Zhihu Inc.

Gentlemen, thank you for standing by, and welcome to the QHU Inc. Third 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 third 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 a 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.jihu.com. I will now turn the call over to Mr. Sun Wei, our CFO.

Thank you, Sun Wei. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, founder and CEO of Ji Hu. Thank you for joining Ji Hu's third quarter 2022 earnings call. We delivered another quarter of a solid execution on our community-to-system-first strategy and are delighted with the strides we have made promoting our community's prosperity. Starting from the beginning of this year, we shifted our strategic focus toward growing quality users and further bolstering the strength and resilience of our content-centric business model. In Q3, the excellence rate of our app users FDAU over MAU reached its highest level in the past three quarters of this year. And the time spent for daily active users climbed both year-over-year and quarter-over-quarter. Faced by this still challenging microenvironment, our community ecosystem demonstrated strength and resilience during the third quarter. Program deals were up by double digits on a year-over-year basis as we continued to expand and optimize our counteroffering and enhance our content creator's user experience. Furthermore, our initiative to heighten operating efficiency drove significant improvements in our bottom line performance for the quarter. In Q3, total revenues reached RMB 911.7 million, increasing by 11% compared with the same period last year, and net loss narrowed by 39% quarter over quarter. Our paid membership retained robust growth momentum, increasing by 88% year-over-year, and contributed 37% of the total revenue during the quarter. Meanwhile, vocational training services continued to accelerate their contribution to total revenue, with a 458% growth rate year-over-year. Continuing efforts to refine our business line and improve operational efficiency during the quarter helps make our ecosystem stronger and more resilient. The Juhu community is thriving and becoming more healthier and healthier. The results of our efforts give us further confidence to invest in long-term growth while striving for profitability in the near term. Now I'd like to share some more details on third quarter achievement. The first part is by users. Our differentiated, fulfilling content and a unique content-centric ecosystem not only resonates with users, but also well-positioned us to address their evolving demands. In turn, increasing user interaction attracts more content creators and inspires their creation, driving the healthy and sustainable community growth. With this in mind, since the beginning of this year, we have shifted our focus from user expansion to quality user growth, which has produced remarkable achievements in the third quarter. On top of our record-high activity rate for monthly active users, DAU over MAU, in Q3, the time spent per user grew by 26% year-over-year and 14% quarter-over-quarter, reaching 29 minutes Average MAUs were down in Q3 by approximately 4% year-over-year, as expected. We continuously expand the breadth and depth of our high-quality content to support user interaction and introduce timely and fulfilling new content. For example, our dot-com-related content significantly drove up the time that young users spend on our platform during the summer vacation period. Our timely content offerings during the quarter not only attracted more male users, but also encouraged them to engage more deeply in rational discussions within the community. In Q3, we also continued to innovate in content format development, aiming to encourage user interaction in more diversified content formats. In particular, our new thoughts format has caught on quickly among creators and users alike. Thanks to its flexible nature and the broad appeal, it's now becoming a more frequent format for both content creation and content consumption. Accordingly, in Q3, the new active follow, one of the ways that our users interact with each other, grew by 16% year over year and 19% quarter over quarter. Second part is about content. We believe that when we better meet users' demand for more high-quality content, higher-quality user growth is a natural result. In Q3, we continue to improve user experience and enhance our competitiveness by expanding our content offering, diversifying our multimedia content formats, and further enhancing our recommendation algorithm. As of the end of Q3, The cumulative pieces of content in our community reached 579 million, representing a 26% year-over-year increase. Of these, 485 million were questions and answers, representing a year-over-year increase of 22%. Our scenario-oriented content cultivation approach has proven to be effective, not only in exploring and satisfying the demands of our various user groups, but also in motivating content creation and boosting content consumption. For example, during the last summer vacation period, we presented Wild Journey's talk, Huang Ye Hui Tan, an eight-part series of high-quality, self-produced programs, wherein our content creators, Li Xueqin and Li Sunwei, exchanged their thoughts with other young people on how Generation Z sees the world. Through this innovation format, we were able to share a brand new world from Gen Z's perspective and help our viewers better understand their view on life. The series' resonating content attracted many young viewers, generating a DAU penetration rate of 28.4% for the quarter. Content offerings associated with self-improvement also proved popular with users between 18 and 25. Driven effectively by these scenario-oriented activities, the percentage of new users between 18 and 25 among our total new MAUs was four percentage points higher compared to the same period last year. In September, we further expanded our content offerings in our career development segment content formats, including video, live streaming, thoughts, and text-and-picture TNAs. The expanded content format generated huge interest. For example, the thought-provoking video speech, How We Should Get Along With Our Work, presented by historian Mr. Xu Zhuoyun, produced over 20 million views within just two weeks. More than 13% of our DAUs consume the career development-related content, and their retention rate was higher than that of our overall DAU by 15 percentage points. Moving to content creators. Our content creators are the most important asset in driving sustainable growth within our community ecosystem. At the end of Q3, our cumulative number of creators has reached a new high. reaching $61.2 million, a year-on-year increase of 15%. We are committed to providing our content creators with an enhanced creation experience as well as fruitful rewards. We work toward this goal by leveraging the solid foundation of our content-centric ecosystem and by providing a broad array of creator-centric programs. In Q3, We are delighted to see thousands of content creators from a cross-section of ranking levels and verticals, including e-sports, career development, and education receive financial incentives from the RMB 100 million fund and the QG plan. In Q3, average income per content creator increased by 47%, compared with the same period last year. Furthermore, On September 13th, we officially launched the Deacon Prize , a new fund program under the Gigi Plan. The Deacon Prize will award specific subsidized to the top 10 content creators who make significant contributions in the field of science or humanities. The third part is about community culture. In line with our community ecosystem first strategy, We are committed to better serving our users and content creators with clearer community rules and guidance, better products and features, and enhanced protection. In Q3, our regular surveys showed significantly increased user satisfaction with our community governance and services. In addition, these surveys also indicated a significant improvement in content creators' net promoter scores across an array of sub-categories scores, including creating tools, growth guides, creator benefits, and copyright protection. As a leading online content community, during the quarter, we continue to fulfill our social responsibilities by leveraging our technological capabilities to promote rational, multidimensional, and constructive discussion on our timely content offerings. For example, we enhanced the emotional monitoring function on our Zhihu hot list to ensure a professional and a rational community environment. Next part is about monetization. Our ever-growing content library, thriving creator ecosystem, and the flourishing community are the assets that differentiate us in this fast-evolving and highly competitive market. During the third quarter, Our high-quality, content-centric community drove sustainable improvement in our monetization ecosystem, enhancing the resilience of our business model and creating new growth drivers for our longer-term development. Our paid membership has maintained a year-over-year growth every quarter for the past three years. In the third quarter of 2022, revenue from paid membership increased by 88% year-over-year. contributing 37% to our total revenues. At the same time, our average monthly paying users exceeded 10 million for the quarter. These achievements were driven by the expansion of our premium content library, especially in the vertical targeting male users. Meanwhile, the enhanced influence of our premium content endorsed with the exclusive e-book rights also contributed to this growth. To better satisfy users' demand for a sustainable supply of premium content, we further strengthened support for premium content creators to encourage their creation efforts and enhance their creation experience. In Q3, we were pleased to see an increasing number of our premium content become mature commercial IPs. This in turn rewarded their creators with a better income. Furthermore, Upgraded copyright protection features help to deepen creators' trust and reliance on the Drupal community. In the third quarter, the average income earned by premium content creators increased by almost 30% compared to the same period last year. Earlier this year, we set a target to help 100 creators earn more than one million RMDs while on a paid membership plan. We are now setting a new target and planning to launch a new ambitious program to reach it. A new super novel program established under the future plan will have greater funding resources and will aim to help 500 content creators earn more than one million RMB over the coming three years. We first established our vocational training and business team in 2019 to better meet our users' evolving needs for knowledge-related content. Now, after nearly three years of development, we are well-positioned in the rising demand market with our trusted brand, improved technical capabilities, and a mature team structure. In the third quarter, revenue from our vocational training business quadrupled year over year and contributed 9% to our total revenue, clearly cementing this business segment as our emerging growth driver. During the quarter, we continue to expand our course offerings, basing our users on the go-need scenario, and in two major categories, academic improvement and career promotion. We further enhance our technical capabilities, including our CRM system, and improve our operational efficiency to better support the robust growth of this business. Our effective customer acquisition strategy paired with diverse, high-quality programs, drove a 300% year-over-year increase in vocational training paying users in the quarters. In Q3, we acquired a new vocational training brand, Yiqi Call, that specializes in professional teacher qualification certification. In doing so, we further broadened our vocational training program coverage to better meet our users' needs. we will continue to explore greater growth opportunities to drive the sustainable development of our community ecosystem. Now, moving to our advertising and accounting commerce solution. Based by challenging micro-dynamics in Q3, Shibu continues to gain traction in marketing budget share and includes greater recognition from brands and merchants. Our CCS and advertising business maintain its growth in our leading industries, including IT and 3C, automotive, and games. The quarter's top five revenue contributors for CCS and advertising were IT and 3C, cosmetics, e-commerce, automotive, and education. We continue to upgrade our chief platform in the third quarter with additional improvements in the platform infrastructure. We also released a new version of the commercial value index to further improve matching efficiency between brands and content creators. Due to continuing weak market conditions for online advertising, CCS revenue decreased slightly in Q3 year-over-year, but showed a double-digit quarter-over-quarter growth Total income earned by content creators through the chief platform continues sustainable growth in Q3. We have long been dedicated to delivering better marketing performance through technology and innovation. As such, our inventive IT-based marketing campaigns have become an effective extension of our traditional advertising program. The IP-based campaigns we released, including Curiosity Lab, Auto Lab, Ingredients Lab, and the G-Trial Lab, have gained great market recognition by advertisers in various industries, such as consumer goods, automobiles, and e-commerce. In Q3, we launched a new Wizarding Factory IP campaign. Content creators, as experts in different fields, are encouraged to visit the factory and R&D facilities of different brands seeking answers submitted by our users. This campaign has received positive feedback from both our users and the brands. The resulting high-quality content helps our users better understand these brands' products and enhance their trust in each brand through transparent communication. To sum up, Our long-term strengths are impact, and our fulfilling content and user quality are well recognized by brands and merchants. We expect that we will continue to win market share in the growing content marketing industry. And moving forward, we will continue to expand our portfolio of marketing solutions to empower our clients in reaching their goals. Meanwhile, we will continue to enhance Juhu's competitiveness to broaden our fulfilling content, drive user engagement, increase operating efficiency, and further enhance our trustworthy community culture. The road ahead is long and will involve many challenges, but with determination, perseverance, and our goal insight, Zhihu is well-positioned to forge a path to growth and profitability. This concludes Ms. Zhou Yuan's remarks. will now turn to our financials. In the third quarter, our community ecosystem first strategy continues to effectively strengthen the resilience of our content-centric business model. As evidenced by our solid operating and financial performance, total revenue grew by 11 percent year-over-year, reaching RMB 911.7 million in Q3. And our net loss margin narrowed significantly by 26 percentage points over Q2, thanks to our disciplined cost control measures. The strength of our multiple growth engine in the content-centric business model once again proved itself in the third quarter with a further balanced revenue structure. CCS and our advertising business combined contributed 51% of our total revenue. At the same time, the PIP membership and the vocational education accounted for 37.9% of total revenue, respectively, in the quarter, up 4.3 percentage points quarter-over-quarter, respectively. Our PIP membership maintained rapid growth momentum in Q3, with revenue increasing by 88% over the year to RMB $3.4 billion. The average number of monthly paying users reached a record high of 10.9 million, representing a percentage rate of 11.2% among the total average MAU in the Zhihu community. Notably, the revenue from our emerging growth engines' vocational training was an over fourfold year-over-year increase to RMB 78 million in the quarter. Revenue from CCS and our advertising business came under pressure in Q3, impacted by the overall weak market conditions for online advertising. Total combined revenue for CCS and advertising for the quarter was down 23% year-over-year and 3% quarter-over-quarter. Wealth profit for Q3 was RMB 4.4 billion. Wealth margin was 48.7%. up one percentage point compared to the last quarter, remaining at the high end across the industry. The quarter-over-quarter improvement in gross margin was mainly attributable to our continuous, vigorous cost control and ongoing efficiency improvement. During the quarter, our relatively fixed costs, mainly including cloud services, bandwidth, and personnel costs, along with the constant costs, continued to decline as a percentage of total revenue. Continuing our effort, starting from the beginning of this year, we further worked to optimize operating expenses and streamline operating efficiency in the third quarter. Our work is yielding food. Total operating expenses for the third quarter were RMB $7.2 billion, leading to our improved operating margins, both year-over-year and quarter-over-quarter. As we continue shifting our focus from user expansion to user engagement, system marketing expenses decrease by more than 10% quarter over quarter. For R&D and G&A expenses, we continue to optimize the expense structure to improve our operational efficiency, and R&D and G&A expenses as a percentage of revenue decrease by 9 percentage points and 3 percentage points. quarter over quarter, effectively. We are steadily reducing our net loss. Our GAAP net loss for the quarter was RMB 297.6 million, compared with the net loss of RMB 487 million in previous quarter. Our adjusted net loss, which primarily excludes share-based competition expenses, was RMB 250.6 million for Q3. compared with RMB 443.8 million last quarter. As of September 30th, 2022, the company had cash and cash equivalent term deposits, restricted cash, and short-term investments of RMB 6.6 billion. And as of September 30th, 2022, we have repurchased approximately 4.9 million Class A ordinary shares at a total cost of US dollar 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.