36Kr Holdings Inc. (NASDAQ:KRKR) Q1 2021 Earnings Conference Call June 1, 2021 8:00 AM ET

Company Participants

Dagang Feng - Chief Executive Officer and Co-Chairman
Xiang Li - Acting Chief Financial Officer

Conference Call Participants

Vincent Yu - Needham & Co

Operator

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 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 [ph], IR Manager of the company. Please go ahead, Jing. Thank you.

Unidentified Company Representative

Thank you very much. Hello, everyone, and welcome to 36Kr Holdings' first quarter 2021 earnings conference call. The company's financial and operational results were released 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. Dagang Feng; and our Vice President of Finance and Capital Markets, Mr. Xiang Li. 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. Mr. Li 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 the 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. Dagang Feng. Paul, please go ahead.

Dagang Feng

[Foreign Language]

Thank you. Hello, everyone. Thank you for joining us today.

[Foreign Language]

As we venture further into 2021, China's economy is gearing up for a new normal as we steadily emerges from the COVID-19 pandemic. In this context, we are stepping regaining growth momentum and fixing our core competitors as the leading platform for new economy growth focus business content and service offerings in China with continued long-term investments and our content production 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 markets, the further integration of private equity and public equity markets. As it ship to work shop from video across digital counter industry for the unlocking -- for the unlocking values public customers, users, and investors.

[Foreign Language]

During the first quarter events again delivered record steady performance in total user traffic with average monthly PV jumping to a new high of 829.3 million, representing a 75% year-over-year increase and the 32% sequential climb. This dramatic represents fourth [ph] consecutive quarter of PV growth, underscoring our exceptional ability to generate new economy content appealing to a broader and growing audience base.

[Foreign Language]

According to the growth in our traffic and user engagement, demand for advertisers continue to demonstrate growth momentum in the first quarter. We are delighted to achieve a 55% year-over-year jump advertising revenue, an increase in both the number of advertising customers and average revenue per advertising customers compare with the same rate of 2020.

[Foreign Language]

Our digital and emerging advertising segments both recovered at a fast pace, propelling us toward a more comprehensive marketing service model in addition to multinational corporations, so massive rise as internet giants. Our advertising quintile have covered more verticals such as healthcare, artificial intelligence and social networking. We are pleasant to see 38Kr is increasingly become the go-to-partner for fast-growing new economy company as our elite brands.

[Foreign Language]

During the first quarter, we continued to refine our content platform and our product offerings, which are 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 the content continues to enjoy high popularity and paralyzed [ph] what is most effect. We published numbers insightful analysis report, timely market updates, as well as stopped the working editorial and commentary every single day. As a content platform we also endeavor to attract and cultivate more quality content creators and continuously expand our content general in order to cover more niche markets and the five broader user demographics.

[Foreign Language]

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 platform, including WeChat, Weibo DouYin, Kuaishou, Bilibili and most recently [indiscernible]. In the first quarter, there were over 160 pieces of content published on 36Kr WeChat official accounts that have gained readership of over a hundred thousand Tam reach.

In addition, our newly launched WeChat account all use customized for the younger generation and their lifestyle and business trends. It's well received by the audience with a fast growing number of followers.

[Foreign Language]

Furthermore, we are enhancing our capabilities in video and audio content to grow our offering metrics and resonate with the wider user base, especially the younger generation. During the first quarter, our live streaming and short form video content initiatives continue to feed additional user traffic growth, specifically our self-produced video content gained further traction, reached over 4.4 million followers on the third-party traffic platform at the end of first quarter, up 53% sequentially. We attracted more than 647,000 followers on Bilibili with our video content gathering over 16 million total views.

On Douyin, our Kr finance accounts attracted around 3.6 million followers spurred by our high performance for setting video content. Recently, we also created a content distribution account on [indiscernible] and we are excited to have witnessed fast follower growth on this new channel, as our short form video content continues to gain popularity.

[Foreign Language]

In terms of commercialization of video content, we have entered into collaborations with a variety of elite brands, including Yili, [indiscernible] Huawei and HP for video marketing services. Moreover, we are expanding our audio base contents, integrating multiple forms, including texts, image, video, audio, and live streaming of which our aim to providing customers with a comprehensive area of content backing solutions.

[Foreign Language]

On the product front, in the first quarter we continue to operate our 36Kr app in an effort to cultivate our organic and proprietary user growth. We edited newer our desktop visit features to the 36Kr app providing users with a more assessable and easy-to-use way to discover and blog content. We also enabled a new tab function our 36Kr app for users to access live streaming contents, our own mobile app to deliver a closer content view and experience across our platform. For the first quarter of 2021, the average content consumption per for 36Kr app increased by nearly 40% on year-over-year basis.

[Foreign Language]

Last but not the least, we recently launched a brand new equity marketing product. Over the years, 36Kr 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 equity market sector and building on our proven accomplishments. We believe we can replicate this success with reverence public equity market content and direct new opportunities in this tremendous market. Our content and service offerings across pre and post equity [ph] companies exhibited rapid growth, gets positive market feedback. This strong performance reforces competence in our ability to drive growth in this promising field.

[Foreign Language]

Next, I would like to share some color on progress we have made this new initiatives across and rest the business space.

[Foreign Language]

We are excited to have made meaningful strives. Our enterprise service review portal better launched last year and distribute our digital destination to discover and select enterprise service in China. The review portal has showcased over 3000 enterprise applications as of March 31st, 2021. Most specifically the review platform launched the ranking of business intelligence software on a rolling basis in spring 2021, featuring leading companies and industrial experts in the BI space and prompting comments on various BI products for hundreds of enterprise customers. We also arrange exclusive meetings for BI software brands and enterprise customers to facilitate potential procurement transactions.

[Foreign Language]

In addition, we are working diligently to extend our value-added enterprise service offerings to more cities and regions in China ride the wave of digital transformation that has evidence that our graphic expansion initiative will bolster our ability to scale our enterprise, especially in partnership with local governments and the value chain resulted. In this spirit, during the first quarter, we pivoted to develop the collaborative opportunities between enterprises and the local governments in [indiscernible]. To date, we have expanded our footprint into top cities, including [indiscernible] cities, like Hangzhou, [indiscernible] Chengdu and Guangzhou and we plan to expand to more of our provinces over time. This effort supported our capabilities to build up a multifaceted and dynamic enterprise service ecosystem. It's very new economy driven development across the nation, through our engaging and valuable content, as well as our comprehensive service offerings.

[Foreign Language]

The development of the internet in China has been doing changes in economic system as digital technologies have been refining -- redefining more and more economic activity. This included digital information, digital merchandise, and digital finance as an increasing share of business activities going digital. The COVID-19 crisis has especially accelerated digital transformation across a variety range business activities. We believe that within the next 20 years, autonomic activities view eventually go digital. Our internet companies and the traditional companies were virtually involved new economy companies. We see huge opportunities are emerging in the digital transformation journey across the broad. And keeping this in mind, we are poised to set up our strategic efforts to grasp the growth potential.

[Foreign Language]

On May 11th, we hosted China Fund Partner Future Summit in Shenzhen attracting hundreds of mainstream investment institutions, which included first tier IPs, 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 equity market, bringing insights to our customers and users. And on May 11-- on May 12th also in Shenzhen we hosted 2021 WISE Innovation Leader Conference, dozens of industry KOLs, leading companies and analysts attending that events, focusing on theme surrounding new technology, new consumer, a new healthcare sectors.

[Foreign Language]

Moving onto our subscription services. This foreign commitment to serving the six 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 Stock Class [ph] brings direct results with support from the government what stopped. This type of support was put in practice during the quarter in Shenzhen during the first quarter in Shenzhen and [indiscernible].

[Foreign Language]

In summary, looking ahead to 2021, we believe demand for 36Kr and its diverse service offerings for our growing pace of new economy participants, we will continue to thrive in the fast evolving digital business content, as a go-to-content and service platform in the Chinese new economy space. These 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 fundamental position as well to further ahead in new business development.

[Foreign Language]

This time, I'll now turn the call over our VP of Finance and Capital Markets, Xiang Li, who will discuss on our key financial results. Please go ahead, Li.

Xiang Li

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 and being a strong 58% year-over-year growth in our advertising revenues in the first quarter. Also, as we continue 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 order 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 first quarter of 2021 financial results. Online advertising services revenue increased by 58% to RMB33.2 million in the first quarter of 2021 compared to RMB21 million in the same period of last year. The increase was primarily attributable to the strong recovery and growth of market demand in the first quarter of 2021.

Enterprise value-added services revenue were RMB6.9 million in the first quarter of 2021 compared to RMB42.8 million in the same period last year. The decrease was primarily because we continuously shifted our focus toward higher margin businesses, and starting from this quarter, we cease to act as a principal in certain low gross margin businesses and the only active as an agent. As a result revenues of such businesses were recognized on net basis from this quarter onward.

To increase compatibility 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 first the quarter of 2021 compared to RMB42.8 million in the same period last year. Subscription services revenue increased by 154% 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 first quarter 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's RMB1.6 [ph] 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 revenue decreased by 66% year-over-year to RMB20.2 million in the first quarter of 2021. The decrease was primarily because we continuously shifted our focus toward higher gross margin businesses, as we mentioned earlier in the enterprise value-added services section. Gross profit was RMB23.4 million in the first quarter of 2021, representing a 329% increase year-over-year. Gross profit margin was 53.7% in the first quarter of 2021 compared to 8.4% in the same period of last year.

Operating expenses were RMB64.8 million in the first quarter of 2021, representing a 37% decrease year-over-year. This was mainly due to the decrease in G&A expenses in the first quarter of 2021.

Sales and marketing expenses were RMB35.7 million in the first quarter of 2021 compared to RMB34.9 million in the same period of last year. G&A expenses were RMB20.2 million in the first quarter 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 million in the first quarter 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 expense -- share-based compensation expenses recognized in cost of revenue, sales and marketing expenses, research and development expenses, as well G&A expenses totaled RMB2.7 million in the first quarter of 2021 compared to RMB13 million in the same period of last year.

Net loss was RMB40.5 million in the first quarter of 2021 compared to RMB95.9 million in the same period last year. Non-GAAP adjusted net loss was RMB37.8 million in the first quarter of 2021 compared to RMB82.9 million in the same period of last year. Net loss attributable to 36Kr Holdings honoring shareholders was RMB39.5 million in the first quarter of 2021 compared to RMB95.4 million in the same period last year. Basic and diluted net loss per share were both RMB3.08 in the first quarter of 2021 compared to RMB9.03 in the same period of last year.

As of March 31st, 2021, the company had cash, cash equivalents and short-term investments of RMB174.1 million compared to RMB209.2 million as of December 31st, 2020. The decrease was mainly attributable to an equity investment we made in the first quarter of 2021, with a total cash consideration of approximately RMB30 million.

This concludes our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Thank you. We have the first question from the line of Vincent Yu from Needham & Co. Please go ahead. Vincent, your line is open. You can ask your question now. Once again, Vincent from Needham & Company, your line is open. You can ask your question now. Thank you.

Vincent Yu

Thank you management for taking my question. I have question -- I have two questions. First question is, can you able to share the comment on overall market recovery in first quarter 2021. And have we seen any chance that we can share for the rest of the year?

And so, second question is, can you share a comment on the clients spend with 36Kr? It was mentioned that some international clients have reduced their spending, have they -- have returned and how all spending, and engagement by client this quarter? Yes, thank you, management.

Dagang Feng

[Foreign Language]

As the worst of the pandemic appears to be behind us, we are seeing solid economic recovery and gradual improvement 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 first quarter with year-over-year revenue growth of 58%.

Our 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 a hundred percent 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're actively managing to tap into rising opportunities in the artificial intelligence and healthcare space and brand new customers.

And looking forward to 2021, we expect advertising demand from branded customers, especially in multinational brands to increase compared with last year.

[Foreign Language]

Okay. I'll do a quick translation. With categories, our advertising customers into traditional customers and new economy customers, the multinational companies accounting for the majority off traditional customers. In the first quarter we saw average revenue per traditional customer increased 11% year-over-year. Since the first quarter is traditional slow season for advertising demand. We expect the average revenue per traditional customer to see substantial year-over-year growth in the following quarters. And along this global recovery from the pandemic, we saw advertising demands from multinational customers rapidly rebounded. We also saw a stronger growth in advertising needs from domestic new economy companies, such as both in the new customer and add sections. Meanwhile, we are making progress in improving our advertising products, such as video advertisement to attract more customers. Some consumer brands have 36Kr interest in this kind of product as they let reach to more new customers risk order to 36Kr video content.

In addition, customers who are rebuilding their brands expect to complete a transformation of brand identity by leverage 36Kr video advertising products. In this regard, 36Kr has become a important partner for traditional brands that are in their transition towards new economy companies.

Vincent Yu

Thank you.

Dagang Feng

Thank you.

Operator

Thank you. We have our next question from the line of Joan Bing [ph] from Credit Suisse. Please go ahead.

Unidentified Analyst

Thank you. Good meeting the management. I have a question here on behalf of Kevin. Can you comment for this quarter's gross profit margin in relation to the business change nature and also the outlook for the GPM income in 2021, because I understand that they've changed the accounting recognition to the net basis and also the business for [technical difficulty] is shifting from [indiscernible]. Thank you, management.

Unidentified Company Representative

Hi, Joan. This is Lynn. I will take your questions. Yes. You can see that our Q1 gross margin actually was substantial increase compared to the same time last year our gross margin climb to 54% 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 that was said earlier, and also we implementing some cost control measures. So, this helped our gross profit and gross profit margin to increase.

And secondly, as you also mentioned that starting from this quarter, we starting -- 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 recommendation 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 we explained in our earnings release as well as in our prepared remarks is because we shifted our focus on 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 trends for the remaining -- remainder of the 20 -- 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.

Unidentified Analyst

Sure. Thank you. That's really helpful.

Operator

Thank you. We have our next question from the line of [indiscernible] from CICC. Please go ahead.

Unidentified Analyst

[Foreign Language]

Okay. I'll translation myself quickly. Can the management share more color on the details and strategy of the new products such as enterprise service review portal. Thank you.

Dagang Feng

[Foreign Language]

Okay. I will do a quick translation. Our enterprise service review portal has been our latest temp in the field of enterprise value-added services. We better launched -- last year B2B additional definition to discover and select enterprise services in China. The review portal has showcased more than 3000 enterprise service applications, mainly in the field of BI, CRM and the collaborative posts. This year, we expect more enterprise service suppliers to come to our platform. By addressing enterprises, this whole transformation demand we aim to further leverage our stellar brands, high quality content offerings, and data insights to provide enterprise service providers with a platform to approach our customers. Thank you.

Unidentified Analyst

Thank you. Thank you very much.

Operator

Thank you. Can we move to the next question?

Unidentified Company Representative

Yes, please.

Operator

Thank you. We have the next question from the line of Jay Dagang [ph] from T.H. Capital. Please go ahead.

Unidentified Analyst

Yeah. Thanks management for taking my one question. I have one question here. How is the process of [indiscernible] product? Thank you.

Dagang Feng

[Foreign Language]

We recently launched a brand new public equity markets production providing spot for working editorial and commentary. Insightful analysis reports and premium offline activities to participants in the public equity markets, including pre-IPO companies, listed companies, firms and securities companies. Our public equity markets product has gained popularity since its launch, which proves our ability to drive growth in this promising future and we are confidence this new product will become a classic product in content that's the risk offering, which strengthens our current content and service offerings in the private markets and extend to a broader field. We believe in the great potential in the public equity markets. Thank you.

Unidentified Analyst

Thank you.

Operator

Thank you. Can we move to the next question?

Unidentified Company Representative

Yes, please.

Operator

Thank you. We have the next question from the line of [indiscernible] from Industrial Securities. Please go ahead.

Unidentified Analyst

[Foreign Language]

I will translate my question. Management, I have a question about [indiscernible] business. Could you explain more about monetization progress by the new infrastructure? And is it the combination advertising and enterprise service? Thank you.

Dagang Feng

[Foreign Language]

I'll do a quick translation. We launched our short-form video initiative within a year. And we are happy to see that we are getting growing number of followers, our accounts on Bidibidi, Douyin and recently in [indiscernible]. I share some numbers of our current short-form video. During the first quarter, our self operated video content gained over 4.4 million followers on the third-party traffic platform at the end of first quarter up 53% sequentially. We attracted more than 647,000 followers Bidibidi with our video content gathering over 60 million total views.

On Douyin our Kr finance account attracted around 3.6 million followers, spread about our high performance training, video content. And recently we also created content distribution account on [indiscernible] And currently, we have cooperated with some elite print [ph] for example, like, Yili, Huawei and HP and our current marketing service model while our short form video is mainly advertising, but, we will expand our current sources to a more comprehensive services, including Trini [ph] and contest our customers to better serve their needs in this new economy content space. Thank you.

Unidentified Company Representative

Thank you.

Operator

Thank you. Our next question comes from the line of Brain Lee [ph] from AMCD. Please go ahead.

Unidentified Analyst

Hello. Thanks for taking my question. I want to know all about the enterprises services. How the progress of your offline activities and which industry will be the most attracted or the popular this year? Thanks.

Dagang Feng

[Foreign Language]

Okay. I will do a quick transition. Our offline events recovering readily. Recently in May we successfully hosted China Fund Partners Future Summit in the 2021 Wise Innovation Leader Conference in Shenzhen where we discussed investments and financing trends in the private and public equity markets after our latest industry trends in three major fields, including 5G technology, new costumer and healthcare. The also made events successful via live stream and received a positive feedback and recognition from many events attendees. We see various sectors taking up digital transformation, including digital information, digital merchandise, digital service, and digital benefits. We think within the next 20 years, most of the business activities will be eventually go digital. As broader, this investment go digital. It will generate tremendous opportunities.

Moving to the hot industries, we think a new costumer is most health industry, and has gained great -- attract all the potentials from -- attention from the capital and also 5G technology, healthcare -- new healthcare and new infrastructure -- healthcare again, attention across capital markets. 36Kr stands out the frontier of new economy focus information, and it remains committed to providing more readily to new economy 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.

Unidentified Analyst

Thank you. Thank you so much.

Operator

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.

Unidentified Company Representative

Thank you once again for joining us today. If you have further questions, please feel free to contact 36Kr's Investor Relations, so the contact information provided on our website.

Operator

Thank you. This concludes today's conference call. You may now disconnect your line. Thank you.