Kuaishou Technology

HKEX:1024

Earnings Call Analysis

Strong Revenue Growth and AI Advances

Kuaishou reported that in Q2 2024, total revenue grew by 11.6% year-over-year to RMB 31 billion, driven by over 20% growth in online marketing and e-commerce services【6:0†source】. The company achieved a record quarterly gross margin of 55% and an adjusted net profit of RMB 4.7 billion, with a margin of 15.1%【6:0†source】. Significant strides were made in AI technology, including the global beta testing of the Kling AI video generation model and the introduction of the Kolors text-to-image model【6:0†source】【6:16†source】. Average Daily Active Users (DAUs) and Monthly Active Users (MAUs) increased by 5.1% and 2.7% year-over-year, respectively【6:16†source】.

Strong Revenue Growth and Record Profitability

In the second quarter of 2024, Kuaishou's total revenue grew by 11.6% year-over-year, reaching RMB 31 billion. This growth was driven by online marketing services and other services, including e-commerce, which achieved over 20% year-over-year growth. Profitability reached new heights with an adjusted net profit of RMB 4.7 billion, up 73.7% year-over-year, and an adjusted net margin of 15.1%.

AI Innovations and Integrations

Kuaishou's investments in AI continue to play a crucial role in its success. The company has developed industry-leading AI metrics, including the KwaiYii large language models (LLMs) and the Kling AI visual generation models. These advancements support a wide range of operations, from content creation to user interaction, helping nearly 20,000 merchants optimize their operations.

User Growth and Increased Engagement

Kuaishou experienced steady growth in user engagement, with the average daily active users (DAUs) reaching 395 million and the monthly active users (MAUs) at 692 million. Average daily time spent per user on the Kuaishou app was 122 minutes. Efforts to improve user experience through enhanced traffic allocation and community engagement have paid off, leading to a 9.5% year-over-year increase in total user time spent on the app.

E-commerce and Merchant Expansion

Revenue from e-commerce and other services grew by 21.3% year-over-year, reaching RMB 4.2 billion. Kuaishou's focus on empowering both new and existing merchants has resulted in a 50% year-over-year increase in active monthly merchants. Initiatives like the Set Sail and Uplift programs provided new merchants with significant traffic support, helping them grow and sustain operations.

Challenges in Live Streaming

Despite a 6.7% year-over-year decline in live streaming revenue to RMB 9.3 billion, Kuaishou is committed to building a sustainable live streaming ecosystem. By enhancing the quality of live streaming content and improving the interaction between streamers and followers, Kuaishou aims to stabilize and eventually grow this segment.

Expanding Overseas Markets

Kuaishou's overseas endeavors showed promising results, with revenue from international markets rising by 141.4% year-over-year to RMB 1.1 billion. Strategic operations in key markets like Brazil and Indonesia have increased DAUs and engagement. Monetization strategies in these regions have also seen success, with overseas marketing revenue growing by over 200% year-over-year.

Guidance and Future Outlook

Looking forward, Kuaishou aims to leverage its technological infrastructure to explore new business opportunities while enhancing existing services. Key goals include achieving a 20% adjusted net margin in the mid-term and continued improvement in operating efficiency and profitability. AI developments remain a critical focus, with plans to expand both B2B and customer-facing applications of Kling AI.

Earnings Call Transcript 2024-Q2

[Operator]

[Interpreted] Good Day. Ladies and gentlemen, thank you for standing by. Welcome to the Kuaishou Technologies Second Quarter and Interim 2024 Financial Results Conference Call. Please note that English simultaneous interpretation will be provided for management's prepared remarks. [Operator Instructions]

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

[Huaxia Zhao, executive]

Thank you, operator. Good evening, and good morning to everyone. Welcome to our second quarter and interim 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 over the second quarter and interim 2024 results announcement ended June 30, 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 a reconciliation of IFRS to non-IFRS financial results and related risk factors, please refer to our second quarter and interim 2024 results assets.

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 and in the case of any discrepancy, management statements in their original language will prevail.

Lastly, unless otherwise stated, all currency gains mentioned are in RMB. Now I'll hand the call over to Yixiao.

[Yixiao Cheng, executive]

Hello, everyone. Welcome to Kuaishou Second Quarter 2024 Earnings Conference Call. In the second quarter, our total revenue grew by 11.6% year-over-year to RMB 31 billion with both online marketing services and other services, including e-commerce, achieving year-over-year growth of over 20%.

In terms of profitability, we set a quarterly record with our gross margin topping 55%. Adjusted net profit reached RMB 4.7 billion with a margin of 15.1%, both hitting new highs.

Despite ongoing challenges from a competitive external environment, our industry-leading AI technology, vibrant user and content ecosystem, healthy and sustainable commercial ecosystem and efficient organizational synergy have all contributed to strong operating and financial results.

As an AI-driven tech company, we've built an infrastructure that supports the training and inference of large models with trillions of parameters. Based on this infrastructure, we have developed industry-leading AI metrics, including KwaiYii LLMs, large visual generation models and the recommendation models, all of which we've integrated into our business operations.

Notably in Q2, we made considerable strides in large visual generation models, launching and testing our large video generation model, Kling AI, which gained broad acceptance [ on more ] domestic and global users.

We have since expanded it to full beta testing globally, enhanced the model's capabilities and introduced a membership program offering exclusive features. As of today, over 1 million users have tested Kling AI, creating over 10 million videos.

We also officially open sourced our text-to-image model, Kolors, to foster a collaborative robust text model ecosystem. Our AI metrics is now seamlessly embedded across various business matters, supporting content creation, content understanding and recommendations and user interactions.

In the first half of the year, nearly 20,000 merchants utilized our AI metrics to optimize their operations on the Kuaishou platform. And the marketing clients average daily spending with AIGC marketing material reached 20 million in June this year, demonstrating the significant potential for our large models and commercial scenarios.

Next, I'll discuss our key business development in Q2. First, user growth and ecosystem construction. In Q2, the average DAUs and MAUs on the Kuaishou app reached 395 million and 692 million, representing year-over-year increases of 5.1% and 2.7%, respectively.

The average daily time spent per DAU on the Kuaishou app was 122 minutes. We achieved accelerated growth in user traffic with a total user time spent on Kuaishou app, increasing by 9.5% year-over-year. We also deepened our strategy for high-quality growth, improving our traffic allocation mechanism and creating more app-opening scenarios to enhance user experiences while boosting revenue generation.

We also enriched the community atmosphere and significantly improved user long-term retention by optimizing measures such as hot comments, ranking and introducing more interaction features, achieving high-quality growth in DAUs.

Additionally, we improved the ROI of user retention costs through refined operating strategies across various business scenarios. Record rate of vibrant, diverse content creation ecosystem, supporting exceptional content creators by refining our traffic algorithms. In Q2, active creators with over 100,000 followers grew nearly 10% year-over-year, and their short video posts increased over 40%.

Daily short video uploads on Kuaishou exceeded 14 million. We used the tailored vertical operation strategy to deliver premium content showcasing our unique ethos. In sports, we focus on creating native content that public enjoys.

As the [ rise ] holding broadcaster for the Paris 2024 Olympics, to align with the Olympic themes, we launched a Kuaishou Village Olympics with the traditional and rural sports blending athletic competition with the rural culture. This attracted over 135,000 live spectators, 520 million online viewers and 6.4 billion impressions, highlighting recreational sports charm.

As the pioneer and the leader in the short play industry, we launched nearly 50 Kuaishou Astral Short Plays in Q2, with 12 surpassing 100 million views.

Supported by our Kling AI, we premiered the Legendary Mirrors of Mountains and Seas, China's the first original AIGC fantasy short play attracting over 15 million views in 2 weeks, demonstrating our large models potential in creating deep, meaningful content.

For our Search business, in Q2, we continue to optimize our search after watching feature and introduced a single column format for displaying search results. This enhanced the user experience and have further unlocked the commercialization potential. As a result, our revenue from search marketing services and GMV from search-induced e-commerce grew rapidly in Q2.

Our search user penetration rate also improved further with MAUs for Kuaishou Search, reaching nearly 500 million in Q2 and daily searches increasing by over 20% year-over-year.

Second, online marketing services. In Q2, despite the ongoing economic pressures in softer consumer sentiment, our revenue from online marketing services outperformed the industry, growing 22.1% year-over-year to RMB 17.5 billion and accounting for 56.5% of our total revenue, further boosting our market share.

Our growth was fueled by enhanced smart marketing solutions and deeper sales funnel conversion pathways for our marketing clients, which led to higher bids. Additionally, our advanced algorithm supported greater exploration of demographic interest and improvements in matching efficiency, significantly boosting the number of effective users with online marketing potential.

Revenue from our external marketing services grew notably in Q2 with the year-over-year growth, surpassing that of Q1, especially in media information, e-commerce and local services. For paid short plays and media information, we improved the user experience by refining native sales funnels and increasing paying users through smart subsidy. This drove rapid growth in paid short plays marketing placement, with the daily marketing spending more than doubling year-over-year, accounting for a high single-digit percentage of total external marketing service revenue.

For Smart Placement in Q2, the penetration of our external marketing product, Universal Auto X or UAX increased across industries with the UAX marketing spending over 30% of our overall external marketing spending. We also provided marketing clients with efficient customer acquisition tools, including a native private message sales -- sales funnel. Spending through this funnel grew more than twofold quarter-over-quarter.

Revenue from our Enclosed Loop Marketing Services grew robustly in Q2, driven by improvements in Smart Placement strategies and capabilities. Merchants using our omni-platform marketing solution, or smart hosting products accounted for 40% of enclosed loop marketing spending. For small- and medium-sized merchants, we boosted marketing placement during promotional events with a simplified auto placement product combination.

This enhances their stability and efficiency, increasing their spending by 60% year-over-year in Q2. In brand marketing, we partnered with the fashion media to launch an initiative combining Eastern aesthetics, trendy culture, intangible culture heritage and avant-garde art, attracting leading brands in cosmetics, food and beverage, apparel and 3C products.

Major brands like Tmall renewed sponsorships for our Kuaishou Astral Short Plays, resulting in over [ 20-fold ] revenue growth year-over-year for marketing sponsorship of Kuaishou Astral Short Plays in Q2.

Third, our E-commerce business. Despite a short-term slowdown in consumer demand and heightened competition in domestic e-commerce, the accelerated restructuring of e-commerce fundamentals will continue to drive an increase in e-commerce share of retail sales.

Lower tier markets with the largest population and greatest growth potential are emerging as mainstream markets and [ native ] these trends, we will focus on helping customers discover affordable quality products that fit their needs through the trustworthy streamers and content. We remain committed to fostering a sustainable, healthy KOL ecosystem while advancing our multi-faceted omni-domain operations for brands and merchants in self-operated live streaming, shelf-based e-commerce and shorter video e-commerce.

In Q2, our e-commerce GMV grew by 15% year-over-year to RMB 305.3 billion. On the demand side, e-commerce monthly active paying users increased by 14.1% year-over-year to RMB 131 million in Q2. And our MAU penetration rate reached a new high of 18.9%. Our user-centric strategy coupled with a focused approach on tapping specific industries, empowers us to specifically capture and respond to fast evolving consumer preferences.

Significant -- especially, we remain focused on iterating initiative for acquiring new users as well as growing active users, expanding our user reach through product and subsidy measures that encourage repeated engagement. We also enhanced the user shopping experience by streamlining marketing processes and facilitating a use first and pay later purchase option.

Supply side, monthly active merchants grew over 50% year-over-year in Q2, driven by our support for new merchants' cold starts, growth and sustained operations and by empowering the existing merchants with omni-domain operations. Our Set Sail Initiative offers up to RMB 100 billion in traffic resources to new merchants with Uplift Initiative helping them scale post cold start.

In Q2, these initiatives covered all new merchants, providing product menus, operational guidance and tailored traffic support. We also enhanced the merchants' overall omni-domain operating capabilities with the follower growth and content integration.

For KOL strategies, we recommend high-quality merchandise to KOLs internally and used external facilitators to help mid-tier KOLs select merchandise targeting recommendations based on follower profiles.

We also use AI marketing and operation tools to enrich KOL marketing strategies, simplify operations, encourage user interactions and enhance platform's capabilities in matching KOLs with products.

For brand merchants, we prioritize the trade-in, trade-up program, membership operations and the big brand, big subsidy channel to attract diverse brand offerings. During the 618 Shopping Festival, GMV from consumer electronics brands and household items grew over 83% year-over-year. E-commerce GMV from pan shelf-based scenarios in Q2 exceeded the overall platform. making up over 25% of total GMV. Orders during the 6 to 18 shopping festival rose 65% year-over-year, driving e-commerce growth.

In our Shopping Mall segment, daily active merchants and paying users increased by over 50% and 70%, respectively, in Q2.

User engagement measured by product cards viewed and product searched surged highlighting a growing consumer trend to [ broaden ] search products in the Kuaishou shopping mall. The introduction of our large models has also improved our ability to identify user purchasing intentions, driving a more than 80% year-over-year increase in search-induced e-commerce GMV in Q2.

In addition, we launched a sales hosting solution for Kuaishou shopping mall that integrate our platform's omni-domain traffic and offer commission-based and price-based hosting aiming to lower merchants' operational barriers and provide merchants with predictable sales channels.

Moreover, our short video e-commerce GMV continued to grow rapidly in Q2 with a year-over-year increase of nearly 70%. Merchants leverage short videos to attract users before live streaming and extend the product sales cycles in housing the synergy between shorter videos and live streaming scenarios.

Next, our Live Streaming business. Revenue from our Live Streaming business was RMB 9.3 billion in Q2, declining less quarter-over-quarter. We continue to iterate our refined operating approach to bolster a healthy and positive Live Streaming ecosystem. On the supply side, we established regional teams dedicated to recruiting high-quality talent agencies through targeted industry promotions and offline presentation.

We also supported leading talent agencies through policies and project guidance, leading to a nearly 50% increase in the number of partnering talent agencies and 60% growth in the number of talent agency-managed streamers by the end of Q2 year-over-year.

Meanwhile, we continue to promote emerging streaming features such as multi-host live streaming and the Grand Stage significantly attracting more talent agencies and streamers driving core growth in our Live Streaming business.

We're committed to enriching premium content, attracting mid-tier streamers, enhancing interactive live streaming features and encouraging streamers to produce high-quality content, thereby promoting more reasons for app opening.

As the official short video partner for CrossFire and King Pro League, we have effectively boosted the visibility of these events by leveraging our short-video plus live streaming plus community ecosystem.

In late June, Kuaishou was also named the strategic short video and live streaming platform for the 2024 Esports World Cup in Saudi Arabia attracting more quality users across various verticals through innovative crossover efforts.

Underscoring how live streaming plus services can empower traditional industries, we continue to scale up our recruitment and real estate transaction services with rapid growth in both the number of users we serve and in the transaction volume. In Q2, daily average number of resume submissions on Kwai Hire increased by more than 130%, and the matching rate grew by over 150% year-over-year.

Daily lead generation on our Ideal Housing also expanded by ninefold compared to the same period last year.

Finally, on our Overseas business progress. In Q2, we continue to deepen our presence in key overseas markets through targeted content offerings, operations and marketing efforts, and our ROI-driven growth strategies. We've been refining operations in traditional marketing channels and exploring new gross revenues. These initiatives drove steady growth in average DAUs in key overseas markets, including Brazil and Indonesia. Notably, DAUs in Brazil rose by 15.4% year-over-year and also improved quarter-over-quarter.

Regarding content operation overseas, we continue to engage more high-quality content creators across verticals like films, news, comedy and sports, enhancing content diversity, quality and the health of our community-based ecosystem. Meanwhile, optimized algorithms, enhanced traffic mechanism and diverse monetization channels have gradually strengthened the positive flywheel effect of content production, consumption and monetization for creators.

Average daily time spent per DAU in key overseas markets increased by 5% year-over-year to nearly 80 minutes in Q2. In terms of monetization capability, our Overseas revenue increased by 141.4% year-over-year to RMB 1.1 billion in Q2, thanks to our targeted monetization strategies implemented across different countries.

Our overseas online marketing team actively expanded our client base across multiple industries by optimizing product capabilities and upgrading online marketing experiences. As a result, online marketing revenue from our Overseas business increased by over 200% year-over-year and continued to grow quarter-over-quarter, leveraging our traffic and advantage in countries like Brazil and Indonesia. We will become an important marketing channel for Chinese companies expanding overseas and for local brands.

With improved overseas monetization efficiency, we gained further operating leverage, gradually reducing the negative impact on the company's profitability.

In Q2, operating loss from Overseas business was RMB 277 million with a 64.5% decrease year-over-year. Reflecting on the first half of the year, despite numerous external challenges, we firmly executed our high-quality growth strategy. We continue to refine our traffic allocation mechanism and focus on [ housing ] user content and product difference while balancing revenue efficiency.

This approach has cultivated healthier and more sustainable content and a commercial ecosystem leading to a satisfying financial results.

Looking ahead to the second half of the year, we will capitalize on our deep technological expertise to further explore how AI can enhance existing business towers and create a new one, while striving to achieve significant accuracy on new business areas creating more value for our users, partners and shareholders.

This concludes my remarks. Thank you. Next, our CFO, Jin Bing, will discuss the company's financial performance for Q2 2024.

[Bing Jin, executive]

Thank you, Cheng Yixiao. Hello, everyone. In the second quarter of 2024, we made a significant announcement in our AI infrastructure, enhancing quality and efficiency across our platform. We focus on high-quality user growth, bring our users exceptional experiences that reinforce our user ecosystem.

Meanwhile, by deepening the application of large model technologies, we've consolidated a steady growth momentum across our core business segments including online marketing services and e-commerce, further energizing our commercial ecosystem. Through our proactive strategies to enhance quality and efficiency, we saw further improvements in our group's operating efficiency and ongoing breakthroughs in profitability.

Adjusted net profit reached RMB 4.7 billion in Q2, with an adjusted net margin of 15.1%, both recording historic high. Now let's have a closer look at our Q2 financial performance.

Our revenues grew by 11.6% year-over-year to RMB 31 billion, mainly driven by growth in Online Marketing Services and E-commerce business. Online marketing services revenue increased by 22.1% to RMB 17.5 billion from RMB 14.3 billion in Q2 last year and accounted for 56.5% of total revenues.

Growth was primarily driven by our optimized smart marketing solutions. Meanwhile, by leveraging industry-leading large models and enhanced algorithm, we gained deeper insights into user needs offering end-to-end efficiency and enhancement for our clients.

These efforts have significantly elevated user experience, enabling our marketing clients to convert sales more actively and efficiently. This led to a significant increase in the number of marketing clients and a corresponding surge in marketing spending.

Revenue from our services -- other services, including e-commerce, reached RMB 4.2 billion in Q2, up 21.3% from RMB 3.4 billion in the same period last year, mainly driven by the increase in e-commerce GMV, which boosted e-commerce commission income.

We continue to advance our diversified omni-domain operation strategy, actively empowering both new and existing merchants leading to a notable year-over-year growth in the number of monthly active merchants. We also strengthened the KOL ecosystem and enriched our product supply by effectively capturing consumer demand and refining our operating strategies to expand our user reach. We consistently enhanced the user shopping experience driving ongoing growth in monthly active paying users.

Our Live Streaming revenue was RMB 9.3 billion, a decrease of 6.7% from RMB 10 billion in Q2 last year. Despite of industry challenges, we responded to proactively committed to building a healthy live streaming ecosystem by optimizing talent agency management and reaching our diverse and high-quality live streaming content and enhancing the interactive experience between streamers and followers. So we ensured sustainable and positive development of our Live Streaming ecosystem.

In Q2, our cost of revenues remained stable at RMB 13.8 billion and accounted for 44.7% of total revenues. Gross profit grew by 23% year-over-year to RMB 17.1 billion. Gross margin was 55.3%, an increase of 5.1 and 0.5 percentage points year-over-year and quarter-over-quarter, respectively. Both gross profit and gross margin reached historic highs.

Moving to expenses. Selling and marketing expenses increased by 16.3% year-over-year to RMB 10 billion, accounting for 32.4% of total revenues. Growth was mainly due to increased spending on business promotions, including E-commerce business.

Research and development expenses were RMB 2.8 billion, decreasing by 11.11% year-over-year. R&D accounted for 9.1% of total revenues dropping from 11.4% in Q2 last year. Administrative expenses decreased by 16.2% year-over-year to RMB 790 million accounting for 2.6% of total revenues, down from 3.4% in the same period last year. The reduction 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 Q2 rose by 169% year-over-year to RMB 4 billion, a significant improvement from RMB 1.5 billion in Q2 last year. Group level adjusted net profit rose by 73.7% year-over-year to RMB 4.7 billion with an adjusted net margin of 15.1%. These adjusted figures reached record highs.

Our balance sheet remains robust with cash and cash equivalents, time deposits, restricted cash and wealth management product of RMB 77.7 billion as of June 30.

Through our enhanced monetization capability and efficient working capital management, we generated a positive operating net cash flow of RMB 7.6 billion in Q2.

Looking ahead, we'll continue to explore diverse monetization channels and new avenues for profit growth, leveraging technological innovation to drive efficient business growth and enhance operating efficiency. Therefore, boosting the company's long-term sustainable profitability.

This concludes our prepared remarks. Operator, please now open the call for questions.

[Operator]

[Foreign Language] [Operator Instructions] The first question comes from Lincoln Kong from Goldman Sachs.

[Lincoln Kong, analyst]

[Foreign Language] So, my question is about AI. What is the company's latest progress in AI, large language model? And what are the upcoming strategies, especially on monetization plan in this field, particularly on Kling AI?

[Yixiao Cheng, executive]

[Foreign Language] Thanks for your question. We kicked off our new AI strategy last year with clearly defined strategic goals. We aim to maintain our industry-leading position in China in the upcoming global AI breakthroughs, leveraging these technologies to empower our existing business operations. At the same time, we aim to secure our competitive edge through groundbreaking innovations that have the potential to transform market dynamics.

Over the past year, we've made steady progress achieving 1 milestone after another. While continuously optimizing the performance of our foundation large models on all fronts, we kept strengthening their applications across various business scenarios, including content creation and understanding, content recommendation, e-commerce and online marketing and more.

[Lincoln Kong, analyst]

[Foreign Language].

[Yixiao Cheng, executive]

In Q2 2024, we achieved milestone breakthroughs in AIGC. Regarding video generation large models, our self-developed large video generation model, Kling, was widely acclaimed by users, both domestically and internationally following its beta testing.

Kling incorporates a 3D spatial-temporal joint attention mechanism to better model complex spatial-temporal movements. By adhering to real-world physical principles, Kling produces reduced live [ activated ] cinematic image quality and dynamic effects that stimulate life-like physical movement with large motion and break the limitations of traditional video generation technologies. We're wishing to introduce a subscription-based membership for our global users and upgrade it to Kling's performance to provide a better user experience while also making positive strides in exploring user payment models.

Secondly, in Q2, our 175 billion parameter KwaiYii LLM outperformed GPT 4.0 in Chinese language [ strides ]. Our multi-model LLM has also matched the capabilities of GPT [ 4v ] in video content comprehension, providing a strong foundation for expanding future application capabilities.

In addition, we recently officially open sourced our text-to-image large model, Kolors, as the most proficient Chinese text-to-image model, Kolors. Overall performance has surpassed Midjourney Version 5 following several upgrades.

[Lincoln Kong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Particularly significant was our enhanced focus on deploying large models in commercial [ ambitious strides ]. Leveraging our KwaiYii large model, we have developed video script generation, live streaming script generation and advertising lead customer service, all integrated with digital human technology.

These investments enable advertisers to produce high-quality video and live streaming content affordably, thereby improving lead conversion efficiency. In the first half of 2024, nearly 20,000 merchants on the Kuaishou platform leveraged our large model capabilities for intelligent operations. And average daily spending with the AIGC marketing materials reached RMB 20 million in June this year, showcasing the enormous commercial potential of large models.

[Lincoln Kong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Lastly, let me briefly talk about our upcoming AI development strategies. With respect to large language models, we will focus on developing and training specialized language models that are better suited to specific business scenarios, significantly reducing the model's overall inference costs on a large scale.

In terms of the lead generation models, we will continue to enhance Kling large model to further improve its performance and maintain our industry leading position.

Speaking of Kling's monetization in addition to strengthening the global operations for our membership programs, we will also explore more B2B monetization possibilities aiming for significant gains in the near future.

Moreover, we anticipate that large models will greatly enhance the efficiency of our commercial recommendation algorithm, providing strong support for our online marketing services growth.

In conclusion, we are committed to executing our LLM strategy, empowering existing business scenarios and striving to create new monetization models to deliver greater value to the group.

Thank you, operator. Next question.

[Operator]

[Foreign Language] [Operator Instructions]. Your next question comes from Thomas Chong from Jefferies.

[Thomas Chong, analyst]

[Foreign Language]. My question is about our e-commerce business. [ In it ] produced industry competition, how can Kuaishou e-commerce device pick the growth momentum on the supply side especially mid and small-sized merchants, which is Kuaishou e-commerce strategy in the second half of the year. Thank you.

[Yixiao Cheng, executive]

[Foreign Language] Thanks for your question. On the supply side, with the rapid development of Kuaishou e-commerce, more and more new merchants have joined us and our existing merchants continued growth. In Q2 of 2024, the number of average monthly active merchants grew by more than 50% year-over-year, primarily due to our concerted efforts in new merchants cold starts, growth and sustained operations in addition to empowering existing merchants to tap into omni-domain operations.

[Thomas Chong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Through the Set Sail Initiative with up to 100 million -- billion -- 100 billion [ video view ] traffic resources, we guarantee 100% of newly onboarded merchants in traffic from their cold start as quality merchants reach certain milestones, we further support their growth with over 70 billion video view traffic resources through our Uplift Initiative, driving [ GMV ] through large-scale promotional bank to help merchants make operational breakthroughs.

Meanwhile, new merchants meeting the GMV threshold within their first 90 days can receive compounded rebates through our Golden Bounty Initiative, ensuring that they maintain confidence in their initial operations and receive substantial traffic support on the platforms.

[Thomas Chong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Looking on to our e-commerce strategy for the second half of the year after the 618 Shopping Festival in Q2, we realized that both domestic e-commerce platforms and merchants are facing challenges with the temporary slowdown in consumer demand in the e-commerce market. As traffic benefits diminish across the board, e-commerce business need to better balance its content and commercial efficiency.

As a major player in content-driven e-commerce, we believe that live streaming platforms are more effective at helping merchants tailor their operations and offer a lot of variety of products through smart policies, data insights and marketing strategies. This not only attracts consumers by encouraging them to explore new shopping opportunities, but also stimulates purchase decisions.

[Thomas Chong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

As we look to the second half of the year, we'll cement and vigorously develop our foundational strength in content e-commerce and social e-commerce focused on the core value of live streaming and short video, and fully leverage the primary role of content-based scenarios in attracting and activating e-commerce users.

In shelf-based scenarios, we aim to enhance user purchasing frequency and steadily develop a broader pan shelf-based e-commerce environment. We will also fortify the development of a long-term healthy KOL ecosystem, thoroughly harnessing the key advantages of leading KOLs and larger scale live streaming events, while enhancing the cultivation and operational mid-tier KOLs. We will look -- work with KOLs to jointly build users' mentality for great deal in live streaming, promote the scale of large live streaming events and improved live streaming resource conversion efficiency.

We will also boost the impact of content during major promotions by focusing on key features and operational strategies. This includes using short videos to drive traffic to live streams before they start and reintroducing blockbuster product through short videos afterward. Our goal is to ensure consumers can find great deals across the platform and in every e-commerce scenario.

For shelf-based e-commerce, in addition to increasing GMV, we will focus on strengthening merchandise supply and variety as well as upgrading search and match efficiency. Through coordinated efforts in operations and algorithms, we will persistently improve the user experience and subsidy efficiency in shelf-based e-commerce that cultivates a proactive use mindset for shelf-based e-commerce.

We believe that through these strategies, we can continue to tap into the e-commerce needs of the 700 million MAUs on Kuaishou and maintain the differentiation and unique value of Kuaishou e-commerce business in the industry.

[Operator]

[Foreign Language]. Next question comes from Felix Liu of UBS.

[Felix Liu, analyst]

[Foreign Language] My question is on your Online Marketing business. In the first half, your Online Marketing business achieved strong growth. For -- looking into the second half, what are the major growth opportunities for this segment?

[Yixiao Cheng, executive]

[Foreign Language] Thanks for your question. In the first half of this year, we provided intelligent marketing solutions to our marketing clients through refined industry operations and large models. We offered deeper sales funnel conversion pathways for our clients, resulting in a year-over-year increase of about 25% in our revenue from online marketing services in the first half of the year and consistently gaining market share.

In the second half of the year, we will optimize our intelligent marketing products and algorithms to continue empowering diverse industry clients, sustain operations on Kuaishou through content operations, e-commerce operations and local service operations.

We will also leverage major marketing events, such as the [ Double 11 ] to realize further operational breakthroughs.

[Felix Liu, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

In terms of content operations, industries with the content attributes such as short plays, novels and video games naturally align with Kuaishou as a content platform. This synergy enables the successful integration of content creation in the marketing, opening up significant growth opportunities.

Short plays, for example, in the first half of the year, we've built a native sales funnel for paid short plays allowing users to complete payment and watch short plays directly within the Kuaishou app. This not only enhance the consumption experience for users, but also improved the product placement and conversion efficiency for our marketing clients.

In Q2 2024, the number of active marketing client for Kuaishou's paid short plays more than tripled with the number of active short plays with ad placements by over 30%, both on a quarter-over-quarter basis. This kind of operational model and native sales funnel capability have also been replicated in all those mini games and other industries, and are expected to bring significant incremental marketing placements in the second half of the year.

[Felix Liu, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Regarding e-commerce operations, we still have to manage room for growth in areas such as short videos, driving traffic to live streaming rooms, for enclosed loop merchants and click ID as replacement for external merchants.

In terms of enclosed loop marketing services in Q2 2024, our marketing spending on driving traffic to live streaming rooms through short videos grew by over 45% year-over-year. Our next step will be continuously to improve the associated advertising performance and conversion efficiency by optimizing production and research capabilities. And fortifying policy support, providing incremental growth for marketing spending.

In terms of a click ID as replacement for external merchants, there has been a significant increase in the retention rate of merchants operating through a click ID as replacement in the past 6 months.

In the future, we will improve the user experience and increase the conversion rate of payments by optimizing the product chain, including payment process to meet the diverse business needs of merchants with more policy incentives.

[Felix Liu, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

As for local operations with the overall transformation of the consumption mix, we have observed a huge demand for local services from our 700 million Kuaishou users, which has also brought new business upside to our local services merchants.

In Q2, the marketing spending of local services merchants rose by more than 60% year-over-year and demand from industries like legal counseling and home decoration was very strong. We plan to leverage our product capabilities of the UAX, digital human live streaming and in-app native private messaging to significantly improve the customer acquisition efficiency of local services merchants leading to further increase in their marketing placements.

[Felix Liu, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

In summary, we will continue to zero in on refined industry operations, intelligent marketing product iteration and algorithm optimization to elevate marketing placement and conversion for our clients. We also remain confident that our online marketing services revenue will outperform the industry's year-over-year growth rate.

Thank you operator, next question please.

[Operator]

[Foreign Language] The next question comes from the line of Brian Gong from Citi.

[Brian Gong, analyst]

[Foreign Language] My question is regarding local service. So we noticed that Kuaishou and Meituan have recently renewed the strategic corporation by signing a new agreement. How does Kuaishou position the local service business? And what are the goals? Also, could you please share the business latest update, thank you.

[Yixiao Cheng, executive]

[Foreign Language] Thanks for your question. The strategic partnership within Kuaishou and Meituan was first announced at the Ecosystem Development Conference in December 2021.

After nearly 3 years of concerted efforts, both parties believe that the corporation has exceeded expectations. In June this year, Meituan merged and GMV on Kuaishou skyrocketed by more than 38x with order volumes soaring by more than tenfolds, both on a year-over-year basis.

Based on this, we have recently renewed the partnership with new 3-year strategic corporation agreement further strengthening the scope and depth of our corporation.

First, our corporation scope will extend to cover 10,000 stores in 100 cities nationwide. Second, our corporation will deepen as Meituan broaden its supply to Kuaishou from group buying to more marketing formats including vouchers, membership, merchandise and flash sales.

Going forward, this may further expand to General In-store business and the Hotel and Travel business among other categories. We believe that by leveraging Meituan's supply advantages, we can quickly widen the merchant and product coverage of Kuaishou's local services, providing a richer, more compelling local services experience for Kuaishou's users.

[Brian Gong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

With our recent business update in mind, I would like to discuss the positioning and goals of local services. This market is huge, yet fragmented with low online penetration and plenty of room for growth. We aim to reduce Kuaishou's large user base in lower-tier markets to find our unique positioning based on our value proposition to users and merchants.

For users, we provide precise local goods and services recommendation that meets users' personal needs tailored to their preferences for relevant local content. Meanwhile, we strengthen the user's mentality for value for money shopping through refining operation capabilities and the Kuaishou merchants joint subsidy strategy, satisfying users' local consumption needs across various scenarios.

This was original aspiration for the local services business and has never changed. We're happy to observe a growing trend among users consuming local services on Kuaishou. In Q2, average [ repaying ] users in local services continue to grow steadily, up 37% compared with Q1.

[Brian Gong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

For merchants, Kuaishou has a massive user base in the lower-tier markets and an active social ecosystem. Leveraging the consumption transformation, we aim to offer merchants cost-effective marketing and operational solutions with a higher conversion rate.

In Q2, as we further enriched our supply ecosystem, the number of active merchants and the average daily number of active merchandise grew by 22% and 33% from Q1, respectively.

Of course, higher converting rates also depend on the high-quality content, utilizing our extensive KOL resources supported by our favorable policies and strategic traffic distribution, we guide them to produce high-quality local services content. In Q2, the GPM of short video and live streaming recommendations rose by 42% and 37% from Q1, respectively, propelling rapid growth in platform GMV.

[Brian Gong, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Overall, our goal is to make steady, solid progress in our local services business while improving subsidy efficiency and managing costs effectively. Thereby better meeting users' needs, empowering merchants and ultimately, creating both user and commercial value for the platform.

Thank you, operator. Last question, please.

[Operator]

[Foreign Language]. The next question comes from Xueqing Zhang of CICC.

[Xueqing Zhang, analyst]

[Foreign Language] My question regards on your profitability outlook. We noticed that the company's adjusted net profit was RMB 4.7 billion this quarter. And adjusted net margin was 15.1 percentage. Given this [ start ], what's the company's potential for profitability in the mid- long-term? And how will [ recent AI investment in private ].

[Yixiao Cheng, executive]

[Foreign Language] Thanks for your question. Since we've achieved a positive adjusted net profit in Q1 2023, we have seen 6 consecutive quarters of growth in both adjusted net profit and adjusted net margin. This reflects our ongoing improvement in operating efficiency and profitability.

In Q2, our adjusted net profit amounted to RMB 4.7 billion with adjusted net margin of 15.1%. This represents that we reached our goal of a 15% adjusted net margin 1 year ahead of schedule.

[Xueqing Zhang, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

These strong financial results can be attributed to 3 key factors. Firstly, we continue to optimize revenue mix by increasing the proportion of higher-margin services like online marketing services and e-commerce.

Secondly, we effectively controlled and improved revenue share and costs. And finally, we heightened the utilization efficiency of servers and bandwidth through technological innovations. These efforts further boosted our gross margin to a quarterly record high of over 35% in Q2.

In terms of our selling and marketing expense to revenue ratio, our high-quality growth strategy has enabled us to achieve steady user growth while growth -- while maintaining largely stable costs for user acquisition and maintenance. Although in the short term, we will be increasing promotional spending. We aim to deepen users' mind share in e-commerce, advertising and local services and drive the growth of the revenue and e-commerce GMV.

Additionally, we will continue to invest incrementally in AI, while limiting the impact on our R&D expense-to-revenue ratio to a minimum. Our revenue mix and operational efficiency continue to improve. We are confident in achieving our midterm target of 20% adjusted net margin, driven by gradual loss reductions or profits from our overseas businesses, local services and other new initiatives.

[Xueqing Zhang, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

Regarding our AI investments, while they may not have a significant impact on our profitability in the short term, your long-term value creation is substantial. These investments will empower our existing business, foster innovation, creating new business opportunities and driving sustainable growth.

[Xueqing Zhang, analyst]

[Foreign Language]

[Yixiao Cheng, executive]

In conclusion, our commitment to enhancing quality and efficiency is deeply embedded in our long-term strategy, guiding every decision we make and implement.

Our AI strategy plays a pivotal role in this endeavor, opening up new avenues for driving revenue growth and improving quality and efficiency, giving us greater confidence in achieving sustainable long-term profitability.

Thank you. That the end of the Q&A session. Back to you, operator.

[Operator]

[Foreign Language]

[Yixiao Cheng, executive]

Thank you, operator. [Foreign Language].

[Operator]

Thank you once again for joining us today. If you have any further questions, please contact our [ terminal market ] and IR team at any time. Thank you.