Kuaishou Technology

HKEX:1024

Earnings Call Transcript 2023-Q1

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Kuaishou Technology First Quarter 2023 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for the management's prepared remarks. The English line will be in listen-only mode.

And now I will turn the call over to Mr. Matthew Zhao, VP of Capital Markets and Investor Relations at Kuaishou Technology.

[Matthew Zhao, VP of Capital Markets, Investor Relations]

Thank you, operator. Good evening and good morning to everyone. Welcome to our first quarter 2023 financial results conference call. Joining us today are Mr. Cheng Yixiao, Co-Founder, Executive Director and CEO; also we have Mr. Jin Bing, Chief Financial Officer.

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

And also during today's call, we are going to also discuss the certain non-IFRS financial measures for comparison purposes only. For a definition of non-IFRS financial measures and a reconciliation of IFRS to non-IFRS financial results, please refer to our results announcement for the fourth quarter ended March 31, 2023 issued earlier today.

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

Now I'll hand the call over to Yixiao.

[Cheng Yixiao]

Hello, everyone. Welcome to Kuaishou's first quarter 2023 earnings conference call. In the first quarter of 2023 we recorded group level adjusted net profit for the first time since our listing, a significant breakthrough on our profitability. This milestone was achieved on the back of a strong first quarter performance driven by new records user metrics, revenue growth and operating efficiency improvements.

In addition to healthy growth in the DAUs and MAUs, we continue to grow the number of content creators, advertisers, and merchants on our platform, while promoting a more integrated commercialization and traffic ecosystem. We also made substantial progress with our store wide ROI strategy in driving end-to-end sales funnel conversion for both our advertising and e-commerce businesses.

As a result of these accomplishments, combined with macroeconomic tailwinds, our revenue growth accelerated across all three business segments in the first quarter of 2023 and outperformed their respective industries. Our effective initiatives to enhance monetization and operation efficiency, while maintaining our pace of business growth, played a pivotal role in our profitability turnaround, leading to adjusted net profit at the group level in the first quarter of 2023.

Next, I'll discuss our key business developments in the first quarter. First user growth and ecosystem construction. In the first quarter of 2023, we set a new record for the scale of our user community by capitalizing on growth opportunities from some seasonal festivals, including Chinese New Year. Average DAUs and MAUs on the Kuaishou App reached 374.3 million and 654.4 million, representing a year-over-year increase of 8.3% and 9.4%, respectively. Average daily time spent per DAU on the Kuaishou's App was 126.8 minutes, while total views of our short video and live streaming content increased by over 10% year-over-year, representing a higher growth rate and a total user spend.

With a focus on both the efficiency and quality of user growth, we lowered our user acquisition and retention costs in the first quarter of 2023 on both a quarter-over-quarter and year-over-year basis. This was the result of our refined management and technological tools as well as the automated placement on original, high-quality short play and short video and live streaming content. Meanwhile, we further enhanced our ROI on user acquisition by growing the proportion of users with higher lifetime value.

We reinforced the virtuous cycle of content supply and consumption by optimizing the content supply through our enhanced algorithm-based learning system targeting different user groups. We also continued to strengthen the social attributes and community vitality of our platform, key factors setting us apart from our competitors. By the end of the first quarter of 2023, pairs of mutual followers on the Kuaishou App reached a cumulative 29.6 billion, representing a 57.6% growth year-over-year.

The Chinese New Year period has always been an important window for user growth and brand promotion. During this year's Chinese New Year, combined with the content and interaction, we provide users with dual venues to celebrate New Year on Kuaishou. On the interaction side we offer a variety of interesting attractive features and social games. In terms of content, we provided a diverse range of Spring Festival related operating activities including CCTV Spring Festival Gala, Kuaishou 1001 and Nights Fans' Gala Online Festival Fairs, Kuaishou CCTV Spring karaoke party and more. Among them Kuaishou 1001 and Nights Fans' Gala and our self-produced program attracted more than 270 million viewers and received over 520 million likes in the first run.

We launched a total of 55 short plays produced by Project Astral during the 2023 winter break period. Among them Donglan Snow accumulated 100 million viewers with a record breaking 40 hours of its launch. Our high quality short play content and growing brand awareness in this area have also been recognized by advertisers. In the first quarter of 2023, revenue from advertising sponsorship of Project Astral show plays increased by more than 300% year-over-year.

In terms of pan-knowledge content, we continued to enrich our inclusive education program New Knowledge Open Class under our pan-knowledge IP Kuaishou's New Knowledge. We have collaborated with top notch institutions such as Tsinghua University and Peking University to offer courses covering a wide variety of fields including history, science and technology, economics and fine arts, attracting close to 10 million viewers.

We have also further refined the search function on our platform, which has led to stronger user habits on searching. In the first quarter of 2023, Kuaishou search's average monthly users exceeded 420 million, and the number of daily searches on our platform peaked at more than 650 million. Meanwhile, we have also achieved continuous progress in commercialization of our search function, as evidenced by a doubling of search-generated e-commerce GMV year-over-year, as well as over 50% year-over-year growth in search advertising revenue in the first quarter of 2023.

Second, online marketing services. In the first quarter, a considerable number of advertisers remained cautiously optimistic towards the recovery of macro economy and consumption trends in 2023. But through efforts to further strengthen our commercialization data infrastructure, optimize our product capabilities and refine our industry-specific management strategies. Advertising revenue growth gradually recovered.

Our revenue from online marketing service for the first quarter of 2023 grew by 15.1% year-over-year to reach RMB 13.1 billion accounting for 51.8% of our total revenue. The number of advertisers on the platform also continued to grow rapidly year-over-year and quarter-over-quarter in the first quarter of 2023.

Our advertising services provided our native e-commerce merchants maintain robust growth momentum, propelled by the growth in the e-commerce GMV on our platform. In the first quarter we pioneered industry leading operating philosophy of store-wide ROI and completed pilot runs for certain brand advertisers during the Valentines' Day and March 8 Women's Day shopping festivals.

These plans proved the capabilities of our storewide ROI based bidding system and it validates end-to-end sales funnel conversion from brand promotion and performance ads, and ultimately to transactions for our closed loop advertising algorithm, so we complete end-to-end ROI production and productization plan, ensuring the align of the advertising, e-commerce, and traffic distribution and factory advertising into your omni domain e-commerce traffic allocation algorithm.

In addition, we launched a project to grow our small and medium-sized e-commerce merchant client base, in particular, within our client acquisition and marketing capabilities and upgraded our Magnetic Taurus, our platform e-commerce marketing solutions on mobile devices to get clients advertising needs, enhance penetration, and optimize our merchant ecosystem.

In terms of our external advertising services, as most of external clients are online businesses, the recoveries have led relatively to offline businesses. However, an encouraging gradual recovery plan began to take shape during the first quarter in the industries such as information services, medical care, finance, and education to explore advertisers long-term goals, to empower our clients to achieve in-depth conversion of their target users.

We are leveraging products and algorithms that are well integrated within industry attributes to promote discovery, accumulation and user brand matching of high quality user cohorts and also build post click models. At the same time, we actively monitor the healthiness of external advertisements on our platform, ensuring the penetration on the high value users through our optimized traffic allocation mechanism.

In addition, we have established review standards and systems for native advertisements, materials to improve the quality of greater materials and reduce the negative impact on user experience and ecosystem. These efforts, together with our organic and commercial traffic allocation mechanism to enhance commercial efficiency and right for advertisers and propel the growth of our external advertising services.

With respect to brand advertising, we focus on strengthening our product capabilities. We established a rich advertising product portfolio, which includes splash ads and sponsorships for our self-produced IPs as well as KOLs' home pages and searches, further expanding our brand advertising scenarios and resources. Furthermore we designed and customized solutions for brand advertisers at various stages across different industries.

We systematically established user assets for brand advertisers and created an end-to-end conversion path integrating brand promotion, performance ads and transaction, leading to increased recognition of our platform value from a growing number of brand advertisers. Driven by these initiatives and benefiting from key promotion events such as the Chinese New Year and March 8 Women's Day in the first quarter, our revenue from brand advertising increased over 20% year-over-year.

Third, our e-commerce business. In the first quarter of 2023 we will continue to strengthen our trust based e-commerce ecosystem and execute our omni-domain operating strategy. We further satisfy our users' needs by enriching our mechanism, and improving matching accuracy between buyers and sellers, and harness the high quality stream of resources and e-commerce content, which in turn drove a year-over-year increase in GMV of 28.4% to RMB 224.8 billion.

On the merchandise side, we continue to enforce our merchandising capabilities, amplifying the exposure of more high quality products for recommendation through product evaluations and ratings based on a broader array of metrics. At the same time, we guided merchants to continue enhancing product information quality and quantity as well as elevating their service capabilities.

On merchant side, we've further upgraded the cooperative mechanism between merchants and KOLs. We've facilitated more accurate product matches for KOLs engaged in product distributions through a more refined and tiered operation strategy, leading to an overall 50% year-on-year increase in GMV through the KOL distribution channel in this quarter. We have started our commission revenue generated from KOL distribution to continue contributing to incremental e-commerce revenue growth going forward. Moreover, by leveraging our Stream Initiative to build a bridge between merchants and KOLs, we have created a flywheel of merchandise and traffic, driving increase both sides of our platform.

With respect to onboarding and development of merchants we established cooperation with more brand merchants across a growing range of industries in the first quarter, catering to our users' increasing needs and consumption of branded merchandise. Leveraging our deep insights into users' consumption behaviors, we carried out targeted of merchants, leading to approximately 30% year-over-year increase in average number of brands onboard that went up in the first quarter.

Aided by promotional events such as Super Brand Day, the growth rate of GMV from brands, including Kwai Brands, was much higher than the overall platform accounting about 30% of our total e-commerce GMV in the first quarter. We also facilitated brands' self-operated live streaming through creative content formats, such as press conferences, product launches and live streaming by bosses, to better cater to users' purchasing needs for brand merchandise. In the first quarter, GMV of brands' self-operated live streaming grew by approximately 70% year-over-year. Going forward, we aim to more brands expand their user base, while achieving GMV ramp-up and sustainable operations.

Additionally, we worked with service providers to attract merchants in industry zones and improve our merchant empowerment system. In the first quarter, we launched the Gold Rush Initiative with exclusive policy and traffic support to help small and medium sized merchants grow. In March, the number of both monthly operated -- onboarded business merchants and monthly active business merchants increased by over 50% year-over-year.

As for merchants with steady operations on Kuaishou, we leveraged promotion activities, such as Spring Festival Goods Festivals and March 8 Women's Day promotions to refine our subsidy strategies, optimize traffic allocation and enhance conversion efficiency, thus fostering GMV scale-up for small and medium sized merchants.

On the user front, we continued to refine our tiered operations for e-commerce business paying users. We cultivated the user mindsets through recommendations and reinforced the conversions of new paying users and potential customers via smart subsidies, promotions and traffic allocation adjustments. In the first quarter of 2023, new e-commerce paying users' monthly purchase frequency increased continuously year-over-year and quarter-over-quarter, with retention rates improving every month.

With respect to relatively less active paying users, we strengthened the identification and reactivation of users with subpar experience. As for active paying users, we launched our early warning and targeted anti-churn strategies in the first quarter to provide better services to high-value users. In the first quarter, the number of monthly active e-commerce paying users average order price and monthly ordering frequency all increased year-over-year.

Algorithm-wise, we mitigated the impact of e-commerce content on user time spent by modeling the relationship between e-commerce related user interactions and consumption time spent, the optimized users' e-commerce consumption experience, leading to more effective recommendations and conversion.

Shelf-based e-commerce is another major realm in Kuaishou's omni-domain e-commerce business strategy. In the first quarter, we started to test the new shopping mall entry button we placed on the landing page of Kwai Shop to better meet the intent-driven shopping needs of highly active paying users. We aim to validate our shopping mall business model and cultivate user mindshare through this active point, laying a solid foundation for full scale launch of our shopping mall service in the future. Meanwhile, as we optimized our search function to better identify user intentions, we improved the product relevance of search results, leading to a doubling of GMV generated from the searches year-over-year in the first quarter.

Next, regarding our live streaming business. In the first quarter of 2023, live streaming roughly grew by 18.8% year-over-year to RMB9.3 billion, driven by year-over-year increases in both average MPUs and monthly ARPPU. Specifically, average MPUs increased by 6.4% year-over-year to 60.1 million, while monthly ARPPU rose by double digits year-over-year. These achievements are as a result of the consistent improvement of live streaming content quality and optimization of user-content matching efficiency through algorithm iterations.

On the supply side, we focused on promoting the development of live streaming as a profession and also the continuous advanced diverse cooperation with top talent agencies and streamers. In the first quarter, the number of active streamers from talent agencies increased by over 140% year-over-year. We also provided traffic support to high-quality mid-level streamers to optimize the constituents of our live streaming supply. At the same time, we continued to explore different live streaming categories, including knowledge-based and virtual person live streaming, to bring our users an endless flow of new types of live streaming content.

Our innovative live streaming + services made steady progress in the first quarter, with average daily resume submissions on Kwai Hire growing by over 300% year-over-year and peak daily resume submissions exceeding 500,000. As at the end of the first quarter, Ideal Housing covered more than 70 cities nationwide, with cumulative gross transaction value surpassing RMB8 billion in the first quarter. In addition, Kwai Dates [ph] a matchmaking service by facing over 100,000 voice chats and the live streaming rooms on average every day in the first quarter.

Finally in terms of overseas business progress. In the first quarter of 2023, we further deepened our key country focus strategy to optimize resource allocation while establishing more agile collaborations elevate the operation efficiency in our core market regions such as Brazil and Indonesia, DAUs and user time spent continued to grow year-over-year and quarter-over-quarter. And revenues from overseas business at an accelerated pace to reach RMB338 million in the first quarter of 2023 increased by over six times year-over-year. Meanwhile, we continued to narrow our overall operating loss in the overseas markets by 45.1% quarter-over-quarter in the first quarter as we further enhanced operating efficiency and continued to reduce costs through an ROI-based investment approach in our overseas business.

Our overseas live streaming business optimized its content supply by adding a vast array of talent agencies to our partner roster and energizing its existing talent agency partners to produce more and better live streaming content. Meanwhile, we ramped up our exploration in live streaming revenue products and rolled out new iterations of operational process, leading to steady improvements in live streaming paying user ratio and ARPPU. In addition, we successfully enhanced the gross profit margin of our live streaming business through a series of measures to improve talent agencies' efficiency.

On the advertising front, advertisements achieved better-than-expected revenue growth, thanks to its efforts to strengthen local operation capabilities, expanding advertiser coverage to more industries, and optimized our product portfolio and service capabilities. In addition, the e-commerce services launched in Brazil in the first quarter to test the waters and preliminarily verified their processes.

Looking ahead to the rest of 2023, Kuaishou will continue to leverage technology to deliver high quality experiences and services to our users and empower content creators, advertisers and merchants, while at the same time unlocking monetization potential throughout vast and vibrant ecosystems to ultimately create long-term value, fresh shareholders and stakeholders.

This concludes my prepared remarks. Thank you. And our CFO, Mr. Jin Bing, will discuss the company's financial performance for the first quarter of 2023.

[Jin Bing, Chief Financial Officer]

Thank you, Cheng. We started the year of 2023 with remarkable performance and delivered a positive adjusted net profit at the group level in the first time of our listing. This milestone was the result of our persistent efforts in advancing integration of user content and commercialization ecosystem, or a continued commitment to refining operation efficiency.

Specifically, we achieved a healthy expansion of our user base, taking our average DAUs and MAUs to new record highs. At the same time, we continued to optimize our monetization models and enhanced monetization efficiency to unlock the vast potential for ecosystem preparing solid revenue growth across our business segments. This coupled with our effective cost control and efficiency enhancement measures, leading to an operating profit now domestic business for four consecutive quarters at 55.4% reduction of rating loss and overseas business year-over-year.

Next, let me walk you through our performance for the first quarter of 2023 in detail. In the first quarter of 2023, Group's revenue increased 19.7%, year-over-year to RMB25.2 billion, accelerating from 15.8% and fourth quarter 2022. This increase was driven by broad-based strength in all our main businesses, including online marketing services, live streaming and other services, particularly the e-commerce business.

Revenue from our online marketing services increased 15.1% year-over-year to RMB13.1 billion in the first quarter with strong performance in our close group advertising and brand advertising services. This growth was driven by our efforts to further strengthen our data infrastructure to support commercialization, optimize our product capabilities, and refine our industry specific management strategies.

In the first quarter, revenue from our live streaming business grew by 18.8% year-over-year to RMB9.3 billion, we continue to reach content supply by deepening cooperation with the top talent agencies and expanding high quality streamer base and constantly expand our live streaming usage scenarios and content categories to strengthen user engagement.

Our average MPUs reached 60.1 million in the first quarter, while our monthly ARPPU also achieved double digit year-over-year growth. On the other services revenue searched 51.3% year-over-year in the first quarter reaching RMB2.8 billion, primarily propelled by our strong e-commerce revenue growth.

We continue to onboard and catch the new merchants to reinforce our merchandising capabilities and optimize our operations strategy, which all helped convert more of our users into active e-commerce paying users and increase their average order value and monthly order frequency plus a virtual cycle of merchant growth, KOLs growth, and e-commerce user growth. As a result, our e-commerce GMV increased 28.4% year-over-year reaching RMB224.8 billion, and the year-over-year growth rate of e-commerce revenue outpaced the overall revenue growth of other services.

For the first quarter of 2023, our cost of revenues increased 9.9% year-over-year to RMB13.5 billion accounting for 53.6% of total revenues. This increase was attributable to the increase in revenue sharing costs and related taxes in line with our revenue growth. Gross profit for the first quarter of 2023 rose 33.4% year-over-year to RMB11.7 billion, gross profit margin also increased significantly year-over-year, expanding 4.7% points from 41.7% first quarter of 2022 to 46.4% this quarter as a result of our improved cost management.

Moving to expenses, selling and marketing expenses for the first quarter of 2023, decreased by 8.1% year-over-year to RMB8.7 billion, primarily due to our efficient and disciplined spending on user acquisition and retention. Selling and marketing expenses as a percentage of total revenues also decreased from 45% in the first quarter of 2022 to 34.6% in this quarter.

Research and development expenses for the first quarter decreased by 17.1% year-over-year to RMB2.9 billion, primarily due to the decrease in employee benefit expenses including related share based compensation expenses. R&D expenses represented 11.6% of our total revenues in the first quarter, also down materially from 16.7% in the first quarter of 2022.

Administrative expenses increased by 5.5% year-over-year to reach RMB900 million for the first quarter, primarily due to the increased employee benefit expenses, including related share based compensation expenses As a percentage of total revenues, it decreased from 4.1% in the first quarter of 2022 to 3.6% in this quarter.

In the first quarter of 2023, our Group achieved adjusted net profit for the first time, which amounted to RMB42 million, a turnaround of adjusted net loss of RMB45.3 million in the fourth quarter of 2022 and RMB3.7 billion in the same period of last year.

Our balance sheet maintained a very healthy trend with cash and cash equivalent, time deposits, restricted cash and wealth management products of RMB44.8 billion of March 31, 2023. Our enhanced monetization capability is an efficient working capital management empowered us to generate a positive operation net cash flow of RMB1.8 billion for the first quarter of 2023.

In summary, additionally, as you may have seen, we announced a share repurchase line of 4 billion in Hong Kong dollar, which demonstrates the confidence of our Board and the management of our company's long-term and sustainable growth potential. So overall, in summary, we continue to propel the high quality development of our ecosystem and drove the maximized value for our content advertising and e-commerce merchant partners.

Looking ahead, we will remain focused on monetization efficiency gain across our business lines, which are built on foundation of ever improving user experience and user trust. This coupled with our ongoing focus on enhancing our cost efficiency positions us well to further improve our operating profitability while creating values for all the shareholders.

This concludes prepared remarks. Now open for questions. Operator, please go ahead.

[Operator]

[Operator Instructions] The first question comes from the line of Kenneth Fong from Credit Suisse. Please go ahead.

[Kenneth Fong, Credit Suisse]

Thank you management for taking my questions and congrats on the strong quarter. Under the current competitive landscape, how should we think about the upside potential for our e-commerce business? Can management share some of the key drivers behind? I also would appreciate some updates on the progress and status of the marketplace e-commerce business. Thank you.

[Cheng Yixiao]

Thank you for your questions. According to the recent MBS Data national wide online retail sales grew by 8.6% year-over-year in the first quarter of this year, and the scale of e-commerce industry continued to expand. As an operating color with an advantageous position in live streaming, e-commerce, we are still growing rapidly. We are fully confident that we will continue to gain market share going forward.

Actual specific drivers of our growth, first on the supply side, the constant enrichment of merchandising infrastructure, short video content, brand e-commerce, and different merchandise categories drives demand growth for our e-commerce business. We will improve our merchandising infrastructure to select competitively priced high quality merchandise for precise user targeting and conversion.

We will also encourage merchants and KOLs to not only make effective recommendations through short video content, but also to promote order placements and transactions. At present e-commerce GMV from short video recommendations accounts for a low single digit of total GMV of e-commerce, with considerable future upside potential.

As for brand e-commerce, in the first quarter our brand GMV grew at a significantly faster pace on a year-over-year basis than our overall e-commerce GMV. Going forward, we will improve sales conversion through more precise marketing subsidies and support policies to encourage self-operated live streaming by merchant while leveraging our high quality KOL resources to expand brand share of voice.

At the same time, our merchandise categories have been growing. The apparel category, which we are in advantageous position, maintained rapid growth with a major increase in a sports and outdoor sub-category. GMV from FMCG, home furniture and three C [ph] continued to increase as a percentage of total GMV, with products carrying a higher average order value such as home appliances growing at a notably faster rate.

GMV from fresh produce, plants and packed products has also displayed a strong growth momentum. While it still accounts for a relatively small proportion overall impact, in fact GMV of Tea and other sub categories nearly tripled year-over-year. This is primarily due to our investor discovery and operation of high quality merchants in industrial zones, as well as the efficient conversion of potential paying users. We are confident in our ability to help merchants from a wider range of industries achieve a quantum leap in their online sales.

Secondly, on the demand side, overall user traffic rising, paying user penetration and higher purchase frequency are the main growth drivers. As a platform with high quality content, we continue to grow our user traffic to new highs. The direction of our future efforts is to make e-commerce an integral part of our high quality content ecosystem and raise the upside of our traffic growth through improvements in e-commerce content quality and matching accuracy. So far, the penetration rate of our monthly active e-commerce paying users has hovered around 15% indicating considerable upside given our massive user traffic.

We are further improving the path from product recommendation to transaction and aligning content consumption with e-commerce needs and enhanced matching algorithm accuracy. Supported by these initiatives, as well as the momentum of our smart subsidy programs, and the main app operation activities, we are confident that we can constantly enhance the conversion and retention efficiency of active e-commerce paying users with cost effective goods, high quality content and customer focused services. Taken together, these efforts will reinforce more users e-commerce consumption habits on Kuaishou's platform leading to further increases in purchase frequency.

Prosperity on both the supply and demand side of e-commerce can only be achieved through strong platform operation and governance. In the first quarter, we basically finished upgrading our merchants experience scoring system and our KOLs reputation scoring system, which are based on a comprehensive evaluation of merchandise and service quality, content and user experience. These systems will allow us to better identify and support high quality merchants, elevate users overall shopping experience, and together with our merchandise scores help us further strengthen our trust-based e-commerce ecosystem in the future.

[Jin Bing, Chief Financial Officer]

And regarding your second question, as our merchandise infrastructure matures we have been testing our new shopping mall service. In the first quarter, we opened testing of the shopping mall feature on buyers homepages. We will gradually rollout access to this service in the second quarter on a larger scale and use the resulting GMV increase and growth momentum to propel supply side enrichments, refine criteria for merchandise listings, and enhance its operating efficiency. The new shopping mall will also help us understand the shopping preferences of our active users and fortify users shopping mindsets. With this as a home base for our e-commerce operations, we will progressively test level one access points for the shopping mall.

With respect to merchandise selection and shelving, we will leverage our platform's existing merchandise pool and improve infrastructure such as on-shelf goods and detailed merchandise information pages. Meanwhile, we'll leverage all types of suppliers resources to constantly bring in high quality supplies. Currently Kuaishou's shelf GMV accounts for over 10% of total GMV of e-commerce, of which GMV resulting from the guess what you like feature and searches both doubled in the first quarter.

The penetration rate of our search function reached a high level of 59% among monthly active e-commerce pain users reflecting our users increasingly established shopping mentality on our platform. We expect our Kuaishou GMV took grow at accelerated pace this year and account for a rising share of total GMV of e-commerce.

[Matthew Zhao, VP of Capital Markets, Investor Relations]

Thank you, operator. Next question, please?

[Operator]

Next question comes from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

[Lincoln Kong, Goldman Sachs]

So, thank you management, for taking my question. My question is about the commercialization business. So can management give us any indication for the external ads, especially the performance ads, when can recover to positive growth territory? And last quarter I mentioned also talking about the traffic efficiency, the upgrade of our commercial service, as well as the storewide ROI, to re-elaborate a bit more in terms of the progress here? Thank you.

[Cheng Yixiao]

Thanks for your questions. In the second quarter, we have gradually completed the execution of full year framework agreements with external advertising customers from the rise on various industries. Given this context, combined with the upcoming June 18th promotions and the implementation of our refined channel policies for some industries, we have noticed a clear multi market recovery trend in external performance and expenditures compared with the same period last year. Industry-wise, the main drivers of this recovery came from gaming, information services, e-commerce and retail industries. The finance and education industries among others also underpinned the year-over-year growth of our external performance ads, thanks to our optimized sales funnel conversion, targeted efforts towards key clients and associated supportive policies.

We expect advertising placements in this information services industry to increase gradually during this year's summer break period, driven by increased user traffic. Advertising expenditures from gaming clients will also enter a peak period during summer break, propelled by the large number of the new releases by game developers and some clients clear traffic needs in this period. These factors have boosted our confidence that our external performance ads will resume growth starting from the second half of this year.

Moving to our progress with respect to building our own strength in the online marketing services, first, in terms of improving advertising traffic efficiency, we continue to strengthen our commercialization data infrastructure. We also substantially elevated our advertising performance by reaching a broader audience among users in the gaming, social networking, and financial industries through better coordination among our front-end business and our product and algorithm teams, exploration of targeted users groups', interests and internal data sharing, as well as by encouraging advertisers to send back in depth user conversion data.

Second, regarding strengthening our product capabilities, in my prepared remarks, I mentioned the intelligent upgrade of our Magnetic Taurus platform for e-commerce and marketing solutions on mobile devices. This upgrade included the connecting ad placements with e-commerce services. As a result, we increased the penetration amongst more medium sized merchants, as evidenced by the 72% year-over-year growth in the number of this type of merchants on Magnetic Taurus on mobile devices in March, further optimizing our closed loop advertising ecosystem.

In terms of search traffic with improvement of our search function and gradual establishment of users search habits on our platform, our search traffic maintained rapid growth as a result, and aided by its higher conversion efficiency search advertising generated 50% higher revenue year-over-year in the first quarter. The rapid growth of search revenue will continue to provide upside potential for advertising revenue. As for brand advertising products, we expanded beyond traditional splash ads to KOLs, homepages and searches among other areas, driving higher growth for brand advertising versus an overall advertising services.

Third, with its back to advertising services upgrades, we are on track to improve our customer service system and response mechanism to address customer service needs in a timely manner. At the industry level, we also promoted the development of product systems and formulated customized industry solutions to address common industry problems and achieved in-depth conversions.

[Jin Bing, Chief Financial Officer]

And turning to storewide ROI, we already launched the associated product at the end of March. Our forecast in the first quarter was to validate our model and optimize product. And this was our focus and improving our ability for incremental ad expenditures. We completed pilot runs for same brand advertisers during the Valentine's Day and March the 8th Women's Day Shopping Festival, which provided us with testing experiences as well as insights while confirming the conversion potential off brand homepage followers. Many advertisers reported the lower personnel and tracking costs and significant improvements in ROI target achievements and at performance after the adoption of storewide hour, which back to commence the large scale rollout of this product in the second quarter.

[Matthew Zhao, VP of Capital Markets, Investor Relations]

Thank you. Operator next question, please?

[Operator]

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

[Thomas Chong, Jefferies]

Thanks management for taking my questions. My question is about the new initiatives, can management comment about local services and online equipment? How's the progress so far? Thank you.

[Cheng Yixiao]

Thanks for your question. In the first quarter, we also made progress in local services. We identified MVP cities for our key operations based on a comprehensive evaluation of city attributes, user base, and team resources. Next, leveraging local KOLs influence, our team's meticulous effort and our third-party partners' rich resources, we established localized ecosystems comprised of KOLs and merchants.

Meanwhile, we advanced our merchandise engine to screen high quality suppliers and deepen our insights into users needs. Among those MVP cities, where we have completed our trial run, Qingdao was a standout, achieving remarkable growth. In just 50 days since its launch average daily GMV of local services in Qingdao searched by 14 times. The number of orders grew by 12 times and the number of users placing order rose by nine times.

Regarding our merchant partners, a well-known fast food chain restaurant completed a quick sales ramp up from co-start only one month after the services launched, generating a GMV of over RMB35 million. Notably, transactions originated from searches accounted for nearly 30% of total sales. These encouraging results clearly reflect Kuaishou users strong desire and preference for local services.

And in terms of strategy, as the offline economy recovered at an accelerated pace, users consumption demand for local services, content experienced rapid growth. In the second quarter, we will continue to expand the number of our core operating cities, augment the availability of high quality local merchants and products, motivate KOLs to create high quality content and strengthen local user’s consumption mindset.

These measures coupled with our platforms supportive policies, will build in the effective and accurate content distribution system, including both short video and live streaming. We will swiftly replicate our established business model from key hubs like Qingdao and Harbin to more cities. Product-wise, we will diversify our product categories from in-store dining to general in-store business, hotel, travel and ticket sales.

Also, apart from local merchants, we will further expand our coverage of SKA brands to help more national chain stores grow their user base and diversify their user mix by leveraging Kuaishou’s advantageous user resources in the lower tier markets. In terms of platform operations, with absent NPS user recommendation system in the first quarter to gain a deeper insight into user preferences and we will continue to refine our local services, products, and consumption scenarios to elevate the overall user experience.

In the first quarter, we also made steady progress in Kwai Hire. We observed a year-on -year increase of over 300% in average daily resume submissions with daily peak submissions surpassing 500,000. This continued growth was resulted from our expanding job postings, the enhancement of resume quality through data infrastructure and improved job supply and demand matching efficiency through algorithms.

Furthermore, we are actively exploring ways to use AI technology to automatically generate recruitment videos at enabling low cost mass production of content to support businesses operations. On a monetization front, we have been validating our CPQL or Cost per Qualified Lead model to have -- and also have completed tests with key industry clients. We expect monetization of Kwai Hire to increasingly distribute to revenue within the next one to two quarters.

[Matthew Zhao, VP of Capital Markets, Investor Relations]

Thank you. Next question please, operator?

[Operator]

The next question comes from Alex Poon from Morgan Stanley. Please go ahead.

[Alex Poon, Morgan Stanley]

Congrats on the very strong quarter. My question is related to our margin improvement trend. Can management share the future trend for gross margin and also the OpEx ratio? Thank you very much.

[Cheng Yixiao]

Thank you for this question. Looking back on the past five quarters, with the joint efforts of all departments in the company, our cost reduction and efficiency enhancement initiatives delivered remarkable results. Our gross profit margin increased from 41.7% in Q1 last year to 46.4% in Q1 this year.

Selling and marketing expenses as a percentage of revenue declined from 45% in Q1 last year to 34.6% in Q1 this year and R&D expenses fell from 16.7% of the total revenue in Q1 last year to 11.6% in Q1 this year. As a result, our domestic business turned to an operating profit starting in Q2 last year, two quarters ahead of schedule. The operating loss in our overseas business has also gradually narrowed, and in the first quarter this year, we realized the adjusted net profit at a group level for the first time since our listing.

Specifically we launched several major campaigns last year to reduce our costs and enhance efficiencies. First, in terms of user growth costs, we focused on improving the cost per DAU while maintaining traffic growth. By refining our investments and subsidy models and taking differentiated approaches in engaging users through different channels, we continuously and continually lowered our retention cost per DAU and optimized our cost structure in user reactivation. This significantly improved our ROI on user growth.

Second, regarding server and bandwidth costs, we continue to boost the efficiency of server and bandwidth usage per thousand minutes through technology. In the midterm, we have constantly lowered server and bandwidth costs as a percentage of revenue by creating a metric system and to measure R&D efficiency and building our own operating data center.

Third, for personnel costs, we establish a personnel cost control baseline to effectively and also constantly optimize associated metrics. On top of that, we placed more emphasis on improving the labor productivity and resource productivity, while continuing to make steady fast investments in higher ROI segments.

Looking ahead continued gross profit margin improvements will be driven by the following factors. First, the change in our revenue mix, as advertising and e-commerce businesses with higher growth profit margin contribute larger shares of revenue. Second, an optimized long-term revenue sharing mechanism among our business segments, which will effectively control revenue sharing costs. Third, we will leverage technological innovations to keep improving server and bandwidth usage efficiency.

On the back of gross profit margin improvement, we will remain focused on optimizing our operating leverage. For instance, while ensuring the realization of our user growth target and relatively steady user time span. We will further improve acquisition costs per user and retention costs per DAU through the governance of new user acquisition channels, efficiency enhancement, and technological upgrades. In addition, our efforts to further iterate our organization and elevate efficiency will allow our personnel expenses at a percentage of revenue to gradually approach to industrials benchmark level.

In summary, the ultimate purpose of cost reductions and efficiency improvement is to boost quality and productivity. These are not simply financial measures, but part of our sustainable strategic mechanism representing changes in our operating mindset, integrated in our DNA. Going forward, we will take this into consideration every time we make and implement a strategic decision for the company.

[Matthew Zhao, VP of Capital Markets, Investor Relations]

Thank you. Operator, next question please.

[Operator]

The next question comes from Xueqing Zhang from CICC. Please go ahead.

[Xueqing Zhang, CICC]

Good evening management and thanks for taking my question. Congratulations on group level profit. Can management share the company's progress in AI and what kind of large language model related products we can expect in the short video field? Thank you.

[Cheng Yixiao]

Thanks for the question. We have established an LLM model research and development team. Leveraging our technical expertise accumulated previously in AIGC algorithms and LLMs. We are advancing LLM development and training as planned. Currently, everything is progressing smoothly. As our model is still in the training phase, and the revolution of AI technologies represents a long-term opportunity, we believe it is crucial to build a solid foundation with LLM, and strive to benchmark the most advanced models in the world. As such, we do not have a concrete plan for public release at the moment.

And now I'd like to share our thoughts on AI's first potential application scenarios in short videos, which are also Kuaishou’s current focus and direction. Firstly, in terms of search ChatGPT like models can expand the search boundaries beyond the current short video search within the platform to encompass the entire internet. It can also provide improved search summaries and Q&A through content generation to enhance the user's search experience.

Secondly, AIGC can assist in the generation of graphics, texts, and videos lowering the barrier to content generation and empowering users to create high quality and more diverse content. It can be utilized in a wide variety of other scenarios. Some of these scenarios include assisting in the production of a story scripts, developing a product advertising copy, and generating AI powered special effects for video. Lastly, regarding recommendation algorithms, AI can enhance our understanding of short video and live streaming content, enabling better matching through recommendation algorithms and improving the [indiscernible] or content recommendations.

In summary, we believe the short video platforms can fully benefit from the advances in AI technology. As such, Kuaishou will persistently drive the development and training of LLMs while ensuring rational and efficient allocation of manpower and other resources. We will also actively seek out opportunities to integrate LLMs into diverse business scenarios.

[Matthew Zhao, VP of Capital Markets, Investor Relations]

Thank you. Back to you operator.

[Operator]

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