36Kr Holdings Inc (KRKR) 2020 Q2 法說會逐字稿

Hello, ladies and gentlemen, thank you for standing by for 36Kr Holdings, Inc. Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

I will now turn the call over to your host, Yolanda Liu, IR Manager of the company. Please go ahead, Yolanda.

Thank you. Hello, everyone, and welcome to 36Kr Holdings' Second Quarter 2020 Earnings Conference Call. The company's financial and operational results were released via newswire services 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. Feng; and our CFO, Ms. Jihong Liang. Mr. Feng will start the call by providing an overview of the company and performance highlights of the quarter in Chinese, followed by English interpretation. Ms. Liang will then provide details on the company's financial results before opening the call for your questions.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with U.S. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law.

Please note that 36Kr's earnings press release and this conference call include discussions of the unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. 36Kr's press release contains a reconciliation of 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. Feng. Please go ahead, Pal.

Thank you, and hello, everyone. Thank you for joining us for the second quarter 2020 earnings conference call.

(foreign language)

[Interpreted] In the second quarter of 2020, although the COVID-19 pandemic spread has been gradually controlled in China, we, along with our clients, were facing significant uncertainties as containment measures and policies related to these measures were not fully eased. Many of our clients have not resumed their marketing plans and promotional activities, thus their demand for our services was still delayed in the second quarter. Under this circumstance, we continue to proactively realign our operations to the evolving market dynamics, grasping new opportunities from clients' emerging and ever-changing needs.

(foreign language)

[Interpreted] Despite the challenges, we are encouraged to have kept making positive strides in the content front. Our average monthly page views reached 499.2 million for the 12-month period ended June 30, 2020, demonstrating a strong year-over-year growth of 43.6%. Notably, our live streaming programs and newly produced short-form video content have gained robust traction during the quarter. While we have not included the viewerships in our monthly page views yet, our new video-based content format has garnered a very positive user reception. During the quarter, for example, the average user time spent on our live streaming and short-form video content has performed quite well, especially considering the serious nature of our business related content offerings. We are pivoting our efforts to seize the vast opportunities in the rising popularity of these content categories, especially in the next few years and fortifying our leading position as a prominent new economy-focused content platform.

(foreign language)

[Interpreted] Turning to our revenue streams. As I just mentioned, due to the enduring impact of the COVID-19, many of our clients' marketing plans and demand for our service offerings had not been restored. This situation led to relatively soft year-over-year performance in our advertising, enterprise value-added services and subscription services. However, compared with the preceding quarter, revenue from our online advertising services realized 48.9% growth. In the second quarter, we attracted an increasing demand for advertising services from TMT companies, illustrating our brands' strong and pervasive influence among the new economy space.

(foreign language)

[Interpreted] With respect to our enterprise value-added services, when developing solutions for our clients, we have adopted more creative approaches, such as live stream events. For example, our CMO Summit in collaboration with Twitter targeted a broad group of Chinese companies that are expanding their business overseas. This 2-hour-live-streamed program generated total viewership of 3.52 million on third-party platforms and stimulated online interactions of over 283,000 on our own platform.

Also, we jointly administered the Huawei Developer Challenge 2020 with Huawei and live-streamed the contest event in the second quarter. This contest served as a unique stage for startup companies to present their innovative capabilities in developing technical solutions while assisting Huawei in its effort to screen and identify outstanding startup partners that can contribute to the construction of its innovative ecosystem. Through our multichannel live streaming, these kinds of online events brought enormous exposure to both our corporate clients and numerous young companies, helping them realize efficient customer acquisition and build collaborative business connections for more resources and growth opportunities.

(foreign language)

[Interpreted] Amid the changing environment brought by COVID-19, we have been helping governments digitize their working process and energize the regional economy. Through our service solutions, such as online marketing and virtual roadshows, local governments are able to introduce the local conditions and supportive policies with wider exposure for efficient investments and talent attraction. These innovative and efficient solutions have gained positive reception and are attracting new governmental collaborations.

As of the second quarter, we have provided related services to about 30 different administrative departments from 7 provincial capital cities with repetitive purchases to our services.

(foreign language)

[Interpreted] In the second quarter, our subscription services had not fully resumed offline courses that usually charge higher prices. Still compared to the preceding quarter, we achieved considerable demand recovery with increased client registrations for our featured V-club courses. Additionally, we developed various creative programs, such as 8-Minutes Conference for our corporate subscribers, especially those operating in new consumer industries, including senior citizen services, fitness, pet services, fashion, medical aesthetics and maternal and infant, et cetera.

Our programs help corporate clients enhance their brands and products' exposure and attract commercial opportunities while introduce various new choices to a wider audience demographic, including Gen Z and senior citizens. Moreover, since the launch of our mini business administration program in the first quarter, we have consistently refined this program and successfully launched its first off-line courses, 36Kr healthcare innovative class, which attracted numerous elite healthcare enterprises and practitioners in this industry. With healthcare as one of our focused industries in the first half of 2020, we organized a variety of activities and events connecting related enterprises in the up- and downstream, industrial parks and institutional investors to promote constructive communications and commercial partnerships in the space.

Our subscription services will continue to target individuals who can fuel business demand and generate more opportunities for our enterprise services.

(foreign language)

[Interpreted] Turning to our overseas business. In spite of the evolving global pandemic situation and increasing international dynamics, our operations overseas continue to make progress with increased high-quality content production and remarkable traffic growth. In July, 36Kr Japan rolled out connec2.jp, a subscription-based platform that provides comprehensive enterprise data analysis, in-depth research reports and bespoke consulting services for both individuals and corporates in Japan.

In collaboration with South China Morning Post, 36Kr Global will provide objective content reports and marketing solutions for Chinese companies that are expanding their business overseas.

(foreign language)

[Interpreted] Overall, even though the COVID-19 has been gradually brought under control in China, the macroeconomic uncertainties still exist, leading to relatively soft client demand in the second quarter. Faced with this difficult market condition, we maintained our diligence operations with active strategies adjustment and innovations to our service and solutions to adapt to the new normal. It is encouraging that our engaging content maintains numerous popularity among our users, bringing robust traffic to our platform. We have also monitored recovering demand for our services and solutions, demonstrating the strength of our brand equity and deep trust from our clients and partners.

Inspired by our clients' trust, we remain dedicated to serving new economy participants in the new normal, addressing their new demands and requirements with innovative and creative solutions. We believe we can overcome the short-term challenges and achieve greater success together with the promising new economy that is full of potential.

(foreign language)

[Interpreted] With that, I will now turn the call over to our CFO, Ms. Jihong Liang, who will discuss our key financial results.

Thank you, Mr. Feng, and hello, everyone. As Mr. Feng mentioned the enduring impact from the COVID-19 pandemic presented us with a challenging second quarter of 2020. Our soft year-over-year topline performance for the quarter reflects relatively lower demand as clients postponed their marketing plans and promotional activities while waiting for the pandemic containment measures to be further eased. Nevertheless, revenues from our online advertising services and subscription services delivered a sequential growth, which indicates gradual demand recovery. We believe there are still tremendous and underserved demands for enterprise value-added services that we will continue to cultivate under the new normal.

In regard to our internal operations, we deployed a more stringent cash management policy, such as requiring prepayment for certain projects and a strict selection of the quality clients to collaborate with. These measures are able to help us maintain healthy cash flows and manageable account receivables. We are pleased that our efforts paid off well as we maintained a solid balance sheet position and for the first time, achieved a positive operating cash flow in the second quarter of 2020.

Moreover, we have made prudent investments in technologies and new devices to prepare for changing market environment, which we believe is critical for our future growth. As a unique enabler for new economy participants, we will continue to explore, identify and understand the new demands and needs of our clients across enterprises, governments, institutional investors and individuals.

By leveraging our brand influence, business connections and extensive service experience, coupled with the investment and technologies, we are relentlessly providing effective solutions to support our clients to recover, grow and thrive.

And now I'd like to walk you through more details on our second quarter of 2020 financial results. Total revenues were CNY 76.7 million in the second quarter of 2020 compared to CNY 118.1 million in the same period of 2019. Online advertising services revenues decreased by 29.9% to CNY 31.3 million in the second quarter of 2020 from CNY 44.7 million in the same period of the 2019.

Enterprise value-added services revenues decreased by 28.6% to CNY 42.6 million in the second quarter of 2020 from the CNY 59.7 million in the same period of the 2019.

Subscription services revenues were CNY 2.7 million in the second quarter of 2020 compared to CNY 13.7 million in the same period of 2019. Cost of revenues were CNY 54.4 million in the second quarter of 2020 compared to CNY 78.7 million in the same period of 2019. Gross profit was CNY 22.2 million in the second quarter of 2020 compared to CNY 39.3 million in the same period of 2019.

Operating expenses were CNY 99.4 million in the second quarter of 2020 compared to CNY 71.9 million in the same period of 2019. The increase was mainly due to increases in general and administrative expenses and sales and marketing expenses in the second quarter of 2020.

Sales and marketing expenses were CNY 39 million in the second quarter of 2020 compared to CNY 25.8 million in the same period of 2019. The increase was primarily attributable to an increase in share-based compensation expenses and promotion fees.

General and administrative expenses were CNY 50.9 million in the second quarter of 2020 compared to CNY 38.9 million in the same period of the 2019. The increase was primarily attributable to an increase in the allowance for doubtful accounts and professional fees, and was partially offset by the decrease of the share-based compensation expenses.

Research and development expenses increased by 32.2% and to CNY 9.6 million in the second quarter of 2020 compared to CNY 7.2 million in the same period of 2019. The increase was primarily attributable to the increase in technology expenses related to technology procurement and device maintenance and testing.

Share-based compensation expenses recognized in cost of revenues, sales and marketing expenses, research and development expenses and the general and administrative expenses in total were CNY 12.6 million in the second quarter of 2020 and CNY 27.9 million, which includes the effect of the re-designation of ordinary shares to convertible redeemable preferred shares amounting to CNY 26.8 million in the same period of the 2019.

Other expenses were CNY 2 million in the second quarter of 2020 compared to other income of CNY 0.9 million in the same period of 2019, primarily attributable to the increase of the share of the loss from equity method investments.

Income tax expenses were CNY 85,000 in the second quarter of 2020 compared to CNY 0.2 million in the same period of 2019.

Net loss was CNY 79.3 million in the second quarter of 2020 compared to CNY 31.9 million in the same period of 2019.

Non-GAAP adjusted net loss was CNY 66.7 million in the second quarter of 2020 compared to CNY 4 million in the same period of 2019.

Net loss attributable to 36Kr Holdings Inc.'s ordinary shareholders were CNY 79.5 million in the second quarter of 2020 compared to CNY 183.5 million, which included the accretion on redeemable non-controlling interests, accretion and re-designation effect of the convertible redeemable preferred shares in the same period of 2019.

Basic and diluted net loss per share were both CNY 0.078 in the second quarter of 2020 compared to CNY 0.641 in the same period of 2019.

As of June 30, 2020, the company had cash and cash equivalents, restricted cash and short-term investments of CNY 197.9 million compared to CNY 294.2 million (sic) [CNY 264.2 million] as of December 31, 2019.

To be mindful of the length of our earnings call, for the first six months of 2020 financial results, I will encourage listeners to refer to our earnings press release for further details. This concludes all our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions) And the first question comes from Kenneth Fong with Crédit Suisse.

(foreign language) The question on the overall advertising demand. So can you mind sharing with us by verticals in the second quarter, which are the vertical, which is particularly strong and which one are particularly weak? And what is our overall demand outlook for the third quarter? And then longer-term into the second half of this year?

(foreign language)

[Interpreted] It's a quite long answer. I will do a simplified interpretation of Mr. Feng's answer. I think in the second quarter, due to the COVID-19, our advertising revenues decreased actually year-over-year by 49%, while the number of advertising clients had an increase. During the quarter by leveraging our brands and service strength we consistently promote our services among especially TMT companies and benefited from the containment of the pandemic first in China and the subsequent gradual economic recovery. In the first half, the number of the TMT companies purchasing our advertising services increased by 13.7% year-over-year. Especially those companies experienced booming demand during the lockup period, such as online business, education, entertainment, et cetera.

On the other note, we observed that, in general, TMT companies have been cutting their budgets. However, we had more collaboration with the top TMT players. Then let's look at demand recovery to the relatively traditional industry corporate clients. The demand recovery tends to be slower, obviously. It's mainly due to the global threat of the pandemic. These factors generally postpone the collaboration with these clients. But for the local companies in traditional industries, we actively extended our collaboration with the companies that suffered loss by the pandemic while on the other hand, at the same time, deepening our partnership with retention clients.

And if we just look forward, in general, amid the pandemic, we witnessed the remarkable resilience for the TMT New Economy companies, such as the industry sectors we mentioned before. Meanwhile, the traditional companies that suffered more from the pandemic actually are seeking the transformation through innovation. So for us, we have been actively collaborating with companies that experienced booming demand during the pandemic to monetize their growing demand for the marketing and promotions. We also serve more government clients, actually, as we discussed in the earlier. We expect demand from these 2 types of clients will continue after the pandemic campaign.

In addition, with gradually recovery of the economy and all kinds of favorable policy support, we expect recovery demand from clients in the automotive and the financial industries as well as off-line consumption sector will gradually come back. And as well, however, since the global overall pandemic situation is still evolving demand for the multinational corporate clients have not been restored yet. But we have gradually -- we started discussion on the collaboration with these kind of clients. So that's what we're looking to the third quarter and second half year of 2020.

And the next question comes from Vincent Yu with Needham & Company.

I have 2 questions. One is about the live streaming initiative. Can you share any updates with regards to live streaming initiative 36Kr rolled out? The second question is about gross margin, how should we think about the gross margin for the remaining balance of the year? (foreign language)

(foreign language)

[Interpreted] Okay. Let's just pause here, and I will do a translation. For the first question about our live streaming programs and updates. And as we can see, in the second quarter, we made the progress in these new content formats. We made investments in further constructing our own self-operated short video and live streaming platform. And at the same time, we're actually operating our official accounts on other top third-party platforms. And in July, our self-operated platform, altogether, we delivered 236 live streaming programs, including virtual Summit roadshows, knowledge-sharing panels, et cetera, with an average of 12 programs delivered on each week day. And the total viewership in July also increased compared with the June data.

And average daily time spent per user on our live streaming and short-form video content showcased their good performance, especially consider the serious nature, actually, of our commercial-related content. And meanwhile, we are looking for the strategic collaboration with the top TMT giants in terms of live streaming and short-form videos so to further -- to improve our content influence across the internet to capture the opportunities for the massive user growth.

(foreign language)

[Interpreted] And for our GP margin, thanks to our disciplined cost control, the GP margin of our advertising services, enterprise value-added services and subscription have all reported improvement for this quarter. Now that the pandemic has been gradually put under control in China and the containment measures further eased, we are optimistic in the further GP margin improvement in the second half of 2020. But since pandemic situation is still fluid globally, we are also closely monitoring the development and stay agile for our business strategies.

And the next question comes from Jiao Shan with CICC.

(foreign language) I have 2 questions. The first one is that with the control of the COVID-19 pandemic, how is the recovery the willingness and needs of enterprise customers in different structures and industries in the second quarter? And the second one is considering the possible structural changes in customers caused by COVID-19 pandemic, what is strategy for future development of your company?

(foreign language)

[Interpreted] Okay. I'll just do the translation for the first part. With -- to respect to our enterprise value-added services, the number of our enterprise vs clients from traditional industries increased year-over-year in this quarter because of the COVID-19 impact and relatively involving demand. We focused on the expanding client base in the consumer industry to help them enhance the exposure. Although the number of our enterprise value-added services clients from the TMT sector decreased year-over-year, the corresponding average customer price increase in the quarter, demonstrating the attractiveness of our services to the top enterprises.

Besides the clients from the online entertainment sector, who are benefited from the pandemic containment measures, actually, we also are seeing that growing demand for our enterprise services from clients in the industry like mobile device industry. In addition, our enterprise value-added services are gaining the traction among the local governments. The growing demand not only reflects our brand influence are enhancing as we expanded our services offerings geographically, but also demonstrate the initial positive results of our swift and active strategy adjustment to our operations. And during this very challenging time, brought upon by the pandemic, we provided integrated online plus off-line comprehensive solutions tailored to these government clients' needs. We expect continued demand from the government clients after the pandemic is contained. And with a gradually recovery of the overall economy under the favorable policies, we also expect demand to resume from automobile and real estate clients for our integrated online and off-line solutions.

(foreign language)

[Interpreted] As we discussed earlier on our last earnings conference call, we believe COVID-19 will have a short-term impact on our advertising business, while bringing a structural influence on the enterprise value-added services. And we have just shared our projections regarding clients' demand recovery for the second half of the 2020 to Kenneth's question. So for the second half of this year, what we will do, we will continue to leverage our service's brand and the resources to further expand our services to clients in wider range of industries. And on the other hand, we will further solidify the data and technology capabilities for our enterprise services.

And the next question comes from Brian Li with AMTD.

(foreign language) We know your business is closely related to the primary market. And U.S. senate just passed the Holding Foreign Companies Accountable Act, what's the impact on the primary market in China and also the implication on company's business?

(foreign language)

[Interpreted] At this macro level background and environment, actually, we'd like to share some views to this quite macro level situation. First of all, we think although this Act passed have the globally impact, but actually for the primary market for Chinese economy, we can see the primary market still stay very active and healthy, which is quite benefit to our own business and all our different kind of business streams. And for us, as China's new economy entrants and the serving platform, we always keep a close eye on the developments regarding this bill. And as -- when -- the senate in May they passed this Act we immediately organized related live stream program on our own platform, inviting experts from well-known U.S. legal firm to share the background information and to share the analysis of the potential results of this bill. Despite the bill, we can see in June a lot of Chinese companies successfully went public in the U.S. market. So overall, we will keep a close eye on this, and we will stay very positive on this issue.

And the next question comes from Jay Dong with T.H. Capital.

(foreign language) I have two questions here. The first one is about trend of content pieces(inaudible), and the trend of page view trend, especially on Toutiao, Weibo and Baidu. And second one is regarding the closer content strategy and how to continue to create more high-quality content in the future.

(foreign language)

[Interpreted] I will do a little translation about this. As everybody knows, we started our business from the content providing. So we always consider the content capability as the basis of all kinds of business streams. We have been consistently enhancing our content capability and fortifying our leading position as a content provider.

You can see the propulsion increase of UGC actually in the past few years and also in the future. But this only reflects part of our content development. As short-form video and also the live streaming programs are gaining the robust traction among our audience, our users, since 2020, we have put in our efforts to seize more opportunities in the rising popularity of these new medium forms in our content production. We not only launched short video and live streaming programs on our own platform, but also we're actively operate our official accounts with high-quality content on other key and very top layer third-party platforms, and we will continue to do this. So I think this is answer and the effort we will put in our content.

And as there are no further questions now, I'd like to return the call to the company for any closing comments.

Thank you so much, everyone. And earlier today, we have released our earnings on our IR website. So feel free to contact us by our IR website, and you can also contact with our IR firm, The Piacente Group Investor Relations. Thank you so much for your time today. Have a good night. Bye.

This concludes this conference call. You may disconnect your lines at this time. Thank you.