Kuaishou Technology (KUASF) CEO Cheng Yixiao on Q4 2021 Results – Earnings Call Transcript

Kuaishou Technology (OTCPK:KUASF) Q4 2021 Earnings Conference Call March 29, 2022 8:00 AM ET

Company Participants

Heather Diwu – Investor Relations

Cheng Yixiao – Chief Executive Officer

Jin Bing – Chief Financial Officer

Nicholas Chong – Senior Advisor

Conference Call Participants

Kenneth Fong – Crédit Suisse

Alex Yao – JPMorgan

Alex Poon – Morgan Stanley

Thomas Chong – Jefferies

Felix Liu – UBS

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Kuaishou Technology Fourth Quarter and Full Year 2021 Financial Results Conference Call. Please note that the 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 Ms. Heather Diwu. Director of Investor Relations at Kuaishou Technology.

Heather Diwu

All right. Thank you, operator. Good evening, and good morning to everyone. Welcome to our Fourth Quarter and Full Year 2021 Financial Results Conference Call. Joining us today, we have Mr. Cheng Yixiao, Co-Founder, Executive Director and also CEO, Mr. Jin Bing, Chief Financial Officer and Senior Adviser, Mr. Nicholas Chong.

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

During today’s call, management will also discuss such non-IFRS financial measures for comparison purposes only. For the definition of non-IFRS financial measures and reconciliation of IFRS to non-IFRS financial results, please refer to our results announcement for the fourth quarter and full year report ended December 31, 2021, issued earlier today.

For today’s call, management will use Chinese as the main language, a third-party interpreter will provide simultaneous interpretation mainly prepared remarks section and consecutive interpretation during the Q&A section. Please note that English interpretation is for convenience purposes only. In case of any discrepancy, management statement in the original language will prevail.

I will now hand the call over to Yixiao.

Cheng Yixiao

Hello, everyone. Welcome to Kuaishou Fourth Quarter and Full Year 2021 Earnings Conference Call. Kuaishou has always been committed to creating happiness to our users. As the fourth quarter of 2021, we had 578 million MAUs and 323 million DAUs here in China.

As our user base continues to expand, we are more aware that as a highly interactive and large volume digital community with high user stickiness, Kuaishou will leverage its breadth and capabilities to provide technologies products, services, infrastructure and solutions for digitization of more products and industries, helping users reducing transaction costs, improve the efficiency of resource allocation and promote social productivity and development of the digital economy.

In the past year, billions of product orders were sent over the country through Kuaishou’s platform, of which nearly 560 million orders for agriculture products, more than 20 million users earned income from Kuaishou of which more than 60% come from low and mid-tier cities. And according to a third-party estimate by the end of 2021, Kuaishou has created 34.64 million jobs for the society.

At the same time, we have been actively expanding new businesses such as local services and recruitment. We aim to meet customer demand through our short video and live streaming capacity, getting a high frequency and low barrier digital community and provide more users and industries with high-quality, efficient, convenient digital platform.

Looking back at 2021, in face of many challenges and uncertainties, we made a series of timely internal adjustments to strengthen our own advantages, improve organizational efficiency and clarify our strategic direction, which ultimate brought satisfactory and financial results.

First, I would like to share our work in relating to the traffic growth in economic and ecosystem cultivation. In the fourth quarter of 2021, our DAUs and MAUs hit historical high. DAUs reached 323 million, achieving the highest ever year-over-year growth rate of 19.2% in 2021 and the corresponding quarter-over-quarter growth also outperformed our typical seasonal patterns.

MAUs reached 578 million, achieving the highest-ever year-over-year growth of 21.5%. Our MAU base grew by more than 100 million comparing with the fourth quarter of 2021, with more users joining Kuaishou, an inclusive and prosperous digital community, our user mix become more diverse. In the fourth quarter, average daily time spent per DAU increased by 32.3% year-over-year to 118.9 minutes and total traffic achieved rapid growth of 57.6% year-over-year.

Through continuous expansion of short videos and live streams in content and use case scenarios, user engagement and stickiness in Kuaishou ecosystem continues to grow. User base and time spend accelerated the growth in the second half of 2021. It was attributable to the strengthening of our social advantages, in-depth operation and feature content and high efficient iteration of our organizational structure.

First, we continue to build our social attributes and strengthen Kuaishou’s characteristics thus forming a close connection between users, create an interactive networking atmosphere and enhancing user stickiness and activity. We have increased our investment in attracting new customers through building social mindsets early in the user lifestyle and also algorithms and products are continuously optimized to actively facilitate the conversion to a more mutual relationships.

By the end of 2021, pairs of future followers on our platform exceeded 19 — 16.3 billion pairs on a community basis, up by 68% year-over-year with more than 200 mutual follow relations that on per MAUs on average. At the same time, the quality of private domain content has improved continuously through ongoing confidence. In the fourth quarter of 2021, the absolute value of private domain traffic of the platform continues to grow and the quality experience of mutual follow relations also has been improved.

Active and constant content creation ecosystem essential for us, we have always followed by the principle of inclusiveness, providing greater support to creators across various aspects such as traffic, in fourth quarter comes up from mid-tier and long-tail creates contributed more than 80% of the platform’s video views consumption, and this percentage continues to rise.

High-quality content creators can be seen and discovered on Kuaishou so that they can accumulate valuable private domain traffic and generate on some results. In the fourth quarter, the number of high-quality content creators on our platform continues to increase quarter-over-quarter. And we have been creating new refined and distinctive content categories, targeting different user group and improving our content operational recommendation abilities.

This has developed the differentiated content minds and achieving positive results in terms of user acquisition and time spent. The new content verticals were created such as short plays, sport and knowledge sharing rapidly grew in 2021.

Take Kuaishou Playlet, for example. We are aiming to build an extensive and refined content supply ecosystem supporting UGC creators while launching Project Astral, which leads to the practice of quality short play creation in this sector. By the end 2021, Project Astral launched 240 exclusive customized short play, of which more than 100 received more than 100 million views.

With more than 10,000 short plays on our platform at present, we have become a home to many blockbuster short plays and lead industry. Short plays have also brought us the user growth with more female users in high tier. In 2021, more than 1 billion users were short plays on Kuaishou. The proportion of video view of short play has quickly increased the level of top content verticals, demonstrating our objective of creating featured content users shared of mind and heart.

In terms of organization efficiency since the adjustment of our organizational structure of the growth department in June we have strengthening of infrastructure, construction of growth system and data integration. This measure laid a more solid technical foundation for our efficiency improvement. At the same time, with a continuous evolution of industry and user mindset, we expanded differentiated channels and formulate dynamic management solutions for user acquisitions and reactivating targeting users at different groups and also stages of their lifestyle cycle.

We have also helped us to find best solution to maximizing the returns and improving customer acquisition and retention efficiency. On the basis of rapid traffic growth, our total revenue reached CNY 81.1 billion in 2021, up by 37.9% year-over-year. Revenue from online marketing services business was CNY 42.67 billion, achieving a rapid growth of 95.2%. And revenue contribution to total revenue increased to 52.6% in 2021 from 37.2% in 2020.

The macro environment has been a continuous engine since the second half of 2021, but we still fully unlock our growth potential, maintain a more resilient growth performance in online marketing service business and further increase our market share.

First, Kuaishou provided advertisers with the fast-growing and huge traffic growth. On Kuaishou the breadth of our public domain and the stickiness of our private domain and closed-loop system for our business ecosystem, together, they provide a unique traffic combination and driving the ecosystem that continues to attract new advertisers.

Continuous optimization of advertising content materials has also earned us a space to further improve and load. And second, although our online marketing services business started relatively late through continuous iteration of our advertising system and products and enhancing our operating and service capabilities. Our advertisers experience and rate of return was further optimized, leading to enhanced industrial competitiveness.

In 2021, we consolidated Xiaodiantong and fan headlines to Magnetic Taurus so that our advertisers would be able to conduct more refined investment and budget allocation in both public and private domain and thus improve decision-making efficiency and rate of return. In terms of maturity of the algorithm model and price mechanism, we have conducted production research and also optimized the algorithm to boost efficiency.

With regards to services, we provided the target solution to our customers from various industries so as to cause the advertised requirement more precisely. In 2021 number of advertisers increased by more than 60% compared in ’20. Advertising of our closed-loop ecosystem is also one of the growth engines of Kuaishou advertising business. For the growth of GMV and active margins and optimized our products in 2021, revenue from advertising business achieved three-digit growth. In the future, we will also continue to improve the return on merchants’ investment by strengthening the value of our closed-loop business and product efficiency.

And also in addition, brand advertisement also achieved a breakthrough performance with revenue up more than 150% in 2021. Kuaishou’s merchant diverse user base and long-term private domain value market is unparalleled and a resources for great advertisers. So coupled with our investment in and also operational high-quality contents as instant games and Super Live show. We have been able to successfully attract more high-quality branded sites on our platform.

The marketing solution that integrates the product efficiency also fully realized commercial closed-loop value in 2021, the number of brand advertisers more than doubled. Live streaming e-commerce as a characteristic of high-efficiency, strong interaction and is content oriented. On a basis, Kuaishou has formed a distinctive trustworthy e-commerce model with a high repeat purchase rate. That superior experience and great exchange in e-commerce shopping mindset for more users. In 2021 our e-commerce GMV reached CNY 680.0 billion, representing record growth of 78.4%.

Specifically, the proportion of Kuaishou our self e-commerce continues to increase. In December 2021, Kuaishou accounted for 98.8% of e-commerce GMV. Trust is undoubtedly the foundation of Kuaishou’s e-commerce business, in the fourth quarter of 2021 the monthly e-commerce repeated purchase rate at of our platform increased by 5 percentage points compared with the same period last year. This is due to the persistent efforts made by the platform and expansion to provide users with more guarantee and cost-effective shop experience.

In 2021, we launched the Kuaishou Trust Card transaction protection mechanism to provide users with protection rights and worry-free shopping experience. We have seen the merchant who activated the Trust Card saw their GMV increased by 20% within 30 days, this not only protects customers’ rights and interests and reduces the cost of user order decision-making, but also improve the conversion rate of both our transaction and live streamings per room. The platform has also improved the timelessness after the sales.

And also this measure has increased the willingness of repeat purchase for the new users. In the second half of 2021, the repeat purchase rate of new users increased by more than 10 percentage points compared with the first half of the year. And currently, we have integrated dozens of trust indicators into a system and a trust index of merchants will determine the traffic distribution.

In addition to strengthening trust, we also continue to optimize the supply of merchandise and improve merchandise quality. In 2021, we upgraded Kuaishou’s selection to Kuaishou distribution which lowered the threshold for merchants and brands joined distribute, allowing more high-quality merchants to join the Kuaishou distribution system. At the same time, the products are set to refine layers and high-quality products identified through algorithms where we matched with more rights and interests for a more accurate and intelligent biomechanism management platform.

In the fourth quarter of 2021, more than 30% of e-commerce GMV came from the Kuaishou distribution system for brand merchants, we established a KA team to provide a tailor-made services. In 2021, the e-commerce business of brand groups have developed rapidly. The e-commerce GMV from self-operated live streaming and well brand was more than 9x of the first half of 2021 with significant driving the conversion of new active buyers. We’re delighted to see that in 2021, the consumption frequency of annual active buyers and ARPPU further increased.

People and content are essential for live streaming of e-commerce, the platform active e-commerce streamers continue to grow in 2021. The further optimization of quality of live streaming content, coupled with the continuous enrichment of merchandise supply based on the foundation for continuous increase of e-commerce penetration in the fourth quarter of 2021. The penetration rate of the platform live streaming e-commerce further increase. Our technical team continues to optimize the mechanism, especially in distribution of e-commerce content in public domain. In 2021, our order conversion rate increased significantly.

In the second half of 2021, we began to build a service provider system and empower more merchants and streamers to count stores efficiency. By the end of 2021 more than 500 service providers has been attracted by Kuaishou platform. The monthly GMV rate of the merchants exceed that of the total GMV by 20 percentage points.

For our live streaming business in the past year, we continue to optimize content quality, improve operational efficiency and explore scenarios expansion to give core player the value of the underwriting infrastructure and promote the increase in user engagement and stickiness.

In 2021, the revenue from live streaming business continued to improve reaching CNY 31 billion, of which the live streaming revenue in the fourth quarter reached CNY 8.8 billion, an increase of 14.3% quarter-over-quarter and 11.7% year-over-year, achieving the first positive year-over-year growth in the year.

Live streaming is an important content supply for the platform. The talent agency business is a good starting point of the platform to reach content supply. It is also an important part of our platform in terms of building healthy and open live streaming e-commerce. And also in the middle of 2021, we launched the Blue Ocean plan to strengthen cooperation with talent agencies and support and attract resources, we hope to discover high-quality and promise and talent agencies and breakthrough bottlenecks of the existing industry obtaining new growth opportunities benefiting from the platform policy and our openness of ecosystem talent agencies bring diversified streamers platform.

At the end of 2021, a cumulative number of streamers signed by talent agencies has more than doubled early year-over-year on platform. More higher-quality content supply has been recognized by users and user willingness to pay has been increased. In the fourth quarter of 2021, the average monthly ARPPU of live streaming business reached CNY 60.7, an increasing of 17.2% year-over-year and 8.2% increase quarter-over-quarter.

At the same time, high-quality content simulate to increase in the live streaming penetration rate and growth of paying users. In the fourth quarter of 2021, the active user penetration rate of live streaming business increased by 15 percentage points over the same period of last year.

The average MPUs of the live streaming business increased by 5.2% quarter-over-quarter to 48.5 million. We believe that there is room for further expansion in short video and live streaming scenarios. New digital needs of users are constantly evolving and a community like Kuaishou with highly active user engagement has more touch points with users enabling it to capture user needs faster and for new transaction base for our users bilateral networks in huge community.

We have gradually begun to explore other scenarios such as online recruitment and local services to empower more industries and people with short videos and live streaming. As for the overseas market, we own — are the key markets in 2021. We achieved successful user acquisition in the first half of the year, gaining a reasonable market share. Since the middle of last year, we are focused more on the strengthening of our differentiation and improving quality of uses and optimizing the construction of infrastructure to key organizational market and increased investment in feature content and targeting core user group more precisely.

At the same time, we have better the direction — planned direction and pace of investment in overseas resources in the second half of 2021 with more distinctive investment and is planned investment, DAU, user time spend and user retention rate this market continue to increase quarter-over-quarter.

In relatively mature market, we have been exploring monetization opportunities at the advertising, live premium and e-commerce. In the future, we hope to develop the fresher products and user mindset in overseas market and continue to achieve high quality and development and better return on investment.

My sharing end up here. Next, I would like to ask Jin Bing to share the company’s financial performance.

Jin Bing

Thank you, Yixiao, and hello, everyone. I’m pleased to have become part of Kuaishou family and meet with all of you in the first earnings call in Kuaishou. We ended the year of 2021 with a strong quarter of financial performance as we continue to take initiatives in cost control and financial efficiency improvement through efficient capital allocation and a disciplined investment approach.

We aim at delivering values for our users, content creators and partners driving high-quality growth and improving our monetization and upgrading our efficiency at the same time. In the fourth quarter, we continued to optimize our revenue and cost structure and release operating leverages, leading a significant quarter-over-quarter decrease in both our operating loss and adjusted net loss.

For the full year 2021, our total revenue reached CNY 81.1 billion, up 37.9% year-over-year. Importing our strong growth momentum was sustained into the fourth quarter despite a challenging macro environment. Our revenues for the fourth quarter increased 35% year-over-year and 19.2% quarter-over-quarter to CNY 24.4 billion. An increase was primarily driven by the online marketing services and other services growth, in particular, the e-commerce business growth.

Our online marketing service maintained a rapid growth and further gained market share. In the fourth quarter of 2021 its revenue reached CNY 13.2 billion, representing an increase of 55.5% year-over-year and 21.3% quarter-over-quarter. Revenue of online marketing services of the full year of 2021 was CNY 42.7 billion, increasing by 95.2% year-over-year. This was mainly driven by a vigorous growth of total traffic and continuously improve digitalized advertising products and operating capabilities.

All of these contributed to further optimized advertising experience and net performance into a growing number of advertisers using our platform as well as increased advertising budget on our platform. Our services include e-commerce is also striving with revenue of CNY 2.4 billion in the fourth quarter of representing an increase of 40.2% year-over-year and 27.3% quarter-over-quarter.

In 2021, revenue of other services reached CNY 7.4 billion, increasing by 99.9% year-over-year and as we further enrich the merchandising supply, improve service capabilities and optimize distribution algorithms our total GMV of e-commerce reached CNY 680 billion in 2021, representing an increase of 78.4% year-over-year. On the monetization side, we prioritize supporting merchants to grow by offering competitiveness net commission rates.

And revenue from our live streaming business was CNY 8.8 billion for the fourth quarter of last year, up 11.7% year-over-year and 14.3% quarter-over-quarter, marking the very first time of year-over-year growth for live streaming in 2021. The increase mainly resulted from in-house live streaming content and more efficient streaming operations, which then drove paying user growth and recovery of the willingness to continue and consumer. Average MPUs for live streaming grew 5.3% quarter-over-quarter to 48.5 million monthly ARPPU.

For live streaming on our Kuaishou has expanded 17.2% year-over-year and 8.6% quarter-over-quarter to CNY 60.7.

Gross profit for the year of 2021 reached CNY 34 billion growing 42.9% year-over-year. Gross profit margin in 2021 was 42%, improving from 40.5% in 2020. Our enhanced growth margin as a result of optimized revenue mix and improved management of operating costs.

Selling and marketing expenses were CNY 10.2 billion for the fourth quarter representing 41.9% of total revenues with a 7.1% quarter-over-quarter decrease. The decrease were primarily due to our more efficient and disciplined spending on our user acquisition and maintenance as required by customer optimization as well as refined operations management and took initiatives to pursue high-quality user growth.

Selling and marketing expenses as a percentage of total revenues decreased throughout the year from 68.5% in the first quarter of 2021 to 41.9% in the fourth quarter. At the same time, we strengthened the optimization of organizational personnel efficiency in the fourth quarter in 2021 research and development expenses were CNY 4.0 billion. This was a decrease of 4.8% quarter-on-quarter, representing 16.4% of total revenues in the quarter down from 20.6% in third quarter, and it expenses for the fourth quarter of 2021 increased slightly by 0.7% quarter-over-quarter to CNY 920 million, representing 3.8% of total revenues versus 4.5% in third quarter.

On adjusted net loss for the fourth of 2021 was CNY 3.6 million. Our adjusted net margin improved 7.9 percentage points quarter-over-quarter. We continue to maintain a strong balance sheet position with cash and cash equivalents, time deposits, restricted cash and wealth management products to CNY 49.6 billion at the end of 2021. We generated a positive operating net cash flow in the fourth quarter of 2021 as we improved monetization efficiency and better manage our working capital.

Looking forward, the sustainable and healthy development of our core business will lead to a further resources deployment and planning. At the same time, continued implementation to reduce costs and improve operating efficiency to fuel our business development and create long-term value for our shareholders.

So much for my sharing. Please, now we’re going to have the Q&A.

Question-and-Answer Session

Operator

Crédit Suisse, Kenneth Fong.

Kenneth Fong

Congrats on the very strong set of results. We saw fourth quarter user and traffic has been very strong and both are reaching historical highs. Can you please share with us the drivers behind? In the first quarter, spring event is also very well received. Can you share with us some of the user growth outlook for this year?

Yixiao Cheng

First of all, in terms of general trend, short video and live streaming are richer and more attractive and easily disseminated content format, which has become increasingly prevalent iterating traditional media format through capacity expansion to support more content than broader user case scenarios.

Furthermore, short video has gradually become a mainstream format as it can be more effective in content filtering and more efficient in content display. So we believe that China’s short video DAUs can potentially reach 1.1 billion. Against this backdrop, we continue to achieve exciting results on the growth side in a decade after our company’s founding. So in the second half of 2021, our DAUs and total traffic increased by 18.5% and 58.3% year-over-year, respectively.

In particular, the fourth quarter, our DAUs reached a historical high of 323 million, which has further enhanced our confidence in achieving our mid- to long-term DAU target, which is 400 million.

And our work on the growth side is mainly 2, as follows, first, strengthening our differentiated advantages and also improving our organizational efficiency. So as the short video industry is shifting from a pure growth stage to a stage where participants compete with existing users, it is requiring us to create more differentiated value for users and become a more unique presence in users’ mind.

So our forecast differentiation or foremost differentiation against other short video platforms is our positioning as a social platform. This is difficult to replicate since this is predicted that on our underlying values and also cap distribution logic. So by the end of 2021, we have more than 16.3 billion payers of mutual followers accumulatively, an increase of 68.2% compared with the end of 2020. This places us as an industrial leader in terms of the mutual relationship penetration rate.

Our private domain traffic also continued to grow, demonstrating a high-quality and the strong mind share of Kuaishou private domain. With respect to content, we consistently serve the personalized need of our users, exploring unique and also new categories that can be supported by short videos and live stream, aiming to inspire a more differentiated user mindset to content.

In addition to the Kuaishou Playlet we mentioned, content verticals such as sports and knowledge sharing have both contributed positively to our user acquisition and user time spent as well as promoted content creation on our platform. Our comments over live ratio are industry-leading, reflecting users strong willingness to interact based on content and trusting connection with each other that expands beyond contents consumption.

We have also continuously enriched the offerings of products and services for our users and started to expand the user case of short video and live streaming to the areas such as local service recruitment, catering to the need for the users.

Our efforts to improve organizational efficiency also boosted user growth. Since the third quarter of last year, we have been continuously optimizing users acquisition efficiency and retention rate. The first quarter is the peak season for the Internet industry to gain users and grow traffic. And this year, leveraging our past experience and efforts on efficiency improvement, our Chinese New Year and Winter Olympics joint events achieved better results in attracting new users compared with last year.

So our user retention rate also increased year-over-year after Chinese New Year. Total investment on users as well as Chinese New Year events in the first quarter were further optimized compared with the same period of last year, demonstrating our significant improvement in efficiency. We remain confident with our total traffic growth this year and are steadily moving towards our mid- to long-term target of 400 million DAUs.

Operator

JPMorgan, Alex C. Yao.

Alex Yao

We are glad to see our e-commerce business continuing to grow robustly in this quarter despite of the macro weakness. So a couple of questions on e-commerce live streaming. Number one, how do you guys see the long-term growth potential for e-commerce live streaming?

Number two, compared to other similar platforms, what is the competitive advantage of commercial e-commerce live streaming. Lastly, we’ve been seeing increasing regulatory requirements in e-commerce and live streaming, are you concerned that those incremental policies for requirements will negatively affect the e-commerce live streaming near-term outlook?

Yixiao Cheng

Thank you for the question. It has always been the ability that live streaming as a new tender format and sales channels offers greater advantages to both consumers and suppliers. First, it is a more efficient content format compared with information displayed in the forms of graphics and texts for traditional shelf-based e-commerce, live streaming displays merchandise more vividly.

This, coupled with the intensive interactions between streamers and users, costs users provides rich information to consumers for decision-making, leading to a better shopping experience and higher sales conversion rate. Secondly, live streaming e-commerce is a sales channel that can better satisfy consumers’ needs for shopping with the continuous improvement in Chinese people’s living standards and highly diversified merchandising action consumers often have clear budget and intention to purchase without specific target in mind, in such circumstances, consumers would go shopping and consume content discover and determine their targets.

The fun content consumption experience provided by live streaming can better meet users’ needs for shopping and the lively vibe of the live streaming session further stimulates users’ intention to buy and facilitate conversion. So in the long term, we believe the total GMV of live streaming e-commerce could reach CNY 6 trillion.

And second question is about Kuaishou competitive advantages. Our years of commitment to products traffic and long-term value has provided us with high-quality private domain traffic and a highly engaged business base with strong trust. Trust-based private domain e-commerce is taking shape in Kuaishou, which is also a unique un-referable feature of us derived from a valuable experience. Our support to the private domain motivated our merchants and streamers to focus on long-term user relationships and operations.

Further optimizing consumer experience contributing to our leading industrial and leading monthly repeat purchase rate. In addition, compared with other platforms, Kuaishou has more advantages in the lower-tier markets. We also noticed that consumers in these markets experienced higher-than-average income growth, which brings requirements of consumption upgrade.

Essentially, consumption is upgraded along with the consumers’ higher willingness to pay for differentiated merchandise, which is at the core brand. As such, consumption upgrade usually comes with increased purchase of branded merchandise.

So we discovered that besides the traditional well-known brand, it is easier for some emerging quite brand basing their operations on Kuaishou to stand out. These brands usually originated from the production head stream and have more cost-effective supply sources than a well-known brand making them a better match for the consumption levels and mindsets of users in the lower-tier markets.

At the same time, with excellent content operation capability, these brands can leverage live streaming more effectively to attract users and facilitate conversion. And lastly, these brands have a strong design to invest in promotion and commercialization because of their intention to increase exposure, build brand image and accumulate brand equity.

Some quite brands have already reached a considerable scale with annual sales of a few hundred million and even several billion renminbi. So why are these emerging brands able to grow up on Kuaishou. On one hand, as a content platform with a traffic advantage, Kuaishou provided these brands with a home base to build their brand narrative and niche.

On the other hand, Kuaishou’s key strengths in private domain attracts users to repeatedly visit and purchase, helping cultivate brand mind share and achieve a long-term healthy operations, benefiting from the industry-leading repeat purchase rate. Meanwhile, these competitive quite brands have become a unique offering of Kuaishou, which not only meet the needs of our existing users but also help us to acquire new buyers.

And lastly, the recent regulatory changes indeed raised the requirements for our governance as live streaming e-commerce is a new industry, it needs to be standardized and relevant laws and regulations need to be improved constantly during its development and expansion.

Leading platforms should led by example, and have the benign interaction with the regulatory authorities to improve systems and rules to ensure the industrial orderly, healthily and sustainable development. We have always been committed to strengthening e-commerce infrastructure and platform governance to enhance the users’ consumption experience and their trust in the platform.

We launched the Kuaishou Trust Card, a transaction safeguard mechanism to provide users with rights such as refund without return. Meanwhile, we rolled out the strict punishment and countermeasures for streamers and merchants selling fake and merchandise or engaged, post publicity and click farming.

In the future, we hope to continue growing with the industry and change more users consumption experience and merchant sale experience to contribute to the development of the digital economy.

Operator

Morgan Stanley, Alex Poon.

Alex Poon

I’ll translate my question. First of all, congrats on very strong results. And my question is related to our efficiency improvement and can management share with us how will we control our costs and to achieve China segment breakeven this year.

Yixiao Cheng

Thank you, Alex. We are very confident that our domestic business will deliver a quarterly adjusted net profit within 2022, and a path is quite clear. Most importantly, we expect continuous growth margin expansion this year.

First, with the development of high-margin business like the advertising and e-commerce, the revenue mix will further increase, driving overall gross margin expansion. Second, for each business line, we are also carrying out cost control measures aimed at better managing revenue sharing costs among others.

Third, as part of our initiatives to reduce costs and increase efficiency we are managing our operating costs such as bandwidth, service, depreciation and amortization and labor costs to release more operating leverage and improve asset utilization efficiency. In the fourth quarter of 2021 our total traffic increased by 57.6% year-over-year. In contrast, our traffic-related operating costs only increased by 10.8% year-over-year, leading to a 3.1 percentage point reduction as a percentage of revenue.

Fourth, while we slightly increased the cost of content in the other cost item, we believe that content can improve the user acquisition, user retention and engagement, which is significant user value and business value as well.

We will maintain discipline in the ROI-based approach with our content investment. Our gross margin reached 42% in 2021 increasing 1.5 percentage points comparing with 2020, and this will continue to expand this year.

And secondly, we strive to continue delivering results and expense control this year. With respect to selling and marketing prices, thanks to our organizational restructuring, optimized efficiency, among other means, acquisition cost per user and retention cost per DAU have both been trending down since the third quarter of 2021, while we ensure user growth and optimize retention, this year, we will continue to refine our operations in an effort to keep the absolute dollar of selling and marketing expenses to be no higher than last year and significantly reduce fees as a percentage of revenue especially in light of the easing of external competition.

In terms of personnel-related expenses, we currently have a relatively sufficient talent pool and we are constantly optimizing the management of our personnel productivity and unit spending efficiency. So we are targeting further optimizations to our R&D and administrative expenses as a percentage of revenue.

Operator

Jefferies, Thomas Chong.

Thomas Chong

My question is about our online advertising services. Given that we have seen a very strong growth momentum in the fourth quarter. However, what we are seeing right now is that macro is not very certain. So how would that affect our 2022 advertising KPIs? And how do we actually maintain or increase the advertising market share for this year?

Yixiao Cheng

The challenges from the macro environment do exist and also continue to affect the entire advertising industry, including us. Despite this our annual advertising revenue reached CNY 42.7 billion, growing current scale and the rapid and above industry rate of 95%, helping us continue to gain market share in the online advertising sector.

So there are several reasons behind it. First of all, advertisers continue to have budget biases for large video-based platforms with scale growing traffic. In the fourth quarter of 2021. Our total traffic increased at a fast pace of nearly 58% year-over-year. And secondly, Kuaishou provides a combination of comprehensive advertising products and a closed-loop transaction that are rare in the market.

So we have 5 comprehensive advertising products, including closed-loop e-commerce ad, external performance ads, brand ads and Kuaishou Union and Star Magnet to meet consumers’ overall marketing and sales needs. So as Kuaishou’s closed-loop e-commerce platform helps advertisers to improve sales conversion while optimizing user experience and advertising effectiveness our native e-commerce ads has grown faster than our overall advertising business in a triple-digit growth rate year-over-year.

And third, although our advertising business started relatively late, it also means more opportunities and upside for future growth. In terms of advertiser coverage, as we strengthen our brand business and service capability, the number of advertisers grew by more than 50% in 2021, and there is room for further improvement.

Meanwhile, our continuous investment in algorithm and product iterations have further optimized our advertising system and products contributing to a double-digit increase in average monthly spending by advertisers. While our external performance as has been affected by macroeconomic factors and regulatory policies, its plan has shown a stronger resilience relative to the industry.

Fourth, the improvement of advertising, quality and algorithm optimization as well as product innovation has also given us further upside in ad load and conversion rates. Our more native advertising content combined with industrial-leading algorithm capabilities and continuous product iterations have played a solid foundation for us to provide a better user experience in ad consumption. In 2021, our ad loads increased by a small degree as planned and still has room to grow.

And lastly, our brand ad business, Kuaishou Union and Star Magnet are all in their early stage, possessing greater growth potential relative to mature companies. These drivers will continue to propel our business growth this year and increase our advertising market share.

Meanwhile, we remain cautious and continue to monitor the recovery trends in a general environment and will be more focusing on our brand business, our own business of development.

Operator

UBS, Felix Liu.

Felix Liu

Let me translate myself. Congratulations on the strong fourth quarter. My question is on your new business initiatives. I noticed you launched an online hiring service focused on blue collar hiring as well as established a strategic collaboration based on local services. So I’m just curious, can management share some insights on your thoughts on the new business, their long-term growth potential as well as your next strategic execution plan?

Yixiao Cheng

Thanks for the question. We believe short video and live streaming as a infrastructure have the ability and potential to change many industries, advance the development of digital economy and boost business efficiency in recent years. Economic development has changed the supply and demand relationships of many industries resulting in demand that cannot be fully met through traditional modeling and models.

Blue collar recruitment is one of them. Pain points such as information asymmetry between blue collar workers and enterprises, mismatch between talent and jobs and labor shortages have long existed, impeding improvements in employment efficiency and economic development. According to the available statistics within China’s current working population, over 400 million people are blue-collar workers, more than twice the size of white collar workers and represent the overall employment situation of the Chinese population.

So the penetration of online recruitment is only a little over 10% in the blue-collar job market compared with more than 50% of the white-collar job market. This is to say that blue collar jobs have the most potential in online recruitment in terms of market size and growth speed.

We have been exploring the industrialization of the live streaming ecosystem and blue-collar recruitment is a very suitable starting point for Kuaishou. We already have the massive blue collar user base featuring strong user trust and frequent real interactions among users and between users and our platform.

Via short video and live streaming candidates can understand the job position, working environment and other relevant information in the shortest time possible and in the most straightforward way, which will improve decision-making efficiency and facilitate a more reliable job search experience. At the same time, enterprises can leverage Kuaishou’s traffic and algorithm technology to find suitable candidates most effectively.

As blue collar workers change jobs relatively more frequently, enterprises are more sensitive to recruitment costs and return, making them an urgent need of a large-scale online product that is more effective and timely. We hope to gradually improve the video-based recruitment system to create a better job conversion for blue collar market.

In the future, we look forward to tapping into our own capabilities and advantages more deeply to facilitate the interaction of digital economy and the real economy and their long-term healthy development.

Operator

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

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