36Kr Holdings Inc. (KRKR) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, thank you for standing by for 36Kr Holdings Inc.'s Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] I will now turn the call over to your host, Yolanda Liu, IR Manager of the company. Please go ahead, Yolanda.

Thank you very much. Hello, everyone, and welcome to 36Kr Holdings Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. The company's financial and operational results were released via Newswire services earlier today and have been made available online. You can also view the earnings press release by visiting the IR section of our website at ir.36kr.com. Participants on today's call will include our Co-Chairman and CEO, Mr. Dagang Feng; and our CFO, Ms. Jihong Liang. Mr. Dagang Feng will start the call by providing an overview of the company and the performance highlights of the quarter in Chinese, followed by English interpretation. Ms. Jihong Liang will then provide details on the company's financial results before opening the call for your questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please note that 36Kr's earnings press release and this conference call include the discussion of the unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. 36Kr's press release contains a consolidation of the unaudited non-GAAP measures to unaudited GAAP measures. Our fiscal numbers mentioned on today's conference call are in RMB. I will now turn the call over to our Co-Chairman and CEO, Mr. Dagang Feng. Please go ahead.

[Foreign Language]

[Interpreted] Thank you, and hello, everyone. Thank you for joining us for our fourth quarter and fiscal year 2019 earnings conference call. 2019 has been a fulfilling year for us as we successfully grew our enterprise services business, expanded our outreach to serve more New Economy participants and enhanced our brand influence and recognition through our listing on NASDAQ. We completed 2019 with solid fourth quarter results, bolstered by our strong content production and distribution capabilities. We published 93,268 pieces of content in the year of '19. Our timely and high-quality, New Economy-focused content has generated robust traffic. This is demonstrated by average monthly page views for 2019 of 425.4 million, representing a dramatic increase of 116.8% compared with '18. In early 2020, we also further expanded our content coverage to include the secondary market by launching the China Concept Stock channel on our platform. This channel provides content on U.S. or Hong Kong-listed Chinese companies that are associated with the New Economy. Building on our extensive and diversified content, we are enriching our New Economy community ecosystem and creating more opportunities for the ecosystem's participants to build commercial relationships. Our significant traffic growth and the heightened brand awareness set a steady foundation for our core business with robust client increase from the New Economy space. During the fourth quarter, we delivered top line growth of 123.6% year-over-year. Now let's look at the detailed breakdown of our revenues. Enterprise value-added services, as our biggest revenue contributor, continued its robust momentum during the fourth quarter as revenue from this segment grew 147.1% year-over-year. It is worth mentioning that a majority of our key clients purchasing our enterprise services were previously clients of our advertising services. These long-lasting relationships not only reflect our customers' increasing demand for our expanded offerings, but also illustrate our success in extending our monetization capability from advertising to enterprise services. Moreover, we launched our dedicated one-stop enterprise service platform, 36Kr Plus, during the quarter. By leveraging 36Kr's advantages in content, brand influence and resources, 36Kr Plus efficiently connects the supply and demand fronts in the enterprise service sector, providing enterprises in need, 36Kr's premium offerings as well as strategically selected service packages from other service providers. We are under discussion with additional partners to further enrich our platform ecosystem. Our consulting project, Volkswagen's Tomorrow Calls innovative contest, was another highlight for the fourth quarter. On behalf of Volkswagen, we orchestrated the biggest open contest in China's automobile industry for 2019. This contest served as a partner screening process for Volkswagen to potentially collaborate with the elite entrepreneurs. We successfully concluded this project by the end of 2019 and received very positive feedback from our clients. Encouraged by the initial success of this service, we are actively exploring more partner opportunities with a large company and local government. As it has become main strength for large-sized enterprises to execute innovative business initiatives through collaborations with emerging companies, the ability to identify the optimal partner is more critical than ever. Leveraging our sophisticated enterprise database, we can offer the most relevant and suitable partner targets for large companies, significantly reducing their expenditure of time, capital and resources. Aside from our enterprise value-added services, our online advertising services also reported impressive fourth quarter performance. Revenue from this segment grew 110.7% year-over-year in the fourth quarter driven by a largely expanded customer base. As mentioned earlier, since the second half of 2019, we have established partnerships with an increasing number of mid- to small-sized companies. We believe with 36Kr's influential platform, we will be able to help these relatively smaller-sized companies gain more market exposure, amplify their brand recognition and continue to address their other development needs as they grow. Our subscription services also achieved considerable growth of 72.1% year-over-year during the fourth quarter. Our featured EClub targets start-ups, enhancing their resources from relationships, knowledge, updates and financing dimensions. These efforts also fortify our connection and interaction with enterprise communities, which all further enable even more monetization opportunities. As of 2019, our EClub had held over 20 live streaming panels and major off-line membership day events. In the fourth quarter, we also expanded our footprint overseas and introduced new strategic partners. Specifically, during the fourth quarter, we inked collaboration agreements with an Israeli technology media, NoCamels, and a Middle East and North Africa technology media, MENAbytes. We are also deepening the discussion on a partnership with South China Morning Post and enter an MOU on collaboration with ftchinese.com. In the fourth quarter, we continue to team with Nikkei and organized 2 innovative New Economy seminar events in Japan. Our overseas expansion, along with broadened geographic and topic coverage, will eventually further solidify our content and monetization capabilities. This concludes my review of our fourth quarter and full year performance. With 2020 well underway, we will further enhance our capability in developing featured service products that better address the requirements and preferences of our target clients. We also plan to actively promote our platform business by leveraging our own brand image and sophisticated proficiency in screening premium service providers. We believe through broadened client coverage, we will be able to realize scale, revenues and profits. Before I turn the call to our CFO, I would like to share some updates regarding the recent coronavirus epidemic. First of all, we extend our condolence to the families of those individuals who have passed away and our thoughts on those who have been infected. We would also like to address our sincere gratitude to people who have been fighting on the front lines of the epidemic. Soon after the coronavirus virus outbreak, we prioritized the health and safety of our employees and have taken various preventive and quarantine measures across our company. In response to the outbreak and its ensuing impact to the entire society, 36Kr, as one of the most influential New Economy-focused content provider in China, has been publishing a series of special reports to objectively reflect the epidemic situation and the medical treatment developments, draw public attention to individuals and companies that are affected and proactively speak up for those in need. Bolstered by our in-depth understanding of the New Economy and our profound influence in the space, we are leveraging the strength of content to offer value proposition to participants in the community. In addition, on February 18, we officially launched a special enterprise service program, 36Kr Winter Warmth Program, by mobilizing our connections and resources in the New Economy space to support companies fighting for survival, centering around the impacts as a result of suspended production, paid in cost and sufficient cash flow, with special -- our special service program aims to introduce collaborative opportunities with large companies, financing resources from institutions, supportive policies from local governments, proficient enterprise services and enhanced media exposure for small to medium companies. Within 7 days since the platform launch, we have effectively connected with over 1,000 enterprises, including more than 115 corporates that are able to extend support. Our 36Kr Winter Warmth Program also shares with the enterprises quality content pivoting around online customer acquisition and cost control and initiated special reports on those elite companies for additional exposure. We believe in the resilience of China's New Economy, which is undergoing dynamic inter-reactive support within its community. We will also leave no stone unturned to support our partners through the challenges. With that, I will now turn the call over to our CFO, Ms. Jihong Liang, who will discuss our key financial results.

Thank you, Mr. Feng, and hello, everyone. We achieved a solid fourth quarter and full year 2019 top line performance. Our rapid growth and development reflect substantial and ever-growing demand for our diverse and high-quality services from the New Economy community. Especially for the fourth quarter, all 3 of our business segments reported strong year-over-year growth with enterprise value-added services continuing as our main top line contributor, accounting for 47.8% of total revenue. This is in line with our strategy to evolve ourselves into a service-focused enabler for New Economy participants. As we broaden our comprehensive offering to an extended customer base, we are achieving improved profitability in the fourth quarter and full year 2019. We will continue to fortify our competitive advantages in content creation and distribution while expanding our monetization channel to grasp growth opportunities, along with the divestment of the New Economy. Next, I would like to share our preliminary estimation of the impact of the coronavirus outbreak. Overall, we currently do not expect material interruption on our operation as most of our daily operations can be accomplished while our employees are working from home, reflecting the operational flexibility of our business. In general, the majority of our content-generation process and the business operations of our advertising, integrated marketing, innovative consulting and the subscription services are processed and delivered online. Although our off-line events are vulnerable to the epidemic outbreak and subsequent quarantine measures enacted by the government, we typically do not organize many grand off-line events during the first half of the year. On the other hand, we basically shifted our off-line-delivered courses and training to online and have produced additional online courses within a short time, targeting a broader audience as people avoid going out amid the quarantine period. In addition, we invited distinguished experts from multiple industries to deliver live lectures during the epidemic outbreak, providing advice for SMEs to make through this hard period. This series of efforts helped us, our partners and further supplemented our influence in the New Economy space. We will also take this special period to strengthen our production capabilities of premium subscription services. With future plans to launch additional elite off-line courses, we're well positioned to capitalize on the unleashed market demand when the epidemic is contained. In the meantime, we do expect indirect impact from the spread of the coronavirus as the epidemic has its shadow over society as a whole, and many of our customers are seriously suffering. Since 36Kr serves clients from a wide spectrum of the industries, the operator risk from the reduced demand is partially diversified and offset. Also, we are able to partner with those clients that are less impacted or experienced booming demand due to the containment measures. These clients include companies in online education, online entertainment, online retail, telecommuting and enterprise services industries. Moreover, the overall challenging operational environment might generate additional demand for comprehensive enterprises service and effective solutions as companies strive for survival. As Mr. Feng introduced, we have launched our special program to help companies in need to connect with the most accessible resources. We resolve to stand with all participants of the New Economy to overcome this challenging time. In the coming year, we will steadily strengthen our cash flow management by continuously transforming our off-line services to more standard online services and transition our revenue model towards the prepaid service fee model. Since the coronavirus situation in China is evolving and business visibility is still limited, we are closely monitoring the epidemic development and evaluating its impact on our business. We will provide updates when we have more clarity. Now let's look at some of our financial metrics. To be mindful of the length of our earnings call, I will focus on key financial highlights of the fourth quarter and encourage listeners to refer to our earnings press release and financial filings for further details. Total revenues were RMB 322.8 million in the fourth quarter of 2019 compared to RMB 144.4 million in the same period of 2018. Gross profit increased by 74.4% to RMB 156.5 million in the fourth quarter of 2019 from the RMB 89.7 million in the same period of 2018. Operating expenses was RMB 106.6 million in the fourth quarter of 2019 compared to RMB 41.9 million in the same period of 2018. The increase was mainly due to the increases in general and administrative expenses and the sales and marketing expenses in the fourth quarter of 2019. Net income was RMB 22 million (sic) [ RMB 32 million ] in the fourth quarter of 2019 compared to RMB 39.1 million in the same period of 2018. Non-GAAP adjusted net income increased by 69.6% to RMB 68.3 million in the fourth quarter of 2019 from RMB 40.2 million in the same period of 2018. Net income attributable to 36Kr Holdings Inc. ordinary shareholders was RMB 98.7 million in the fourth quarter of 2019 compared to a net loss of RMB 30.8 million in the same period of 2018. The change is primarily attributable to the company ceased to accrual the accretion associated with the redeemable and convertible preferred shares upon the completion of the initial public offering as they are automatically converted into the ordinary shares. As of December 31, 2019, the company had cash and cash equivalents, restricted cash and short-term investments of RMB 264.2 million compared to RMB 194.4 million as of December 31, 2018. This concludes all our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Kenneth Fong from Crédit Suisse.

Dear management, congrats on a very solid set of results. I have 2 questions. The first is, given the challenging macro outlook, especially the coronavirus that hurt a lot of SMEs, how is -- how do we think about the advertising outlook for this year given the weak macro, and on top of that, we also have competition from the market? And my second question is on the monthly page view, definitely a very strong growth of 120% year-on-year. So is there -- on the 2020 this year, is there any way or new initiative that can help us to monetize the traffic and content on the website?

[Foreign Language]

[Interpreted] Okay. First, I will just do a little bit translation for the first question. Indeed, it has seen the market demand has been slowing down or even decreasing from 2019. And the market advertising traffic has decreased by around 10% compared to the same period of 2018, which the data is from a third-party institution. Also, we can see the hard effect in a more competitive market. And also, the industry concentration of the brand advertising shows an increasing trend. These concentrations are mainly concentrated in several verticals in the market, but we can also see the working trend of our advertising services growth, which proves the differentiation advantage of our so-called 2B and connecting type of advertising and further prove the hard effect in the market. And we will see the main driver -- driving factor of our advertising growth is the number of our customers' growth. Also, like the average price per customer also has increased slightly, which is on -- which is due to the strategy of expanding more New Economy customers. And -- but we can also see the -- like among the relatively large brands, large customers, we have a higher retention rate. And then let's take a look at 2020. We will continue to expand the New Economy and relatively traditional customers by broadening industry and regional coverage. And we will continue to take the active strategy to increase our CPD-type ad price to take for the price rise by leveraging our own differentiation advantages. And we have to admit that our brand awareness is also enhanced by the successful IPO in last year. And in the supply side, we will continue to pay attention to our user experience, so we will maintain the advertising space at this level and to improve the utilization rates. Also, we can see the impact of the coronavirus outbreak in the very beginning of this year, and this may lead to a relatively slowdown in the revenue growth of 2020 of the half -- the first half of 2020. And -- but -- and many of our customers are severely suffered. And they may cut the budget, decrease the purchase to our enterprise value-added services or postpone the plans. But we want to address that our core business model stay stable, which is independent of the fluctuation of the market demand. And we serve clients from a wide spectrum of the industries, so the risk from the reduced demand is partially diversified or offset. So we may benefit from the partnership with those clients that are less impacted and/or experience maybe booming demand due to the containment measures in online -- such as in online education, online entertainment, online retail, enterprise services industries. And by -- from completing the organization restructuring, we're going to increase the average human performance in this year, and we believe this will help to -- this will help our high gross margin business -- I mean, the advertising business. And we're going to improve the standardization of our products with a better economy of SKU and make full use of our competitive advantage. We will catch up with the full year expectation. Okay. This is for the first question. And for the second question.

Okay. [Foreign Language]

[Interpreted] Okay. So we can see that we generated and published over 93,000 piece of content in the last year and -- which is compared to the 2018 is a relatively same level. This is because the -- we really focus on the top high-quality content that brought massive traffic. So as you can see, our traffic, just average -- which is measured by the average monthly page view, has increased over -- around 117% compared to the 2018. And this is because we conducted the traffic promotion on the external channels, especially like Weibo, and we achieved remarkable results. So when mentioning the major strategy in terms of the content and traffic for this year, first of all, for our self-owned platforms, we're well going to -- we attempt to increase the proportion of the UGC content, which will increase -- enrich our platform ecosystem to drive the traffic as well. And secondly, the second strategy will be more diversified content and refine the operation, especially to the external platform. And we believe the traffic increments will be on Toutiao, Zhihu, Baidu, like these external channels. And we will copy the success from -- we will copy the successful lessons from the Weibo we achieved last year. And another growth opportunity, we will focus on Douyin or TikTok, Weixin short videos, and we will -- these will contribute more traffic proportion, we believe, and to bring more monetization value opportunities. And when speak of the coronavirus epidemic outbreak this year, we currently do not expect material interruptions on our content generation or operation. And we have been publishing a series of special reports to objectively reflect the epidemic situation and medical treatment development and draw public attention to the individuals and companies that are affected and to speak up for those who's in need. We are leveraging this strength of content to offer the value proposition to participants in the New Economy community. And last but not the least, we will -- the content always serves as our customers' entry point to our services, so we will continue to conduct this strategy. And also, we believe the traffic number, as we mentioned earlier, the average monthly page view is one of the indicator of our influence in the New Economy space. Okay. So that's for the 2 questions.

Your next question comes from the line of Vincent Yu from Needham & Company.

I have a few. First of all, how much impact we are seeing on the off-line training business caused by the coronavirus epidemic? And second is do we have any update on the new category coverage expansion by the marketing business team? Lastly, I would like to follow-up on the ad demand question. After resumption to work since March, are we seeing any pressure on the ad pricing? [Foreign Language]

[Foreign Language]

[Interpreted] I would just do a short translation to the -- like the previous 2 questions. And the first question is the impact on the -- our off-line business. And our off-line business mainly consists of the 2 segments. First of all is the off-line event, and the second part is the off-line subscription courses or the trainings. Actually, we do expect the direct impact by the epidemic outbreak from the coronavirus epidemic. And -- but we want to address that, typically, we do not organize many grand off-line events during the first half of the year and the smaller summits in the middle of the year, also like it's in the middle of the year. And we -- at the same time, we swiftly switched our off-line-delivered courses and trainings to online. And these type of online summit, like recently we partnered with Lark. And also, we helped the like Huoyan cloud to acquire customers via the online live streaming and road shows. These success shows that our online type of events or road show has achieved success and very popular. And the second part is the off-line courses and trainings. We want to say we swiftly switched our off-line-delivery courses to online and which -- and also, at the same time, produced additional online courses within a short time. And in addition, we invited distinguished experts from the multiple industries to deliver live lectures during the outbreak. We also take this special period to strengthen our production of the -- production capability of the premium subscription services. Like Mr. Feng just mentioned, we launched the 36Kr future academy, which will give the market more online and off-line subscription services. And bolstered by our -- like bolstered by our resources in the spectrum of the industries, we will like -- we will just diversify this kind of risk for every segment of our business. And for the second question, it's about the new category coverage by our business team, and we would like to share some new attempts in a variety of industries and business categories. I will just make a quick point taking to let everybody know about the new coverage. First, we -- to amplify the New Economy ecosystem, which, by this, we just launched our Chinese Concept Stock channel on our platform. And also, we're trying to integrate the material industrial chain to better facilitate the monetization of capabilities. And the second one, to extend the service categories by this strategy, we launched versus 36Kr Plus, which we mentioned earlier, and we partnered with other business friends. We launched the 36Kr Winter Warmth Program beginning of this year. And the third, we're trying to extend the service cycle and to scale the in-depth services, both for the large-sized companies and for the smaller -- small- to medium-sized companies when trying to focus on the service cycle extension. And the fourth is to expand our business in more diversified industries and the regions, as we mentioned, that we will enhance the coverage of the top enterprises in diversified industry besides the automobile. And we never stop to continue to cover more regional -- in regional geography -- regional and globally. And last but not the least, in terms of our subscription services, the newly launched online courses become very popular, and we are going to continue to give these series of online and off-line subscription services in the coming year.

Your next question comes from the line of Yuxiang Wang from CICC.

Congratulations on a robust results. Actually, I've got 2 questions. And the first is what will be the major growth driver for the full year 2020? And the second is could the management share more details about the progress of new agreements or new clients on the enterprise services business? [Foreign Language]

[Foreign Language]

[Interpreted] Okay. I'll just do a short translation here. And for the first question, we can see the robust growth for our enterprise services in 2019. So we do consider this segment business will remain to our main drivers of 2020 and -- but we still believe, at the same time, the advertising business will keep the growth speed in this year. And so for the 2020, actually, what we will do is, first of all, we will translate our revenue model towards the prepaid service fee model, which will help our cash flow better. And the second, we will improve the SKU and the update of our subscription services and also improve the conversion of our core users to our customers and to take the active strategy to improve the average price per customers as well. And the third one is to explore more business opportunities and more business types, at the same time, to solidify the current services. And we can share a little bit with everybody like the undergoing new products currently. The first is the innovative solution to local governments, and the second one is subscription services online purchasing system. And the third one is we will do the update to our enterprise yellow page product. So these are what we want to share with everybody. And for the second question for the -- some details about the progress of the new clients or -- for the enterprise services. We can see the robust growth of this segment, and we will see our enterprise service clients in the 2019 are distributed in nearly 20 industries, and the top clients are mainly distributed in automobile. And we will take the -- this is because we have these new automobile daily brand in the content. So we will take the similar strategy in more diversified industry in this year and to expand the service offerings and to extend the service cycle to scale and depth services and to promote the platform business, as we mentioned, and further enhance our capability in developing featured services product. And if you mentioned -- as you mentioned the -- about our, like new orders or pipelines for this year, it's a guess that our -- some of our clients will indeed to postpone the plan to purchase our advertising services. But as we mentioned in the earlier time, we believe we can catch up in the second half of this year. Okay. So that's the answer for your 2 questions. Thank you very much, Yuxiang.

Your next question comes from the line of Brian Li from AMTD Group.

So I have 2 questions. First is about the subscription service. I want to know any new services launched for the institutional investors. And the second one is regarding the sales and marketing expense. I noticed that the company has a good control on the sales and marketing as the expense ratio to the revenue was down 1 percentage point to 13.4% this quarter. So I want to know how does the company balance the business expansion and the sales and marketing expense and how to achieve the operating leverage? [Foreign Language]

[Foreign Language]

[Interpreted] Okay. I would just do a little bit translation here. For the first question, in terms of our subscription services, actually, we don't see any change for the business in terms of the business type for the institutional investors. And we can see a lot of big names for -- as our institutional subscribers such as GGV, IDG, BAI, Lenovo Capital, JOY CAPITAL, these kind of famous PVC fund. And also, we have seen CVC investors, which -- because we expanded our customer types as well in this year. And as the fee model, actually, the fee model stays the same in the 2019. But we do update our [ kaiku ] series to 36Kr future academy in this year. And the beginning of this year have seen this future academy is very popular in the market. So we will continue with this business line. And in terms of the retention rate of our 2019, the overall retention rate of our total customer is over 40%, and the retention rate of the institutional subscribers in 2019 is around 70%. And so this is for the first question. And for the second question, yes, we can see the robust revenue growth but a relatively low growth of our sales and marketing expenditure. This is -- we will own this to our lower customer acquisition cost by leveraging our content capabilities, as we mentioned all the time. And we believe, in the future, the economies of the scale will further enhance as the enterprise value-added services and the subscription services get more mature. Okay. So these are for your 2 questions. Thank you so much, Brian.

As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact 36Kr's investor relations through the contact information provided on our website or the TPG investor relations. Thank you very much.

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