Zhihu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Juhu Inc. First Quarter 2023 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 call is being recorded. At this time, I would like to turn the conference over to Ms. Iris Liu, IR Manager. Please go ahead, ma'am.

Thank you, our pleasure. Hello, everyone. Welcome to our first quarter 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and Chief Executive Officer of Zhufeng, Mr. Li Dahai, Chief Technology Officer, and Mr. Harusha, our Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as well with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and the 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.zhu.com. I will now turn this call over to Mr. Harish Shah, CFO of Zhihu.

Thank you, Erin. I'm pleased to deliver today's opening remarks. on behalf of Mr. Zhou Yuan, founder and CEO of Zhuhu. Hello, everyone. Thank you for joining Zhuhu's first quarter 2023 earnings call. We are delighted to start 2023 with a solid first quarter highlighted by sustained revenue growth and a significantly narrowed net loss, both beating the market consensus. While continuously expanding our user base over the past two years, We have also been closely following and capturing the evolving demand for short-form online reading, including both knowledge sharing and no-votes. In addition to the various YAN Selections membership services, we launched a new app, YAN Story, in major app stores recently to serve the broader users' content demands. As a part of QHOO's product matrix, YAN Story will not only contain content generated from the QHOO community, but also provide more differentiated content. Moreover, Yanyan Story will cover users from different tier cities and support more audiobooks by offering more effective incentive plans for content creators. Yanyan's selection of abundant premium content paired with our widely recognized brand name prepared the number of average monthly subscribing members to a record high of 14.9 million in the first quarter. representing 116% year-over-year and 14.5% sequential growth, respectively. We also continued to advance our technological development during the quarter through a combination of internal initiatives and joint development efforts as we actively explored the possibilities and potential of revolutionary AI technology Zhihu is now equipped with large language model technology that has 20 billion parameters. We launched our first large language model, or LLM, Zhihai to AI in April, aiming to enable our content creators to generate high-quality content more efficiently. Additionally, our users may utilize our LLM summarization function to consume more content and accelerated their readings in a more enjoyable way. At the beginning of 2023, we optimized our organizational structure by combining advertising and accounting and commerce solutions, or CCS, to enhance the overall competence and operational efficiency of our combined marketing services business. This upgrade has empowered us to better utilize the resources within the Juhu community and provide our clients with more effective and comprehensive marketing solutions. As we optimize our marketing services business, I will personally spend more time on the segment and monitor its execution. Starting from the recent months, we have already seen a revival of advertisers' engagement in e-commerce and 3C sectors. We are confident that our marketing services will achieve sequential growth in the second quarter and pick up growth momentum in the second half of the year. Now, let me move on to our users and content, where we have made remarkable progress, especially in our short-form content. In the first quarter, we continued to broaden our content coverage and deepen our penetration across our cornerstone verticals. optimizing our content composition and the format to better satisfy users' evolving needs to use their fragmented time efficiently and obtain information quickly. To that end, we significantly upgraded our ideal tab on the ATT, making it a short-form content pool to complement the long-form knowledge-based content currently available in Truehood's community. We also expanded our short-form content library to cover more lifestyle and consumption scenarios in response to users' needs. By upgrading an array of tools and functions, such as picture editor and video captions, among many others, we provided a more efficient scenario to inspire creativity for new content creation. This exciting progress in content successfully drove an increase in the number of users in our community, driving our MAUs in March to more than 110 million. We achieved a reacceleration in MAU growth in the first quarter and expect MAUs will grow up to 120 million within 2023 to mark another historical high. While we remain dedicated to further solidifying Tuhu's leading position As a platform for users to discuss and exchange ideas, we are also looking for ways to enhance our offerings by incorporating AI knowledge within our community. At the Zhihu Discovery Conference in April, we introduced our AI strategy along with our first LLM, Shihai2AI. Through investment and joint development efforts, we are accelerating our progress in integrating AI knowledge across various application scenarios throughout our ecosystem. The Trending Topics Summary is our first trial AI function. By leveraging AI's language learning ability to collect thoughts and integrate answers, the Trending Topics Summary is able to summarize answers and present them to our users in an intuitive and clear manner. We are now opening this LLM summarization function to more users via the Juhu mobile app. By further capitalizing on our unique advantages in both the data layer and the application layer, Juhu is committed to becoming an important developer and ultimately a leading contributor to the industry's overall development in this area of AI knowledge. Next, our membership business. Driven by our premium content offerings, and continuously expanding brand influence. Our paid membership business grew rapidly during the quarter, delivering robust increases on both an annual and a sequential basis. Paid membership revenue for the first quarter increased by 105.2% year-over-year, while average monthly subscribing members grew by 116% year-over-year to 14.9 million in this quarter. We streamlined content creation procedures to improve efficiency and enforce community compliance to protect content creators' rights and benefits. As a part of our multi-brand strategy, we launched our new app, Yanyan Story, featuring numerous user-favorite functions, such as story search, audio books, and recommended reading lists. This new app will help us attract more membership subscribers beyond the Zhihu community while building a distinct user base seeking for more concentrated reading experience inside the Zhihu community cohort. We hope Yanyan's differentiated content will also penetrate massive Internet users from Tier 2 and Tier 3 cities in China. Now, moving on to our vocational training business. Brand new from vocational training business, increased by 117.6% year-over-year to RMB 107 million in this quarter. We grew our footprint in the vocational training industry value chain by organic growth and business acquisition. We see the greater potential in the graduate student entrance examination market. We recently completed the acquisition of an MBA master's a training institution specializing in preparation for MBA entrance examinations in China. Completing the integration of MBA masters has further enhanced our industry competence with an improved business structure and enriched service offerings. Additionally, we continue to expand our vocational training services across major categories by developing programs that are in high demand, in this evolving market, including civil service examination, ESG, judicial examination, and story writing, among others. As I mentioned earlier, we are integrating AI technology into our course offerings as we look to enhance the overall quality and user experience, encouraged by the positive feedback We have received our first new AI-empowered program. We will continue to deepen our exploration of innovative technologies. Before I conclude, I'd like to provide a brief update on our ESG efforts. We published our ESG annual report for 2022 last month, presenting Zhihu's longstanding commitment to social responsibility. As a leading online content community in China, Our top priority and the greatest asset is and will always be our people, our employees, our content creators, our users, and our society. Therefore, we strive to holistically improve our ecosystem for each of these stakeholders throughout 2022. With the initiative including an upgraded leadership development system for employees, our Haiyan Campaign 4.0 incentive plan for content creators, an array of programs to protect and serve our most vulnerable users, including minors, those with disabilities, and seniors. We also leveraged our wealth of knowledge content to promote childhood education, particularly in rural areas, as we believe education equality and the growth and the development of China's young generation are critical to societal progress. Going forward, we will remain committed to our stakeholders improving their lives as we seek new ways to create value for our society and our planet sustainably. Looking ahead to the rest of 2023, we will remain focused on both monetization and user growth. Marketing services and paid membership have become our major revenue drivers during our continued expansion of the vocational training business and the LLM development. We will further expand the discussion and search scenarios in the Zhihu community as we leverage our resources and refined experience to study and respond to the evolving needs, thereby better serving both users and clients. Thanks to our organizational optimization and operational efficiency improvements, in the first quarter, our non-GAAP net loss narrowed to RMB 120 million, with adjusted net loss margins narrowed to 12.1%. We expect our business growth will continue accelerating, and we are confident we will achieve a 20% year-over-year increase in MAU as we strive to make innovative breakthroughs. We also believe our passion for progress and dedication will continue to empower our strength and resilience as we grow in this exciting and dynamic industry. This concludes Mr. Zhou's remarks. I will now turn to our financial details in the first quarter for review of our first quarter 2023 results. Please see our press release issued earlier today. We were excited to commence 2023 with a strong first quarter. Both our top line and the bottom line beat the street consensus while our operating cash flow turned positive for the first time with our initial public offering. Total revenue for the first quarter increased by 33.8% year-over-year to reach RMB 994.2 million effectively beating the market consensus. Our paid membership and vocational training services continued to exhibit robust growth during the quarter, increasing their contributions to total revenue to 46% and 11%, respectively. However, as a variety of market factors continue to affect the overall online advertising market, advertising spending remains sluggish, in the first quarter. To mitigate the impact, we optimized our organizational structure during the quarter, enabling us to better utilize our community resources and enhance our service capability by integrating brand advertisements and the CCS. Starting from the first quarter, our advertising business is now combined with the CCS into marketing services to align with our new strategy and upgrade the business structure. Our paid membership revenue for the quarter was RMB 454.8 million, up 105.2% year-over-year, from RMB 221.7 million in the same period of 2022. Our average monthly subscribing members grew by 116% year-over-year to 14.9 million, which is a record high. Our appealing premium content and outstanding user experience continue to attract a broader user base, even beyond our Jufu community. The company's marketing services revenue for the quarter was RMB 392.1 million. We are encouraged to see some recent signs of recovery in our marketing services in the recent months. And we've had our marketing services business to gain faster recovery during the second half of this year. Our vocational training business revenue for the quarter reached RMB 107 million, representing a year-over-year increase of 170.6% from RMB 39.5 million in the same period of 2022. Moving forward, we will continue to enhance our service capabilities and advance our footprint in the industry through both organic growth and business acquisitions. Gross profit for the first quarter increased by 52.7% year-over-year to RMB 512.2 million. Gross margin expanded to 51.5% from 45.1% in the same period of 2022, representing more than 6 percentage point expansion thanks to our enhanced monetization efforts and the improvement of our cloud services. and bandwidth utilization efficiency. We were particularly happy to see our investment in research and development rewarded us with the savings in the cloud service utilization. Total operating expenses for the first quarter were RMB $729 million, down by 25.9% from RMB $983.7 million in the same period of 2022. Selling and marketing expenses decreased by 12% to RMB 445.6 million from RMB 506.6 million in the same period of 2022. The decrease was primarily due to our discipline, the promotion, spending, and the decrease in salaries and welfare expenses for sales and marketing related personnel. In the meantime, the number of Juhu's MUs recovered significantly to 110 million in March. We will remain dedicated to driving user growth through our ongoing content ecosystem-first strategy. Research and development expenses increased RMB 183 million from RMB 166.5 million in the same period of 2022. The increase was primarily attributable to the increase in the salaries and welfare of research and development personnel, as well as the increased expenditure in Zhihu's large language model training for this year's largest technology upgrades. Our large language model will gradually serve a broader user base in the Zhihu community going forward. General and administrative expenses decreased by 67.7% to RMB $100.4 million from RMB $310.6 million in the same period of 2022, primarily due to the lower share-based compensation expenses recognized and the decrease in professional service fees. Benefiting from our ongoing operation efficiency improvements and the cost control strategy, we greatly narrowed our net loss into one Our gap net loss in the quarter was RMB 179 million, narrowing by 17.9% year-over-year. Our adjusted net loss on a non-gap basis, which primarily excludes the share-based compensation expenses and amortization of intangible assets resulting from business acquisition, was RMB 120.2 million for the first quarter, down by 67.3% from the same period of last year, with an adjusted net loss margin of 12.1%. In this quarter, we generated RMB 69.9 million operating cash flow, marking the first time we have achieved positive operating cash flow since our IPO. This milestone demonstrates Shuhu's revenue diversification and the business model can similarly generate positive cash flow from its operations and represents an additional step towards becoming a profitable company. Now moving to our balance sheet. As of March 31, 2023, the company had a cash and a cash equivalent term deposits and a short-term investment of approximately RMB $6,258 million. compared with RMB 6,262 million as of December 31st, 2022. Also, as of March 31st, 2023, we have repurchased approximately 6.9 million Class A ordinary shares at an aggregate price of US dollars 17.8 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.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Vicky Wei with Citi.

管理层晚上好,谢谢接受我的提问。 恭喜公司超预期的业绩。 请问管理层能否分享一下我们公司对于AI技术的战略计划? For evening management, thanks for taking my questions and congrats on the stronger than aesthetic corner. Will management share some color on the company AIGC technology strategy and how should we think of the AI investment and the future monetization potential? Thank you.

Thank you, Vicky. I think your AIGC related strategy questions will be answered by our chief technology officer, Li Da Hai, and I will have to answer your question about the budget.

Thank you. I am Da Hai. My answer is this. In the call community, we have a unique Chinese language data advantage. In the AI technology revolution, we have formed a unique positioning, especially in the professional field, which is very important for us. Call keeps an open attitude towards artificial intelligence technology. We released a large model of Shihaito in early April. This large model This is Li Dahai, CTO of the complex.

To answer your question, Zihu is having unique positioning in terms of Chinese-based database in China. And we are uniquely positioned in the artificial intelligence revolution in China, especially in a lot of different verticals for professional field content accumulation. Zihu is open-minded towards AI revolution. And in early April, we have released Zhihai 2 AI our large language model. We released Zhihai to AI through both internal investment and joint development with other companies. These have largely enhanced our speed of development and also brought along team and knowledge flow between different teams. Now we are having about 20 billion parameters in terms of our latest LLM. And we are planning to reach about 100 billion parameters for our large language model towards the end of this year. Thank you.

Hi, Vicky. A second question about our investment in this area. I think we are in the progress of doing the new plan for this large language model training. We believe it's one of the most important technology development projects for this year. But I think the impact on the P&L that will no more than the 300 million RMB. That's the answer to the question. Thank you, Vicky. Thank you.

Thank you. And the next question comes from Steve Koo with Goldman Sachs.

Good evening, Mr. Wang. Thank you for accepting my question. Congratulations on the transformation of our business cash flow and the 1.1 billion milestone of MAU. Can you please share with us the driving factors behind the growth of MAU, including our strategy and the change in user behavior, as well as our vision for future user growth? Thank you. Good evening, management. Thanks for taking my questions. Congrats on the positive operating cash flow as well as the MAU crossing the 110-minute milestone. Could you please share with you the driving forces behind our strong MAU growth as well as our strategy and changes in the user behavior and your outlooks for the future MAU growth? Thanks.

Hello, Steve. I'd like to answer this question. First of all, the effect of the first ecological strategy we implemented in the past year is not bad. In fact, it has built a more stable development structure for the entire development. So when we were in the first quarter, the whole MAU continued to grow. This is also what we did this year. This is Zhou Yuan, CEO of the company.

In the past year, we have made a lot of remarkable progress in terms of content ecosystem for strategy. This also helped us to grow our MAU through a robust growth. And during the first quarter of this year, MAU has also experienced steady growth.

We have a few key tasks that I would like to highlight. First, the efficiency and quality of our entire head-to-head meeting has been improving over the past period of time. Second, we are focusing on short content and short capacity on the product side. This has also received a lot of users' welcome. Third, we surrounded the entire user group, I will help translate Mr. Julian's answers to you. The first one that our user acquisition strategy

was executed well. The efficiency of the utilization was improving in the past quarter. And second, we have some adjustment of on the product and on the content. As I presented during the remarks in the course before, we are now focusing on the short form content, as you may know. So we have a long form very large base of the long-form knowledge library. And now we are going to provide more short-form content, which is very welcomed by our users. A third one that we are more focusing on the people between the age between 18 to 35 years old with a job in maybe tier 1, 2, 3 cities in China. This large group of users we estimated will be beyond around like 300 or 400 million people, the population. That's a large potential for us. Lastly, but also importantly, we believe the AI-driven technology, the larger language model, the technology will be applied to more scenarios on Google's mobile app. This, we believe, will help improve our user experience and improve our user growth going forward. Thanks for the question. And back to your question about the user behavior changing in recent months. I have some numbers to be shared with you. The first one about the user engagement and user time spent on our mobile app has been unchanged in comparison with Q4 last year. We're still between 27 to 28 minutes per user per day. And our membership, the people who are grabbing our membership and spend even more longer time, like 15 minutes per user per day.

This is my answer to your question. I would like to add two points. The number of female users is constantly increasing. It has brought us a healthier user structure. The second is that more than 30 of our users are constantly growing. You can understand that our new users, new, young, and senior users are constantly entering the call. Our original users have also grown. So, in fact,

So the users beyond the 30 years old is growing, the cohort, according to our internal statistics. And the second is the female users is also increasing in terms of the percentage of the total user cohorts. Thanks. That answers your question. Next.

Thank you. And the next question comes from with CICC.

What time does management expect to return to positive growth? And we noticed that the revenue from advertising and CCIs have been merged into the marketing services this quarter. So just wondering the company's consideration for the adjustment. Thank you.

Thank you, Xiexin. This is Henry. I will have to answer the question. So the first one, we have been seeing some rebound or recovery in the second quarter. But we believe that the headwind of the market was still there. And we still have been seeing some sluggish of the clients, of the advertisers. But the rebound was coming from the 3C and the e-commerce, the e-commerce sector. So we think the obvious recovery should be seen in the second half of this year. I've got a second question that's Because we have been upgrading our advertising products, and according to our company level's new strategy, we believe that this adjustment about the CCS and advertising will increase our marketing and competitive competence to increase our power of our integrated marketing solution for our clients. and also can support our more longer-term growth. So that will make the change. That answers your question.

Thank you. And the next question comes from Eileen Lin with China Renaissance.

Thanks, Management, for taking my question. I have a question regarding Zhihu's new app, Yanyan Story. Can Management share more details about future plans, long-term growth potential, and likely monetization method other than memberships? Thank you.

YanYan Story is our newly released application

We have received a lot of positive feedback from the market for this new story application, and we are generally optimistic about the future trend, future growth of this application.

In the original story, this app is actually different from the previous one. In terms of experience, there is still a clear difference. We will provide a more immersive experience The Yan Yan Story application compared with our original Zhihu Yan selection has a lot of clear differentiation.

And the Yanyan Stories application is focused on premium short stories, and it provides immersive and concentrated reading experience for users. It also helps us to attract more users from the Yanyan Stories outside the QHOO community.

We believe that this year, the growth of the selection business will continue to maintain a We believe that for this year, the yen selection will continue its healthy and robust growth

in terms of those year-on-year growth and the sequential growth. And in the future, we believe that with the improvement of the general macroeconomic condition in China, we will also generate IP gains from the application.

And to supplement CEO's answers to you, first, I believe that Yanyan will be positioned at maybe different tier cities users in China. And Yanyan's content will not be all the same as Zhihu's content. So that's the differentiation. And second, from the product level, for example, Yanyan will provide audio books or the flying bullet chat function. These are very welcomed functions by our users, which is quite different from the Zhihu mobile app. That's our answers for you, Eileen.

Next. Thank you. The next question comes from Zhezhi Chen with Haitong International.

我的问题是关于教育业务的。 教育业务我们看到在这个季度依旧增长强劲, 就能否请管理层分享一下教育业务的一个中长期的一个战略计划, 就比如说怎么样去做一个持续的增长以及近期的业务的一个进展。 Thank you for taking my question. Congratulations for the decent public goals and the quality of operation cash flow. So my question is about the education business. Can management share the mid- and long-term strategies for this segment, and, for example, how to maintain the goals momentarily for this segment? And can management also please provide more color on the recent updates for this segment? Thanks.

Thank you, Jessie. So, the professional education is a part of the construction, which is a part of the construction, which is a part of the construction. Actually, when we introduced this business to everyone last year, we said that, first of all, our education business and community users are very compatible. Second, we are very confident in building a closed loop from content to service. Third, we can use this technical data to carry out training for the entire section. Today, we have achieved a very significant and clear income.

Thank you, Daisy, for your question. Vocational training is one of the second growth drivers that we have been building on recently. And we think Zhihu is naturally uniquely positioned to do the vocational training business. Firstly, it is because our user base has a lot of overlap with the target users for vocational training. And secondly, it's that our content to our vocational training services have a closed loop. And thirdly is that our technology and data will increase the efficiency of our vocational training. We have made a lot of tremendous progress in the last year.

Our long-term goal for vocational training business is to enhance the efficiency and quality for this industry

And we have been focusing on two directions. Firstly, it's that we are diversifying to provide comprehensive services for our clients. And secondly, it's that we will utilize our data and technology to enhance the efficiency to provide better services for our customers.

To supplement the CEO's answer to you, Casey, the company is very emphasizing the focusing on the the reason the development of the reactive knowledge to be applied to the whole education or professional training industry. And we believe that our large-language model training will also empower our professional training in the future. And that's our answer to your question.

Next. Thank you. The next question comes from Thomas Strong with Jefferies.

So I'll transfer myself. Thanks, management, for taking my question. So my question is, how should we think of the GP margin outlook and the timing to reach breakeven? Thanks. Thank you, Lauren. So my answer to your question is quite straightforward.

The first one, we are seeing some progress in the gross margin improvements in this year and in this quarter. But we believe that it's too early to say what kind of gross margin to be achieved within the next few quarters. But believe us that we are doing the strict cost control strategies as well as improving our efficiency. So we believe that we are on the way to improving our margin. The second question is that because we have the new investments in the R&D development for our large language model training, so this also has some impact on our P&L for the rest of the year. So we believe that our breaking point will be the summer quarter next year, 2022. And that's our answer to your question.

Thanks.

Thank you. And this concludes the question and answer session. I would like to return the call to Iris Liu for any closing comments.

Thank you. Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Pearson Financial Communications. Thank you very much.

Thank you. The conference has now concluded. Thank you for attending today's presentation. May not disconnect your lines.