Kuaishou Technology

HKEX:1024

Earnings Call Analysis

Strong Revenue Growth and Strategic Advancements in Q1 2024

In the first quarter of 2024, Kuaishou achieved a 16.6% year-over-year revenue increase to RMB 29.4 billion, supported by a gross margin near 55%. The company reported a robust adjusted net profit of RMB 4.4 billion. Key contributors included 27.4% growth in online marketing services, reaching RMB 16.7 billion, and a 28.2% rise in e-commerce GMV. User engagement improved, with daily active users (DAUs) growing 5.2% to 394 million, and average daily usage per DAU reaching 129.5 minutes. Additionally, the company's strategic focus on AI capabilities and enhanced monetization strategies continued to fuel growth and improve operational efficiency.

Introduction and Overall Performance

In the first quarter of 2024, Kuaishou Technology reported impressive financial results, showcasing their strong start to the year. The company achieved a total revenue of RMB 29.4 billion, marking a 16.6% year-over-year increase. The gross margin was close to 55%, while the adjusted net profit reached RMB 4.4 billion, resulting in an adjusted net margin of 14.9%. This performance outpaced market expectations, underscoring the company's resilience and robust business model.

User Growth and Engagement

Kuaishou's user metrics also reflected substantial growth. The average Daily Active Users (DAUs) on the app increased by 5.2% year-over-year to 394 million, while the Monthly Active Users (MAUs) grew by 6.6% to 697 million. Users spent an average of 129.5 minutes per day on the app, contributing to an 8.6% year-over-year growth in total user time spent. This growth was driven by enhancements in content and user experience, alongside initiatives like algorithm-based forecasts and optimized user acquisition channels.

Online Marketing Services

Revenue from Kuaishou's online marketing services showed robust growth, rising by 27.4% year-over-year to RMB 16.7 billion and accounting for 56.6% of total revenues. This growth was fueled by increased spending from more online marketing clients and e-commerce merchants, with smart marketing solutions and enhanced capabilities playing a significant role. The gradual recovery in the macro economy further boosted advertisers' budget allocation.

E-commerce Expansion

Kuaishou's e-commerce business exhibited rapid development, with the e-commerce Gross Merchandise Volume (GMV) growing by 28.8% year-over-year to RMB 288.1 billion. The company adopted a dual-drive approach encompassing live streaming e-commerce and shelf-based e-commerce. Shelf-based e-commerce experienced more than 50% year-over-year growth, driven by improved supply chain capabilities and initiatives to lower operational costs for merchants.

Live Streaming Business

While live streaming revenue declined by 8% year-over-year to RMB 8.6 billion, Kuaishou focused on fostering a healthier live streaming ecosystem. Improvements included refining product features, enhancing streamer support, and promoting mid-tier streamers. These efforts laid a solid foundation for sustainable long-term growth despite industry challenges.

International Growth

Kuaishou's international business saw significant advancements, especially in key markets like Brazil. The company's international revenue surged by 193.2% year-over-year to RMB 991 million, driven by localized content strategies and events like the Brazilian Carnival. The number of Daily Active Users (DAUs) in Brazil increased by 13%, and the average daily time spent per DAU exceeded 75 minutes.

Technological Advancements and AI Integration

Kuaishou made notable progress in developing large language models (LLMs) to enhance various business scenarios, including content understanding, AI interactions, and digital human services. These advancements have significantly improved user experience, marketing efficiency, and customer service capabilities.

Financials and Margins

The company's gross profit grew by 37.6% year-over-year to RMB 16.1 billion, with the gross profit margin improving to 54.8%. Operating expenses were well-managed, with a notable decrease in Research and Development (R&D) and administrative expenses. Kuaishou's balance sheet remained strong, with a positive operating net cash flow of RMB 5.8 billion and total cash reserves of RMB 63.7 billion.

Outlook and Strategic Priorities

Kuaishou remains committed to optimizing the balance between its traffic ecosystem and monetization strategies, leveraging technology and innovation to unlock more monetization potential. The company plans to focus on refining industry-specific operations, improving marketing solutions, and expanding its e-commerce and online marketing services, aiming to create long-term value for shareholders and partners.

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Kuaishou Technology First Quarter 2024 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. This English line will be in listen-only mode.I will now turn the call over to Mr. Matthew Zhao, VP of Capital Markets and Investor Relations at Kuaishou Technology.

[Huaxia Zhao, executive]

Thank you, operator. Good evening, and good morning to everyone. Welcome to our first quarter 2024 financial results conference call. Joining us today are Mr. Cheng Yixiao, Co-Founder, Chairman and CEO; Mr. Jin Bing, Chief Financial Officer.Before we start, please note that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ from those discussed. The Company does not undertake any obligation to update any forward-looking information except as required by law. For all important information about this call, including forward-looking statements, please refer to the company's public information or the first quarter 2024 results announcement for these 3-months ended March 31, 2024 issued earlier today.During today's call, management will also discuss certain non-IFRS financial measures. These are provided for additional information and should not replace IFRS based financial results. For a definition of non-IFRS financial measures and reconciliation of IFRS to non-IFRS financial results and related risk factors, please refer to our first quarter 2024 results announcement.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 a 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. Lastly, unless otherwise stated, all currency units mentioned are in RMB.Now, I will hand the call over to Yixiao.

[Yixiao Cheng, executive]

Hello, everyone. Welcome to Kuaishou's first quarter 2024 earnings conference call. In Q1, our total revenue grew by 16.6% year-over-year to RMB 29.4 billion with a gross margin close to 55%, adjusted net profit of RMB 4.4 billion and adjusted net margin of 14.9%. These results clearly outperformed the market. Despite being the typical slow season, we delivered robust operating and financial performance, highlighting strong business resilience and economic mode created by our users and commercial ecosystems. We're off to a great start in 2024.In Q1, we rolled out traffic recommendation mechanism to all users, boosting user experience and monetization efficiency. Our smart marketing solution helped the marketing clients improve performances, attracting more budgets. We're committed to creating an excellent shopping experience for users and have steadily grown our e-commerce business with a dual-drive approach of live streaming e-commerce and shelf-based e-commerce.In Q1, we continue to foster a healthier live streaming ecosystem, laying a solid foundation for the platform's sustainable development. We also steadily advanced the R&D and training of our self-developed large language models to empower various businesses scenarios with AI technology, enabling growth through increased efficiency.Next, I'll discuss our key business developments in Q1. First, user growth and ecosystem construction. In Q1, average DAUs and MAUs on the Kuaishou App reached 394 million and 697 million, growing by 5.2% and 6.6% year-over-year, respectively. The average daily time [ spent ] per DAU on the Kuaishou App was 129.5 minutes. Our total user time spend in Q1 grew by 8.6% year-over-year.These increases reflect our commitment to advancing our high-quality user growth strategy. By catering user needs with great content and continuously improving user experience, we provide more value to our users. For user growth, we optimized our user acquisition channel mix, combining algorithm-based forecast on new user retention rates to increase the ROI of our user growth.We also launched initiatives like exploring diversity of our user interest, refining short video elements and enhancing short-video common ranking strategies. These efforts improved the user experience and increased the user time spent on our platform.For content supply, we backed quality creators with a distinct Kuaishou characteristics and generated differentiated, high-quality, unique Kuaishou IP content for special occasions, giving users more reasons to open the Kuaishou App. For instance, to celebrate the Year of the Dragon with our vast user base of nearly 400 million, we continued our, A Taste of Chinese New Year on Kuaishou activities in 2024, offering a variety of Chinese New Year themed content. [ Highlighted ] was Dragon Night, a fan celebration on Kuaishou hosted by Jackie Chan, who welcomed numerous celebrity fans and Kuaishou [indiscernible]. This event attracted over 216 million views with over 690 million cumulative likes and over 6.63 million peak concurrent users.Additionally, themed programs like Kuaishou 1001Nights Fans' Gala, online festival fairs and the VillageBasketball Association, not only provided a stage for creators to showcase their talent, but also increased the users' stickiness on Kuaishou.During the Chinese New Year Season,20 short plays received more than 100 million views with 7 exceeding 300 million views each. More various diverse short play series like a [ Superpowered ] Team and [ Grandpa Night ] generated huge social buzz from celebrity led to [ KOL ] led. Kuaishou short plays is making great advancements.Regarding our search business, we optimized the search function by leveraging large language model technology and refined the landing page for a search after watching feature to enhance the user experience. These efforts resulted in improved user penetration and overall search experience.In Q1, the monthly average users for Kuaishou Search increased by more than 15% year-over-year with the daily searches reaching a peak of nearly 800 million. We actively promoted search commercialization revenue from [ search ]. Search marketing services grew by over 50% year-over-year in Q1.Second, online marketing services, in Q1, with the macro economy and consumer market is showing signs of stabilization and gradual recovery, our revenue from online marketing services rose by 27.4% year-over-year to RMB 16.7 billion, accounting for 56.6% of our total revenue. We [ rigorously ] promoted the use of our smart marketing solution across various scenarios, posting active marketing clients by nearly 90% year-over-year in Q1.Furthermore, we guided a traditional external marketing clients' who shift their operations natively onto Kuaishou through our self-developed sales on a conversion path. This transition helped them convert targeted users and complete closed loop transactions on our platform in reaching our insights to users. By using algorithms to model the conversion of active users into transaction through our marketing activities, we further unlocked to the monetization potential of our online marketing services.In Q1, leveraging our AI and LLM capabilities, our smart marketing solution provided clients with end-to-end solutions to improve efficiency, covering smarter creations, smart replacements, smart connection. With our AIGC capabilities for smart creation, we could quickly generate higher quality creative content, diversifying our creative deployments.In Q1, the peak daily spending from the clients with AIGC marketing materials exceeded RMB 10 million. Regarding smart placement, our UAX product and omni-platform marketing solution offer clients a range of automated placement functions like bidding, real-time tracking and adjustment. In terms of smart connection, our AI-driven customer service helps clients communicate with target users, significantly improving marketing conversion efficiency.In specific industries, the conversion rate from content exposures to lead generation has increased by over 40%. In Q1, revenue from our enclosed loop marketing services grew rapidly year-over-year, outpacing the overall e-commerce GMV growth. We further iterated our omni platform, marketing solutions strategy and capabilities. Especially our omni platform merchandise marketing solution introduced new core features like marketing, material data disclosure, content creation and editing optimization.We provided all clients with access to these new features in March to help them explore lower high-quality traffic and expand their GMV. Regarding smart hosting product, we tested and unveiled live-streaming hosting functions for major promotion scenarios, improving clients' marketing performance and willingness to place ads with us. Merchants' total marketing spending through our omni-platform marketing solution or smart hosting products accounted for 30% of overall enclosed loop marketing spending in Q1.In Q1, our year-over-year revenue growth in external marketing services continued to outperform the market, especially in new media information, gaming and education sectors. Within the media information sector, average daily spending in marketing for paid short videos, short plays rose over four-fold year-over-year. This was fueled by our ongoing optimization of this self-developed sales funnel conversion path and increased supply and demand resulting from incentives policy.On the gaming front, in Q1, we validated the effectiveness of the IAA marketing model for Kuaishou's mini-program games, boosting the marketing spending of our gaming clients. Marketing spending in the education sector nearly doubled year-over-year in Q1, driven by our ability to meet growing user demand, resulting in increased budget from marketing clients.Our smart placement product under external marketing services, the UAX, provides tailored full-lifecycle automated marketing solutions to clients in diverse industries, enhancing their marketing conversion efficiency to the market spending through the UAX increased by [ 4 times ] quarter-over-quarter in Q1.In brand marketing services, we have established a rich brand of marketing matrix and customized solutions for our clients. By leveraging our superior content and precise demographics targeting and efficient conversion, we helped clients achieve their marketing goals of improving brand awareness and sales conversion.As a result, we have successfully attracted budgets from a wider range of brand clients. The number of brand marketing clients during the 2024 Chinese New Year soared by more than 120% year-over-year. The blockbusters from Kuaishou Astral Short Plays delivered highly effective exposure to targeted demographics reach for brands like Tmall.com and Honor Smartphones, among others.We upgraded our marketing solutions, integrating brand awareness, operational marketing and sales conversion for clients in the automotive industry aiming to a more efficient brand marketing and lead operation. Recently, we collaborated with the Dongfeng [ and ] Nissan to attract traffic using celebrity IPs and KOL recommendations. Our auto dealer network on the platform then engaged with this traffic, converting it into sales. This resulted in nearly 800 million views for the brand-related content achieving omni domain operations for the launch of the new vehicle models.Third, our e-commerce business. In Q1, we enhanced buyer conversion efficiency by our refining operations, further enriching our merchandise offerings and expanding e-commerce scenarios. As a result, our e-commerce GMV grew by 28.8% year-over-year to RMB 288.1 billion.On the user front, our e-commerce monthly active paying users grew by 22.4% to RMB 126 million in Q1, mainly due to the expanding shopping scenarios like shelf-based and short video e-commerce and the ongoing upgrade of marketing tools and features. We also reinforced policy guidance to enhance the end-to-end experience for consumers during and after sales. These policies, including speedy refund and proactive service takeover by platform, greatly improved the overall customer experience.During the Chinese New Year promotion, the number of paying users surged by over 60% compared with the last year. On the supply side, the number of monthly active merchants grew by nearly 70% year-over-year in Q1, mainly due to the sustained activity level of newly on-boarded merchants. We clearly optimized our policies to attract merchants and augmented marketing capabilities to cover a diverse range of supplier types from brands and large merchants to small and medium-sized merchants.Consequently, the number of newly on-boarded and monthly active merchants [ continues ] to grow with a high speed year-over-year in Q1. For small and medium-sized merchants, we rolled out generous incentives for new merchants under the Gold Bound Policy supporting their co-start with initiatives for deposits, traffic generation, distribution and training. The improved incubation and educational resources have equipped merchants to scale up their business on our platform.We maintained strong growth among branded merchants in Q1. During the Chinese New Year promotion, brand GMV surged by over 70% compared with last year. Branded Merchants significantly increased their focus on both short videos and shelf-based e-commerce. In Q1, brand GMV leads by more than 110% in short video segment and over 80% in shelf-based segment year-over-year. Across verticals like consumer electronics and home appliances, men's apparel and sports and gems and jewelry contributed relatively high growth rates. We encouraged new small and medium-sized KOLs to collaborate with the brands in live streaming through the Supernova Initiative.We also provided additional marketing tools for large-scale live streaming to assist leading KOLs in making breakthroughs. For KOL distribution, we recommended a high-quality merchandise KOLs and helped small and medium-sized KOLs to select merchandise via external coordinators. This strategy strengthened our platform's matching capabilities, [ greatly ] [ enhanced ] streamers' willingness to host live streaming sessions and amplify their commercial contributions in short video and other e-commerce scenarios.Our shelf-based e-commerce continued its strong growth in Q1. Shelf-based e-commerce GMV outpaced the overall platform growth, accounting for approximately 25% of total GMV. We achieved remarkable strides on both the supply and demand fronts with more than 50% and 60% of year-over-year increases in average daily active merchants and average daily paying users, respectively in Q1.We also further enhanced the merchandise infrastructure, enriched merchandise offerings and improved the price management system. These efforts enable us to fulfill core user group needs in key categories such as the fresh produced food, personal care and daily necessities. Meanwhile, our short-video e-commerce GMV maintained its rapid growth in Q1, nearly doubling year-over-year.Within short video, e-commerce monthly and daily active paying users continue to rise, supported by consistently enriched content offerings, for example, the order volume of our shopping mall during the Chinese New Year Promotion soared by 98% compared with the last year, with impressive performances across short video, search induced and shelf-based e-commerce. GMV from short video-embedded shopping links, search-induced e-commerce and shelf-based e-commerce search by 345%, 164% and 383%, respectively compared with the last year.These stellar results highlighted how our dual engine of live streaming and shelf-based e-commerce have been unlocking -- has been unlocked more new business opportunity for merchants.Next, regarding our live streaming business, in Q1, we continue to [ tribute ] a healthy live stream ecosystem laying a solid foundation for long-term and sustainable growth. We strongly supported mid-tier streamers', improving their activity and quality through online training, offline lectures and streamer tasks. This approach accelerated new streamers' growth and [ incentivizing ] talent agencies to drive their [ revenue ]. We also continue to promote emerging categories such as multi-host live streaming and Grand Stage, iterating product features and reaching our live stream ecosystem.By the end of Q1, we have partnered with 50% of more talent agencies and [ grown ] the number of talent agency managed streamers on Kuaishou by 50% year-over-year. In addition, as the examples of our [ live streaming+ ] services empowering traditional industries, Kwai Hire launched the New Year Job Fair in Q1 to address job seeking and recruitment needs following the Chinese New Year.The event featured various online activities hosted by KOLs and well-known enterprises. In Q1, daily average number of resume submissions soared by over 180% and the average -- daily average number of users submitting resumes increased by over 120%, both on a year-over-year basis.Additionally, by the end of Q1, Ideal Housing expanded its reach to over 100 cities nationwide and established partnerships with over 50,000 streamers.Finally, regarding our overseas business progress, we've established differentiated advantages in key overseas markets by effectively expanding our user base and implementing a robust localization strategy. With a focus on localized or original content generation, we rapidly grow our content supply by optimizing our platforms to traffic mechanism and diversifying creators' income sources.We capitalized on events like Brazilian Carnival and Brazil's largest reality show, BBB 24, among others, to consistently increase the user activeness. These initiatives helped to fortify Kwai's brand awareness and recognition, laying the groundwork for enhancing monetization as one of the [ Big B ] sponsors [indiscernible] related topics on social media specifically for BBB. By the time, the show ended on April 16 it had attracted 14 billion [indiscernible] views.In Q1, DAUs in our key markets grew rapidly with average daily time spent per DAU improving both year-over-year and quarter-over-quarter. Notably, DAUs in Brazil rose by 13% year-over-year. And the average daily time spent per DAU exceeded75 minutes. As a result, revenue from our overseas business reached to RMB 991 million in Q1, up by 193.2% year-over-year.As we continued to boost operating efficiency, we successfully narrowed our overseas operating loss by 67.4% year-over-year with operating loss also reduced quarter-over-quarter.In terms of the overseas online marketing services, we continuously refined our localized marketing capabilities and enhanced our product ecosystem. These efforts further improved advertisers' marketing efficiency and placement stability. Additionally, we focused on developing platform capabilities, service quality and creativity. By leveraging marketing opportunities from events such as the Brazilian Carnival, we [ also ] bolstered both brand awareness and sales conversion for international and Chinese brands operating overseas.In Q1, marketing revenue from our overseas business surged by nearly three-fold year-over-year. During the Brazilian Carnival, Kwai helped the Chinese markets and created a blockbuster marketing campaign through a diversified creative solution, leading to a total of 95.6 million exposures. This successful event shaped to -- the brand awareness and product reputation in the Brazilian market. Kwai also developed a detailed user profile analysis for [indiscernible] providing valuable data points for the brand's ongoing expansion efforts in Brazil and targeted promotional strategies and long-term operations.To sum up the business model and the future potential of short video combined with the live streaming, continues to be where we see one of the greatest opportunities for our business. We are also committed to building healthier and more sustainable community content and commercial ecosystem, investing in AI technology and empowering more business scenarios. Dedicating our resources to those areas will help us elevate users' content consumption experience and deliver augmented value to our users, providing more possibilities for quality and efficiency improvements for merchants and marketing clients in ecosystem.Now, [ that ] concludes my prepared remarks. Next, you will hear from our CFO, Mr. Jin Bing, who will discuss the company's financial performance for Q1.

[Bing Jin, executive]

Thank you, Yixiao, and hello, everyone. In the first quarter, we actively navigated the market challenges adhering to the strategy of high-quality, efficient business growth. By integrating technology and boosting efficiency, we reinforced our core strengths. Our sustainable strategies across all of our business are well executed, showing a healthy and robust financial position that marks a strong start to the year.Our focus on the user growth and efficiency and quality, coupled with significant enhancements in technology and premium content quality has laid a solid foundation for the sustainable monetization and profitability.Our adjusted net profit reached RMB 4.39 billion in Q1 with an adjusted net profit margin close to 15%, showing a substantial increase in profitability.Now let's have a closer look at our financial performance for Q1. Our group's revenue grew by 16.6% year-over-year to RMB 29.4 billion, mainly driven by growth in our online marketing services and e-commerce business. Online marketing services revenue increased by 27.4% to RMB 16.7 billion from RMB 13.1 billion in Q1 last year and accounted for 56.6% of total revenues. This growth was mainly driven by online -- more online marketing clients, higher spending, particularly from e-commerce merchants. Adoption of our smart marketing solutions and enhanced capabilities, our omni platform marketing products further fueled this growth. Gradual recovery in the macro economy and the consumer market also promoted advertisers' budget allocation, leveraging our AI and LLM model capabilities.We have been able to deeply [ having ] the users' needs, boosting marketing budget allocation and the conversion efficiency. Other services revenue grew by 47.6% to RMB 4.2 billion from RMB 2.8 billion in Q1 last year, mainly driven by the continuous increase in e-commerce GMV, which boosted e-commerce commission income. We enriched our diverse shopping scenarios, expanded high-quality content offerings, upgraded marketing tools and optimized platform policies.These efforts greatly improved the consumer experience and higher conversion efficiency, leading to a rapid growth in monthly active merchants and monthly active paying users driving 28.2% year-over-year increase in e-commerce GMV. Our live streaming revenue was RMB 8.6 billion, a decrease of 8% from RMB 9.3 billion in Q1 last year.Despite industry challenges, we continue to innovate live streaming scenarios, promote emerging categories, deepen our focus on high-quality content to foster a sustainable and healthy live stream ecosystem. In Q1, our cost of revenues decreased by 1.6% to RMB 13.3 billion and accounted for 45.2% of total revenues, mainly due to technology upgrades such as optimizing the structure of bandwidth resources, which cut down on both bandwidth expenses and a server of custody costs year-over-year.Gross profit grew by 37.6% year-over-year to RMB 16.1 billion. And our gross profit margin improved to 54.8%, expanding by 8.4 and 1.7 percentage points year-over-year and quarter-over-quarter, respectively.Moving to expenses. Selling and marketing expenses increased by 7.6% year-over-year to RMB 9.4 billion, accounting for 31.9% of total revenues, down from 34.6% in Q1 last year. The year-over-year growth was mainly due to increased spending on business promotions, including e-commerce business and et cetera.R&D expenses were RMB 2.8 billion, decreasing by 2.6% year-over-year. R&D accounted for 9.7% of total revenues dropping from 11.6% in Q1 last year. Administrative expenses decreased by 49.7% year-over-year to RMB 462 million, accounting for 1.6% of total revenues, down from 3.6% in the same period last year. The decrease in R&D and administrative expenses was mainly due to lower employee benefit expenses, including related share-based compensation expenses.Group level net profit for Q1 rose to RMB 4.1 billion, a significant improvement from a net loss of RMB 876 million in Q1 last year. Group level adjusted net profit rose to RMB 4.4 billion, a considerable leap from RMB 42 million in Q1 last year. Our balance sheet remains robust with cash and cash equivalents, time deposits, restricted cash and wealth management products of RMB 63.7 billion as of March 31.Through our enhanced monetization capabilities and efficient working capital management, we generated a positive operating net cash flow of RMB 5.8 billion in Q1. Looking ahead, we are committed to optimizing the balance between our traffic ecosystem and the monetization strategies to [ cultivate ] a healthy and sustainable ecosystem for users and merchants. We'll continue improving efficiency and maximizing ROI as our revenues expand, leveraging our advantages in technology and innovation. We aim to unlock more monetization potential and create long-term value for our shareholders and partners.This concludes our prepared remarks. Operator, please now open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Lincoln Kong of Goldman Sachs.

[Lincoln Kong, analyst]

Congrats on the very strong first quarter results. So my question is around the e-commerce business. Can management share the progress of our e-commerce shopping mall business? And any more thoughts around the launching of Kuaishou select the sales hosting model here?

[Yixiao Cheng, executive]

Thanks for your question. Our e-commerce business is experiencing rapid growth. As one of the growth engines of our e-commerce business, shelf-based e-commerce achieved high-speed growth of more than 50% year-over-year in Q1 of 2024, driven by increases in both supply and demand.On the user side, the shelf-based e-commerce value proposition to users lives and better meeting users' predictable shopping needs, attracting new users to our platform and heightening the consumption frequency of our active users.Targeting on users growing predictable needs, we opened full access to the shopping mall [ tab ] as well as sections like big brand, big subsidy and special sale at low prices to significantly strengthen the users' mindset of making purchases in our shopping mall.In Q1, the number of average daily buyers of our shopping mall soared by over 70% year-over-year. The rapid growth indicates a rising consumption demand in our shopping mall scenarios where users are gradually developing browsing and searching habits. This clearly shows the long-term potential for our shopping mall business.On the merchant side, more and more merchants have found their path to operations in the shelf-based e-commerce realm. Thanks to our efforts in [ help ] merchants with the different operational capacity and merchandise categories to acquire business opportunities on our platform.As the operational needs of both brand merchants and white label merchants continually grow, the number of average daily active merchants surged rapidly by more than 70% year-over-year. Meanwhile, we continue to improve our supply chain capabilities and launched a consolidated shipping service for Northwest China in Q1, which allows merchants to ship merchandise to consumers in Northwest China through transit consolidation of warehouses.This service considerably lowered shipping costs while ensuring logistics [indiscernible], which has helped merchants to expand into remote markets.During the rapid development of our e-commerce business in recent years, we have seen some merchants' operational pain points first hand, especially traditional merchants, including original manufacturers at the industry zones. These merchants already have deep-seated supply chain expertise and are looking to work with new platforms like Kuaishou to develop their business.They have good quality products, but lack marketing and sales channels. To address this pain point, we launched Kuaishou's [ Choice ], providing merchants with platform sales hosting services to give them a pathway to enter the market and lower their operational threshold.Under this model, merchants only need to be responsible for [ carting ], delivering and providing customer services, while Kuaishou takes care of the SKU operations, marketing and sales. This cooperative relationship allows both the platform and merchants to do what they do best.Leveraging the first half sales data of our e-commerce platform, we could more clearly identify which product categories or a single SKU have the potential to become blockbusters. This helps us elevate the efficiency of product selection and pricing, more over through traffic integration and large-scale operations. We offer merchants predictable sales channels and sales on a conversion path. This service reduces merchants' operating costs on Kuaishou and facilitates rapid transactions on our platform, providing merchants with viable solutions for their operations.Our shopping mall will roll out more marketing features during the June 18th shopping festival to meet user shopping needs and help merchants achieve high sales. Going forward, we hope to integrate shelf-based and content-based e-commerce segments more deeply and complementarily, which will become the sustainable driving force of our e-commerce business. This will help more merchants achieve omni domain operations more effectively and attract more business opportunities.

[Operator]

Your next question comes from Tom Chong of Jefferies.

[Thomas Chong, analyst]

My question is regarding online marketing service. As company achieved robust revenue growth in online marketing service in Q1, looking ahead, what will be the driving forces for further revenue growth?

[Yixiao Cheng, executive]

Thanks for your question. In Q1, online marketing services revenue reached RMB 16.65 billion, up 27.4% year-over-year. Both close-the-loop e-commerce marketing services and external marketing services grew remarkably as we provided better marketing solutions to clients, driving ECPM improvement.Our growth was led by our success in [ bringing ] clients deeper sales [ funnel ] conversion [ paths ] for targeted demographics through measures such as joint modeling as well as end-to-end efficiency enhancements from our LLM driven smart marketing solutions.Looking ahead, we believe our online marketing services revenue growth will mainly be led by advancements in ECPM and ad load. ECPM, in particular, is one of the key metrics where we still have significant room for improvement compared with our peers. We will continue to deepen the sales funnel conversion path for our clients' targeted demographics, which will lead to better build from clients.Our LLM based smart marketing solutions have already shown promising results in areas such as smart creative content production, smart marketing placements and smart interaction and connection. Going forward, we also expect LLMs to help us achieve greater breakthroughs in understanding users' preferences and distributing marketing content.In terms of ad load enhancements, we will integrate native marketing content with organic content by refining native marketing materials, achieving a true marketing ad content approach, which will increase the ad loads upper limit.In Q1, the spending of external native marketing materials grew by 30% quarter-over-quarter with a consistent increase in the share of external marketing spending from native marketing materials.In addition, we have discovered opportunities in some prospective industries. In the automobile industry, many auto brands have seen the huge potential of the lower-tier market. And our integrated marketing solutions that combine brand awareness, sales conversion marketing for the automobile industry, have brought us more [ budgeted ] allocations from auto manufacturers and aftermarket clients.In the education industry, there is potential for higher year-over-year growth by addressing our core demographics user need for professional education and interest-based courses. In the media and information industry, marketing spending of paid short plays increased month-over-month based on the closed-loop operation of our self-developed conversion path for short plays, which we established at the end of last year.This year, we will work to replicate this model in mini-program games and online literature industries, not only elevating user experience and amplifying user time spend, but also accumulating more post-link conversion data to enhance recommendation accuracy.In general, we will continue to refine industry-specific operations, iterate a smart marketing product and optimize algorithms to bring better marketing placement and conversion to clients. We are very confident we can grow our online marketing services revenue at a faster pace than the industry.

[Operator]

Your next question comes from Felix Liu of UBS.

[Felix Liu, analyst]

Congratulations on the very strong Q1 results. Can management share more color on the latest developments and your strategy and tactics for local services in 2024?

[Yixiao Cheng, executive]

Thanks for your question. After 1.5 years, we have deeper understanding on users' needs and preferences for local service content. We also validated the business model for our local services in some core cities and have a clear picture of our strategy and tactics for the business.Now, consumer spending is driving economic force with great potential for unleashing user consumption in lower-tier markets. With this backdrop, we think our local services can bring more new customers and greater incremental opportunities for merchants in 2024.As for our recent developments, first, on the supply side, we have been continuously optimizing industry-specific merchandise and conducting targeted programs in core categories, making breakthroughs in certain product categories. As a result, in Q1 of 2024, the number of average daily active merchants and the number of merchandises rose by 29% and 38% quarter-over-quarter, respectively.We continue to develop multiple categories. In Q1, capitalizing on the key winter vacation and the Chinese New Year promotion period. We cooperated with traditional and online travel agencies to enrich the variety of offerings within the hotel and travel categories. By leveraging our user base and content advantages, we created benchmark [ cases ] such as the [ Jiaxing ] South Lake [ scenic ] area.Content-wise, we continue to work with top-notch KOLs through various policies. We [ helped ] to shorten KOLs growth cycles and empowered creators to increase income on our platform, jointly building a high-quality content ecosystem. In Q1, the number of KOLs, distributing products grew by 32% and the number of daily average active streamers hosting live sessions increased by 62%, both on a quarter-over-quarter basis.On the demand side, we made continuous efforts to strengthen the users' mentality in accessing our local services by improving basic functionalities and enriching marketing features. This allows us to consistently reinforce the idea of value for money to users while enhancing subsidy efficiency.In addition, we continue to qualify KOL and merchant fulfillment capabilities, optimize our platforms, governance system and boost governance efficiency, all aimed at elevating user experience. In Q1, average daily paying users of local services, Kwai market by nearly 9% year-over-year.Regarding our platforms matching capability, we adjusted our traffic mix by synergizing public and private domains. This optimized our local content distribution efficiency in recommended traffic, elevating both user experience and transactional value. As a result, our local services GPM for both short video and live streaming continue to increase quarter-over-quarter in Q1 and drove rapid GMV growth.As for our strategic priorities in 2024, first, we will tailor our operations to the characteristics of different industries to achieve industry-specific refined operations. We will steadily expand the scale of our in-store dining services while implementing differentiated category growth strategies for general in-store business and the hotel and travel business.Second, on the product strategy front, by working with service providers and strengthening our own operational capabilities, we will strengthen the users' price mentality with a higher subsidy efficiency. We will advocate affordable prices for superior quality goods to provide users with products that offer the best value for their money.Third, we will boost both the quality and quantity of our local services content. We're going to focus on quality. Content is our biggest differentiator compared with the shelf-based platforms and is central to our ability to run this business.By providing excellent content, we can attract more users and help merchants and KOLs provide good products and services to users, increasing the user and commercial value of our platform.

[Operator]

Your next question comes from Alex Poon of Morgan Stanley.

[Chun Poon, analyst]

Congrats on very strong results. The company has just announced a new buyback program of up to HKD 15 billion over the next 3 years. What are the main considerations in formulating this amount? And what is the expected pace of execution?

[Bing Jin, executive]

Thank you for your question. We are committed to creating more value for our shareholders, especially in terms of capital return. After our group level adjusted net profit turned positive in Q1 last year, we immediately announced a HKD 4 billion repurchase program, which was well recognized by the market.On December 18th last year, we also implemented an automatic share repurchase plan in accordance with the new rules of the Hong Kong Stock Exchange. This plan is part of the HKD 4 billion repurchase program, allowing our company to execute repurchases during the exchanges escalated to restricted period.As of the closing of trading on May 21st, we had repurchased around 61.74 billion shares, accounting for about 1.4% of our total share outstanding and for a total of approximately HKD 3.09 billion in aggregate. And this figure has amounted to 1.7% of our total shares outstanding as of May 22nd. There are some changes out there.These repurchases demonstrate our genuine commitment to returning value to our shareholders and our confidence in the company's value.As the original HKD 4 billion repurchase program will expire upon the shareholder meeting in June this year, we have put forth a new repurchase program with the Board of Directors for up to HKD 16 billion over the next 3 years. In the current market environment and this new repurchase program is also a testament to our confidence in the company's value and commitment to returning value to shareholders.This program is based on a thorough analysis that includes our cash flow position and market expectations for profitability over the next 3 years and cash reserves among others.The actual implementation of the new program will depend on comprehensive considerations based on the capital market environment. We will prudently arrange the pace and intensity of share repurchases to continuously enhance shareholder returns.

[Operator]

Your next question comes from [indiscernible] of CICC.

[Unknown Analyst]

Congratulations on another strong quarter. My question is about AI. Can management share the latest progress on your AI and the large language model?

[Yixiao Cheng, executive]

Thanks for the question. In Q1, we steadily improved the functions of our self-developed LLMs and the speed of their application in various business scenarios. For improving model performance based on pre-training data and model architecture monetization, optimization, we made technological breakthroughs in [ RLHF ]. This made the overall performance of our updated HKD 175 billion scale LLM to approach that of GPT 4.0. Moreover, we recently unveiled our first multi-model LLM.I'd also like to elaborate on our LLM's application and business scenarios. In Q1, we specified our LLM application strategy of upgrading understanding, facilitating integration and exploring generation. We made notable progress in omni domain LLM, content understanding, AI integrations -- interactions, digital humans and business scenarios and the AIGC among others.Regarding omni domain LLM content understanding, our multi-model LLM helped us gain a deeper understanding of short video and live streaming content and user comments as well as explored users' behaviors and interests. In doing so, we aim to better recommend organic marketing and e-commerce content, improving marketing spending and e-commerce GMV while amplifying user time spend.On the AI interaction side, we focus on the usefulness of AI Kwai, where we significantly enhanced its reply accuracy rate and launched multi-[ round ] dialogs and image and text functions. In Q1, the user penetration of AI quite grew tremendously with the number of daily users exceeding 1.5 million at its peak, making our community more interactive.Lastly, for digital humans and business scenarios in AIGC, our LLM capabilities cover a range of scenarios, including short video, live streaming and smart customer services. Specifically, our AI products for short video scenarios can provide clients with short video script creation, material discovery and automatic marketing placement capabilities.Our AI digital human live streaming offers client's [ ability ] of virtual person, live streaming 24/7. And our smart customer services can help clients automatically identify questions and solve various queries more smoothly and naturally through notable rounds of dialogues. LLMs application in these scenarios considerably lowered our clients' customer acquisition costs and brought us incremental marketing placement opportunities from clients.In Q1, daily spending of AIGC live streaming and short video materials surpassed 10 million at its peak. The deep integration of LLMs with short video and live streaming business [ scenarios ] also boosted our commitment to R&D investments in LLMs.We will continue to share more of our progress in LLMs as they unfold going forward.

[Huaxia Zhao, executive]

That comes to the end of Q&A session. Back to you, [indiscernible].

[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.[Statements in English on this transcript were spoken by an interpreter present on the live call.]