Kuaishou Technology (KUASF) Q2 2022 Results - Earnings Call

2022-08-24 10:49:02

Kuaishou Technology (OTCPK:KUASF) Q2 2022 Earnings Conference Call August 23, 2022 7:00 AM ET

Company Participants

Heather Diwu - Director, Investor Relations

Cheng Yixiao - Co-Founder, Executive Director and Chief Executive Officer

Jin Bing - Chief Financial Officer

Conference Call Participants

Alex Poon - Morgan Stanley

Thomas Chong - Jefferies

Kenneth Fong - Credit Suisse

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Kuaishou Technology Second Quarter and Interim 2022 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management’s prepared remarks. And this English line will be in listen-only mode. And now, I am going to turn the call over to Ms. Heather Diwu, Director of Investor Relations at Kuaishou Technology.

Heather Diwu

Thank you, operator. Good evening and good morning to everyone. Welcome to our second quarter and interim 2022 financial results conference call. Joining us today are Mr. Cheng Yixiao, Co-Founder, Executive Director and CEO; Mr. Jin Bing, Chief Financial Officer.

Before we start, we would like to remind you that today’s discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today’s announcement and its discussion. The company does not undertake any obligation to update any forward-looking information, except as required by law.

During today’s call, management will discuss certain non-IFRS financial measures for comparison purposes only. For a definition of non-IFRS financial measures and reconciliation of IFRS to non-IFRS financial results, please refer to our results announcement for the second quarter and interim report ended June 30, 2022 issued earlier today.

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

I will now hand the call over to Yixiao.

Cheng Yixiao

Hello everyone. Welcome to the Kuaishou second quarter 2022 earnings conference call. In the second quarter of 2022, we continue to overcome challenges and achieve significant business breakthroughs. So the pandemic was sporadic and also macroeconomic was volatile. We remain steadfast in the commitment to creating more value for users, while also consistently enhancing our operational efficiencies.

Our domestic DAUs in the second quarter of 2022 reached 347 million, achieving better-than-average seasonal performance and setting a new record. Meanwhile, our domestic business segment made breakthroughs progress, delivering quarterly operating profit two quarters ahead of plan, which has clearly shown the health and sustainability of our business model as well as the executive and also efficiency potential for organization and team. We launched the Kuaishou Express in the second half of 2019, and have made considerable investment in growing users while paying attention to acquisition efficiency. The group’s adjusted EBITDA positive for the first time in nearly a year.

Now I would like to discuss the progress we made with several aspects of our business in the second quarter. First, I talked about the user metrics and also traffic. In the second quarter of 2022, we continue to achieve high quality and efficient user growth through optimizing our strategies, algorithm content operation, et cetera. We delivered a record high DAUs of 347 million at an accelerated growth of 18.5% year-over-year, which – with the lower acquisition and maintenance cost per DAU. Our average MAUs reached 587 million, up by 15.9% year-on-year, and an average DAUs to average MAUs ratio also hit a historical high as 59.2%, reflecting quite as growing user stickiness and vibrancy of our user community. Furthermore, our average daily time spent per DAU reached 125.2 minutes in the second quarter of 2022, up by 17.1% year-on-year. Our total time spent also grew a rapid pace of 38.7% year-on-year. More specifically, our user acquisition size, we continue to explore efficient channels and effectively expand listing channels in the target manner. At the same time, we actively manage the operation according to our traffic strategy, and improve our very unique in old fashion. And also at the same time, we are improving our efficiency.

And also, our channel in strategy also iterated and also, we are improving our economic management manner. At the same time, we actively managed operation according to our traffic strategy and also improve the kind of best operation method. And also at the same time, by having seasonal alteration, we are also focusing on our strategy and also efficiency at the same time with the lower cost, we have also – which also had a significant improvement in both quantity and quality of user growth. And also user experience is key for retaining user and increase in time spent through algorithm operation, we have made more actual and differentiated implementation of high quality content, particularly mid to long content thereby enriching use of consumption, improving usage experience.

In the second quarter, the year-on-year growth of our video views even outpaced the growth of total user time spent. Meanwhile, we developed a new perspective on user retention which related to our simple user labels into a more comprehensive user health index. This enhancement has made our intensive model more refined and efficient, improving our system iteration frequency from daily base to minute base and also putting us a generation ahead of our peers in term of efficiency.

Our highly effective user retention strategy also serves as a powerful tool for ongoing control of user-related costs, with optimization in content algorithm operations and more will further increase the proportion of unsubsidized and minimized subsidized users in our base. In the second quarter, our DAU growth rate and decrease in retention cost per DAU showed a healthy divergence and our first year highlight of new users continued to increase quarter-over-quarter. This accomplishment boosted our confidence and enables us to strive forward to our 400 million DAU user target. In addition to improving efficiency, plus our hands-on growth strategy, operating the social platform and user mindset drove meaningful results in the second quarter of 2022. As of mutual followers of Kuaishou App grew 66% year-over-year, reaching more than 20 billion cumulatively, with average following per MAU continue to increase more than 300, which reflective of strengthening social stickiness and also user mindset.

On the content side, we will continue to strengthen operations in our largest vertical, while conducting more corrective screenings and opera operations of blockbuster contents. Kwai Playlet has always been our benchmark content vertical in the second quarter of 2022. We further accelerated the growth of our short play content and achieved meaningful result by any new categories, including family and documentary and exploring new duration format, such as 5-minute episodes. Also, DAU is to place great emphasis on content and less on production, particularly on the scripting stage. This strategy has considerably produced blockbusters. Short plays have also contributed significant user acquisition and user activeness, especially among young and female users.

With key impact into blockbuster content and also stronger operational capability, we recently created several blockbuster entertainment contents. Kuaishou insists on the strategy of providing entertainment content with high directions and premium user experience. We organized and hosted Jackie Chan’s first local live streaming event and Jay Chou, highly anticipated new album live streaming event. Jackie Chan’s spectacular live streaming event was enjoyed by fans worldwide joined 130 million views, including Kuaishou [indiscernible] users. Jay Chou’s live streaming and over 110 million views and over 450 million interactions and also relations exceeding 10 million, which is actually a historical high history of Internet. As of June of 2022, Kuaishou had more than 2,000 celebrity accounts who together had 870 million followers.

Another primary focus of Kuaishou has been to improve the monetization efficiency and we have continuous income and optimization measures across our ecosystem, product technology and service capability is among the excess of our business platform, [indiscernible] in China. We saw pressure from challenging microenvironment and also resurge of pandemic in the first half of the year. For a safe time, we have [indiscernible] the fully unleashed of our improved monetization we are releasing in the short-term, we are still outperforming industry across our [indiscernible] market share.

In the second quarter of 2022, earning from online marketing services increased by 10.5% year-on-year to RMB11 billion. Against a weak economic environment advertisers conservative budgeting, we have been more proactively deepening our relationships with advertisers to increase the number of active consumers and also increase overall advertising demand. In the second quarter, the number of proactive advertisers increased by more than 90% year-over-year. Meanwhile, advertiser retention rate further improved, reflecting our ad performance and product capabilities. We have also recently implemented several optimization measures. For example, we introduced light version of our products through medium and small customers, making advertising easier and more convenient.

In addition, regarding ad performance, we adopted more refined and frequent monitoring and operations and minimizing our advertisers. Through algorithm operation, we were able to improve tasking intelligence. We allowed it to help the advertisers with budget allocation and bidding strategy management to actually improve matching and conversion efficiency in the second quarter, over advertising ADR and advertising transaction rate also improves. Gross advertising from our native e-commerce business also rebounded during the second quarter and our e-commerce business started to recover after pandemic surged. In the second quarter, we focused more on building comprehensive e-commerce marketing service capabilities, while continuing improving the basic service quality.

We further capitalize our dual engine of short video of [indiscernible] advertising business through the short video e-commerce advertising while improving matching and conversion rate. We also guided the merchants to conduct combined promotion and operations in both public and private domains to further unlock the value of our closed-loop e-commerce platform, the average ROI for native advertisers continue to improve in the second quarter.

In terms of the brand advertising, we have also expanded our ad spaces and also constantly be innovating new promotion solutions, for example, for KOLs, we launched a [indiscernible] plan innovation platform approach linking platform plus KOL plus brand. We selected 100 high-quality KOLs based on our content quality and commercial value and jointly launched various product combinations for brands to fulfill their KOL matching needs in different scenarios, empowering brands to grow their businesses. The year-over-year growth of our brand advertising in the second quarter of 2022 outpaced that of the overall online marketing services.

Our e-commerce business was also affected by the pandemic during the second quarter. Nevertheless, we outperformed the industry, thanks to our differentiated advantages in traffic efficiency and e-commerce experience. E-commerce GMV increased by 31.5% year-on-year to RMB191.2 billion, with live streaming e-commerce gaining a larger share in the e-commerce market in the second quarter.

On the merchant side, more sellers have come to recognize live streaming e-commerce advantages in traffic, efficiency and [indiscernible] acquisition as well as the growing number of the test cases. Hence, more merchants are joining live streaming e-commerce ecosystem resulting our promotional strategies, which had helped enriched our merchant supply. For the first half of 2022, the monthly new merchant member increased notably against the same period last year, near doubled and in the second quarter, number of monthly active Kwai Brand merchants by more than a third quarter-over-quarter and number of monthly active brand merchants grew by more than 200% year-over-year.

Building on our domain traffic and enrich merchant content, we maintain close attention to improve the transaction efficiency to optimize algorithms starting from this year, we are focused on improving efforts we have provided, seller and product merchant. Regarding users, we have actually stepped up the access in exploring our personalized needs, to continue to refine, re-label and have a better understanding of our users. On the product front, we made significant investment in building a core database and how capital factoring product descriptions that we can better understand our products. The efforts significantly enhance the GPM of e-commerce live streaming in the second quarter with new merchants that are starting up stage. We expand and invested additional resources all service providers to improve their startup editions and helping to speed up growth.

In the second quarter of 2022 over 2,000 merchants saw their revenues climb in leak compounds through service provider empowerment. Meanwhile, we are consistent fortify our truck-based e-commerce ecosystem. In the second quarter, our industry leading market or pre-purchase rate continues to increase year-over-year and quarter-over-quarter and our trust based economy further reinforce consumer merchant [indiscernible] compared with a shelf base or shelf based e-commerce, live streaming e-commerce engaged in earlier stage in consumer decision-making process with ongoing efforts of content merchant and merchandise supply to optimize the branding part of shopping experience creating a virtuous cycle. In the second quarter, our monthly entered [indiscernible] actually penetration rate remained in close momentum reaching over 15%.

And also another highlight of our second quarter performance from live streaming business and revenue grew at an accelerated base of 19.1% year-over-year to RMB8.56 billion particularly due to volume effectiveness. First, the strategy adjustments that we made on the content supply, I think the second half last year produced excellent results. Though strengthening cooperations with [indiscernible] content operations of existing channels on Kuaishou and also on [indiscernible] will be more external professionals, we have achieved more improvements in overall content quality as well as operational capabilities for our live streaming business. In the second quarter of 2022, number of our monthly active streamers exceeded 10 million on a number of high-quality active streamers with over 100,000 followers saw double-digit growth year-over-year.

In the second quarter, we made more explorations in live streaming production and operation to launch normal interactive features and new store-based user consumption motivations, such as the [indiscernible] live streaming function driven by dual improvement in content outlook and quota share proposals rose further among users evidenced by current year-over-year growth in user time spend on live streaming and also to simply optimize revenue efficiency at our live streaming traffic. As for the algorithms, during real-time mention of live-streaming content, we improved our live streaming conversion rate effectively penetration rates and also paying the ratio establishing a more efficient and smooth live streaming payment funnel. In the second quarter, the average MAUs for live streaming rose 21.8% year-over-year to 54 million.

We are in Kuaishou’s live streaming ecosystem. Prior recruitment, a high potential new business also made remarkable progress in the second quarter. With the advantages in traffic algorithms, core user profiles and our truck-based ecosystem, Kuaishou has strike a balance between cost and efficiency for corporate recruiters operating economies of sale while providing high percentage for equipment and fulfillment experience to users. Also, it is a relatively new business. [indiscernible] has quickly gained the recognition and attention of individual and corporate users within a year of Kuaishou from reaching 250 million in the second quarter, up 19% relative to the first quarter, supported by our powerful merchant and operational dividends combined [indiscernible] boosts the industry leading placement conversion rate. And also our priority for this year is to contemplate users’ mindset and growth of sales while improving a service quality through short videos and live streaming we aim to create more social and economic value for both individual users and enterprises.

Moving on to our overseas business. In the second quarter, we continue to create differentiated content for the user mindset and explore more diverse content as on format. At the same time, we’ll further increase our investment algorithms and products to optimize user experience, so as to achieve high-quality and efficient user growth and retention rate. At the end of June of this year, the time spend per year, you know that these market exceeded 60 minutes – and 60 minutes indicating a positive breakthrough user experience in growing number of regions as well as the five-wheel gradually gathering momentum.

In the second quarter, we also actively explore more monetization by advertising and live streaming virtual guests brought in more advertisers and partners with more live streaming having agencies to consolidate and also solidify the foundation for greater ecosystem. As a result the revenue for our overseas operations more than doubled quarter-over-quarter from net earning losses. Going forward, we hope to continue to explore half and ROIC overseas growth model. We are completing a new round of organizational restructuring remaining at further unlocking the organizations’ vitality and potential and continuously creating efficient and high value services for supply chain uses.

This concludes my prepared remarks. And now, I would like to ask our CFO, Jin Bing, who will take to us about financial performance.

Jin Bing

Thank you, Yixiao, and hello, everyone. We now could have a closer look at the financial performance for the second quarter of this year. So first of all, I am sure that Kuaishou made a breakthrough progress in the second quarter. Despite a challenging macro environment, our traffic and revenues continue to grow steadily. Meanwhile, our domestic business became profitable at the operating level and also 2 points ahead of traffic. We also achieved positive results in monetization of overseas business and penetrate our revenue growth achieving narrow operation loss.

Our revenues for the second quarter increased 13.4% year-on-year to RMB21.7 billion. The increase was mainly driven by revenue growth in our online marketing services, e-commerce business and live streaming business. Revenue from online marketing services reached RMB11 billion in the second quarter of 2022, up 10.5% year-over-year. This was primarily attributable to our traffic growth and the continuous improvement in our services production base and ad performances, which continually increased the number of advertisers. Meanwhile, as our solid closed-loop ecosystem generates improved conversion rate. For e-commerce, merchants, their contribution to our closed-loop bond and marketing services show stronger resilience and growth. Other services revenue for the second quarter of 2022 increased by 7.1% year-on-year to RMB2.1 billion largely due to the solid growth in e-commerce revenues.

Our rich merchandise supply was powered by the growth of well-known bank such as Kwai Brands, which while our enhanced merchant efficiency promoted to increase in the monthly active e-commerce main users. This, combined with our unit trust-based e-commerce model and empowerment by service providers and our total e-commerce GMV to increase by 31.5% year-over-year to RMB191.2 billion. In the second quarter of 2022, revenue from live streaming grew by 19.1% year-over-year to RMB8.6 billion. This was primarily attributable to improvement in both our live streaming content quality and platforms live streaming operational capabilities and also as well as the continuous improvement in user content merchant efficiency, which provides the growth of average live streaming MPUs of 21.8% year-year to 54.2 million.

Our cost of revenues for the second quarter of 2022 increased by 10.9% year-over-year to RMB11.9 billion representing 55% in our total revenues. The year-on-year increase was made due to two reasons: plus an increase in revenue sharing costs related to ads which were in line with our revenue growth. Second, the increase in content cost as part of the other cost of revenues, resulting from our continued efforts in diversifying content verticals and enrich in content ecosystem. However, during the quarter, we were able to partially offset the impact of these actives by optimizing efficiencies of our bandwidth usage and reducing our bandwidth expenses and serving custody costs.

Gross profit for the second quarter of 2022 reached RMB9.8 billion, growing 16.5% year-on-year. Gross profit margin in the second quarter of 2022 was 45% improving from 43.8% in second quarter of 2021, an increase of 3.3 percentage points quarter-over-quarter. Our year-on-year increase in GP margin was primarily as a result of further optimizing our bandwidth and server efficiency which drove the decrease in ratio of bandwidth and depreciation to revenue. However, the quarter-over-quarter improvement to gross profit margin was mainly due to optimization of revenue sharing costs and related taxes.

Selling and marketing expenses were RMB3.8 billion for the second quarter of 2022 decreased by 22.2% year-on-year and 7.7% quarter-over-quarter representing 40.4% of revenues, a significant decline of 18.5 percentage points from 58.9% in the second quarter of 2021. This decrease resulted from our improved acquisition efficiency and optimization in content algorithms and operations, which led to more disciplined and efficient standing to our user acquisition and main channels while sustaining strong traffic growth.

Administrative expenses for the second quarter of 2022 were RMB960 million, increased by 10.6% year-over-year, primarily due to an increase in share-based compensation expenses. Research and development expenses in the second quarter of 2022 were RMB3.3 billion, decreased by 16.1% year-over-year and 6.8% quarter-on-quarter, primarily due to decrease in employee benefit expenses, including the related share-based compensation expenses. Our operating loss for the second quarter of 2022 continue its downward trend now reaching RMB3.1 billion, an improvement from RMB7.2 billion in the second quarter of 2021 and RMB5.6 billion in the first half or in the first quarter of 2022.

As a result, our operating margin increased by 23.6 percentage points year-over-year and 4.7 percentage points quarter-over-quarter, improving from net of 37.7% in the second quarter of 2021 to an active 14.1% in the current coming quarter. Adjusted net loss for the second quarter of 2022 was RMB1.3 billion, barring substantially from RMB3.7 billion in the first quarter of 2022 and RMB5.0 billion in the second half of 2021. This resulted in adjusted net profit margin improvement from net 26.2% in the second quarter of 2021 to net 6% in the second quarter of 2022, representing an increase of 20.2 percentage points year-over-year and 11.7 percentage points quarter-over-quarter. We remain a healthy balance sheet with cash and cash equivalents, time deposits restricted cash and wealth management products of RMB41.26 billion as of June 30 of 2022.

Going forward, we will continue to reinforce the monetization viabilities of our various business while embracing change and adapting to evolving macro environment with a steady perhaps commitment to sustainable growth and profitable improvement to our group level. We will enhance our operational efficiency and effectively execute our long-term development strategies.

This concludes our prepared remarks. We are now going for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Alex Poon from Morgan Stanley. Please ask your question.

Alex Poon

Thank you, management for taking my question. Congrats on a very strong quarter. My question is related to our e-commerce business. Second quarter GMV grew – growth was much better than expectation. And can management explain it – describe to us how our e-commerce ecosystem developing so far? And how will we tackle the changes after the COVID for the consumer behavior change? Thank you very much.

Cheng Yixiao

Thank you for the question. In the second quarter, we continue to build our trust base experience-centric e-commerce ecosystem and speed up improving sales conversion by leveraging live streaming as the main venue. Trust is the cornerstone of our e-commerce system. And also as we continue to improve our user rights and interests protection system and a penetration of orders under the trust purchase, which is part of a system further increase. In particular, our high compensation policy, 9x refunds for each take item now for this more than half of orders, which is industry leading and we are confident to further improve it. With further enhanced platform governance and also presented user feedback as very points in a purchase process in the form like Repeat Customer Recommendation Index and to further strengthen the users company in merchants and our platform. We continue to lead the industry in e-commerce monthly repeat purchase rate, which had increased both quarter-over-quarter and year-over-year.

These private domains, is the foundation of the merchants to operate effectively over time on Kuaishou, our public domain traffic can help merchants quickly get through the co-start stage and raise their operating. This quarter, we focused on enhancing on conversion rate, while public domain traffic by enriching and refining products and user tax and improving the accuracy of merchant merchandise and users for any period, the GPM of public domain e-commerce live streaming increased by high double-digit percentage points year-over-year and continue to grow quarter-over-quarter. By offering high-quality merchandise and services to strengthen the peak purchase and private domain traffic conversion, we have created a highly efficient dual-engine model with public and private domain.

Also, our e-commerce business will not have to achieve better-than-expected growth this quarter without our continued expansion in high-quality resources on our supply side. During the first half of 2022, the number of monthly new merchants increased significantly by more than 90% year-over-year. More and more merchants gradually recognize the value of live streaming e-commerce, lively product displays and efficient interactions, as well as this higher conversion rate. We are also actively expanding our rich to high-quality merchants in inventory zones. And also, our plan is to deploy services in 100 inventory zones by the end of this year. And at the end of first half, we were over halfway there with more than 10 industries covered.

On the brand supply side, we continue to promote more brands, particularly Kwai Brands to provide consumers with more abundant high-quality merchandise while further enhancing user awareness of brands to our platform. In the second quarter, the number of monthly active brand merchants more than doubled year-over-year. Among the internationally renowned beauty and Cosmetics brand achieved average multi GMV of RMB200 million in the first quarter of online platform. And during the 616 shopping festival, our total brand GMV increased more than 5 folds year-over-year. In terms of Kwai Brands, the number of monthly active Kwai Brand merchants doubled quarter-over-quarter. In addition to our presence in apparel and cosmetic categories where live stream e-commerce holds an advantage. Kwai Brands also featured in categories such as food and beverages, home appliances, home furniture and also other products.

And as for the second part of the question, given the pandemic resurgence in many places in the first half of this year, with their offline operations under pressure, many merchants were more willing to explore online sales channels. At the same time, the pandemic also filled the desire of traditional online merchants to find new growth channels even as the leverage to speed up since signing up new merchants. So this year, we continue to strengthen our support for start-up merchant, establishing an exclusive traffic pool and providing them with diverse products and marketing tools and the one-on-one operation services. Furthermore, our service providers are providing more adoptive services to drive new merchants in areas that I know points and also in relation to product selection and also operation at the early stage, helping them jump starting and also achieving GMV growth.

In the second quarter, the net monthly retention rate of the new merchants increased significantly year-over-year and quarter-over-quarter both and also the time between co-start [indiscernible] of new merchants shortened by nearly 15% year-over-year. In addition, we could see us as being more price-sensitive and more rational in the post-pandemic era, which resonates well, whether on staple quality good and reasonable prices philosophy. So we bring more exposure to merchants, capable of providing a high-value expense ratio, and this encourages merchant to refining their products and services. At the same time, we continue to improve the quality of product fulfillment and aftersales services. So our consumers can buy affordably and also the trustworthy products. So although effected by the pandemic and the unnecessary consumption overall was at best. During the 616 promotion we noticed beauty and cosmetics also the home appliance within other categories on quite show managing a relatively healthy recovery.

Furthermore, consumers’ staple service, such as food and beverages saw rapid development during the pandemic. Although in the food and beverage vertical, the penetration rate of live streaming e-commerce is still rapidly low. We believe there is a great upside potential with the streamers providing expression and also rigidity of to pay and flavor as well as the bulk sales model as a trust-based e-commerce platform with fast expanding traffic advantage. Increasing matching efficiency and also the product supply, we believe standard products also have much room for penetration to our platform. We are stepping up our effort to develop shopping more like functions, including Kwai shops, entry point, search box and also get what you like feature, which can help users who have a clear shopping target to find where exactly to get it, better catered to users with brief purchase demand and keep reinforcing their purchasing on Kuaishou. We believe, in the near to long-term, the total GMV of the live streaming e-partners industry centered on short video platforms can reach RMB6 trillion, and we will continue to strengthen our leadership in this industry.

Operator

Next question comes from the line of Thomas Chong of Jefferies. Please go ahead.

Thomas Chong

Thank you, management for taking my questions and congratulations on very strong set of results as well as great second quarter for the domestic business. May I ask management that we think of operational efficiencies and ROI uphold on investment, how should we think about our top line growth, and achieve effective results? Thank you.

Cheng Yixiao

So thank you for the question. It is indeed a very exciting our domestic business growth even two quarters ahead of schedule. We made efforts on several fronts’ revenue growth, gross margin. To begin with, while maintaining steady revenue growth, we made breakthroughs in our revenue-sharing cost management as our core business grew in scale and influence, we innovatively design and optimize a more effective revenue-sharing mechanism, lowering the revenue-sharing costs and also related taxes as a percentage of revenue by 2.5 percentage points quarter-over-quarter.

Secondly, upholding the principle of using technology to higher efficiency and with efficiency, keeping costs under control, we focus on tech upgrades to achieve the ultimate in cost effectiveness. In terms of server technology, we advanced the dedicated management of resources and implemented the technological innovations, which improved computing and storage resources utilization rates, helping us to minimize the unit resource costs. In the first half of the year, while the total domestic time spent grew by over 40% year-over-year, our bandwidth costs per 1,000 units in China fell significantly year-over-year. So, the ratio of bandwidth and server costs to revenue dropped by over 3 percentage points, and that contributed markedly to our overall gross margin improvement. As for audio and video technologies, we carried out a vast technology research and developed applications, which combined with multiple video product algorithms, image enhancement and audio compression algorithms, reduced considerably our total bandwidth usage. Our self-developed product algorithm KVC is the industry’s first next-generation video algorithm standard, widely promoted and used online, and also the large-scale launch of PCBN and other device cloud interaction and integration technologies have substantially increased the promotion of free and low-cost bandwidth usage. And regarding expenses, in terms of selling and marketing expenses, since the third quarter of last year, while ensuring user growth we have been able to keep lowering the acquisition and retention costs per DAU through organizational restructuring, efficiency enhancements and technology iterations. We also strengthened refined management of our operations plus competition, eased compared with last year. In the second quarter, with rapid traffic growth maintained, and also user number reaching a new high, selling and marketing expenses as a percentage of revenue declined by 18.5 percentage points year-over-year. And lastly, we continue to optimize our personnel-related costs to revenue ratio through a series of organizational restructuring and efficiency and cost initiatives, moving closer to the industry-leading level. At the concerted efforts of all in the company, we notably narrow our losses. We will continue to explore more monetization models and improve the monetization efficiency where – while following an efficient growth path to increase revenue while reducing costs, and also which will give us a solid foundation to unlock the value in the medium to long-term.

Operator

The next question comes from the line of Kenneth Fong of Credit Suisse. Please ask your question.

Kenneth Fong

Congrats on the strong quarter and thanks for taking my question. I have a question about client recruitment. Can you update us on the latest progress, growth strategy as well as the plans for monetization? Thank you.

Cheng Yixiao

Thanks for the question. First, China’s blue-collar population exceeds 450 million, accounting for half of the country’s working population, and are the most in-demand workers in the country. With the population bonus commission and also the labor shortages at rise, the blue-collar recruitment market has become supply or user driven. However, we have noticed that in the past, these users have not been adequately searched and blue-collar recruitment market has many pain points such as inadequate access to information, false information and consistent contract performance, quality, etcetera, etcetera. And for employers, they also face challenges that require urgent attention, such as low recruitment conversion rate, high recruitment costs and also poor economies of scale. In the post-pandemic year, we have spotted opportunities in blue-collar recruitment, also, as the most favorite show video and live streaming platform of blue-collar users, we see it as our responsibility to step up and deliver better solutions to industries given superior user experience to blue-collar workers and higher conversion efficiency to enterprises. I am quite sure of advantages of online blue-collar recruitment efficiency and experience are primary built on our three core competencies. The first one is the scale of our user base. In the second quarter of this year, the unit MAUs of required recruitment [ph] reached 250 million, making an online blue-collar recruitment platform with the largest user base here in China. Equally important is the impact of our user base on the business conversion model. Compared with daily recruitment for entertainment current consumption, job hunting is a low-frequency user behavior. As blue-collar workers change jobs 3x to 5x a year for conventional recruitment platform, users will uninstall the app for the app to become idle after a job is found. So, constantly, a larger budget has to be used on user acquisition and eventually recruiters pay the bill for higher operations and traffic costs. However, here at Kuaishou, our rich short video and also live streaming content play a crucial role in driving user acquisition and attention earning on this advantage. We provide recruitment services effectively improving operating efficiency while also lowering recruitment costs for enterprises. And the second factor is our ability to build trust. Trust is absolutely critical in blue-collar recruitment. Taking the secondary as an example, 80% of the blue-collar job seekers are job hunting across provinces. Considering the impact of the pandemic, it is very important for these job seekers to have a better understanding of potential employers and also positions so that they can save relevant expenses. And also the interactive model of Kuaishou live streaming allows users to obtain critical information such as work environment and job content while establishing trust with live-streamers and employers. Such trust-based real-time interactive job hunting experience cannot be codified by traditional search experience or job listing. In addition, since live-streamers has accumulated a valuable user asset on Kuaishou we are motivated on other service agreements for offline stages of recruitment process. Kuaishou also provide users with a complaint channel. Our long-term operation mindset and trust-based model gradually cultivates it through the mutual trust and public supervision, provide recruitment experiences and conversion rate far exceeding the traditional darkening model, and also ultimately reduce the patch of false information and fraud again uses joint contract fulfillment offline. The third advantage is our distribution and matching capability with advanced and diverse traffic. Kuaishou excels in nationwide traffic distribution. Our efficient traffic matching and the economies of scale make us well suited for large-scale and rapid blue-collar recruitment. Our industrial leading MMU technology is capable of deeply understanding the multimedia content, which combines with user characteristics, recognition enables better recruiting cold staff of data. In addition, we introduced algorithm technology to precisely match supply and demand while also boosting public domain traffic allocation thereby improve both number of views and successful conversion rates. There – and also ultimately build a highly efficient, accurate and authentic service chain. From recruiter’s feedback, our placement conversion rate is very competitive in the industry, and we are one of the most effective long-term options for enterprises. In summary, the advantages of our vast business model, the real-time interactive nature of live streaming and the trust factor deeply embedded in our DNA has lowered the job finding threshold for blue-collar workers and increased the recruitment conversion rate for enterprises. We recently made some key milestones in the recruitment business and also have some obligations. In June of 2022, the half year Kwai Recruitment was launched. The peak number of daily resumes submitted reached a high of over 360,000, and also assuming rather quickly the second place in the industry, being it there. However, the resources that we have invested in products and research related to the businesses considerably less members of other blue-collar recruitment platforms. Furthermore, as units grow, so does brand recognition and voice in the blue-collar recruitment industry, increasing number of enterprises, agencies and live streaming who are actively seeking cooperation with Kuaishou and even relocating the focus of business under Kuaishou conducted to producing a flywheel effect as well as building a moat for defending user mindset and relevant content. At the end of June, we had more than 100,000 corporate partners. Meanwhile, we have noticed that our blue-collar recruitment business and our platform’s core consumption indicators are trending in the same direction. This shows that our industrial content such as blue-collar recruitment had a good extent, satisfying user’s regular needs and in turn encouragement to make Kuaishou their preferred platform. And as such, we have reached the cross-business synergies. On monetization, we have initiated small-scale trials of advertisements and achieved promising initial results. We are also exploring more in-depth monetization models. This year, we will continue to refine our operations and content, expand the scale of job applications, improve traffic utilization efficiencies and test our business models. We expect the online penetration rate of blue-collar recruitment to reach 30% in 2025 or ‘26, and the market size to reach around RMB100 billion. We hope to capitalize on our advantage to enhance the recruitment experience for the entire industry while improving online conversion rate and capturing a leading share of RMB100 billion online blue-collar equivalent markets.

Heather Diwu

Thank you once again for joining us today. If you have any further questions, please contact our Capital Markets and Investor Relations team at any time. Thank you.