Zhihu Inc (ZH) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Second Quarter and Half Year Interim '22 Financial Results Conference Call. (Operator Instructions) Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Jingjing Du, Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our second quarter 2022 financial results conference call. Joining us today are Mr. Zhou Yuan, Chairman and CEO of Zhihu; and Mr. Sun Wei, our CFO.

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

During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhihu.com. I will now turn our call to Mr. Sun Wei, our CFO.

Thank you, Jingjing. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu. Thank you for joining Zhihu's second quarter 2022 earnings call. The recent COVID-19 pandemic situation and the macroeconomic conditions created challenging environment in the second quarter. Against this backdrop, we focused on retaining high-quality user growth in a sustainable and efficient manner.

Confronting these uncertainties, we firmly executed our Community Ecosystem Comes First strategy and improved business efficiency with optimized organizational structure. In addition, we continue to expand our fulfilling content offerings, enhance creators' experience and strengthen community culture.

Together, this efficiently drove quality growth in our user base, improved engagements and stickiness and bettered our bottom line performance.

In Q2, our average MAU grew by 12.3% year-over-year to 105.9 million and from January to June this year, the average time spent per DAU increased more than 12%.

We are delighted to see our content creators becoming more active and creative, contributing more high-quality fulfilling content to our library. In the quarter, the average DAU of our high-ranking content creators increased by nearly 50% compared to the same period last year, with the average creation volume per creator almost doubling.

With all of the efforts we've made to enhance our community ecosystem, we are delighted to see fruitful rewards, not only in our community ecosystem centered around our user, creators and content libraries, but also in our business results.

In Q2, despite many uncertainties, our total revenue reached RMB 836 million, growing 31% year-over-year and 12.5% quarter-over-quarter, while our net loss narrowed by 24.4% from the first quarter of the year, as a percentage of the total revenue.

Zhihu's diversified revenue structure was a critical force in achieving remarkable top line growth amid adverse macro conditions. Paid membership in the quarter grew significantly by 75.1% year-over-year and contributed 32.4% of total revenue. This phenomenal growth clearly demonstrates the strength of content-centric business model and the resonance of our fulfilling content with users.

We also saw strong growth in content-commerce solutions or CCS, which grew 15.9% year-over-year, retaining strong growth momentum relative to the wider industry. And our vocational training services are rapidly emerging as a new growth driver, contributing 5.5% of our total revenue in the quarter with a sixfold year-over-year growth.

Last year, we set 2022 as a transition year, focusing on the execution of our Community Ecosystem Comes First strategy. We are now more than halfway through 2022. Given all the macro level unexpected development in the first half of the year, we have never been more sure that by investing in high-quality growth and focusing on achieving profitability in the near term will make our community and business more sustainable for the long run.

Now I would like to go through our business in detail, covering content, users and monetization.

Content - fulfilling content that broadens horizons, provides solutions and resonates with users is the foundation that drives sustainable community growth.

At the end of Q2, the cumulative pieces of content in our community reached 551 million, including 462 million questions-and-answers, representing a year-over-year increase of 31% and 26%, respectively.

In Q2, we continued to implement the scenario-oriented approach to fulfilling content creation in various verticals. This approach has worked especially well in scenarios surrounding career development and family needs. For example, during the time of once yearly national college entrance examination, the gaokao, search traffic surges with parents and students anxiously seeking knowledge, experience and insights to help with important decisions around the life inflection point. To meet these needs, we broadened and deepened related content coverage by enlisting experienced users, who previously sat for the exam, raised questions and sought the gaokao information on our platform to become gaokao answers and provide help to others in our community. According to "the summary report on collage selection and application 2022" we released in July, the total number of questions on college selection application related topics increased to approximately 7.7 million, and the total page views for the gaokao related content grew a remarkable 57% year-over-year to exceed 2.5 billion.

After the exam period, we released more relaxing content in tune with the summer vacations and launched a well-received series of online summer events in categories, including sentiments, movies and television, fashion, ACG. It is worth of mentioning that Laughter and Forgetting on Gaokao topic and high-quality videolized content we produced during the summer break was not only well received by the young generation, but also resonated among our mature users.

In June, we launched an online learning portal on our website to further promote our vocational training related content portfolio. The learning portal offers hundreds of online educational resources in both video and text and picture format. The robust content library contains both career skill development and personal enrichment learning resources.

Some examples include Python training and English exam prep as well as photography and pop music educational content. The learning portal has been well received and significantly drove engagement with our target users for the vocational training services business. Vocational training content is evolving into an important part of our closed-loop monetization ecosystem.

The second part is about users. Scenario-oriented content cultivation in various verticals and enhanced recommendation algorithm effectively boosted the demand for more quality content consumption. During the quarter, we saw encouraging performance across a range of user growth metrics, including our user base, user consumption experience, user engagement and stickiness.

The average MAU for Q2 increased by 12.3% year-over-year to 105.9 million. Average monthly viewers for the quarter exceeded 647 million, rising by 26.6% year-over-year. We continued to see our user base remain young and geneder-balanced with a robust user growth trend from the second and the lower-tier cities.

We're also seeing inspiring growth across other closely watched key metrics used to inherently evaluate the well-being of our community. These includes user's activeness, time spent, retention and engagements.

Moving to the content creator side. Enhancing creators creating experience and financial rewards is one of the pillars to our strategy. Our Haiyan plan 4.0 for creator support scheme is a critical part of this effort. Within one quarter of the plan's release, we received overwhelmingly positive feedback from creators with survey results showing more than half of the high-ranking creators have experienced strong traffic support.

On the financial side, we are gratified to see that both the number of creators who earned the financial income and average income per creator in Q2 retained strong growth momentum on a year-over-year basis. At the start of Q1, we set a target to help more than 100 creators earn more than RMB 1 million in the year via our paid membership program. We are proud to announce that we have progressed much faster than expected.

The next part is about community culture. During the quarter, we further reinforced our community compliance through improved product features and technical infrastructure such as upgraded privacy protection features for users and copyright protection features for our content creators.

We also increased thresholds to enhance youth protection in verticals such as esports. Our community culture and strong brand further strengthen our content ecosystem. And we are firmly demonstrating our conviction to uphold our social responsibilities to maintain a healthy community culture and promote rational optimism as a social platform and the content community.

As we look at the second half of the year, we will continue to iterate our multimedia infrastructure and optimize product offerings. We believe we can further unlock our value in more commercial opportunities by better addressing our users' content consumption needs.

In particular, we see our diversified content formats providing greater potential to address users' needs in multi-scenarios, including thoughts and live streaming, which are both gaining in popularity among users. We believe that the diverse and enhanced monetization capabilities will position us stronger and more resilient for long-term development.

Now moving to financials. Our CFO, Wei, will go through our financial results in detail later in this call, but I'd like to first highlight a few points how our content-centric monetization has proven itself resilient and strong in the second quarter.

As many industries were heavily impacted by the ongoing COVID-19 outbreaks and softer macro environment, advertisers and business partners became more cautious in online marketing spending and placed greater weight on integrated marketing solutions that deliver more comprehensive influence on targeted consumers. Our community-based ecosystem is an ideal vehicle to accomplish this goal.

Through our content-commerce solutions and advertising, we successfully increased our recognition from brands and merchants and attracted their market spending despite the challenging market conditions. The top 5 industries in revenue contribution in Q2 came from e-commerce, IT&3C, cosmetics and skin care, Internet services and automotive.

There are 2 drivers raising the ceiling of CCS. In Q2, we continued to motivate our creators by publishing the Zhihu influence and growth list. The newly listed commercial content creators in the second quarter came from various industries, including IT&3C, fashion, automotive, maternal care among others.

At the same time, Cheese Platform maintained its role to effectively connect content creators with brands and merchants. The number of creators who have joined this platform and earned income through CCS continued to grow both on a year-over-year and a quarter-over-quarter basis.

We also further improved our commercial content distribution efficiency and further upgraded the assessment system for commercial content by implementing fulfilling content standards.

Let's talk about advertising. Despite the fact that brand advertising budgets were negatively affected in Q2, our IP-based marketing campaigns provides a unique value to advertisers. By leveraging our massive user base and trustworthy community culture, our multiple IP-based marketing campaigns have great influence on users' mindset through creative and fulfilling content.

During Q2, our Curiosity Lab in Chinese series partnered with one of our clients, a smart kitchen appliance manufacture to design, plan and execute a fun and imaginative campaign centered around playful quirky questions tied to their products and business. The campaign was a huge success.

One of the questions that generated huge engagement was, "If your kitchen smoke could sing, what Opera would it sing? " The relevant content under this question attracted nearly 5 million views and the accompanying experimental video we made has been viewed over a million times.

Paid membership maintained strong momentum during the quarter. Among Zhihu's premium paid content library, our Yan Columns are particularly popular, owing to the high quality of original works from our community creators. One such creator, the ER doctor, Mr. Li Hongzheng, known in Zhihu Community as the Dr. House. We were attracted by his talent via Big Data and invited him to start his own column in the community "Stories from the Emergency Room.". Since then, he has become one of our top columnists, attracting tens of millions of clicks. And there are many others like him. The value of this mechanism is more than allowing us to scout for talented creators. It also provides a steady stream of creative inspiration for our creators.

In the second quarter, the financial income earned by our premium content creators increased by almost 80% compared to the same period of last year. This community-based mechanism not only differentiates us from other premium content providers, but also offers strong potential to drive the vitality of our monetization ecosystem.

At the end of Q2, our average monthly paying members reached 8.46 million and in July, the number exceeded 10 million. This growth demonstrates the remarkable success of our content-centric business model. It is encouraging to see a more diversified paying member base and a growing number of male users captivated by more content relating to history, fiction and true stories in our premium library. Male users have now grown to about 25% of our total paying members.

On a rapidly developing vocational training business maintained robust growth momentum during Q2 contributing 5.5% to the total revenue. In the second quarter, we further enhanced the sales and CRM system for the business by strengthening our technical capabilities. In addition, we continued to expand the number of course offerings, including newly launched courses in Engineering and the Design. Our growing library of diversified vocational courses helped further expand of user base as witnessed by the number of paying users in this business tripling over last year. We view this business as an emerging growth driver with huge potential and believe it will make further positive contributions to our community ecosystem.

And marching forward by leveraging our self-reinforced content ecosystem, combined with the enhanced commercialization capability, we will be able to drive the sustainable prosperity of our community ecosystem. At the same time, we will continue to implement prudent cost controls to achieve a rational balance between user growth and profitability in the long run.

This concludes Mr. Zhou Yuan's remarks, I will now turn to our financials.

We are delighted to report another strong quarter despite the resurgence of COVID-19 and the subsequent business disruptions in major cities across China. Our content-centric business model continued to show its resilience as well as exciting growth potential through the impressive execution of our Community Ecosystem Comes First strategy. Our revenue for Q2 reached RMB 836 million, representing a year-over-year increase of 31%.

Zhihu's overall top line growth reflects the strength of our diversified revenue drivers. The CCS and our advertising business combined contributed 57.2% of total revenue in the quarter. Our paid membership and vocational training business together represented 38% of our total revenue, further demonstrating the value of diversified drivers within our monetization ecosystem.

CCS revenue alone achieved a year-over-year growth of 15.9% and accounted for 28.8% of total revenue. In late Q2, our CCS reacted quickly and captured the demand up trend in the market. As the macro economy started to show an upward trend in June, the effectiveness of CCS services was validated, recording increases in both the number of end customers and the average spending for CCS customers.

We have seen a negative impact on the advertising market since April due to the COVID-19 resurgence. Some of our brand marketing customers delayed or canceled their marketing campaigns originally scheduled for Q2. As a result, our advertising revenue accounted for 28.4% of total revenue in the quarter, down 4% compared to the same period of last year.

Our paid membership services recorded a 75.1% year-over-year growth rate in revenue, reaching RMB 271.2 million in Q2. The average number of monthly paying members in the quarter hit another record high of 8.46 million with a penetration rate of 8% of average MAU.

Our fledgling vocational training continued its revenue growth momentum in Q2 and increased 6 times year-over-year in revenue.

During the second quarter, our gross profit was RMB 400 million with an improved gross profit margin to 48% compared to the previous quarter. The quarter-over-quarter improvement in GP margin was due to our diligent, ongoing cost control discipline and efficiency improvements. Across the wider industry, our gross profit margin continued to remain at high end.

Throughout the quarter, we continued to look for ways to better optimize our operating expense's structure and improve operational efficiency. Our total operating expenses for Q2 were RMB 860.3 million with improved operating margins on a sequential basis.

As a percentage of total revenue, total marketing expenses decreased over 5% compared to the same period of last year, thanks to our optimized expense structure with targeted spending on our promotion and advertising to adapt to the changing market conditions. At the same time, we are selectively invested in our R&D capability and improved R&D staff incentives through a better organized employee benefit plan. Accordingly, our R&D expenses as a percentage of revenue increased 7.8% year-over-year, while G&A expenses decreased 13% as a percentage of our revenue.

Our net loss was RMB 487 million in Q2 and narrowed by 24.4% as a percentage of the total revenue from the first quarter of this year. And our adjusted net loss, which primarily excludes share-based compensation expenses, was RMB 443.8 million in Q2. As of June 30, 2022, the company had cash and cash equivalents, term deposits, restricted cash and short-term investments of RMB 7 billion.

In late May, we announced an up to USD 100 million share repurchase program. And as of June 30, 2022, we have repurchased approximately 0.3 million Class A ordinary shares at a total cost of USD 1.1 million.

This concludes my prepared remarks on our financial performance for this quarter. Let's turn the call over to the operator for the Q&A session. Thank you.

(Operator Instructions) Our first question comes from Xueqing Zhang from CICC.

(foreign language) And I will translate myself. And my question is related to paid membership business. We saw our membership revenue has achieved 75 percentage year-on-year growth in the second quarter and became the largest revenue contributor as well. So just wondering what's the driving factors behind it? And how does management think about the longer-term growth rate of membership business?

(foreign language)

[Interpreted] I'm the CEO of the company. My name is Zhou Yuan. First of all, thank you for your interest in our membership business. Now our members were grown and born in our community, and they come back and actually give us very positive feedback to the overall development of the community. And right now, we believe that their development has been very healthy.

(foreign language)

[Interpreted] Now the penetration rate of our Paid membership in MAU was 7.98% in June, reaching 8.99 million. In July, it exceeded 10 million, and it has continued to grow in the past 24 months. Currently, there is no sign of signaling slowing down of the growth momentum.

(foreign language)

[Interpreted] Now the number of members continue to grow. It not only helps our existing users to consume some of the content, but also is a great traction to attract new users as well. Now the spillover effect of the paid content of our members will continue to promote the increase in the number of paid members, which played an important role in promoting the growth of Zhihu's community users.

(foreign language)

[Interpreted] Now in order to understand the long-term development of our membership business, one must first understand the organic growth of our members out from our community. Our Zhihu community is really the powerhouse of original content on the Internet in China.

The original UGC content is the engine of our very diverse content ecosystem in the community. With the help of content differences brought about by the continuous generating mechanism of content creators which is very unique to the Zhihu community, we have incubated our membership business from the community, making it one of the most efficient and effective monetization models in Zhihu and in our content ecosystem.

(foreign language)

[Interpreted] Now the other thing is the scalability of our membership business. We have noticed that the significant differences in the content that we are able to generate from our ecosystem actually meet the demand of a large number of users on the entire network that are constantly longing for high-quality content, which makes our business growth space very significant and substantial.

When we are able to incubate such an environment where the efficiency of content supply continued to improve and our user demand continue to expand, we believe that our business still have a lot of room for growth and the ceiling is very high.

(foreign language)

[Interpreted] Now with that said, we have curated an environment that allow the efficiency of content supply continued to improve and also user demand continue to expand, it is expected that we will continue to see the penetration rate of our paying members in Zhihu MAU continue to increase. And in the long run, it's possible that we can achieve 20% or higher.

(foreign language)

[Interpreted] Now the other aspects that I would like to mention is sustainability. In the process of our membership development, large-scale efficient and sustainable discovery of high-quality content is the key to really unlocking the high growth of our membership business. Our community is our greatest strength and also, it is the greatest driving force for a member development. The community mechanism makes it easy for us to identify high potential content creators and continue to help them make profit through creation on our Zhihu platform, and this has been very crucial for our membership business development.

(foreign language)

[Interpreted] Now in the process of developing our membership business, we have formed a series of know-how through developing projects such as the Haiyan Plan 4.0 and also the community content creation contests, etc. We have curated a series of supporting activities that allow and encourage our content creators, which in turn allow us to efficiently support more Yan Columns content creators based on a better understanding of their creation style. Now the key to our ability to produce high-quality content on a large scale, really lies in this kind of improvement of this model.

(foreign language)

[Interpreted] Now this model is very effective in the sense that it allows us to curate a series of steps which is a closed-loop process, including topic creation, content consumption, user feedback and content revision. The entire content creation process ensure the output of high-quality content.

(foreign language)

[Interpreted] Now the new content of the Yan Columns, which is very popular amongst our users, increased by over 130% year-over-year in this quarter. These popular item and contents can easily drive the conversion of new members. And we believe that our membership business model will allow us to continue to generate high-quality content, which will in turn feedback very positively to the community ecology.

(foreign language)

[Interpreted] Now the last point is about the ecology or ecosystem that I just mentioned because this membership business model allow us to have very positive contribution from our content creators, which could help us to continue to build our ecosystem, allowing our creators to achieve considerable income in the whole ecosystem and the value generated can further actually support other creative activities in the community, which further improve the ecosystem health of the community content. Thank you.

The next question comes from Ashley Xu from Crédit Suisse.

(foreign language) I want to get more color about our ecosystem first strategy, which has been executed this quarter. Are there any operating metrics that could be shared to showcase the improvement in our community? And also, what's the timeline of this adjustment? And should we expect any impact on our user growth target, both for the year-end and also in the long-term?

(foreign language)

[Interpreted] Now first of all, thank you for your questions. There are really multiple levels of questions to your statement, so I'm going to respond to them one by one. Now regarding the first part of your question, actually, at the beginning of the year, we started our ecosystem first strategy, which mainly revolves around user experience, creator experience, content with a sense of fulfillment, a good community atmosphere and really matching the development of commercialization.

(foreign language)

[Interpreted] Now first, let's look at the results for Q1 and Q2 ever since we adopted this new strategy. Now in terms of the content production, the average daily content volume increased significantly and also ever since we focused on the quantity of high-level content creators. In the second quarter, we're able to observe an increasing activity rate of those creators and also the DAU of high-ranking creators increased by nearly 50% year-over-year and the average daily creation volume nearly doubled year-on-year as well.

(foreign language)

[Interpreted] Now last time I mentioned about launching the Haiyan Plan 4.0 projects, which involved a lot of resources allocation and favorable support going to the high-ranking content creators. And now we are entering the second developmental stage of that project, which is more than just, for your update, we are really pushing forward a new iteration of the project, which means that the positive changes that we observe from high-ranking content creators are beginning to spillover to our mid-ranking content creators as well, which also generated very positive outcome for the second quarter of the year.

(foreign language)

[Interpreted] Now in terms of the toolkits that we provided for our content creators, first of all, the goal is to reduce the cost of content creation. And ever since the second quarter, we've received a lot of positive feedback regarding using those toolkits because, first of all, it help them to really expand the creation format, allow them to lower the creation threshold and also attracted a lot of new content creation as well, and that's why we've observed such positive growth for the second quarter of the year.

(foreign language)

[Interpreted] And so as a result, our overall content creation volume on a daily basis increased by 10% quarter-over-quarter.

(foreign language)

[Interpreted] Now in terms of the average time spent of our DAU, from the beginning of this year to the end of June this year, it increased by about 12%. And also the consumption that has included the content format of videos has been 20% higher than those kind of content consumption without the format of video, which means that our very diversified kind of content creation format really allow us to uncap a lot of commercialization opportunities that really are leveraging the effect and benefit and advantages from our very diverse crowd of users as well as different kind of consumption scenarios as well. .

(foreign language)

[Interpreted] Now June is the typical college entrance exam month in China, so we had observed a lot of students coming to our platform for that kind of related content. And so the content consumption or the viewing rate of those kind of related content actually increased by about 60% year-over-year and the activity level of those kind of content-related users increased substantially as well, and we also see that kind of growth sustained for July of this year.

(foreign language)

[Interpreted] Now the optimization of our ecosystem doesn't achieve overnight. There is a lot of details embedded in this process, and we are taking them step by step, and I'm going to talk about the details from 2 aspects of the product and operation.

(foreign language)

[Interpreted] Now on our community side and also our product side, our focus of work is, first, to continue to improve the infrastructure, which includes having better classification of the content, further refinement of our user profiling and also the construction of our community atmosphere and also better emotion recognition as well. These are really the solid foundations that allow us to ensure the improvement of the user experience, and we are continuing to iterate this kind of community construction as well.

(foreign language)

[Interpreted] Now the second thing is in order to continue to upgrade, we have continued upgrading our short content as well. The short contents that we mentioned last quarter, which is named "Thought" continue to improve and we have done a lot of effort in improving the feature and the user experience. And as a result, the activity level of using those kind of "Thought" content has been very high.

And from the results, we can actually see that the monthly average number of content creator posting "Thought" has increased by over 150% quarter-over-quarter. And the number of content creators who sent both pictures and videos have continued to increase quarter-over-quarter as well.

(foreign language)

[Interpreted] Now also, one thing that we noticed can generate long-term benefits for us is to strengthen the community relationship. And we have done so. For example, we are able to actually attract a lot of active attention based on our relationship referral and endorsement. And with the improvement of our community governance, we have observed a lot of positive outcome as well.

The new kind of active retention of our daily active users has achieved accelerated quarter-over-quarter growth in the past 2 quarters since the beginning of this year. Strengthening the functions centered on social relationships can actually further strengthen the stickiness and the healthiness of the community ecosystem.

(foreign language)

[Interpreted] Now in addition to that, we have also been focusing on the targeted improvement of, for example, the Haiyan Plan projects around the content creators as well, and we have been progressing step by step. Since we launched this plan, our creators have had a lot of traffic and income which is very, very positive and beneficial for them. And our high-ranking content creators also feel that their overall traffic has improved as well.

In terms of our user operations, in addition to the, for example, the in depth cultivation of content and also the encouragement of originality and other such projects that I mentioned to you last time, we have also made targeted content breakthroughs for our core user groups this year.

For example, we have launched the OGV projects named The Career That I Desire that's really targeting different kind of careers. Within that projects, we are able to invite a lot of professionals to come here to share their experience.

For example, we invited programmers from Silicon Valley on our Zhihu platform to talk about their experience and also answer a lot of questions about being a programmer. And we also invited lawyers -- well-known lawyers and successful lawyers from the Red Circle law firms. We've invited brand directors of Fortune 500 companies, etc, to really showcase what a typical workplace is like and to talk about different kind of scenarios. Overall, the feedback has been very, very positive.

(foreign language)

[Interpreted] Now in terms of the commercialization, we believe that the Cheese Platform and the Yan Columns creators have all brought very good results to the platform's ecosystem. And the number of creators, who have obtained income, has increased and also the income per capita has also increased year-over-year. We have been talking about the community-based content business model, which is really to integrate monetization into our community ecosystem.

(foreign language)

[Interpreted] Now in the second part of your question, you also asked about user growth. As I mentioned earlier, the community-first strategy is not a project, it's a process that we have to go through step by step. Now from the perspective of ecosystem construction, ever since the beginning of this year, we have launched a series of measures that have generated a very positive outcome. For example, our MAU has reached 106 million, which is 12% Y-o-Y growth.

(foreign language)

[Interpreted] Now this quarter, in terms of our monthly viewer of our Zhihu content, which means the viewership of our content across the Internet has reached 648 million, which is about 26.6% of Y-o-Y growth. This means that our Zhihu's content really is penetrating every single corner of the Internet.

(foreign language)

[Interpreted] Now monthly viewer in the beginning was just a simplified information displayed on other websites outside of the platform of Zhihu. And with our upgrade of the functionality of Zhihu's APP, right now, we are seeing a larger gap between viewing the contents from our website and platform versus viewing it from externally. And so definitely, this is not a work priority of ours, but we continue to push forward the development and the upgrade of this function.

(foreign language)

[Interpreted] Now the macro environment has placed a lot of pressure on our second quarter performance. However, we believe the situation is being eased going into the 3Q this year. Therefore, we have to really reduce and control our costs and improve our operational efficiency in the face of these external and macro challenges. Now in terms of our user acquisition, we need to enhance the acquisition efficiency as well as control the cost as well, which means that we need to put more focus on our community-based kind of user acquisition.

(foreign language)

[Interpreted] Now in summary, we will continue to invest in growing our users; however, we will definitely consider the return on investment, and we will pace a very good rhythm in terms of balancing our investment as well as the monetization effects. In the short term, we are not going to prioritize or rushing into scaling up our platform. I think that's the only responsible move for our shareholders and investors. Thank you.

(Operator Instructions) The next question comes from Daisy Chen from Haitong International.

(foreign language) I will translate myself. My question is about your traditional ads and CCS. Can management share more color on the reasons behind the revenue deceleration for ads and CCS in the second quarter? For example, the performance of advertiser verticals that were affected by the pandemic restrictions.

Also, can management comment on the recovery trend posted lockdown including the trends in June, July and August? And your expectations and the future performance in ads and CCS in the third quarter and the second half?

(foreign language)

[Interpreted] First of all, thank you for your question. I'm the CFO, let me respond to this question. Now for the second quarter of the year, the whole marketing industry has been struggling due to the macroeconomic effect and also the weakening demand side as well as the resurgence of the pandemic. And this is not just about an incidence to our company, but for the whole marketing industry.

But overall, our advertising and our CCS business still achieved positive growth. We also noticed that our clients actually paying more attention to pursuing higher ROI. At the same time, they are paying more attention to gaining long-term value from the marketing activities as well.

Now from the user side, we also noticed that the consumption behavior has become more cautious and more pragmatic. So when making consumption decisions, it has become the norm to really obtain information from content platforms and also from multiple other platforms as well.

(foreign language)

[Interpreted] Now let me talk about the advertising and CCS business one by one. First of all, our CCS really has become a marketing product that gains the trust from our users with our high-quality content, and it continues to gain market share as well with a year-over-year growth of over 15%. And the merchants and our customers that invested in our CCS continued to grow in Q2 this year.

Also, in terms of the vertical, those who actively use our CCS includes IT and 3C electronics, education and training, e-commerce, etc. And the average amount invested per customer also increased year-over-year, proving that we are actually still the go-to platform for brands and business customers even in a very harsh economic environment.

(foreign language)

[Interpreted] Now in terms of our advertising business, which is also affected by the overall macro element in the economy, our brand advertising revenue is actually affected as well. But we believe that such an impact will actually be eased in later quarters, as we see the pandemic pressure continue to be relieved and also the economy gradually picks up. At the same time, we are also continuing to innovate on the advertising product side to better integrate with the content and creators of the community.

For example, we have launched a series of IP-based products. For example, our Zhihu Auto Laboratory and also the Zhihu Curiosity Laboratory, both of them have received a very good reputation, and we will continue this kind of launching of different series of products and projects.

(foreign language)

[Interpreted] Now about our Q3 and also the trends for the second half of the year, we will look at different factors externally and internally. Externally speaking, we are really depending on whether or not the pandemic will resurge. For example, lately, we hear that kind of resurgence in cities such as Chengdu, Shenzhen, and Sanya.

And also internally speaking, we have to look at our vertical mix regarding these kind of businesses. For example, e-commerce and daily care and also cosmetics, IT, 3C electronics, Internet service, automobile and also professional education. These are the top contributors to our business. And so whether or not they can pick up very soon will also determine our forecast going into the second half of the year.

(foreign language)

[Interpreted] Now looking at our July and August performance compared to June, there is no clear sign of recovery just yet, especially in the vertical of e-commerce. Typically, they will have some shrinkage in their investment budget after their June investment, typically which to peak of their budget.

And typically, in September, the e-commerce players will gradually start their second half investment in the marketing area. So if the macro economy begin to recover quicker for the second half of the year, basically, the e-commerce vertical will be the first industry that can generate more profit and revenue for us.

(foreign language)

[Interpreted] Now in addition to that, other verticals such as daily self-care, cosmetics, food and beverage, they are still suffering from the supply chain shortages, etc. So overall, we also will have to judge the macroeconomic recovery speed in order to understand better our forecast going into the second half of the year.

Now overall speaking because our CCS is better compared to traditional advertising in terms of this marketing efficiency, so in the long run, we believe that excluding the pandemic's impact, we would be able to actually get a lot of commercialization and market opportunities in the long run with our high-quality content-centric marketing solution.

(foreign language)

[Interpreted] All right. That's all for our guidance going into Q3 and also the second half. I hope that has been helpful to you.

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Jingjing for any closing remarks.

Thank you all once again for joining us today. And if you have any questions, please contact our IR team directly or TPG Investor Relationship. Thank you.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.