Earnings Transcript for 1024.HK - Q1 Fiscal Year 2024

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 Market and Investor Relations at Kuaishou Technology.

Matthew Zhao: 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 the three 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, a 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 remark session and consecutive interpretation during the Q&A session. Please note that English interpretation is for convenience purposes only. In the case of any discrepancy, management statements in their original language will prevail. Lastly, unless otherwise stated, all currency units mentioned are in RMB. Now, I'll hand over the call to Yixiao.

Cheng Yixiao: 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 RMB29.4 billion, with a gross margin close to 55%, adjusted net profit of RMB4.4 billion, and adjusted net margin of 14.9%. These results greatly 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 mechanisms to all users, boosting user experience and monetization efficiency. Our smart marketing solution helped 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 do-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 advance the R&D and training of our self-developed large language models to empower various business 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 spent 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 a user interest, refining short of view elements, and enhancing short video common ranking strategies. These efforts improve the user experience and increase the user time spent on our platform. For content supply, we backed quality creators with 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 taste of Chinese New Year on Kuaishou activities in 2024. Offering a variety of Chinese New Year themed content, a highlighter was Dragon Night, a fan celebration on Kuaishou hosted by Jackie Chan, who welcomed numerous celebrity friends in Kuaishou [indiscernible]. This event attracted over 260 million views, with over 690 million cumulative likes and over 6.63 million peak concurrent users. Additionally, themed programs like Kuaishou 1001 Nights, Fans Gala, Online Festival Fairs, and the Village Basketball Association not only provide a stage for creators to showcase their talent, but also increase the user's thickness on Kuaishou. During the Chinese New Year season, 20 titles of Kuaishou Astral Short Plays received more than 100 million views, with seven exceeding 300 million views. More various diverse short play series like Super Power the Team and Grandpa and I generated huge social buzz from Celebrity led [indiscernible] Kuaishou short play is making great investment. Regarding our search business, we optimize the search function by leveraging large language model technology and refining the landing page for 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% a year-over-year. With the daily searches reaching a peak of nearly 800 million, we actively promoted search commercialization revenue from such. Search marketing services grew by over 50% a year-over-year in Q1. Second, online marketing services in Q1, with the macro economy and consumer market showing signs of stabilization and grid rural recovery, our revenue from online marketing services rose by 27.4% a year-over-year to RMB16.7 billion, accounting for 56.6% of our total revenue. We vigorously promoted the use of our smart marketing solution across various scenarios, boosting active marketing clients by nearly 90% year-over-year in Q1. Furthermore, we guided the traditional external marketing clients to shift their operations natively onto Kuaishou through our self-developed sales funnel conversion path. Business 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 transactions through our marketing activities, we further unlock 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 smart creation, smart replacement, 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 RMB10 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 40%. In Q1, revenue from our in-closed loop marketing services grew rapidly year-over-year, outpacing the overall e-commerce GMV growth. We further iterated our omni-platform marketing solution 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 high quality traffic and expand their GMB. Regarding smart hosting products, we tested and unveiled live streaming hosting functions for major promotion scenarios, improving clients marketing performance and a 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 in closed-loop marketing spending in Q1. In Q1, our year-over-year revenue growth and external marketing services continue to outperform the market, especially in new media information, gaming, education sectors. Within the media information sector, average daily spending in marketing for paid short videos, short plays rose over fourfold year-over-year. This was fueled by our ongoing optimization of the 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 food, life cycle automated and marketing solutions to clients in diverse industries, enhancing their marketing conversion efficiency, total marketing spending through UAX, increased by over 4 times, quarter-over-quarter in Q1. In brand marketing services, we've established a rich brand marketing metrics and customized solutions for our clients. By leveraging our superior content, precise demographics, targeting and efficient conversion, we help 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. A 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 and targeted demographics reach for brands like T-Mall.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 Dongfeng 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 new vehicle models. Third, our e-commerce business. In Q1, we enhanced buyer conversion efficiency by our refining operations, further enriching merchandise offerings, and expanding e-commerce scenarios. As a result our e-commerce GMV grew by 28.8% year-over-year to EMB288.1 billion. On the user front our e-commerce monthly active paying users grow by 22.4% to RMB126 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 onboarded merchants. We greatly 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 onboarded 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. They improved incubation and educational resources and 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. Brand emergence 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 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 high quality merchandise to KOLs and helped small and medium sized KOLs to select merchandise via external coordinators. This strategy strengthens our platforms' matching capabilities greatly in our 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 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 fresh produce, 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 auto value of our shopping mall during the Chinese New Year promotion sorted 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 searched by 345%, 164%, and 383% respectively compared with last year. These stellar results highlighted how our dual engine of live streaming and shelf-based e-commerce has been unlocking -- has been unlocked more new business opportunities for merchants. Next, regarding our live streaming businesses, in Q1 we continue to build a healthy live stream ecosystem, laying a solid foundation for long-term sustainable growth. We strongly supported a mid-tier streamers improving their activity and quality through online training, offline lectures, and streamer tasks. This approach accelerated a new streamers growth and incentivized talent agencies to drive their [indiscernible]. We also continue to promote emerging categories such as multi-host live streaming and grand stage, iterating product features, enriching our live streaming 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% of your view. In addition, as examples of our live streaming plus services empowering traditional industries, Kuaishou Higher 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 sorted by over 180% at the average. Daily average number of users submitting resumes increased by over 120% on a year-over-year basis. Additionally, by the end of Q1, Ideal Housing expended 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 original content generation, we rapidly grow our content supply by optimizing our platforms to traffic mechanism and diversifying creators' income sources. We capitalize on events like Brazilian Carnival and Brazil's largest reality show, BBB24, among others, to consistently increase user activities. These initiatives help to fortify quite a bearing awareness and recognition, laying the groundwork for enhancing monetization. As one of the BBB sponsors, Qua created a related topic on social media specifically for BBB. By the time the show ended on April 16th, it had attracted 14 billion communal views. In Q1, DAUs in our key markets grow rapidly with average daily time spent per DAU improving both year-on-year and quarter-over-quarter. Notably, DAUs in Brazil rose by 13% a year-over-year and the average daily time spent per DAU exceeded 75 minutes. As a result, revenue from overseas business reached RMB191 million in Q1 up 193.2% year-over-year. As we continued to boost operating efficiency, we successfully narrowed our overseas operating loss by 67.4% a year-over-year with operating loss also reduced a quarter-over-quarter. In terms of overseas online marketing services, we continuously refine our localized marketing capabilities and enhance our product ecosystem. These efforts have further improved advertisers, marketing efficiency, and placement stability. Additionally, we focus on developing platform capabilities, service quality, and creativity. By leveraging marketing opportunities from events such as the Brazilian Carnival, we've also posted a post-brand awareness and sales conversion for international and Chinese brands operating overseas. In Q1, marketing revenue from overseas business surged by nearly three-fold year-over-year. During the Brazilian Carnival, Cai helped the Chinese smartphone brand RealMe create a blockbuster marketing campaign through a diversified creative solutions, leading to a total of 95.6 million exposures. This successful event shaped RealMe's brand awareness and product reputation in the Brazilian market, [indiscernible] also developed a detailed user profile analysis for RealMe, 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 efficient improvements for merchants and marketing clients in the ecosystem. This concludes my prepared remarks. Next, you will hear from our CEO, Mr. Jin Bing, who will discuss the company's financial performance for Q1.

Jin Bing: 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-escalated, 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 into technology and premium content quality, has laid a solid foundation for the sustainable monetization and profitability. Our adjusted net profit reached RMB4.39 billion in Q1 with an adjusted net profit of 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% a year-over-year to RMB29.4 billion, mainly driven by growth in our online marketing services and e-commerce business. Online marketing services revenue increased by 27.4% to RMB16.7 billion from RMB13.1 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 of our omni-platform marketing products further fueled this growth. Gradual recovery in the macro economy and consumer market also promoted advertisers budget allocation leveraging our AI and LLM model capabilities we have been able to deeply tap into users needs boosting marketing budget allocation and conversion efficiency. Other services revenue grew by 47.6% to RMB4.2 billion from RMB2.8 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 the buyer 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 RMB8.6 billion, a decrease of 8% from RMB9.3 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 streaming ecosystem. In Q1, our cost of revenues decreased by 1.6% to RMB13.3 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 a year-over-year. Gross profit grew by 37.6% a year-over-year to RMB16.1 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 RMB9.4 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, etc. R&D expenses were RMB2.8 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 RMB462 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 RMB4.1 billion, a significant improvement from a net loss of RMB876 million in Q1 last year. Group level adjusted net profit rose to RMB4.4 billion, a considerable leap from RMB42 million in Q1 last year. Our balance sheet remains robust with cash and cash equivalents, time deposits, restricted cash, and wealth management products of RMB63.7 billion as of March 31st. Through our enhanced monetization capabilities and efficient working capital management, we generated a positive operating net cash flow of RMB5.8 billion in Q1. Looking ahead, we are committed to optimizing the balance between our traffic ecosystem and monetization strategies to create 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 preparatory remarks. Operator, please now open the call for questions.

Operator: [Foreign Language] We will now begin the question-and-answer session. [Operator Instructions] [Foreign Language] Your first question is from Lincoln Kong from Goldman Sachs.

Lincoln Kong: [Foreign Language] Thank you management for taking my question and congrats on a very strong first quarter result. 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 the Kuaishou Select, the sales hosting model here? Thank you.

Cheng Yixiao: [Foreign Language] [interpreted] 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 shelf-based e-commerce value proposition to users lies in 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 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 helping merchants with a 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 continued 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, and warehouses. This service considerably lowered shipping costs while ensuring logistics time lines, which has helped merchants expand into remote markets. During the rapid development of our e-commerce business in recent years, we have seen some merchants operational pain points firsthand, 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 Choice, providing merchants with platform sales hosting services to give them a pathway to enter the market and lower their operational thresholds. 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 the merchants to do what they do best. Leveraging the food sales data of our e-commerce platform, we could more clearly identify which product categories or single SKUs have the potential to become blockbusters. This helps us to elevate the efficiency of product selection and pricing. Moreover, through traffic integration and large-scale operations, we offer merchants predictable sales channels and sales on a converging 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 year, during 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 complimentary which will become the sustainable driving force of our e-commerce business. This will help more merchants achieve all many domain operations more effectively and attract more business opportunities.

Matthew Zhao: Thank you. Operator. Next question please.

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

Thomas Chong: [Foreign Language] Thanks management, for taking my question. My question is regarding online marketing service. As company achieve robust revenue growth in online marketing service in Q1, looking ahead, what will be the driving forces for further revenue growth? Thank you.

Cheng Yixiao: [Foreign Language] [interpreted] Thanks for your question. In Q1, online marketing services revenue reached RMB16.65 billion, up 27.4% year-over-year. Both closed-loop e-commerce marketing services and external marketing services grew remarkably as we provided better marketing solutions to clients, driving ECPM improvements. Our growth was led by our success in bringing clients deeper sales funnel conversion passes for targeted demographics through measures such as joint modeling as well as end-to-end efficiency enhancement from our LLM driven smart marketing solutions. Looking ahead, we believe our online marketing services revenue growth will mainly be led by investments 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 final conversion path for our clients' targeted demographics, which will lead to better bids 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 enhancement, we will integrate native marketing content with organic content by refining native marketing materials, achieving a true marketing as 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 lower tier market and our integrated market solutions that combine brand awareness, sales conversion, and auto operation marketing for the automobile industry have brought us more budget allocations from auto manufacturers and after-market clients. In the education industry, there is potential for higher year-over-year growth by addressing our core demographic user needs for professional education and interest-based courses. In the media and information industry, marketing spending of page 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-programmed games and online literature industries, not only elevating user experience and amplifying user time span, but also accumulating more post-link conversion data to enhance recommendation accuracy. In general, we will continue to refine industry-specific operations, iterate smart marketing products, 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.

Matthew Zhao: Thank you. Operator, next question, please.

Operator: [Foreign Language] Your next question is from Felix Liu from UBS.

Felix Liu: [Foreign Language] Thank you, management, for taking my questions and congratulations on the very strong Q1 results. Could management share more color on the latest developments and your strategy and tactics for local services in 2024? Thank you.

Cheng Yixiao: [Foreign Language] [interpreted] Thanks for your question. After a year and a half, 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 a 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 merchandisers 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 a benchmark cases such as the [indiscernible] South Lake Scenic Area. Content-wise, we continue to work with top-notch KOLs. Through various policies, we helped shorten KOL's growth cycles and empowered creators to increase income at 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 users' mentality in accessing our local services by improving basic functionalities and reaching 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 fortify KOL and merchant's fulfilment capabilities, optimize our platform's governance system, and boost governance efficiency, all aimed at elevating user experience. In Q1, average daily paying users of local services skyrocket by nearly nine-fold year-over-year. Regarding our platforms matching capability we adjusted our traffic mix synergising 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 continues to increase quarter-over-quarter in Q1 and drove rapid GMB growth. As for our strategic priorities in 2024, first, we will tailor our operations to the characteristics of different industries to achieve industry-specific refine 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 user's price mentality with 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 with a 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.

Matthew Zhao: Thank you. Operator, next question, please.

Operator: [Foreign Language] Your next question comes from Alex Poon or Morgan Stanley.

Alex Poon: Thank you, management for taking my question and congrats on your very strong results. The company has just announced a new buyback program of up to HKD16 billion over the next three years. What are the main considerations in formulating these amounts and what is the expected pace of execution? Thank you very much.

Cheng Yixiao: [Foreign Language] [interpreted] 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 HKD4 billion repurchase program, which was well recognized by the market. On December 18, 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 HKD4 billion repurchase program allowing our company to execute repurchases during the exchanges designated 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 HKD3.909 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 HKD4 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 HKD16 billion over the next three years. In the current market environment, 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 three years and cash reserves among others. The actual implementation of the new program will depend of comprehensive considerations based on the capital market environment. We will prudently arrange the pace and intensity of share repurchases to continuously enhance shareholder returns.

Matthew Zhao: Thank you. Operator, next question please.

Operator: [Foreign Language] Your next question comes from [indiscernible] of CICC.

Unidentified Analyst: [Foreign Language] Thanks management for taking my question and congratulations on another strong quarter. My question is about AI. Can management share the latest progress on your AI and the large language model? Thank you.

Cheng Yixiao: [Foreign Language] [interpreted] Thank you for your question. In Q1, we sturdily improved the functions and soft developed LLMs and speed up their application in various business scenarios. For improving model performance based on pre-training data and model architecture monetization optimization, we made a technological breakthroughs in RLHF. This made it the overall performance of our updated 175 billion scale LLM to approach that of GPT 4.0. Moreover, we recently unveiled our first multi-model LLM. I also like to elaborate on our LLLs 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 all many domain LLM content understanding, AI interactions, digital humans in business scenarios, and 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 explore 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 spent. On the AI interaction side, we focus on the usefulness of AI-QI, where we significantly enhanced its reply accuracy rate and launched multi-round dialogue 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 in 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 clients the 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 multiple rounds of dialogues. LLM's 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 hours 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.

Matthew Zhao: Let's come to the end of Q&A session. Back to you, [indiscernible].

Operator: [Foreign Language]

Matthew Zhao: 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.