Kuaishou Technology (OTCPK:KUASF) Q3 2024 Earnings Conference Call November 20, 2024 7:00 AM ET

Company Participants

Matthew Zhao - Vice President, Capital Markets & Investor Relations
Cheng Yixiao - Co-Founder, Chairman & Chief Executive Officer
Jin Bing - Chief Financial Officer

Conference Call Participants

Lincoln Kong - Goldman Sachs
Thomas Chong - Jefferies
Felix Liu - UBS
Brian Gong - Citi
Lei Zhang - Bank of America
Xueqing Zhang - CICC

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Kuaishou Technology Third Quarter 2024 Financial Results Conference Call.

Please note that English simultaneous interpretation will be provided for management's prepared remarks. This English line will be in listen-only mode.

I will now turn the call over to Mr. Matthew Zhao, VP of Capital Market and IR at Kuaishou Technology.

Matthew Zhao

Thank you, operator. Good evening. Welcome to our third quarter 2024 financial results conference call.

Joining us today are Mr. Cheng Yixiao, Co-Founder, Chairman and CEO; Mr. Jin Bing, Chief Financial Officer.

Before we start, please know that today's discussion may contain forward-looking statements which involve a number of risks and uncertainties. Actual results and outcomes may differ from those discussed. The company does not undertake any obligation to update any forward-looking information except as required by law. For all important information about this call, including forward-looking statements, please refer to the company's public information or the third quarter 2024 results announcement ended September 30, 2024 issued earlier today.

During today's call management, we'll also discuss certain non-IFRS financial measures. These are provided for additional information and should not replace IFRS-based financial results. For a definition of non-IFRS financial measures, a reconciliation of IFRS to non-IFRS financial results, and related risk factors, please refer to our third quarter 2024 results announcement.

For today's call, management will use Chinese as the main language. A third-party interpreter will provide a simultaneous English interpretation in the prepared remarks session and a consecutive interpreter during the Q&A session. Please note that English interpretation is only for convenience purposes only. In the case of any discrepancy, management statements in their original language will prevail.

Lastly, unless otherwise stated, all currency units mentioned are in RMB.

I'll now hand the call over to Yixiao.

Cheng Yixiao

Hello, everyone. Welcome to Kuaishou's third quarter 2024 earnings conference call.

In Q3, despite a challenging macro environment, we grew our user base and delivered solid financials by staying committed to our tech-driven user-centric business philosophy.

We achieved a milestone of over 400 million DAUs, and the total revenue grew by 11.4% year-over-year to RMB31.1 billion. Revenue from our core commercial business, including online marketing services and other services, primarily e-commerce, increased by nearly 20% year-over-year. Adjusted net profit rose 24.4% year-over-year to RMB3.9 billion, showing our ability to increase profitability.

We strengthened our content and commercial ecosystem by deeply integrating and applying large AI models across content creation, understanding and recommendation scenarios. In Q3, daily spending with AIGC marketing materials peaked at RMB30 million. In September, we unveiled our latest video generation model upgrade, Kling AI 1.5, setting new industry benchmarks for video quality with a video resolution of 1080p, dynamic performance, semantic responsiveness and feature enhancements such as motion brush.

Next, I'll discuss our key business developments in Q3. First, user growth and ecosystem construction. In Q3, average DAUs on the Kuaishou App reached 408 million and MAUs reached 714 million, increasingly 5.4% and 4.3% year-over-year, respectively. This further solidified our leading position as the third-largest app in China. The average daily time spent per DAU on the Kuaishou App was 132.2 minutes, while total user time spent rose 7.3% year-over-year. Average daily live streaming and short video views reached nearly 110 billion.

Executing our strategy of high-quality user growth, we enhanced our capabilities in leveraging marketing channels for user acquisition, optimized the product features and integrated user acquisition initiatives with commercial scenarios like e-commerce. As a result, we expanded our user base and drove more frequent user engagement.

We enhanced omni-domain traffic allocation efficiency by refining our content distribution mechanism, creating stronger alignment between content and revenue growth. To boost user retention, we optimized features to foster fun community engagement and positive social atmosphere. For example, we enhanced private messaging across multiple scenarios, introduced creative features like the [indiscernible] and refined the comment rankings. We also focused on improving the overall experience of our platform's less active user algorithm enhancements, also deepening our user retention by modeling diverse user interest, user-to-user relationships and key drivers for opening up our app.

On the product side, upgrades like redesigned sidebar and enhanced user experiences drove up user satisfaction. In terms of content operations, we built a unique multifaceted ecosystem by developing specialized content verticals aligned with users' interest, supporting standout creators with our unique features and expanding our reach with high-profile events.

In the sports vertical as rights-holding broadcaster of the Paris Olympics, we created extensive content lineup, including panoramic on-demand event coverage, exclusive proprietary IP, interactive features and diverse user-generated content, bringing users an all-encompassing Olympic experience. Olympics-related content on Kuaishou garnered 310.6 billion impressions during event with 640 million users tuning in and generating 15.89 billion interactions. To engage young users with live streamed online concerts featuring Teens In Times and Hatsune Miku in Q3, live streaming sessions from the two TNT concerts achieved a combined 950 million views.

For our Search business, we optimized the search results page to improve accuracy and user experience, significantly increasing user penetration in search. In Q3, average MAUs for the Kuaishou searches exceeded 500 million. Average daily searches climbed by over 20% year-over-year to over 700 million and daily searches peaked at over 800 million. User search behavior also give us valuable insights into their needs, driving rapid growth in our revenue-generating business related to searches.

Second, online marketing services. In Q3, revenue from online marketing services grew 20% year-over-year to RMB17.6 billion, achieving over 20% growth for the sixth consecutive quarter, highlighting the segment's sustainable growth momentum. By continuously improving our data infrastructure, smart placement products and algorithms, we delivered higher placement ROI for our clients, leading to increased bids. Additionally, our large AI models' semantic understanding of marketing content and merchandise features allow us to match users and merchandise more accurately for merchants, boosting marketing conversion efficiency.

In Q3, revenue growth in our online marketing services was primarily driven by the external marketing services with spending in social -- media information, e-commerce platforms and local services industries outpacing the overall market growth year-over-year.

For paid short plays and media information, we offer high-quality content tailored to different age groups of targeted audiences, increasing user payment conversion rate and improving placement outcomes for clients through our smart subsidy strategies.

We also accelerated our In-Apps Ads short play model, expanding our user base for free short plays and providing clients with more diverse revenue opportunities, leading to over [300] (ph) growth in short-play marketing spending year-over-year.

We introduced a differentiated Universal Auto X UAX placement solutions leveraging end-to-end smart capabilities including infrastructure, creative generation, targeting and adjustments to enhance the stability of a client's marketing placement and increase budget allocation. As a result, total marketing spending through the UAX accounted for around 50% of the external marketing spending in Q3.

Closed-loop marketing services revenue grew in Q3 with monthly active merchants using marketing placements increasing by over 50% year-over-year. Our automated marketing placement services helped small and medium-sized merchants expand GMV and improve retention rates. We focused on policy support, product iterations and algorithm optimization to enhance the conversion of short video traffic to live streaming, increasing marketing spending in this area by nearly 20% year-over-year in Q3. Smart marketing placement is now crucial for merchants' sustainable operations on Kuaishou, with omni-platform marketing solutions or smart hosting products accounting for about 50% of closed-loop marketing spending.

In brand marketing, we offered integrated solutions to drive brand awareness and sales conversion through marketing science, KOL recommendations, and customized strategies. In Q3, we partnered with over 150 brands, including China Mobile, FAW-Volkswagen, leveraging the Paris Olympics to support rapid growth with our sports+ strategy and content ecosystem. Among these, 60 were new brand clients. Beyond traditional methods like sponsorships and product placement, we also worked with Star Magnet KOLs for product recommendations, boosting brand exposure through high-quality content. This, aided by precise user profiles and data analysis helped brand clients expand their reach and increase sales.

Third, our e-commerce business. Our e-commerce business showed resilience in Q3 despite it being a slow season and facing consumer demand challenges. With a solid foundation in content-based e-commerce and a strategic focus on providing exceptional content and superior products, we maintain a strong market presence. By emphasizing live streaming e-commerce, unlocking the potential of short video e-commerce and expanding pan shelf-based e-commerce, we are maximizing synergies across various scenarios. These efforts boosted e-commerce supply, enriched our ecosystem, and increased the user spending, resulting in a 15.1% year-over-year. GMV increased to RMB334.2 billion in Q3.

On the supply side, with an industry landscape where our supply often outweighs demand, content has become more crucial in driving consumer demand, with more merchants seeking long-term growth on content-based e-commerce platform. Small and medium-sized merchants exceeded expectations with the new merchants on Kuaishou increasing over 30% year-over-year and their average revenue per store up by more than 60%. This growth was largely driven by initiatives like the Golden Bounty Initiative, Set Sail Initiative, and Uplift Initiative, which helped early-stage merchants increase traffic and reduce uncertainties.

We leveraged our nationwide partner ecosystem to help new merchants develop their business, focusing on key product categories. For existing merchants, we offered refined operational methodologies to support their long-term business growth. In Q3, average monthly active merchants grew by over 40% year-over-year. Our merchants' healthy growth enriched our platform's merchandise ecosystem by expanding categories by over 20% year-over-year and offering users a wider selection of high-quality products.

To enhance content-based e-commerce, we customized operations for KOLs. For top-tier KOLs, we introduced marketing tools like Exclusive Mega Group Buy and Mega Crowd Deals to incentivize live streaming and enhance content value. During the 818 Shopping Festival, customers using Exclusive Mega Group Buy placed 25% more orders per person than others, while other conversion efficiency for the same product category rose 55% after using Mega Crowd Deals.

For small and medium-sized KOLs, we launched the Rising Star Initiative offering cash incentives, traffic support, and exposure while collaborating with the regional service providers for local operations. These helped them achieve strong growth, increasing their average daily GMV by over 40% quarter-over-quarter and the average daily number of merchandise sold by over 25% quarter-over-quarter. The Blockbusters Initiative provided subsidies for selected merchandise, offering users more affordable high-quality products. As a result, KOLs GMV increased by over 24% year-over-year during the 818 Shopping Festival, with the small and medium-sized KOLs GMV growing over 27% year-over-year.

Short video e-commerce also grew rapidly with the GMV rising over 40% year-over-year in Q3, driven by blockbuster products and live streaming highlights. In addition, we improved content quality and conversion efficiency, extending the product life cycle through short video-embedded shopping links that drove traffic to live streaming rooms. By optimizing strategies like integrating e-commerce content with marketing materials and joint modeling of short video traffic and simple live streaming rooms, we achieved nearly 40% quarter-over-quarter growth in GMV, driven by short videos directing traffic to live streaming rooms in Q3.

While stabilizing and growing our content-based e-commerce, our pan shelf-based e-commerce has increasingly complemented our e-commerce business. In Q3, pan shelf-based e-commerce GMV accounted for 27% of our total e-commerce GMV and its growth continued to outperform overall GMV growth, driven by strong supply and demand. Average daily active merchants and paying users in our shopping mall grew by nearly 70% and over 60% year-over-year, respectively. Thanks to our efforts in integrating blockbuster products and traffic resources pan shelf-based e-commerce GMV during the 818 Shopping Festival rose by 45% year-over-year. Moreover, through engaging blockbuster product live streams and strengthening customer mindshare product-driven branding, we have consistently driven more repeated purchases and reinforced customer mindshare in our pan shelf-based scenarios.

The ongoing expansion of our e-commerce supply and ecosystem coupled with increased synergies across various e-commerce scenarios has further stimulated user demand. In Q3, the number of e-commerce monthly active paying users grew 12.2% year-over-year to 133 million. Building on the momentum from the Q2 peak season, our diverse marketing strategies, which included targeted approaches for new, growing, and mature users, also supported this growth. Tools such as like coupons for live streaming rooms and order incentives have been instrumental in expanding our user base and improving conversion rate and transaction efficiency. Going forward, we remain committed to our user-centric approach. Leveraging integrated live streaming and short video content along with our pan shelf e-commerce strategy, we'll continue to empower merchants and KOLs to grow historically.

Now, our live streaming business. In Q3, live streaming revenue was RMB9.3 billion, with the year-over-year decline narrowing further. As a foundational part of our content ecosystem and a key reason users engage with Kuaishou, we remain focused on fostering a healthy, sustainable livestream ecosystem. On the supply side, we saw increasing professionalism and institutionalization among streamers and refined operational capabilities from partner talent agencies. Multi-host live streaming and other emerging product categories also continue to grow. By the end of Q3, our partner talent agencies grew by more than 40% year-over-year and talent agency managed streamers increased by over 60%.

We continue to expand the variety of high-quality content, building on rich entertainment and local cultural content. We focus on niche areas and launch content from various IPs featuring talented streamers such as the Grand Stage and the New Episodes of National Arts live-streaming programs. By integrating content IP with the local culture and tourism resources, we helped drive the growth of these industries. To enhance our gaming live streaming ecosystem, we adopted a comprehensive content marketing strategy, including incubating new games, live streaming game distribution and cultivating top-tier influencers, among others. We also developed gaming content with unique Kuaishou features. In Q3, active gaming live-streaming creators exceeded 30 million, boosting the appeal of our diverse top-notch content to live-streaming users.

Our live streaming+ services continued to empower traditional industries. For example, we advanced our recruitment real estate services, driving rapid growth in customer reach and transaction scale. In Q3, average number of resume submissions on Kwai Hire nearly doubled year-over-year and the number of matches grew by over 200%. For Ideal Housing, daily lead generation surged over four-fold compared with the same period last year.

Finally, on our overseas business progress, we have set deep roots in Brazil and built strong local market brands by deepening our local content operations. In Q3, we saw steady high-quality user growth overseas, achieving breakthroughs by innovative user acquisition channels and improved user retention. DAUs in Brazil grew by 9.7% year-over-year. In content operations, algorithm improvements helped highlight premium content across verticals like entertainment, news, and everyday life and sports. With Kuaishou's strong user base and growing brand influence, we optimize the monetization mechanism for creators, refined product flow to enhance their earning potential and motivation. Content subsidies also become more efficient, supporting creators' sustainable operations. User activity grew steadily with the average daily time spent per DAU in Brazil up 4.2% year-over-year and continue to grow quarter-over-quarter.

In terms of monetization, we continue to enhance marketing clients' experience with improved traffic mechanism and efficiency while ensuring a healthy ecosystem. We also embedded new traffic scenarios to expand incremental marketing share leading to year-over-year doubling of online marketing revenue. Total overseas revenues reached RMB1.33 billion, growing by 104.1% year-over-year. Along with this rapid growth, we kept our overseas operations highly efficient under ROI-driven approach, narrowing our operating loss from overseas business by 75.9% year-over-year to RMB153 million in Q3. Additionally, after more than a year of exploring e-commerce business models in Brazil, we made initial progress in terms of products, content, services and transaction efficiency, laying a solid foundation for accelerated growth in our Brazil e-commerce business.

In summary, despite external challenges, we're confident that short video remains one of the best industries for growth given our current end user revenue and profit growth as well as its long-term potential. With a focus on tech, innovation, and putting users first, we're expanding our business boundaries through ongoing technological advancements. At the same time, we're building a vibrant content and commercial system for our users and partners, powered by better products and high-quality content.

That concludes my prepared remarks. Next, our CFO, Mr. Jin Bing, will discuss the company's financial performance for Q3.

Jin Bing

Thank you, Yixiao.

In Q3 2024, our average DAU surpassed 400 million, a significant milestone in our user ecosystem. Driven by our commitment to long-term value, we maintained user-centered ROI focused strategies that foster high-quality growth through AI empowerment.

As Yixiao has mentioned, AI at Kuaishou has evolved beyond a tool for innovation, serving as a powerful engine driving productivity. It is deeply embedded across our content and commercial ecosystems, helping us stay strong in user traffic, enhance operating efficiency and strengthen diversified revenue streams. In line with this, we also supported sustained and steadfast investments in AI.

In Q3, our total revenue reached RMB31.1 billion, with revenue from our core business growing nearly 20% year-over-year. Our gross margin was 54.3% and adjusted net profit reached RMB3.9 billion. These results underscore our core businesses fundamental strength and resilience supported by our ongoing investment in technology that would drive our sustainable growth.

Now, let's have a closer look at our Q3 financial performance. In Q3, our revenue grew 11.4% year-over-year to RMB31.1 billion, mainly driven by growth in online marketing services and e-commerce business. In Q3, online marketing services revenue increased by 20% to RMB17.6 billion from RMB14.7 billion in Q3 last year, representing 56.6% of our total revenues. This growth was driven by our continuous advancement in data infrastructure, smart placement products, and algorithm optimization, which boosted ROI and a stability in ad placement for our clients.

Revenue from other services including e-commerce reached RMB4.2 billion in Q3, up 17.5% from RMB3.5 billion in the same period last year. This increase was mainly driven by growth in e-commerce GMV, which boosted e-commerce commission income. We achieved notable year-over-year growth in the number of monthly active merchants as we leverage our strengths in content-based e-commerce and strengthened synergies across omni-domain operations while enhancing our KOL ecosystem and merchant operations. Optimizing the content based e-commerce experience and expanding merchandise variety stimulated the user activity and willingness to buy, driving continuous growth in the number of monthly active paying users.

Our live-streaming revenue was RMB9.3 billion, declining 3.9% from RMB9.7 billion in Q3 last year. We continued to build a healthy, sustainable live-streaming ecosystem. By promoting the professionalism and institutionalism of streamers, refining talent agency management, and diversifying content offerings, we attracted more users to our platform.

In Q3, our cost of revenues went up by 5.4% to RMB14.2 billion and accounted for 45.7% of total revenues, mainly due to increased revenue sharing costs and related taxes in line with our revenue growth as well as bandwidth expenses and server custody costs.

In Q3, gross profit grew by 17% year-over-year to RMB16.9 billion. Gross margin was 54.3%, an increase of 2.6 percentage points year-over-year.

Moving to expenses, SG -- selling and marketing expenses increased by 15.9% year-over-year to RMB10.4 billion, accounting for 33.3% of total revenues. Growth was mainly due to increased spending on business promotions, including short plays in online marketing services and e-commerce business. R&D expenses were RMB3.1 billion, increasing 4.5% year-over-year. R&D accounted for 10% of total revenues, dropping from 10.6% in Q3 last year. Administrative expenses decreased by 11.4% year-over-year to RMB800 million, accounting for 2.6% of total revenues, down from 3.2% in the same period last year. The reduction in R&D and administrative expenses was mainly due to lower employee benefit expenses, including related share-based compensation expenses.

Group level net profit for Q3 rose by 50% year-over-year to around RMB3.3 billion. Group level adjusted net profit rose 24.4% year-over-year to around RMB3.95 billion with an adjusted net margin of 12.7%, a 1.3 percentage point improvement year-over-year.

Our balance sheet remains robust, with cash and cash equivalents, time deposits, restricted cash and wealth management products totaling RMB86.7 billion as of September 30th. Through our enhanced monetization capabilities and efficient working capital management, we generated a positive operating net cash flow of RMB7.7 billion in Q3. Additionally, we actively implemented our shareholder return strategy. During the nine months ended September 30, 2024, we repurchased approximately HK$3.98 billion worth of shares in aggregate or around 91.11 million shares, accounting for about 2.1% of our total shares outstanding at the beginning of this year.

Looking ahead, we'll continue to prioritize user needs, deepen technology, business synergies, and actively explore diverse growth revenues. This initiative will strengthen our competitive edge in ever changing market and create long-term value for our users, partners, and shareholders.

This concludes our prepared remarks. Operator, please now open the call for questions.

Question-and-Answer Session

Operator

[Foreign Language]

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Lincoln Kong of Goldman Sachs.

[Foreign Language]

Lincoln Kong

[Foreign Language]

So, thank you management for taking my question, and congrats on a solid quarter. Could management share with us some latest progress of the AI large language model, especially regarding Kling AI? Is there any business operational or financial data you can share and what will be the direction of monetization going forward? Thank you.

Cheng Yixiao

[Foreign Language]

[Interpreted] Thank you for your question. In Q3, we further optimized the performance metrics of our foundation large models and deepened their application in content understanding, recommendation, production and user interaction. We are advancing the KwaiYii LLM MoE model, which uses a mixture-of-experts approach. Despite having only tens of billions of parameters, it surpassed the KwaiYii model with 175 billion parameters across multiple pre-training metrics. This significantly reduced the cost of training and inference while making the model better suited to Kuaishou's existing business scenarios. Kling AI has also undergone numerous iterations in a short time. In September, we introduced the Kling AI 1.5 model, which supports native 1080-pixel video. We also developed and upgraded a range of controllable generation capabilities such as camera lens control, first and last frame control, motion brush, and lip-syncing, solidifying our industry leadership.

[Foreign Language]

[Interpreted] Regarding applying large models for content understanding, we consistently expanded their use across various scenarios, including short video, live streaming, comments, advertising and e-commerce. These efforts drove improved user retention, marketing spending and e-commerce GMV. In content recommendation, our upgraded large model technology notably increased overall user time spent on our platform. As for content creation and user interaction, spending with AIGC, marketing materials continued rise, with average daily spending surpassing RMB20 million in Q3. Our interactive assistant AI Kwai has also been integrated into more scenarios, including Olympic medal prediction, user private messages, comment section interactions with peak MAUs exceeding 18 million.

[Foreign Language]

[Interpreted] Next, I'd like to provide an update on Kling AI's progress. Since its launch in June, Kling AI has accumulated over 5 million users and generated more than 51 million videos and over 150 million pictures. In September, Kling AI's MAUs surpassed 1.5 million, and organic user retention improved steadily month-over-month. We also launched a standalone app recently to make user access even easier.

[Foreign Language]

[Interpreted] On the monetization front, at the end of July, we began gradually rolling out a subscription membership offering for Kling AI's domestic and international users, providing them with the models' more tailored performance capabilities. At the same time, we officially opened our API services at the end of September, covering modules such as video generation, image generation, and virtual try-on. So far, Kling AI's early commercialization has met our expectations, with monthly cash revenue exceeding RMB10 million. We will explore more diverse monetization tools and models in the future and we're confident that Kling AI will see rapid revenue growth next year.

[Foreign Language]

[Interpreted] We firmly believe combining AI large models with Kuaishou's existing business scenarios will generate tremendous commercial value. Going forward, we plan to build our team's AI algorithm capabilities to achieve algorithm innovation and scenario application breakthroughs.

Matthew Zhao

Thank you. Next question please, operator.

Operator

[Foreign Language]

Your next question comes from Thomas Chong of Jefferies.

[Foreign Language]

Thomas Chong

[Foreign Language]

Thanks management for taking my questions and congratulations on a very solid set of results. In this quarter, Kuaishou has over 400 million in terms of DAU and the time spent per DAU exceeding 130 minutes. How should we think about the trend and target for DAU and user time spent going forward? What measure does the company have in place to continue increasing the overall traffic? Thank you.

Cheng Yixiao

[Foreign Language]

[Interpreted] Thank you for your question. In March 2022, we announced for the first time that our medium-term DAU target was to reach over 400 million. Together, we refined our user growth strategies, provided high-quality, diverse content, and consistently optimized and iterated our products and algorithms. As a result, we achieved steady growth in our DAU user time span metrics while maintaining total user growth and relatively stable retention costs each year, ultimately reaching our 400 million plus average DAU milestone.

[Foreign Language]

[Interpreted] Looking ahead to the next phase of our DAU growth plan, we think new user acquisition will be more challenging as short video penetration rates continue to grow. That said, we can still do a lot to improve user retention and activity. Regarding time spent, we are focused on enriching content and enhancing the efficiency of our algorithm recommendations. We believe these efforts give users a greater sense of value, which matters more than merely increasing average daily time spent.

[Foreign Language]

[Interpreted] On specific strategies for traffic growth, I'd like to share three points. First, in terms of our traffic allocation strategy, we will continue to upgrade our traffic distribution mechanism to align commercial and organic content, maximizing overall revenue. Traffic support for high-quality content will also help foster healthy community development. Second, on product optimization, we will strengthen our competitive edge by consolidating Kuaishou's modes in social networking and the private domain, while exploring more innovative interactive features to increase the community's interactive atmosphere. At the same time, we will fortify users' product mindset through better comment section experience and search functionality. Lastly, for content operations based on developing various reasons for users to open the app, we will produce exceptional vertical content that resonates with Kuaishou's users and support standout creators whose content represents Kuaishou's distinctive brand while leveraging influential major events to reach a broader audience.

[Foreign Language]

[Interpreted] In short, we are confident we will continue seeing steady traffic growth. In the future, more importantly, we hope to create more product usage scenarios for users to provide higher-quality content and services and become an engaging and useful content platform for more users.

Matthew Zhao

Thank you. Next question please, operator.

Operator

[Foreign Language]

Your next question comes from Felix Liu of UBS.

[Foreign Language]

Felix Liu

[Foreign Language]

Thank you management for taking my question and congratulations on the strong third quarter results. My question is on your online marketing business. We noticed that short play has recently contributed greatly to your online marketing services growth. How should we think about the sustainability from this new ad vertical and commencement shared in your latest growth strategy for online marketing going forward? Thank you

Cheng Yixiao

[Foreign Language]

[Interpreted] Thank you for the question. As you said, associated marketing budgets expanded with the thriving short play industry. This has also become an important driver for the overall growth of Kuaishou's online marketing business. In Q3, short play's marketing spending on Kuaishou grew by over 300% year-over-year, accounting for a double-digit share of overall external marketing spending. Peak daily marketing spending also recently surpassed 40 million. This is mainly due to the optimized user experience, thanks to our refined native sales funnel and increased paying users from smart subsidies. In addition, we accelerated the use of the IAA model in Q3 and rapidly expanded the demographic interested in short play, fueling a high-speed growth in short play's marketing spending through IAP and IAA models.

[Foreign Language]

[Interpreted] As for the sustainability of the short play business, we are optimistic about its prospects for steady growth in the medium term. According to third-party data forecasts, the short play market could exceed RMB100 billion by 2027. As the short play supply ecosystem continues to expand, there is potential for further commercialization among the over 50 -- 500 million existing short play users with room to increase the short play penetration rate. For Kuaishou, we already have a rich short play supply ecosystem and a short play user base of more than 300 million. With these advantages plus the support of our continuous enhancements to products and algorithms, we expect to Kuaishou short play's marketing spending through both the IAP and IAA models to sustain rapid growth.

[Foreign Language]

[Interpreted] Next, I'd like to briefly talk about the main growth strategies for our online marketing business. In terms of closed-loop marketing services, we are working to better match content and merchandise with users. With the meticulous refinements to our model predictions, we can enhance the conversion of content-based e-commerce materials and guide merchants to engage in sustained operations from short video to live streaming. As for external marketing services, our focus is on native content advertising including short plays, Kuaishou mini-games, and online literature. Our goal is to give users a compelling experience, enhance user stickness, and maximize ROI for marketing clients' ad placements. On the brand side, we will leverage our deep understanding of users grounded in marketing science to help marketing clients identify and reach their target audiences. We will also offer clients brand marketing solutions that integrate brand awareness and sales conversion through KOL recommendations and customized strategies to attract clients.

[Foreign Language]

[Interpreted] Lastly, we still have a lot of room for improvement in refined industry operations, smart marketing products and algorithm optimization. Meanwhile, we are seeing the increasing benefits of applying large models to marketing recommendation scenarios, driving better ROI for clients. As such, we're confident that we can continue to gain market share and grow our online marketing services revenue.

Matthew Zhao

Thank you. Next question please, operator.

Operator

[Foreign Language]

Your next question comes from Brian Gong of Citi.

[Foreign Language]

Brian Gong

[Foreign Language]

Thanks, management for taking my questions, and congratulations on the decent results. My question is regarding e-commerce. Could management share the overall performance during the Double 11 sales promotion and the company's [niche] (ph) strategies? Thank you.

Cheng Yixiao

[Foreign Language]

[Interpreted] Thanks for your question. We are pretty satisfied with our performance during this year's Double 11 sales promotion, especially given the ongoing consumer demand challenges. By capitalizing on the momentum of our content-based scenarios and pan shelf-based e-commerce scenarios, we achieved strong year-over-year growth in e-commerce GMV during the event, setting a new record high. We provided over 20 billion video views in traffic subsidies, RMB2 billion in user subsidies, and RMB1 billion in merchandise subsidies, empowering more merchants to realize better and faster growth on Kuaishou. During the event, the number of merchants and KOL sign-ups for our Double 11 sales exceeded RMB3 million for the first time and we acquired more than 70 million new e-commerce users during the event.

[Foreign Language]

[Interpreted] During the Double 11 sales promotion, our promotional subsidies and operational mechanisms focused on content-based scenarios and live-streaming rooms. This drove a notable increase in the live streaming penetration rate among streamers with over 10,000 followers. It also propelled the number of live streaming rooms with GMV exceeding 1 million to more than [2,500] (ph), and led to a 10-fold year-over-year increase in the release of short videos with embedded shopping links. We also placed more emphasis on marketing features in content-based scenarios. Specifically for top-tier merchants and KOLs, we prioritized follower engagement and product recommendations, introducing Mega Group Buy to boost followers' interactions with streamers and build loyalty. For small and medium-sized merchants and KOLs, we provided surprise subsidies and other features to facilitate sales breakthroughs in large-scale promotional events. Additionally, we offered more traffic and resource subsidies for shelf-based merchants, ensuring quality products received better returns through task incentives and merchant engagement strategies.

[Foreign Language]

[Interpreted] On the merchandise side, we integrated a subsidy budget across the platform to ensure the products in our content-based scenarios had equivalent price advantages. Meanwhile, we categorized the platform's key promotional products, including newly launched products during the season, preferred products during the promotional period, and core blockbuster products online as well as top-performing products from various brands. Notably, we excelled in non-standard products such as tea, liquor, health-related merchandise and jewelry and germ stones, as well as a standard product like consumer electronics and household items. During this year's sales promotion, our e-commerce Big Brand, Big Subsidy initiative covered more than 2,200 top-selling brands and over 2,500 high-demand product categories.

[Foreign Language]

[Interpreted] With the national trade-in and trade-up policy for the home appliances industry gaining more traction in the second half of the year, we believe platforms like Kuaishou have a greater advantage as we cater to diverse customers and their multilevel demands. During this year's promotion, national subsidies helped assimilate consumer demand for upgrading old home appliances for new ones. We quickly seized this policy and promoted home appliances trade-in and trade-up subsidies on Kuaishou in more cities in China. We also optimized the sales funnels for acquiring coupons and order placement conversion. Kuaishou users redeemed over [1.46 million] (ph) national subsidy e-commerce coupons during the promotion, driving substantial growth in sales across consumer electronics and household categories.

[Foreign Language]

[Interpreted] Our robust performance during the Double 11 sales promotion demonstrated the merits of our development strategy which calls for refocusing on live streaming e-commerce, tapping into the potential of short video e-commerce and steadily expanding our pan shelf-based e-commerce. Looking ahead, we remain confident despite the challenges of ongoing weak consumer demand and increasing market competition. By leveraging our resources in content-driven e-commerce and focusing on delivering exceptional content and superior products, we believe we can continue to expand our e-commerce supply and ecosystem. This will also help merchants and KOLs realize omni-domain growth. These strategies in support of national subsidies and other policies will help us drive consumption upgrades across our platforms, 700 million MAUs on our platform.

Matthew Zhao

Thank you. Next question please, operator.

Operator

[Foreign Language]

Your next question comes from Lei Zhang of Bank of America.

[Foreign Language]

Lei Zhang

[Foreign Language]

Thanks management for taking my question. My question is mainly regarding local services. Since we do have a steadfast investment here, so how does management evaluate the process of this business? And do we have any mid- to long-term goals here? Thank you.

Cheng Yixiao

[Foreign Language]

[Interpreted] Thank you for your question. We've begun exploring the local services business in 2022 and have gradually validated our users' local services' needs. By mid-2023, we had started industry-specific and regional operations to grow GMV and expand our user base. This year we strove to increase monetization efficiency. Going forward, we aim to achieve break even at the individual city level and we have made solid steady progress each step of the way.

[Foreign Language]

[Interpreted] Local services represent high frequency business scenario where we increase the reasons and frequency for users to open our app by offering high-quality local content and high value-for-money products and services. We continue iterated our KOL rating measure to promote high-quality content products while optimizing our traffic distribution mechanism to direct traffic to superior content and enhanced user experience. Given our users' emphasis on value-for-money services, this year, we built a price comparison model for higher quality core product, enriching our comparison engine's application scenarios and leading to an ongoing increase in the number of paying users. In Q3, the number of daily active paying users rose by 28% and GMV maintained high growth rate of 26%, both on a quarter-over-quarter basis.

[Foreign Language]

[Interpreted] On the monetization front, we boosted local operation-based merchants advertising spending by exploring multiple industry-specific categories and various incentives. For lead-based merchants, we persistently increased their incremental budget allocations through new advertising products. In Q3, revenue from local services increased more than 2.5 times year-over-year and grew 36% quarter-over-quarter. The gap between revenue and expenses is gradually narrowing due to our efforts to improve our subsidy and operational efficiencies. So, considering the overall value of the platform, we believe local service is a business that needs long-term investment. We also see a consistent trend of ROI improvement.

[Foreign Language]

[Interpreted] In the medium to long term, we are committed to meeting users' needs while leveraging our user base to empower merchants to grow. We will focus on platform value and the incremental revenue value that the business brings to the company while maintaining a good user ecosystem.

Matthew Zhao

Thank you. The last question please, operator.

Operator

[Foreign Language]

Your next question comes from Xueqing Zhang of CICC.

[Foreign Language]

Xueqing Zhang

[Foreign Language]

Thanks management for taking my question. My question regards OpEx. The company's selling and marketing expense in Q3 increased both year-on-year and Q-on-Q. What are the main reasons? Looking ahead to the fourth quarter, what's the trend of OpEx? Thank you.

Jin Bing

[Foreign Language]

[Interpreted] Thank you for your question. In Q3, selling and marketing expenses rose year-over-year as we increased our investment in online marketing services and the e-commerce business. The overall cost for user growth and retention remained stable. Our investments in online marketing services mainly relate to user subsidies for paid short plays, with ROI as the guiding principle for subsidy spending. We not only expanded paid short plays user scale, but also drove marketing budget allocations from clients that were several times higher than the subsidies we provided. We expect that our ROI will further improve as users develop a mindset for paying short plays, supported by our optimized smart subsidy plans. The investment in e-commerce is also primarily related to user subsidies. We maintain a cautious approach, so even with the increase in our e-commerce subsidies, their proportion to GMV remains relatively low compared to industry standards and our subsidy efficiency has continued to improve.

[Foreign Language]

[Interpreted] Regarding selling and marketing expenses as we enter Q4 and prepare for the major e-commerce promotional season, we expect an increase in user subsidies in e-commerce and slight increase in our investment in online marketing services both on a quarter-over-quarter basis. So, as in previous years, selling and marketing expenses are expected to grow quarter-over-quarter in Q4 due to seasonality. In terms of R&D expenses, our increased investment in AI large models will lead to higher costs for related R&D personnel resulting in quarter-over-quarter growth in overall R&D expenses. However, both selling and marketing expenses and R&D expenses as a share of revenue will decline quarter-over-quarter. As we fortify our quality and efficiency improvements in the future, we expect our overall profitability to further improve as well, creating value for shareholders.

Matthew Zhao

At the end of Q&A session, please get back to me operator. Thank you.

Operator

[Foreign Language]

Matthew Zhao

Thank you, operator.

[Foreign Language]

[Interpreted] Thank you once again for joining us today. If you have any further questions, please contact our Capital Market and IR team at any time. Thank you.