Kuaishou (HKEX: 1024) today released its financial report for the third quarter of 2024 ending September 30: revenue was 31.1 billion yuan, up 11.4% year over year; net profit was 3.3 billion yuan, compared to 2.2 billion yuan for the same period last year. As measured by non-IFRS, adjusted net profit was $3.948 billion compared to $3.173 billion for the same period last year.

After the financial report was released, Kuaishou CEO Cheng Yixiao and CFO Jin Bing attended the earnings conference call that followed to interpret the key points of the financial report and answer questions from analysts.

Here are the highlights of the analyst Q&A session of this conference call:

Goldman Sachs Analyst Lincoln Kong: Regarding the development of the company's artificial intelligence (AI) business, can you ask management to introduce the latest developments in this area. In particular, after Kuaishou's “Keling” model went live, is there any business or financial data that can be shared? How should we think about the future direction of commercial monetization?

Cheng Yixiao: This quarter, while continuing to optimize the performance of the base model, we are deepening the application of our big model in content understanding, content recommendation, content production, and user interaction. In terms of the large base model, we are developing the “Kuaiyi” hybrid expert (MoE) model. With a total number of parameters of only tens of billions, many indicators in the pre-training stage of the model surpassed the “Kuaiyi” 175 billion model, greatly reducing the cost of model training and reasoning, and also better adapting to Kuaishou's existing business scenarios. The big “Keling” model has also experienced many iterations in a short period of time. The “Keling” 1.5 model released in September supports native 1080P video, and has upgraded various capabilities such as lens control, front-end frame control, motion brush, and counterpart in terms of controlled generation, continuing to maintain its leading position in the industry.

Regarding the application of big models, in terms of content understanding, we continue to promote the implementation of big model technology in various scenarios such as short videos, live streaming, reviews, commercialization, and e-commerce, and have made progress in various aspects such as user retention, commercial consumption, and increasing e-commerce sales. In the field of content recommendation, our upgraded recommendation model technology has brought significant long-term growth to the market.

In terms of content generation and interaction, the consumption of marketing materials generated based on artificial intelligence continued to rise this quarter, with an average daily consumption of more than 20 million. The interactive assistant “AI Xiaokuai” also incorporated more scenarios including Olympic contests, user private messages, and comment area interactions. The peak number of monthly active users also surpassed 18 million.

Next, I'll introduce you to the business progress of “Keling AI”. Since its launch in June of this year, “Keling AI” has had more than 5 million users, generating more than 51 million videos and more than 0.15 billion images. In September, the number of monthly active users of “Keling AI” exceeded 1.5 million, and the user retention rate gradually increased. Recently, we have also launched the “Keling AI” standalone app, which is convenient for users to use.

On the commercial monetization side, “Keling AI” has successively introduced a membership payment system for domestic and overseas users since the end of July to provide users with a differentiated model effect experience. At the same time, we also officially launched an API service at the end of September, covering modules such as video generation, image generation, and virtual fitting.

Currently, the commercialization progress of “Keling AI” is in line with our expectations, with monthly turnover exceeding 10 million yuan. We will also explore more diversified monetization systems in the future, and we are confident that we will achieve rapid growth in the revenue scale of “Keling AI” next year. I still firmly believe that the combination of the AI model and Kuaishou's existing business scenarios can generate huge commercial value. In the future, we will strive to build the team's AI algorithm capabilities to achieve new breakthroughs in algorithm innovation and scenario application.

Jeffrey Analyst Thomas Chong: The number of daily active users exceeded 0.4 billion this quarter, and the viewing time for a single user was over 130 minutes. How does management view the future trends and goals of the two numbers? What steps can we take to continue to increase market traffic?

Cheng Yixiao: In March 2022, we first proposed a mid-term target of more than 0.4 billion daily active users. Around this goal, we achieved a steady increase in the number of daily active users and viewing time while total user growth and maintenance costs remained relatively stable every year through measures such as refined user growth strategies, high-quality diverse content supply, and continuous optimization and iteration of products and algorithms, and achieved the milestone goal of breaking 0.4 billion per day in the third quarter.

Looking ahead to the next phase of the daily activity growth plan, we believe that as the penetration rate of short videos into the Internet population increases, it will be more difficult to acquire new users, but there is still more work we can do to improve user retention and activity. Regarding increasing time, we believe that using rich content and improving the efficiency of algorithm recommendations can make users more profitable, which is more important than simply increasing the average daily user visit time.

Regarding specific strategies for traffic growth, I would like to share three main aspects. First, in terms of traffic distribution strategies, we will continue to promote institutional upgrades, promote the same direction of commercial content and natural content, maximize comprehensive benefits, support the supply of high-quality content through traffic inclination, and promote the healthy development of the community. Second, in terms of product optimization, we will consolidate Kuaishou's social and private moats, explore more innovative interactive gameplay, enhance the interactive atmosphere of the community, and strengthen users' product mentality through optimization of the comment area experience and search function. Finally, in terms of content management, we will focus on opening up reasons for users, create high-quality content that Kuaishou users like, support benchmark creators with Kuaishou characteristics, and break the circle of users through influential hot events.

Overall, we remain confident that we will not continue to achieve steady growth in traffic in the future. More importantly, we hope to create more product usage scenarios for users, provide better content and services, and become an interesting and useful content platform for more users.

UBS Analyst Felix Liu: My question is about online marketing. I have noticed that short dramas have contributed greatly to the growth of our online marketing business recently. I would like to ask the management how they think about the continuation of the growth of the skit advertising business? Can the company share more about the future growth strategy of the online marketing business?

Cheng Yixiao: As you said, along with the booming development of the skit industry, the growth of the marketing budget of the skit industry has also become an important driving force driving the overall growth of Kuaishou's online marketing business. In the third quarter, the marketing consumption of Kuaishou skits increased by more than 300% year on year, accounting for a large share of the external recycling market, reaching double digits. Recently, the monthly consumption peak also exceeded 40 million. This is mainly due to our continuous optimization of self-built links, improving the user experience, and increasing the scale of payments through automated subsidies. In addition, we accelerated the adoption of the in-app advertising (IAA) model this quarter, rapidly expanded the number of people interested in skits, and experienced a rapid increase in marketing consumption of in-app purchases (IAP) and two-wheel drive skits in the IAA model.

Regarding the sustainability of the skit business, we are optimistic that it will achieve steady growth in the medium term. We are concerned about data forecasts from third parties that the skit market is expected to exceed 100 billion yuan in 2027. With the gradual enrichment of the skit supply ecosystem, the current skit audience exceeds 0.5 billion, and there is still room for further commercialization, and there is still room for improvement in the penetration rate of the skit audience. As far as Kuaishou is concerned, we not only have a rich short drama supply ecosystem, but also have a short drama user base of over 0.3 billion. Through continuous improvement of products and algorithms, we believe that the marketing consumption of Kuaishou's short drama IAP and IAA models can all maintain rapid growth.

Next, I'll briefly share with you the main growth strategies for our online marketing business. In terms of internal circulation, we will focus on improving the matching and reach of content, products, and users. By making solid model estimates, the conversion effect of content e-commerce materials is enhanced, and merchants are guided to carry out long-term management from short videos to live broadcasts. In terms of external circulation, we will focus on original content-type advertisements, including skits, Kuaishou games, and novels, to bring users the ultimate experience, enhance users' stickiness to the platform and increase the return on investment (ROI) for marketing customers.

On the brand side, we will rely on marketing science to accurately understand users, help marketing customers find potential users, and provide customers with integrated quality and efficiency brand marketing solutions through talent planting and customized investment promotion. Finally, we still have a lot of room for improvement in the refined operation of the industry, intelligent marketing products and algorithm optimization. At the same time, we have also gradually seen the benefits of large model applications in marketing recommendation scenarios, bringing customers better marketing ROI. Furthermore, we are very confident that the revenue from online marketing services will continue to gain market share.

Citibank Analyst Brian Gong: Regarding E-commerce Double 11, could management please share the company's overall performance during the promotion period and what are our main strategies?

Cheng Yixiao: In the current environment where consumer demand challenges still exist, we are quite satisfied with the performance of this year's Double 11 Promotion. Relying on the content market and the full explosion of the pan-shelf market, our e-commerce Double 11 Shopping Festival sales grew strongly year-on-year and reached a new high. We have provided more than 20 billion in traffic subsidies, 2 billion user red envelopes, and 1 billion in product subsidies to enable more merchants to achieve better and faster growth on Kuaishou. During the Kuaishou Double 11 period this year, the number of businesses that signed up for the Kuaishou Double 11 shopping festival surpassed 3 million for the first time this year, a record high. E-commerce added more than 7 million new users.

During the Double 11 period this year, the focus of our big promotion subsidies and operation mechanism returned to the content room and returned to the live broadcast room, which contributed to a significant increase in the broadcast rate of Wanfan anchors. The number of live broadcast rooms with sales exceeding one million exceeded 2,500, and the number of short trailer video releases increased tenfold over the same period last year. At the same time, we are paying more attention to building marketing gameplay in the content market. Specifically, for leading merchants and talents, we mainly focus on fan appeal and planting, and focus on introducing fan group buying gameplay to enhance the interactivity and stickiness of fans and anchors. For mid-waist experts and merchants, we have provided gameplay such as Red Envelopes from the Sky to help explode during the promotion period. In addition, for shelf-type merchants, we provide more traffic and resource subsidies, and use task incentives and investment strategies to ensure that good products obtain better profits.

On the product side, we are opening up the subsidy budget for the entire platform to ensure that the products in the content market have the same price advantage. At the same time, from a platform perspective, we have clearly divided the main promotion shelves, including new products released throughout the network during the season, new products that users prefer to buy during the promotion period, popular products from all over the network, and super products from various brands. Among them, the dominant categories include non-standard products such as tea, wine, health, jewelry, etc., as well as standard products such as electricity consumption and household products. Our e-commerce big name supplement section. This year's Double Eleven covered more than 2,200 popular brands and more than 2,500 popular categories across the network.

As the country's implementation of the trade-in policy for the home appliance industry intensifies in the second half of the year, we believe that Kuaishou's platform that meets the diverse and multi-level needs of new online consumers has greater advantages. During Double 11 this year, with the help of state subsidies, consumers' demand for trade-in home appliances was fully stimulated. We quickly seize the dividends on the policy side, promote the implementation of home appliance trade-in subsidies in more cities in Kuaishou, and at the same time strengthen the platform's voucher collection link optimization and order conversion.

During Double Eleven this year, the number of Kuaishou e-commerce national supplement users received more than 1.46 million vouchers, which led to a sharp increase in sales of consumer electronics products. The performance of the Double 11 promotion surpassed expectations, making us more determined about the e-commerce development strategy of returning to the live broadcast room, breaking through short videos, and steadily building a pan-shelf. Looking forward to the future, although the challenges of weak consumer demand and increased market competition still exist, we believe in the correctness of the core strategy of content e-commerce based on the resource endowments of content and improving products. We will continue to enrich e-commerce supply and ecology, help Shangda achieve global growth, and contribute to consumption upgrading with the help of national subsidies and other policies.

Bank of America Merrill Lynch analyst Lei Zhang: My question is mainly about the local lifestyle business. How can management evaluate our recent progress in this business, and are there any medium- to long-term goals to share?

Cheng Yixiao: Starting in 2022, we have been experimenting with local lifestyle businesses, gradually exploring and verifying that our users have local lifestyle needs, to starting the industry and regionalized operations in mid-2023, increasing sales and user size, to trying to improve monetization efficiency this year, and even to the landing of hierarchical profits expected in the future, we have been steady and steady every step of the way.

Local life is a high-frequency business scenario. By providing users with high-quality local content and extremely cost-effective products and services, we increase the reasons and frequency for Kuaishou users to open Kuaishou. We continue to iterate on talent upgrade policies to guide the production of high-quality content, and at the same time insist on supporting the good and fighting the bad, optimizing traffic distribution mechanisms, and bringing a better experience to users. Our users pay more attention to cost performance, so we are targeting higher quality core products this year to build comparison capabilities and enrich the application scenarios of price comparison engines. The number of payment users continued to grow, and the number of daily active buyers continued to increase by 28% in the third and fourth quarters. Sales also maintained a rapid increase of 26% month-on-month.

In terms of monetization, we use industry refinement, multi-category exploration, and multi-incentive methods to leverage more advertising investment for local businesses. For lead-based merchants, we also continue to increase the incremental budget investment of merchants through new advertising products. In the third quarter, revenue from local businesses increased more than 2.5 times year over year, and increased 36% month over month.

Under measures such as continuously improving subsidy efficiency and operational efficiency, the gap between revenue and cost is gradually narrowing. Considering the comprehensive value of the platform, we feel that the local business is a business worth investing in for a long time, and we have seen a trend of continuous improvement in ROI. In the medium to long term, we will firmly focus on meeting user needs while empowering merchants to achieve growth based on our user endowments. On the premise of maintaining a good user ecosystem, the focus is on considering the value of the platform and the incremental revenue value brought to the company.

Xueqing Zhang, analyst at CICC Securities: We noticed that the company's operating expenses in the third quarter increased year-on-month. What are the main reasons? Looking ahead to the fourth quarter, what is the trend in our OpEx (operating expenses)?

Jin Bing: Sales and marketing expenses in the third quarter of this year increased compared to the same period last year, mainly because we increased our investment in online marketing services and e-commerce business, while the overall level of user growth and maintenance expenses remained stable. The investment in online marketing services is mainly related to user subsidies for paid skits. Using ROI as the premise of subsidy investment, we have increased the number of users paying for skits while leveraging the customer marketing investment budget several times the user subsidy amount.

We anticipate that ROI will further increase as users' mentality to pay for short dramas is formed and intelligent subsidy programs are optimized. E-commerce investment is mainly related to user subsidies. Of course, we still maintain relatively careful investment. Therefore, although the absolute value of our e-commerce subsidy amount has increased, the proportion of the subsidy amount in GMV is still at a relatively low level in the industry, and our subsidy efficiency continues to improve.

In terms of sales and marketing expenses, as we enter the fourth quarter and welcome the arrival of the e-commerce promotion season, it is expected that the absolute amount of e-commerce user subsidies will increase month-on-month. At the same time, our investment in online marketing services will also increase slightly from month to month, so sales and marketing expenses in the fourth quarter will be the same as in previous years, and it is expected that there will be a seasonal increase from month to month.

In terms of R&D expenses, our incremental investment in large AI models will lead to an increase in related R&D personnel costs, and R&D expenses will also increase month-on-month, but the ratio of sales and marketing expenses and R&D expenses to revenue will decrease month-on-month. We believe that with the deepening of our ongoing initiatives to improve quality and efficiency in the future, the Group's overall profitability can be further improved and value created for shareholders. (end)