Zhihu Inc.

Ladies and gentlemen, thank you for standing by and welcome to Shihu Inc. First Quarter 2024 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. Today's conference is being recorded. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to Zhihu's first quarter 2024 financial results conference call. Joining me today are Mr. Zhou Yuan, our founder, chairman, and chief executive officer, and Mr. Wang Han, our chief financial officer. Before we get started, I'd like to remind you that today's discussion will include forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Legatation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Other information regarding these and other risks and uncertainties is included in our public filings with the U.S. SEC and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Additionally, the matter we will discuss today will include both GAAP and non-GAAP financial measures for comparison purpose only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issue earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhuhu.com. I will now turn the call over to Mr. Wang Han, CFO of Zhuhu. Han, please go ahead.

Thank you, Yolanda. Hello, everyone. Thank you for joining Zhuhu's first quarter 2024 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, founder, chairman, and CEO of Zhuhu. The first quarter of 2004 marked a significant turning point for Zhihu. Strategically, we concentrated on our core strengths and the most crucial aspects of our development in the AI area. This involved a series of tactical adjustments, including resource reallocation and organizational optimization. From an operating perspective, our top priority in the short term is to achieve profitability. The advent of AI has disrupted the traditional internet business model. which relied on expanding user base, enhancing user engagement, and boosting user ad value to gain market share. In AI era, the focus has shifted to high quality content and user value, whose core value lies not only in presenting Chinese highest quality content library, but also in our unique content creation mechanism and our community's professional atmosphere, which foster continued emergence of new high quality content. 3Who users are not passive recipients of information, but are active participants in content creation and knowledge sharing. This core strength provides us with a first mover advantage in exploring new business models and position us uniquely in the market, increasing our pricing power. Following our proactive reduction in community-related user acquisition costs, the size of our user base declined to some degree in line with our expectations. However, engagement among our monthly active users increased, core user retention sustained its growth momentum, and daily active user time span also increased significantly. Furthermore, our efforts to enhance trustworthiness within the Drupal community continue to drive community prosperity. Our strategy for cultivating scenario-oriented content ensures a continuous stream of authentic, in-depth, high-quality content based on users' own experiences. As of the end of the first quarter, the cumulative pieces of content on our platform reached 804.2 million, including 611 million Q&As, up 15.4% year-over-year. Cumulative content creators within the Juho community reached 73.6 million, an increase of 13% year-over-year. We also observed a notable year-over-year increase in the proportion of highly active users engaged in creation and a percentage of high-level daily active creators. Utilizing the power of AI-driven technology, we continue to equip our content creators with a variety of user-friendly creation tools, offering a professional and supportive environment to help them break financial rewards. In the first quarter, the total number of content creators who earned income on Zhihu grew by more than 25% year-over-year. Notably, the number of content creators benefiting from our Zhizhi plan was nearly fourfold compared to the same period last year. In the AI era, we have continually upgraded our cybersecurity capabilities to ensure better protection of our user data privacy and intellectual property rights. At the same time, we fully leverage AI model's capability to enhance efficiency of content identification, review, and governance within the Google community. In certain scenarios, AI reviewers can achieve higher accuracy compared to the manual identification and review, allowing us to significantly reduce the number of manual reviewers while maintaining high efficiency. We continue to refine and upgrade our existing systems, Wali and Wukong, leveraging our Zhihai 2 LLM. These improvements have further enhanced user engagement and effectively combated fake traffic, leading to a continued decline in users' negative feedback and propelling to community sustainable development. We're progressing steadily towards our goal of achieving quarterly profitability within this year. To that end, we have accelerated our loss reduction through two operating tactics. First was to continually improve employee efficiency, further reducing labor costs. Second was to reduce community-related user acquisition costs. Meanwhile, we have maintained a higher ROI in our paid membership and vocational training businesses, which extended our reach beyond the Zhihu community. With this effort, the cost of revenue and total operating expenses in Q1 decreased by over RMB $130 million quarter-over-quarter. Notably, we recorded our sixth consecutive quarter of year-over-year growth in gross profit margin and three consecutive quarters of sequential decline in our sales and marketing expenses in the first quarter. Additionally, we have been accelerating the application of Zhihai to LLM to further enhance operating efficiency across every aspect of our businesses. For example, teaching, learning, and research aspects for our vocational training business. By integrating our own knowledge library, we have driven notable efficiency improvements in AI teaching assistance, cell services, homework assessment, and more. As a leading content-centric community, Jihoo serves as a lending platform where professionals engage in the most extensive and in-depth discussions on AI-related topics. Since the beginning of this year, the amount of AI-related content and the number of creators have continued to surge by double-digit year-over-year growth. Specifically, the number of AI field creators certified by Blue Label has increased by 130% year-over-year. Moreover, tens of thousands of specialized terms related to AI are being discussed within our community. In 2004, our exploration of and investment in AI will shift to focus on application layer. Our advancement in AI enables us to enhance operating efficiency across our existing businesses. as well as to unlock emerging potential beyond the Google community, all built on a foundation of trustworthiness. Since the launch of our AI-powered search feature in March, we have observed double-digit growth in app active days, user retention rates, and user engagement among the users who are using our new AI search feature. Now, I would like to delve into more details of the progress we achieved across our multiple business lines for the first quarter. First, our vocational training business continued to grow robustly, with the revenue increasing by 35.9% year-over-year to RMB 145.4 million. Its contribution to our total revenue also rose, surpassing 15% for the first time. As of the end of the first quarter, we established more than 30 subcategory courses through both self-operated business and acquisitions. Notably, our self-operated offerings are closely connected to the Zhihu community. allowing us to address users' needs swiftly and precisely while earning higher profits. Our acquired offerings, on the other hand, meet specific demands and cater to a broader market. Together, these courses complement each other in broadening our offerings and driving the rapid and sustainable growth of our vocational training business. In the first quarter, Our self-operated offerings grow rapidly, particularly AI, AGM, software exam courses, demonstrating excellent profitability and rapid growth. Importantly, our program tutors are also content creators within the dual community. With this dual role, tutors are deeply involved in the course development while maintaining ongoing interactions with students in the community about real course experiences, skill improvements, and other topics. This approach effectively addresses the ever-growing new demand of our new users. Growth from our acquired offerings remains steady during this quarter, further elevating our brand name awareness and service advantages. In April of this year, one of our subsidiaries, P&G Education, hosted a dedicated live broadcast inviting executives from the CFA Institute. They provided professional insights into CFA exam reforms. offering firsthand preparation guidance and expert analysis. This initiative garnered significant attention and sustained feedback from both the industry and examinees. Our paid membership business remained our largest revenue contributor this quarter, reaching RMB 449.7 million. As of the end of this first quarter, our average monthly subscribing members stood at 14.8 million, showing a slight decrease of 0.8% year-over-year, but an increase of 4.1% quarter-over-quarter. Average revenue per user remained stable compared to the same period last year. Leveraging the support of the G4 community and our unique positioning, our premium short stories continue to captivate and resonate with our users. In April, 123 historically chart-topping pieces, including Zhi Hu's exclusive story Sand of Time and Endless River Sea Wars Flows were included in the National Library's digital collection. Zhi Hu's Premium Counter Library, including short stories, continued to expand in the first quarter. The total volume of premium content increased by 14% year-over-year, attracting new subscribers while encouraging increased consumption among existing subscribers. On the content creator side, we are delighted to see our creators building a solid market reputation and achieving financial rewards on our platform. In the first quarter, the number of content creators who earned income increased by 78% year-over-year. In addition to top creators earning substantial income, many mid-tier and long-tail content creators within our community also earn significant income through high-quality content creation discourse. As a market leader, Zhihu continues to unlock the monetization potential of our vast array of premium short story IPs, spearheading our expansion into the short drama market and consistently setting new industry benchmarks for growth. In the first quarter, IP monetization revenue increased by 165.7% year-over-year, In April, another short drama, Drippy, adapted from a story in Jiwoo's content library, achieved a new record high for popularity on its debut day on Tencent's micro drama platform. In the long run, the ongoing expansion of our premium content and diverse content consumption formats will continually drive growth in the lifetime value of subscribing members. Let's now shift to our marketing services. In first quarter, marketing services revenue were RMB 330.5 million, representing a decrease of 15.7% yield. Business returned to a growth on a quarter-to-quarter basis. Our key clients in cornerstone verticals continue to demonstrate healthy improvements in retention rates, consumption, and output. Apart from ID3C industry, which maintained its year-over-year growth rate of over 40%, the fast-moving consumer goods sector also experienced high double-digit year-over-year growth. We're currently in the process of upgrading our CCS product, including proactively enhancing content governance and reducing the distribution of commercial content that negatively impacts user experience. As we are striving for quality profitability by the fourth quarter of 2024, we are giving our efforts to narrow our losses. Meanwhile, we firmly believe the emerging potential of our AI search and the value we continue to unlock across Chihuahua's trustworthy community will provide fresh momentum for our sustainable growth and a clear path to profitability for the remaining quarters of this year. This concludes Mr. Julian's remarks. Now I will review the details of our first quarter financials. For a complete overview of our first quarter 2004 results, please see our press release issued earlier today. We have continually optimized our core structure over the past several quarters. As a result, we recorded our sixth consecutive quarter of year-over-year growth in the gross profit margin. On the expense side, we significantly reduced community-related user acquisition costs while maintaining a prudent level of investment in cutting-edge technology, including AI. This initiative has effectively optimized our fixed costs, enhancing our commercialization efficiency. With this proven strategic adjustment, we are confident of achieving quarterly profitability of within 2004. Our marketing services revenue for the first quarter were RMB $330.5 million, a decline of 15.7% year-over-year. This increase was primarily due to the ongoing refinement of our CGS product to strategically focus on margin improvements. However, we have observed the recovery in our brand advertising segment in the first quarter. Performance-based advertising also demonstrated sequential growth. Notably, audience receipt, as well as fast-moving consumer goods, led its growth by vertical. Pay membership maintained a stable trend in the first quarter, reaching RMB 449.7 million. The number of subscribing members grew to 14.8 million, up 4.1% a quarter of a quarter. Vocational training revenues for the quarter was RMB 145.4 million, increasing by 35.9% year-over-year. Our soft-operated offerings, particularly AI-AGN software-exam courses, delivered robust growth, while our acquired business also retained solid momentum. Benefiting from enhanced operating efficiency, our gross profits for the first quarter increased by 6.1% year-over-year to RMB 543.5 million. propelling a gross profit margin improvement of 5.1 percentage points year-over-year to 56.6%. Our total operating expenses per quarter were RMB 768.2 million, compared with RMB 729.0 million in the same period last year. Selling and marketing expenses increased to RMB 478 million from RMB 445.6 million in the same period of 2003. Moving forward, we will maintain our prudent financial policies and rigorously map our ROI across marketing channels. Our research and development expenses this quarter increased to RMB 197.4 million from RMB 183 million in the same period of 2003. The increase was primarily due to our increased spending on technology innovation. DNA expenses decreased by 7.5% to RMB 92.9 million. The decrease was primarily due to lower share-based composition expenses combined with improved operating efficiency. As a result of all of this, our gap net loss for the first quarter narrowed by 7.4% year-over-year to RMB 165.8 million. Our non-gap net loss for the first quarter was RMB 135.7 million. As of March 31st, 2004, the company had cash and cash equivalents term deposit and short-term investment of RMB 5.2 billion, compared with RMB 5.5 billion as of December 31st, 2003. In the first quarter, the company repurchased 4.8 million plus eight owner shares for a total price of US dollar 8 million. In summary, as we continue to optimize our cost and expense structure, our operating efficiency is steadily improving. Throughout the remainder of 2004, we're confident that our strong strategic execution will provide a solid foundation for achieving our quarterly profitability goals in the near future. 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.