduced the gross transaction value as a supplemental metric to describe our business. Gross transaction value of enterprise value added services was RMB32.5 million in the Q1 of 2021 compared to RMB42.8 million in the same period last year. Subscription services revenue increased by 154 percent year over year to RMB3.4 million. The increase was primarily attributable to the growth in institutional investor and enterprise subscription services. Total revenues were RMB43.5 million in the Q1 of 2021 compared to RMB65.2 million in the same period of last year. This is mainly due to the aforementioned change of revenue recognition for our enterprise value added services, where there is a RMB25.6 million variance between net revenues and gross transaction value. If you do the math, you will see actually our overall business trend is upward and demonstrated solid year over year growth. Cost of revenues decreased by 66% year over year to RMB20.2 million in the Q1 of 2021. The decrease was primarily because we continuously shifted our focus toward higher gross margin businesses, as we mentioned earlier in the enterprise metal added services section. Gross profit was RMB23.4 million in the Q1 of 2021, representing a 3 29% increase year over year. Gross profit margin was 53.7 percent in the Q1 of 2021 compared to 8.4% in the same period of last year. Operating expenses were RMB64.8 million in the Q1 of 2021, representing a 37% decrease year over year. This was mainly due to the decrease in G and A expenses in the Q1 of 2021. Sales and marketing expenses were RMB35.7 million in the Q1 of 2021, compared to RMB34.9 million in the same period last year. G and A expenses were RMB20.2 million in the Q1 of 2021, compared to RMB59.3 million in the same period last year. The decrease was primarily attributable to the decrease in the allowance for doubtful accounts and share based compensation expenses. Research and development expenses were RMB9 1,000,000 in the Q1 of 2021 compared to RMB8.5 million in the same period last year. The increase was primarily attributable to the increase in payroll related 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 and A expenses, totaled RMB2.7 million in the Q1 of 2021 compared to RMB13 1,000,000 in the same period of last year. Net loss was RMB40.5 million in the Q1 of 2021 compared to RMB95.9 million in the same period of last year. Non GAAP adjusted net loss was RMB37.8 million in the Q1 of 2021 compared to RMB82.9 million in the same period last year. Net loss attributable to 36 KR Holdings' ordinary shareholders was RMB39.5 million in the Q1 of 2021, compared to RMB95.4 million in the same period last year. Basic and diluted net loss per share were both RMB0.38 in the Q1 of 2021, compared to RMB0.93 in the same period of last year. As of March 31, 2021, the company had cash, cash equivalents and short term investments of RMB174.1 million compared to RMB209.2 million as of December 31, 2020. The decrease was mainly attributable to an equity investment we made in the Q1 of 2021, with a total cash consideration of approximately RMB30 1,000,000. This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead. Thank you. We have the first question from the line of Winston Pugh from Needham and Co. Please go ahead. Vincent, your line is open. You can ask your question now. Once again, Vincent from Needham and Company, your line is open. You can ask your question now. Thank you. Thank you, management, for taking my question. I have question I have two questions. First question is, can management share the comment on overall market recovery in Q1 2021? And have we seen any chance that we can share for the rest of the year? So second question is, can I share a comment on the client's spend with 36 KR? It was mentioned that some international clients have reduced their spending. Have they have returned? And how the overall spending and engagement by client this quarter? Yes. Thanks, management. Okay. As the worst of the pandemic appears to be behind us, we are seeing solid economic recovery and gradual improvements across various industries. More specifically, a few new economy companies spearheaded the growth in the aftermath of the pandemic. As such, our advertising business gathered strong momentum in the Q1 with year over year revenue growth of 58%. Advertising services for our new economy customers continue to grow both in terms of number of advertising customers and average revenue per advertising customer. And we achieved more than 100% growth each in advertising services for several verticals such as consumer and lifestyle, e commerce, artificial intelligence and healthcare. In particular, advertising services for healthcare customers delivered explosive growth. We are actively managing to tap into rising opportunities in the artificial intelligence and health care space and attract new customers. And looking forward to 2021, we expect advertisement demand from branded customers, especially multinational brands to increase compared with last year. Okay. I'll do a quick translation. We categorized our advertising customers into traditional customers and new economy customers. The multinational companies accounted for the majority of traditional customers. In the Q1, we saw average revenue per traditional customer increased 11% year over year. Since the Q1 is traditional slow season for advertising demand, we expect average revenue per traditional customer to see substantial year over year growth in the following quarters. And along with global recovery from the pandemic, we saw advertising demand from multinational customers gradually rebounded. We also saw stronger growth in advertising needs from domestic new economy companies, such as both in the new consumer and AI sections. Meanwhile, we are making progress in improving our advertising products such as video advertisement to attract more customers. Some consumer brands have higher interest in this kind of product as they would like to reach to more new customers with exposure to 36 hairs video content. In addition, customers who are rebuilding their brands expect to complete transformation of brand identity by leveraging strategic pair's video advertising products. In this regard, strategic pair has become an important partner for traditional brands that are in their transition towards new ecomic companies. Thank you. Thank you. Thank you. We have our next question from the line of John Ding from Credit Suisse. Please go ahead. Thank you. Good evening, management. I have a question here on behalf of Kemi Feng. Can you comment on this quarter's gross profit margin in relation to the business change nature and also the outlook for the GPN in 2021? Because I understand there are circumstances that we've changed the accounting recognition to the net basis and also the business for enterprise services is shifting from the role of principal to the agent. Thank you, management. Hi, Juan. This is Lin. I will take your question. Yes, you can see that our Q1 gross margin actually was a substantial increase compared to the same period last year. Our gross margin climbed to 64% this quarter compared to 8.4% last year. I think there are a couple of reasons here. First of all, obviously, we have been shifting our focus towards higher margin businesses as I was said earlier. And also we're implementing some cost control measures. So altogether this helped our gross profit and gross profit margin to increase. And secondly, as you also mentioned that starting from this quarter we are starting to record net revenue for our enterprise value added services. So this will not affect our gross profit, but it will definitely help increase our gross profit margins to some extent. And I also want to highlight that as you mentioned, yes, we changed the revenue recognition for our enterprise value added services revenue from this quarter onward. And actually if you take that into consideration and if you do the math, you will see that our overall business trend is upward compared to the same period last year and have demonstrated solid growth. And the reason as we explained in our earnings release as well as in our prepared remarks is because we shifted our focus and resources to higher margin business. So as a result for some lower margin businesses we only act as an agent and where previously we act as a principal in these businesses. That's why we started to recognize net revenue for those businesses. And also for your question on the outlook of gross margin trend for the remainder of the year 2021, I can assure you that our gross margin will be on a continuous improvement trend for the rest of the year. Hope this answers your question. Thank you. Sure. Thank you. That's very helpful. Thank you. We have our next question from the line of Shihan Zhao from CICC. Please go ahead. I will translate myself quickly. Could the management share more color on the details and the future strategy of the new product such as enterprise service review portal? Thank you. Okay. I'll do a quick translation. Our enterprise service review portal has been our latest attempt in the field of enterprise value added services. We better launched it last year with to build a digital definition to discover and select enterprise services in China. The review portal has showcased more than 3,000 enterprise service applications, mainly in the field of BI, CRM and collaborative posts. This year, we expect more enterprise service suppliers to come to our platform By addressing enterprises' digital transformation demands, we aim to further leverage our stellar brands, high quality content offerings and data insights to provide enterprise service providers with our platform to acquire customers. Thank you. Thank you. Thank you very much. Thank you. Can we move to the next question? Yes, please. Thank you. We have the next question from the line of Jade Deng from TH Capital. Please go ahead. Yes. Thanks management for taking my question. I have one question here. How is the process of public equating market's products? Thank you. We recently launched a brand new public equity market product, providing thought provoking editories and categories in set for analysis reports and premium offline activities to participants in the public active markets, including pre IPO companies, listed companies, bonds and securities companies. Our public active markets product has gained popularity since its launch, which proves our ability to drive growth in this promising field. And we are confident this new product will become a classic product in content and service offering field, which strengthens our current content and service offerings in the market and extend to a broader field. We believe in the great potential in the public acting markets. Thank you. Thank you. Thank you. Can we move to the next question? Yes, please. Thank you. We have the next question from the line of VP Kyo from Industrial Securities. Please go ahead. So I will transfer my question. Hi, management. I have a question about the short video business. Could you explain more about the monetization progress around this new infrastructure? Is this a combination of advertising and enterprise service? Thank you. I'll do a quick translation. We launched our short form video initiatives within a year and we are happy to see that we are gaining a growing number of followers on our account on Bilibili Douyin and recently in Xiaopingshu. I'll share some numbers of our current short term videos. During the Q1, our self operated video content gained over 4,400,000 followers on the 3rd party traffic platform at the end of the Q1, up 53% sequentially. We attracted more than 647,000 followers on Bilibili with our video content gathering over 60,000,000 total views. On Douyin, our Care Finance account, attracted around 3,600,000 followers spurred by our high performance training video content. And recently, we also created accounting distribution account on Xiaohongshu. And currently, we have cooperated with some elite brands, for example, like Yili, Ping An, Huawei and HP. And our current monetization model for our short form video is mainly advertising, but we will expand our current services to a more comprehensive services, including training and contest for our customers to better serve their needs in this new economy content space. Thank you. Thank you. Our next question comes from the line of Ryan Lee from AMTD. Please go ahead. Hello. Thanks for taking my question. I want to know more about the enterprises, Sohu, how the progress of your offline activities and which industry will be the most attractive or the popular this year? Thanks. Okay. I'll do a quick translation. Our offline wins are recovering gradually. Recently, in May, we successfully hosted China Farm Partners Future Summit and the 2021 Wise Innovation Leader Conference in Shenzhen, where we discussed investments and financing trends in the private and public equity markets as well as the latest industry trends in 3 major fields including 5 gs technology, new consumer and healthcare. We also made the event successful via live stream and received positive feedback and recognition from many event attendees. We see various sectors taking up digital transformation, including digital information, digital merchandise, digital service and digital finance. We think within the next 20 years, most of the business activities will reverse fully go digital. As the broader business investment goes digital, it will generate tremendous opportunities. Moving to the hot industries. We think new consumer is the most hot industry and has gained great attract a lot of potential from attention from the capital. And also 5 gs technology, healthcare, new healthcare and new infrastructure healthcare are gaining widespread attention across capital markets. 36 Care stands as a frontier of new economy focused information and remains committed to providing more value to new economic citizens with high quality content offerings and value added services. And we think we can provide better services to our clients, our customers in the new economy business space. Thank you. Thank you. Thank you so much. Thank you. As there are no further questions now, I would like to turn the call back to company for any closing remarks. Thank you. Thank you once again for joining us today. If you have further questions, please feel free to contact 36 Payers' Investor Relations through the contact information provided on our website.