Chinese Tech Giants Report Mixed Q2 2024 Results: Zhihu, Weibo, and Lufax Earnings Highlights

Zhihu Inc. (ZH) Q2 2024 Earnings Conference Call Transcript

Vicky Wei - Citi Xueqing Zhang - CICC Thomas Chong - Jefferies Daisy Chen - Haitong International Ladies and gentlemen, thank you for standing by and welcome to the Zhihu Inc., Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. Today's conference is being recorded. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am. Yolanda Liu Thank you, Operator. Hello, everyone. Welcome to Zhihu's second quarter 2024 financial results conference call. Senior management joining me today are Mr. Zhou Yuan, our Founder, Chairman, and the Chief Executive Officer, and Mr. Wang Han, our Chief Financial Officer. Before we get started, I would like to remind you that today's discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in other public filings with the U.S. Securities and Exchange Commission and Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Additionally, the matter we will discuss today will include both GAAP and non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhihu.com. I will now turn the call over to Mr. Wang Han, our CFO. Please go ahead. Wang Han Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu's second quarter 2024 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, and Chairman, and CEO of Zhihu. We're pleased to report another strong quarter. In the second quarter, we achieved robust improvements in operating efficiency, with our gross margin raised by 5.8 percentage points year-over-year to 59.6%. Our total operating expenses decreased by more RMB 140 million compared to the same period last year, including a reduction of RMB 120 million in marketing expenses. Our adjusted net loss declined by 79.9% year-over-year to RMB 44.6 million, marking our lowest quarterly loss since our U.S. IPO. In the second quarter, we made significant strides in enhancing the Zhihu's community's trustworthiness and strengthening our core user experience. In addition to introducing an array of AI-powered products and engrossing content initiatives, we proactively refined commercial content distribution and meticulously tailored our services to meet the diverse needs of various user groups. As a result, our community remains vibrant and continues to grow, exhibiting positive trends across key user metrics, such as core user retention rates and daily active user timestamps. We expanded AI applications across our products and services during this quarter, aiming to provide users and clients with an enhanced experience. In late June, we officially launched Zhihu Zhida, marking a significant milestone in our AI search initiatives. Since its debut on the PC platform, we have observed a promising increase in user engagement and market reputation, highlighting new growth opportunities for us. Throughout the second quarter, our laser focus on cornerstone verticals coupled with enhanced support for content creators has led to significant improvements in the experiences of both users and content creators within our community. As of the end of June, the cumulative pieces of content on Zhihu reached 830.9 million, a 16.8% year-over-year increase. The cumulative number of content creators within the Zhihu community grew by 12.5% to 74.9 million during the quarter. This continued rise in a proportion of highly active users engaged in content creation. To further bolster user engagement, Zhihu continued to foster rational, optimistic, in-depth discussions around prominent social issues and world events this quarter. For example, during the annual Gaokao period, we strategically enhanced the community's support for Gaokao users by elevating the first-hand experiences shared by previous examinees, optimizing search functionalities, and refining recommendation algorithms. Accordingly, the volume and quality of Gaokao-related answers rose markedly, with three-day and seven-day classroom response rates experiencing double-digit growth. The surge in user engagement and community interactions further solidified Zhihu's position as the most trusted platform for young people seeking guidance on pivotal life decisions, whether in the lead-up to university or as they prepare to enter the workforce. We also implemented effective initiatives to draw users to our coverage of the Paris Olympics. Within a week of the Olympic opening on July 26, content views related to the event soared to over 600 million, with over 500,000 discussions spanning topics such as science and technology, sociology, psychology, and cultural arts. Thanks to these efforts, positive feedback from Zhihu users on our high-quality content continued to rise, accompanied by a significant increase in user interactions. Average daily engagements per year grew by nearly 40% year-over-year, with the monthly average of upwards increasing by over 47% year-over-year and more than 13% quarter-over-quarter. As we progress in our development of the cutting-edge technology, we consistently strive to push boundaries and expand application scenarios. The official launch of Zhihu Zhida in late June marked a significant step in our exploration of AI-powered search functionality. Zhihu Zhida's deep integration with the content creators sets it apart from other AI-driven search products. The majority of the content powering Zhihu Zhida is derived from Zhihu's proprietary high-quality content library, which allows users to trace counselors back to their original sources, explore more premium Q&As within a community, and directly connect with content creators. We believe Zhihu Zhida's unique ability to prioritize human elements and emphasize professional and authentic content that embodies collective humanism is especially valuable in an area increasingly dominated by AI-generated content. In July, Zhihu Zhida's total visit increased by 430%, compared with June, as we continue to leverage Zhihu's self-developed LLM to refine Zhihu Zhida's performance and user experience. By the end of July, 70% user retention doubled compared with early July. Zhida's multi-round response capability also outperformed market peers, earning high praise from professionals. Moving into the second half of the year, we will continue to enhance our user experience on Zhida's PC platforms through our ongoing improvements in product features, algorithms, and performance. Simultaneously, we are set to officially launch and upgrade Zhida Tab on the Zhihu app, which will effectively complement the desktop version. Zhida not only provides professionals with effective tool-based scenarios, but also with vast potential for exploration in user interaction and content creation through the power of the Zhihu community. Moreover, we aim to reach a broader audience with Zhida, relying on its performance and reputation rather than extensive advertising and promotion. Our effective strategic planning and execution is reflected not only by our growing user engagement and flourishing community, but also by our significantly improved operating efficiency. In the second quarter, we further optimized operating efficiency across our business lines by leveraging AI technologies, propelling us towards our operational targets for this year. Now, I would love to delve into more details of the progress we achieved across our multiple business lines for the second quarter. First, our marketing services remained under pressure in the second quarter, with revenue totaling RMB 344 million, decreasing by 16.7% year-over-year. However, I want to highlight that within our marketing services, although our CCS is currently experiencing a decline during its adjustment period, both brand advertising and performance-based advertising exhibited robust growth, increasing by 17% and 28.4% year-over-year, respectively. This performance underscores our effective monetization capabilities and substantial commercial potential of our high-value user base within the community. Across all the industries we cover, the IT and 3C categories continue to lead in growth. Additionally, food and beverage, beauty, skincare, sports, and outdoor industries experienced notable increases in the average order volume during the 618 Shopping Festival, up by 17.4%, 14.1%, and 13.1%, respectively, compared with the same period last year. We remain committed to delivering high-quality content that empowers our clients to drive their business growth, while also supporting mid-tier content creators with substantial commercial potential in achieving their financial goals. In this year's 618 Shopping festival, the number of commercial content creators on a distribution platform increased more than six-fold compared with the same period last year. As we move into the second half of the year, we will continue to enhance our marketing services, grounded in the trustworthiness of our community. Our efforts will focus on the following key areas. First, by leveraging our AI and LLM capabilities and enhanced data infrastructure, we aim to further boost conversion efficiency for brands and merchants, while also enhancing our own product and operational efficiency. Second, we will capitalize our community's professional discussion environment and the trustworthiness among high-value users to assist more emerging verticals, particularly those facing technological barriers, to build stronger marketing awareness and commercial credibility. Third, we will foster closer connections with a great number of content creators to enhance their ability to earn financial rewards in line with their capabilities. Turning to our Paid Membership business, our premium content has continued to distinguish itself with its unique market positioning and compelling strategies, attracting many new users in the second quarter. The number of subscribing members grew by 4.7% year-over-year to 14.7 million, while revenue contribution grew to 46%, reaching RMB 432.7 million. In addition to broadening our premium content offerings, we actively explored various new growth channels in the second quarter, including co-branding memberships and distribution channel extensions. For content creators, Zhihu's premium content discovery mechanism not only provides content creators with opportunities for growth, creative fulfillment, and revenue generation, but also foster an entirely new creation ecosystem within the industry. In the second quarter, the number of Zhihu premium content creators earning income increased by 77.4% year-over-year. We also continued to unlock our high-quality strong story IPs monetization potential. On July 9th, the short drama Love in a Dream premiumed on Tencent Video. This marks another successful adaptation from Zhihu's Yanyan Story library, following the acclaim of [Indiscernible]. Next, I will review our Vocational Training business. We strategically optimized our business structure in the second quarter with a focus on efficiency enhancement, concentrating on self-operated offerings and aligned closely with our community to provide greater certainty and profitability. We also recorded gains on certain adjustments to our acquired business in this quarter, achieving high margins. As a result of these effective measures, operating efficiency within the vocational training segment improved significantly despite a slight decrease in the total revenue, which amounted to RMB $133.6 million per quarter. GMV for our vocational skills and interest programs achieved over 50% year-over-year growth this quarter, with AI and AGI-related programs continued to receive positive user feedback. Additionally, in response to students' evolving needs during the graduation season, we expanded our offerings to include career planning and overseas study advisor programs. In turn, this expansion encouraged valuable user contributions, with beneficiaries enriching the community with high quality content and innovative creations as they shared their insights and experiences. Moving forward, we will continue to strengthen our absolute advantage in specialized subject offerings. We will also utilize AI technology to enhance operating efficiency and accelerate our progress towards profitability. In summary, our strong second quarter performance showcases our understanding of strategic planning and execution capabilities. As we move into the second half of 2004, we will remain confident in and committed to achieving quarterly profitability targets. Meanwhile, we will continue improving our segmented, engaging user experience and enhancing the Zhihu Community's trustworthiness to grow and nurture our user base. We will also advance our AI development initiatives, enriching our product capabilities and facilitating operating efficiency improvements across the board. By fully leveraging our unique value proposition, we will further unlock Zhihu's growth and commercialization potential, driving the company's long-term sustainable development. This concludes Mr. Zhou Yan's remarks. Now I will review the details of our second quarter financials. For a complete overview of our second quarter 2024 results, let us refer to our press release issued earlier today. Throughout the second quarter, we made significant strides in refining our core structure and optimizing operating efficiency. While maintaining disciplined spending and proactively pursuing high ROI across our business lines, we accelerated our exploration of AI-powered technologies, substantially enhancing our products and services. As a result, we have achieved notable improvements in both gross margin and adjusted net loss. Remarkably, this quarter represents our lowest quarterly loss since our U.S. IPO. Our marketing services revenue for the quarter was RMB 344 million, compared with RMB 412.7 million in the same period of 2023. This decline primarily reflects our deliberate ongoing refinement of service offerings to strategically focus on margin improvements. Pay membership revenue for the second quarter decreased slightly by 3.7% year-over-year to RMB 432.7 million. Primarily due to a marginal decline in our average revenue per subscribing members. However, our average number of monthly subscribing members grew by 4.7% year-over-year this quarter, demonstrating the effectiveness of our user growth strategies and promotions. Vocational training revenue for the quarter was RMB 133.6 million, compared with RMB 144.5 million in the same period of 2003. This decrease was mainly due to our strategic refining of acquired business, prioritizing self-operated programs that offers high margins and greater profitability. Our gross profit for the second quarter was RMB 556.5 million, compared with RMB 562.1 million in the same period of 2023. Thanks to our enhanced operating efficiency, the gross margin has improved year-over-year for seven consecutive quarters, reaching 59.6%, the highest level since our U.S. IPO. Our total operating expenses for this quarter was RMB 740.4 million, a 16.7% decrease from RMB 889.3 million in the same period of last year. Our selling and marketing expenses decreased by 22.9% to RMB 417 million, down from RMB 540.6 million in the same period of 2023. This reduction was primarily driven by more disciplined promotional spending and a decrease in personnel-related expenses. Our research and development expenses for the quarter decreased by 11.4% to RMB 209.3 million, down from RMB 236.2 million in the same period of 2023. This reduction was primarily attributable to more efficient spending on technological innovation. General and administrative expenses were RMB 114.1 million compared with RMB 112.5 million in the same period of 2023. Our GAAP net loss and non-GAAP net loss for the second quarter has both narrowed substantially, decreasing by 71.1% and 79.9% year-over-year respectively. As of June 30, 2004, the company has cash-in-cash equivalence term deposit, redistricted cash and short-term investment of RMB 5.1 billion compared with RMB 5.5 billion as of December 21, 2003. As we advance into our second half of 2024, we will persist in our commitment to rigorously strategic execution, driving our closer to profitability. At the same time, we will diligently explore innovative avenues to deliver enduring value to our shareholders. This concludes my prepared remarks on our financial performance for this quarter. I will now turn the call over to the operator for the Q&A session. [Operator Instructions] The first question today comes from Vicky Wei with Citi. Please go ahead. Vicky Wei Thanks, management, for taking my question. Would management share some color about the progress of achieving breakeven target? Thank you. Wang Han Thank you for your question. This is from Wang Han, CFO of Zhihu. Our profitability goals remain unchanged and resolute. We still plan to achieve a quarterly non-GAAP net profit on this fourth quarter. And our second quarter financial results fully validate our strong strategic planning and execution capabilities. After a single quarter of adjustments, we not only reduced our losses by streaming costs and expenses, but also recorded our lowest absolute quarterly loss since our IPO. And from the current progress of the third quarter, our loss reduction work should also be more pressing, so please stay tuned. The next question comes from Xueqing Zhang with CICC. Please go ahead. Xueqing Zhang Thanks, management, for taking my question. My question regards on your user base. How has Zhihu managed to maintain a stable database despite scaling down community promotion expense? And a follow-up question on your AI search. Can management share the progress of AI search? What's the user metrics after the launch of Zhihu Zhida? How does management feel the potential commercialization? Thank you. Zhou Yuan This is from Zhihu's CEO, Zhou Yuan. The proactive user strategy adjustments we have made over the past two quarters were all quality-oriented, prioritizing our core user experience. As you mentioned, for our user base, the core is user retention improvement for us. And the user retention improvement is from the improvement of high-quality content and the core of the improvement of high-quality content is to rely on in-depth content cultivation operation approach. I will explain a little bit more here. This in-depth cultivation approach has two meanings. One is in-depth operation and the other is in-depth content. And so far, it seems to be working well. Our user base is quite stable. Thank you for your question. I will continue to answer for your second question. We successfully launched Zhihu Zhida on PC platform at the end of June. And over the past period, our work has focused on two main areas. The first, optimizing the model. And the second, upgrading and optimizing the end. The optimization of model has led to significant improvements in user retention with significant increase in the number of high-frequency users, or what we call heavy users. As for the end optimization, we started by enhancing the functionality of our PC end, which is an important productivity scenario. And this work will continue for some time. Meanwhile, we are preparing to launch Zhihu Zhida on our mobile end, features of which are still in plan. The goal of this end enhancement is for us to reach more users. The combination of model and end optimization is translating into our user growth. Overall, we are seeing positive changes in terms of product usage, user time spent, and both next day and seven-day user retention. And for sure, right now, our primary focus is on improving the experience for heavy users. And the commercialization is not the priority at this moment. The next question comes from Thomas Chong with Jefferies. Please go ahead. Thomas Chong So I transfer myself. My question is about advertising. So our performance app and brand app has good performance during 618. So what's the drivers behind and what are our advantages? Thanks. Wang Han Thank you for your question. This is from Zhihu CFO Wang Han. Zhihu is becoming increasingly clear about its commercial strength and expertise, specifically in helping brands to build premium value with high-quality audience. I'd like to share two practical cases. The first example of these two cases is our successful collaboration with media to achieve both positive word-of-mouth and self-worth refrigerator priced over 60,000 yuan. During this 618 Shopping Festival, Toshiba's premium flagship star-rated refrigerator achieved positive ROI through Zhihu's first stop for new product purchases solution. By leveraging our high-value community and users, we focused on human-centered design and advanced technology for high-end home appliance, successfully creating a differentiated discussion space for new products, achieving both positive word-of-mouth and strong sales. The second example is our Lighthouse project IT collaboration. With the same -- the Lighthouse of the community illuminates the warmth of the product. We help Vivo promote the Blue Heart AI accessibility feature. This initiative combines social value with strong marketing results. The in-platform topic gained over 1.3 million rates, and Zhihu's video channel set an all-time high record of interactions with likes and favorites, surpassing 100,000 and over 40,000 shares. The video even received praise and a share from Vivo's Chief Marketing Officer, generating significant buzz and positive feedback for both brands and our community. These successful cases categorized by high value and strong word-of-mouth, demonstrated that Zhihu's strength in professional discussion forums unlocks the commercial potential of high-value users. By becoming the center of trust for these audience, this is the most natural path for Zhihu's commercialization. Thank you for the question. The next question comes from Yu Chen Zu with Guangfa [ph] Securities. Please go ahead. Unidentified Analyst What are the main drivers behind the growth of Zhihu's paid user base? And how can we assess the outlook of this segment? Thank you. Wang Han Thank you for your question. This is from Zhihu CFO Wang Han. Our two drivers remain the growth of our subscribing members and the increase in ARPU. In terms of the user scale of our paid members, as we mentioned previously, with massive market beyond Zhihu community, we will continue to explore multiple channels to expand our user base. Firstly, the MAU of Yanyan Stories app in July saw a year-over-year increase of more than 36%. In the second quarter, our exploration of co-brand memberships and distribution channels further demonstrated the spillover effect of the Zhihu Yanyan Stories brand with paid members growing year-over-year in this quarter. Regarding ARPU growth, the key is enriching membership benefits. We have launched a premium membership that included privileges such as audiobooks and radio dramas with differentiated pricing. Order in this category has been steadily increasing. As the reputation and influence of Zhihu Yanyan Stories continues to spread, we have more product formats and member benefits based on this advantage currently in development. So please stay tuned. Thank you for your question. [Operator Instructions] The next question comes from Daisy Chen with Haitong International. Please go ahead. Daisy Chen Thank you for taking my question. My question is about the vocational training. How do you think of the future of your self-operated part-time kind of business? Currently, we know that the economy and consumption is relatively weak. Do you think is there an opportunity or a challenge for its goals? Thank you. Wang Han Thank you for your question, Daisy. This is from Zhihu CFO Wang Han. The external environment is certainly a significant positive for our self-operated vocational training business. Firstly, from a fundamental perspective, the pressure on the employment environment has rapidly increased. The demand for professional or soft skills and comprehensive abilities. Additionally, the stable and favorable regulatory policies in the education industry have a sustainable, improved performance and the market value of the companies in this sector, which positively influences our valuation benchmarks. This year, the primary goal for our vocational training business is to improve efficiency and accelerate loss reduction. We have swiftly adjusted some underperforming courses and acquired subsidiaries. Reallocating more resources to strengthen our core programs and expand into new disciplines. In short term, this might mean sacrificing some low-quality revenue, but we have simultaneously benefited from realized gains and profit improvements. In terms of acquisition side, we will continue to actively seek suitable targets with high standards like the company can integrate it well with our community and have good operational and profitability levels. In long term, we believe that the synergy between the vocational training business and our community will significantly empower this business segment. In rapidly validating new demand, acquiring customers precisely and building strong reputation, ultimately translating into a competitive advantage in our unit economics model. That concludes today's Q&A session. At this time, I will turn the conference back over to Yolanda for any additional or closing remarks. Yolanda Liu Thank you, operator. And thank you all once again for joining us today. If you have any further questions, please don't hesitate to contact our IR team directly or PSN Financial Communications. Thank you all. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Earnings call: Zhihu Inc. sees strong margin growth in Q2 2024 By Investing.com

In the second quarter of 2024, Zhihu Inc. (NYSE: ZH) reported substantial improvements in operating efficiency, reflected in a high gross margin of 59.6% and a significant decrease in adjusted net loss by 79.9% year-over-year. The company has been focusing on enhancing the trustworthiness of its community and the user experience by introducing AI-powered products and content initiatives, including the launch of Zhihu Zhida. Despite a decrease in marketing services revenue due to strategic adjustments, the company saw robust growth in brand advertising, performance-based advertising, and its paid membership business. The vocational training segment also reported over 50% year-over-year growth in GMV, with the company aiming to continue its focus on profitability and user experience enhancements. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Zhihu Inc. has demonstrated resilience and strategic focus in its operations, as evidenced by its strong financial performance in the second quarter of 2024. As the company continues to innovate and expand its services, it remains a significant player in the technology and online education sectors. InvestingPro Insights In the context of Zhihu Inc.'s recent performance, key metrics from InvestingPro provide a deeper understanding of the company's financial health and market position. As of the last twelve months leading up to Q1 2024, Zhihu holds a market capitalization of $297.09 million, indicating its size and significance in the sector. Despite the company's high gross profit margin of 55.87%, which aligns with the substantial improvements in operating efficiency reported, Zhihu faces challenges as it is not profitable over the last twelve months, with an operating income margin of -25.93%. This is reflected in the P/E ratio of -2.72, underscoring that the market currently values the company at less than its earnings, which may be due to anticipated declines in profitability. InvestingPro Tips highlight that Zhihu is quickly burning through cash and analysts do not anticipate the company will be profitable this year. This is significant as it informs potential investors about the company's current cash flow challenges and sets expectations regarding its near-term profitability prospects. Additionally, the price of Zhihu's stock has experienced a notable decline over the past six months, with a -33.25% return, which may raise concerns among investors about the stock's recent performance. It's also worth noting that Zhihu does not pay a dividend to shareholders, which could be a factor for those investors seeking regular income from their investments. For those interested in a comprehensive analysis, there are over 10 additional InvestingPro Tips available, offering a wealth of information for a more informed investment decision. InvestingPro Data also reveals that Zhihu's revenue growth has been mixed, with an 8.03% increase over the last twelve months as of Q1 2024, yet with a quarterly decline of -3.36%. This juxtaposition of long-term growth against short-term decline may suggest a need to monitor the company's revenue trajectory closely. As Zhihu Inc. continues to navigate its strategic adjustments and invest in AI and content initiatives, these InvestingPro Insights and Tips can help investors gauge the potential risks and opportunities associated with the company's stock. Operator: Ladies and gentlemen, thank you for standing by and welcome to the Zhihu Inc., Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. Today's conference is being recorded. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am. Yolanda Liu: Thank you, Operator. Hello, everyone. Welcome to Zhihu's second quarter 2024 financial results conference call. Senior management joining me today are Mr. Zhou Yuan, our Founder, Chairman, and the Chief Executive Officer, and Mr. Wang Han, our Chief Financial Officer. Before we get started, I would like to remind you that today's discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in other public filings with the U.S. Securities and Exchange Commission and Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Additionally, the matter we will discuss today will include both GAAP and non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhihu.com. I will now turn the call over to Mr. Wang Han, our CFO. Please go ahead. Wang Han: Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu's second quarter 2024 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, and Chairman, and CEO of Zhihu. We're pleased to report another strong quarter. In the second quarter, we achieved robust improvements in operating efficiency, with our gross margin raised by 5.8 percentage points year-over-year to 59.6%. Our total operating expenses decreased by more RMB 140 million compared to the same period last year, including a reduction of RMB 120 million in marketing expenses. Our adjusted net loss declined by 79.9% year-over-year to RMB 44.6 million, marking our lowest quarterly loss since our U.S. IPO. In the second quarter, we made significant strides in enhancing the Zhihu's community's trustworthiness and strengthening our core user experience. In addition to introducing an array of AI-powered products and engrossing content initiatives, we proactively refined commercial content distribution and meticulously tailored our services to meet the diverse needs of various user groups. As a result, our community remains vibrant and continues to grow, exhibiting positive trends across key user metrics, such as core user retention rates and daily active user timestamps. We expanded AI applications across our products and services during this quarter, aiming to provide users and clients with an enhanced experience. In late June, we officially launched Zhihu Zhida, marking a significant milestone in our AI search initiatives. Since its debut on the PC platform, we have observed a promising increase in user engagement and market reputation, highlighting new growth opportunities for us. Throughout the second quarter, our laser focus on cornerstone verticals coupled with enhanced support for content creators has led to significant improvements in the experiences of both users and content creators within our community. As of the end of June, the cumulative pieces of content on Zhihu reached 830.9 million, a 16.8% year-over-year increase. The cumulative number of content creators within the Zhihu community grew by 12.5% to 74.9 million during the quarter. This continued rise in a proportion of highly active users engaged in content creation. To further bolster user engagement, Zhihu continued to foster rational, optimistic, in-depth discussions around prominent social issues and world events this quarter. For example, during the annual Gaokao period, we strategically enhanced the community's support for Gaokao users by elevating the first-hand experiences shared by previous examinees, optimizing search functionalities, and refining recommendation algorithms. Accordingly, the volume and quality of Gaokao-related answers rose markedly, with three-day and seven-day classroom response rates experiencing double-digit growth. The surge in user engagement and community interactions further solidified Zhihu's position as the most trusted platform for young people seeking guidance on pivotal life decisions, whether in the lead-up to university or as they prepare to enter the workforce. We also implemented effective initiatives to draw users to our coverage of the Paris Olympics. Within a week of the Olympic opening on July 26, content views related to the event soared to over 600 million, with over 500,000 discussions spanning topics such as science and technology, sociology, psychology, and cultural arts. Thanks to these efforts, positive feedback from Zhihu users on our high-quality content continued to rise, accompanied by a significant increase in user interactions. Average daily engagements per year grew by nearly 40% year-over-year, with the monthly average of upwards increasing by over 47% year-over-year and more than 13% quarter-over-quarter. As we progress in our development of the cutting-edge technology, we consistently strive to push boundaries and expand application scenarios. The official launch of Zhihu Zhida in late June marked a significant step in our exploration of AI-powered search functionality. Zhihu Zhida's deep integration with the content creators sets it apart from other AI-driven search products. The majority of the content powering Zhihu Zhida is derived from Zhihu's proprietary high-quality content library, which allows users to trace counselors back to their original sources, explore more premium Q&As within a community, and directly connect with content creators. We believe Zhihu Zhida's unique ability to prioritize human elements and emphasize professional and authentic content that embodies collective humanism is especially valuable in an area increasingly dominated by AI-generated content. In July, Zhihu Zhida's total visit increased by 430%, compared with June, as we continue to leverage Zhihu's self-developed LLM to refine Zhihu Zhida's performance and user experience. By the end of July, 70% user retention doubled compared with early July. Zhida's multi-round response capability also outperformed market peers, earning high praise from professionals. Moving into the second half of the year, we will continue to enhance our user experience on Zhida's PC platforms through our ongoing improvements in product features, algorithms, and performance. Simultaneously, we are set to officially launch and upgrade Zhida Tab on the Zhihu app, which will effectively complement the desktop version. Zhida not only provides professionals with effective tool-based scenarios, but also with vast potential for exploration in user interaction and content creation through the power of the Zhihu community. Moreover, we aim to reach a broader audience with Zhida, relying on its performance and reputation rather than extensive advertising and promotion. Our effective strategic planning and execution is reflected not only by our growing user engagement and flourishing community, but also by our significantly improved operating efficiency. In the second quarter, we further optimized operating efficiency across our business lines by leveraging AI technologies, propelling us towards our operational targets for this year. Now, I would love to delve into more details of the progress we achieved across our multiple business lines for the second quarter. First, our marketing services remained under pressure in the second quarter, with revenue totaling RMB 344 million, decreasing by 16.7% year-over-year. However, I want to highlight that within our marketing services, although our CCS is currently experiencing a decline during its adjustment period, both brand advertising and performance-based advertising exhibited robust growth, increasing by 17% and 28.4% year-over-year, respectively. This performance underscores our effective monetization capabilities and substantial commercial potential of our high-value user base within the community. Across all the industries we cover, the IT and 3C categories continue to lead in growth. Additionally, food and beverage, beauty, skincare, sports, and outdoor industries experienced notable increases in the average order volume during the 618 Shopping Festival, up by 17.4%, 14.1%, and 13.1%, respectively, compared with the same period last year. We remain committed to delivering high-quality content that empowers our clients to drive their business growth, while also supporting mid-tier content creators with substantial commercial potential in achieving their financial goals. In this year's 618 Shopping festival, the number of commercial content creators on a distribution platform increased more than six-fold compared with the same period last year. As we move into the second half of the year, we will continue to enhance our marketing services, grounded in the trustworthiness of our community. Our efforts will focus on the following key areas. First, by leveraging our AI and LLM capabilities and enhanced data infrastructure, we aim to further boost conversion efficiency for brands and merchants, while also enhancing our own product and operational efficiency. Second, we will capitalize our community's professional discussion environment and the trustworthiness among high-value users to assist more emerging verticals, particularly those facing technological barriers, to build stronger marketing awareness and commercial credibility. Third, we will foster closer connections with a great number of content creators to enhance their ability to earn financial rewards in line with their capabilities. Turning to our Paid Membership business, our premium content has continued to distinguish itself with its unique market positioning and compelling strategies, attracting many new users in the second quarter. The number of subscribing members grew by 4.7% year-over-year to 14.7 million, while revenue contribution grew to 46%, reaching RMB 432.7 million. In addition to broadening our premium content offerings, we actively explored various new growth channels in the second quarter, including co-branding memberships and distribution channel extensions. For content creators, Zhihu's premium content discovery mechanism not only provides content creators with opportunities for growth, creative fulfillment, and revenue generation, but also foster an entirely new creation ecosystem within the industry. In the second quarter, the number of Zhihu premium content creators earning income increased by 77.4% year-over-year. We also continued to unlock our high-quality strong story IPs monetization potential. On July 9th, the short drama Love in a Dream premiumed on Tencent (HK:0700) Video. This marks another successful adaptation from Zhihu's Yanyan Story library, following the acclaim of [Indiscernible]. Next, I will review our Vocational Training business. We strategically optimized our business structure in the second quarter with a focus on efficiency enhancement, concentrating on self-operated offerings and aligned closely with our community to provide greater certainty and profitability. We also recorded gains on certain adjustments to our acquired business in this quarter, achieving high margins. As a result of these effective measures, operating efficiency within the vocational training segment improved significantly despite a slight decrease in the total revenue, which amounted to RMB $133.6 million per quarter. GMV for our vocational skills and interest programs achieved over 50% year-over-year growth this quarter, with AI and AGI-related programs continued to receive positive user feedback. Additionally, in response to students' evolving needs during the graduation season, we expanded our offerings to include career planning and overseas study advisor programs. In turn, this expansion encouraged valuable user contributions, with beneficiaries enriching the community with high quality content and innovative creations as they shared their insights and experiences. Moving forward, we will continue to strengthen our absolute advantage in specialized subject offerings. We will also utilize AI technology to enhance operating efficiency and accelerate our progress towards profitability. In summary, our strong second quarter performance showcases our understanding of strategic planning and execution capabilities. As we move into the second half of 2004, we will remain confident in and committed to achieving quarterly profitability targets. Meanwhile, we will continue improving our segmented, engaging user experience and enhancing the Zhihu Community's trustworthiness to grow and nurture our user base. We will also advance our AI development initiatives, enriching our product capabilities and facilitating operating efficiency improvements across the board. By fully leveraging our unique value proposition, we will further unlock Zhihu's growth and commercialization potential, driving the company's long-term sustainable development. This concludes Mr. Zhou Yan's remarks. Now I will review the details of our second quarter financials. For a complete overview of our second quarter 2024 results, let us refer to our press release issued earlier today. Throughout the second quarter, we made significant strides in refining our core structure and optimizing operating efficiency. While maintaining disciplined spending and proactively pursuing high ROI across our business lines, we accelerated our exploration of AI-powered technologies, substantially enhancing our products and services. As a result, we have achieved notable improvements in both gross margin and adjusted net loss. Remarkably, this quarter represents our lowest quarterly loss since our U.S. IPO. Our marketing services revenue for the quarter was RMB 344 million, compared with RMB 412.7 million in the same period of 2023. This decline primarily reflects our deliberate ongoing refinement of service offerings to strategically focus on margin improvements. Pay membership revenue for the second quarter decreased slightly by 3.7% year-over-year to RMB 432.7 million. Primarily due to a marginal decline in our average revenue per subscribing members. However, our average number of monthly subscribing members grew by 4.7% year-over-year this quarter, demonstrating the effectiveness of our user growth strategies and promotions. Vocational training revenue for the quarter was RMB 133.6 million, compared with RMB 144.5 million in the same period of 2003. This decrease was mainly due to our strategic refining of acquired business, prioritizing self-operated programs that offers high margins and greater profitability. Our gross profit for the second quarter was RMB 556.5 million, compared with RMB 562.1 million in the same period of 2023. Thanks to our enhanced operating efficiency, the gross margin has improved year-over-year for seven consecutive quarters, reaching 59.6%, the highest level since our U.S. IPO. Our total operating expenses for this quarter was RMB 740.4 million, a 16.7% decrease from RMB 889.3 million in the same period of last year. Our selling and marketing expenses decreased by 22.9% to RMB 417 million, down from RMB 540.6 million in the same period of 2023. This reduction was primarily driven by more disciplined promotional spending and a decrease in personnel-related expenses. Our research and development expenses for the quarter decreased by 11.4% to RMB 209.3 million, down from RMB 236.2 million in the same period of 2023. This reduction was primarily attributable to more efficient spending on technological innovation. General and administrative expenses were RMB 114.1 million compared with RMB 112.5 million in the same period of 2023. Our GAAP net loss and non-GAAP net loss for the second quarter has both narrowed substantially, decreasing by 71.1% and 79.9% year-over-year respectively. As of June 30, 2004, the company has cash-in-cash equivalence term deposit, redistricted cash and short-term investment of RMB 5.1 billion compared with RMB 5.5 billion as of December 21, 2003. As we advance into our second half of 2024, we will persist in our commitment to rigorously strategic execution, driving our closer to profitability. At the same time, we will diligently explore innovative avenues to deliver enduring value to our shareholders. This concludes my prepared remarks on our financial performance for this quarter. I will now turn the call over to the operator for the Q&A session. Operator: [Operator Instructions] The first question today comes from Vicky Wei with Citi. Please go ahead. Vicky Wei: Thanks, management, for taking my question. Would management share some color about the progress of achieving breakeven target? Thank you. Wang Han: Thank you for your question. This is from Wang Han, CFO of Zhihu. Our profitability goals remain unchanged and resolute. We still plan to achieve a quarterly non-GAAP net profit on this fourth quarter. And our second quarter financial results fully validate our strong strategic planning and execution capabilities. After a single quarter of adjustments, we not only reduced our losses by streaming costs and expenses, but also recorded our lowest absolute quarterly loss since our IPO. And from the current progress of the third quarter, our loss reduction work should also be more pressing, so please stay tuned. Thank you, Vicky. Operator: The next question comes from Xueqing Zhang with CICC. Please go ahead. Xueqing Zhang: Thanks, management, for taking my question. My question regards on your user base. How has Zhihu managed to maintain a stable database despite scaling down community promotion expense? And a follow-up question on your AI search. Can management share the progress of AI search? What's the user metrics after the launch of Zhihu Zhida? How does management feel the potential commercialization? Thank you. Zhou Yuan: This is from Zhihu's CEO, Zhou Yuan. The proactive user strategy adjustments we have made over the past two quarters were all quality-oriented, prioritizing our core user experience. As you mentioned, for our user base, the core is user retention improvement for us. And the user retention improvement is from the improvement of high-quality content and the core of the improvement of high-quality content is to rely on in-depth content cultivation operation approach. I will explain a little bit more here. This in-depth cultivation approach has two meanings. One is in-depth operation and the other is in-depth content. And so far, it seems to be working well. Our user base is quite stable. Thank you for your question. I will continue to answer for your second question. We successfully launched Zhihu Zhida on PC platform at the end of June. And over the past period, our work has focused on two main areas. The first, optimizing the model. And the second, upgrading and optimizing the end. The optimization of model has led to significant improvements in user retention with significant increase in the number of high-frequency users, or what we call heavy users. As for the end optimization, we started by enhancing the functionality of our PC end, which is an important productivity scenario. And this work will continue for some time. Meanwhile, we are preparing to launch Zhihu Zhida on our mobile end, features of which are still in plan. The goal of this end enhancement is for us to reach more users. The combination of model and end optimization is translating into our user growth. Overall, we are seeing positive changes in terms of product usage, user time spent, and both next day and seven-day user retention. And for sure, right now, our primary focus is on improving the experience for heavy users. And the commercialization is not the priority at this moment. Thank you, Xueqing, thanks for your question. Operator: The next question comes from Thomas Chong with Jefferies. Please go ahead. Thomas Chong: So I transfer myself. My question is about advertising. So our performance app and brand app has good performance during 618. So what's the drivers behind and what are our advantages? Thanks. Wang Han: Thank you for your question. This is from Zhihu CFO Wang Han. Zhihu is becoming increasingly clear about its commercial strength and expertise, specifically in helping brands to build premium value with high-quality audience. I'd like to share two practical cases. The first example of these two cases is our successful collaboration with media to achieve both positive word-of-mouth and self-worth refrigerator priced over 60,000 yuan. During this 618 Shopping Festival, Toshiba (OTC:TOSYY)'s premium flagship star-rated refrigerator achieved positive ROI through Zhihu's first stop for new product purchases solution. By leveraging our high-value community and users, we focused on human-centered design and advanced technology for high-end home appliance, successfully creating a differentiated discussion space for new products, achieving both positive word-of-mouth and strong sales. The second example is our Lighthouse project IT collaboration. With the same -- the Lighthouse of the community illuminates the warmth of the product. We help Vivo promote the Blue Heart AI accessibility feature. This initiative combines social value with strong marketing results. The in-platform topic gained over 1.3 million rates, and Zhihu's video channel set an all-time high record of interactions with likes and favorites, surpassing 100,000 and over 40,000 shares. The video even received praise and a share from Vivo's Chief Marketing Officer, generating significant buzz and positive feedback for both brands and our community. These successful cases categorized by high value and strong word-of-mouth, demonstrated that Zhihu's strength in professional discussion forums unlocks the commercial potential of high-value users. By becoming the center of trust for these audience, this is the most natural path for Zhihu's commercialization. Thank you for the question. Operator: The next question comes from Yu Chen Zu with Guangfa [ph] Securities. Please go ahead. Unidentified Analyst: What are the main drivers behind the growth of Zhihu's paid user base? And how can we assess the outlook of this segment? Thank you. Wang Han: Thank you for your question. This is from Zhihu CFO Wang Han. Our two drivers remain the growth of our subscribing members and the increase in ARPU. In terms of the user scale of our paid members, as we mentioned previously, with massive market beyond Zhihu community, we will continue to explore multiple channels to expand our user base. Firstly, the MAU of Yanyan Stories app in July saw a year-over-year increase of more than 36%. In the second quarter, our exploration of co-brand memberships and distribution channels further demonstrated the spillover effect of the Zhihu Yanyan Stories brand with paid members growing year-over-year in this quarter. Regarding ARPU growth, the key is enriching membership benefits. We have launched a premium membership that included privileges such as audiobooks and radio dramas with differentiated pricing. Order in this category has been steadily increasing. As the reputation and influence of Zhihu Yanyan Stories continues to spread, we have more product formats and member benefits based on this advantage currently in development. So please stay tuned. Thank you for your question. Operator: [Operator Instructions] The next question comes from Daisy Chen with Haitong International. Please go ahead. Daisy Chen: Thank you for taking my question. My question is about the vocational training. How do you think of the future of your self-operated part-time kind of business? Currently, we know that the economy and consumption is relatively weak. Do you think is there an opportunity or a challenge for its goals? Thank you. Wang Han: Thank you for your question, Daisy. This is from Zhihu CFO Wang Han. The external environment is certainly a significant positive for our self-operated vocational training business. Firstly, from a fundamental perspective, the pressure on the employment environment has rapidly increased. The demand for professional or soft skills and comprehensive abilities. Additionally, the stable and favorable regulatory policies in the education industry have a sustainable, improved performance and the market value of the companies in this sector, which positively influences our valuation benchmarks. This year, the primary goal for our vocational training business is to improve efficiency and accelerate loss reduction. We have swiftly adjusted some underperforming courses and acquired subsidiaries. Reallocating more resources to strengthen our core programs and expand into new disciplines. In short term, this might mean sacrificing some low-quality revenue, but we have simultaneously benefited from realized gains and profit improvements. In terms of acquisition side, we will continue to actively seek suitable targets with high standards like the company can integrate it well with our community and have good operational and profitability levels. In long term, we believe that the synergy between the vocational training business and our community will significantly empower this business segment. In rapidly validating new demand, acquiring customers precisely and building strong reputation, ultimately translating into a competitive advantage in our unit economics model. Thank you. Thank you for your question. Operator: That concludes today's Q&A session. At this time, I will turn the conference back over to Yolanda for any additional or closing remarks. Yolanda Liu: Thank you, operator. And thank you all once again for joining us today. If you have any further questions, please don't hesitate to contact our IR team directly or PSN Financial Communications. Thank you all. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Weibo Corporation (WB) Q2 2024 Earnings Call Transcript

Sandra Zhang - Investor Relations Gaofei Wang - Chief Executive Officer Fei Cao - Chief Financial Officer Good day, and thank you for standing by. Welcome to the Weibo Report Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sandra Zhang. Please go ahead. Sandra Zhang Thank you, operator. Welcome to Weibo's second quarter 2024 earnings conference call. Joining me today are our Chief Executive Officer, Gaofei Wang, and our Chief Financial Officer, Fei Cao. This conference call is also being broadcast on the Internet and is available through Weibo's IR website. Before the management remarks, I would like to read you the safe harbor statement in connection with today's conference call. During today's conference call, we may make forward-looking statements, statements that are not historical facts, including statements of our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Weibo assumes no obligation to update the forward-looking statements in this conference call and elsewhere. Further information regarding this and other risks is included in Weibo's annual report on Form 20-F and other filings with the SEC. All the information provided in this press release is occurring as of the date hereof. Weibo assumes no obligation to update such information, except as required under applicable law. Additionally, I would like to remind you that our discussion today includes certain non-GAAP measures, which exclude stock-based compensation and certain other expenses. We use non-GAAP financial measures to gain a better understanding of Weibo's comparative operating performance and the future prospects. Our non-GAAP financials exclude certain expenses, gains or losses and other items that are now expected to result in future cash payments, or non-recurring in nature, or are not indicative of our core operating results and outlook. Please refer to our press release for more information about our non-GAAP measures. Following management's prepared remarks, we will open the lines for a brief Q&A session. With this, I would like to turn the call over to our CEO, Gaofei Wang. [Interpreted] Thank you. Hello, everyone. Welcome to Weibo's earnings conference call. [Foreign Language] [Interpreted] Today, I will share with you highlights in Weibo's product monetization in the second quarter of 2024. [Foreign Language] [Interpreted] On the user front, by the end of the second quarter, Weibo's MAU reached 583 million and average DAUs reached 256 million. In light of an already sizable user community and a mature user mindset, we have proactively adjusted our user strategy this year, with more channel budget allocated to the acquisition and engagement of the high-quality users. This quarter, our DAU versus MAU ratio increased year-over-year and quarter-over-quarter, reflecting further improvement of user engagement. [Foreign Language] [Interpreted] On the monetization front, in the past two years, we have been focusing on combining Weibo's hot trend products with advertising and marketing demand, and thus, our hot trend marketing has been recognized by a wider range of industries and advertisers. In the second quarter, our total revenues reached US$437.9 million, of which our ad revenues reached US$375.3 million. On a constant currency basis, our total revenue would have increased 1% year-over-year and our ad revenues would have decreased 1% year-over-year. Our non-GAAP operating income reached US$157.6 million, representing a non-GAAP operating margin of 36%, a modest pickup year-over-year. [Foreign Language] [Interpreted] Next, let me share with you progress made in part of the monetization in the second quarter. In 2024, we still focus on growing user scale and engagement, strengthening the competitiveness of content ecosystem and improving operating efficiency as our key strategies -- strategic objectives. [Foreign Language] [Interpreted] On the channel front, we maintained close cooperation with handset manufacturers, focusing on acquisition of high-value users and promotion of user engagement. We also invested to further refine accuracy of algorithm and targeting capability of our business model in order to create enriched content offering for our channel users and increase their user engagement, which laid foundation for monetization. [Foreign Language] [Interpreted] On social attributes, in the second quarter, we are leveraging our relationship-based feed to further recover vertical content ecosystem. We strengthened the interaction between KOLs and fans, increased their user thickness and improve user interaction efficiency of relationship-based feed. Meanwhile, this year, we have also been investing in user-generated content by improving the [growth path] (ph) of high-quality UGC in Weibo to encourage more quality content generation around vertical content and boost user engagement. In terms of user interest sharing, we further strengthened Super Topic community as a core domain for user to share interest-related content. In the first half of this year, users' social interaction increased significantly with double-digit growth year-over-year. For example, during the first half of this year, we increased the interaction between celebrity and fans by expanding campaigns of celebrity and their work. As a result, in the second quarter, the number of average daily users who posted and the number of posts in the entertainment-related Super Topic increased over 50% year-over-year, respectively. In terms of the daily live-sharing content by ordinary users, we improved the distribution mechanism for those high-quality content to be fairly distributed in core feeds and help users who consistently generate content to accumulate fan base. For instance, in the second quarter, we launched a Weibo photography [indiscernible] to select high-quality UGC photography around daily life, aiming to encourage all users to record and share their daily life in multiple dimensions. During the first campaign in May and June, nearly 500,000 users shared their photography and contributed over 2.1 million photographs, attracting over 3 million users to engage and interact. [Foreign Language] [Interpreted] On the content ecosystem front, in the second quarter, while maintaining our competitiveness in the IP-related content ecosystem of hot trends, entertainment and events, we focus on increasing investment in verticals such as digital product, automotive, game, fashion and beauty and healthcare to enhance Weibo's competitiveness in the content ecosystem and further improve monetization efficiency. [Foreign Language] [Interpreted] On hot trend IP ecosystem, in the second quarter, with the release of plentiful entertainment work, we leveraged our advantage of celebrity and fans and entertainment work as well as fans' interaction across verticals. We encourage more users to consume and discuss around entertainment contents. As a result, the number of user interaction in the entertainment vertical increased double-digit year-over-year. For example, in the second quarter, we reached in-depth cooperation with the music variety show Singer 2024 of Hunan TV station on cross-screen live streaming and real-time hot topics to achieve user interactions. The show became a phenomenal hit in the first half of 2024 through launching innovative campaigns on Weibo, such as allowing users to recommend Singer across platforms, [start] (ph) candidate polls on Weibo, and roll out real-time hot trends around the show. The total views of the show, Singer 2024 exceeded 50 billion times and the number of user discussion exceeded 560 million times. This hot trend plus social interaction pattern between TV and social media not only make the show influential, but also provide brand advertiser with more diversified marketing solution and generated sustainable ad revenue growth for Weibo through hot trend marketing. During college entrance exam season this year, we cooperated with People's Daily to boost discussion on university's major selection and application after the entrance exam and organized the expert and KOLs of over 10 verticals, such as education, healthcare, digital product, automotive and finance, to share with examinees on suggestions of professional learning, application and industry employment. The total view of college entrance exam-related content reached 38.9 billion times in June and the number of user discussion exceeded 110 million times, representing an increase of over 50% compared with the same period last year. [Foreign Language] [Interpreted] On vertical content operations, we continue to focus on two aspects in Q2. First, we strengthened the construction of vertical content ecosystem, including supporting vertical content and engaging cross-field accounts and media outlets in the generation and distribution of vertical hot trends. Second, we beefed up the support of golden and orange [verified] (ph) account in vertical areas and empowered them to earn higher commercial returns on our platform. In the second quarter, we continued to reinforce hot trend operation in automotive and digital product verticals with emphasis on industry brand and product. As a result, the number of golden verified account in automotive and digital product verticals, as well as their traffic, interaction and ad revenue on our platform continued to increase year-over-year. For example, for the automotive vertical, as competition in the new energy vehicle market intensified, OEMs stepped up their investment in content operation. In the first half of this year, over [13] (ph) manufacturers -- auto manufacturers and around 100 executives of auto industry registered or activated Weibo accounts. Thanks to the content contribution from these executives, KOLs and media accounts in the automotive industry also actively created follow-up hot topics. We are pleased to see our client join us in building the automotive content ecosystem, which not only help clients to refine brand operation and product promotion, but also lay the foundation for our long-term business cooperation with clients. [Foreign Language] [Interpreted] As for the online game vertical, built upon content construction of online game ecosystem over the past three years, we have covered over 80% of the top 100 games in terms of content operation. UGC creation and interaction thickness continue to improve, leading to rapid growth of the golden verified account in the online gaming vertical. In the second quarter, the number of golden verified account in this vertical increased by over 80% year-over-year, with their traffic and interaction grew over 30% on an annual basis. Leveraging Weibo's expanded advantages in the online gaming ecosystem and higher influence of golden verified accounts, we have built closer partnership with online game clients on content marketing. In the second quarter, nearly 50% of the commercial project for game promotion chose to cooperate with Weibo in hot trends marketing, demonstrating better recognition of Weibo's golden verified account among clients in this industry. The ad revenue of golden verified account from the game industry increased by over 4 times year-over-year. We are delighted to see that the online gaming vertical has gradually entered the self-reinforcing cycles between content and monetization ecosystem similar to the automotive and digital vertical. [Foreign Language] [Interpreted] Moving on to monetization. In 2024, we will continue to beef up our efforts to reinforce our monetization competitiveness, leveraging Weibo's strength in hot trends and Ips, as well as driving vertical content ecosystem, we will sharpen the competitive edge of our content marketing and performance ad product in the hope of enhancing our capabilities to navigate through business risk in key industries. [Foreign Language] [Interpreted] Amid a relative soft end market in the second quarter, our ad revenue decreased 1% year-over-year on a constant currency basis. By industry, our [advantages] (ph) industries, such as handset and automotive industries, sustained solid growth strength, benefiting from clients' recognition of Weibo's hot trend marketing. Therefore, our ad wallet share of clients' marketing budget in this sector either remained stable or increased. Thanks to the impressive topic views and discussion generated by the blockbuster Ips, such as Singer 2024, Weibo attracted many clients to launch campaigns around this IP-related hot trends, which brought forth incremental hot trends marketing dollars to our platform. For example, in the second quarter, Vivo and Weibo reached strategic cooperation in content marketing, achieving index co-creation of content between Weibo platform and the brand. To elaborate, we expanded the marketing initiative on new product launch to daily hot trends throughout the year and thus comprehensively enhance the user reach and nurture user mindset of the brand and its product. Take the Vivo X100 Series launched in the second quarter as an example. After the new product release in May, Vivo took advantage of the peak period of offline concert in the second quarter, and the popularity of variety show, Singer 2024, actively participated in the co-creation of hot trends and strengthened user awareness of the differentiated [tech] (ph) of the Vivo X100 Series, [concert go-getter] (ph), to enhance user penetration of Vivo's portrait photography. We successfully helped Vivo achieve the first place in a dual track of concerts and telephoto. In the current Internet IP market, clients will gradually concentrate on the top IPs. This trend can also be seen from the traffic structure of Weibo. The traffic and monetization opportunities brought forth by the top IPs was significantly higher than those from mid-tier IPs. [Foreign Language] [Interpreted] On the flip side, in the second quarter, the sales of international cosmetic brands were still under pressure, which negatively affected the pace of new product launch and thus their scalable budgets. Therefore, our ad revenue from the cosmetic and beauty sector continued on a descending trajectory year-over-year. In order to boost clients' willingness of new product marketing and its effectiveness, we stepped up our cooperation with e-commerce platform and domestic brands this year. To elaborate, we actively explored the synergy of new product launch of the FMCG industry between social and e-commerce platforms and provide clients with better marketing support. We hope these efforts will translate into more stable growth in the FMCG sector in the coming quarters. In the second quarter, we started the cooperation on new product launch, marketing with Tmall with focus on the cosmetic and beauty as well as footwear and apparel industries. Leveraging Weibo's strength in hot trend marketing, we offer full funnel value proposition to clients from social influence to e-commerce conversion. With this partnership, we hope to enhance client recognition of the value of Weibo's culture and marketing and also cultivate and reinforce users' mindset of discovering new product on Weibo. We will continue to explore this model with Tmall in the third quarter and try to penetrate into more industries and clients. With higher client recognition of Weibo's culture and marketing and our broadening coverage of domestic beauty brands, we hope to see our ad revenue in the cosmetic and beauty sector stabilize or return to growth year-over-year in the fourth quarter. [Foreign Language] [Interpreted] Overall speaking, amid the current competitive landscape, based on the current brand plus performance ad offerings, Weibo's marketing service has upgraded to content marketing solutions with emphasis on hot trend and IP, celebrity and KOL plus performance ad. Leveraging adjustment in the sales structure and ad product in the past two years, the market competitiveness of these three types of ad offerings has gradually improved and become the key driver of revenue. Ad revenue directly generated by these three types of ad offerings accounts for over 50% of our total ad revenues. From industry perspective, the hot trend and IP marketing finally serve the FMCG, digital products and automotive industries. Clients in these industries seek to amplify their product influence, leveraging organic culture or even build market hype around their new products through Weibo's culture and marketing. The celebrity and KOL marketing mainly caters to the luxurious goods, cosmetic and beauty, as well as footwear and apparel industries. Clients can better reach fans and influence their consumption decision with higher accuracy by working with celebrities and KOLs in professional areas. Finally, despite the fierce competition in the performance ad marketing in recent years, we are gradually improving our competitiveness ad through algorithm optimization and social native ad offerings. Although performance ad has not become the main contributor to revenue growth in the past two years, performance ad offerings are crucial for us to broaden client coverage and identify high-quality clients. [Foreign Language] [Interpreted] In contrast to other platforms' competitive edge in traffic-based monetization, we have built our competitiveness on media-oriented and brand-oriented ad placement, as well as content marketing based on hot trend IPs and celebrities. These differentiation are critical for us to obtain marketing budget for product promotion and user mindset. Meanwhile, as we further strengthen the construction of content ecosystem in the entertainment, sports events and industry-based verticals, and better integrate organic content ecosystem with commercial content ecosystem, our business model, which is mainly based on brand plus celebrity marketing and content marketing, while supplemented by performance ad, will be more conductive to improving the platform's monetization efficiency. This is also our most important strategy and objective for strengthening our monetization competitiveness in future. [Foreign Language] [Interpreted] With that, let me turn the call over to Fei Cao for a financial review. Fei Cao Thank you, Gaofei, and hello, everyone. Welcome to Weibo's second quarter 2024 earnings conference call. Let's start with user metrics. In June 2024, Weibo's MAU reached the 583 million and average DAU reached the 256 million. As communicated last quarter, in 2024, we have proactively adjusted our user strategy to put more emphasis on the acquisition and engagement of high-quality users, as demonstrated by improved DAU versus MAU ratio this quarter. Turning to financials. As a reminder, my prepared remarks would focus on non-GAAP results. All monetary amounts are in US dollar terms and all the comparisons are on a year-over-year basis unless otherwise noted. Now, let me walk you through our financial highlights for the second quarter 2024. Weibo's second quarter 2024 net revenue was $437.9 million, a decrease of 1% or an increase of 1% on a constant currency basis. Operating income was $157.6 million, representing an operating margin of 36%. Net income attributable to Weibo reached $126.3 million, representing a net margin of 29%. Diluted EPS was $0.48. Let me give you more color on the second quarter 2024 revenue performance. Weibo's advertising and marketing revenues for the second quarter 2024 was $375.3 million, a decrease of 3% or 1% on a constant currency basis, reflecting muted ad demand amidst [indiscernible] macro environment. Mobile ad revenues were $352.3 million, contributing approximately 94% of total ad revenue. In terms of growth, 3P products, e-commerce and entertainment were the largest contributors to growth. We are delighted to see sustained ad wallet increase of handset sector this quarter, leveraging a robust content ecosystem and the dynamic discussion around 3P products. The entertainment sector demonstrated good momentum this quarter, driven by blockbuster TV programs and Weibo's unique value proposition for hot trends. On flip side, the top-line recovery will still drag by underperformance of the FMCG sector. Despite a modest growth of the food, of beverage and apparel sector, the cosmetic and the personal care sector still feel [behind] (ph) due to large ad budget from [indiscernible] and the intense competition among ad platform. For ad product, promoting feed ad was the largest, followed by social display and topic and search. Ad revenue from Alibaba for the second quarter was [$32.4 million] (ph), an increase of 21% or 23% on a constant currency basis. We are pleased to see the solid ad growth from Alibaba continue throughout the first half of 2024, as Weibo's brand plus performance solution resonated well with Alibaba to fulfill its professional marketing goals. Before turning to VAS segment, let me share some preliminary color on the trend entering the third quarter of 2024. On the upside, Weibo continues to be the go-to-platform to discover and discuss around hot trends during the Summer Olympics, which boosted user engagement and attracted intensive ad placement. That said, with a chunk of advertising budget allocated to the Olympic Games, we expect relatively lukewarm ad demand post the Olympic season, reflecting in sluggish consumption data. We will beef up our sales execution and enrich Weibo's constant ecosystem in the second half of the year in the hope of mitigating macro and industry headwinds. Turning to VAS. VAS revenues were $62.6 million in the second quarter, an increase of 15% or 18% on a constant currency basis, primarily driven by revenue growth of membership services. We have benefited from improved ARPU for membership services since they rolled out premium VIP features to cater to the need of 3P users. Turning to costs and expenses. Total costs and expenses for the second quarter were [$218.3] (ph) million a decrease of 2%. Operating income in the second quarter was $157.6 million, representing an operating margin of 36% compared to 35% in the same period last year. Turning to income tax. Under GAAP measure, income tax expense for the second quarter was $33.3 million compared to $25.5 million last year. The increase was mainly due to the withholding tax accrued related to earnings to be remitted from our Wuxi to our Hong Kong subsidiary, which is to fund our demand for US dollars in business operations and the payments of dividends and debt, et cetera, in future. Net income attributable to Weibo's shareholders in the second quarter was $126.3 billion, flattish year-over-year. Net margin was 29%, flattish versus the same period last year. Turning to our balance sheet and cash flow items. As of June 30, 2024, Weibo's cash, cash equivalents and short-term investments totaled $2.84 billion We have made special cash dividend payment of approximately $199.4 million in May. In the second quarter, cash provided by operating activities was $132.1 million. Capital expenditures totaled $10.3 million, and depreciation and amortization expenses amounted to $14.5 million. With that, let me now turn the call over to the operator for the Q&A session. Thank you. [Operator Instructions] We will now take the first question from the line of Alicia Yap from Citigroup. Please go ahead. Thanks management for taking my questions. Can management comment a little bit how you view the overall macro outlook and how will that translate to your advertising outlook for the second half of this year? And then, can you share with us whether you have observed any meaningful change of the advertiser sentiment in the different industry vertical? Any particular shift of the sentiment from any advertiser that you might have observed? And also does management believe the current macro environment could actually last into next year? Thank you. [Interpreted] Thank you very much for the question. So first of all, in terms of our advertisement revenue in Q2, from a renminbi standpoint, this was flat versus the last quarter and also year-on-year wise. And also you can see that although we've been experiencing some of the decline and also the decrease of the overall consumption, but still the willingness of placing the ads [products] (ph) from the advertisers was pretty much stable. So, in terms of the overall revenue, in Q2, we can see that there was particularly negative impact by the verticals like the cosmetics and beauty products by about 5%. But for the rest of the other industries, we're experiencing pretty much growth. [Foreign Language] [Interpreted] And also in terms of the Q3 outlook and also the second half performance, there are still some of the uncertainties in terms of the macroeconomic development, especially about the consumption. So, we remain very much cautious over the outlook for the rest of the 2024. So, still we will be experiencing some of the challenges terms of the resumption of the consumption and the macro economy in the first-tier cities, for instance. And this is, of course, going to impact some of the willingness of placing the ads by the advertisers, but still you can see that against the other players in this advertising industry, Weibo's advertising business is relatively not that big. So, still we are seeing some of the precautious behaviors of the placing ads by the advertisers. But still, in terms of the new products launch and some of the other relevant advertisements related to the new products, the customers are tending to choose those top-notch IP and also top-notch platforms to do their advertisement and also promotion. So, this is going to help us to acquire additional budget from this standpoint. [Foreign Language] [Interpreted] And also furthermore, we can see that we are able to divide the customers into three categories or three kinds. The first category is in the FMCG industry, including the food and beverages, the apparels and shoes, as well as entertainment, and also the [development] (ph) industries. So, still the scale of the consumption or the volume in total is pretty large. So, even if the customers are pretty much precautious in allocating their budgets for advertisement, but still they are quite [contentious] (ph) in searching for new IP and also concentrate on those top-notch platforms. So, for instance, in Q3, we had the big activities like the Olympic Games. And you can see that in terms of the hot trend selling rate and also the other parameters, we have seen a very good improvement and also the boost. So, meaning that the customers are willing to spend budget on acquiring those top-notch IPs and also collaborating with the top-notch platform. So, from this standpoint, Weibo still stands in terms of our advantages. [Foreign Language] [Interpreted] And also for the other industries and verticals, for instance, the headsets and automotive and gaming, as well as films and movies and those entertainment industries, for instance, we were experiencing pretty much pressure and stress over the consumption improvement and resumption. But still most of the competitions are pretty much around the new products and some of the new movie marketing, for instance, and also promotion. So, people and also different companies are competing with each other to get more market share around the marketing for new products and new launches. So, Weibo still holds our advantage in this particular area in terms of hot trends social topics as well as very good relationship with some of the customers. So, in that sense, for instance, in this summer holiday, the box office of most of the new movies slowed down or decreased a lot year-on-year wise comparing with the same period last year. Almost, [halved] (ph) in terms of the total value of the box office. But still, because of a very good relationship and our customers are choosing Weibo to promote their new products and also increasing their budget on us, so from this standpoint, we are still increasing our revenue, and we do have our advantage in this area. [Foreign Language] [Interpreted] And also for the third category, we're talking about those stressful industries, for instance, the cosmetics and beauty products and also some of the luxurious brands. We've been seeing a very stressful situation over the resumption and increase of the consumption as a whole. So, in these particular industries, the customers are not choosing to launch any new products and in order to get a better result. So, as a result, we've been seeing most of the ad were pretty much a performance-based ads or some of the discount and promotional activities or campaigns. So, Weibo is less competitive in this front. So, of course, we can still gain our revenue by getting the budget of the performance-based ads from our customers or organizing some of the campaigns for our customers, but still Weibo is less competitive versus the previous two categories and also the marketing methods in this arena. Thank you. Thank you. We will now take the next question from the line of [Suocheng Zhang] (ph) from CICC. Please go ahead. Thanks management for taking my question. My question regards on AIGC. We noticed that the company self-developed the [iQIYI] (ph) large language model, successfully passed the legislation in July. What's our latest developments in AIGC? How does it help our content production and commercialization efficiency? Thank you. [Interpreted] And thank you for this question. And also, first of all, previously, we have been sharing with everybody about the application of AIGC by Weibo, and the standpoint of generating content for the platform and also enhancing the interaction between the users and among users. In the second half or later stage of the July, we were hearing about the approval of the LLM that developed by Weibo and by the government. And also we use this technology to further boost and also enhance the AI products that we -- application -- we are applying now. For instance, the comment robots and also some of the AI assistance in getting the response to the users. So, we hope that the interaction based on the contents by Weibo and on a Weibo platform is going to be more intelligent and also timely fashion. [Foreign Language] [Interpreted] And also the second thing that I would like to say is that in Q2, we've been -- or in the first half of this year, also we had a better interpretation and understanding capability by this AI model especially the multimodal understanding and also interpretation of the contents on Weibo because we know that there are millions of billions of contents generated by the random users. And, also because these contents were randomly generated by the users, it was not standardized and it was not structured. And also it was not that common. I mean, following a certain pattern in terms of the total user. So, also those contents were having the image form, the video, and also text. So, at the current stage, the recommendation of those contents to the relevant target users is still based on the correct and precise interpretation and understanding of those contents. So, at the current stage, the large language models that we have got approval is primarily used in this front to better understand and also more precisely understand the [indiscernible] the message and the content in order to have a more precise recommendation to the users. And now we have a coverage of almost 90% of the users, but, of course, still there are some of the works that we need to further working on in order to improve the precisions of the understanding. And, also, we need to do some of the further efforts to increase the computational power in this area as well. So still, we are observing the future potential of this particular feature. And second point I would like to say is that, now, in terms of the searching results, there are some of the results that from the media or We Media or from the random users. So, this particular AI is able to help the users within one minute to conclude and summarize the searched contents so that the user experience is going to be much better in using the search feature of Weibo. And, because of this, in Q2, we had already MAU of this particular feature exceeding 10 million already. But this is only one of the examples that we are trying the capability of AI. And also in the near future, we are going to have a better trial of this, in helping us to better interpret and understanding the contents and also to trigger, and based on the information-based flow that we have and also based on the other capabilities that we have, we are going to have a better use and application of the AI feature and also this technology. Thank you. There are no further questions at this time. I would like to hand over to Sandra Zhang for closing remarks. Sandra Zhang Thanks, operator, and thank you all for joining our conference call today. We'll see you next quarter. This concludes today's conference call. Thank you for participating. You may now disconnect.

Earnings call: Weibo reports mixed Q2 2024 results, focuses on AI By Investing.com

Weibo Corporation (NASDAQ:WB), a leading social media platform in China, has announced its financial results for the second quarter of 2024. Despite a challenging macroeconomic environment, Weibo's Monthly Active Users (MAU) increased to 583 million, with Daily Active Users (DAU) reaching 256 million. The company reported a slight year-over-year decline in net revenue to $437.9 million and in ad and marketing revenue to $375.3 million. However, Value-Added Services (VAS) revenue saw a 15% increase. Weibo's non-GAAP operating income stood at $157.6 million, with a non-GAAP operating margin of 36%. The company is investing in AI technology to enhance content production and commercialization, aiming to improve monetization competitiveness and user engagement. In summary, Weibo's second quarter of 2024 witnessed a mix of challenges and opportunities. The company's focus on AI technology and strategic partnerships appear to be pivotal in navigating the uncertain macroeconomic landscape and intensifying competition in the social media space. With a strong user base and innovative approaches to content and monetization, Weibo is poised to adapt and strive for growth in the coming quarters. Operator: Good day, and thank you for standing by. Welcome to the Weibo Report Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sandra Zhang. Please go ahead. Sandra Zhang: Thank you, operator. Welcome to Weibo's second quarter 2024 earnings conference call. Joining me today are our Chief Executive Officer, Gaofei Wang, and our Chief Financial Officer, Fei Cao. This conference call is also being broadcast on the Internet and is available through Weibo's IR website. Before the management remarks, I would like to read you the safe harbor statement in connection with today's conference call. During today's conference call, we may make forward-looking statements, statements that are not historical facts, including statements of our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Weibo assumes no obligation to update the forward-looking statements in this conference call and elsewhere. Further information regarding this and other risks is included in Weibo's annual report on Form 20-F and other filings with the SEC. All the information provided in this press release is occurring as of the date hereof. Weibo assumes no obligation to update such information, except as required under applicable law. Additionally, I would like to remind you that our discussion today includes certain non-GAAP measures, which exclude stock-based compensation and certain other expenses. We use non-GAAP financial measures to gain a better understanding of Weibo's comparative operating performance and the future prospects. Our non-GAAP financials exclude certain expenses, gains or losses and other items that are now expected to result in future cash payments, or non-recurring in nature, or are not indicative of our core operating results and outlook. Please refer to our press release for more information about our non-GAAP measures. Following management's prepared remarks, we will open the lines for a brief Q&A session. With this, I would like to turn the call over to our CEO, Gaofei Wang. Gaofei Wang: [Foreign Language] [Interpreted] Thank you. Hello, everyone. Welcome to Weibo's earnings conference call. [Foreign Language] [Interpreted] Today, I will share with you highlights in Weibo's product monetization in the second quarter of 2024. [Foreign Language] [Interpreted] On the user front, by the end of the second quarter, Weibo's MAU reached 583 million and average DAUs reached 256 million. In light of an already sizable user community and a mature user mindset, we have proactively adjusted our user strategy this year, with more channel budget allocated to the acquisition and engagement of the high-quality users. This quarter, our DAU versus MAU ratio increased year-over-year and quarter-over-quarter, reflecting further improvement of user engagement. [Foreign Language] [Interpreted] On the monetization front, in the past two years, we have been focusing on combining Weibo's hot trend products with advertising and marketing demand, and thus, our hot trend marketing has been recognized by a wider range of industries and advertisers. In the second quarter, our total revenues reached US$437.9 million, of which our ad revenues reached US$375.3 million. On a constant currency basis, our total revenue would have increased 1% year-over-year and our ad revenues would have decreased 1% year-over-year. Our non-GAAP operating income reached US$157.6 million, representing a non-GAAP operating margin of 36%, a modest pickup year-over-year. [Foreign Language] [Interpreted] Next, let me share with you progress made in part of the monetization in the second quarter. In 2024, we still focus on growing user scale and engagement, strengthening the competitiveness of content ecosystem and improving operating efficiency as our key strategies -- strategic objectives. [Foreign Language] [Interpreted] On the channel front, we maintained close cooperation with handset manufacturers, focusing on acquisition of high-value users and promotion of user engagement. We also invested to further refine accuracy of algorithm and targeting capability of our business model in order to create enriched content offering for our channel users and increase their user engagement, which laid foundation for monetization. [Foreign Language] [Interpreted] On social attributes, in the second quarter, we are leveraging our relationship-based feed to further recover vertical content ecosystem. We strengthened the interaction between KOLs and fans, increased their user thickness and improve user interaction efficiency of relationship-based feed. Meanwhile, this year, we have also been investing in user-generated content by improving the [growth path] (ph) of high-quality UGC in Weibo to encourage more quality content generation around vertical content and boost user engagement. In terms of user interest sharing, we further strengthened Super Topic community as a core domain for user to share interest-related content. In the first half of this year, users' social interaction increased significantly with double-digit growth year-over-year. For example, during the first half of this year, we increased the interaction between celebrity and fans by expanding campaigns of celebrity and their work. As a result, in the second quarter, the number of average daily users who posted and the number of posts in the entertainment-related Super Topic increased over 50% year-over-year, respectively. In terms of the daily live-sharing content by ordinary users, we improved the distribution mechanism for those high-quality content to be fairly distributed in core feeds and help users who consistently generate content to accumulate fan base. For instance, in the second quarter, we launched a Weibo photography [indiscernible] to select high-quality UGC photography around daily life, aiming to encourage all users to record and share their daily life in multiple dimensions. During the first campaign in May and June, nearly 500,000 users shared their photography and contributed over 2.1 million photographs, attracting over 3 million users to engage and interact. [Foreign Language] [Interpreted] On the content ecosystem front, in the second quarter, while maintaining our competitiveness in the IP-related content ecosystem of hot trends, entertainment and events, we focus on increasing investment in verticals such as digital product, automotive, game, fashion and beauty and healthcare to enhance Weibo's competitiveness in the content ecosystem and further improve monetization efficiency. [Foreign Language] [Interpreted] On hot trend IP ecosystem, in the second quarter, with the release of plentiful entertainment work, we leveraged our advantage of celebrity and fans and entertainment work as well as fans' interaction across verticals. We encourage more users to consume and discuss around entertainment contents. As a result, the number of user interaction in the entertainment vertical increased double-digit year-over-year. For example, in the second quarter, we reached in-depth cooperation with the music variety show Singer 2024 of Hunan TV station on cross-screen live streaming and real-time hot topics to achieve user interactions. The show became a phenomenal hit in the first half of 2024 through launching innovative campaigns on Weibo, such as allowing users to recommend Singer across platforms, [start] (ph) candidate polls on Weibo, and roll out real-time hot trends around the show. The total views of the show, Singer 2024 exceeded 50 billion times and the number of user discussion exceeded 560 million times. This hot trend plus social interaction pattern between TV and social media not only make the show influential, but also provide brand advertiser with more diversified marketing solution and generated sustainable ad revenue growth for Weibo through hot trend marketing. During college entrance exam season this year, we cooperated with People's Daily to boost discussion on university's major selection and application after the entrance exam and organized the expert and KOLs of over 10 verticals, such as education, healthcare, digital product, automotive and finance, to share with examinees on suggestions of professional learning, application and industry employment. The total view of college entrance exam-related content reached 38.9 billion times in June and the number of user discussion exceeded 110 million times, representing an increase of over 50% compared with the same period last year. [Foreign Language] [Interpreted] On vertical content operations, we continue to focus on two aspects in Q2. First, we strengthened the construction of vertical content ecosystem, including supporting vertical content and engaging cross-field accounts and media outlets in the generation and distribution of vertical hot trends. Second, we beefed up the support of golden and orange [verified] (ph) account in vertical areas and empowered them to earn higher commercial returns on our platform. In the second quarter, we continued to reinforce hot trend operation in automotive and digital product verticals with emphasis on industry brand and product. As a result, the number of golden verified account in automotive and digital product verticals, as well as their traffic, interaction and ad revenue on our platform continued to increase year-over-year. For example, for the automotive vertical, as competition in the new energy vehicle market intensified, OEMs stepped up their investment in content operation. In the first half of this year, over [13] (ph) manufacturers -- auto manufacturers and around 100 executives of auto industry registered or activated Weibo accounts. Thanks to the content contribution from these executives, KOLs and media accounts in the automotive industry also actively created follow-up hot topics. We are pleased to see our client join us in building the automotive content ecosystem, which not only help clients to refine brand operation and product promotion, but also lay the foundation for our long-term business cooperation with clients. [Foreign Language] [Interpreted] As for the online game vertical, built upon content construction of online game ecosystem over the past three years, we have covered over 80% of the top 100 games in terms of content operation. UGC creation and interaction thickness continue to improve, leading to rapid growth of the golden verified account in the online gaming vertical. In the second quarter, the number of golden verified account in this vertical increased by over 80% year-over-year, with their traffic and interaction grew over 30% on an annual basis. Leveraging Weibo's expanded advantages in the online gaming ecosystem and higher influence of golden verified accounts, we have built closer partnership with online game clients on content marketing. In the second quarter, nearly 50% of the commercial project for game promotion chose to cooperate with Weibo in hot trends marketing, demonstrating better recognition of Weibo's golden verified account among clients in this industry. The ad revenue of golden verified account from the game industry increased by over 4 times year-over-year. We are delighted to see that the online gaming vertical has gradually entered the self-reinforcing cycles between content and monetization ecosystem similar to the automotive and digital vertical. [Foreign Language] [Interpreted] Moving on to monetization. In 2024, we will continue to beef up our efforts to reinforce our monetization competitiveness, leveraging Weibo's strength in hot trends and Ips, as well as driving vertical content ecosystem, we will sharpen the competitive edge of our content marketing and performance ad product in the hope of enhancing our capabilities to navigate through business risk in key industries. [Foreign Language] [Interpreted] Amid a relative soft end market in the second quarter, our ad revenue decreased 1% year-over-year on a constant currency basis. By industry, our [advantages] (ph) industries, such as handset and automotive industries, sustained solid growth strength, benefiting from clients' recognition of Weibo's hot trend marketing. Therefore, our ad wallet share of clients' marketing budget in this sector either remained stable or increased. Thanks to the impressive topic views and discussion generated by the blockbuster Ips, such as Singer 2024, Weibo attracted many clients to launch campaigns around this IP-related hot trends, which brought forth incremental hot trends marketing dollars to our platform. For example, in the second quarter, Vivo and Weibo reached strategic cooperation in content marketing, achieving index co-creation of content between Weibo platform and the brand. To elaborate, we expanded the marketing initiative on new product launch to daily hot trends throughout the year and thus comprehensively enhance the user reach and nurture user mindset of the brand and its product. Take the Vivo X100 Series launched in the second quarter as an example. After the new product release in May, Vivo took advantage of the peak period of offline concert in the second quarter, and the popularity of variety show, Singer 2024, actively participated in the co-creation of hot trends and strengthened user awareness of the differentiated [tech] (ph) of the Vivo X100 Series, [concert go-getter] (ph), to enhance user penetration of Vivo's portrait photography. We successfully helped Vivo achieve the first place in a dual track of concerts and telephoto. In the current Internet IP market, clients will gradually concentrate on the top IPs. This trend can also be seen from the traffic structure of Weibo. The traffic and monetization opportunities brought forth by the top IPs was significantly higher than those from mid-tier IPs. [Foreign Language] [Interpreted] On the flip side, in the second quarter, the sales of international cosmetic brands were still under pressure, which negatively affected the pace of new product launch and thus their scalable budgets. Therefore, our ad revenue from the cosmetic and beauty sector continued on a descending trajectory year-over-year. In order to boost clients' willingness of new product marketing and its effectiveness, we stepped up our cooperation with e-commerce platform and domestic brands this year. To elaborate, we actively explored the synergy of new product launch of the FMCG industry between social and e-commerce platforms and provide clients with better marketing support. We hope these efforts will translate into more stable growth in the FMCG sector in the coming quarters. In the second quarter, we started the cooperation on new product launch, marketing with Tmall with focus on the cosmetic and beauty as well as footwear and apparel industries. Leveraging Weibo's strength in hot trend marketing, we offer full funnel value proposition to clients from social influence to e-commerce conversion. With this partnership, we hope to enhance client recognition of the value of Weibo's culture and marketing and also cultivate and reinforce users' mindset of discovering new product on Weibo. We will continue to explore this model with Tmall in the third quarter and try to penetrate into more industries and clients. With higher client recognition of Weibo's culture and marketing and our broadening coverage of domestic beauty brands, we hope to see our ad revenue in the cosmetic and beauty sector stabilize or return to growth year-over-year in the fourth quarter. [Foreign Language] [Interpreted] Overall speaking, amid the current competitive landscape, based on the current brand plus performance ad offerings, Weibo's marketing service has upgraded to content marketing solutions with emphasis on hot trend and IP, celebrity and KOL plus performance ad. Leveraging adjustment in the sales structure and ad product in the past two years, the market competitiveness of these three types of ad offerings has gradually improved and become the key driver of revenue. Ad revenue directly generated by these three types of ad offerings accounts for over 50% of our total ad revenues. From industry perspective, the hot trend and IP marketing finally serve the FMCG, digital products and automotive industries. Clients in these industries seek to amplify their product influence, leveraging organic culture or even build market hype around their new products through Weibo's culture and marketing. The celebrity and KOL marketing mainly caters to the luxurious goods, cosmetic and beauty, as well as footwear and apparel industries. Clients can better reach fans and influence their consumption decision with higher accuracy by working with celebrities and KOLs in professional areas. Finally, despite the fierce competition in the performance ad marketing in recent years, we are gradually improving our competitiveness ad through algorithm optimization and social native ad offerings. Although performance ad has not become the main contributor to revenue growth in the past two years, performance ad offerings are crucial for us to broaden client coverage and identify high-quality clients. [Foreign Language] [Interpreted] In contrast to other platforms' competitive edge in traffic-based monetization, we have built our competitiveness on media-oriented and brand-oriented ad placement, as well as content marketing based on hot trend IPs and celebrities. These differentiation are critical for us to obtain marketing budget for product promotion and user mindset. Meanwhile, as we further strengthen the construction of content ecosystem in the entertainment, sports events and industry-based verticals, and better integrate organic content ecosystem with commercial content ecosystem, our business model, which is mainly based on brand plus celebrity marketing and content marketing, while supplemented by performance ad, will be more conductive to improving the platform's monetization efficiency. This is also our most important strategy and objective for strengthening our monetization competitiveness in future. [Foreign Language] [Interpreted] With that, let me turn the call over to Fei Cao for a financial review. Fei Cao: Thank you, Gaofei, and hello, everyone. Welcome to Weibo's second quarter 2024 earnings conference call. Let's start with user metrics. In June 2024, Weibo's MAU reached the 583 million and average DAU reached the 256 million. As communicated last quarter, in 2024, we have proactively adjusted our user strategy to put more emphasis on the acquisition and engagement of high-quality users, as demonstrated by improved DAU versus MAU ratio this quarter. Turning to financials. As a reminder, my prepared remarks would focus on non-GAAP results. All monetary amounts are in US dollar terms and all the comparisons are on a year-over-year basis unless otherwise noted. Now, let me walk you through our financial highlights for the second quarter 2024. Weibo's second quarter 2024 net revenue was $437.9 million, a decrease of 1% or an increase of 1% on a constant currency basis. Operating income was $157.6 million, representing an operating margin of 36%. Net income attributable to Weibo reached $126.3 million, representing a net margin of 29%. Diluted EPS was $0.48. Let me give you more color on the second quarter 2024 revenue performance. Weibo's advertising and marketing revenues for the second quarter 2024 was $375.3 million, a decrease of 3% or 1% on a constant currency basis, reflecting muted ad demand amidst [indiscernible] macro environment. Mobile ad revenues were $352.3 million, contributing approximately 94% of total ad revenue. In terms of growth, 3P products, e-commerce and entertainment were the largest contributors to growth. We are delighted to see sustained ad wallet increase of handset sector this quarter, leveraging a robust content ecosystem and the dynamic discussion around 3P products. The entertainment sector demonstrated good momentum this quarter, driven by blockbuster TV programs and Weibo's unique value proposition for hot trends. On flip side, the top-line recovery will still drag by underperformance of the FMCG sector. Despite a modest growth of the food, of beverage and apparel sector, the cosmetic and the personal care sector still feel [behind] (ph) due to large ad budget from [indiscernible] and the intense competition among ad platform. For ad product, promoting feed ad was the largest, followed by social display and topic and search. Ad revenue from Alibaba (NYSE:BABA) for the second quarter was [$32.4 million] (ph), an increase of 21% or 23% on a constant currency basis. We are pleased to see the solid ad growth from Alibaba continue throughout the first half of 2024, as Weibo's brand plus performance solution resonated well with Alibaba to fulfill its professional marketing goals. Before turning to VAS segment, let me share some preliminary color on the trend entering the third quarter of 2024. On the upside, Weibo continues to be the go-to-platform to discover and discuss around hot trends during the Summer Olympics, which boosted user engagement and attracted intensive ad placement. That said, with a chunk of advertising budget allocated to the Olympic Games, we expect relatively lukewarm ad demand post the Olympic season, reflecting in sluggish consumption data. We will beef up our sales execution and enrich Weibo's constant ecosystem in the second half of the year in the hope of mitigating macro and industry headwinds. Turning to VAS. VAS revenues were $62.6 million in the second quarter, an increase of 15% or 18% on a constant currency basis, primarily driven by revenue growth of membership services. We have benefited from improved ARPU for membership services since they rolled out premium VIP features to cater to the need of 3P users. Turning to costs and expenses. Total costs and expenses for the second quarter were [$218.3] (ph) million a decrease of 2%. Operating income in the second quarter was $157.6 million, representing an operating margin of 36% compared to 35% in the same period last year. Turning to income tax. Under GAAP measure, income tax expense for the second quarter was $33.3 million compared to $25.5 million last year. The increase was mainly due to the withholding tax accrued related to earnings to be remitted from our Wuxi to our Hong Kong subsidiary, which is to fund our demand for US dollars in business operations and the payments of dividends and debt, et cetera, in future. Net income attributable to Weibo's shareholders in the second quarter was $126.3 billion, flattish year-over-year. Net margin was 29%, flattish versus the same period last year. Turning to our balance sheet and cash flow items. As of June 30, 2024, Weibo's cash, cash equivalents and short-term investments totaled $2.84 billion We have made special cash dividend payment of approximately $199.4 million in May. In the second quarter, cash provided by operating activities was $132.1 million. Capital expenditures totaled $10.3 million, and depreciation and amortization expenses amounted to $14.5 million. With that, let me now turn the call over to the operator for the Q&A session. Operator: Thank you. [Operator Instructions] We will now take the first question from the line of Alicia Yap from Citigroup. Please go ahead. Alicia Yap: Hello, thank you. [Foreign Language] Thanks management for taking my questions. Can management comment a little bit how you view the overall macro outlook and how will that translate to your advertising outlook for the second half of this year? And then, can you share with us whether you have observed any meaningful change of the advertiser sentiment in the different industry vertical? Any particular shift of the sentiment from any advertiser that you might have observed? And also does management believe the current macro environment could actually last into next year? Thank you. Gaofei Wang: [Foreign Language] [Interpreted] Thank you very much for the question. So first of all, in terms of our advertisement revenue in Q2, from a renminbi standpoint, this was flat versus the last quarter and also year-on-year wise. And also you can see that although we've been experiencing some of the decline and also the decrease of the overall consumption, but still the willingness of placing the ads [products] (ph) from the advertisers was pretty much stable. So, in terms of the overall revenue, in Q2, we can see that there was particularly negative impact by the verticals like the cosmetics and beauty products by about 5%. But for the rest of the other industries, we're experiencing pretty much growth. [Foreign Language] [Interpreted] And also in terms of the Q3 outlook and also the second half performance, there are still some of the uncertainties in terms of the macroeconomic development, especially about the consumption. So, we remain very much cautious over the outlook for the rest of the 2024. So, still we will be experiencing some of the challenges terms of the resumption of the consumption and the macro economy in the first-tier cities, for instance. And this is, of course, going to impact some of the willingness of placing the ads by the advertisers, but still you can see that against the other players in this advertising industry, Weibo's advertising business is relatively not that big. So, still we are seeing some of the precautious behaviors of the placing ads by the advertisers. But still, in terms of the new products launch and some of the other relevant advertisements related to the new products, the customers are tending to choose those top-notch IP and also top-notch platforms to do their advertisement and also promotion. So, this is going to help us to acquire additional budget from this standpoint. [Foreign Language] [Interpreted] And also furthermore, we can see that we are able to divide the customers into three categories or three kinds. The first category is in the FMCG industry, including the food and beverages, the apparels and shoes, as well as entertainment, and also the [development] (ph) industries. So, still the scale of the consumption or the volume in total is pretty large. So, even if the customers are pretty much precautious in allocating their budgets for advertisement, but still they are quite [contentious] (ph) in searching for new IP and also concentrate on those top-notch platforms. So, for instance, in Q3, we had the big activities like the Olympic Games. And you can see that in terms of the hot trend selling rate and also the other parameters, we have seen a very good improvement and also the boost. So, meaning that the customers are willing to spend budget on acquiring those top-notch IPs and also collaborating with the top-notch platform. So, from this standpoint, Weibo still stands in terms of our advantages. [Foreign Language] [Interpreted] And also for the other industries and verticals, for instance, the headsets and automotive and gaming, as well as films and movies and those entertainment industries, for instance, we were experiencing pretty much pressure and stress over the consumption improvement and resumption. But still most of the competitions are pretty much around the new products and some of the new movie marketing, for instance, and also promotion. So, people and also different companies are competing with each other to get more market share around the marketing for new products and new launches. So, Weibo still holds our advantage in this particular area in terms of hot trends social topics as well as very good relationship with some of the customers. So, in that sense, for instance, in this summer holiday, the box office of most of the new movies slowed down or decreased a lot year-on-year wise comparing with the same period last year. Almost, [halved] (ph) in terms of the total value of the box office. But still, because of a very good relationship and our customers are choosing Weibo to promote their new products and also increasing their budget on us, so from this standpoint, we are still increasing our revenue, and we do have our advantage in this area. [Foreign Language] [Interpreted] And also for the third category, we're talking about those stressful industries, for instance, the cosmetics and beauty products and also some of the luxurious brands. We've been seeing a very stressful situation over the resumption and increase of the consumption as a whole. So, in these particular industries, the customers are not choosing to launch any new products and in order to get a better result. So, as a result, we've been seeing most of the ad were pretty much a performance-based ads or some of the discount and promotional activities or campaigns. So, Weibo is less competitive in this front. So, of course, we can still gain our revenue by getting the budget of the performance-based ads from our customers or organizing some of the campaigns for our customers, but still Weibo is less competitive versus the previous two categories and also the marketing methods in this arena. Thank you. Operator: Thank you. We will now take the next question from the line of [Suocheng Zhang] (ph) from CICC. Please go ahead. Unidentified Analyst: [Foreign Language] Thanks management for taking my question. My question regards on AIGC. We noticed that the company self-developed the [iQIYI] (ph) large language model, successfully passed the legislation in July. What's our latest developments in AIGC? How does it help our content production and commercialization efficiency? Thank you. Gaofei Wang: [Foreign Language] [Interpreted] And thank you for this question. And also, first of all, previously, we have been sharing with everybody about the application of AIGC by Weibo, and the standpoint of generating content for the platform and also enhancing the interaction between the users and among users. In the second half or later stage of the July, we were hearing about the approval of the LLM that developed by Weibo and by the government. And also we use this technology to further boost and also enhance the AI products that we -- application -- we are applying now. For instance, the comment robots and also some of the AI assistance in getting the response to the users. So, we hope that the interaction based on the contents by Weibo and on a Weibo platform is going to be more intelligent and also timely fashion. [Foreign Language] [Interpreted] And also the second thing that I would like to say is that in Q2, we've been -- or in the first half of this year, also we had a better interpretation and understanding capability by this AI model especially the multimodal understanding and also interpretation of the contents on Weibo because we know that there are millions of billions of contents generated by the random users. And, also because these contents were randomly generated by the users, it was not standardized and it was not structured. And also it was not that common. I mean, following a certain pattern in terms of the total user. So, also those contents were having the image form, the video, and also text. So, at the current stage, the recommendation of those contents to the relevant target users is still based on the correct and precise interpretation and understanding of those contents. So, at the current stage, the large language models that we have got approval is primarily used in this front to better understand and also more precisely understand the [indiscernible] the message and the content in order to have a more precise recommendation to the users. And now we have a coverage of almost 90% of the users, but, of course, still there are some of the works that we need to further working on in order to improve the precisions of the understanding. And, also, we need to do some of the further efforts to increase the computational power in this area as well. So still, we are observing the future potential of this particular feature. And second point I would like to say is that, now, in terms of the searching results, there are some of the results that from the media or We Media or from the random users. So, this particular AI is able to help the users within one minute to conclude and summarize the searched contents so that the user experience is going to be much better in using the search feature of Weibo. And, because of this, in Q2, we had already MAU of this particular feature exceeding 10 million already. But this is only one of the examples that we are trying the capability of AI. And also in the near future, we are going to have a better trial of this, in helping us to better interpret and understanding the contents and also to trigger, and based on the information-based flow that we have and also based on the other capabilities that we have, we are going to have a better use and application of the AI feature and also this technology. Operator: Thank you. There are no further questions at this time. I would like to hand over to Sandra Zhang for closing remarks. Sandra Zhang: Thanks, operator, and thank you all for joining our conference call today. We'll see you next quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Lufax Holding Ltd (LU) Q2 2024 Earnings Call Transcript

Xinyan Liu - Head of Board Office and Capital Markets Yong Suk Cho - Co-CEO & Chairman of the Board Peiqing Zhu - Chief Financial Officer Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam. Xinyan Liu Thank you very much. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business; our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please. Yong Suk Cho Thank you for joining us today for our second quarter 2024 earnings call. In the second quarter, the macroeconomic environment remains complex for small business owners. Despite this, we saw continued improvements in asset quality across both our Puhui and customer finance businesses as we continued to implement our prudent business strategies. We believe this will provide a solid foundation for our future growth. Let me provide some updates on the macro situation before we discuss the business details. The SME development index trended down by 0.3 points quarter-over-quarter to 89 in June. Meanwhile, the Business Conditions Index published by the Cheung Kong Graduate School of Business declined from 50.1 in March to 49.3 in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector. Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new loan sales in the second quarter of 2024 were CNY 45.2 billion, representing a 15.5% year-over-year decline. The decline was mainly caused by a 35% year-over-year decrease of Puhui loans, which comprised 51% of total new loan sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for Puhui loans on high-quality SBOs. Meanwhile, our consumer finance business continues to grow and delivered a solid performance during the quarter. Consumer finance loans saw a 23.6% year-over-year increase in new loan sales, representing 49% of our new loan sales. As a result of our continuous efforts to roll out smaller tickets and revolving product structures. Furthermore, we are pleased to observe a notable improvement in asset quality as we adopt more stringent credit standards with focus on higher-quality customer segments and resilient geographies bolstered by our enhanced risk assessment system. For Puhui loans, the C-M3 flow rate improved to 0.9% from 1.0% in the previous quarter, mainly driven by the improvement of C-M3 ratio of unsecured loans. Our consumer finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the first quarter. Next, let's take a look at our loans under the 100% guarantee model. As discussed previously, since the fourth quarter of 2023, all new Puhui loans have been enabled under the 100% guarantee model. As our Puhui loan balance increasingly represents loans enabled under this model, our balance take rate has trended upwards, reaching 9.3% during the second quarter, as a negative impact from our high CGI premiums has been eliminated. Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, it is worth noting that due to decrease in loan balances, our unit operating expenses have increased, which has become a key drag on our unit profitability. Let me now provide some updates on our newly acquired PAObank. By leveraging strategic synergies, with Lufax following the acquisition, PAObank delivered solid growth in the first half of 2024, its total loan balance stood at CNY 2.4 billion by the end of second quarter, representing a 45% year-over-year increase. Going forward, PAObank is planning to roll out new initiatives, including insurance, wealth management products to better serve SME and retail customers. To reinforce the strong license strategy we have discussed in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products and improve our capital management efficiency. Now turning to the progress of our special dividend. I am pleased to announce that we completed the distribution of special dividends at the end of July as scheduled. After receiving the dividend, Ping An Group's ownership increased to 56.8% and Ping An Group now consolidates our financial results. Lufax will remain an independent entity listed on New York Stock Exchange in Hong Kong. Meanwhile, we seek to enhance synergies with Ping An Group, primarily in the following 3 key areas. First is branding. Ping An Group is a Fortune 500 company and a leading global financial institution, with a strong global reputation and financial standing we serve as a powerful endorsement for Lufax, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially have lower funding costs. Second is technology. We will leverage Ping An Group's extensive technological resources, including its advanced AI systems to further strengthen our risk management and fraud prevention measures. Our goal is to provide small business owners and consumers with efficient, secure and cost-effective financial services. So these channel resources while adhering strictly to applicable laws and regulations, we aim to expand our reach by tapping into Ping An Group's extensive nationwide network for online and off-line channels. This expansion will complement our efforts to strengthen our direct sales force. In summary, our expanded relationship with Ping An Group will help us better serve our SBO customers, using their difficulty and expense of financing. With our strengthened capabilities, we strive to be a benchmark company with an unique law in supporting the growth of China's vital, small and micro enterprise economy. While the macro environment remains complex, we are encouraged by the improvements in asset quality and the products of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economic landscape and have set our sights on achieving sustainable quality growth. I will now turn the call over to Peiqing, who will provide more details for our financial performance and business operations. Peiqing Zhu Thank you, Y.S. I will now provide a closer look into our Q2 results. Please note that all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In Q2 2024, our total income decreased by 35.5% to CNY 6 billion from CNY 9.3 billion in Q2 2023, mainly due to a decrease of outstanding loan balance by 44.8% from CNY 426.4 billion as of June 30, 2023, to CNY 235.2 billion as of June 30, 2024, partially offset by our interest increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 20.3% from CNY 8 billion to CNY 6.3 billion, among which the total operating expenses declined by 29.7% from CNY 5 billion to CNY 3.5 billion, and credit impairment losses decreased by 14.6% from CNY 3 billion to CNY 2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio. The decrease of credit impairment losses was mainly due to the decrease in actual losses of loans as a result of improvement of credit performance, partially offset by the upfront provision from loans and 100% guarantee model. As a result, we recorded a net loss of CNY 730 million for the second quarter. Turning to our unique economy for Puhui business. Our APR by balance decreased from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024, primarily due to the change of customer mix as we continue to prioritize high-quality customers. Despite the decrease in APR, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model. We expect the take rate will further increase as the percentage of loans enabled under 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly, thanks to the favorable monetary policy and the support of our funding partners. On the other hand, while sales and marketing expenses remain stable, credit costs and other operating expenses flat on our net margin. This was primarily due to the contraction of our loan balance. Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100% guarantee model, as discussed before. While we anticipate this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability, but it is expected to lead to improve long-term financial performance as the loan portfolio matures. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was CNY 2 billion, representing a decrease of 51%, mainly due to the decrease in retail credit services fees as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the close of the Lujintong business in April 2024. Our net interest income was CNY 2.7 billion, a decrease of 19.3% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was CNY 850 million, a decrease of 26%. In terms of revenue mix, technology platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year. Net interest income and guarantee income accounted for 45.4% and 14.2%, respectively, of total revenue in Q2 as compared to 36.3% and 12.4% in the same period last year. In terms of expenses, our credit impairment losses decreased by 14.6% to CNY 2.6 billion. Our total marketing expenses, which includes expenses for acquisition costs as well as general sales and marketing expenses, decreased by 46% year-on-year basis to CNY 1.4 billion in Q2. The decrease was mainly due to reduced loan-related expenses resulting from a decrease in the new loan sales and outstanding loan balances as well as the elimination of expenses associated with our Lujintong business. Operation and service expenses decreased by 15.8% year-on-year to CNY 1.3 billion in Q2, as a result of decreased loan balance and our continued efforts to control expenses, partially offset by increased commissions associated with improved collection performance. Our finance costs decreased by 90.2% to CNY 13 million in Q2 from CNY 136 million in the same period of 2023, mainly due to decreased interest expenses after the repayment of C-Round convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits. In terms of capital at the end of June 2024. Our main operating entities remain well capitalized. Our guarantee subsidiary's leverage ratio stood at 2.4x and our consumer finance subsidiary's capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economic environment and our strategy -- strategic shift to the 100% guarantee model, we are seeing encouraging signs in terms of asset quality and in growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term, sustainable, future success. I will uphold our commitment to bringing value to our investors. That concludes our prepared remarks for today. Operator, we are ready to take questions. [Operator Instructions] The first question comes from Emma Xu with Bank of America Securities. Emma Xu Actually, I have two questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that in second quarter, you granted RMB 45.2 billion new loans and the cumulative amount of the new loans issued in the first half reached RMB 93.3 billion, accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target? And when will we see the turning point of the loan growth recovery? And the second question is that, congratulations on the continued improving asset quality. So your M3 flow rate has declined 2 quarters in a row and down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate? And how will management try to sustain this good trend? Yong Suk Cho Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand overall is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudent strategy on SBO lending, we see that from our CF business, the consumption loan demand is actually more and stable. So we focus more on consumer finance and relatively large [indiscernible] consumption loan to cope with declining SBO loan demand in near term, especially in the regions where our loan volume consumption is more significant. And for your second question, we all know that it is not easy to improve C-M3 flow rates while loan balance keeps declining. But with continuous portfolio mix improvement, what I mean is, now we see them more and more accounts from 2023 and 2024 takes a bigger part of the whole portfolio, which is [indiscernible] account. So we believe our asset quality measured by C-M3 flow rate with continuous improvements. And also, we put tremendous efforts in our risk model - underwriting model and also collection model upgrade and then asset quality management process. So all in all, we are confident that about sustainability of our asset quality going forward. Thank you. I have four questions today. Firstly, I was wondering in what areas do we see more collaboration potential in the future with the Ping An Group? And secondly, I'd like to ask do we have any plans to further increase the shareholder returns? Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors? Third, I will notice that the funding cost decreased slightly in the second quarter, and I was wondering what's the outlook for the future funding cost? And I'll ask -- I want to ask why the OpEx to income ratio hiked in the second quarter? Do we see any room to further improve this ratio? That's all. Yong Suk Cho Okay. Let me answer your -- this question on 1 to 3. Thanks, Yada. Let me see my notes. So after special dividends, Ping An Group's ownership increased much close to 57%, so 56.8%. And that we have been working closely with Ping An Group from the very beginning in a few key areas like customer sourcing, right, using their online, offline channels and technology developments and then brand maturing. But with increased Ping An Group ownership now, we expect it will help us to reduce funding cost in [indiscernible] finance standing. So actually, your third question is about funding costs. We believe funding cost is cumulatively decreasing or optimizing. We believe this trend will continue. And also with the acquisition of that nationwide small loan lending license, that lending license, that comes with better low-funding cost going forward. So we are confident about the funding cost further improvements. And then about the second question, although the Board of Directors has determined that no semiannual dividend will be paid at this time because we made a net loss recorded for the first half of 2024, but management is dedicated to returning value to shareholders. We always seek out potential ways to increase shareholder returns as demonstrated in this special dividend this time. And our annual dividend policy, which is 20% to 40% of net profit and we pay semiannually, that policy does not change, remain unchanged. Peiqing Zhu Okay. About the funding cost, I would like to share some of my view. For our Puhui loan, we expect that just because of the APR policy, the Central Bank released the variable monetary policy to the market and support -- that will definitely support our partners. And of course, they were partnered to our companies. So together with the synergy of the Ping An Group will enable -- which will enable us to enjoy a low funding cost. For consumer finance loans, I believe that we will continue to such a lower interest rate in the incumbent market. That actually, you can see the trend also in [indiscernible] market, right, the rate was led by the Central Bank to going down. And we expect that funding cost to remain at a relatively low level. And generally, we will say that we are optimistic to our overall funding cost that will continue to decrease. And another question about to our income ratio increased in the second quarter. Although we remain committed to the cost optimization, our OpEx to income ratio trended upwards during this quarter. This was mainly due to our loan scale contraction, that led to a decline in economy of scale. In addition, some of the fixed expenses contributed to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology and synergy and the digitalization and the work together with the Ping An Group and our internal efforts. Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks. Xinyan Liu Thank you. This concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact Lufax's IR team. Thanks again. Thank you. This conference has now concluded. You may now disconnect.

Earnings call: Lufax reports Q2 2024 earnings, asset quality improves By Investing.com

Lufax Holding (NYSE: LU), a leading Chinese personal financial services platform, reported its financial results for the second quarter of 2024, indicating a mixed performance with improvements in asset quality despite a decline in loan volume and a net loss for the quarter. The company's total new loan sales dropped by 15.5% year-over-year to CNY 45.2 billion, with Puhui loans, a significant portion of its portfolio, decreasing by 35%. However, consumer finance loans increased by 23.6% YoY. Lufax reported a net loss of CNY 730 million due to reduced revenues and a higher fixed expenses to income ratio but saw a decrease in credit impairment losses and operational costs. The company did not declare a semiannual dividend but remains committed to enhancing shareholder returns. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Lufax Holding's second-quarter earnings call shed light on the company's current financial health and strategic focus. Despite the challenges reflected in the net loss and decreased loan volume, the company showed signs of robust asset quality and a commitment to leveraging its relationship with Ping An Group to enhance its financial position and operational efficiency. Lufax's management remains focused on navigating the current market conditions while maintaining a long-term perspective on growth and shareholder value. InvestingPro Insights Lufax Holding's second quarter results for 2024 reveal a challenging period for the company, marked by a significant decrease in loan volume and a reported net loss. An examination of real-time data from InvestingPro provides additional context to these figures and sheds light on the company's financial health and stock performance. InvestingPro Data indicates a market capitalization of $2.03 billion, reflecting the size and scale of Lufax within the financial services industry. Despite this substantial market presence, the company's Price to Book (P/B) ratio stands at a low 0.18, suggesting that the stock may be undervalued relative to its book value. This is particularly relevant given the company's position as a prominent player in the Consumer Finance industry, as noted in one of the InvestingPro Tips. Moreover, the Revenue Growth for the last twelve months as of Q2 2024 has contracted by 36.66%, aligning with the reported decline in loan volume and the challenges faced by the company. The Gross Profit Margin remains strong at 65.38%, indicating that Lufax is still able to maintain a high level of profitability on its services despite the downturn in revenue. InvestingPro Tips highlight that Lufax's stock has experienced high price volatility and has taken a significant hit over the last week, with a one-week price total return of -17.31%. This could be of interest to investors looking for potential entry points or considering the timing of their investment decisions. For readers interested in a deeper analysis, there are 15 additional InvestingPro Tips available, which provide further insights into Lufax's financial performance and stock behavior. These tips, along with comprehensive metrics, can be accessed through the InvestingPro platform at https://www.investing.com/pro/LU. This real-time data and expert analysis from InvestingPro can help investors make more informed decisions regarding their investments in Lufax Holding, especially in light of the company's recent financial results and market performance. Full transcript - Lufax Holding Ltd (NYSE:LU) Q2 2024: Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam. Xinyan Liu: Thank you very much. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business; our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please. Yong Suk Cho: Thank you for joining us today for our second quarter 2024 earnings call. In the second quarter, the macroeconomic environment remains complex for small business owners. Despite this, we saw continued improvements in asset quality across both our Puhui and customer finance businesses as we continued to implement our prudent business strategies. We believe this will provide a solid foundation for our future growth. Let me provide some updates on the macro situation before we discuss the business details. The SME development index trended down by 0.3 points quarter-over-quarter to 89 in June. Meanwhile, the Business Conditions Index published by the Cheung Kong Graduate School of Business declined from 50.1 in March to 49.3 in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector. Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new loan sales in the second quarter of 2024 were CNY 45.2 billion, representing a 15.5% year-over-year decline. The decline was mainly caused by a 35% year-over-year decrease of Puhui loans, which comprised 51% of total new loan sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for Puhui loans on high-quality SBOs. Meanwhile, our consumer finance business continues to grow and delivered a solid performance during the quarter. Consumer finance loans saw a 23.6% year-over-year increase in new loan sales, representing 49% of our new loan sales. As a result of our continuous efforts to roll out smaller tickets and revolving product structures. Furthermore, we are pleased to observe a notable improvement in asset quality as we adopt more stringent credit standards with focus on higher-quality customer segments and resilient geographies bolstered by our enhanced risk assessment system. For Puhui loans, the C-M3 flow rate improved to 0.9% from 1.0% in the previous quarter, mainly driven by the improvement of C-M3 ratio of unsecured loans. Our consumer finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the first quarter. Next, let's take a look at our loans under the 100% guarantee model. As discussed previously, since the fourth quarter of 2023, all new Puhui loans have been enabled under the 100% guarantee model. As our Puhui loan balance increasingly represents loans enabled under this model, our balance take rate has trended upwards, reaching 9.3% during the second quarter, as a negative impact from our high CGI premiums has been eliminated. Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, it is worth noting that due to decrease in loan balances, our unit operating expenses have increased, which has become a key drag on our unit profitability. Let me now provide some updates on our newly acquired PAObank. By leveraging strategic synergies, with Lufax following the acquisition, PAObank delivered solid growth in the first half of 2024, its total loan balance stood at CNY 2.4 billion by the end of second quarter, representing a 45% year-over-year increase. Going forward, PAObank is planning to roll out new initiatives, including insurance, wealth management products to better serve SME and retail customers. To reinforce the strong license strategy we have discussed in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products and improve our capital management efficiency. Now turning to the progress of our special dividend. I am pleased to announce that we completed the distribution of special dividends at the end of July as scheduled. After receiving the dividend, Ping An Group's ownership increased to 56.8% and Ping An Group now consolidates our financial results. Lufax will remain an independent entity listed on New York Stock Exchange in Hong Kong. Meanwhile, we seek to enhance synergies with Ping An Group, primarily in the following 3 key areas. First is branding. Ping An Group is a Fortune 500 company and a leading global financial institution, with a strong global reputation and financial standing we serve as a powerful endorsement for Lufax, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially have lower funding costs. Second is technology. We will leverage Ping An Group's extensive technological resources, including its advanced AI systems to further strengthen our risk management and fraud prevention measures. Our goal is to provide small business owners and consumers with efficient, secure and cost-effective financial services. So these channel resources while adhering strictly to applicable laws and regulations, we aim to expand our reach by tapping into Ping An Group's extensive nationwide network for online and off-line channels. This expansion will complement our efforts to strengthen our direct sales force. In summary, our expanded relationship with Ping An Group will help us better serve our SBO customers, using their difficulty and expense of financing. With our strengthened capabilities, we strive to be a benchmark company with an unique law in supporting the growth of China's vital, small and micro enterprise economy. While the macro environment remains complex, we are encouraged by the improvements in asset quality and the products of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economic landscape and have set our sights on achieving sustainable quality growth. I will now turn the call over to Peiqing, who will provide more details for our financial performance and business operations. Peiqing Zhu: Thank you, Y.S. I will now provide a closer look into our Q2 results. Please note that all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In Q2 2024, our total income decreased by 35.5% to CNY 6 billion from CNY 9.3 billion in Q2 2023, mainly due to a decrease of outstanding loan balance by 44.8% from CNY 426.4 billion as of June 30, 2023, to CNY 235.2 billion as of June 30, 2024, partially offset by our interest increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 20.3% from CNY 8 billion to CNY 6.3 billion, among which the total operating expenses declined by 29.7% from CNY 5 billion to CNY 3.5 billion, and credit impairment losses decreased by 14.6% from CNY 3 billion to CNY 2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio. The decrease of credit impairment losses was mainly due to the decrease in actual losses of loans as a result of improvement of credit performance, partially offset by the upfront provision from loans and 100% guarantee model. As a result, we recorded a net loss of CNY 730 million for the second quarter. Turning to our unique economy for Puhui business. Our APR by balance decreased from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024, primarily due to the change of customer mix as we continue to prioritize high-quality customers. Despite the decrease in APR, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model. We expect the take rate will further increase as the percentage of loans enabled under 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly, thanks to the favorable monetary policy and the support of our funding partners. On the other hand, while sales and marketing expenses remain stable, credit costs and other operating expenses flat on our net margin. This was primarily due to the contraction of our loan balance. Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100% guarantee model, as discussed before. While we anticipate this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability, but it is expected to lead to improve long-term financial performance as the loan portfolio matures. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was CNY 2 billion, representing a decrease of 51%, mainly due to the decrease in retail credit services fees as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the close of the Lujintong business in April 2024. Our net interest income was CNY 2.7 billion, a decrease of 19.3% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was CNY 850 million, a decrease of 26%. In terms of revenue mix, technology platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year. Net interest income and guarantee income accounted for 45.4% and 14.2%, respectively, of total revenue in Q2 as compared to 36.3% and 12.4% in the same period last year. In terms of expenses, our credit impairment losses decreased by 14.6% to CNY 2.6 billion. Our total marketing expenses, which includes expenses for acquisition costs as well as general sales and marketing expenses, decreased by 46% year-on-year basis to CNY 1.4 billion in Q2. The decrease was mainly due to reduced loan-related expenses resulting from a decrease in the new loan sales and outstanding loan balances as well as the elimination of expenses associated with our Lujintong business. Operation and service expenses decreased by 15.8% year-on-year to CNY 1.3 billion in Q2, as a result of decreased loan balance and our continued efforts to control expenses, partially offset by increased commissions associated with improved collection performance. Our finance costs decreased by 90.2% to CNY 13 million in Q2 from CNY 136 million in the same period of 2023, mainly due to decreased interest expenses after the repayment of C-Round convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits. In terms of capital at the end of June 2024. Our main operating entities remain well capitalized. Our guarantee subsidiary's leverage ratio stood at 2.4x and our consumer finance subsidiary's capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economic environment and our strategy -- strategic shift to the 100% guarantee model, we are seeing encouraging signs in terms of asset quality and in growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term, sustainable, future success. I will uphold our commitment to bringing value to our investors. That concludes our prepared remarks for today. Operator, we are ready to take questions. Operator: [Operator Instructions] The first question comes from Emma Xu with Bank of America (NYSE:BAC) Securities. Emma Xu: Actually, I have two questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that in second quarter, you granted RMB 45.2 billion new loans and the cumulative amount of the new loans issued in the first half reached RMB 93.3 billion, accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target? And when will we see the turning point of the loan growth recovery? And the second question is that, congratulations on the continued improving asset quality. So your M3 flow rate has declined 2 quarters in a row and down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate? And how will management try to sustain this good trend? Yong Suk Cho: Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand overall is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudent strategy on SBO lending, we see that from our CF business, the consumption loan demand is actually more and stable. So we focus more on consumer finance and relatively large [indiscernible] consumption loan to cope with declining SBO loan demand in near term, especially in the regions where our loan volume consumption is more significant. And for your second question, we all know that it is not easy to improve C-M3 flow rates while loan balance keeps declining. But with continuous portfolio mix improvement, what I mean is, now we see them more and more accounts from 2023 and 2024 takes a bigger part of the whole portfolio, which is [indiscernible] account. So we believe our asset quality measured by C-M3 flow rate with continuous improvements. And also, we put tremendous efforts in our risk model - underwriting model and also collection model upgrade and then asset quality management process. So all in all, we are confident that about sustainability of our asset quality going forward. Thank you. Operator: The next question comes from Yada Li with CICC. Yada Li: I have four questions today. Firstly, I was wondering in what areas do we see more collaboration potential in the future with the Ping An Group? And secondly, I'd like to ask do we have any plans to further increase the shareholder returns? Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors? Third, I will notice that the funding cost decreased slightly in the second quarter, and I was wondering what's the outlook for the future funding cost? And I'll ask -- I want to ask why the OpEx to income ratio hiked in the second quarter? Do we see any room to further improve this ratio? That's all. Yong Suk Cho: Okay. Let me answer your -- this question on 1 to 3. Thanks, Yada. Let me see my notes. So after special dividends, Ping An Group's ownership increased much close to 57%, so 56.8%. And that we have been working closely with Ping An Group from the very beginning in a few key areas like customer sourcing, right, using their online, offline channels and technology developments and then brand maturing. But with increased Ping An Group ownership now, we expect it will help us to reduce funding cost in [indiscernible] finance standing. So actually, your third question is about funding costs. We believe funding cost is cumulatively decreasing or optimizing. We believe this trend will continue. And also with the acquisition of that nationwide small loan lending license, that lending license, that comes with better low-funding cost going forward. So we are confident about the funding cost further improvements. And then about the second question, although the Board of Directors has determined that no semiannual dividend will be paid at this time because we made a net loss recorded for the first half of 2024, but management is dedicated to returning value to shareholders. We always seek out potential ways to increase shareholder returns as demonstrated in this special dividend this time. And our annual dividend policy, which is 20% to 40% of net profit and we pay semiannually, that policy does not change, remain unchanged. Peiqing Zhu: Okay. About the funding cost, I would like to share some of my view. For our Puhui loan, we expect that just because of the APR policy, the Central Bank released the variable monetary policy to the market and support -- that will definitely support our partners. And of course, they were partnered to our companies. So together with the synergy of the Ping An Group will enable -- which will enable us to enjoy a low funding cost. For consumer finance loans, I believe that we will continue to such a lower interest rate in the incumbent market. That actually, you can see the trend also in [indiscernible] market, right, the rate was led by the Central Bank to going down. And we expect that funding cost to remain at a relatively low level. And generally, we will say that we are optimistic to our overall funding cost that will continue to decrease. And another question about to our income ratio increased in the second quarter. Although we remain committed to the cost optimization, our OpEx to income ratio trended upwards during this quarter. This was mainly due to our loan scale contraction, that led to a decline in economy of scale. In addition, some of the fixed expenses contributed to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology and synergy and the digitalization and the work together with the Ping An Group and our internal efforts. Thank you. Operator: That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks. Xinyan Liu: Thank you. This concludes today's call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact Lufax's IR team. Thanks again. Operator: Thank you. This conference has now concluded. You may now disconnect.

iQIYI, Inc. (IQ) Q2 2024 Earnings Call Transcript

Xueqing Zhang - CICC Lincoln Kong - Goldman Sachs Maggie Ye - CLSA Thomas Chong - Jefferies Thank you for standing by, and welcome to the iQIYI Second Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Chang You, IR Director of the company. Please go ahead. Chang You Thank you, Operator. Hello, everyone, and thank you for joining iQIYI's second quarter 2024 earnings conference call. The company's results were released earlier today and available on the company's investor relations website at ir.iQIYI.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO; Mr. Xiaohui Wang, our CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our Membership business and Mr. Xianghua Yang, Senior Vice President of movies and overseas business. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, the management team will participate in the Q&A session. Before we proceed, please note that the discussion today 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 are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but not are limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Hello everyone. Thank you for joining us today. In the second quarter, we saw intense competition for top content. Well, with our sales of diversified premium content. Certain titles did not met our high expectations, putting pressure on our financial results. After a good deal of hard work, we have overcome the short term fluctuation in our content slate performance. As a matter of fact, we build the wide range competition within the long-form video sectors and constructive which have enhanced its appeal over other entertainment formats and also private as a valuable opportunity to review and refine our tactics. It helps us gain a better understanding of user preference and improve our business for future growth. We firmly believe that ultimately, the success in the long-term video business depends on the stable supply of premium content and the ability to achieve balance in both content quality and commercial benefits. With this in mind, our goal is to further improve the overall success rate of our content portfolio and more importantly, the stability of content from it. In fact, as the summer season unfolds, our premium content has gained strong momentum. The release of acclaimed titles such as [Indiscernible] the Strange Tales of Tang Dynasty Season 2, [Indiscernible] has us set all key operating metrics and a broad aspect to the leading spot in terms of market share in the key drama category in July, according to enlightened data. Notably, the second season of Strange Tales of Tang Dynasty becomes the 14th drama to bring all popularity index score of 10,000 for IT, in addition to delivering high quality content, providing great user experience stands as another cornerstone of our business as we remain committed in enhancing a number of benefits. We are also refining our content distribution to bring free user superior viewer experience while balancing commercial performance. Looking ahead, we are investing in multiple areas to drive the company's long-term sustainable growth. Firstly, we are extensively applying AI to improve content creation, operational efficiency and user experience. Secondly, we will further enhance our domestic business while expanding offspring in broader overseas market. Thirdly, we are using our iQIYI content influence and its IP portfolio to explore revenue opportunities beyond membership and advertisement such as IP divest, derivatives and offline experiences. These initiatives align perfectly with our core value which centers on maximizing our IP value through technical innovation and content creativity, setting the stage for an exciting future. Now, let's move on to the performance of our core business segments, starting with Membership services. Our primary goal for Membership services remains on driving sustainable long-term revenue growth through top notch content and superior user experience. In the second quarter, membership revenue was down 9% annually, primarily due to fluctuation in our content slate performance, causing the attrition of key title driven members and the high base effect from last year's mega Fitzhe [ph], the no part arm grew steadily year-over-year. This was partially fueled by our displaying pricing strategy as we scaled back on the overall promotions and discounts. Our enhanced member benefits also played a major role, effectively encouraged the members to sign up for high care plan. Furthermore, we have innovative value added services drove users willingness to pay. Notably, we launched the Express Package for Ten dramas in the second quarter and gathered the highest number of cash purchases. Following the success in drama category, we plan to expand Express Package to other content categories such as variety, show and admissions. We remain confident in the long-term outlook of our membership business, which is supported by several key factors. Firstly, we have successfully built a solid foundation of loyal safety members. Secondly, content remains a primary driver of our membership growth and we are in the middle of introducing more diversified premium content. We encourage other user cohorts. Furthermore, we are committed to enhancing our operational strategy to improve membership accreditation and retention. Initiatives include one, reaching broader demographic growth by expanding our sales channel and utilizing wide raw social marketing to improving conversation rates by launching marketing initiatives directly tied to popular content of the season such as health effect packages, Express Package and counter inheritance program in Boca. The suite providing value for many services for long-term and high tier plan subscribers such as inclusive offline events. In the second quarter, we organized 17 offline events and received positive member feedback. Building on the strong user reception from last year, our annual offline flagship event, the 2024 iQIYI Scream Night Three, is set for its comeback in December 7 this year in Macau. The perceived value of our members was even further amplified by our very 1st July 17 iQIYI Member Festival. Through this event, we offered appealing membership discounts and hosted seven hour live broadcasting to promote over 530 titles in our content pipeline. More than 40 celebrities anticipated the live streaming event and generated over 30 million views. In the future of July, the 17th iQIYI membership festival is set to be an annual event inclusive to our members. It is an event to discover attractive deals and activities. This festival will not only underscore the substantial value we provide to our numbers, but will also serve as a key opportunity to boost our brand influence. Moving on to content, we are overcome the short term fluctuation in the company, set flight performance in Q2 and learn a lot from this short term setback. Through the in-depth analysis of the overall projects, we have gained valuable insights that are set to guide all continent predictions and operations in the future. Firstly, we respect to content creation. We will craft more and higher quality content that meets the appetite of mainstream audiences. In particular, we plan to broaden our portfolio with offering that especially appeal to our female audience to maintain our edge in the constantly evolving field of content creation. We aim to further enhance our ability to tap into popular social trends, thereby producing content that establish a deeper connection with our audiences. We will embrace a more innovative aspect in our casting and script selection process, aiming to transcend the limits of traditional storytelling. Secondly, regarding content scaling, we will closely monitor our user trends and adopt a dynamic scaling strategy that is guided by user engagement and net retention. This approach ensures that our content rollout is optimally timed to align with our audiences' preferences and viewer habits. Thirdly, in terms of managing our in-house studios, we are committed to enhancing the efficiency and effectiveness of our operation nodes at each key stage of the creative process. Our aim is to cultivate a more proactive culture among our talent, ensure they have ample freedom to fully unleash their artistic skills and foster an environment where creativity can thrive. Moving on to the detailed content performance in the second quarter. For dramas, our leadership in the reality and suspense genres remains unchallenged. Our original drama, To the Wonder, with an ala carte [ph], perfectly demonstrated our success in blending artistic merits and commercial benefits to generate exceptional performance across all metrics. What's more impressive is the show's remarkable large-scale effect, with its influence extending well beyond the online domain, as it boosts tourism to its filming location in Xinjiang to effectively extend the vitality of the IP we worked with creative teams to host an open-field concert in Xinjiang in July, which was widely acclaimed by users, sponsors, and the local culture and tourism bureaus. In addition, we further solidified our position as the go-to platform for the suspense genre by launching dramas, Tell No One and Lost in the Shadows and under our Light on Theatre brand. These movies, will continue to outperform our peers according to in-patent viewership data. In the second quarter, we launched a total of 15 key titles in our movie channel, including multiple box office hits, such as Article 20, The Argylle [ph], and Pegasus 2, Situation R. In our Cloud Cinema, we launched 21 titles, covering the latest and most popular dialectical releases, such as The box office for Fight Against Evil 2. For original movies, we released various genres, such as disaster comedy, Traumatic Future, Qian Zhu Hai Yang, and suspense crime, Suspect, Chao Yi Chen Tan. For variety shows, our two flagship shows returned with the new season, namely the Detective Adventure Season 4, Meng Tan, and The Rap of China 2024, Xin Shuo Chang, both of which continued to be well-recognized by advertisers. The Rap of China 2024 also generated considerable membership revenues. For animation, we continued to invest in original Chinese animations, and began to see encouraging initial results with enhanced in-house production capabilities. How Dare You serves as a perfect example to our title, as it hit multiple records for iQIYI original animation. It is our first original animation to break our popularity with a popularity index of 5,000. Its revenue and user acquisition also reached new highs. As we enter the summer location season, which is a critical broadcasting window for online video platform, we are excited that our premium content has helped us regain market leadership. We roll out premium content in both Asian and modern genres to appeal to a wide audience with a particular focus on young viewers who have more free time to enjoy our offering during their holiday. So far, Strange Tales of the Tang Dynasty Season 2 and A Lonely Hero's Journey have all been well-received by audiences. Additionally, in the suspense genre, the drama interlaced themes for the young ones [foreign language] have both showcased a strong user engagement. Notably, Strange Tales of the Tang Dynasty returns for a second season showcasing remarkable quality that has led it to break iQIYI's popularity index of 10,000. The acclaimed serials have demonstrated a pronounced long-tail effect. The second season substantially amplifies the user contact and membership revenue generated by the first season, increasing them by about sixfold and tenfold respectively. This drama also serves as an excellent example of our generalized approach to IP development. Encouraged by the success of the first two seasons, production for the third season is set to begin shortly. Additionally, the IP starts to generate diverse revenue streams as its influence now expands into offline domains, including entertainment, tourism, and consumer goods. In a strategic move to capitalize on this success, we have launched the IP-based VR development [ph] in key cities such as Beijing, Shenzhen, and Xian. This initiative aims to broaden the impact and presence of our original content extending beyond traditional screens. Beyond drama, our creativity is expanding into new categories. TenDay, a brand-new original iQIYI variety show IP, has garnered user praise for its innovative format and recorded a peak iQIYI popularity of over 7,000. Additionally, the King of stand-up comedy [foreign language] marked IT's first exploration into stand-up comedy. The show has received encouraging initial feedback standing out among the comedy variety offerings this summer. Moving on to our content supply for dramas, we expect the availability of premium content supplies to be meaningfully enhanced. Meanwhile, we are fast-tracking the production of Asian-customer idol dramas and modern idol dramas, both targeting female audiences. Some of the much-anticipated works in this genre include [Foreign language]. In the realistic and suspense category, audiences can anticipate it as a diversified content offering, including [Foreign language], we will release more diversified article hits on our platform. Original, self-produced iQIYI or digital films are expected to be released in the future, including King, Pinocchio, and A Frozen Dream, [foreign language]. For our variety show line up, we plan to release a greater number of titles in the second half of the year compared to the first. Building on the momentum of Tenday and the theme of the Stand-Up Comedy, we are preparing to launch more innovative shows, including The Moon is Shining, Yuan Shao Yue, which is set to release later this month. Moving on to animation, we expect to see a third in-title during the second half of the year, with increased diversification in general. We plan to launch 8 to 14 additional seasons of key original works compared to the first half. Alongside How Dare You with Cheng He Li Tong, we have also launched the final take-home, The Legend of Kyle Law, Shenwu Tianzun, and A Moment But Forever, which shares its iQIYI with an upcoming drama series of the same name. The action-packed anime Super Q Extraordinary Chapter [foreign language] is also set to release soon. On a separate note, iQIYI has become one of the key content sources for traditional TV media, covering outlets such as CCTV, satellite TV, and regional TV stations, thanks to our enhanced offering of original content. In just the first half of 2024 alone, we have distributed about 50 drama series, reinforcing the long-tail effect of premium content. The value of our IP has been even further unleashed by exploring diversified monetization streams, for example, franchising granules from the dramas Fox Spirit, Matchmaker, Red Moon Pact, Yuechu [foreign language] which is a new hype for iQIYI original dramas. We have also worked with established toy brands for IP licensing, joint product customization, and marketing. Moving on to the advertising business. In the second quarter, total revenue was RMB1.5 billion, down 2% year-over-year. Performance apps remained as a highlight of the quarter, growing at a healthy rate year-over-year. Key sectors such as e-commerce and Internet services demonstrated solid performance, with e-commerce revenue from the June 18 shopping festival growing 80% annually, and revenue from Internet services growing 30% annually. The solid result in performance apps is also a clear reflection of our technical advancement. Through upgraded ad placement mechanism and reinforced mark-feeding algorithm, we have further enhanced the monetization efficiency of traffic and the ROI for our clients. Additionally, our AI tools now cover browser industries, enabling more efficient ad production and driving AI power app revenue by 150% sequentially. For brand apps, revenue was down annually, mainly due to fewer variety shows launched. Besides that, our premium content continued to attract brand advertisers, with 59% of the revenue stemming from content-targeted apps. In particular, our major dramas achieved notably double-digit annual growth in revenue. The performance of the June 18 shopping festival was also in line with our expectations. Moving on to technology and products, we remain committed in advancing technology innovation as it's crucial in improving content production, user experience, and operational efficiency. For example, our virtual production technology used to be limited to fantasy genres. This quarter marked an exciting breakthrough as we successfully extended its application into a new territory, deploying it within the reality-themed drama for the first time. We have also made meaningful progress with our in-house pre virtualization technology. This tool allows for the rapid design and virtualization of scenes and shots before actual filming begins. We have applied this across multiple flagship projects and it has led to a lack in grace in production efficiency. Our enhanced developed platform continues to demonstrate its power. Our enhanced iQIYI content management system has been in operation for over two years. This decade data driven system provides substantial support to management team and producers in project management effectively elevates content quality and the success rate. Now this management system has covered all our projects in drama, movie and animation. Another high efficiency system is of intelligent protection management system which is widely used by production crews for diverse onsite text, equipping them with frontline production tool and production management capabilities. In the second quarter alone, 21 dramas adopted the system to date. This system has been used in 67 iQIYI dramas and gained widespread recognition for its effectiveness. In addition, we have expanded the use of AI across various aspects, covering project assessment, creativity, marketing and distribution. This broadened application has meaningfully enhanced content production and operational efficiency. For example, AI has supported revenue forecasting and the decision-making during initial phase of project development. AI also drives our advertising innovation for focus-grade mark-maker Red Moon Pet. We integrated virtual character and theme into ad materials, substantially increasing ad outcome. This new ad format was welcomed by advertisers and opened up ample possibilities. For content marketing, we have employed AI among -- modules to analyze cloud information and generate key marketing points to improve marketing efficiency. Finally, for our business outperformance in regions outside of Mainland China, over the second quarter, we sustained solid performance in our overseas business, with both total revenues and membership revenues continuing to grow annually and sequentially. The influence from C-dramas on iQIYI's original content continues to strengthen, evidenced by the 30% annual increase in membership revenue from top C-dramas during the quarter. Our localization attempt has also started to bear fruit. The accumulated number of views of our original Thai dramas [Indiscernible] ranked first in a number of markets, including the U.S., Canada, and U.K. We have also made solid progress in animation. How Dare You has attained remarkable viewership and revenue on our overseas set, which are historically high among all iQIYI original Chinese animations, and even outperformed top Japanese animations in several countries. Leveraging our premium content, we have expanded local partnerships to boost global penetration and monetization. Our efforts include deepening collaboration with telecom operators in overseas markets to enrich fundamental products and strengthen promotion activities. For example, we have partnered with Ooredoo Select, one of the largest telecom companies in the Middle Eastern and North African markets, to stream iQIYI's content on their OTT platform. This partnership will further enhance the influence of C-drama VR beyond Asian markets. In the future, we will continue to enhance the influence of the iQIYI brand overseas with premium C-pop content in key markets, accelerate production of local content, and explore diversified IP monetization opportunities. In summary, looking ahead, we are dedicated to pursuing our long-term goals with a sustainable approach. We will grow out more diversified premium content, apply innovative technologies more extensively, and continue to enhance our team's creativity and execution capabilities. With that, we believe the flywheel effect of the IT content ecosystem will drive our long-term goals. Now, let me pass on to Jun to go through our financial performance. Jun Wang Thanks Mr. Gong, and hello everyone. Let me walk you through the key numbers. In the second quarter, the total revenues were RMB7.4 billion, down 5% annually. The membership services revenue reached RMB4.5 billion, down 9% annually, primarily due to fluctuations in accountancy [ph] performance as previously discussed. For online advertising, revenues decreased by 2% year-over-year to RMB1.5 billion. This was primarily due to the decrease in brand ad businesses, which again is due to the decrease of the variety of shows we had during the quarter. But the result was partially offset by the healthy growth of the performance ad businesses. Content distribution revenue reached RMB698 million and grew 2% annually. Other revenues increased by 16% annually to RMB784 million, partially driven by the increase of revenue derived from the patent agency services and third-party cooperation. Moving on to costs and expenses. Content cost was RMB4.1 billion, down 2% annually. Total operating expenses were RMB1.4 billion, flat annually. This was in line with our disciplined marketing spending strategy. Turning to profits and cash flow, the non-GAAP operating income was RMB501 million and its corresponding margin was 7%. The operating cash flow totalled RMB411 million and remained positive for nine consecutive quarters. As of the end of the second quarter, we had cash equivalents, short-term investments and long-term restricted cash included in prepayments and other assets, totalling RMB8.6 billion. We have prudently managed our financial resources, striving to improve the overall health of our business and to optimize the financial leverage of our balance sheet. In August, we have completed the repurchase right offer for our convertible notes in 2026. An aggregate principal amount of US$395 million was validly surrendered and repurchased, and only 157,000 aggregate principal amounts of the notes remained outstanding. For detailed financial data, please refer to our press release on our IR website. Thank you. [Operator Instructions] Your first question comes from Xueqing Zhang with CICC. Thanks management, for taking my question. My question is about the competition landscape. We noticed that other platforms had some blockbusters this year, and our market share, which has been leading in recent years, has also fluctuated. How does management view the current competition landscape for long videos, and what are your strategies? Thank you. Chang You [Foreign Language] We will invite our CCO, Xiaohui, to answer this question. The intense competition within the industry has always been present. And this conversation actually helps us to improve the overall quality and the richness the industry's content, enhancing the competitiveness of the long-form video sector compared to other forms of entertainment, such as we often mentioned short-form video. At the same time, it also motivates us to continually improve content quality in the future. We've always emphasized that the ultimate goal in the long-form video competition is to sustain a high-quality, diverse content supply and achieve a win-win situation between the content quality and the commercial benefit. Looking at our long-term market share performance, iQIYI has actually maintained a leading position in the core categories of drama and film for a long period of time. Although we experienced some fluctuation in our drama market share in Q2, but after a thorough review and a targeted optimization, we've overcome the short term difficulties and returned to the number one position in drama category market share. In balancing the content quality and commercial returns, iQIYI's performance continues to lead. The drama series To the Winter and The Strange Tales of Tang Dynasty Season 2 are great examples, and we believe this advantage will further enhance in the future. Going forward, we will remain dedicated to creating high-quality content tailored for mainstream and female audiences. Enhancing our social insights and innovation, optimizing content scheduling strategies and strengthening the management in every facet of our income studios. And we believe these initiatives are all aimed at improving the stability of our high-quality, diverse content supply. Our current drama reserve accommodates the viewing demand of the mainstream audience. We have a relatively ample reserve specifically for the core genres of ancient costume dramas aimed at female audiences as well as for the mystery suspense and the reality themed dramas. We will also continue to strengthen our capabilities for IP serialization development. For example, The Strange Tales of Tang Dynasty Season 2, which launched in Q2, is a successful case of serialized content development. And the third season will soon be introduced. In the future, the well-loved series such as The Fearless and Under the Skin also launched their second seasons. And The Ingenious One Season 2 is also in preparation. Thank you. Your next question comes from Lincoln Kong with Goldman Sachs. Lincoln Kong [Foreign Language] Thank you, Management, for taking my questions. My question is about the membership business. How should we think about the prospects of membership growth in the future, especially for our subscribers, as well as the ARPU growth? Thank you. Chang You We'll invite our Senior VP of Membership Business, Youqiao Duan, to answer this question. From a perspective of membership structure, our cornerstone members represent a stable base of our subscribers and have remained steady. Fluctuations actually mainly come from the members who are attracted by new and popular content. As the summer season arrives, our content offerings have positively influenced the return of the heterogeneous users and retention of long-standing numbers. In Q2, our ARM, which is the average revenue per member, maintained a solid year-over-year growth. The current level of ARM provides us with flexibilities in terms of operational tactics. In the near future, our focus will be on expanding the scale of our membership, but the ultimate goal remains to maximize membership revenue. In the future, we also plan to implement more proactive measures to optimize account sharing and combat piracy, thereby supporting the long-term healthy growth of our membership business. We'll share specific plans with every one of the progress that's made. Thank you. Your next question comes from Maggie Ye with CLSA. Good evening, and thanks for the chance to ask questions. Regarding our overseas business, we've seen very decent revenue growth in past quarters by high-quality local production in addition to distribution of our premium mentoring [ph] content. As iQIYI international celebrates its 5-year anniversary, can management share your latest thoughts on business strategy and plan for our overseas business? Thank you. We'll invite our senior VP, San Ha Yang, who is responsible for the overseas business, to answer this question. We started expanding into the overseas market in 2019 and have achieved initial success. In 2023, our overseas operations actually reached full-year operating breakeven. Our goal for 2024 is to boost revenue growth while continuing to increase profit. And for Q2 this year, the total revenues for overseas and also membership revenue will maintain a healthy year-over-year and also quarter-over-quarter growth. In terms of content, we have discovered an optimal content mix suitable for our overseas markets, and we aim to further increase content offerings through different measures. For example, the popularity for Chinese language content overseas has significantly increased, becoming a major source of our top content for our overseas platform. In fact, over the past three years, over half of the 20 most popular shows on IP overseas were Chinese dramas, most of which were iQIYI originals. This demonstrates the influence of Chinese language content and the strength of our original offerings. And in the future, we'll continue to use Chinese dramas as the foundation of our overseas content offerings and actively explore opportunities to increase production of local original content. And also, from the technology perspective, we will utilize AI technology to empower the different aspects of the long-form video industry, enhancing the production efficiency of iQIYI's localized original content overseas. Regarding our local partnerships, we have already established deep connection and cooperation both with telecom operators in certain regions. And going forward, we aim to expand our partnerships to telecom operators in additional countries and to increase our collaboration with local partners. And we believe these will enhance our brand awareness and content influence overseas. And for our long-term objectives is to make iQIYI's overseas platform the home of beloved Asian content, expanding the influence of Chinese language content while also increasing the coverage of local content, and continue to explore diversified IP monetization models. And our CFO, Wang Jun, just added to this. And he mentioned that in 2023, our overseas business actually reached full year operating breakeven. This is based on the fact that -- from a management accounting perspective. Jun Wang This is based on the views from the management account. Chang You Correct, correct. And this is a very healthy trend that has developed over the past year. Thank you. Your next question comes from Thomas Chong with Jefferies. Hi, good evening. Thanks, management, for taking my question. As iQIYI has a lot of good IP, can management share your strategy of unlocking the IP potential in different areas rather than membership and advertising? Thank you. Our CEO is answering this question. He mentioned that content IP is the core asset of our company. Promoting the monetization of content IP in various forms, including off-line business, is an important and sustained effort that is key to enhancing our long-term value and competitiveness. We actually describe this IP-based business model with a metaphor called eating a fish in multiple ways, which actually emphasize our ability to transform each piece of our content IP into numerous prospects, for revenue, thereby, we believe this will maximize its value across different markets and platforms. With many years of focus producing original content, actually, the value of our company's IP assets has grown significantly. For instance, two years ago, in Q2 2022, our original dramas has accounted for over half of our quarterly new release key dramas. And this proportion now has stabilized at around 70%. And also leading high-quality, high original dramas have not only found success during their initial broadcasting period, but also have demonstrated a sustainable long tail effect, which maintained popularity over an extended period of time. We actually hope that the off-line experience business will become our second growth curve in the future. And we also noted the shift in consumer behaviour change in domestic offline commerce and cultural tourism sectors, where the premium content IP actually plays an increasingly important look in creating engaging experiences. For example, our vast library of high-quality video content IPs actually serve as our core strength in this area. For example, we leveraged the IP from the recent hit drama title called The Strange Tales of Tang Dynasty beyond its online presence, successfully introducing an immersive VR experience in cities like Beijing and Xian, these are key cities in China. In addition, we've developed new derivative products such as car games designed to appeal to the taste of a younger demographic, further extending the IP's reach and impact. And this operating -- for the operational model, actually, we actually favoured a light asset approach which has a promising prospect for incremental revenue under limited cost. Actually based on our experiences this approach has actually been validated in terms of off-line experiences. And this model is now being able to be replicated and scaling. In addition to what I just mentioned, the VR experiences that I mentioned earlier, we're also exploring further initiatives similar around our IP. For example, our [Foreign Language] which is the IP merchandise stores, now also QiBubble Park, which is a theme park designed for children. And these initiatives are actually developing in collaboration with our partners similar to what I just mentioned, the light-asset approach. And the aim is to provide users with a very comprehensive and engaged entertainment experience. Thank you. There are no further questions at this time. I'll now hand back to management for closing remarks. Chang You Thank you, everyone, for participating in the call. And if you have further questions, please don't hesitate to contact us. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.