Zhihu Inc.

Hello, ladies and gentlemen. Thank you for standing by, and welcome to the Zihu, Inc. Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a 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. Iris Liu, IR Manager. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone. Welcome to our Second Quarter 2023 Financial Results Conference Call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and Chief Executive Officer of Zhihu, Mr. Li Dahai, Chief Technology Officer, and Mr. Henry Hsia, our Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the state public provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed 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 in our website at ir.zhu.com. I will now turn this call over to Mr. Harish Shah, CFO of Zhuhu.

Thank you, Iris. I'm pleased to deliver today's opening remarks. on behalf of our CEO, Mr. Zhou Yuan. Hello, everyone. Thank you for joining us for Zhuhu's second quarter 2023 earnings call. We continued to accelerate development across our business during the second quarter, achieving sustainable growth through effective execution of our community ecosystem-first strategy. As we enriched our content library, user engagement increased throughout the Zhuhu community and our average MAUs continued to increase as well, rising to $109.4 million in the second quarter, representing 3.3% year-over-year growth and 6.9% sequential growth. Furthermore, our limiting efforts to diversify monetization channels and upgrade our service capabilities during the second quarter drove robust growth in total revenue. which increased by 24.9% year-over-year. At the same time, we further enhanced operating efficiency, boosting our gross margin to 53.8%, up by six percentage points year-over-year. Our non-GAAP net loss narrowed significantly as a result of ongoing operating efficiency improvements by 49.9% compared with the same period last year. despite our newly initiated investment in generative AI technology. Speaking of generative AI technology development, following the launch of our first large language model, Chi Hai 2 AI, in April, we are currently conducting internal trials of AI applications, aiming to strengthen the vibrancy of our community and further unlock commercial value. Leveraging our vast content portfolio, potential applications of this cutting-edge technology in our community could include more efficient content search and more customized recommendations for our users. AI technology could also help content creators increase productivity and creativity to further enrich Zhuhu's content pool. Let me now move on to our users and content. In the second quarter, we focused on content quality enhancement particularly by continuously enriching our professional content library and enhancing users' interaction with professional users. To that end, we upgraded our Content Creator Incentive Scheme High-End Plan 5.0 in April, providing selected content creators with an array of supportive tools as well as better user traffic support and financial rewards for their high-quality work. With these efforts, we were encouraged to see increased growth momentum in both the volume of content created and the number of the content creators. By the end of the second quarter, our 66.6 million cultivated content creators had contributed 711.3 million pieces of content covering over 1,000 verticals. To further refine the content quality, we also upgraded our professional identity verification functions in this quarter. Many of our content creators who have been endorsed by our Blue Medal professional identification veterans in specific industries, such as internet, finance, legal, engineering, et cetera, with credentials from well-known enterprises, colleges, and institutions. Professional identity status has brought them enhanced credibility, greater recognition of their professional content, and up to 10 times more user interaction post-identification. A growing number of professional users have collectively contributed content, underscoring Zhihu's reputation as a professional community with high credibility. Our reliable professional and abundant content made Zhihu a desirable destination for users to search for answers and follow trending topics. Discussions on trending topics in various formats such as Q&A, live streaming, and ideas enlivened the Zhihu community also. In addition to enjoying our discussion content, consumers are becoming more reliant on Zhihu's detailed and informative commerce content as a decision-making reference. Moving forward, we will continue to focus on content quality while expanding our content library, creating value for our user across all aspects of studying and consumption. Users have always been the cornerstone of the Zhihu community. Our content encourages users to stay and grow on our platform, driving our average MAUs to 109.4 million in the second quarter. Furthermore, increasing user engagement is critical in promoting the healthy development of our ecosystem. Many of our long-term frequent users started their journey on Zhihu when they were students. Now, they are between 18 and 40 years old with higher education and have become new generation professionals. They want to share their insights, experience, and stories and to become key opinion professionals. Zhihu has expanded its content verticals to capture key opinion professionals involving interest accordingly. This deepening generational engagement reflects Zhihu's peerless ability to captivate users for the long term and serve them at different stage of life. In addition, by leveraging Zhihu's strong brand awareness, content library, and AI-powered technology, We are confident Chihu can further extend coverage in lower tier cities by attracting more professionals, young generations, and consumers. Meanwhile, we will continue to support the content creators and uphold a high standard of community governance, reinforcing our healthy culture of sincerity, expertise, and respect. Now, let me go into the details of our commercialization progress. Let's start with our membership business, which sustained its strong growth momentum in the second quarter. Paid membership revenue for the second quarter increased by 65.6% year-over-year, while average monthly subscribing members grew by 65.3% year-over-year, reflecting our dedication to expanding premium content coverage. In the second quarter, we continued to enhance the effectiveness of our story creation tools and upgrade our financial reward plans to inspire passion among content creators while protecting their rights and benefits through enhanced anti-piracy measures. The number of Zhihu core premium content pieces increased by more than 200% year-over-year during the quarter. Also, the number of membership content creators who earn income from Zhihu increased by almost 50% year-over-year Thanks to creators' passion and their premium content contributions, our users were able to enjoy a larger content library with superior quality. In the second half of this year, we will further differentiate ourselves with our content and membership products from those of our competitors and expand our content categories to cover the evolving needs of both male and female members. We will also expand our content distribution channel by partnering with more platforms, such as Huawei, among smartphone manufacturers. What's more, a web drama series adapted from a novel in Chihu content library was recently launched on Tencent Video platform, disseminating our premium content to a broader audience in a visual format. We anticipated that more of our premium stories will be adapted, unlocking our IP value going forward. Next. of our vocational training business, which continued to deliver excellent results with its revenue increasing by 213.3% year-over-year and 35.1% quarter-over-quarter. Following the acquisition of MBA master in the second quarter, we were able to further optimize our program offerings. Meanwhile, by encouraging professionalism and sincerity in our community for young professional users, we increased their interest in sharing and learning vocational skills on Zhihu, driving organic growth across our proprietary vocational training offerings. While our vocational training business is still in the early stage, we will continue to invest in human resources and technology infrastructure to build a solid foundation. As a leading content-centric community, Zhihu's unique proposition enables us to deeply understand our users' involving learning demands, then satisfy those demands through well-selected, targeted programs. Moving on to marketing services. Back in the first quarter of 2023, we combined advertising and content commerce solutions, or CCS, into marketing services. This change helped to optimize our organization structure and synergize resources. By strengthening our service capabilities and optimizing the service offerings, we are able to provide more precise, comprehensive marketing solutions and improve operating efficiency. In Q2, we recorded a sequential quarterly revenue increase of 5.3% with expanded gross margin. Among the various industries we serve, IPM3C and home appliances stood out. growing significantly by double digits both year-over-year and sequentially, benefiting from increasing ROI across the related sectors within the Chihu community. Going forward, we will continue to streamline our marketing services offerings and optimize recommendation algorithms to meet advertising clients' evolving needs. Overall, as we move into the second half of 2023, we will focus on enhancing our efficiency to further narrow our losses and advance our progress in terms of our profitability, while prioritizing healthy and sustainable growth across all of our business segments. Before I conclude, I would like to specifically highlight our progress in generative AI technology. As I mentioned earlier, Zhihu has been focusing on innovatively applying large language model technology into our services and products over the past several quarters. We are currently exploring AI's potential application to enhance users' content search experience, optimize algorithms, and improve content creation efficiency. For instance, we aimed to develop search tools that analyze our Q&A content pool to present more precise and better summarized results, thereby improving both the accuracy and efficiency of content searching. In addition to these breakthroughs, we have been empowering our internal operating system with AI technology to further increase its data monitoring and operational capabilities. Moving forward, we will continue to invest prudently in generative AI technology to create new AI-powered functions that can improve the content creator's creation experience as well as enhance our service capabilities. We firmly believe that AI-powered technologies' true value lies in empowering human beings across all aspects of life as an extension of our innate capabilities. This concludes Mr. Zhou Yuan's remarks. Now I will turn into our financial details for the second quarter. For review of our second quarter 2023 results, please see our press release issued earlier today. We delivered the started results for the second quarter of 2023 on the heels of a strong first quarter. Our total revenues for the second quarter increased by 24.9% year-over-year, which is in line with management guidance. Our gross margin further expanded by 6 percentage points, and our non-GAAP net loss margin narrowed by 32 percentage points, both on a year-over-year basis. thanks to our effective ongoing cost control measures. Guided by our community ecosystem first strategy, we continue to expand our premium content library and assimilate content creators' passion for creation, preparing prosperity across Shihu's vibrant community. Both our paid membership and vocational training services continue to grow robustly, increasing by 65.6% and 213.3%, respectively, on a year-over-year basis. We also further improved our operation efficiency with streamlined organizational structure and product offerings. As a result, while our quarterly marketing service revenue decreased by 13.7% year-over-year, It picked up sequentially for growth of 5.3% quarter-over-quarter. In particular, our cornerstone vertical of our advertisement business, IT and 3C and home appliance, outperformed with a high double-digit year-over-year increase. Our paid membership revenue for the quarter was RMB $449.1 million, up 65.6% from RMB $271.2 million. in the same period of 2022. This increase was attributable to the rapid growth of our subscribing members. For the second quarter, our average monthly subscribing members reached 14 million, increasing by 65.3% year-over-year. In Q3, we anticipated the paid membership revenue will achieve both sequential and year-over-year growth. Our vocational training business revenue for the second quarter increased by 213.3% year-over-year, reaching RMB 144.5 million from RMB 46.1 million in the same period of last year. As we continue to enrich our program offerings through both M&A and self-developed products, as well as enhance our service capability, with cutting-edge technology. We are confident we can harness even more of this industry's massive potential. Our marketing services revenue for the quarter was RMB 412.7 million, compared with RMB 478.1 million in the same period of the last year. During the quarter, we focused on better utilizing our resources and phased out some low-margin marketing services and products. all of which contributed to the margin improvement of the quarter. We expect these strategy adjustments in marketing services business to generate recovery growth and increase our resilience in the face of macroeconomic uncertainty in the second half of this year. Gross profit for the second quarter increased by 40.7% year-over-year to RMB $562.1 million. with gross margin expanding to 53.8% from 47.8% in the same period of 2022, demonstrating the effectiveness of our refined monetization efforts, as well as our improvements in cloud services and bandwidth utilization efficiency. Total operating expenses were RMB $889.3 million in the second quarter, compared to RMB 860.3 million in the same period of last year. Selling and marketing expenses increased slightly to RMB 540.6 million from RMB 532.4 in the same period of 2022. As we continue to invest in promoting our product offerings and branding, while remaining prudent in our overall marketing-related spending. Research and development expenses increased to RMB $236.2 million from RMB $223.6 million in the same period of last year. The increase was primarily attributable to our increased spending in technology innovation, as we believe such investment will better position us in the competitive landscape over the long term. General and administrative expenses increased to RMB $112.5 million from RMB $104.3 million in the same period of 2022 due to the increased share-based compensation expenses. Our ongoing efforts to control costs and improve operational efficiency continued to bear fruit. Our gap net loss for the quarter was RMB 279.1 million, down by 42.7% on a year-over-year basis. Our non-GAAP adjusted net loss, which primarily excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisition, was RMB 222.3 million for the second quarter, decreasing by approximately 50% from the same period last year. Non-GAAP net loss margin for the quarter was 21.3%, narrowing significantly by 32 percentage points from a year ago. We will still prioritize loss reduction for the rest of the year. Our net cash used in operating activities was RMB 58.3 million for the first half of 2023, a significant reduction from RMB $515.1 million for the same period of last year, highlighting our improved operation efficiency and the shift in our revenue structure. As of June 30, 2023, the company had cash and cash equivalents, term deposits, and short-term investments of approximately RMB $6.2 billion. compared with RMB 6.3 billion as of December 31st, 2022. 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 section. Thank you.