Kuaishou (HKEX: 1024) today released its financial report for the third quarter of 2024, ending on September 30: revenue was 31.1 billion yuan, an 11.4% year-on-year increase; net income was 3.3 billion yuan, while net income for the same period last year was 2.2 billion yuan. Measured under non-International Financial Reporting Standards, adjusted net income was 3.948 billion yuan, compared to 3.173 billion yuan for the same period last year.
After the financial report was released, Kuaishou CEO Cheng Yixiao and CFO Jin Bing attended the subsequent earnings conference call, interpreting the key points of the financial report and answering analysts' questions.
The following is the main content of the analyst Q&A session from the conference call:
Goldman Sachs analyst Lincoln Kong: Regarding the development of the company's artificial intelligence (AI) business, could management introduce the latest progress in this area, especially after the launch of Kuaishou's "Keling" large model? Are there any business or financial data that can be shared? How should we consider future commercial monetization directions?
Cheng Yixiao: In this quarter, while continuously optimizing various performance aspects of the base large model, we deepened the applications of our large model in content understanding, content recommendation, content production, and user interaction. In terms of the base large model, we are developing the "Happy" Mixed Expert (MoE) model. With a total parameter scale of only a few tens of billions, multiple indicators in the model pre-training stage exceed the 175 billion "Happy" model, significantly reducing model training and inference costs, and better adapting to Kuaishou's existing business scenarios. The "Keling" large model has undergone multiple iterations in a short period. The 1.5 model released in September supports native 1080P videos and has upgraded capabilities in controllable generation such as lens control, start and end frame control, motion brush, lip-sync, etc., maintaining a leading position in the industry.
Regarding the applications of large models, in terms of content understanding, we continue to promote the landing of large model technology in various scenarios such as short videos, live streaming, comments, commercialization, and e-commerce, making progress in user retention, commercial consumption, and increasing e-commerce sales in many aspects. In the field of content recommendation, our upgraded recommendation large model technology has brought significant duration growth for the large cap.
In terms of content generation and interaction, this quarter, the consumption of marketing materials generated by artificial intelligence continued to increase, with a daily consumption of over 20 million. The interactive assistant "AI Xiaokuai" has also been integrated into more scenarios including Olympic guessing games, user private messages, and comment section interactions. The peak monthly active users also exceeded 18 million.
Next, let me introduce the business progress of "Keling AI." Since its launch in June this year, "Keling AI" has attracted over 5 million users, generated over 51 million videos, and over 0.15 billion images. In September, the monthly active users of "Keling AI" exceeded 1.5 million, and the user retention rate has been gradually improving. Recently, we have also launched an independent app for "Keling AI" to facilitate user experience.
At the commercialization end, 'KeLing AI' has successively launched a membership payment system for domestic and overseas users since the end of July, providing users with differentiated model effect experience. At the end of September, we officially opened the API service, covering modules such as video generation, image generation, and virtual try-on.
Currently, the commercialization progress of 'KeLing AI' meets our expectations, with monthly revenue exceeding tens of millions of RMB. In the future, we will explore more diversified monetization systems, and we are confident in achieving rapid growth in 'KeLing AI' revenue scale next year. I still believe that the combination of AI large models with Kuaishou's existing business scenarios can generate tremendous commercial value. In the future, we will strive to build the team's AI algorithm capabilities, aiming to achieve new breakthroughs in algorithm innovation and scene applications.
Jeffrey analyst Thomas Chong: This quarter, the daily active users exceeded 0.4 billion, with an average user viewing time exceeding 130 minutes. How does the management view the future trends and goals of these two numbers? What measures can we take to continue increasing the traffic of large cap?
Cheng Yixiao: In March 2022, we first proposed the midterm goal of daily active users exceeding 0.4 billion. Around this goal, with refined user growth strategies, high-quality diverse content supply, continuous optimization and iteration of products and algorithms, and while keeping the total user growth and maintenance costs relatively stable each year, we achieved steady growth in daily active users and viewing time. In the third quarter, we achieved the milestone goal of an average of over 400 million daily active users.
Looking ahead to the next stage of daily active user growth planning, we believe that as the penetration rate of short videos among the internet population further increases, acquiring new users will become more challenging. However, there is still much work we can do to improve user retention and activity. Regarding increasing viewing time, we believe that enriching content and enhancing algorithm recommendation efficiency can make the users feel more rewarded, which is more important than simply increasing the average daily user visit duration.
Regarding specific strategies for traffic growth, I mainly want to share three aspects. Firstly, in terms of traffic distribution strategy, we will continue to promote mechanism upgrades, facilitate alignment between commercial and organic content to maximize overall revenue, and support quality content supply through traffic tilting to promote the healthy development of the community. Secondly, in product optimization, we will strengthen Kuaishou's moat in social and private domains, explore more innovative interactive play methods, enhance the community's interactive atmosphere, and strengthen user product mentality through the comment section experience and search function optimization. Lastly, in content operation, we will create quality niche content that Kuaishou users like based on the reasons they visit, support benchmark creators with Kuaishou characteristics, and help users break their content circle through influential hot events.
In summary, we remain confident in achieving continued stable growth in traffic in the future. What's more important is that we hope to create more product usage scenarios for users, provide better quality content and services, and become a content platform that is interesting and useful for more users.
UBS analyst Felix Liu: My question is about online marketing. I noticed that in recent times, short dramas have made a significant contribution to the growth of our online marketing business. I would like to ask the management how they view the sustainability of the growth in short drama ad business. Can the company share more about future growth strategies for online marketing business?
Cheng Yixiao: As you said, with the flourishing development of the short video industry, the growth of marketing budgets in the short video industry has also become an important driving force for the rapid growth of Kuaishou's online marketing business. In the third quarter, the marketing expenditure of Kuaishou's short videos increased by over 300% year-on-year, accounting for a double-digit proportion of the overall marketing spend, and the recent monthly peak expenditure also exceeded 40 million. This is mainly due to our continuous optimization of self-built links to enhance user experience, and increasing payment scale through automatic subsidies. In addition, we have accelerated the implementation of the In-App Advertising (IAA) model this quarter to quickly expand the interest audience of short videos, driving a high-speed growth in marketing expenditure of short videos through both In-App Purchases (IAP) and IAA models.
Regarding the sustainability of the short video business, we remain optimistic about its steady growth in the mid-term. We have noticed third-party data forecasts that the short video market size is expected to exceed 100 billion yuan by 2027. With the gradual enrichment of the short video supply ecosystem, the existing population of over 0.5 billion short video users still provides a basis for further commercialization, and there is still room for improvement in the penetration rate of short video users. For Kuaishou, we not only have a rich supply ecosystem of short videos, but also a user base of over 0.3 billion short video users. With continuous improvements in products and algorithms, we believe that Kuaishou's marketing expenditure in short video IAP and IAA models can maintain rapid growth.
Next, I will briefly share with you our main growth strategies for the online marketing business. In the internal circulation, we will focus on improving the matching and reach of content, goods, and users. By solidly improving model estimation, enhancing the conversion effect of content e-commerce materials, and guiding merchants to operate more sustainably from short videos to live streaming. Externally, we will focus on original content-type ads, including short videos, Kuaishou mini-games, and novels, to provide users with the ultimate experience, enhance platform stickiness, and increase the return on investment (ROI) for marketing clients.
In terms of branding, we will rely on marketing science to accurately understand users, help marketing clients find potential customers, and provide brand marketing solutions that integrate product and effect through methods such as influencer endorsements and customized sponsorship. Finally, we still have a lot of room for improvement in industry fine operations, intelligent marketing products, and algorithm optimization. At the same time, we are gradually seeing the benefits of using large models in marketing recommendation scenarios, bringing better ROI for clients. In addition, with continuous market share gains in online marketing services, we are very confident.
Citibank analyst Brian Gong: Regarding the Singles' Day sales, could the management please share with us the overall performance of the company during the big promotion period and what our main strategies are?
Cheng Yixiao: In the current environment where consumption demand challenges still exist, we are quite satisfied with the performance of this year's Singles' Day sales. Leveraging content scenes and the comprehensive outbreak of the merchandise shelf scene, our e-commerce Singles' Day sales revenue has grown strongly year-on-year, reaching a new high. We provided over 20 billion in traffic subsidies, 2 billion in user red packets, and 1 billion in merchandise subsidies, empowering more merchants to achieve better and faster growth on Kuaishou. During this year's Singles' Day on Kuaishou, the number of businesses participating in the shopping festival event exceeded 3 million for the first time this year, setting a new historical record. The addition of new e-commerce users exceeded 7 million.
During this year's Singles' Day sales, our major promotion subsidies and operational mechanisms focused on returning to content scenes and live streaming rooms, significantly improving the broadcast rates of popular anchor hosts. The number of live streaming rooms with sales exceeding one million during this period exceeded 2500, and the release of trailer short videos increased tenfold year-on-year. At the same time, we paid more attention to marketing play development in the content scenes, specifically targeting top merchants and influencers with fan appeal and endorsement, focusing on launching fan group-buying activities to enhance fan and anchor interaction and stickiness. For mid-level influencers and merchants, we provided gameplay such as sudden red packets to help boost sales during the big promotion period. In addition, for shelf-type merchants, we provided more subsidies for traffic and resources, ensuring that good products receive better returns through task incentives and partnership strategies.
Looking at the goods side, we integrated the entire platform's subsidy budget to ensure that goods in the content scene have equal price advantages. At the same time, we clearly divided the main recommended product categories from a platform perspective, including new products released in the current season, new products preferred by users during the big promotion period, core hot-selling products across the platform, and the super products of various brands. The advantageous categories include non-standard products like tea, wine, health, and jewelry, as well as standard products like consumer electronics and home goods. Our large-scale e-commerce subsidized section on Singles' Day this year covered over 2200 hot-selling brands and over 2500 hot-selling product categories.
With the increasing implementation of the government's policy to encourage the replacement of old home appliances in the second half of this year, we believe that platforms like Kwai, which cater to the diverse and multi-level needs of new consumer groups, have greater advantages. During this year's November 11 shopping festival, with the assistance of government subsidies, consumer demand for replacing old home appliances has been fully stimulated. We quickly seized the policy dividend, promoted the landing of more cities' home appliance replacement subsidies on Kwai, and at the same time, strengthened the platform's coupon optimization and order conversion chain.
During this year's singles' day sales, Kwai's e-commerce national subsidy users received coupons totaling over 1.46 million, driving a significant increase in sales of consumer electronics and home categories. The performance of the singles' day big promotion exceeding expectations has made us more confident in our development strategy of returning to live streaming, breaking through short videos, and steadily building a diversified e-commerce strategy. Looking ahead, despite the challenges of weak consumer demand and intensified market competition, we believe in the correctness of our core strategy of rich content e-commerce resources and insisting on the combination of good content and good commodities. We will continue to enrich e-commerce supply and ecosystem, help businesses achieve comprehensive growth, and contribute to the consumption upgrade under the assistance of policies like national subsidies.
UBS Group analyst Lei Zhang: My main question is about the local life business, how does the management evaluate the progress we have made in this business recently, and are there any medium to long-term goals that can be shared?
Cheng Yixiao: We started experimenting with the local life business in 2022, gradually exploring and verifying the demand of our users for local life. By mid-2023, we started operating with industry and regional focus, expanding sales and user base, then this year, we tried to improve monetization efficiency, and even in the future, we expect to achieve tiered profitability, every step being solidly executed.
Local life is a high-frequency business scenario, we increase the reasons and frequency for Kwai users to open the app by providing them with quality local content and highly cost-effective goods and services. We continuously upgrade talent policies, guide high-quality content production, while persisting in supporting the good and eliminating the bad, optimize traffic distribution mechanisms, providing users with a better experience. Our users value cost-effectiveness, so this year we focus on building a more competitive core product for richer pricing engine applications. The number of paying users continues to grow, with a 28% increase in daily active buyers in the third and fourth quarters. Sales also maintained a high-speed growth of 26% month-on-month.
In terms of monetization, for local operational businesses, we leverage industry refinement, multi-category exploration, and various incentive methods to leverage more advertising investment. For lead-based businesses, we continuously improve incremental budget allocations through new advertising products. In the third quarter, revenue from local business grew over 2.5 times year-on-year, with a 36% month-on-month growth.
By continuously improving subsidy efficiency and operational efficiency, the gap between revenue and cost expenses is gradually narrowing. From a comprehensive platform value perspective, we believe that the local business is worth long-term investment, seeing a trend of continuous improvement in ROI. In the medium to long term, we will firmly focus on meeting user demands, and based on our user resources, empower businesses to achieve growth. While maintaining a good user ecosystem, we mainly consider the platform value and the incremental revenue value it brings to the company.
Goldman Sachs analyst Xueqing Zhang: We noted that the company's marketing and sales expenses grew on a month-on-month basis in the third quarter, would like to understand the main reasons for this? Looking to the fourth quarter, how is the trend of OpEx (Operating Expenses) changing?
Jin Bing: In the third quarter of this year, sales and marketing expenses have increased compared to the same period last year, mainly due to our increased investment in online marketing services and e-commerce business, while the level of user growth and retention costs overall remains stable. The investment in online marketing services is mainly related to the subsidies for paid short videos. We use roi as the premise for subsidy investment, increasing the scale of paid short video users while leveraging a customer marketing budget several times higher than the subsidy amount.
We expect that as user awareness of paid short videos forms, and with the optimization of intelligent subsidy solutions, roi will further improve. The investment in e-commerce is mainly related to user subsidies, and of course, we still maintain a relatively cautious investment. Therefore, although the absolute value of our e-commerce subsidies has increased, the proportion of subsidies to GMV remains relatively low in the industry, and our subsidy efficiency continues to improve.
In terms of sales and marketing expenses, entering the fourth quarter, as we welcome the arrival of the e-commerce major promotion season, we expect the absolute amount of e-commerce user subsidies to increase month-on-month. At the same time, our investment in online marketing services will also slightly increase month-on-month, so sales and marketing expenses in the fourth quarter will increase seasonally compared to previous years.
In terms of research and development expenses, the incremental investment in AI large models will lead to increased costs of related R&D personnel, and R&D expenses will also increase month-on-month, but the proportions of sales and marketing expenses and R&D expenses to income will both decrease. We believe that with the deepening of our continuous quality and efficiency improvement measures in the future, the overall profitability of the group can further increase, creating value for shareholders. (End)
