Kuaishou Technology

HKEX:1024

Earnings Call Transcript

[Operator]

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Kuaishou Technology Fourth Quarter and Full Year 2024 Financial Results Conference Call.

Please note that English simultaneous interpretation will be provided with the management's prepared remarks. [Operator Instructions]

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

[Huaxia Zhao, executive]

Thank you, operator. Good evening, and good morning to everyone. Welcome to our fourth quarter and full year 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 recorded by law. For all important information about this call, including; forward-looking statements, please refer to the company's public information the fourth quarter and full year 2024 results announcement ended December 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 to financial results. For a definition of non-IFRS financial measures and reconciliation of IFRS to non-IFRS financial results and the related risk factors, please refer to our fourth quarter and full year 2024 results announcement.

For today's call, management will use Chinese as the main language, a third-party interpreter will provide simultaneous English interpretation in the prepared remarks session and a consecutive interpretation during the Q&A session.

Please note that English interpretation is for convenience purposes only. In the case of any discrepancy, management's statements in the original language will prevail. Lastly, unless otherwise stated, all currency units mentioned are in RMB.

Now I'll turn the call over to Yixiao.

[Yixiao Cheng, executive]

Hello, everyone. Welcome to Kuaishou's Fourth Quarter and Full Year 2024 Earnings Conference Call.

Over the past year, guided by our technology, improvement user-centric business philosophy, we leveraged technology and empower content and business ecosystem. This created a greater value for both our users and partners and drove our robust financial performance in Q4 our average DAUs remain above 400 million, and our total revenue grew by 8.7% year-over-year to RMB 35.4 billion. Our adjusted net profit reached a new quarterly high in Q4 of RMB 4.7 billion.

For the 2024 full year, our total revenue increased by 11.8% year-over-year to RMB 126.9 billion, and our adjusted net profit increased by 72.5% year-over-year to RMB 17.7 billion with an adjusted net margin of 14%. These gains reflect our steady improvement in profitability. Today, it has become increasingly evident to that with the ongoing advancements and the breakthroughs in the large models and application capabilities, AI is pushing the boundaries of video content creation, user experience and the broader business ecosystem.

As a leading short video platform and content community in China and globally, Kuaishou stands at the forefront of this critical intersection of AI technology and larger video models. While we're driving transformative changes across the industry landscape, we firmly because of that, AI is much more than an efficiency improvement tool. It is the core engine that will create a greater value for our business ecosystem, while continuing to drive the platform's traffic growth. Importantly, our work proactively engages in and advances broader industry's profound transition.

Next, I would like to share some of our thoughts on our go-forward AI strategy. As the predominant content and consumption for global users, shorter videos have been deeply embedded in the fabric of user's daily lives in every industry. Users have developed an increasingly strong demand for richer and more diverse top notch content. With element of large video models, we can greatly lower the entry barrier to the video creation, particularly the cost barriers.

Users can now generate premium videos with a simple prompt picture. This positions us to unlock the massive creative potential for nonprofessional creators. We believe [ Kolin ] is becoming the new infrastructure for the creation in the AI era. Right now, it's a powerful resource for PGC and PUGC creators that help them create high-quality videos and images efficiently.

Next, Kling AI will evolve into a video story telling tool for amateur creators with cinema-grade video generation capabilities, it empowers people to craft compelling visual stories and become a gen-AI-based director, forming an AI GC-driven community for content consumption interaction, while creating a large scale application in commercial scenarios.

Moving forward, by empowering through Kling, we hope to transform and upgrade existing business while creating a new track for AI-driven video content production. By doing so, we will strengthen and elevate our position as a leading platform for shorter video production and consumption community. We unveiled to Kling, a large future generation model last June. After its launch, it quickly gained significant traction with the video creators and artists globally attracting more than 1 million applicants in just one month.

Encouraged by users' positive response, the Kling team swiftly improved the model, releasing new iterations approximately every 2 weeks. By the end of Q4 last year, we rolled out Kling AI 1.6, this latest version features in responsiveness to tax subscriptions such as motion, temporary actions and account for movement. It also significantly improved the visual quality enhancing style consistency, color accuracy, lightening dynamics and rendering detail keeping us in the leader in terms of global technological advantages.

Kling AI 1.5 pro is currently one of the top 2 larger models in the world, according to the well-known AI evaluation website, artificialanalysis.ai ranking alongside of Google view 2, far ahead of other domestic video generation large model. In Q4 of 2024, we officially launched a stand-alone Kling AI app, giving global users a lot of ways to access it, including through both the app and the web.

With the continuous improvement in Kling AI functionality, its user base has grown at an accelerated pace while Kling AI's commercialization has also gained momentum, thanks to access channels such as membership subscriptions for individual users and API interface solutions for merchants.

As of February, since Kling AI monetization, we reached an important milestone of more than RMB 100 million in cumulative revenue for Kling AI. We expect Kling AI will achieve another leap in revenue in 2025. For the next stage, we'll continue optimizing iterating AI Kling technological capabilities through dedicated research and development efforts and a fast investments in resources to into a Kling large model, maintain its industry-leading position.

As Kling AI continues to advance, we firmly believe in technology and its applications are creating value for our partners on the platform, especially for our marketing clients and e-commerce merchants. As such, we will upgrade our AI algorithms and underlying recommendation technologies by closely following and learning to apply the technological progress of DeepSeek and other global foundation models, this will continually amplify the matching efficiency between users, can on merchandise and improved conversion, leading to a higher ROI for our marketing clients.

We'll also gradually upgrade our magnet engine into a next-generation AI-powered intelligent commercial engine. Through large multi-mode model, we generated a more creative and user-friendly marketing material content for our marketing clients to dramatically reducing their content production costs and freeing up more of their budget to focus on brand promotion and traffic conversion.

Meanwhile, AI generated virtual digital human live streaming solution will lower the marketing entry barrier and help clients reach breakthroughs in sales. In Q4, both average daily spending on AI GC short video marketing materials and virtual digital human live streaming solutions exceeded RMB 30 million with a daily peak of RMB 60 million. Moreover, we have 45-hour model estimation capabilities by using large models to analyze product systematics and user behavior as well as integrating model architectures and a sequence representatives.

Representation as such, we have boosted advertising performance of marketing materials, driving more marketing spending. AI recommendation technology also offers us an opportunity to redefine the content-based e-commerce paradigm, without a deep understanding of exceptional content and a superior product, we are shifting from a model where people search for products to one where products intuitively understand and find the right people.

For consumers, we have validated the sales funnel of our AI trial tool in the KOL streaming tool, making personalized AI shopping easier and more interactive. For small and medium size to streamers and merchants, we launched a smart presentation tool, which makes intelligent products augmentations and generate sales pitches, among other smart features, strengthening live streamers and merchant e-commerce marketing capabilities.

The era of AI is happening right now. As short video platform content community, we are determined that is not a replacement for human creativity, innovation or creation. We see it as a tool to help more people in these endeavors. AI will allow everyday users to break industry and a culture barriers giving them opportunity to become a globally loved artist and entrepreneurs to equal access to creative better generation productivity tools. With our enduring commitment to inclusivity, we have always strived to create a community where every day people can showcase their talent and share their lives.

We recognize this transition requires time and patients over the next 3-plus years, we plan to increase our capital expenditures and R&D investments, which may impact the speed of our margin expansion. That said, I'm convinced that the fees we plan today, we will shape the entire video production and the consumption industry over the next decade and formally establish Kuaishou as the inclusive digital home in AI era.

While we set up ourselves on the stars and look forward to the future, we remain grounded in making steady incremental progress. With that overview of our vision, I'd like to briefly review our key business highlights and developments in Q4 and full year 2024.

First, user growth and ecosystem construction. Q4, average days on the Kuaishou App reached 401 million and MAU used to reach 736 million, increasing by 4.8% and 5% year-over-year, respectively, the average yearly time spent per DAU on the Kuaishou App was 125.6 minutes. While total user time spend rose by 5.8% year-over-year, our refining user growth strategy led to consistent improvement in new users engagement interaction and retention rates.

We focus on optimizing features and improve the end-to-end viewing experience for users increasing the resolution and ensuring smooth streaming, we have continuously enhanced the video sharing and communication experience while introducing various innovative features in private messaging, which drove the daily average private messenger penetration rate, up by nearly 5% points year-over-year in Q4 among users with mutual followers, we also find our common ranking strategy, resulting a year-over-year increase of over 40% in user time spent on comments features in Q4.

Content is the cornerstone of our dynamic community, understanding why you just open our app, guides our content strategy. In terms of traffic distribution, we ensure that stand-out and high-quality content featuring distinctive Kuaishou characters reaches the right audience through more recommendations and higher exposure, foreseeing deeper engagement and stronger connections. For example, content creator Da Bing's live streaming room emerged as a welcoming space for Kuaishou users to share the stories and interact with one another, strengthening the heartfelt bonds, between users and content creators.

In the pan-knowledge vertical, Anwan Qin Opera Theater Troupe, offline tours and online live streaming spark to widespread in user engagement and discussions. The Troupe's new year's eve performance achieved over 140 million cumulative views across live streaming and short views. This foster a connection between regional users and creators both online and offline and strengthen the core user stickness while promoting China's traditional art and intent for cultural heritage.

Sixth, online marketing services. In Q4, revenue from online marketing services grew by 13.3% year-over-year to RMB 20.6 billion. This marked the first time the segment's quarterly revenue exceeded RMB 20 billion. In addition, for 2024, this revenue grew by over 20% year-over-year. Our quarterly revenue growth was mainly driven by a year-over-year eCPM increase in the high single digits.

We captured incremental opportunities such as commercialized short plays and the online marketing services and enhanced our marketing service recommendation model through AI. This improved our ability to predict accurate outcomes and increase the conversion efficiency of marketing matures Additionally, smart marketing solutions such as the UAX placement solutions and omni-platform, marketing solutions significantly enhance our marketing clients advertising performance.

In Q4, external marketing services continue to be the primary driver of our online marketing services. In particular, the content-consumption industry, which include a short plays, mini games and novels experienced, faster growth. Notably, marketing spending from commercialized or short place to search to more than 3 fold year-over-year in Q4.

On the product front, we upgraded to the UAX placement solutions, transitioning from rule-based to model-based decision-making. As a result, UAX-based marketing spending accounted for over 55% of total external marketing spending in Q4.

Closed-loop marketing services continue to support merchants in leveraging high-quality traffic on Kuaishou boosted operating efficiency. In Q4, total e-commerce and marketing spending by merchants using our omni platform marketing solutions and smart hosting products contributed approximately 55% of total close to the loop marketing spending.

By focusing on enhancing small and medium-sized merchants willingness for marketing placement on our platform and improving advertising performance, we drove a year-over-year increase of over 30% in these merchants working expand.

Third, our e-commerce business, leveraging our advantages in content-based scenarios and pan-shelf-based commerce, our e-commerce GMV grew by 14.4% year-over-year to RMB 462.1 billion in Q4. The more about an e-commerce offering is enhanced to synergy efficiency of our omni platform traffic have enabled us to better meet the needs of our e-commerce users.

In Q4, the number of e-commerce monthly active paying users increased by 10% year-over-year to 143 million with an MAU penetration rate of 19.5%. We also launched targeted programs to acquire new users from Southern China enhanced their activity, while harnessing key promotional events refining coupon and a subsidy strategies. During the Double 11 Sales Promotion, we gained over 7 million net new users for the fortifying users loyalty for repeat purchases. Going forward, we'll continue to uphold our user-centric strategy and partner with merchants and KOLs to optimize the consumer shopping experience.

On the merchant side, in Q4, merchants continue to thrive in Kuaishou's e-commerce ecosystem. The number of average monthly active merchants increasing by over 25% year-over-year. GMV small -- from small- and medium-sized merchants largely grew year-over-year in Q4, mainly driven by our 3 core policies, namely improving policies for new merchant recruitment, optimizing policies for existing merchants and leveraging diversified scenarios. To encourage new merchants to use Kuaishou, we launched the Golden Bounty Initiative, Set Sail Initiative and provided a cold-start traffic through targeted scenarios. These programs helped early-stage merchants increase traffic, reduce operating costs and aligning incentives to their key growth cycles and transition points.

We worked with ecosystem partners to accelerate new merchant growth, providing small and medium-sized merchants with refined methodologies for content-based e-commerce and establishing growth paths for merchants in omni domain stories, including KOL, live streaming and distribution through video and shopping mall.

In our KOL business, we strengthened the platform's merchandise management capabilities through our Blockbuster Initiative and broaden the KOLs product offerings during sales promotions.

Meanwhile, we further energized our content based scenarios through diverse activities and marketing tools, including KOL competition to motivate streamers, during the Double 11 Sales Promotion more than 39 million users joined Group Buy for KOL followers, and over 2,500 live streaming rooms achieving GMV exceeding RMB 1 million.

In terms of diversified scenarios in Q4, short video e-commerce GMV grew by over 50% year-over-year. As important components to our content-based scenarios, both short video and e-commerce and interaction between short videos and live streaming have been instrumental in helping merchants and KOL's can expand their business. Additionally, Kuaishou for the base e-commerce GMV contributed 30% of our total e-commerce GMV in Q4. Its growth consistently outperformed the overall GMV growth mainly driven by strong supply and demand.

In Q4, average daily active merchants grew by over 50%, and average daily paying users in our shopping mall group by nearly 40% year-over-year. As our pan-shelf-based e-commerce increasingly complements our content-based scenarios, so we have enhanced merchants' omni domain operation efficiency by strengthening the platform's control blockbuster products.

Next, regarding our live streaming business, Q4 revenue from our live streaming business was RMB 9.8 billion with a year-over-year decline continued to narrow compared to the previous quarter. We are determined about building a healthy and sustainable live streaming ecosystem for the long term and achieving diversify of growth propelled by high-quality content. By the end of Q4, a number of our partner talent agencies grew by over 30%. Number of tail-end agency managed streamers increased by over 60%, both on a year-over-year basis.

On the supply side, leading categories continue to create value, such as multi-host live streaming, group live streaming and Grand Stage. In addition, by expanding user engagement on Grand Stage in the rural towns, we accelerated our ability to discover and support local small and medium-sized streamers.

In terms of gaming live streaming in Q4, we explored comprehensive collaborations with the key games, including Games for Peace, CrossFire in areas such as streamer growth, content co-creation and event promotion while deepening our expertise in fighting games and other niche verticals. In addition, as our live streaming+ services empower traditional industries in Q4, the average daily number of users submitting resumes on Kwai Hire, increased by over 100% year-over-year. Number of matches grew by over 270% year-over-year.

For Ideal Housing, daily lead generation surged by over 260% compared with the same period last year. Finally, our overseas business and local services progress. Regarding our overseas business in Q4, we are deeply rooted in Brazil, where we continue investing in local content operations and brand marketing. We achieved breakthroughs in innovative user acquisition channels. Increasing DAUs by 9.3% year-over-year in Brazil. Benefiting from optimized traffic distribution mechanism and a cooperation with a top-tier local IP resources, we have gradually built a rich, diversified content ecosystem with a steadily growing user activity.

The average daily time spend per day -- year-over-year and quarter-over-quarter, exceeding 75 minutes, thanks to these improvements, our total overseas revenue maintained rapid growth of 52.9% year-over-year in Q4. Notably, online marketing revenue increased by 83.5% year-over-year.

Meanwhile, as a result of our effective control over costs and expenses, the operating loss from our overseas business narrowed by 57.2% year-over-year. In addition, we have initially validated our e-commerce business model in Brazil, achieving consistent growth in order of volume with improved subsidy and operational efficiencies. These early success have unlocked the potential for a healthy, sustainable development in the Brazilian market.

Now our local services, GMV for local services more than doubled year-over-year in Q4. We focus on city clusters with strong user bases and constantly focus on our user needs by further optimizing price consumption capability and comparison capabilities and scenario applications. These efforts enhanced our compelling value-for-money consumption experience, driving a 52.4% year-over-year increase in average monthly paying users in Q4. We also worked on improving content quality and optimizing the user experience, which steadily increased the conversion efficiency monetization also improved with the revenue from local services growing by 2.6x year-over-year in Q4.

As we have further optimize the infrastructure of our commercialization products, we also strengthened our partnerships with more high-quality local operation and ladder-based -- leader-based merchants by leveraging our differentiated traffic resources and powering merchants to achieve incremental growth. At the same time, in pursuing a higher ROI for our healthy and sustainable growth in local services, we amplified subsidy and operational efficiencies and continued narrowing our operating loss year-over-year Q4.

Looking back over the past few years, despite the numerous challenges, we achieved a sustained growth of offset our ecosystem partners by relying on the strength of our robust and driving content ecosystem, every improving structure and expanding commercial scenarios.

As this new era of AI technology unfolds, we remain committed to advancing our AI strategy, and remain dedicated to our technology-driven user-centric business philosophy staying deeply attuned to users' needs continually expanding our current offerings and fostering our AI content and business ecosystem built upon a trust-based community to create long-term value for our partners and shareholders.

My prepared remarks -- and here, now I hand the call over to Mr. Jin Bing to introduce the company's financial update for the full year 2024 and Q4 last year.

[Bing Jin, executive]

Thank you, Yixiao, and hello, everyone. Looking back to the past year. We achieved a new breakthroughs in our operating metrics and steady improvements in our financial performance despite uncertainties in the external environment. We maintained a strong momentum by leveraging our robust content and healthy and sustainable business ecosystem and consistently enhancing the synergy efficiency for our omni platform traffic in second half of 2024.

Our average DAUs surpassed 100 million, marking a significant milestone in our user ecosystem. As an AI-driven tech company we proactively explored and deepen application of AI -- large AI models in various business, further elevating our content business system while driving greater operating efficiency. For 2024, our total revenue reached RMB 126.9 billion, increasing 11.8% year-over-year. Our adjusted net profit jumped by 72.5% year-over-year to RMB 17.7 billion with an adjusted net margin of 14% reflecting rapid improvement in profitability.

Now let's take a closer look at our Q4 financial performance. In Q4, our total revenue grew by 8.7% year-over-year to RMB 35.4 billion, mainly driven by growth in our online marketing services and e-commerce business.

In Q4, online marketing services revenue increased by 13.3% to RMB 20.6 billion from RMB 18.2 billion in Q4 last year, and accounted for 68.3% of total revenue. The quarterly revenue surpassed RMB 20 billion for the first time, contributing to our full year online marketing services revenue growth of over 20% year-over-year. This growth was mainly driven by our continuous enhancements to algorithms and models, as well as our smart placement products.

Both upgraded our content and the user understanding using AI technology, further improving recommendations and a conversion efficiency, which promoted more marketing spending. Revenue from other services, including e-commerce, reached RMB 4.9 billion in Q4, up 14.1% from RMB 4.3 billion in the same period last year. This increase was mainly driven by the growth in e-commerce GMV, which boosted e-commerce commission income. We further advanced our omni domain operations to expand merchants in the Kuaishou's business by leveraging our rich content ecosystem and continuously improving the synergy efficiency of our money domain traffic.

Meanwhile, we further provided abandoned in the product offering is more diverse marketing activities to constantly elevated user shopping experience fortifying our e-commerce user loyalty for repeat purchase. All these measures lead to increases in the number of e-commerce, monthly active paying users and monthly active merchants.

Q4, our live streaming revenue was RMB 9.8 billion, a decrease of 2% from RMB 10 billion in Q4 last year with a year-over-year decline continued to narrow sequentially. We continue to foster a healthy and sustainable live streaming ecosystem by consistently developing diverse leading categories in live streaming, deepening our expertise in niche verticals, accelerating the ability to discover and support local small and medium-sized streamers. We effectively increased the number of streamers and talent agencies and their engagement levels.

Cost of revenues went up by 6.5% year-over-year in Q4 to RMB 16.3 billion and accounted for 46% of total revenue. This increase was mainly due to increase to revenue sharing costs and the related tax in line with our revenue growth. Depreciation of property and equipment and right-of-use assets and amortization of intangible assets.

In Q4, gross profit grew by 10.6% year-over-year to RMB 19.1 billion. Gross profit margin was 54%, an increase of 0.9 percentage points year-over-year. Moving to expenses. Selling and marketing expenses increased by 11% to RMB 11.3 billion, accounting for 32% of total revenue. The increase was mainly due to increased spending on online marketing services and e-commerce business promotions.

R&D expenses were RMB 3.5 billion, rising by 4.7% year-over-year, accounting for 9.8% of total revenue. dropping from 10% -- 10.1% in Q4 last year. Administrative expenses increased by 15.2% year-over-year to RMB 866 million. As a percent of total revenue, administrative expenses were flat with the same period of last year. The increase in R&D and administrative expenses was mainly due to higher employee benefit expenses, including related share-based compensation expenses.

Group level net profit for Q4 rose by 10% year-over-year to RMB 4 billion. Group level adjusted net profit rose 7.8% year-over-year to RMB 4.7 billion, reaching a new quarterly high with an adjusted net margin of 13.3% year-over-year. Our balance sheet remains robust with cash and cash equivalents, time deposits, restricted cash and wealth management products, totaling RMB 92.8 billion as of December 31, 2024. Through enhanced the monetization capabilities and efficient working capital management, we generated positive operating cash flow of RMB 8.6 billion in Q4. Additionally, we actively implemented our shareholder return program throughout 2024.

Within year 2024, we had repurchased an aggregate of approximately HKD 5.6 billion in shares or around 123 million shares, which accounted for about 2.8% of our total shares outstanding at the beginning of 2024.

Next, I'll provide a quick overview of our financial performance for 2024, for the full year 2024, our group's total revenue reached RMB 126.9 billion, up 11.8% year-over-year. This includes online marketing services revenue of RMB 72.4 billion, which rose 20.1% year-over-year. Revenue from our live streaming business decreased by 5.1% year-over-year to RMB 37.1 billion, which is better than we expected at the start of the year.

Revenue from other services, including our e-commerce business, totaled RMB 17.4 billion, an increase of 23.4% year-over-year. Gross profit margin expanded by 4 percentage points year-over-year to 54.6% in 2024. Our adjusted net profit for the full year was RMB 17.7 billion, increasing by, remarkable, 72.5% year-over-year with an adjusted margin of 14%.

Looking at how we continue to add here to our technology-driven user-centric business. Philosophy under this approach, we prioritize the user needs and actively promote the development of thriving content and business ecosystem. At the same time, we'll continue to invest in decisively by reinforcing the critical role of AI technology to maintain our competitive edge in the average changing market. These efforts will under future growth potentials and drive the long-term sustainable development for our business and financial performance.

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

[Operator]

[Foreign Language] [Operator Instructions] The first question comes from the line of Felix Liu from UBS.

[Felix Liu, analyst]

[Interpreted] My question is on your AI progress. We noticed that the company's large video model Kling has attracted widespread attention. It was even mentioned at the press conference of the NPC and CPPCC in earlier March. Can management please share the reason for Kling's success and your plans to maintain the model's leading edge?

[Yixiao Cheng, executive]

[Interpreted] Thank you for your question. First of all, I'd like to thank you all for your interest and support for Kling AI. Kling AI started out as an internally integrated project early last year. It opened for testing on June 6 last year and quickly iterated more than 20 versions since its launch. On December 19, 2024, we officially rolled out the Kling AI 1.6 model. This significantly improves semantic adherence, visual aesthetics and the motion quality, while supporting both standard and high-quality models.

In terms of semantic adherence, Kling AI 1.6 model has enhanced the responsiveness to tax descriptions with a better motion temporary actions and camera movements as well as better understanding of first to frame content and can generate elements not included in it. This model also boosts better visual aesthetics with a stronger style consistency, more appealing colors, better lighting dynamics and more vivid details. The Kling AI 1.6 model has improved motion quality, featuring smooth motion that makes expressions more natural.

In particular, in our internal evaluation, the overall performance of the Kling AI 1.6 model improved image to video capabilities by almost 200% on the Kling AI 1.5 model. This gives us confidence that Kling AI's comprehensive image to video performance is currently #1 in the world.

The reason why Kling AI has been able to achieve and maintain its global leadership, it's closely tied to our sharply focused strategy for researching and developing large multi models. In particular, we quickly established Kling AI's industry advantages through organizational collaboration, investment in computing power, algorithm improvement and data accumulation.

In organizational collaboration, we have always ascribed great value to our technical teams. We have a deep talent pool for developing algorithms and video understanding with a high level of collaboration across our teams.

In terms of computing power, we put more computing resources on developing large video models to achieve key breakthroughs. On the algorithm front, the high complexity of lead generation model selection requires more precise technical judgment, semantic selection and a large amount of algorithm innovations. We have been at the forefront of algorithm innovation, solidifying our ability for further technological breakthroughs.

Lastly, in data accumulation, we built a strong technical mode in video data processing and synthetic data technology.

As for how we maintain our leading edge with our models going forward, we'll continue to use our focused strategy and provide even more support to Kling AI, we'll also continue to make R&D investments in Kling AI large video model technology and leverage the Kling AI brand to attract top talent. By strengthening and integrating our efforts across areas in computing power, algorithms and data, we're confident we can sustain our global technological leadership in video generation models.

[Operator]

[Interpreted] The next question comes from Lincoln Kong from Goldman Sachs.

[Lincoln Kong, analyst]

[Interpreted] My question is also about AI. I think management mentioned in the prepared remarks, company's longer-term AI strategy. Could management break this strategy time in terms of action plan and the milestone targets over the next few years?

[Yixiao Cheng, executive]

[Interpreted] Thank you for your question. We kicked off our new AI strategy at the beginning of 2023 and made clear traffic strategic goals to ensure we can maintain our leadership and amid potential AI breakthroughs. As AI technology develops and gradually matures, we believe the market is bound to see volatility with up and down cycles.

For Kuaishou, the best option is to use AI to upgrade our existing business and rapidly form a positive cycle between R&D investments and returns. This will be key to ensuring our AI products can truly equipped to transcend market cycles. At the same time, we are focused on building a strong system that drives ongoing innovation in our large model team to make more innovative breakthroughs and keep our leading edge in large model technology.

In the long term, with Kling AI, we aim to transform and upgrade our existing business while pioneering a new frontier in AI generated video content production. This will help us strengthen and grow our platform's leadership position for short video production and consumption community.

For this long-term strategy in mind, we think there are a few key areas where we need to continue making progress. First, we'll continue to refine our large language mottos and large multimodal underlying technological capabilities, staying and think with industry development and driving continuous innovations in algorithm. In large language model R&D, we shifted our focus in Q3 of last year to the KwaiYii LLOM MOE model, which has smaller parameters. MOE model helped us maintain our model's overall performance and better suited to our existing business scenarios while significantly reduced training and inference costs.

This year, since DeepSeek R1 large model open source. We are even more confident that we can closely track and learn from the most advanced foundation models in the market to consistently improve the performance of our foundation models.

Second, we'll continuously upgrade the AI monetization model represented by Kling to drive rapid revenue growth with the goal of making Kling AI, the world's top grossing video generation AI application. Whether it's a tool for professional creators to produce high-quality images and videos or a video storytelling tool for amateur creators, we believe Kling AI powerful technology and product capability can significantly lower the entry barrier for content creators is driving the production consumption and interaction of the AIGC content.

At the same time, we are integrating across Kuaishou's content and business ecosystem. For instance, by improving content understanding and recommendations, we can expand our user base and increase engagement. We will also make AI capabilities more widely available to advertisers and e-commerce merchants on our platform, providing them with expert tools in various areas, including AI generated video marketing material, digital human live streaming, AI try-ons and smart presentation. These innovations will help our business ecosystem partners operate more efficiently and unlock new growth for us in the online marketing services and e-commerce business.

Ultimately, as we advance our AI models, the cost and complexity of content creation will drastically decrease leading to a surge of AIGC generated content in volume and quality. This could potentially lead to new business models, opening up new sustainable growth channels for our company. Thank you.

[Operator]

[Interpreted] The next question from the line of Brian Duan from Citi.

[Duan Bing, analyst]

[Interpreted] I can translate myself. Thanks management for taking my question. My question is regarding Kling AI's commercialization. Could management please share with us the recent progress, including AI's commercialization and is a commercialization target for 2025?

[Bing Jin, executive]

[Interpreted] Thank you for your question. Since launching Kling AI, we have focused on 2 key areas: maintaining our industry leadership through continuous technology and product generations and exploring monetization tools that will turn our R&D investments into revenue. Right now, Kling AI generates revenue through user subscriptions, API interface solutions for businesses and customize the scenario solutions, providing exclusive functionality and services for users in both domestic and international markets.

Since we began monetizing Kling AI in Q4 last year, its monthly revenue has grown at a rapid pace sequentially. From the beginning of its commercialization until February 2025, Kling AI's cumulative revenue has succeeded RMB 100 million. To our understanding, Kling AI is now China's #1 video generation application by revenue. And revenue comes from international users grew rapidly with a strong retention rate in our global pay subscriber base.

This further underscores that Kling AI as global leadership in AI innovation, where it's become a go-to video creation tool for AI content creators and artists worldwide. Beyond our growing user subscription, our services for our business are also quickly scaling. We have partnered with thousands of domestic and overseas enterprises including Xiaomi, BlueFocus, AWS China, Freepik, showcasing Kling AI's exceptionality to empower video creation, infrastructures across various industries.

We believe that as Kling AI continues to evolve with a stronger technology and more advanced features and will serve as an ever wider range of individual users in the business across more scenarios. Working closely with creators and business clients who will identify key demands, explore more high-value scenario applications and build a comprehensive ecosystem that connects AI to production, content production and monetization while keeping our ROI in check, our next steps will be to scale up marketing and brand activities, both at home and abroad expanding Kling AI's reach and influence among broader demographic. We're confident that Kling AI will have significant revenue growth in the year of 2025.

[Operator]

[Interpreted] Next question comes from Daniel Chen from JPMorgan.

[Qi Chen, analyst]

[Interpreted] My question is also related to AI. In your speech, you mentioned that the company is harnessing advanced AI technology to empower its content and also business ecosystem.

Could you please elaborate on the progress of the specific application and also our plans for them?

[Yixiao Cheng, executive]

[Interpreted] Thank you for your question. As I mentioned earlier, harnessing AI to empower our existing business and align with our R&D investment and returns will ensure our one products can translate market cycles since we first launched our new AI strategy, we have made steady progress and consistently hit key milestones, one after another, along the way and by continuously enhancing the comprehensive our foundation models, we have fortified AI's role in empowering our content and business ecosystem.

In content understanding and recommendations, we use large AI models to analyze short video, live streaming comments and user interests. The result is more accurate user recommendations that have increased user activity and time spent on our platform. Large models, higher-level reasoning allows for more advanced content analysis, smarter recommendations and better matching capabilities effectively replacing the need for extensive manual labeling.

Instead, our models automatically learned from these like streaming comments and commercial content as well as user preferences. For search scenarios, we started internal testing in early March, integrating DeepSeek R1's large model capabilities to improve intelligence surge accuracy and user experience. This has helped to drive higher user activity while tapping into new monetization opportunities in our search scenario.

In commercial applications, we expect AI models to keep improving on analyzing product semantics and user behavior. By refining model architecture and sequenced representations over time, we can improve model estimation capabilities, which will enhance app performance. Ultimately, driving growth in marketing spend. For example, we expect our AI-powered tools will reduce most of our marketing clients short production cost by 60% to 70% or more.

Additionally, as AI digital human technology matures, we are creating new opportunities for merchants with digital human live streaming rooms, helping them achieve standout content-based e-commerce. In 2025, we expect AI marketing products such as AIDC short video marketing materials and virtual digital human live streaming solutions to continue to add incremental value growth to our online marketing services revenue.

[Operator]

[Interpreted] Last question comes from the line of Guan [ Leo ] from Citic Securities.

[Guanran Wang, analyst]

[Interpreted] So my question is about could management share your AI investment plan and scale and also the impact on your profit?

[Bing Jin, executive]

[Interpreted] Thank you for your question. As Yixiao mentioned earlier, our AI strategy is crucial to the company's future development. We've already seen the tremendous value it brings to our content and business ecosystem. With Kling AI's monetization accelerating. We're even more confident about making a firm and long-term commitment to investments in AI.

In terms of AI-related CapEx, we plan to increase our 2025 spend in AI compared with 2024, but in a measured way. First, we already prepurchased and stored some training computing power in 2023 and '24, and we'll continue purchasing computing power in 2025. Our main goal is to ensure that Kling AI has the training computing power needed to keep its leading edge.

Second, we are making structural adjustments to our AI-related CapEx as Kling AI's commercialization grows, we will adjust and increase investment in inference computing. The computing power required for inference is sufficiently supplied in the market. That is why while we plan to add more inference GPU, the overall CapEx increase will be controlled.

Finally, we will keep improving the utilization efficiency of our existing computing power and servers through engineering, innovation and operational optimization, making sure we get the most value from our existing infrastructure.

For AI-related expenses like R&D personnel costs, we expect a moderate year-over-year increase as we look to attract, retain and develop our talented AI team. Overall, we estimate that AI investments will impact our adjusted net margin by about 1% to 2% this year. Of course, we will dramatically adjust the scale of AI investment based on business progress. For example, if Kling AI's monetization keeps accelerating, we might increase investment in inference computing power.

That said, since Kling AI has already reached breakeven in terms of the gross profit margin in inference generated videos, additional spending on inference will have a relatively small impact on our bottom line. In the long term, as AI continues to empower our economy and business ecosystem, we expected this to meaningfully drive higher revenue efficiency and profitability for the company over time.

Thank you, that's end of the QA session. Back to you operator.

[Operator]

[Interpreted] 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.

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