Zhihu Inc (ZH) 2023 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2023 Financial Results Conference Call. (Operator Instructions) Today's conference is being recorded. At this time, I would 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 third quarter 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and Chief Executive Officer of Zhihu; Mr. 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 involve inherent risks 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 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 IR 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 Third Quarter 2023 earnings call. During the quarter, we made considerable progress in our multi-engine commercialization across the entire community, boosting our total revenues by 12.1% year-over-year. Notably, revenues from our membership and vocational training businesses increased 39.2% and 85.6% year-over-year, contributing 45.7% and 14.2% of our total revenues, respectively.

Throughout the quarter, we continued to unlock the vitality and prosperity of the Zhihu community, inspiring our content creators' high-quality production while continuously expanding our user base and encouraging user interaction. Our number of MAUs reached another milestone for the quarter, rising to 110.5 million.

We continue to view cost control and operational efficiency as one of our strategic priorities. Consequently, we witnessed a 5 percentage point increase in our gross margin, bringing it to 53.7% for the quarter, along with a notable 10.1% reduction in our non-GAAP net loss compared to the previous year. Going forward, I will be dedicated to leading the team to enhance our operating efficiency and further narrow losses.

Now I'd like to delve into the details of our third quarter initiatives and discuss our progress concerning content and creators and the commercialization progress. Let's start with our content and content creators. As of Q3, the accumulated pieces of content across the Zhihu community reached 743.7 million, representing a year-over-year increase of 28.4%. In addition to expanding our overall content library across various verticals, since our users carnival in July, we have specifically focused on expanding and enriching content related to new generation professionals' evolving demands, including their career growth, lifestyle, and consumption-related scenarios.

Furthermore, to bolster our community ecosystem, we continued to focus on the organic commercialization of our content. At our Zhihu Business Conference in September, we announced the official release of a new commercial content product "Zhiyao" designed for credentialed professionals. With this product, professionals can answer questions, share product experiences, and provide industry insights as experts in their specific fields. Alongside this initiative, we also enhanced our New Generation Professional content creators by providing high-quality traffic support through our Macro Influencer incubation plan, (foreign language), leading to greater and more direct influence on users' consumption decisions. We also launched a data product, the "Zhihu Youshu" mini program, which can help our merchants and brands capture precise market growth potential by analyzing trending topics, industry research, and many other factors, as a valuable part of our marketing services.

We also drove increased operational efficiency and performance across the Zhihu community in the third quarter as we continued to elevate our content supply by integrating AI and other new technologies. By enhancing algorithms and AI-powered content comprehension, we were able to deliver more customized and balanced content to users, especially content with higher commercial value.

Content creators continue to contribute immense value to the Zhihu community. During the quarter, in addition to enhancing our content library, we strove to inspire new content creators to join us while also increasing support for our existing content creators. During Q3, the average financial income of content creators who received financial income from our platform increased by more than 30% year-over-year. We stimulated both the quantity and quality of their production by actively engaging in operating activities. Simultaneously, we provided support through improved community governance and strengthened interest protection mechanisms. Additionally, we intensified our crackdown on pirated content.

To promote the sustainable growth of our dynamic and flourishing content ecosystem, we adopted a more active approach to our multi-engine commercialization in this quarter. As a result, our membership business maintained its accelerated growth momentum, and the revenue contribution from the vocational training business continued to increase. This stands as a strong testament to our outstanding content monetization capability and the effectiveness and resilience of our business model.

Our total revenue for the quarter was RMB1.0 billion, up 12.1% year-over-year. Among our various revenue streams, paid membership revenue grew by 39.2% year-over-year and average monthly subscribing members increased by 35.9% year-over-year to 14.8 million. This strong revenue performance was boosted by our persistent efforts to broaden content coverage while improving content distribution efficiency. Zhihu IP products have begun to demonstrate huge potential within the online entertainment industry in China. Our content and blockbuster IP have garnered broad recognition beyond the Zhihu community, amplifying the potential for audience base growth. A hit TV drama, "Scent of Time, adapted from the novel Xi Qian Hua on the Zhihu platform, debuted on Youku in October to broad market acclaim. We believe that the strong sense of connection and broad appeal of the original stories in Zhihu's library offers great opportunities for film and television adaptation, which will further unlock our content ecosystem's growth and monetization potential for our valuable IPs. Zhihu has already accumulated more than a hundred thousand IPs in its library, including short stories and science fiction, etc. There are currently many other Zhihu works in the film and television pipeline, and we look forward to sharing more details of these projects once they are available. By leveraging our technology and operations capabilities, we are confident we can share the massive value and influence of our IPs with our users, content creators, and business partners.

We will continue advancing the development of our high-quality IP content and integrate AI technologies from content creation to commercialization. An array of functions and tools we have recently launched or improved, such as our AIGC-powered illustration tool, "Writer Assistant, have significantly boosted content creation. Meanwhile, our updated interactive functions, together with our broader and more diverse content categories, have effectively expanded our user coverage. Moving forward, we will continue to strengthen our commercialization capabilities through innovation and exploration to increase ARPU.

Moving on to marketing services. In the third quarter, our marketing services were still affected by the overall fluctuations in the macro environment. Despite these challenges, our cornerstone verticals, especially those advertisers' products requiring a relatively longer decision-making process with high values, have been widely recognized among brands and manufacturers. For example, IT and 3C and Home Appliances continued to make solid progress. Together, these increased significantly by double digits year-over-year, highlighting the effectiveness of our content-centric marketing solutions.

To further unleash the commercial value of the Zhihu community's high-quality content, traffic and other opportunities for brands and manufacturers, we have been consistently upgrading our products and expanding content consumption scenarios. We have enhanced our partnerships with third-party e-commerce platforms such as Taobao for traffic data analysis. This includes live monitoring of comprehensive indices, including traffic volume, user engagement, user acquisition, and transaction number. This enables merchants and brands to enhance their ROI through more optimized performance-based marketing. Our newly launched content product also helps to maximize the value of the credentialed professionals and influence on users' consumption decisions. Furthermore, we continue to upgrade our underlying technology capabilities to achieve better ROI for our brands through our smart advertisement allocation model and streamlined "Order Placement" functions. Boosted by these efforts, our advertising business recovery has begun to pick up sequentially in the fourth quarter. Moving forward, we are confident that our operational effectiveness and enhanced brand recognition will enable us to capture the market's growth potential.

Moving on to our Vocational Training business. We have been striving to broaden and diversify our program offerings by identifying and fulfilling users' demand for academic and vocational qualifications as well as employment skills. Our well-rounded product and service spectrum now covers Postgraduate Entrance Examination, Civil Service Examination, ESG, CFA, and CPA examinations, language testing, Writing or Data Analytical Skills, and AGI, among others. As a result, vocational training revenue soared 85.6% year-over-year in the third quarter. We will continue to adjust our service offerings to capture market growth. We also boosted the operational efficiency of our vocational training business and focused resources on post-merger integration during the quarter. The resulting optimized ROI in user acquisition significantly strengthened our business' product competitiveness.

Furthermore, we remain confident in the opportunities that the AI revolution is bringing to the education industry. As such, we continue to fortify our R&D capabilities and integrate AI into products and services to improve user experience. During the quarter, we released the AI- powered paper correction tool, which sets a new benchmark for user experience in the vocational training industry. We also expanded our AI technology application scenarios to improve our sales conversion and users' interactive learning experience.

Our strategic investment in AI technology is playing a pivotal role in our development as we approach our next stage of growth. Our Large Language Model, "Zhihaitu AI," which received regulatory approval in early November, has now reached 100 billion level parameters. With regulatory approval secured, Zhihaitu AI can serve more users and commercial clients, marking another milestone in the process of transforming the "Zhihu Community" into the "Zhihu Intelligent Community." We believe Zhihaitu AI's advantage lies in its ability to naturally combine Large Language Model with specific scenarios, powered by superior content understanding and inference abilities. We will gradually open our Large Language Model, benefiting our users and partners, while propelling the sustainable growth of the entire industry. We will better empower our content creators and users in various scenarios while enabling brands and manufacturers to reap the benefits and reach their operational targets.

In short, Zhihu's success and resilience are underpinned by our dynamic ecosystem with high-quality content at its core. With progress across content and commercialization of our diverse revenue streams in this quarter, we are well-positioned to continue driving healthy and sustainable growth while enhancing profitability. Going forward, we will continue to seek and seize opportunities to empower users and creators with advanced technology, creating value for all of our stakeholders.

This concludes Mr. Zhou Yuan's remarks.

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

I am pleased to announce another solid quarter with accelerated progress in our multi-engine commercialization. Driven by robust growth in paid memberships and the vocational training business, our total revenues for the quarter increased with strong resilience, rising by 12.1% year over year, in line with our management's guidance provided previously. As we consistently broadened and diversified our products and services, paid membership revenue for Q3 increased by 39.2% year-over-year, while vocational training revenue increased by 85.6% from the same period of last year. Our gross margin for Q3 further expanded by 5 percentage points year-over-year to 53.7%, as we focused on high-margin business and projects. Our ongoing, prudent cost control measures and operating efficiency enhancements also improved the Company's bottom line. Accordingly, our non-GAAP net loss for Q3 narrowed by 10.1% from the same period of 2022.

Our Paid Membership revenue for the quarter was RMB 466.8 million, up 39.2% from RMB 335.4 million for the same period of 2022. This increase was propelled by the continued growth of our subscribing members, which increased by 35.9% year-over-year to 14.8 million.

Our Vocational Training business revenue for the third quarter was RMB144.8 million, up 85.6% year-over-year. This organic growth came from new course offerings provided by our existing business. Notably, our newly launched online courses for ESG-related examination preparation received excellent feedback from users. The remainder of the revenue growth was attributable to the acquisition of MBA Masterpreviously., which was acquired previously.

Our Marketing Services revenue for the quarter was RMB383 million. Despite the overall industry challenges, our cornerstone verticals, including IT and 3C and Home Appliances, maintained their growth momentum, increasing significantly by double digit year-over-year.

Gross profit for the third quarter increased by 23.4% year-over-year to RMB 548.5 million, with gross margin expanding to 53.7% from 48.7% for the same period of 2022, primarily due to our enhanced monetization efforts as well as our improved efficiency in cloud services and bandwidth utilization.

Total operating expenses were RMB 898.6 million for the third quarter compared with RMB 723 million for the same period of 2022.

Selling and marketing expenses for the third quarter increased to RMB 534.3 million from RMB 478.3 million for the same period of 2022 as we continued to invest in promoting our products and brand name.

Research and development expenses increased to RMB249.7 million for the third quarter from RMB160.8 million for the same period of 2022. The increase was primarily attributable to our increased spending on technology innovation as we believe strongly in the potential opportunities in large language model technology.

General and administrative expenses increased for the quarter to RMB114.6 million from RMB83.9 million in the same period of 2022, due to increased rental expenses and an increase in share-based compensation expenses from our acquired business. In this quarter, we incurred approximately RMB18 million relocation expenses as we moved to our new headquarters in Beijing.

Driven by our ongoing efforts to control costs and operational efficiency improvement, our GAAP net loss for the quarter was RMB278.4 million, narrowed by 6.5% on a year-over-year basis.

Our non-GAAP adjusted net loss, which primarily excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisition, was RMB225.3 million for the third quarter, narrowed by around 10% from the same period last year.

As of September 30, 2023, the Company had cash and cash equivalents, term deposits, and short-term investments of approximately RMB5.7 billion, compared with RMB6.3 billion as of December (corrected by company after the call) 31, 2022.

Also as of September 30, 2023, we repurchased approximately 18.3 million Class A ordinary shares for a total of USD 42.6 million on both the New York Stock Exchange and the Stock Exchange of Hong Kong.

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

(Operator Instructions) The first question today comes from Steve Qiu with Goldman Sachs.

(foreign language) So first, congratulations on receiving the approval for our large language model Zhihaitu AI. Could management share with us the latest progress of our large language model as well as the future monetization roadmap?

(foreign language)

[Interpreted] This is Dahai Li, CTO of Zhihu. To summarize, Zhihu is well positioned as a content community that has high-quality content and data on its platform, and we have made tremendous progress in terms of building up our large language model capabilities in the past few months. And in the future, our key focus will be on the application of our Zhihaitu AI into different business scenarios on our platform.

(foreign language)

[Interpreted] And more specifically speaking, our Zhihaitu AI is now upgraded to 100 billion level parameters of multi-modal large language model. And in early November, we have obtained the regulatory approval for our large language model. In terms of application, internally, we have used our Zhihaitu model into different aspects of our daily operations.

(foreign language)

[Interpreted] And speaking of content comprehension, our large language model has been used for content classification, our content search, and recommendation to enhance operating efficiency. For example, in the past, our content classification system upgrade takes about 1 quarter and now shortened to 2 weeks. In this way, we will enhance our user engagement and stickiness.

(foreign language)

[Interpreted] In terms of our marketing services, our large language model helps us to refine the titles of our content commercial articles and help us to refine our content products to enhance commercialization conversion rate.

(foreign language)

[Interpreted] Our multi-modal large language model also facilitates the generation of cover pictures of stories of our paid membership business. And users will also be able to interact with the virtual characters of our short stories and get an in-depth understanding of the contents of the stories.

(foreign language)

[Interpreted] Speaking of our Vocational Training business, our large language model helps to correct the essays for our students and also help our tutors to answer the basic or frequent questions from the students, in this way to enhance the operation efficiency of our Vocational Training business.

(foreign language)

[Interpreted] In terms of our content auditing, the large language model -- with the help of our large language model, the in-depth language identification abilities, the large language model is able to filter low-quality content and identify the non-compliant contents of the questions and the user reviews, in this way to enhance the overall efficiency and accuracy.

(foreign language)

[Interpreted] So these summarizes our past explorations in terms of the utilization of large language models in our community.

(foreign language)

[Interpreted] For our future plans, with the approval of the regulators, we plan to utilize our Zhihaitu AI into more products or functions that can be accessed by our users to enhance our content creation and consumption experiences.

(foreign language)

[Interpreted] AI as to Zhihu, is a very important opportunity. Through the R&D of Zhihaitu AI's large language model and continuously upgrading our basic model capabilities, we will provide better experiences for our users and content creators and also enhance our commercialization efficiency.

The next question comes from Xueqing Zhang with CICC.

(foreign language) Congratulations on another solid result. The Membership business once again demonstrates strong growth this quarter. What's the strategy for this business in the future? And how does the company view the recent development trend of micro drama series?

(foreign language)

[Interpreted] This is Zhou Yuan, CEO of Zhihu. As you can see that as our CFO has introduced previously, in the third quarter this year, our revenue from paid membership business has increased year-over-year by 39.2%, and we have accumulated average monthly paying users for about 15 million. And currently, we have accumulated a mass audience base and content creator base for our paid membership business.

(foreign language)

[Interpreted] And based on our content business flywheel, our paid membership business is experiencing resilient growth. And firstly, we have explored our content IP commercialization currently. In October, our hit drama, Scent of Time, has released on Youku and have received broad market appeal from the market.

(foreign language)

[Interpreted] And secondly speaking, our paid membership business has constantly improved in terms of our operating efficiency with the help of technology innovation. As Dahai has mentioned just now, with the approval of AI large language model, our AI technology will facilitate us in terms of the Writer's Assistant and also the cover picture generation for stories of our membership business.

(foreign language)

[Interpreted] And another aspect I would like to mention is that AI will not only help us to enhance operating efficiency, but it will also help us to create more in-depth interaction with the contents of the stories, for example, the interaction with virtual characters in the stories. And in this way, we will create more in-depth content consumption and help to increase our ARPU for our paid membership business.

(foreign language)

[Interpreted] And the final aspect I would like to mention is that we are constantly exploring different means of media for our paid membership business. And in our Yan Selection business, not only the short video dramas you have mentioned that is developing very rapidly in China recently, but we also have about 100,000 number of stories or contents in our paid membership business. And we will constantly innovate our media to help us to enhance our paid membership business.

And Xueqing Zhang, this is Henry, the CFO of the company. To comment on the answers to our CEO about the short form, the TV drama, we believe it's a huge market with brilliant potential. And as the CEO mentioned, Zhihu was equipped with a very large -- we accumulated more than 100,000 stories in the library. So we believe that the market will recognize Zhihu's IP -- the scarcity value of the Zhihu Ips in this very, how to say, unique and booming market.

The next question comes from Vicky Wei with Citi.

(foreign language) Will management provide some color about the recent progress of the marketing service business and the performance of the Double 11 performance? How should we think of 2024 outlook for this business?

(foreign language)

[Interpreted] This is Zhou Yuan. To introduce some of the noticeable progress of our Double 11 campaign, our content commerce solutions business has made some historical milestone during the past Double 11 campaign.

(foreign language)

[Interpreted] So for some of the specific progress or metrics we have achieved for the Double 11 campaign, during the Double 11 period, our relevant content search volume has increased year-over-year by 188%. And in terms of our average selling price of our commerce products, the average selling price has achieved more than RMB 1,300.

(foreign language)

[Interpreted] And in terms of different verticals of our content -- of our marketing services, firstly speaking for our IT, 3C and home appliances sectors, the business volumes have achieved high double-digit growth year-over-year. And for other sectors like outdoor and (corrected by company after the call) personal care products, the growth (added by company after the call) in both business volume and amount is also noticeable.

(foreign language)

[Interpreted] We have established cooperations or partnerships with a lot of e-commerce platforms in terms of our data (corrected by company after the call) for performance-based products. During the Double 11 period, the conversion rate, transaction rate and new client rate for our marketing services have increased noticeably.

(foreign language)

[Interpreted] For different verticals of our marketing services, the average conversion rate of these verticals has reached (corrected by company after the call) 6%, and the average transaction rate has reached 8%. That is to say, among 100 of the people who have visited the stores, about 8 of them have been successfully converted to transactions.

(foreign language)

[Interpreted] We have been targeting new generation professionals (corrected by company after the call) since the beginning of this year. It's one of our key targeted users. And in this year, we have noticed some trends, interesting trends. For example, some of the lifestyle-related consumptions have increased significantly on our platform, for example, domestic coffee machine, floor scrubber or digital cameras and other high-quality IT, 3C products.

(foreign language)

[Interpreted] And another interesting trend we have noticed is that on our content platform, our users is very reliant on the introduction by the professionals (corrected by company after the call) or experts when they choose among different products, especially some detailed metrics of these products. For some of the products such as mini LED or various electronic devices, the transaction volume has almost doubled or tripled on our platform.

(foreign language)

[Interpreted] Another thing is that thanks to our continuously improved data capabilities and our data cooperation with e-commerce platforms, the data capabilities of our platform has significantly improved. And in this way, our content commerce solutions and content recommendation capabilities have also converted or translated into higher ROI for performance-based marketing services.

(foreign language)

[Interpreted] And finally, as an outlook for next year or Q4 of this year, in the fourth quarter of this year we have noticed a recovery trend for our marketing services. And with the enhancement of our performance-based marketing solutions, we are confident that next year our marketing services will see a more noticeable recovery.

The next question comes from Daisy Chen with Haitong International.

(foreign language) I will translate myself. My question is about the education business. We noted that Zhihu's education segment's year-on-year growth rate is still quite strong this quarter. So can management share your view on the growth rate and the margins for your Vocational Education business for the next few quarters?

(foreign language)

[Interpreted] This is Zhou Yuan. In terms of our revenue from the Vocational Training business, it's rapidly growing. For this quarter, the revenue from Vocational Training has grown 85% year-over-year compared to the same period last year. And during the first half of this year, the revenue of Vocational Training business is already comparable to the full year last year.

(foreign language)

[Interpreted] And speaking of the different varieties of the vocational training courses provided by our business, it's actually serving the similar demand of the same audience or the same target group of our platform, the new generation professionals. And our courses help them to grow in terms of their personal development and their career development and also education certification. On our platform, we already have about more than 10 categories of courses in our platform.

(foreign language)

[Interpreted] And we have paid attention to the data or roadmap in terms of the user growth in our business operation. And I will give a more specific example.

(foreign language)

[Interpreted] In this quarter, the Vocational Training business has seen a very interesting trend. For some of the genres provided in our platform, such as ESG or Artificial Intelligence-related courses, it's very catered to the growing demand of the market to fulfill the career growth of our users. For example, the AI-related courses have seen almost double or triple growth in the recent months.

(foreign language)

[Interpreted] And moving on to the future, I think our key focus will be on the expansion of (corrected by company after the call) our course offerings. And also with the help of AI, our operating efficiency will be enhanced.

(foreign language)

[Interpreted] And in this industry, we have seen that there is significant room for improvement for digitalization or technology enhancement in this industry. And what we are doing currently is that we are focusing on integration and operating efficiency enhancement (corrected by company after the call) in the industry. And with the help of the business expansion and commercialization, we are confident that the investment or commitment we have made in this segment will materialize in the future.

Dasiy to conclude, so - we have the focus on our Training business, okay? So I think this Vocational Training business will achieve more than like a 20% year-over-year growth in next year. But as Zhou Yuan, our CEO mentioned, we made a technology investment, integration in this business. So we believe that it is still like in the investment stage of the business.

The next question comes from Thomas Chong with Jefferies.

(foreign language) My question is about margin and the OpEx trend. Can management comment about the outlook for our GP margin as well as the OpEx outlook? On that front, can management comment about the timing to achieve breakeven?

So our outlook for the GP margin, that will somehow be more certain or more sustainable at around maybe 53% to 55% as we are improving our utilization. As you may know, as we introduced in the remarks that we said that we improve our utilization of the cloud services and the focus on improving the operation efficiency for the cost control. And as you can see, we have a shift in our revenue structure. And to see the business, for example, like Paid Membership as well as the Vocational Training business -- maybe their margin is not as high as the Advertisement business, but going forward we believe that we will keep that around like -- the GP margin will between 53% to 55%. That's question one.

About our OpEx trend, we believe that we have seen some like opportunities to lower the percent of our sales marketing as a percent of our revenue in the next year. Because we are a content platform, so we believe that there is still some room space to do more like better cost control in the OpEx spending.

And about the breakeven point, we believe that will happen in the next year.

The next question comes from Eileen Lin with China Renaissance.

(foreign language) I will translate myself. I have a follow-up question to Thomas' question. Can management share more quarter-to-quarter trends for the breakeven timing? And is there any color you can share on the selling and marketing expense?

Eileen, this is Henry. Because we are in the year-end budgeting work stream, so I think we will update with the markets our progress about the breakeven point. We believe that will be somehow some quarter -- maybe one of the quarters next year.

About the sales and marketing, as I mentioned in the previous question, we believe that there is still some like percentage point space to lower our sales and marketing as a percentage of our total revenue in the next year and in the next quarter. Yes, that's my answer to your question.

This concludes our question-and-answer session. I would like to turn the conference back over to Iris for any closing remarks.

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.

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

Thank you all.