Kuaishou Technology

HKEX:1024

Earnings Call Transcript 2021-Q2

[Operator]

[Audio Gap]

financial results conference call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. [Operator Instructions] So we are doing recording of the meeting.

I will now turn the call over to Ms. Heather Diwu, Director of Investor Relations at Kuaishou Technology.

[Heather Diwu, executive]

[Interpreted] Thank you, Amber. Good evening, and good morning to everyone. Welcome to our second quarter and interim 2021 financial results conference call. Joining us today are Mr. Su Hua, Co-Founder, Chairman and CEO of Kuaishou; Mr. Cheng Yixiao, Co-Founder, Executive Director and Chief Product Officer; and Mr. Nicholas Chong, our CFO.

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.

During today's call, management will also discuss certain non-IFRS financial measures for comparison purposes only. For a definition of non-IFRS financial measures and the reconciliation of IFRS to non-IFRS financial results, please refer to our results announcement for second quarter and interim report ended June 30, 2021 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 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.

I will now hand the call over to Mr. Su Hua, Co-Founder, Chairman and CEO of Kuaishou.

[Hua Su, executive]

Welcome, everyone to our second quarter earnings call. As a newly listed company for just half a year, we are a newcomer to the capital market with a lot to learn. However, as an Internet company, we are already 10 years old, a young adult, so to speak. Ten years ago, we pioneered the short video industry, and today, short video has become the mainstay for the new generation of Internet users. While we currently rank second in the industry, our user base and the time spent by users on our platform both continue to grow, making us part of the lives of more than 500 million users in China.

In addition to users, our number of business partners also continues to grow. Having worked hand-in-hand with many over the years, they have contributed to the prosperity of Kuaishou's ecosystem by creating high-quality content for users and by providing a rich variety of products and services. Strengthening the win-win collaboration with our ecosystem partners and bringing more benefits to a wider group of value creators is the value we have always upheld and we'll continue to reinforce in our next stage of development.

Now I'd like to share with you more about our operations. I will cover 4 areas today: our users; our traffic composition; the 3 business models to monetize our traffic; and lastly, our overseas business.

I'll start with users and focus on 2 aspects we care deeply about, DAUs and user stickiness. In the second quarter, our DAUs reached 293 million, achieving year-over-year growth of 12%. Year-over-year growth accelerated in April, May and June, reaching nearly 14% in June. The momentum continued after the second quarter as demonstrated by accelerating growth, both on the year-over-year and month-over-month basis.

Our user stickiness is also strengthening, as evidenced by in the second quarter, our MAUs reached 506 million, up 6.7% year-over-year with DAUs to MAUs ratio expanding to 58%. Daily average time spent per DAU reached 107 minutes, up 25% year-over-year and 7.6% quarter-over-quarter.

Now let's turn to our traffic composition or the public and private domains people often refer to. We began our operations in the private domain, and it remains the bread and butter of our platform. There are strong emotional bonds between our gamers and their followers built not in just a day or 2, but over 1 year, 2 years or even longer. I myself have followed a number of streamers for years and bore witness to the different stages of their life, school, graduation, getting married and having children, sharing their happiness and worries.

Our pool of high-quality streamers continues to expand with 1.9 million active streamers sharing their lives every day in the second quarter. These creators produce high-quality content and, at the same time, reap solid rewards. In second quarter alone, total revenue sharing to creators exceeded RMB 10 billion, growing significantly year-over-year. We firmly believe in the saying on Kuaishou, one shall have peace of mind when he possesses a piece of land.

This year, we launched private domain optimization projects to put this concept into practice. Conscientious creators on our platform who prioritize long-term success with positive influence to society and follower loyalty will gain more traffic and development support. Correspondingly, short-sighted creators with negative influences to society and hurt the interest of their followers will be cracked down and restricted.

In the short term, this project may slightly affect our monetization efficiency. However, in the long run, we believe it will enhance Kuaishou's overall user stickiness and commercial value. Even with such a large user base, we're still growing, benefiting from extraordinary vitality of our communities and the enhancing social attributes as evidenced by increasing number of mutual followers, which exceeded 12.6 billion pairs on a cumulative basis and a year-over-year boost of 60%.

To achieve incremental growth, we have made many endeavors to optimize public domain. The improvement of our public domain capabilities is the upstream of our private domain traffic strategy and our efforts have already produced good results. As mentioned, average daily time spent per DAU rose 25% year-over-year.

There are a number of factors driving the growth in both DAUs and average daily time spent per DAU. First, we have world-leading AI technology. We have continued to invest in this area, which provides us with more comprehensive and real-time insights into our users' long-term and short-term interest, thereby optimizing user content consumption experience.

Secondly, we carried out many content upgrades, achieving outstanding performance in short play, sports and top news. Take short plays, for instance, by the end of the second quarter, over 800 short-play series had received more than 100 million views each.

Thirdly, we have been exploring the realization of more user consumption cases. For example, we use [ visualization ] to enrich our content offerings in cosmetic science and technology, finance and economics, education and real estate. This helped build a highly efficient and long-lasting connection between people and services and unlocked new value for users as well as commercial value.

Now let's move on to our 3 business models. We achieved total revenue of RMB 19.1 billion in the second quarter, increasing 49% year-over-year. Gross margin rose 2.7 percentage points quarter-over-quarter to 43.8%.

First, online marketing services. In Q2, its revenues increased 156% year-over-year to RMB 10 billion, continuing to contribute more than 50% to total revenue. Meanwhile, proportion from brand advertising continued to go up. As more advertisers recognize excellent results on our platform, they began to appreciate Kuaishou's strategic role in brand promotion.

In Q2, some well-known luxury brands placed advertisements with us as well. In addition, we launched Magnetic Taurus in the second quarter of 2021, which is a marketing platform dedicated to Kwai Shop owners. This platform enables Kwai Shop owners to grow their follower base and raise GMV. Such closed-loop advertisements more closely resemble organic content and provide better viewing experience with higher placement efficiency. Of course, given the later stage start of our advertisement business, there are still gaps to fill in our infrastructure and team capabilities, which we'll continue to optimize.

Live streaming is a relatively mature business model and the key components of Kuaishou's content ecosystem, contributing to both content and revenue. In second quarter, revenues from live streaming reached RMB 7.2 billion, essentially flat compared with the first quarter. As private domain optimization project continues to unfold, we believe that revenue from live streaming will remain relatively stable and expect it will increase slightly quarter-over-quarter.

Our e-commerce and other services achieved growth of 21.3% in second -- 213% in second quarter with revenue reaching RMB 2 billion. This was primarily driven by e-commerce, which registered GMV of RMB 145 billion, a 100% with number of annual active buyers continuing to grow steadily in second quarter. We also recorded rapid growth in new categories such as home textiles, home renovation and luxury goods while maintaining dominant position in leading categories, including women's apparel, jewelry and beauty and cosmetics.

As consumers are purchasing more products on Kuaishou, average value per order continues to increase. Kwai Shop's enhanced functionality has attracted more merchants, contributing to a sustained improvement in the closed-loop transaction ratio on our platform in the second quarter of 90%. With respect to merchandise supply, Kuaishou Selection's single month GMV exceeded RMB 10 billion.

Lastly, I'd like to give you an update on our overseas business, which I know many of you are interested in hearing more about. Overseas business remains an investment priority. Overseas short video and live streaming have relatively low user penetration and are ripe with opportunities for future growth and development.

We believe that as a leading short video and live streaming platform in China, Kuaishou can also become a key player in the overseas market. Our overseas business registered fast growth since beginning of this year with MAUs surpassing 180 million in June. By leveraging our inclusive and diverse localized content, we have made solid achievements in South America, Southeast Asia and Middle East.

Apart from business development, we also made social contribution by utilizing our technological advantage, leveraging strength of our community. For example, during Hunan floods, Kuaishou immediately opened up multiple mutual assistance channels and created a dedicated team on torrential rain in Hunan, with mobile resources to the greatest extent and assisted in the disaster relief efforts from all quarters of society. It was truly touching to see streamers emerging on our platform work to mobilize material supplies for assistance as soon as the need arose as well as passed along heart-warming strength during this time of great difficulty.

On June 6, Kuaishou celebrated 10th birthday. Every year, over 20 million people earn an income on our platform. Over 100 million are sharing their lives with rest of the world and more than 500 million are entertained on Kuaishou. Over the past decade, we have always adhered to philosophy equally weighted with efficiency and fairness. The philosophy has underpinned our development over the past 10 years and will further motivate us during the coming decade. We hope that Kuaishou's future development and growth will continue to inspire users and user society and create new opportunities for more people.

Now let me go through our financial performance. For second quarter of 2021. Our revenue for second quarter increased by 48.8% year-over-year and 12.5% quarter-over-quarter to RMB 19.1 billion. The increase was primarily driven by the growth of online marketing services and other services, including e-commerce business. As a percentage of revenues, online marketing services contributed 52.1%, while live streaming contributed 37.6%. The remaining 10.3% was from other services.

Our cost of revenues increased by 27.6% year-over-year to RMB 10.8 billion for second quarter of 2021. The year-over-year increase mainly came as a result of 2 factors: first, increases in bandwidth expenses, server custody cost depreciation and amortization cost of assets, which were in line with our increase in user traffic attributable to the enlarged user base and the growth of our business, including overseas; second, we increased employee headcount to support business growth, hence, employee benefit expenses and share-based compensation expenses increased accordingly.

Cost of revenues increased 7.2% quarter-over-quarter, which is primarily attributable to increase in revenue-sharing costs and related taxes as our revenue grew. In addition, employee benefits and share-based compensation expenses increased as a result of increased headcount to support our business growth.

As a result of the foregoing, our gross profit for the second quarter of 2021 reached RMB 8.4 billion, growing 89% year-over-year and 20% quarter-over-quarter. Our gross profit margin for second quarter of 2021 was 43.8% compared to 41.1% in first quarter of 2021 and 34.5% in the second quarter of 2020. These progressive increases were due to the expansion and growth of higher gross margin business lines, which includes online marketing services and other services, including e-commerce business.

Our selling and marketing expenses increased by 100.8% year-over-year to RMB 11.3 billion for second quarter of 2021. As a percentage of total revenues, our selling and marketing expenses increased to 58.9% in second quarter of 2021 from 43.6% for same period of 2020. The increase was primarily due to higher promotion and advertising expenses as we ramped up investment in overseas market expansion, product promotion and brand marketing campaigns.

However, when compared with the first quarter of 2021, the selling and marketing expenses in the second quarter of 2021 decreased in absolute terms by 3.3% and dropped to 58.9% from 68.5% as a proportion of total revenues. This was due to one-off Chinese New Year-related promotion expenses in the first quarter of 2021 and the improved cost efficiency, partially offset by increased investment in overseas market expansion in the second quarter of 2021.

Our administrative expenses for second quarter of 2021 increased by 149.4% year-over-year and 22.9% quarter-over-quarter to RMB 864.2 million. As a percentage of total revenue, it increased to 4.5% in the second quarter of 2021 from 2.7% for the same period of 2020. This was primarily due to an expansion in headcount to support business growth as well as a related increase in share-based compensation expenses. If the impact of share-based compensation expenses is excluded, then administration expense as a percentage of total revenues were 3%, 2.7% and 2.3% for the second quarter of 2021, first quarter of 2021 and second quarter of 2020, respectively.

Our research and development expenses for the second quarter of 2021 increased by 198.1% year-over-year to RMB 3.9 billion. As a percentage of total revenues, our research and development expenses increased to 20.4% in second quarter of 2021 from 10.2% in the same period last year. This increase was primarily driven by significantly higher headcount as we intensified investment in big data and expanding our advanced technology capabilities. Share-based compensation expenses also increased in line with our higher research and development head count.

When compared with the first quarter of 2021, second quarter 2021 research and development expenses saw more modest increases, growing 39.1% in absolute terms and increasing to 20.4% from 16.5% as a proportion of total revenues. If the impact of share-based compensation expenses is excluded, the research and development expenses as a percentage of revenues were 12.5%, 10.8% and 8.6% for the second quarter of 2021, first quarter of 2021 and second quarter of 2020, respectively.

Our fair value changes of convertible redeemable preferred shares in the second quarter of 2021 were nil compared to negative RMB 35.4 billion in the second quarter of 2020. This is the result of completing our initial public offering in February 2021.

Our loss attributable to equity holders of the company was RMB 7 billion for second quarter of 2021 compared to RMB 57.8 billion for first quarter of 2021. Adjusted net loss for the second quarter of 2021 was RMB 4.8 billion compared to a loss of RMB 4.9 billion for the first quarter of 2021.

Adjusted EBITDA for the reporting quarter was negative RMB 3.3 billion, improving from negative RMB 4.2 billion in the first quarter of 2021. Our net cash used in operating activities was RMB 2.7 billion in the second quarter of 2021. We maintained a strong balance sheet position in the second quarter with cash and cash equivalents, time deposits, restricted cash and wealth management products of RMB 57.2 billion as of June 30, 2021.

So this concludes our management's presentation. We will now have a Q&A session. Thank you.

[Operator]

[Foreign Language] Bank of America, Eddie Leung.

[Eddie Leung, analyst]

[Foreign Language] So I have 2 questions. The first one is about user growth. We heard from Mr. Su about the continuous user growth into the third quarter. So just wondering if there is any target for the full year, either domestically or for the overseas user base.

And then secondly, I'm wondering if the recent development in the regulation space would have any impact to our operations. For example, recent policies of data security and data privacy.

[Yik Kay Chong, executive]

[Foreign Language]

[Interpreted] Customer obsession is always our core value, and DAU has been a business indicator we care very much about. Indeed, there was a slight fluctuation within 1 percentage point in Q2, but we believe this fluctuation was a normal range. As Mr. Su mentioned earlier, the year-over-year growth in April, May and June showed an accelerating trend with year-over-year growth rates in June reaching approximately 14%. The growth momentum continued after the second quarter, accelerating in both quarter-over-quarter and year-over-year basis every month. As such, we are quite confident towards our annual growth target as well as our medium- to long-term target of 400 million DAUs.

Let me further explain the fluctuation in Q2. First, our campaigns during the Chinese New Year in Q1 delivered good results and helped us acquire a large number of users, which created a high base of users in Q1. Second, there are many young users on our platform, and their activeness depends or tends to be affected more by holidays and weekends. They are more active during weekends and less so on weekdays. Due to the Chinese New Year and winter holiday, the work day effect was weaker in the first quarter, which, to some extent, contributed to our high days of DAU in the first quarter.

Furthermore, I want to emphasize that we have an industry-leading user retention rate. While there is still room for improvements in the new user retention from certain user acquisition channels, as such, we have implemented various measures to support user growth in the second quarter. For example, we merged reporting lines of our user growth division and product division, connected the underlying data of user growth with product plan and developed new channels through social fission and search engine optimization and so on.

[Foreign Language]

We are the pioneer of short video. Definitely, this sector today looks quite different from 10 years ago. Apart from serving as the content community, we are able to accommodate more content and services better serving users more diverse and in-depth needs. Therefore, although user penetration rates of short video is already quite high, we can still see our DAU continues to grow, while our user activeness and engagement also have high growth potential. So to answer your question as just now, for the medium to long term, we are still keeping this target of 400 million DAU, and we have confidence in achieving it. Thank you.

[Foreign Language]

At present, our society has entered a new stage of development with attention on both efficiency and fairness. As an enterprise, Kuaishou has upheld the belief of fairness and inclusivity since its day 1, sharing the fruits and benefits of technological advancements with all members of society is one of our core values. From this perspective, Kuaishou's mission is consistent with the current mainstream of social development. We have maintained active and smooth communications with regulatory authorities and have carried out compliance preparations very early in response to the bottom line and red line requirements related to business operations, including those relevant to data securities.

[Foreign Language]

The entire Internet industry and for us as a company must proactively shoulder governance responsibilities and social responsibilities. We believe a positive interaction between enterprises and regulators is conducive to developing the digital economy better and faster. In the short term, our revenues will be affected as we adapt and adjust to various policies. On this point, we are basically in line with the industry.

[Operator]

[Foreign Language] Jefferies, Thomas Chong.

[Thomas Chong, analyst]

[Foreign Language] I have 2 questions. My first question is about the online shopping or e-commerce business. We are seeing live streaming online shopping has a lot of room to grow, but also competition is also very intense. May I ask of management about how we should think about our e-commerce strategies going forward in particular, for the branding -- for the brand side, how we can attract more brand merchants and help or empower them to improve or drive their business performance?

And my second question is about advertising. Given that we are seeing Q2 advertising is undergoing a strong growth momentum, just want to get a sense, in particular, on the brand advertising side. Can management share about the latest progress? On the other hand, we are also seeing macro uncertainties these days. And is there any impact to our online marketing business?

[Yik Kay Chong, executive]

[Foreign Language]

[Interpreted] Thank you very much. Let me answer your question about e-commerce. During Q2, our e-commerce GMV doubled to more than RMB 145 billion, of which, Kwai Shop, the closed-loop mode of our e-commerce business, accounted for over 90% comparing with 66% in the same period of 2020. We also continue to strengthen our e-commerce infrastructure, helping further expand and strengthen our closed-loop e-commerce model.

We have 3 key strategies. First is to develop trust-based e-commerce. We hope that we can protect the experience for both buyers and sellers, enhance the trust between them through operations and guidance on our platform. Building on the trusted relationship we are able to enter categories that traditional e-commerce cannot penetrate. In addition, enhanced trust can also help increase our repeat purchase rate.

[Foreign Language] Second, we will keep strengthening our branded e-commerce strategy. As DAU and time spend increase, we are gaining more public domain traffic. Compared with non-branded products, branded products can more easily draw public domain traffic to their own private domains.

To facilitate the rapid development of branded e-commerce, we have set up a brand operation center to empower brand merchants with assistance in traffic, budgeting, services, tools and policies. We have also created a proprietary operation methodology for brand merchants on our platform.

Many brands have achieved good results by working with us. For example, a domestic menswear brand started live streaming on Kuaishou and gained 100,000 followers on 1 day, starting from 0, and its monthly GMV reached more than RMB 10 million. Besides, we continued to build out Kuaishou Selection, our official platform of e-commerce product selection.

In the second quarter, we introduced more branded merchandise to Kuaishou Selection, contributing to its GMV growth of more than 90% quarter-over-quarter while further improving user experience and platform efficiency.

[Foreign Language] Third, we will strengthen our capabilities on developing service providers system. Unlike traditional e-commerce platforms, Kuaishou's e-commerce ecosystem is a dual way supplier-driven model, which is driven by both the supply of merchandise and the supply of streamers. This model requires more service providers on the platform to help merchants and streamers provide better services to consumers.

[Foreign Language] Let me now answer your question about advertising. In the second quarter, our revenues from online marketing services amounted to RMB 10 billion, up 150-odd percent year-over-year. As our infrastructure improves continuously and our sales team grows, more and more advertisers have realized the value of the Kuaishou platform and our users. Thus, the number of active advertisers continued its fast-growing trend in the second quarter.

We had some preliminary achievements with our brand advertisement strategy made at the beginning of the year. We have established a closed-loop solution for brand advertisers, helping them produce customized short videos, build live streaming rooms, manage private domain traffic as well as monetize through e-commerce.

As a result, the share of revenue from brand advertisement has been increasing, and the number of brand advertisers in the quarter increased by nearly 4x compared with the same period last year. Our closed-loop advertisement that connects the public and private domain traffic also maintained steady growth.

[Foreign Language] Our advertising business still has many growth drivers. The first is to enhance the connection with e-commerce and continue to promote the growth of advertisement from e-commerce clients within our closed loop system. The second is to continuously improve our fundamental capabilities and algorithms, products and operations to enhance our value proposition to customers. The third is to focus on the key industries, making breakthrough to increase our market share.

Changes in the advertising market certainly impacts our business to some extent. On this point, we are in line with the industry. But overall, for the full year, our advertising business is still growing rapidly.

[Operator]

[Foreign Language] China Renaissance, Ella Ji.

[Diying Ji, analyst]

[Foreign Language] So I have 2 questions. The first one is relating to live streaming. We noticed that the entire live streaming industry has shown some slowness recently. Just wonder what is the Kuaishou's live streaming businesses currency status? And could you also discuss the outlook?

The second question is, as one of the top short video platform, how do you view the competitive landscape and your competitive advantage at the current stage?

[Yik Kay Chong, executive]

[Foreign Language]

[Interpreted] Let me first answer your question about live streaming. Kuaishou is still leading the industry on the number of active streamers and the depth and breadth of content. In the second quarter, the number of our daily active streamers remained around 1.9 million. The penetration rate of our live streaming users also stayed high, reflecting that live streaming as a content format won a wide recognition among Kuaishou users.

[Foreign Language] Last year, our optimization and exploration in the public domain mainly focused on short videos, and it has been endorsed by our users and the markets. This resulted in strong growth in user time spent, user activeness and advertising revenues. The improvement of our public domain capabilities serves as the upstream part of our private domain traffic strategy only. This year, we have started to optimize our live streaming business in the public domain to help our streamers gain more followers and viewers.

[Foreign Language] We will increase investment in the optimization of private domain traffic. We will provide traffic support towards streamers who have been investing and growing on our platform for the long term. While to those who seek quick profits, being unfriendly to the public, their followers, the platform and the merchants, we will resolutely crack down and educate them on these behaviors.

This work will take lots of time. We believe that in the long run, these efforts will help us solidify our scale advantages in private domain traffic and on the number of streamers, which will then reflect on our live streaming revenue improvement.

[Foreign Language] Now let me talk about competition. Competitive landscape is relatively stable at present. On one hand, although our public domain products look similar in formats, but there are 3 key factors in short video industry: supply, demand and algorithms that interplay with each other and create differentiation in use. That's why there are many users on both platforms.

As short videos have a low creation threshold, the supply cannot be monopolized. In addition, demand for short videos scatters in nonconvergence, and algorithms matching supply and demand also have their own characteristics due to long-term accumulation of data. Previously, we had a gap in average time spent per DAU previously, but now we have caught up in that regard. And the average time spent per DAU of those using both platforms are also at quite similar levels.

[Foreign Language] Secondly, our core base private domain is very stable. As mentioned earlier, the interaction and social data and trends of our users have been very good. We are in the process to convert public domain traffic to private domain traffic. This conversion process also takes time. In addition, compared with those in higher-tier cities, users in mid- to lower-tier cities are relatively more socially active. In these cities, we have a good ecosystem and social setting for location-based semi acquaintance socialization.

[Operator]

[Foreign Language] CICC, Ge Shiqi.

[Shiqi Ge, analyst]

[Foreign Language] I have 2 questions. First one is about Kuaishou has integrated business model. So how do you balance different business in the ecosystem? And my second question is, you also mentioned in your results announcement that you have continuously implemented traffic adjustments. So what are your latest strategies on the traffic distribution and what advantages do you have?

[Yik Kay Chong, executive]

[Foreign Language]

[Interpreted] First, in response to the ecosystem balancing questions, there are 2 aspects. One is the balance between ad and e-commerce. The other is the balance between live streaming and e-commerce. In terms of ads and e-commerce, currently, the closed loop ads accounts for more than 30% of revenue from online marketing services, involving mainly revenues generated through Xiaodiantong, Kuaishou fans headline services and Magnetic Taurus.

In the future, as the ties between e-commerce and advertising tighten, we expect advertisements generated by e-commerce clients on our platform to maintain rapid growth. In terms of advertisement from participants externally, we will improve sales team's capabilities and iterate products continuously to attract more advertisers on the platform.

[Foreign Language] Regarding live streaming and e-commerce, we will not intentionally distribute traffic between these 2 businesses. The main task for Kuaishou is to offer highly efficient production tools to our streamers, which in turn attracts more streamers on our platform. Outstanding e-commerce streamers are no different from entertainment streamers. They can create good content and experiences, generate traffic rather than waste it.

[Foreign Language] In terms of traffic policy, we need to improve our traffic distribution efficiency in public domain. In order to improve content efficiency, we prioritized the display of content being more worthy of consumption to enhance viewers' sense of gain and happiness. This will, in turn, significantly enhance user stickiness and interactions.

Besides, we also need to improve monetization efficiency. We will provide traffic towards content creators who have stronger capabilities of merchandise promotion, virtual gifting encouragements, attention capture and followers gain, thus ensuring that our traffic growth effectively leads to commercial value gains.

[Foreign Language] With respect to the private domain, we will start more work on optimization to truly realize that one shall have a piece of land when he has peace of mind, thereby enhancing the distinctive value of our private domain. In addition, we have cultivated strong traffic in public domain. We will further direct and divert those traffic to private domain.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language] In the second quarter, the group's sales and marketing expenses remained relatively high without a significant decrease quarter-over-quarter. Can you split the domestic and overseas expenses and what are the changes moving forward? And how do the management team balance the growth and the retention of users in the domestic market and the related expenses in the future?

[Yik Kay Chong, executive]

[Foreign Language]

[Interpreted] Thank you for your questions. In the second quarter, overseas business accounted for about 1/3 of our sales and marketing expenses. There were 2 main reasons for the increase on overseas spending. First, we have achieved very good user growth momentum in the past few months, which proved that our capabilities and experience accumulated in China can also be applied to overseas markets and bring us good results.

Second, based on what we have learned from our domestic experience, we can acquire users at a relatively lower cost when competition is not intense, laying a solid foundation for future commercialization. Therefore, in overseas markets, we need to accelerate our progress and capture market share in more regions as quickly as possible.

[Foreign Language] In the domestic market, we have started focusing on improving the efficiency of user acquisition and maintenance. In the second quarter, domestic sales and marketing expenses declined, and those related to Kuaishou Apps user growth and user retention also trended down.

At the end of the second quarter, we adjusted our organizational structure, merging the reporting lines of the user growth division and the product division. This change was aimed at connecting the underlying data of the 2 businesses, so as to better optimize the efficiency of acquiring and retaining new users. In addition, efforts to enrich and give steps to our content verticals can help us provide content that satisfies the needs of new users. To date, these initiatives brought apparent improvements.

Coming into the third quarter, new user retention and user acquisition efficiency on Kuaishou App both improved notably. However, we must acknowledge that we are indeed not very operationally efficient, and we see plenty of room for improvement in this regard.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language] I will translate myself. I noticed the overseas MAU recorded strong growth. And what decisions your overseas products from competitors and about the product portfolio in different markets? A second question is regarding overseas DAU expansion plan and user growth strategies. How should we look into the MAU trend into the second half of the year and by the end of 2022?

[Yik Kay Chong, executive]

[Foreign Language]

[Interpreted] Our experience in China proves that the short video industry, even in a highly competitive region, has enough room for multiple platforms to coexist and develop. In overseas markets, penetration rates of short video products is still far behind that in China. Hence, we expect an incremental of billions in user growth. There is also ample room for differentiation in user demand and content supply. In the short term, our competition strategy is to leverage distinctive content supply to attract those who have yet to be converted to short video users. Now we will put our efforts on carrying out this strategy.

[Foreign Language] When choosing our target market, we will focus on areas with high population density, high acceptance of short video products and high monetization potential. Regarding our growth strategy, in addition to actively promoting growth and attracting new users, we also encourage creation of localized content to help foster growth and penetration of such content. More local content will help increase user activeness and user retention in the corresponding locale, forming a virtuous cycle driven by the growth of content and user community.

[Foreign Language] In addition to encouraging users to create content, we will also actively explore local PTC as a supplement to local UGC. So far, Kuaishou has performed well in South America, Southeast Asia and the Middle East. We hope to gain as much market share as possible in various key markets before competition within existing markets only begins.

[Operator]

[Foreign Language] Thank you very much. Because of time constraints, we will conclude our Q&A session here. Now let me invite Heather to make concluding remarks.

[Heather Diwu, executive]

[Foreign Language]

[Interpreted] Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or TPG Investor Relations through the contact information on our website. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]