Zhihu Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Juhu, Inc. First Quarter 2022 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a Q&A session. Today's conference is being recorded. At this time, I would 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 first quarter 2022 financial results conference call. Joining us today are Mr. Zhou Yuan, our 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 definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see our earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.juhu.com. I will now turn the call over to Mr. Sun Wei, our CFO.

Okay. Thank you, Jingjing. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, founder and CEO of Juhu. Thank you for joining Juhu's first quarter 2022 earnings call. In April, we successfully completed our due primary listing on the Hong Kong Stock Exchange, marking another key milestone following our listing on the NYSE last year. Our due primary listing further cemented our solid foundation for the sustainable and long-term growth of the company. In the first quarter, aligned with our Community Ecosystem Comes First strategy, we continued to cultivate fulfilling content in various verticals, Our sense of fulfillment approach and algorithm, combined with refined analysis of the needs and characteristics of our core user groups, has continued to enhance our understanding of users and help us more precisely meet their needs. At the same time, our iterative tools, creator operations, and support helps further encourage content creation. The combined effect of the above effectively work to boost the sustained vitality and the rational prosperity of our community ecosystem. During the first quarter, our average MAUs grew by 19.4% year over year to 101.6 million, with over 96% being mobile MAUs. Backed by our strategy of creating a better community ecosystem, starting from January, we have continued to improve user experience by optimizing recommendation algorithms. We have also actively implemented initiatives to better manage content, which is incompatible with our sense of fulfillment content standards, including content that is biased, irrelevant, unfriendly, and spamming content. As a result, and as anticipated, we saw a slight pullback in overall user growth in the first quarter compared with peak levels in previous quarters. However, at the same time, we witnessed notable growth in user engagement and retention due to the enhanced user experience on our platform. Our high-quality content and unique content-centric business model have enabled Juhu to achieve increasing brand value and strong financial performance, despite the significant macro headwinds. Our total revenue recorded year-over-year growth of 55.4%, reaching RMB 743 million in the first quarter, beyond the high end of our revenue guidance. And our revenue base was further diversified, evidenced by content commerce solutions and the advertising business, together contributing 59.8% to total revenue, with CCS growing to be the largest revenue contributor in the quarter. We believe these achievements also rely on the joint efforts of all parties in the Zhihu community, and they support our shareholders who share the same vision. The Board is confident about the company's continued growth in the future and announces that we have proposed to obtain a shareholder's approval for a share repurchase program of up to US$100 million, available for the coming 12 months. Now, allow me to further elaborate on our business from content, users, and monetization perspective. One, content. Zhuhu has continued to cultivate various content verticals since last year by introducing Sense of Fulfillment as the content assessment standard and upgrading our multimedia format. We were able to better address users' deep consumption needs for high-quality content. By the end of first quarter, the cumulative pieces of content in Zhihu community had reached 520 million, including 440 million questions and answers, representing a year-over-year increase of 36% and 30%, respectively. Along with the execution of our strategy, we are delighted to see more and more fulfilling content coming from high-ranking creators. High-ranking creators learn their status by continued contributions to the community, measured by an activity level at least 40% higher than the same period last year. Among this group of high-ranking creators, their daily content creations have increased by over 125% year-over-year. This increasing activity and high-quality content creation have enraged the Ichiku Content Library with new and sustainable vitality. During the first quarter, We cultivated fulfilling content in various verticals using a scenario-oriented approach with a focus on our users in the 18 to 36 years old demographic, or we call it the second 18 years of life. Content verticals such as campus life and education, career development, business and internet, science and psychology are highly popular among these users. To better meet their personalized personalized demands, and answer common scenario-oriented questions, we further refined the algorithm to better identify our creators' interests and expertise in topics of high interest and encourage them to create more fulfilling content in this area. Additional popular verticals include postgraduate exam preparation, economics, HR profession, and scientific research. For example, to fulfill users' curiosity about artificial intelligence and encourage those who want to join in this field, in April, we invited Andrew Ong, a noted expert in the field, to answer questions such as how to systematically learn in machine learning. Andrew's time of sharing his thoughts, experience, and insights inspired hundreds of comments in multiple dimensions and won more than thousands of approvals. just within a couple of hours. With these efforts, we were pleased to see the monthly content creation in the science vertical increase by 61.3% in March, compared with this January. And the number of average daily active users who consume content in this vertical has increased by almost 30%. In-depth discussion on timely content continue to be highly popular. among Zhihu users and help to drive organic user growth and engagement. At Zhihu, we promote rational optimism. As a social platform and content community, we believe that we have a social responsibility to promote rational, optimistic, and constructive discussions on timely content. During the first quarter, when the pandemic resurfaced in Shanghai, Zhihu users expressed their emotional and psychological distress, and rationally discussed the disruption, cost, and potential solutions. Some programmers even shared mini-program tools they wrote to help with grocery shopping. Similar rational discussions were carried out during the tragic loss of the China Eastern Airlines flight 5735 in April. As of the end of the first quarter, the DAUs who consumed the timely content remained about 40% among all DAUs in our community. And the average PV per user for timely consumption among all MAUs also retained its growth momentum. Since last year, we have been continually iterating our multimedia strategy in the community, allowing users and creators to consume, create, and interact across multiple content formats. Video is an indispensable part of our ecosystem and a popular content format. The ratio of DAOs who consume videos remains stable at about 45% in Q1. On the supply side, we have firmly cracked down on the improper videos in our community and significantly reduced the traffic of the videos, which didn't meet our fulfilling content standard in the first quarter. By doing so, we made Zhuhu videos dynamically better integrated to the entire community ecosystem and have received very positive feedback in a regular user experience survey. While content shared in the formats of questions and answers and videos are currently the most frequently consumed on our platform, we are also working to broaden and upgrade format options available to users and creators to include short-format thoughts and the longer formats such as live streaming. Expanding the content creation format available to our creators will further unlock their creativity and continue to diversify our vast content library. A thriving content community like ours needs not only growing and fulfilling content, but also continuously improve community governance and culture. We are relentless in working to uphold good community compliance and governance that promotes a healthy community culture. Towards this end, in the first quarter, we began publicizing weekly reports in the community that transparently detail our ongoing progress in dealing with low quality and non-compliant content, as well as our measures to protect against cyber crimes and attacks. Thanks to our constantly iterative technical and operational capabilities, our community is able to maintain a healthy and long-term prosperity, underpinned by its culture of sincerity, expertise, and respect. Now, let's move to user section. On the user front, in the first quarter of 2022, the average MAUs of the Zhihu community reached 101.6 million, increasing by 19.4% year-over-year. Among all MAUs, the percentage of MAUs from the Juhu app continues to increase, exceeding 96%. Along with the execution of our community ecosystem comes first strategy. Our users are becoming more interactive with each other. By the end of March, our average monthly engagement per MAU increased by over 18% since the end of last year. Our user base has also become more balanced. As of the end of first quarter, among all our MAUs, users from second tier in the lower cities accounted for over 50%. Users under the age of 30 accounted for 73% of the MAUs in the first quarter. And the number of users aged 30 and above continue to grow fast. User growth among these aged 30 and above is largely driven by the increasing amount of timely content provided in the Zhuhu community. The percentage of female users stayed relatively flat at 47%. Female users show a strong preference for lifestyle-related content and the premium membership content. Now let's talk about creators who have always been a unique user group in the Zhuhu community, acting as an important pillar of our ecosystem. With all of these initiatives we have implemented to effectively improve creators' experience, there has been a notable increase in stickiness among high-ranking creators on verticals such as science and technology and the career. The number of DAUs within this group of creators increased by more than 45% at the end of the compared to the beginning of the quarter. For the same period of comparison, the number of DAOs among creators in the verticals of business increased by 37%. To build on our strong momentum, we recently released the creator support scheme, namely high-end plan 4.0 recently. Our focus is on encouraging creators to go deeper into the verticals in which they have deep knowledge or interest. In particular, we are targeting creators who could be researchers with extensive subject matter knowledge, practitioners with valuable experience and expertise, or even avid hobbyists with deep love and interest in an area. We have upgraded our creator sorting system and the matching algorithm to empower creators with clear direction how to increase their ranking and channel more traffic towards their content. In addition, we refined a more comprehensive monetization scheme to better reward creators financially. Talented creators who may have already earned income through our cheese platform and paid membership program can now also be rewarded for their continuous contribution of non-commercial but fulfilling content through our Zhizhi plan. This name literally means salute knowledge. And we target to make available a total of 100 million RMB to creators who provide fulfilling content through chief platform and Zhizhi plan. Last year, we had over 30 creators who earned incomes exceeding 1 million RMB from the paid membership program. This year, we are determined to identify over 100 creators who can earn over 1 million RMB under the creator support scheme. What's even more gratifying is that the total income earned by JUCO creators through multiple channels for the first quarter of 2022 increased by over 70% compared to the same period of last year. This again proves that our content-centric business model provides benefits to participants throughout the ecosystem. Meanwhile, we will continue to improve creators' experience through further enhanced products, creator operations, and support services. Now, let's go to commercialization. Turning to commercialization, in the first quarter of 2022, our total revenue reached RMB $743 million. representing year-over-year growth of 55.4% amid a challenging macroeconomy. At the beginning of this year, we restructured our sales team by industries to better understand and serve the needs of brands and merchants. This has enabled us to effectively expand the customer base in certain industries and increase their spending by providing a more comprehensive product offering. We have already seen notable results coming from our IT and 3C industry, where both the number of customers and the average customer spending have increased. Since March, the COVID-19 resurgence in China has caused multiple supply chain disruptions and reduced business activities across most industries. Online vocational training, internet services, and gaming are among those less affected. whereas e-commerce, FMCG, and other physical goods industries have been more adversely impacted. While the short-term headwinds are expected, we are committed to strengthening commercialization capabilities in our ecosystem and investing for long-term growth. New infrastructure improvements, such as cheap platforms and tools like Toast and Youshu, are an example of this. and are all upgraded on a regular basis to support our brands and merchants. In the first quarter, the number of commercial content creators who contributed to CCS and generated financial income increased by 96.5% compared to the same period of last year. Let's now move to our membership and vocational training services. By offering abundant high-quality content and effectively improving the user experience, we have been able to significantly raise our brand awareness among the users and established closed-loop monetization capabilities. On the supply side, with premium content, we continue to search for talented creators and inspire them with our knowledge of users' needs and fast-growing financial reward opportunities. Total pieces of premium content exceeded 3.9 million as of the end of Q1 2022. The high-quality premium content attracted more paying members, and in return provided more financial rewards to the creators. As mentioned in the Haiyan plan, we had over 30 creators whose income exceeded 1 million RMB last year, and many more creators in the future will be able to join benefits derived from our paid membership services. On the development side, pertaining to our vocational training services, we are pleased to see that revenues contribution exceeded 5% in the first quarter, representing a 12-fold increase compared to the same period last year. The cost offering formed by two core product lines, examination and workplace skills improvement, have been curated to address the needs of user groups aged between 18 to 36 by improving their professional skills and enhancing their competitiveness. Vocational training is very important to expand our services to users and diversify the commercialization of our ecosystem. We plan to continue to enhance our technical capabilities and further expand vocational training course offerings by utilizing our strong brand awareness, strengthening our internal operations, and carefully evaluating M&A opportunities. We have already taken meaningful steps in this regard. In 2021, we completed the acquisition of a vocational training brand specializing in CSA and CPA qualification exams, and a well-known brand focusing on English training. In doing so, we added valuable content to better meet our users' needs, grew our user base, and further broadened our CRM capabilities. In the future, we aim to develop an independent vocational training brand that will be aligned with JUGU's core values and can operate as a natural complement to our operations and the extension of our mission. In terms of user clearance, our monthly renewal rate remains steady in the first quarter at 65%. We closely monitor this metric and believe it serves as a working proxy of overall user experience satisfaction. Moving forward, we will continue to further enhance our infrastructure, including the sales management system and the service delivery to continually improve our user experience and consumption satisfaction. In closing, I firmly believe that on top of this strong business value we provide, Zhuhu has a leading social and community-based content platform also provides important social value to our users and the greater communities we serve. Perhaps now in a time with so many unprecedented challenges and uncertainties, I am convinced of this more than ever. I am proud of the role Zhuhu can play in the lives of people at this time. We will continue to stay true to our founding beliefs and are committed to helping more people to find their answers and in doing so, also help relieve anxiety and reduce fear. This concludes Ms. Zhou Yan's remarks. I will now walk you through our Q1 financial performance in a little more detail. We are delighted to report another solid quarter of performance in Q1 2022, with total revenue up 55.4% year-over-year, reaching RMB $743 million Continuing to benefit from our dynamic community ecosystem and increasing content creation, our revenue structure was further optimized and diversified in the first quarter. Our content commerce solutions have become our most powerful growth engine and contributed 30.5% of total revenue, closely followed by paid membership and advertising revenue, which contributed 29.8%. and 29.2% to the total revenue, respectively. Occasional training, one of our new initiatives in diversifying commercialization capabilities, has now demonstrated a promising growth trajectory, with this quarterly revenue contribution exceeding 5% for the first time. During the first quarter, CCS continued to gain market shares by providing highly efficient marketing solutions The total revenues of CCS reached RMB 226.8 million, up by 87.7% year-over-year. This benefited from both an increased customer base and additional spending by each customer. The revenues generated from categories such as vocational training, FMCG, ITM3C products, and internet services were more resilient and among the top in terms of revenue contribution. Meanwhile, our advertising business recorded RMB 217.3 million in revenue, representing a 1.7% year-over-year increase, despite of a soft demand caused by the resurgence of COVID-19. Our IT and 3C brand advertising revenue achieved over 100% increase year-over-year, while top advertisers from FMCG e-commerce remained resilient with a double-digit growth. However, as the supply chain disruptions began to expand beginning in late March, we anticipated a potential slowdown in our advertising revenue in the short term. We will continue our investment in advertising infrastructures to improve the efficiency and the effectiveness of our products and ultimately deliver greater value. Thanks to the continuous effort in diversifying revenue structures, our revenues generated from other content-centric business lines are more resilient against software consumer demand. Our revenue from membership service was RMB 220.7 million and achieved a yearly increase of 75.1%. Average monthly paying members in the first quarter reached 6.89 million, with a 6.8% paying ratio to average MAU. Our vocational training business continued its robust growth momentum in Q1, with revenue increased 12-fold year-over-year, and contributing over 5% of total revenue for the first time. Vocational training is a business grown from natural expansion of our users' needs. With the acquisition of two companies that are valuable in their respective fields, we have collectively created greater synergy. Going forward, we will continue to expand the coverage and enhance the quality of cost offerings through both self-operations and M&A, and further enhance our infrastructure to improve sales and CRM management capabilities. While our content-centric ecosystem and the business model have been pacified by strong revenue growth, we believe the balance between investment for future growth and the well-managed cost control practice is also vital for the long-term development. As we maintain high and diverse revenue growth, our gross profit margin for the quarter was 45%, remaining at a high level relatively to the wider industry. Following our remarks in the last quarter of conference call in late March, we have continued to review our costs and making improvements in our operating efficiency. As a result, we have controlled the non-GAAP operating expenses for daily business and reduced it by around 2% since Q4 last year. However, in the first quarter, we incurred one of listing expenses of over 30 million RMB and some G&A related SBC expenses in association with the Hong Kong IPO. Consequently, our total operating expenses for Q1 were RMB 984 million and non-GAAP operating expenses were RMB 743 million. Going forward, we will continue seeking ways to further improve our operating efficiency. As a result of all the above, our adjusted net loss which primarily excludes share-based compensation expenses, was RMB 367 million in Q1. And as of March of 2021, the company had cash and cash equivalents, term deposits, restricted cash, and a short-term investment of RMB 7.1 billion. And lastly, as mentioned by Julia, on April 22nd, we specifically listed on the main board of Hong Kong Stock Exchange under the stock code 2390 with a global offering of 26 million Class A ordinary shares. In compliance with the local regulation and following the common practice adopted by public companies in the Hong Kong market, we will no longer provide financial guidance on net revenues going forward. We remain deeply committed to delivering sustainable growth of business and the community and driving shareholder value in the long term. This concludes my remarks on our financial performance. Operators, we are ready for T&A session. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Shuqing Zhang with CICC. Please go ahead.

But considering that there are more social media topics in the first quarter, and the pandemic, it will actually help users to be more active. Can you please help us share more details about the growth of users, including some of the possible customers and feedback? 然後我們怎麼看待二次度的一個用戶增長的趨勢,以及說全年是否有更新的一個用戶增長的目標。 And I will translate myself. Thanks management for taking my question. My question is about the user growth. With the community ecosystem comes first strategy. We saw slight pullback in average MAU in the first quarter. And we think in the first quarter, the COVID lockdown and the more social hot topics may positively boost our user activity. So can management share more color on user growth momentum, such as new user acquisition and retargeting? And how does the management think of the user growth trend in the second quarter? And what's the annual target in terms of the full year of 2022? Thank you.

Hello, I am Zhou Yuan, the CEO of Zhihu. Thank you for your question. About growth and this year's strategy and the overall situation of our Q2 second half of the year, I would like to introduce it. So this year's work, the core is still around the strategy of our ecological low. In the past one quarter, in fact, many of this expected income, we all Hi, thank you for the question.

I'm the CEO of the company. My name is Zhou Yuan. Let me talk about the question or the aspect of growth strategy for the whole year, as well as for the second quarter and the second half of the year. Now, in terms of our adjustment in order to fulfill our ecosystem first strategy, we've done a lot of adjustment, and we were able to actually achieve a lot of our growth target for the first quarter.

So first of all, it is the experience of this creative environment and creators. In the first stage, including the second stage that has already been developed, we put the focus of this work on the improvement of the experience of high-level creators in the community. From the context, our work is still relatively successful. The number of high-level creators in the first quarter has continued to increase in terms of activity. The average number of high-level creators in the first quarter increased by 40% compared to the number of high-level creators in the second quarter. The amount of content created in the second quarter increased by more than 125%.

So in terms of our ecosystem first strategy, we mainly focus on adjusting the user experience as well as the whole, the ecosystem for our high ranking creators in their use of the community. And as a result, we are able to actually achieve quite a lot for Q1 and also the beginning of Q2. Just to give you some idea, the active level of our high-ranking creators has increased significantly, and the quarterly DAU of our high-ranking creators has increased by 40% YOY, and also their daily content creation has increased by over 125% YOY as well. Just now, our CFO also introduced

We actually just released our latest marine plan in 2022, which is the 4.0 of the marine plan. It includes this in the creation system, this flow cleanliness, capital revenue, and some measures in many aspects. Here, because there is public information, I won't talk about it. But I have to talk about it, I just want to tell you a little bit about the 4.0 of the marine plan. And also, as was mentioned by our CFO earlier in the prepared remarks, we just launched our 4.0 version of the high-end plan for the whole year last week.

And based on the public information, you can actually check more details for the high-yen plan. We mainly focus on the adjustment and the upgrading of the creator system as well as different monetization channels or ways for our content creators. And this is part of our tradition of creating a more robust ecosystem for our yen creators as well as following up on our successful upgrade of our high-ranking content creators ecosystem following in Q1.

What does this mean? In fact, it means that we will, through the promotion of the Hanyuan Project, then put the work of the creator ecosystem, based on our experience of high-level creators in the first quarter, gradually promote it to the group of creators in the central department in the second quarter and the third quarter. In this way, the scale and work will be promoted.

Now, what we mean by the high-end plan is that we want to achieve a goal of optimizing the whole creator's ecosystem in general. As we first prioritize the upgrading of the ecosystem for our high-ranking creators, we want to take more experience in gradually expanding the kind of upgraded system and monetization ways for other kind of lower-ranking meets the lower-ranking content creators in the subsequent quarters of the year.

Okay.

Now that was about our ecosystem and how we prioritize it in the first quarter and what we have achieved so far. Coming up, I would like to talk about the membership growth as well as other traffic growth strategies going forward.

So we uh around this gain sense content standard Uh, in the first degree, we are actually continuing to update and upgrade our recommendation system So uh So what's the result is that the content of high traffic in the whole community is actually changing Simply put, it's more of a long-term interest in the user rather than a short-term one-time consumption

Now, what we mean by that is that we want to prioritize the sense of fulfillment for our community participants as well as our content creators, so we actually upgraded our recommendation system. As a result, we are able to see style changes in our high-quality content on the platform, and that really reflects the long-term interest of our users rather than the short-term interest.

The content of the acquisition is not just a standard. It is also our business itself. It is also the ability of our key platform algorithm. It is a very important work for our community work for a period of time. We are quite confident that with the steady promotion of this work, including the division of other resources, and the upgrade of user interest, the community will achieve more significant progress in the second half of the year in terms of ecological goals and growth goals.

Now, when we talk about the content upgrade, we are not really just outlining several guidelines or making new standards. They're actually the content themselves and also the optimization of our algorithm for the whole community so that we can continue to prioritize the user experience for the whole group of users on our platform. as a result we can gradually upgrade our user profiling as well as to make the algorithm more comprehensive and more capable as well and so going forward for the second half of the year we will continue on benefiting the whole ecosystem as a result of these upgrading of our overall content as well as the sense of achievement sense of fulfillment priority

So from the data, in the first quarter, the average period of the new users is constantly increasing. It has reached the highest level in the last eight quarters. This is directly related to our growth in the sense of achievement. At the same time, another important work is that we have also established the corresponding ecological goals in community governance. For example, the issue of male and female rights and the issue of gender equality. Um, um, um, um, um, um,

Now, you can see all of those improvements from our figures from the first quarter of the year, basically prioritizing the sense of achievement, allowing us to gain actually the highest level of next month retention rate of our new users, achieving an eight-quarter high. And also, we are able to optimize the overall experience with our fine-tuning of the community governance capability in order to fulfill our ecosystem first strategy and priority. And we were able to proactively resolve some of the group conflict amongst the community participants as well. And so since the beginning of the year, we are able to have well witnessed an increase of the average user interaction by 18% for the first quarter.

In the first quarter, a lot of things happened. No matter what the situation is, whether it is the society or the capital market, the international situation, etc. I think the social hot spot in the first quarter really brought a lot of traffic and a lot of user feedback. This kind of data will have such a reflection. But I think the social hot spot, in fact, it can't just look at the traffic. OK.

Now, it is true that ever since the beginning of the year, we've experienced a lot of social changes domestically speaking, as well as internationally speaking in different kinds of market, including the capital market. So as a result, we were able to actually saw an increase in our overall traffic on the platform, as well as some returning of our old users as well. However, to be honest, these kind of social topics overall have been very negative, you know, in terms of their impact on people's psychology, in terms of their impact on the whole society. And so they have been impacting people's mindset a lot to the negative direction, intriguing or triggering a lot of fear, narrow-mindedness, as well as bias in our minds.

So I want to tell you that when an event or an issue becomes a hot topic, And so I think our priority right now is really to think about how to help people to discuss a topic in a more positive note as well as

in a more rational manner as long as any social topic emerge on our top discussion ranks. And we believe that that actually matters more than just gaining the traffic as a result of emerging social hot topics by themselves. And so going forward, we are going to actually make more effort on our community governance in order to achieve a better result rather than just focusing on customer or traffic acquisition.

So in general, it is under the first strategy of community ecology. We have a lot of work that is actively and steadily promoting it. So in essence, good ecology will bring good content and drive high-quality user growth and sales growth. We are very confident in the growth of the third half of this year and remain optimistic. Thank you

And so under the strategy of ecosystem first, we are continuously and very steadily moving forward with our efforts And we believe that as long as we uphold this strategy of ecosystem first, we should be able to continue to generate high quality contents. And as a result, we can get a lot of user interest as well as traffic on the platform. And at the end of the day, we can generate profit from it naturally and organically. And so we are still very confident about our growth overall for the second half of the year.

Okay, operator, we would like to take the next question.

Absolutely. Our next question today comes from Steve Kru with Goldman Sachs. Please go ahead.

Good evening, Director. Thank you very much for answering my question. My question is about this ad. I would like to know, under the background of the epidemic control, there is a situation of 2G ad plus CCS. Thanks management for taking my questions. My question is on advertisement. Could management share regarding current tight COVID situation or restriction, what is our outlook on the second quarter advertising plus the CCS revenue? And it would be great if you could provide us more color by verticals, including our top verticals such as FMCG, e-commerce, auto, education, as well as online games and their performances in the second quarter. And just wondering, given COVID restriction definitely has been, you know, losing in some of the areas and as well as the recovery of the logistics, have you seen an advertising budget recovery into the end of the May? Thank you.

Okay. Thank you, Lincoln. I'm the CFO of Zhuhu. Thank you. Sorry. I'm the CFO of Zhuhu. Let me answer this question. Actually, we can all see that since the beginning of this year, the epidemic has still appeared relatively repeatedly in various places. Basically, it may be that various places are now taking relatively strict measures to prevent the epidemic. I believe that many of you can feel the short-term changes in supply chain and residential consumption and the macroeconomic situation. I believe that many of you can feel it. I believe that many of you are still in Shanghai now. Then we also noticed that these external changes from mid-March have gradually affected the advertising and CCS of this call. We see that in the first quarter, the overall increase in advertising and CCS year-on-year is 33%, and the epidemic has not subsided from Q1 to the present, so there is still pressure on the B-end income.

Hi, thank you for your question. I'm the CFO of the company. My name is Sun Wei. Allow me to take your question. Now, since the beginning of 2022, we've been able to, we actually have observed a lot of the resurgence of the pandemic all over the world, as well as in China. And so different provinces in China has adopted quite a tightened prevention policy in order to prevent the spread of the pandemic and the viruses. As a result, the supply chain as well as overall macro economy and consumer consumption has experienced some short-term changes, and I believe that we are all part of it. And I believe that if you are in Shanghai right now, you might still be negatively impacted by the lockdown policy there. And definitely it affected our business. And we have noticed some changes on our business as well, ever since the mid to late March of the year. And it affected mainly our advertising as well as our CCS business because they were both the 2B side of the business on the platform. And overall, I believe that the Q1 impact performance is still under the impact of the pandemic, and we still are facing some restriction and some constraint as a result of the pandemic on our 2B side of the revenue. Okay.

Let me first talk about the areas that are directly affected by the QE. These areas mainly include network service, games, IT, and 3C. These areas are relatively directly affected.

And before I go about saying or giving you more expectations about our Q2's growth, I would like to actually talk about the impact from the pandemic on our Q1's results. First of all, I would like to address the positive impact. And so there are several verticals on our platform that are impacted positively, including the online service, online gaming, as well as the IT and 3C electronics.

From the perspective of the web service, we can see that there are several segment areas that perform well. For example, social, job-hunting, and training. These three areas are relatively good. Social is mainly due to the positive impact of the Q1 spring holiday. Job-hunting is due to the loss of job-hunting in March. Training is now because the environment is not very good. The demand for self-improvement by users is also constantly improving and growing. So the positive impact in these areas is relatively obvious. Okay.

First, about the online service segment, I believe that there are several key segments or sub-segments that are doing quite well, that actually overall performed quite well for the first quarter. They are the social services, job search and recruitment, as well as the education and training. Now, for social services, because of the Chinese New Year Festival, we observed some positive changes and growth. And for job search and recruitment because March typically is the peak season for job recruitment. And for education and training because people are beginning to actually educate themselves and are looking to improve their overall vocational skills given the weakening macroeconomy environment. And as a result, that stimulated the growth of our growth in the segment of education and training.

Now for our online gaming segment, it performed also very well because

our game manufacturers or the game platforms are willing to put in more advertisement investment or budgets during the Chinese New Year point in time. And also for our IT and 3C electronics, a lot of the cell phone manufacturers are gaining more recognition or giving us more recognition for content-oriented or content-based marketing solutions. And as a result, our CCS were able to grow quite significantly for the segment of IT and 3C electronics. Okay. There are also several segments that have been impacted negatively. For example, the logistic and supply chain were impacted very significantly because of the pandemic. And so as a result, the e-commerce vertical has experienced negative growth. And also in terms of the household personal care, as well as the beauty industry, their budget has been shrinking as a result of the pandemic. And we believe that the emerging domestic brands are now entering an adjustment period of consumption weakening.

Then this is Q1. Speaking of Q2, we also see that from the perspective of展望, there are several areas that may be greatly affected, including e-commerce. And also, that was about our Q1 observation. And for Q2, we expect to see some negative impact in the following segments, including e-commerce, life services, healthcare, household and personal care products, as well as auto. And for industries that we believe still have some growth potential for Q2 will be IT and 3C electronics, online gaming, as well as education and training. 嗯,那我在简单的这个说一点细节,就是负面影响这几个行业像电商。 Just to give you more color on the above mention, for e-commerce, for example, big e-commerce players were still very cautious about their ad dollars.

because of the pandemic because of the constraint in the supply chain as well as the logistic system and so we expect to be able to keep maintain some growth but it should be well we expect it to be impacted by the overall industry development um Now another segment that we just mentioned would be or is expected to be negatively impacted is offline services such as daily life service as well as healthcare service because the majority of those businesses rely their operation offline and because of the lockdown policy here and because of the pandemic impacts Some of the clients will have to pause their advertisement investment, and as a result, the overall development for the whole industry going into Q2 is expected to be impacted.

OK.

And also for the verticals of household and personal care, as well as the automaking industry, we believe that they will still be negatively impacted going into Q2 by the pandemic. For big companies such as L'Oreal, Unilever, they were seriously and significantly impacted by the Shanghai lockdown policy. And as a result, they have reduced their ad budget. And for the automaking industry, as a result of the postponed of the Beijing Auto Show, the overall new product launches in this industry were postponed as well. And also, nationally, their ad budget were reduced or postponed. And we would see that 100 products that are priced below 150,000 actually were more impacted by the chip supply shortages, and as a result, their ad dollar were reduced as well. And because of the fact that we were not able to actually visit the clients or the customers face-to-face offline or on-site, we were not able to greatly improve the marketing conversion rate.

Okay. I think there are several areas where there is an opportunity for growth. One is IT and 3C, one is games, and the other is training. In the IT3C field, the industry has maintained a certain level of growth in Q1. The large industry continues to grow from Q1 to Q2. However, due to the impact of the supply chain on many IT3C merchants, they cannot send goods or there is no goods, so they pay more attention to the effect of short-term sales. The attention will be significantly increased. There is some pressure on us, but in general, this is an industry with opportunities. The game is not greatly affected by the epidemic. Taiwan Taiwan Taiwan Taiwan

And as I mentioned, there are three segments that we believe have a lot of growth potential, including the IT and 3C electronics, online gaming, as well as education and training. Now for IT and 3C electronics, we believe that they were able to maintain some sort of growth for the first quarter of the year. So overall, the industry is expected to still maintain some degree of growth going into Q2. But for big players, Because of the constraint in the supply chain shortages, they were not able to really release a lot of the products into the market. And so their ad budget, you know, naturally was impacted negatively. And with this kind of macro environment, they were actually placing more focus on short-term marketing activities. advertisement rather than long term and that definitely posed some challenge to our content based kind of marketing platform and solution but overall we believe that the segment of IT and 3C electronics is going to still be able to maintain some degree of growth. Now for the segment of online gaming we now are seeing the recovery of the market as a result of the ending of the licensing freeze of new games But it will still take some time for the matching of the new product launch and the marketing events. And so we are expecting to see some growth for this particular segment going into Q2. And for the third vertical that we mentioned that will have a lot of growth potential is still the education and training. As I mentioned, because of the pandemic, because of the weakening of the overall economy, people are beginning to turn inwards and focusing on personal growth. And so naturally, education and training will receive a lot of growth drivers and they will actually put in more focus on the short-term as well as long-term marketing effect. And we believe that we can benefit from the overall development of the industry.

Okay. And so overall speaking, our expectation for Q2 for our advertising and CCS solutions will be still quite cautious and reserved. We believe that they will gain about double-digit growth.

YOY for the second quarter, especially for GD+, which will be expected to maintain quite a fast growth momentum.

Okay.

Steve, I hope I answered your question. Thank you.

Thank you. And our next question comes from Ashley Xu with Credit Suisse. Please go ahead.

I just want to check on our latest progress about visualization, how is user feedback, and also what's our plan for the rest of the year. Thank you.

Okay, this is more like a question for the user. First of all, our video has become part of an indispensable part of the content ecology. The penetration rate of the entire video is that the penetration rate of consumption has reached 45%. How to say this is that it has entered a relatively stable positive cycle. So thank you for the question.

Actually, video has become an integral part of Zhihu's content ecosystem, and our consumption rate amongst the DAU for the first quarter of video has already exceeded 45%. This definitely marks a key developmental milestone on the platform, because it tells you it tells us that we have entered a positive cycle of development for our video content um

So now we are on this street and today, this video is with our community. In fact, it has also been further integrated into the company. It is more integrated. So in this sense, this video is through the further integration with the community. Got more negative energy and further strengthened.

And so for the first quarter, under the strategy of Ecosystem First, we are able to optimize our overall experience of video for the content creators, including, for example, optimizing the overall style of the videos, as well as encouraging more original content or original high-quality videos from our organic content creators. And with some simplification of the products, we are able to make the video creation process easier and also more refined as well. And going forward, we will continue to integrate and basically integrate the video together with other content formats on the platform so that we can continue to empower our content creators.

In terms of video creation, it is still based on content. In terms of consumption, We have upgraded the algorithm and continued to upgrade it. On the one hand, we have made a personalization of the frequency adjustment for users with different video preferences. On the other hand, we have also carried out a better division of videos of different quality. We are further focused on suppressing these relatively low quality content. In this way, this is actually a healthier and more distributed way for users to distinguish their preferences. Now users have been raised to recommend Okay.

Now, what I've mentioned is about the content of video themselves. It's mainly about content creation. However, on the consumption side, we also have done a lot of adjustment and upgrade as well. For example, we've optimized our algorithm in order to better match our users' preferences and be able to actually make lots of customization or individualized recommendations according to different users' preferences. And also, we categorize different videos by the quality of the videos And we have been very, very strictly in screening out and cracking down some of the low-quality videos as well. And as a result, we are able to cultivate a very healthy, sustainable kind of video consumption habit from our users that can be very sustainable, and that is definitely their preference base as well. And right now, a lot of our users are already very used to consuming the videos that we recommend to them based on their preferences. And over the last period of time, we have also optimized the video tab as a function on the platform as well. And that didn't really harm or compromise our video consumption.

On the one hand, this video is indeed growing in a relatively healthy melting community. On the other hand, this year, the whole video is a next step strategy. In short, the core is vertical and original sound. In fact, it has been fully reflected in our entire marine plan. What I want to say is that the community of Zhihu is a multi-border creative ecosystem. In our contract, in the past, the title and video title of our contract were actually very popular. This is actually one of our characteristics. You will find that the creators of Zhihu today are relatively well-versed. Our idea is that we don't have to distinguish the creators from each other. In fact, it's not like that. We are actually giving people a bigger advantage in terms of tools. Then we can make a difference in operation and product experience in different consumer scenarios.

And so as you can see, our video content has become an integral part of our society, of our ecosystem, and has been promoting the development of our ecosystem. And so back to your question regarding the future developmental strategy of our video content, I think I can summarize it as two key words. One is vertical development. The other is original creation, which can be actually reflected in our latest launch, our newly launched high-end plant or high-end projects. So going into the second half, I think Again, I just want to emphasize that Zhihu is a multi-format platform that definitely can support the development of the video as well as our original media format, which is text and images. And today, as you can notice, a lot of our content creators are actually very versatile. They are not limited by any format of just, for example, text or an image or a video in general, and they can do either one. or any one of those. And so we actually do not agree with the categorization of our content creators by format itself, by media format itself. We think what we can do going forward is to integrate everything onto the platform so that we can actually continue to empower our content creation. And what we can do as the platform is to differentiate different consumption scenarios and to better help and empower our content creators using multiple formats.

In fact, this video is actually a very important part of our多媒介. Then I can add some more examples to introduce the changes in the creation and consumption of the多媒介. For example, you will see a lot of improvements in our recent live broadcasts. The original creator of this picture is also very good at playing in it. In fact, there is a live broadcast on the original table at 8.30 this evening. You have to know that the smart desktop has been based on text for many years. But in the live broadcast of the desktop, the output power of the creator is also very good. This is a very obvious difference between the traditional live broadcast and the live broadcast of the desktop. The content of the live broadcast of the desktop is very strong, and then when it is over, the creator will add text content to edit it.

Now, let me just give you more examples to illustrate how video has become an integral part of our platform. For example, we've done a lot of upgrade on our overall content format, including using a live streaming platform. to upgrade the overall user experience. And you can see a lot of the original content creators that mainly focus on text and images creation were also very good at live streaming and doing video live streaming as well. And actually, as we speak tonight at 8.30 p.m., tonight we have we actually have an event that's called Roundtable Discussion on our Juho platform, and a lot of our content creators were so good at the discussion that they not only were able to focus on the topic with video, the format of video and live streaming, but also they were able to do a lot of output afterwards in the format of text and images as well so that they can continue to distill some of the key ideas being discussed during the Roundtable. Jason, I hope I answered your question. Thank you. I hope I answered your question. I hope I answered your question.

Thank you. And our next question comes from Yiwen Zeng with China Renaissance. Please go ahead.

Hello, Mr. Guo. This is a very quick question. In our prepared remarks, we mentioned that we want to improve operational efficiency. Can you briefly talk about some of the key points of the reduction in efficiency, such as labor or some of the financial expenses? Thanks for taking my question. So in previous remarks, you mentioned we want to improve operation efficiency. So can you elaborate on the key areas of such optimization? For example, whether that's headcount optimization or optimization. How should we think about market trend down the road? Thank you.

OK. I will try to make it clear for you to understand what we are doing. First of all, I want to make it clear. What is our standard effect? It refers to our business upgrade and our management upgrade. These two things. Because only through the real business upgrade and management upgrade, the various numbers of the standard effect are sustainable.

Thank you for the question. Now about cost reduction and efficiency improvement. I want everyone to understand that the core of doing that, or the final goal of doing that, is to upgrade our business as well as our management. Because only by doing that can we achieve a sustainable way of long-term cost reduction and efficiency improvement.

Let me give you an example. Let's take our community business as an example. In the first quarter, including the second quarter, To put it simply, there are three steps. Okay.

Let me give you an example in terms of our community development. For the first quarter and going into the second quarter, we have taken three steps.

The first step is to integrate video and community organization early on. Last year, at the beginning of our video business, we were a relatively independent team. So the purpose of our business is to make it run faster in this way. But today, when we record this video, the consumption rate of the video has actually reached 45%, and it has become a part of the video system relatively steadily. So we put it in a negative form. This combination is more in line with our expectations.

So the first step is to really integrate our video together with the community. Last year, when we first launched our video format, it was in a pilot stage of development, and that kind of independent, closed-loop development was very beneficial for the fast growth of our video content. Right now, for the first quarter, we have already achieved a lot of growth. For example, the consumption penetration rate of video has exceeded 45%, and that shows that video has already become an integral part of our ecosystem. And so we believe that going into the second quarter of the year and also the rest of the year, an integration of the video content together with the community will be more empowering for all of the content creators.

The second step is actually based on the first step. We have an integration of the entire community business. This allows us to, for example, network investment, our operation, our recommended products, basic products, our content understanding. In fact, it also includes our business content. The communication path of these teams will become shorter. Then further improve the communication efficiency and open up

And the second step is definitely built on the development of the first step. And so for the second step, our goal is to further integrate the whole community in different aspects of our daily operation. And as a result, we believe that we can greatly enhance the communication efficiency for our operational staff as well as other parts of the business, including the communication between different units. And we can actually integrate the data between different units and different parts of our business so that overall the efficiency of operation and communication can be enhanced.

The third step is actually on the basis of this organization upgrade, we are upgrading or saving our work methods and processes. Overall, it is more inclined to the drive of data and products. In the end, it will point to a better output of a business.

And the last step is also based on the development of our second step, which is the organizational restructuring of our organization. And so for the third step and the last step, the goal is to better construct or reconstruct our working mechanism so that we can continue to be driven by our data as well as our products in order to achieve a better business.

So what I want to tell you is that we are actually in the process of one, two, three, We are very strict about our high-count deep processing and then in today's this this this now this this number with the beginning of the year, we actually have a relatively obvious change. Our high-count does not need so much. At the same time, in this process, we have also been very strict and careful with the cost of each link, so this will also bring a structural adjustment and reduction.

And also while implementing these three steps, we were able to really review our headcount and really streamline some of the headcounts that were unnecessary to our business. And so compared to the beginning of the year, definitely our headcount has changed quite significantly And also in terms of the expenses that we have been spending on different steps of our business and different parts of our business operation, they have undergone a very stringent review as well. And as a result, we are able to achieve a lot of structural upgrade in terms of our overall spending.

The logic of other teams is similar to this. I will not go into the details. After a while, our company will have a Okay.

And other teams and other sort of business unit optimization is very, very similar to this overall logic, so I'm not going to elaborate on those right now. So that's why we are very confident that in the near future we can really upgrade our profitability. And so going into the second quarter as well as the second half of the year, we believe that we will continue to monitor very closely our operation in terms of the operational expenses as well as the cost control. And so the cost reduction as well as efficiency improvement will remain our work priority for the remainder of the year as well as for the year of 2023. Thank you. I hope I answered your question. Thank you.

And ladies and gentlemen, this concludes today's question and answer session. At this time, I will turn the conference back to Jingjing for any additional or closing remarks.

Thank you once again for joining us today. And if you have any further questions, please feel free to contact our IR team directly or TPG Invest relation. Thank you.

This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.