Kuaishou Technology (1024) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Kuaishou Technology Second Quarter and Interim 2026 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. [Operator Instructions] I will now turn the call over to Mr. Matthew Zhao, VP of Capital Markets and IR at Kuaishou Technology.

[Interpreted] Thank you, operator. Good evening, and good morning, everyone. Welcome to Kuaishou Technology Second Quarter and Interim 2020 Financial Conference Call. Joining us today are Mr. Cheng Yixiao, Co-Founder, Chairman and CEO; and Mr. Jin Bing, our CFO. Before we start, please note that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties and -- actual results and outcomes may differ from those discussed. The company does not undertake any obligation to update any forward-looking information, except as recorded by law. For all important information about this call, including forward-looking statements, please refer to the comps public information for the second quarter and interim 2026 results announcement ended June 30, 2026 issued earlier today. During today's call, management will also discuss certain non-IFRS financial measures. Please are reported for additional information and should not replace IFRS-based financial results. For a definition of non-IFRS financial measures and a reconciliation of IFRS to non-IFRS financial results and the related risk factors, please refer to our second quarter and interim 2026 results announcement. For today's call, management will use Chinese since the main language. A third-party interpreter will provide a simultaneous English interpretation in the prepared remarks and a Q&A and a consecutive inflation during the Q&A session. Please note that English interpretation is for convenience purposes only. In any discrepancy management's original statements will prevail. Lastly, and unless otherwise stated, all currency units mentioned are in RMB. I will now hand the call over to Yixiao.

[Interpreted] Hello, everyone. Welcome to Kuaishou's Second Quarter 2026 Earnings Conference Call. In Q2, amid a complex macroeconomic environment and industry competition, we remain committed to our long-term vision and strategic AI investments and we achieved a high-quality growth. In Q2, the average DAUs on the Casa reached RMB 412 million. Total revenues increased by 1.4% year-over-year to RMB 35.5 billion. Revenues from our core commercial business, including online marketing services and other services, primarily e-commerce and Kling AI increased by 7.4% year-over-year. Adjusted net profit reached RMB 3.9 billion with an adjusted net margin of 11%. Overall profitability remains stable, further demonstrating the remains of our business operations. Now I'll elaborate the progress of each segment in Q2. First, our strategy and progress of our large big generation model, Kling AI. In Q2, Kuaishou continued advancing its vision of empowering everyone to craft capitalist [indiscernible] through model breakthroughs, product feature upgrade and a global creative ecosystem expansion. Kling AI reinforced its global leadership in motor multi-mode video generation. Kling AI launched native 4K video output in Kling AI 3.0 series as the industry's first video generation model to support native output it enables 1 click generation of cinema grade 4 [indiscernible] film, TV and advertising [indiscernible] delivers high-resolution features without complex post production and achieving industrial grade cinematic military effect. Kling AI also released the 3.0 Turbo model which maintain a stable, high-quality dynamic output and precise audiovisual zinc, while improving creative efficiency and reducing production costs. Kling MCP and Kling CLI were officially launched as well. enabling AI agents to dispatch clean AI for batch content creation and expanding its use case in workflow automation and intelligent all contrition. Kling AI continues to empower professional content creation with its technical innovation and creative achievements earning broad industry recognition. -- and the 2026 canned lines, 2 times and videos generated with Kling AI, 1 silver line and 2 bronze lines, demonstrating recognition of its creative capabilities by 1 of the world's premier creative awards program. And the 2026 Beijing International Film Festival, multiple Kling AI -created works, including paper smartphone were selected for the AIGC section stroke of genius with usage serving as a literal supervisor when the annual feature to work in short play micro-sort play award, highlighting Kling AI's strengths in empowering professional film making and content creation driven by model breakthroughs, continuous product enhancements and deeper penetration, Kling AI commercialization maintained a strong growth momentum. In Q2, Kling AI generated revenue of over RMB 850 million, up over 200% year-over-year, continuing to lead a global AI commercialization. In Q2, we made a solid progress advancing the research and application of our general purpose large models. We released 2 and upgraded a multi-model model that enables deep perception around 256,000 ultra-long context and delivers nearly losses reasoning for long video temporary understanding. It also became the first [indiscernible] based model with a built-in agent collaboration mechanism, demonstrating the potential for code parsing and a tool implication. We introduced AgentX, a self-evolving agent AI agent for industrial recommendation systems that autonomously handles recommendation model and strategy design, performance evaluation and knowledge accumulation, significantly improving iteration efficiency of our recommendation algorithms. It enables recommendation systems to autonomously drive recommendation model and strategies design, evaluated performance and accumulated insights significantly boosting the iteration efficiency and the recommendation algorithms. In Q2, we developed a scenario-based agent capabilities for generating marketing materials across our online marketing services tailored to industries and [indiscernible], we achieved over 70% year-over-year growth in AIGC shorter media marketing spend in Q2. We also extended our generative recommendation and intelligent models to live streaming, search and pan shelf-based e-commerce narratives. This improved marketing content recommendation effectiveness and unlocked more line marketing spend budgets. In Q2, our self-developed a general purpose aid, MyFlicker has integrated skills across key internal systems began serving all employees by over 92% of the employees were using our AI agents and the code contribution rhythm on R&D engineers reached 60%. Meanwhile, ranging our enterprise create a large model platform, integrate high-performance model inference, cost-efficient model customization and fully management service, on [indiscernible] internal AI use cases and also external enterprise clients with large model infrastructure router, a global AI auto aggregation platform, several renting hosted open source models ranked among the top by API call consumption. Second is the growth in [indiscernible] ecosystem. In Q2, average use on the Kuaishou reached RMB 412 million. The average MAUs reached RMB 797 million. We leveraged AI-powered Smart placement to improve the user acquisition efficiency and boost retention and renew and reactivity users. We consistently fund our traffic management to better serve our highly active acquire users. We also continue to emphasize our social futures, users with mutual followers engaging in private messaging grew over 15% year-over-year. We also optimized the Kuaishou APP's core features, comprehensive will be elevating the user experience through systematic improvements through product features you play back the smoothness and intelligent interaction. We believe in the power of community and we remain committed to strengthening our differentiated high-quality content ecosystem. In June and July, we leveraged the world combos to launch our native IP, Kuaishou World Cup Fans Trophy. Beyond covering trading [indiscernible], we launched original events, including the Kuaishou XY-style FC and Dream Chasers Youth Football Tournaments. Through trend-driven operations, engaging interactions and community co-creation, we build a sports hub where a quieter user could participate. These activities generate 68.2 billion impressions and 360 million in cumulative livestream views. We also continued innovating our copyrighted content partnerships using a joint operation model to deliver more high-value content to users. We use an e-commerce live streaming model to secure live broadcasting rights for 2026 CPA season. We also introduced a paid live streaming model for online music performance. In April, we hosted a TP concert, generating over RMB 10 million in sales, achieving a synergy between continent commercialization. The [indiscernible] also driven grass sports events achieving a notable regional scale, especially in Northwest China. Third, online marketing services. In Q2, revenue from online marketing is reached RMB 20.6 billion, up 4.4% year-over-year. Our non-e-commerce marketing services continued expanding across content consumption, lifestyle services and AI applications, supported by our omni domain traffic synergy strategy and dedicated programs for brand merchants e-commerce marketing services remained resilient. We also continue deepening a applications across the full marketing services life cycle. In Q2, the content consumption Star services and AI applications continue to drive the year-on-year growth in our non-e-commerce marketing services revenue. In constant consumption had lower production costs and reduced creation areas driving rebid short-play supply growth that cater to other user preferences. This enriched our content ecosystem and boosted the related marketing demand by doing short play supply on Kuaishou, both live action and AI generated had grown over [indiscernible] from January. In Q2, short-play driven marketing spend grew over 100% year-over-year. In Lifestyle services, we deepened our presence in some verticals like comprehensive and no services while exploring incremental growth opportunities. We also optimized the deep conversion capabilities enhance the food stack leader driven marketing solutions such the user cohort, exploration AI agent. These efforts helped clients to more effectively identify high [indiscernible] users, improving lead quality and conversion. In AI applications, we worked closely with the clients to align ad placement with in-app conversion, helping them to improve user retention and conversion. This further strengthened our competitiveness in capturing added spend from AI application clients. For e-commerce marketing services in Q2, we strengthened our omni domain traffic synergy across e-commerce and commercialization business to improve merchant traffic matching efficiency. We conducted a more granular merchant segmentation with the tiered operations, tailoring product strategies to address merchants [indiscernible] we also took a content supply side approach by managing marketing matures, including incentivizing first launch content and increasing recommendation diversity. These initiatives optimize the e-commerce market and material continents enabling high-quality content to reach relevant and traffic more efficiently, improving our long-term commercial ecosystem. Despite a back roll and emerging challenges, we remain committed to traffic support for high-quality merchants the T2000 brand initiatives launched in Q4 last year has delivered a processing early results. Brand merchant marketing spend outperformed our broad e-commerce marketing in Q2. Its revenue contribution continues to grow and the product level, our net transaction ROI bar to continue to evolve by enhancing omni [indiscernible] bidding capabilities and refine leading mechanisms and model strategies client penetration rose from 45% in Q1 to 55% in Q2, effectively helping merchants reduce return rates. In Q2, we continue optimizing AI applications across industry-specific scenarios, improving clients' marketing placement efficiency and strengthening our capacity to capture incremental market budgets across sectors in content consumption through content understanding user matching and smart placement, I helped quality content to reach users more efficiently. In Lifestyle Services, AI is applied to getting material generation, digital human live streaming business operations, user intent identification and deep conversation production, these help merchants lower costs across content creation, placement and customer services. And four, our e-commerce business. In Q2, we advanced our strategy across 3 areas: growing our paying user base, expanding supply and deepening e-commerce and commercialization traffic integration we optimized our merchant ecosystem and mix, strengthen brand and new merchant antigen in their growth, growth synergies between e-commerce and commercialization. During the quarter, we focused on growing high-quality buyers while active pay users remained largely stable quarter-over-quarter as the users omni consumption habits continue developing, we strengthened our private domain advantages by aligning traffic across diverse areas. This enabled a content-driven product coagulation, shelf-based conversion, store repurchases to reinforce 1 another in a positive growth cycle. We also enhanced cross-scenario synergies and optimize the subsidy efficiency driving best growth across content basis and [indiscernible]. On the supply side, in Q2, we continued onboarding new merchants and advancing brand expansion through cost reduction, efficiency improvement of growth incentives, product empowerment and operational support hope the new and small and medium-sized merchants grow while further improving our merchant mix. We launched our updated Starlight initiative, offering tier supportive programs for branded merchants, larger merchants into the zone merchants and SME merchants, helping more and scale faster. Supported by these initiatives newly onboarded merchants grew year-over-year and rose nearly 10% quarter-over-quarter, new merchants achieving scaled growth in their second month rose nearly 3% year-over-year, reflecting continued improvements in new merchant quality. On the brand side, self-operated GMV from T2000 brands maintained strong year-over-year growth, while their contribution to omni domain GMV steadily increased marketing spend on the branded commercialization also grew rapidly year-over-year for they're boosting brand merchants contribution to the both overall e-commerce GMV and online bidding revenue. By industry leveraging content-based e-commerce trends, merchants counting tea, alcohol and health products, beauty and cosmetics and fresh food continued growing unlocking structural growth opportunities. We continue to improve our KOL ecosystem structure, enhancing content supply quality. We keep in collaboration with the top-tier KOLs, increasing support for mid-tier cars in our strong verticals like 3 rural and enemy and improved the consistency of existing KOLs performance, reinforcing our e-commerce content foundation. By engineering KOL resources with a distinctive product offerings, we deepened our penetration in industry zones and launched content and marketing initiatives like product origin tracking, live streams. These efforts strengthen the synergy content and supply empowered KOLs and improved conversion. We also expanded our KOL base through in-platform incubation, talent agency partnerships an external acquisition to boost the string frequency, we refine our incentive policies. In Q2, the number of streamers with over 10,000 grow year-over-year, while KOL streaming frequency continued to increase steadily. On the distribution pool development, we leveraged the AI to enhance product capabilities creating a more targeted system, further boosting the vibrancy of our distribution system. In Q2, active KOLs distribution patriation continued rising year-over-year and merchant KOL merchants metrics grew over 20% year-over-year. In Q2, throughout the full life cycle merchants, we continued optimizing our capabilities across e-commerce scenarios, helping merchants reduce, improve efficiency and driving intelligent operations. These initiatives validated AI's evolution from a productivity tool into a comprehensive business execution solution. In Q2, over 850,000 merchants use our free business tools across product selection and listing, marketing material to creation business analysis, smart placement and AI power customer service. these AI tools provided tons with end-to-end operation support and capability enhancement. Next, our live streaming business. Q2 live streaming revenue reached RMB 8.7 billion. We focused on supply side of health and leverage AI to empower live streaming products, driving ecosystem quality and product invasion. On the supply side, we launched the Confluence initiative, providing streamer acquisition incentives, early-stage growth support ecosystem governance to steadily expand the supply of new streamers from talent agencies and improve their early traction efficiency. We also strengthened independent streamer operations. focusing on identifying high-value independent streamers to solidify our live streaming supply foundation. We also encourage the top streamers to expand into Group 5 live formats reading their traffic and influence to enrich high-quality live streaming content supply. On the product and technology front, further empower the live streaming rooms powered by clean gives with customizable special effects continue to evolve, offering more formats and capabilities in boosting users' willingness to pay. In Q2, AI gives us [indiscernible] users passed to 6 million. AI-driven content understanding, continued optimizing our live streaming recommendation strategy, enabling more precise matching between streamers and users, supporting paying users growth Intelligent live streaming give recommendation and ranking features based on real-time multimodal signals improve users' payment experience and exit. AI tools like AI interaction of systems and digital offer to our solution was for the refined improving streamers to serve efficiency. Finally, our overseas business progress. In Q2, we remain committed to high-value growth strategies, strengthening our overseas foundation in profitability, long-term operation and localization. On traffic and content, we maintain refinery user acquisition, in-house local content and expanded community creator networks fostering an engaging atmosphere around real-life scenarios and deepening content consumption among core users for overseas online marketing services, we capitalize on major events such as Vista and the World Cup driven by AI as ROI analysis, User Group [indiscernible], innovative product features and industry-specific strategies. We helped marketing clients capture the key marketing periods and achieve rapid growth. We also unlocked the monetization potential in short of plays and other content formats, together with our marketing services capabilities. This formed the de engine growth model while accelerating expansion in growth sectors, such as e-commerce or [indiscernible] GMV and order volume continued solidated year-over-year growth in Q2. At the same time, we drove growth in average water value through product mix optimization and quality support, while maintaining solid operational efficiency and profitability. Looking ahead to the second half, amid growing external challenges will remain steadfast in advancing our core strategy, leveraging our technology and ecosystem strength to navigate headwinds. While we face short-term revenue pressure and have AI investment, we will maintain our long-term focus and continue expanding the commercial exploration of AI to empower quits content and commercial ecosystems. As we pursue near-term breakthroughs and high-quality growth over the long term, we remain committed to creating long-term value for our users and platform partners. That concludes my prepared remarks. Next, I will hand it over to Jin Bing, who will read the company's financial update for the second quarter.

[Interpreted] Thank you, Huaxia, and hello, everyone. In Q2, we continue to deeply create technologies across our business scenarios. As a result, we achieved a high court growth through our overall business amid a complex environment. The comprehensive application of AI has become an engine driving the company's long-term development and continue to empower our content ecosystem, enhanced user experience, our providing merchants and advertisers with end-to-end emerging business operation tools for our platform partners, these capabilities help to reduce costs and improve efficiency. It also injected a new growth momentum into our business. In Q2, the group's total revenues reached RMB 35.5 billion. Adjusted net profit reached RMB 3.9 billion in the second quarter with an adjusted net margin of 11%, the group's overall profitability remained at a healthy level. Now let's take a closer look. Our total revenue grew 1.4% year-over-year to RMB 35.5 billion in Q2. The increase was mainly driven by growth of our online marketing services and the Kling AI business. Online marketing services revenue increased to 4.4% to RMB 20.6 billion in Q2 from RMB 19.8 billion in the same period last year. This growth was primarily attributable to deepening application of AI in online marketing business which effectively enhanced our client marketing placement efficiency driving more marketing spend. Revenue from other services, including e-commerce and Kling AI business reached RMB 6.2 billion in Q2, up 18.5% from RMB 5.2 billion in the same period last year. The increase was mainly driven by continued expansion of our Kling AI business as the Kling AI achieved a breakthrough in model cables, continuous product enhancements and deeper penetration across professional creative snares, its commercialization can continue to strong maintain strong growth momentum. In Q2, our live streaming revenue was RMB 8.7 billion. We consistently cotivated high-quality content, leverage AI-powered product innovations enhanced the quality of our [indiscernible] is developed a rich and healthy lapse from ecosystem, diverse high quality content. Cost of revenue increased to 10.7% year-over-year to RMB 17.2 billion in Q2, accounting for 48.4% of total revenues. The increase was mainly due to higher revenue sharing costs and related taxes in line with our revenue growth. Based on the evolve, our gross profit was RMB 18.3 million in Q2 compared to RMB 19.5 billion in the same period last year. gross profit margin was 51.6% compared to period last year. Turning to expenses in Q2, selling marketing expenses were RMB 9.9 billion compared to RMB 10.5 billion in the same period last year. selling marketing expenses decreased to 27.9% of total revenues from 30% in Q2 last year. primarily attributable to the lower spending for promotional activities, R&D expenses increased to 34.7% year-over-year to RMB 4.6 billion accounting for 12.9% of total revenues. The increase was mainly due to increased investments in AI, including related costs, Administrative expenses were RMB 895 million compared to RMB 897 million in period last year, remaining relatively stable year over-year. Group net profit for Q2 was RMB 3.2 billion. Group level adjusted net profit was RMB 3.9 billion with an adjusted net margin of 11%. Our balance sheet remains robust cash and cash equivalents, time deposits and financial assets and its restated cash totaled RMB 121.3 billion as of June net cash generated from operating activities in Q2 was RMB 5.9 billion. Additionally, we actively leverage delivered our commitment to shareholder returns based on marketing conditions. As of today, we had repurchased approximately HKD 1,970 million or around 43.3 million shares, representing about 1% of our total shares sitting for 2026. Looking ahead to the second half, as Huaxia mentioned, amid external challenges we expect to face near-term intelligence as pressure on revenue and our continued investment in AI, both weigh on profitability, we will continue to uphold our technology revenue user-centric cell philosophy, while maintaining deeply focused on our users' needs. We remain story committed to advancing AI averaging our leading AI technologies to further empower our content ecosystem and commercial value chain. At the same time, we will apply prudent financial discipline to reduce costs and improve efficiencies will further strengthen the company's competitiveness moat and create long-term value for our users, partners and shareholders. That concludes our prepared remarks. Now we can open for the call for Q&A.

Kenneth Fong from UBS.

[Interpreted] Congrats on the very stable cooperation and robust growth of Kling. I have a question regarding Kling competitive landscape and the iteration direction. Recently, multiple video generation, large language model have been updated successfully. So how should we view the current competitive landscape of the video generation models? And what is Kling competitive strategy?

[Interpreted] Thank you for your question. The global market for video content generation represents a massive USD 150 billion opportunity. AI media generation models have substantial potential for user adoption, we believe the AI video generation segment is currently in a vibrant phase with the diverse stakeholders, maximizing their strengths to drive industry upside. As industry players leverage their respective platform systems, vertical scenarios and technological capabilities to compete through differentiation. The commercialization boundaries of AI video generation continue to expand across diverse areas including advertising, e-commerce films, short plays and gaming compared with relatively fragmented competitive landscape of large language models -- today's AI video generation segment features a more concentrated market structure with a clear dominant leaders in a higher level of concentration among Tier 1 players, video generation models also requires significantly greater levels of computing power, data, talent and technology. Over the past 2 years, Kling AI has consistently remained among the Tier 1 players in the AI video generation segment. The clean AI team continued to demonstrate strategic foresight into the industry. and strong execution capabilities. In June 2024, we launched the world's first commercially available video model product based on the DIT architecture. In April 2020, we introduced the world's first multi-model visual language interaction architecture [indiscernible]. In December 2025, we released the world's first omni model-based multimodal V2 generation model -- our track record has consistently proven that the clin AI team is among the industry's top teams worldwide, leading with a strong research, engineering and strategic execution capabilities Recently, Kling AI closed an independent financing round, which will further enhance its competitiveness in the industry. Since this launch, Kling AI has focused on serving professional content creators by leveraging video generation large model technology to improve the productivity of professional creators who make video creation in their career and have sustainable purchasing power. Kling AI features strong prompt understanding and controllable store board communities enabling users to achieve precise and coherent creative expression. In terms of deal quality and production scalability, Kling AI also satisfies professional creators need for high-quality video content. Kling AI is world's first video generation model supporting native 4K output. Users can generate 40 beds with a single click without the need for additional upscaling or processing, resulting in a clear visuals, richer details in a more cinematic look and feel. Overall, we are highly confident in Kling AI's long-term competitiveness in the new generation segment as model capabilities continuously iterate product experience continues to improve in the professional creator consistent and commercialization stares further expanded. At the same time, the AI video generation sector is rapidly gaining broader adoption and Kling AI will consistently unlock greater growth potential.

The next question comes from Lincoln Kong of Goldman Sachs.

[Interpreted] My question is also about AI strategy. So other than Kling AI, this quarter, what are the other areas in terms of the Al [indiscernible]?

[Interpreted] During the quarter, our AI advancements extended beyond the clean AI iteration. We also made tangible achievements across organizational efficiency, AI applications in online marketing services scenarios in our core recommendation systems iterations. Regarding AI applications in online marketing services scenarios, we have deeply integrated AI across key processes, including the generation of AI GC marketing materials intelligent bidding and generative recommendation. In the generation of marketing materials, we connected user interest modeling with video production capabilities enabling an upgrade from searching for marketing material for videos to creating videos tailored for users. On the intelligent bidding front, leveraging marketing clients historical account data on marketing placement and conversion goals our agent system developed self-learning and continuously optimized automated bidding strategies. This effectively improved long-term customer value and marketing placement performance, delivering strong ROI and for generative recommendation, our models can truly understand amortizing content and user needs. -- by converting products, live streams, search queries and industry information into semantic representation, we improved user product matching efficiency. Regarding the iteration of our recommendation systems, we launched AgentX and agent-driven R&D close [indiscernible] in the past, taking a recommendation strategy from idea to launch often involved in multiple steps, including data analysis, solution design, product code modification, experiment configuration, AV testing and monitoring metric attribution and post-launch review. This process relied heavily on menu execution by algorithm engineers, which limited efficiency. Today, our Agent serves as the execution engine for recommendation iteration, freeing engineers from a wider range of repetitive tasks and enabling them to focus on gold setting critical reviews and higher-level judgment and decision making. As a result, we significantly enhance both the innovation efficiency and the performance of our recommendation strategies. In terms of organizational efficiency improvement and organizational enablement, our in-house developed agent tools, including my flicker, have achieved over 90% employee adoption. They fully cover diverse functions, including technology, R&D, data analytics, business operations. These tools have significantly enhanced our internal productivity. Using technological R&D productivity, as an example, in the second quarter of 2026, our technological R&D team's average delivery cycle was shortened by more than 10% compared with the first quarter. Meanwhile, the average daily lines of cold submitted on AI-assisted R&D increased by over 70% sequentially. AI's contribution rate to newly added code exceeded 60%. Kuaishou Vanchin not only efficiently supports internal AI use cases, but also provide a large model infrastructure services to a wide range of external enterprise clients achieving strong revenue growth. In summary, we will consistently harness AI to deeply empower our business and our organization, continue to expand the boundaries of AI applications and work together with our partners to jointly explore and create more innovative business value and greater growth upside.

The next question comes from Thomas Chong of Jefferies.