Zhihu Inc (ZH) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Zhihu Inc. First Quarter 2023 Financial Results Conference Call. (Operator Instructions) Today's conference call is being recorded.

At this time, I'd like to turn the conference over to Ms. Iris Liu, IR Manager. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our first quarter 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and Chief Executive Officer of Zhihu; Ms. Li Dahai, Chief Technology Officer; and Mr. Henry Sha, our Chief Financial Officer.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include inherent risk and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company's Prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose 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 this call over to Mr. Henry Sha, CFO of Zhihu.

Thank you, Iris. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu. Hello, everyone. Thank you for joining Zhihu's first quarter 2023 earnings call. We are delighted to start 2023 with a solid first quarter highlighted by sustained revenue growth and significantly narrowed net loss, both beating the market consensus.

While continuously expanding our user base over the past 2 years, we have also been closely following and capturing the evolving demand for short-form online reading, including both knowledge sharing and novels. In addition to the various Yan Selections' membership services, we launched a new app 'Yanyan Story' in major app stores recently to serve the broader users' content demand. As a part of Zhihu's product matrix, Yanyan Story will not only contain content generated from the Zhihu community, but also provide more differentiated content. Moreover, Yanyan Story will cover users from different tier cities and support more audio books. By offering more effective incentive plans for content creators, Yan Selection's abundant premium content paired with our widely recognized brand name propelled the number of average monthly subscribing members to a record high of 14.9 million in the first quarter, representing 116% year-over-year and 14.5% sequential growth, respectively.

We also continued to advance our technological development during the quarter through a combination of internal initiatives and joint development efforts as we actively explored the possibilities and potential of revolutionary AI technology. Zhihu is now equipped with Large Language Model technology that has 20 billion parameters. We launched our first Large Language Model or LLM, "Zhihaitu AI," in April, aiming to enable our content creators to generate high-quality content more efficiently. Additionally, our users may utilize our LLM summarization function to consume more content and accelerate their readings in a more enjoyable way.

At the beginning of 2023, we optimized our organizational structure by combining advertising and content commerce solutions, or CCS, to enhance the overall competence and operational efficiency of our combined "marketing services" business. This upgrade has empowered us to better utilize the resources within the Zhihu community and to provide our clients with more effective and comprehensive marketing solutions. As we optimize our marketing services business, I will personally spend more time on the segment and monitor its execution. Starting from the recent months, we have already seen a revival of advertiser engagement in the eCommerce and 3C sectors. We are confident that our marketing services will achieve sequential growth in the second quarter and pick up growth momentum in the second half of the year.

Now let me move on to our users and content, where we have made a remarkable progress, especially in our Short-Form Content.

In the first quarter, we continued to broaden our content coverage and deepen our penetration across our cornerstone verticals, optimizing our content composition and formats to better satisfy users' evolving needs to use their fragmented time efficiently and obtain information quickly. To that end, we significantly upgraded our "Idea" tab app, making it a short-form content pool to complement the long-form knowledge-based content currently available in Zhihu's community. We also expanded our short-form content library to cover more lifestyle and consumption scenarios in response to users' needs. By upgrading an array of tools and functions such as the picture editor and video captions, among many others, we provided a more efficient scenario to inspire creativity for new content creation. This exciting progress in content successfully drove an increase in the number of users in our community, driving our MAUs in March to more than 110 million. We achieved a reacceleration in MAU growth in the first quarter and expect MAUs will grow up to 120 million within 2023, to mark another historical high.

While we remain dedicated to further solidifying Zhihu's leading position as a platform for users to discuss and exchange ideas, we are also looking for ways to enhance our offerings by incorporating AI technology within our community. At the Zhihu Discovery Conference in April, we introduced our AI strategy along with our first LLM, "Zhihaitu AI." Through investment and a joint development effort, we are accelerating our progress in integrating AI technology across various applications scenario throughout our ecosystem. The "Trending Topic Summary" is our first trial AI function. By leveraging AI's language learning ability to collect, sort and integrate answers, the Trending Topics Summary is able to summarize answers and present them to our users in an intuitive and clear manner. We are now opening this LLM summarization function to more users via the Zhihu mobile app. By further capitalizing on our unique advantages in both the data layer and the application layer, Zhihu is committed to becoming an important developer and ultimately a leading contributor to the industry's overall development in this era of AI technology.

Next our membership business. Driven by our premium content offerings and continuously expanding brand influence, our paid membership business grew rapidly during the quarter, delivering robust increases on both an annual and sequential basis. Paid membership revenue for the first quarter increased by 105.2% year-over-year while average monthly subscribing members grew by 116% year-over-year to 14.9 million in this quarter. We streamlined content creation procedures to improve efficiency and enforced the community compliance to protect the content creators' rights and benefits. As a part of our multi brand strategy, we launched our new app, "Yanyan Story," featuring numerous user-favored functions, such as story search, audiobooks and recommended reading lists. This new app will help us attract more membership subscribers to get into the Zhihu community, while building a distinct user base seeking for a more concentrated reading experience inside the Zhihu community cohort. We hope Yanyan's differentiated content will also penetrate the massive internet users from Tier 2 and Tier 3 cities in China.

Now moving on to our vocational training business. Revenue from vocational training business increased by 170.6% year-over-year to RMB 107 million in this quarter. We grew our footprint in the vocational training industry value chain by organic growth and business acquisition. To seize the great potential in the graduate student entrance examination market, we recently completed the acquisition of MBA Master, a training institution specializing in preparation for MBA entrance examinations in China. Completing the integration of MBA Master has further enhanced our industry competitiveness with an improved business structure and enriched service offerings.

Additionally, we continued to expand our vocational training services across major categories by developing programs that are in high demand in this evolving market, including Civil Service Examination, ESG, Judicial Examination and Story Writing, among others. As I mentioned earlier, we are integrating AI technology into our course offerings as we look to enhance the overall quality and user experience. Encouraged by the positive feedback we have received on our first new AI-empowered program, we will continue to deepen our exploration of innovative technologies.

Before I conclude, I'd like to provide a brief update on our ESG efforts. We published our ESG annual report for 2022 last month, presenting Zhihu's long-standing commitment to social responsibility. As a leading online content community in China, our top priority and greatest asset is and will always be our people - our employees, our content creators, our users and our society. Therefore, we strove to holistically improve our ecosystem for each of these stakeholders throughout 2022, with the initiatives including an upgraded leadership development system for employees, our "Haiyan Campaign 4.0" incentive plan for content creators, and an array of programs to protect and serve our most vulnerable users, including minors, those with disabilities and seniors. We also leveraged our wealth of knowledge content to promote childhood education, particularly in rural areas, as we believe education equality and the growth and development of China's young generations are critical to societal progress. Going forward, we will remain committed to our stakeholders, improving their lives as we seek new ways to create value for our society and our planet sustainably.

Looking ahead to the rest of 2023, we will remain focused on both monetization and user growth. Marketing services and paid membership have become our major revenue drivers, fueling our continued expansion of the vocational training business and LLM development. We will further expand discussion and search scenarios in the Zhihu community as we leverage our resources and refine experience to study and respond to the evolving needs, thereby better serving both users and clients. Thanks to our organizational optimization and operational efficiency improvements, in the first quarter our non-GAAP net loss narrowed to RMB 120 million with adjusted net loss margin narrowed to 12.1%. We expect our business' growth will continue accelerating and we are confident we will achieve 20% year-over-year increase in MAU as we strive to make innovative breakthroughs. We also believe our passion for progress and dedication will continue to empower our strength and resilience as we grow in this exciting and dynamic industry.

This concludes Mr. Zhou Yuan's remarks.

I will now turn to our financial details in the first quarter. For a review of our first quarter 2023 results, please see our press release issued earlier today.

We were excited to commence 2023 with a strong first quarter. Both our top line and bottom line beat the street consensus, while our operating cash flow turned positive for the first time since our initial public offering. Total revenue for the first quarter increased by 33.8% year-over-year to reach RMB 994.2 million, effectively beating the market consensus. Our paid membership and vocational training services continued to exhibit robust growth during the quarter, increasing their contribution to total revenue to 46% and 11%, respectively. However, as a variety of macro factors continued to affect the overall online advertising market, advertising spending remained sluggish in the first quarter. To mitigate the impact, we optimized our organizational structure during the quarter, enabling us to better utilize our community resources and enhance our service capability by integrating brand advertisement and CCS. Starting from the first quarter, our advertising business is now combined with CCS into Marketing Services to align with our new strategy and upgrade the business structure.

Our Paid Membership revenue for the quarter was RMB 454.8 million, up 105.2% year-over-year from RMB 221.7 million in the same period of 2022. Our average monthly subscribing members grew by 116% year-over-year to 14.9 million, which is a record high. Our appealing premium content and outstanding user experience continued to attract the broader user base even beyond our Zhihu community.

The Company's Marketing Services revenue for the quarter was RMB 392.1 million. We are encouraged to see some recent signs of recovery in our marketing services in the recent months. And we expect our marketing services business to gain faster recovery during the second half of this year.

Our Vocational Training business revenue for the quarter reached RMB 107 million representing a year-over-year increase of 170.6% from RMB 39.5 million in the same period of 2022. Moving forward, we will continue to enhance our service capabilities and advance our footprint in the industry through both organic growth and business acquisition.

Gross profit for the first quarter increased by 52.7% year-over-year to RMB 512.2 million. Gross margin expanded to 51.5% from 45.1% in the same period of 2022, representing more than 6 percentage-points expansion, thanks to our enhanced monetization efforts and the improvement of our cloud services and bandwidth utilization efficiency. We were particularly happy to see our investment in research and development rewarded us with savings in cloud service utilization.

Total operating expenses for the first quarter were RMB 729 million, down by 25.9% from RMB 983.7 million in the same period of 2022.

Selling and marketing expenses decreased by 12% to RMB 445.6 million from RMB 506.6 million in the same period of 2022. The decrease was primarily due to our disciplined promotional spending and the decrease in salaries and welfare expenses for sales and marketing related personnel. In the meantime, the number of Zhihu's MAUs recovered significantly to 110 million in March. We will remain dedicated to driving user growth through our ongoing content-ecosystem-first strategy.

Research and development expenses increased to RMB 183 million from RMB 166.5 million in the same period of 2022. The increase was primarily attributable to the increase in salaries and welfare of research and development personnel, as well as the increased expenditure in Zhihu's Large Language Model training for this year's latest technology upgrades. Our Large Language Model will gradually serve a broader user base in the Zhihu community going forward.

General and administrative expenses decreased by 67.7% to RMB 100.4 million from RMB 310.6 million in the same period of 2022, primarily due to the lower share-based compensation expenses recognized and decrease in professional service fees.

Benefiting from our ongoing operation efficiency improvements and cost control strategy, we greatly narrowed our net loss in Q1. Our GAAP net loss in the quarter was RMB 179 million, narrowing by 70.9% year-over-year.

Our adjusted net loss on a non-GAAP basis, which primarily excludes the share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was RMB 120.2 million for the first quarter, down by 67.3% from the same period of last year, with an adjusted net loss margin of 12.1%.

In this quarter we generated RMB 59.9 million operating cash flow， marking the first time we have achieved positive operating cash flow since our IPO. This milestone demonstrates Zhihu's revenue diversification and business model can certainly generate positive cash flow from its operations and represents an additional step towards becoming a profitable company.

Now moving to our balance sheet.

As of March 31, 2023 the company had cash and cash equivalents, term deposits and short-term investments of approximately RMB 6,258 million compared with RMB 6,262 million as of December 31, 2022. Also as of March 31, 2023 we have repurchased approximately 6.9 million Class A ordinary shares at an aggregate price of USD17.8 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 section. Thank you.

(Operator Instructions) And the first question comes from Vicky Wei with Citi.

[Interpreted] Congrats on a stronger than expected quarter. Will management share some color on the company AIGC technology strategy and how should we think of the AI investment and the future monetization potential?

I think your AIGC related strategy questions will be answered by our Chief Technology Officer Dahai Li and I will help answer your question about the budget.

[Interpreted] This is Li Dahai, CTO of the company, to answer your question. Zhihu is having unique positioning in terms of Chinese based database in China and we are uniquely positioned in the artificial intelligence revolution in China, especially in a lot of different verticals for professional content accumulation. Zhihu is open minded towards AI revolution and in early April we have release "Zhihaitu AI" our Large Language Model. We released "Zhihaitu AI" through both internal investment and joint-development with other companies. These have largely enhanced our speed of development and also brought along team and knowledge flow among different teams. Now we are having about 20 billion parameters in terms of our related LLM and we are planning to reach about 100 billion parameters for our Large Language Model towards the end of this year.

Vicky, your second question about our investment in this area. I think we are still in the progress of doing the new plan for this Large Language Model training. We believe this is one of the most important technology development projects for this year. But I think the impact on the P&L that will be no more than RMB 300 million, this is the answer to your question.

And the next question comes from Steve Qiu with Goldman Sachs.

[Interpreted] Congrats on the positive operating cash flow as well as the MAU crossing the 110 million milestone. Could you please share with you the driving forces behind our strong MAU growth as well as our strategy and changes in user behavior and your outlook for the future MAU growth?

[Interpreted] This is Zhou Yuan, CEO of the company. In the past year, we have made a lot of remarkable progress in terms of content-ecosystem-first strategy. This also helped us to grow our MAU through a robust growth and during the first quarter of this year, MAU has also experienced steady growth.

(foreign language)

I will help translate Mr. Zhou Yuan's answer to you. So first one that our user acquisition strategy was executed well. The efficiency of the user acquisition was improved in the past quarter. And second, we have some like adjustment on the product and on the content as I presented during the remarks in the call before. We are now focusing on the short-form content as you may know. So we have a very large base of the long-form knowledge language and now we are going to provide more short-form content, which is very welcomed by our users. Third one that we are now focusing on the people within the age between 18 to 35 years old with good job, in maybe tier 1, 2, 3 cities in China. This large group of users we estimated will be around like 300 million or 400 million people population. That's a large potential for us. Lastly, but most importantly, we believe the AI driven technology, the Large Language Model technology will be applied to more scenarios on Zhihu's mobile app. This we believe will help improve our user experience and drove our user growth going forward. Thanks for the question.

And back to your question about the user behavior changing and the reason on that, I have some numbers to be shared with you. The first one about the user engagement and user time spent on our mobile app has been unchanged in comparison with Q4 last year. We're still between 27 to 28 minutes per user per day. And our membership, the people who are grabbing our membership spend even more longer time like 50 minutes per user per day. This is my answer to your question.

(foreign language)

So the users beyond 30 years old is growing the cohort according to our internal statistics. And the second is the female users is also increasing in terms of the percentage of the total user cohort. That answers your question.

And the next question comes from Xueqing Zhang with CICC.

[Interpreted] Can management share with us the recovery progress of marketing services? What time does management expects to return to positive growth? And we noticed that the revenue from advertising and CCS has been merged into the marketing services business this quarter. So just wondering the company's consideration for the adjustment.

This is Henry. I will answer the question. So the first one, we have seen some rebound or recovery in the second quarter, but we believe that the headwinds of the macro was still there. And we still have seen some sluggish of the clients, of the advertisers, but the rebound was coming from the 3C and the eCommerce sector. So we think more obvious recovery should be seen in the second half of this year. For the second question, because we have a business upgrade on our advertisement products and according to our company level new strategy, we believe that this adjustment about the CCS and advertising will increase our marketing and competitive competence to increase our power of our whole integrated marketing solution for our clients, and also can support our more longer-term growth. So that will make the change. That's my answers to your question.

And the next question comes from Eileen Lin with China Renaissance.

[Interpreted] I have a question regarding Zhihu's new app, "Yanyan Story". Can management share more details about future plans, long-term growth potential and likely monetization method other than membership?

[Interpreted] "Yanyan Story" is our newly released application. We have received a lot of positive feedback from the market for this new story application and we are generally optimistic about the future growth of this application. The "Yanyan Story" application compared with our original Zhihu "Yan Selection" has a lot of clear differentiation and the "Yanyan Story" application is focused on premium short stories and it provides immersive and concentrated reading experience for users. It also helps us to attract more users from the "Yanyan Story" outside the Zhihu community. We believe that for this year the "Yan Selection" will continue its healthy and robust growth in terms of year-on-year growth. And in the future we believe that with improvement of general macroeconomic conditions in China, we will also generate IP gains from the application.

And to supplement CEO's answers to you. First, I believe that Yanyan will be positioned at maybe different tier cities users in China and Yanyan's content that will not be all the same as the Zhihu content, so that's a differentiation. And second, from the product level, for example Yanyan will provide, like audiobooks or the flying bullet chat function. These are very welcomed functions by our users, which is quite different from the Zhihu mobile app. That's our answer to you.

The next question comes from Daisy Chen with Haitong International.

[Interpreted] Congratulations for the decent top line growth and the qualitative operation cash flow. So my question is about the education business. Can management share the mid- and long-term strategy for the segment and for example how to maintain the growth momentum for the segment? And can management also please provide more color on the recent update for this segment?

[Interpreted] Thank you, Daisy, for your questions. Vocational training is one of the second growth drivers that we have been building on recently, and we think Zhihu is naturally uniquely positioned to do the vocational training business. Firstly, it is because our user bases have a lot of overlap with the target users for vocational training. And secondly, is that our content in our vocation training services have a closed loop. And thirdly, is that our technology and data will increase the efficiency of our vocational training. We have made a lot of tremendous progress in the last year. Our long-term goal for vocational training business is to enhance the efficiency and quality for this industry and we have been focusing on 2 directions. Firstly, is that we are diversifying to provide comprehensive services for our clients. And secondly, is that we will utilize our data and technology to enhance the efficiency to provide better services for our customers.

To supplement CEO's answers for you. The company is very emphasized in focusing on the recent development of the AI technology to be applied to the whole education or professional training industry. And we believe that our Large Language Model training will also empower our vocational training business in the future. That's our answers to your question.

The next question comes from Thomas Chong with Jefferies.

[Interpreted] So my question is how should we think of the GP margin outlook and the timing to reach breakeven?

My answer to your question is quite straightforward. The first one, we are seeing some progress in the gross margin improvement in this year and in this quarter, but we believe that it's too early to say that what kind of the gross margin to be achieved within the next few quarters. But I believe that we are doing the strict cost control strategy as well as improving our efficiency. So we believe that we are on the way to improve our margin. The second question is that because we have like the new investment and like the R&D development for our Large Language Model training so this also has some impact on our P&L for the rest of the year. So we believe that our breakeven point will be the some quarter next year 2024. That's our answer to your question.

Thank you. And this concludes the question-and-answer session. I would like to turn the call to Iris Liu for any closing comments

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Piacente Financial Communications. Thank you very much.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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