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Zhihu Inc. (NYSE:ZH) Q1 2024 Earnings Call Transcript

Zhihu Inc. (NYSE:ZH) Q1 2024 Earnings Call Transcript June 12, 2024

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Zhihu Inc. First Quarter 2024 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Today's conference is being recorded. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am.

Yolanda Liu: Thank you, operator. Hello everyone. Welcome to Zhihu's first quarter 2024 financial results conference call. Joining me today are Mr. Zhou Yuan, our Founder, Chairman, and Chief Executive Officer and Mr. Wang Han, our Chief Financial Officer. Before we get started, I'd like to remind you that today's discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Other information regarding these and other risks and uncertainties is included in our public filings with the U.S. SEC and Hong Kong Stock Exchange.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Additionally, the matter will discuss today will include both GAAP and non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and 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 at ir.zhihu.com. I will now turn the call over to Mr. Wang Han, CFO of Zhihu. Han please go ahead.

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Wang Han: Thank you, Yolanda. Hello everyone. Thank you for joining Zhihu's first quarter year 2024 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman, and CEO of Zhihu. The first quarter of 2024 marked a significant turning point for Zhihu. Strategically, we concentrated on our core strengths and the most crucial aspects of our development in AI area. This involved a series of tactical adjustments, including resource reallocation and organizational optimization. From an operating perspective, our top priority is the -- in the short-term is to achieve profitability. The element of AI has disrupted the traditional Internet business model, which relies on expanding user base behind the user engagement and boosting user add value to gain market share.

In AI era, the focus has shifted to high-quality content and user value. Zhihu's core value lies not only in processing Chinese highest quality content library, but also in our unique content creation mechanism and our communities for fashion atmosphere, which foster continued emergence of new high-quality contracts. Zhihu users are not passive recipients of information, but are active participants in content creation and knowledge sharing. These core strengths provide us with the first-mover advantage in exploring new business models and positioned us uniquely in the market, increasing our pricing power. Following our proactive reduction in community-related user acquisition cost, the size of our user base decline to something great in line with our expectations.

However, engagement among our monthly active users increased; core user retention sustained its growth momentum and daily active users' spend also increased significantly. Furthermore, our efforts to enhance trustworthiness' within the Zhihu community continued to drive community prosperity. Our strategy for [Indiscernible] scenario-oriented content ensures a continued stream of authentic in-depth, high-quality content based on our users' own experiences. As of the end of the first quarter, the cumulative business of content on our platform reached 804.2 million, including 611 million Q&As, up 15.4% year-over-year. Cumulative content creators within the Zhihu community reached 73.6 million, an increase of 13% year-over-year. We also observed a notable year-over-year increase in the proportion of highly active users engaged in creation and a percentage of high-level daily active creators.

Utilizing the power of AI-driven technology, we continue to equip our content creators with a variety of user-friendly creation tools, offering a professional and supportive environment to help them break financial rewards. In first quarter, the total number of content creators earn income on Zhihu grew by more than 25% year-over-year. Notably, the number of content creators benefiting from our [Indiscernible] plan was nearly fourfold compared to the same period last year. In the AI era, we have continually upgraded our cybersecurity capabilities to ensure better protection of user data privacy and intellectual property rights. At the same time, we fully leverage AI models capability to enhance efficiency of content identification, review, and governance within the Zhihu community.

In certain scenarios, AI reviewers can achieve higher accuracy compared to the many identification and review, allowing us to significantly reduce the number of manual reviewers, while maintaining high efficiency. We continue to refine and upgrade our existing systems, [Indiscernible] leveraging our Zhihu 2 [ph] LLM. These improvements have further enhanced user engagement and effectively combat fake traffic leading to a continued decline to users' negative feedback and propelling Zhihu's community sustainable development. We're progressing steadily towards our goal of achieving quarterly profitability within this year. To that end, we have accelerated our loss reduction through two operating tactics. First was to continue to improve employee efficiency, further reducing labor costs.

Second was to reduce community-related user acquisition costs. Meanwhile, we have maintained a higher ROI in our pay membership and location training businesses, which extended our reach beyond the Zhihu community. With these efforts, the cost of revenue and total operating expenses in Q1 decreased by over RMB130 million quarter-over-quarter. Notably, we recorded our sixth consecutive quarter of year-over-year growth in gross profit margin and three consecutive quarters of sequential decline in our sales and marketing expenses in the first quarter. Additionally, we have been accelerating the application of Zhihu 2 LLM to further enhance our operating efficiency across every aspect of our businesses, for example, teaching, learning, and research assets for our vocational training business.

By integrating our own knowledge library, we have driven notable efficiency improvements in AI teaching assistants, cell services, homework assessment and more. As a leading content-centric community, Zhihu sets as a lending platform where professionals engaged in the most extensive and in-depth discussions on AI-related topics. Since the beginning of this year, the amount of AI-related content and the number of creators have continued to surge by double-digit year-over-year growth. Specifically, the number of AI creators certified by Blue Label has increased by 130% year-over-year. Moreover, tens of thousands of specialized terms related to AI are being discussed within our community. In 2024, our exploration of investment in AI will shift to focus on application layer.

Our advancement in AI enables us to enhance operating efficiency across our existing businesses as well as a lot of emerging potential beyond the Zhihu community, albeit on the foundation of [Indiscernible]. Since the launch of our AI-powered search feature in March, we have observed double-digit growth in app active days, user retention rate, and user engagement -- amount of users who are using our new AI search feature. Now, I would like to dive into more details on the progress we achieved across our multiple business lines for the first quarter. First, our vocational training business continued to grow robustly with the revenue increasing 35.9% year-over-year to RMB145.4 million. Its contribution to our total revenue also grew, surpassing 15% for the first time.

A network administrator monitoring a data center, with a wall of servers in the background.
A network administrator monitoring a data center, with a wall of servers in the background.

As of the end of the first quarter, we established more than 30 sub-category courses through both self-operated business and acquisitions. Notably, our self-operated offerings are closely connected to Zhihu community, allowing us to address users' needs richly and precisely, while yielding higher profits. Our acquired offerings on the other hand, meet specific demand and cater to a broader market. Together, this courses complement each other and broadening our offerings and driving the rapid and sustainable growth of our vocational training business. In the first quarter, our self-operated offerings grew rapidly, particularly AI, AG, and self [ph] exam portions, demonstrating excellent profitability and rapid growth. Formally, our program tutors are also content creators within the Zhihu community.

With this dual role , tutors are deeply involved in the course development while maintaining ongoing interactions with students in the community about real course experiences, skill improvement, and other topics. This approach effectively addresses the ever-growing new demand of our new users. Growth from our acquired offerings remained steady during this quarter further elevating our brand name awareness and service advantages. In April of this year, one of our subsidiaries, [Indiscernible] Education, hosted a dedicated live broadcast inviting executives from the CFA Institute. They provided professional insights into CFA exam reforms, offering first-hand preparation guidance and expert analysis. This initiative gathers significant attention and sustained feedback from both the industry and examinees.

Our paid membership business remained our largest revenue contributor this quarter, reaching RMB449.7 million. As of the end of this first quarter, our average monthly subscribing members stood at 14.8 million, showing a slight decrease of 0.8% year-over-year, but an increase of 4.1% quarter-on-quarter. Average revenue per user remained stable compared to the same period last year. Leveraging the support of Zhihu community and our unique positioning, our premium short stories continue to calculate the revenue with our users. In April, 123 historically chart-topping business, including Zhihu's exclusive story [Indiscernible] were included in the national library digital collection. Zhihu's premium content library, including short stories, continue to expand in the first quarter.

The total volume of premium content increased by 14% year-over-year, attracting new subscribers, while encouraging increased consumption among existing subscribers. On the content creator side, we are delighted to see our creators building a solid market reputation and achieving financial rewards on our platform. In first quarter, the number of content creators' income increased by 78% year-over-year. In addition to top creators earning substantial income, many mid-tier and long-tail content creators within our community also earned significant income through high-quality content creation this quarter. And as a market leader, Zhihu continues to unlock the monetization potential of our vast array of premium short story IPs, spearheading our expansion into the short drama market and consistently setting new industry benchmark for growth.

In the first quarter, IP monetization revenue increased by 165.7% year-over-year. In April, another short drama [Indiscernible] be adapted from story in Zhihu's content library, achieved a new record high for popularity on its debut day on Tencent's Micro drama platform. In the long run, the ongoing expansion of our premium content and diverse content consumption formats will continually drive growth in the lifetime value of subscribing members. Let's now shift to our marketing services. In first quarter, marketing services revenue were RMB330.5 million, representing a decrease of 15.7% year-over-year. Within this total, revenue from our brand advertising business increased significantly by 40% year-over-year, while our performance-based advertising business returned to growth on a quarter-over-quarter basis.

Our key clients in cornerstone verticals continue to demonstrate healthy improvements in retention rates, consumption, and ARPU. Apart from IDFC [ph] industry, which maintained its year-over-year growth rate of over 40%, the fast-moving consumer goods sector also experienced high double-digit year-over-year growth. We're currently in the process of upgrading our CCS product, including proactively enhancing content governance and reducing the distribution of commercial content that negatively impact user experience. As we are striving for quality profitability by the first quarter of 2024, we are giving our efforts to narrow our losses. Meanwhile, we firmly believe the emerging potential of our AI search and the value we continue to unlock across Zhihu's trustworthy community will provide price momentum for our sustainable growth and a clear path to profitability for the remaining quarters of this year.

This concludes Mr. Zhou Yuan's remarks. Now, I will review the details of our first quarter financials. For a complete overview of our first quarter 2024 results, please see our press release issued earlier today. We have continually optimized our cost structure over the past several quarters. As a result, we recorded our sixth consecutive quarter of year-over-year growth in the gross profit margin. On the expense side, we significantly reduced community-related user acquisition costs, while maintaining a prudent level of investment in cutting-edge technology, including AI. This initiative has effectively optimized our fixed costs, enhancing our commercialization efficiency. With this proven strategic adjustments, we are confident of achieving quarterly profitability in 2024.

Our marketing services revenue for the first quarter were RMB330.5 million, a decline of 15.7% year-over-year. This decrease was primarily due to the ongoing refinement of our CCS product to strategically focus on margin improvement. However, we have observed a recovery in our brand advertising segment in the first quarter. Performance-based advertising also demonstrated a sequential growth, notably [Indiscernible] as well as fast-moving consumer growth, that is growth by vertical. Pay membership maintained a stable trend in the first quarter, reaching RMB449.7 million. The number of subscribing members grew to 14.8 million, up 4.1% quarter-over-quarter. Vocational training revenues for the quarter were -- was RMB145.4 million, increasing by 35.9% year-over-year.

Our self-operated offerings, particularly AI, AG, and software exam has delivered robust growth, while our acquired business also retain solid momentum. Benefiting from enhanced operating efficiency, our gross profit for first quarter increased by 6.1% year-over-year to RMB543.5 million, propelling a gross profit margin improvement of 5.1 percentage points year-over-year to 56.6%. Our total operating expenses for the quarter were RMB768.2 million compared with RMB729.0 million in the same period last year. Selling and marketing expenses increased to RMB478 million from RMB445.6 million in the same period of 2023. Moving forward, we will maintain our prudent financial policies and rigorously narrow ROI across marketing channels. Our research and development expenses for first quarter increased to RMB197.4 million from RMB183 million in the same period of 2023.

The increase was primarily due to our increased spending on technology innovation. G&A expenses decreased by 7.5% to RMB92.9 million. The decrease was primarily due to lower share-based compensation expenses combined with improved operating efficiency. As a regard of -- our GAAP net loss for the first quarter narrowed by 7.4% year-over-year to RMB165.8 million. Our non-GAAP net loss for the first quarter was RMB135.7 million. As of March 31st, 2024, the company had cash and cash equivalents, term deposits, and short-term investment of RMB1.2 billion compared with RMB5.5 billion as of December 31st, 2023. In the first quarter, the company repurchased 4.8 million plus A ordinary shares for a total price of $8 million. In summary, as we continue to optimize our cost and expense structure, our operating efficiency is steadily improving.

Throughout the remainder of 2024, we're confident that our strong strategic execution will provide a solid foundation for achieving our quarterly profitability goals in the near future. 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.

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