Zhihu Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Juhu Inc. second quarter and half-year interim 20-second 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'd like to turn the conference over to Ms. Jingjing Du, Head of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone. Welcome to our second quarter 2022 Financial Results Conference Call. Joining us today are Mr. Zhou Yuan, Chairman and CEO of Zhihu, and Mr. Sun Wei, our CFO. Before we start, we would like to remind you that today's discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today's announcement and this discussion. The company does not undertake any obligation to update this forward-looking information except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.jehu.com. I will now turn our call 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 Zhihu. Thank you for joining Zhihu's second quarter 2022 earnings call. The recent COVID-19 pandemic situation and the macroeconomic condition created challenging environments in the second quarter. Against this backdrop, we focused on retaining high-quality user growth in a sustainable and efficient manner. Confronting these uncertainties, we firmly executed our Community Ecosystem Comes First strategy and improved business efficiency with optimized organizational structure. In addition, we continue to expand our fulfilling content offerings, enhance creators' experience, and strengthen community culture. Together, we efficiently draw quality growth in our user base improved engagement and stickiness, and bettered our bottom line performance. In Q2, our average MAU grew by 12.3% year-over-year to 105.9 million. And from January to June this year, the average time spent per DAU increased more than 12%. We are delighted to see our content creator becoming more active and creative, contributing more high-quality, fulfilling content to our library. In the quarter, the average BAU of our high-ranking content creators increased by nearly 50% compared to the same period last year, with the average creation volume per creator almost doubling. With all of the effort we've made to enhance our community ecosystem, we are delighted to see fruitful rewards, not only in our community ecosystem centered around our users, creators, and content libraries, but also in our business results. In Q2, despite many uncertainties, our total revenue reached RMB 836 million, growing 31% year-over-year, and 12.5% quarter-over-quarter, while our net loss narrowed by 24.4% from the first quarter of the year as a percentage of the total revenue. Chihuahua's diversified revenue structure was a critical force in achieving remarkable top-line growth amid Edward's macro conditions, paid memberships in the quarter rose significantly by 75.1% year-over-year and contributed 32.4% of total revenue. This phenomenal growth clearly demonstrates the strength of content-centric business models and the resonance of our fulfilling content with users. We also saw strong growth in Common Commerce Solutions, or CCS, which grew 15.9% year-over-year, retaining strong growth momentum relative to the wider industry. And our vocational training services are rapidly emerging as a new growth driver, contributing 5.5% of our total revenue in the quarter, with a six-fold year-over-year growth. Last year, we set 2022 as a transition year, focusing on the execution of our community ecosystem come-first strategy. We are now more than halfway through 2022. Given all the macro-level unexpected developments in the first half of the year, we have never been more sure that by investing in high-quality growth and focusing on achieving profitability in the near term will make our community and business more sustainable for the long run. Now, I would like to go through our business in detail, covering content, users, and monetization. Content. Fulfilling content that broadens horizons, provides solutions, and resonates with users is the foundation that drives sustainable community growth. By the end of Q2, the cumulative pieces of content in our community reached 551 million, including 462 million questions and answers, representing a year-over-year increase of 31% and 26%, respectively. In Q2, we continue to implement the scenario-oriented approach to fulfilling content creation in various verticals. This approach has worked especially well in scenarios surrounding career development and family needs. For example, during the time of a once-yearly National College entrance examination , search traffic surges with parents and students actually seeking knowledge, experience, and insights to help with important decisions around this life inflection point. To meet this need, we broaden and deepen related content coverage by enlisting experienced users who previously sat for the exam, raised questions, and sought scorecard information on our platform to become scorecard answerers. and provide help to others in our community. According to the summer report on college selection and application 2022 we released in July, the total number of questions on college selection and application related topics increased to approximately 7.7 million. And the total page views for GoCo related content grew a remarkable 57% year over year to exceed 2.5 billion. After the exam period, we released more relaxing content in tune with the summer vacation and launched a well-received series of online summer events in categories including sentiments, movies and television, fashion, ACG. It is worth mentioning that the laughter and forgetting on Gaokao topic in Chinese Gaokao Xiaolangshu and high-quality video live content we produced during the summer break was not only well received by the young generation, but also resonated among our mature users. In June, we launched an online learning portal on our website to further promote our vocational training related content portfolio. The learning portal offers hundreds of online educational resources in both video and text and picture formats. The robust content library contains both career skill development and personal enrichment learning resources. Some examples include patent training and English exam prep, as well as photographic and pop music educational content. The learning portal has been well received and significantly drove engagement with our target users for the vocational training services business. Vocational training content is evolving into an important part of our closed-loop monetization ecosystem. The second part is about users. In our oriented content cultivation in various verticals and enhanced recommendation algorithm effectively boosted the demand for more quality content consumption. During the quarter, we saw encouraging performance across a range of user growth metrics, including our user base, user consumption experience, user engagement and stickiness. The average MAU for Q2 increased by 12.3% year-over-year to 105.9 million. Average monthly viewers for the quarter exceeded 647 million, rising by 26.6% year-over-year. We continue to see our user base remain young and a general balance, with a robust user growth trend from the second in the lower tier cities. We're also seeing inspiring growth across other closely watched key metrics used to inherently evaluate the well-being of our community. These include users' activities, time spent, retention, and engagement. Moving to the content creator side, enhancing creators' creating experience and financial reward is one of the pillars to our strategy. Our high-end plan for creator support scheme is a critical part of this effort. Within one quarter of the plan's release, we received overwhelmingly positive feedback from creators with survey results showing more than half of the high-ranking creators have experienced strong traffic support. On the financial side, we are gratified to see that both the number of creators who earned financial income and average income per creator in Q2 retained strong growth momentum on a year-over-year basis. At the start of Q1, we set a target to help more than 100 creators earn more than 1 million RMB in a year, while our paid membership program. We are proud to announce that we have progressed much faster than expected. The next part is about community culture. During the quarter, we further reinforced our community compliance to improve product features and technical infrastructure, such as upgraded privacy protection features for users. and copyright protection features for our content creators. We also increased thresholds to enhance youth protection in verticals such as esports. Our community culture and a strong brand further strengthen our content ecosystem and we are firmly demonstrating our conviction to uphold our social responsibilities to maintain a healthy community culture and to promote rational optimism at the social platform and content community. As we look at the second half of the year, we will continue to iterate our multimedia infrastructure and optimize product offerings. We believe we can further unlock our value in more commercial opportunities by better addressing our users' content consumption needs. In particular, we see our diversified content formats providing greater potential to address users' needs in multi-scenarios, including thoughts and live streaming. which are both gaining in prosperity among users. We believe that the diverse and enhanced monetization capabilities will position us stronger and more resilient for long-term development. Now moving to financials. Our CFO Wei will go through our financial results in detail later in this call, but I'd like to first highlight a few points how our content-centric monetization has proven itself resilient and strong in the second quarter. As many industries were heavily impacted by the ongoing COVID-19 outbreaks and softer macro environment, advertisers and business partners became more cautious in online marketing spending and placed greater weight on integrated marketing solutions that deliver more comprehensive influence on targeted consumers. Our community-based ecosystem is an ideal vehicle to accomplish this goal. Through our content commerce solutions and advertising, we successfully increased our recognition from brands and merchants and attracted their market spending despite the challenging market conditions. The top five industries in revenue contribution in Q2 came from e-commerce, IT and 3C, cosmetics and skincare, internet services, and automotive. There are two drivers raising the ceiling of CCS. In Q2, we continue to motivate our creators by publishing the Jihoo influence and growth list. The newly listed commercial content creators in the second quarter came from various industries, including IT and 3C, fashion, automotive, maternal care, among others. At the same time, Qi's platform maintained its role to effectively connect content creators with brands and merchants. The number of creators who have joined this platform and earned income through CCS continue to grow, both on a year-over-year and quarter-over-quarter basis. We also further improved our commercial content distribution efficiency and further upgraded the assessment system for commercial content by implementing fulfilling content standards. Let's talk about advertising. Despite the fact that brand advertising budgets were negatively affected in Q2, our IP-based marketing campaign provided a unique value to advertisers. By leveraging our massive user base and trustworthy community culture, our multiple IP-based marketing campaigns have great influence on users' mindset to creative and fulfilling content. During Q2, our curiosity lab in Chinese . This series partnered with one of our clients, a smart kitchen appliance manufacturer, to design, fly, and execute a fun and imaginative campaign centered around playful, quirky questions tied to their products and business. The campaign was a huge success. One of the questions that generated huge engagement was, if your kitchen smoke could sing, what opera would it sing? The relevant content under this question attracted nearly five million views, and the accompanying experimental video we made has been viewed over a million times. Paid membership retained strong momentum during the quarter. Among Juhu's premium paid content library, our Yen columns are particularly popular owing to the high quality of original work from our community creators. One such creator, the ER doctor, Mr. Li Hongzheng, known in the Chihuahua community as the Dr. House. We were attracted by his talent while big data and invited him to start his own column in the community. Stories from the emergency room. Since then, he has become one of our top columnists, attracting tens of millions of clicks. There are many others like him. The value of this mechanism is more than allowing us to scout for talented creators. It also provides a steady stream of creative inspiration for our creators. In the second quarter, the financial income earned by our premium content creators increased by almost 80% compared to the same period of last year. This community-based mechanism not only differentiates us from other premium content providers, but also offers strong potential to drive the vitality of our monetization ecosystem. At the end of Q2, our average monthly paying members reached 8.46 million, and in July, the number exceeded 10 million. This growth demonstrates the remarkable success of our content-centric business model. It is encouraging to see a more diversified paying member base. and a growing number of male users captivated by more content relating to history, fiction, and true stories in our premium library. Male users have now grown to about 25% of our total paying members. Our rapidly developing vocational training business maintained robust growth momentum during Q2, contributing 5.5% to the total revenue. In the second quarter, we further enhanced the sales and CRM system for the business by strengthening our technical capabilities. In addition, we continue to expand the number of course offerings, including newly launched courses in engineering and design. Our growing library of diversified vocational courses helps further expand our user base. as witnessed by the number of paying users in this business tripling over last year. We view this business as an emerging growth driver with huge potential, and we believe it will make further positive contributions to our community ecosystem. And marching forward, by leveraging our self-reinforced content ecosystem, combined with the enhanced commercialization capability, we will be able to drive the sustainable prosperity of our community ecosystem. At the same time, we will continue to implement prudent cost controls to achieve a rational balance between user growth and the profitability in the long run. This concludes Mr. Zhou Yuan's remarks. I will now turn to our financials. We are delighted to report another strong quarter despite the resurgence of COVID-19. and the subsequent business disruptions in major cities across China. Our confidential business model continues to show its resilience, as well as exciting growth potential through the impressive execution of our community ecosystem comes first strategy. Our revenue for Q2 reached RMB 836 million, representing a year-over-year increase of 31%. To whose overall top line growth reflects the strength of our diversified revenue drivers, the CCS and our advertising business combined contributed 57.2% of total revenue in the quarter. Our paid memberships and the vocational training business together represented 38% of our total revenues, further demonstrating the value of diversified drivers within our monetization ecosystem. CCS revenue alone achieved a year-over-year growth of 15.9% and accounted for 28.8% of total revenue. In late Q2, our CCS reacted quickly and captured the demand uptrend in the market. As the macroeconomy started to show an upward trend in June, the effectiveness of CCS services was validated, recording increases in both the number of end customers and the average spending per CCS customer. We have seen a negative impact on the advertising market since April due to the COVID-19 resurgence. Some of our brand marketing customers delayed or canceled their marketing campaigns originally scheduled for Q2. As a result, our advertising revenue accounted for 28.4% of total revenue in a quarter. down 4% compared to the same period of last year. Our paid membership services recorded a 75.1% year-over-year growth rate in revenue, reaching RMB 271.2 million in Q2. The average number of monthly paying members in the quarter hit another record high of 8.46 million. with a penetration rate of 8% of average MAU. Our fledgling vocational training continued its revenue growth momentum in Q2, and it increased six times year over year in revenue. During the second quarter, our growth profit was RMB 400 million, with an improved growth profit margin to 48% compared to the previous quarter. The quarter-over-quarter improvement in GP margins was due to our diligent, ongoing cost control discipline and efficiency improvement. Across the wider industry, our gross profit margins continue to remain at high end. Throughout the quarter, we continue to look for ways to better optimize our operating expenses structure and improve operational efficiency. Our total operating expenses for Q2 or on the 860.3 million, with improved operating margins on a sequential basis. As a percentage of total revenue, social marketing expenses decreased over 5% compared to the same period of last year, thanks to our optimized expense structure with targeted spending on our promotion and advertising to adapt to the changing market conditions. At the same time, we selectively invested in our R&D capability and improved R&D staff incentives to a better organized employee benefits plan. Accordingly, our R&D expenses as a percentage of revenue increased 7.8% year-over-year, while G&A expenses decreased 13% as a percentage of our revenue. Our net loss was $487 million in Q2. and narrowed by 24.4% as a percentage of the total revenue from the first quarter of this year. And our adjusting net loss, which primarily excludes share-based compensation expenses, was RMB 443.8 million in Q2. As of June 30, 2022, the company had cash and cash equivalents, term deposits, restricted cash, and a short-term investment of RMB In late May, we announced an up to $100 million share repurchase program. And as of June 13, 2022, we have repurchased approximately 0.3 million Class A ordinary shares at a total cost of $1.1 million. This concludes my prepared remarks on our financial performance for this quarter. Let's turn the call over to the operator for the Q&A session. Thank you.