Zhihu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Juhu Inc. Second Quarter 2024 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 Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to Drupal's second quarter 2024 financial results conference call. Senior management joining me today are Mr. Zhou Yuan, our founder, chairman, and the 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 Legitimacy Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. For the information regarding these and other risks and uncertainties, is included in other public filings with the U.S. Securities and Exchange Commission and Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements except as required under Asset 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 issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.jufu.com. I will now turn the call over to Mr. Wang Han, our CFO. Please go ahead.

Thank you, Elena. Hello, everyone. Thank you for joining Zhuhu's second 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. We're pleased to report another strong quarter. In the second quarter, we achieved robust improvements in operating efficiency, with our gross margin raised by 5.8% of percentage points year-over-year to 59.6%. Our total operating expenses decreased by more than RMB $140 million compared to the same period last year. including a reduction of over RMB 120 million in marketing expenses. Our adjusted net loss declined by 79.9% year-over-year to RMB 44.6 million, marking our lowest quarterly loss since our U.S. IPO. In the second quarter, we made significant strides in enhancing the Juhu's community's trustworthiness and strengthening our core user experience. In addition to introducing an array of AI-powered products and engrossing content initiatives, we proactively refined commercial content distribution and meticulously tailored our services to meet the diverse needs of various user groups. As a result, our community remains vibrant and continues to grow, exhibiting positive trends across key user metrics such as core user retention rates and daily user timestamps. We expanded AI applications across our products and services during this quarter, aiming to provide users and clients with an enhanced experience. In late June, we officially launched Zhuhu Zhida, marking a significant milestone in our AI search initiatives. Since its debut on the PC platform, we have observed a promising increase in user engagement and market reputation, highlighting new growth opportunities for us. Throughout the second quarter, Our laser focus on cornerstone verticals coupled with enhanced support for content creators has led to significant improvements in the experiences of both users and content creators within our community. As of the end of June, the cumulative pieces of content on Juhu reached 830.9 million, a 16.8% year-over-year increase. The cumulative number of content creators within the Juhu community grew by 12.5% to 74.9 million during the quarter. this continued rise in the proportion of highly active users engaged in content creation. To further bolster user engagement, we will continue to foster rational, optimistic, in-depth discussions around prominent social issues and word events this quarter. For example, during the annual Goal Call period, we strategically enhanced the community's support for Goal Call users by elevating the firsthand experiences shared by previous examinees optimizing search functionalities, and refining recommendation algorithms. Accordingly, the volume and quality of the Kakao-related answers rose markedly, with three-day and seven-day question response rate experiencing double-digit growth. The surge in user engagement and community interactions further solidified Zhihu's position as the most trusted platform for young people seeking guidance on pivotal live decisions. whether in the lead up to university or as they prepare to enter the workforce. We also implemented effective initiatives to draw users to our coverage of the Paris Olympics. Within a week of the Olympic opening on July 26, common views related to the event soared to over 600 million with over 500,000 discussions spanning topics such as science and technology, sociology, psychology, and cultural arts. Thanks to these efforts, positive feedback from Juhu users on our high-quality content continued to rise, accompanied by a significant increase in user interactions. Average daily engagements per DAU grew by nearly 40% year-over-year, with the monthly average of upvotes increasing by over 47% year-over-year and more than 13% quarter-over-quarter. As we progress in our development of the cutting-edge technology, We consistently strive to push boundaries and extend application scenarios. The official launch of Zhihu Zhida in late June marks a significant step in our exploration of AI-powered search functionality. Zhihu Zhida's deep integration with the content creators sets it apart from other AI-driven search products. The majority of the content powering Zhihu Zhida is derived from Zhihu's proprietary high-quality content library, which allows users to trace counselors back to their original sources. explore more premium Q&As within the community, and directly connect with content creators. We believe Zhihu Zhida's unique ability to prioritize human elements and emphasize professional and authentic content that embodies collective humanism is especially valuable in an area increasingly dominated by AI-generated content. In July, Zhihu's total visits increased by 430% compared with June as we continued to leverage Zhihu's self-developed LLM to refine Zhihu's performance and user experience. By the end of July, 7-day user retention doubled compared with early July. Zhihu's multi-round response capability also outperformed market peers, earning high praise from professionals. Moving into the second half of the year, we will continue to enhance our user experience on Jirida's PC platforms through our ongoing improvements in product features, algorithms, and performance. Simultaneously, we're set to officially launch and upgrade Jirida tab on the Google app, which will effectively complement the desktop version. Jirida not only provides professionals with effective tool-based scenarios, but also with vast potential for exploration in user interaction and content creation through the power of the TrueHoo community. For our work, we aim to reach a broader audience with Straight On, relying on its performance and reputation rather than extensive advertising and promotion. Our effective strategic planning and execution is reflected not only by our growing user engagement and flourishing community, but also by our significantly improved operating efficiency. In the second quarter, we further optimized operating efficiency across our business lines by leveraging AI technologies, propelling us towards our operational targets for this year. Now, I would love to delve into more details of the progress we achieved across our multiple business lines for the second quarter. First, our marketing services remained under pressure in the second quarter, with revenue totaling RMB 344 million, decreasing by 16.7% year-over-year. However, I want to highlight that within our marketing services, although our CCS is currently experiencing a decline during its adjustment period, both brand advertising and performance-based advertising exhibited robustly growth, increasing by 17% and 28.4% year-over-year, respectively. This performance underscores our effective monetization capabilities and substantial commercial potential for high-value user base within a community. Across all the industries we cover, the IT and 3C categories continue to lead in growth. Additionally, food and beverage, beauty, skincare, sports, and outdoor industries experienced notable increases in the average order volume during the 618 shopping festival, up by 17.4%, 14.1%, and 13.1% respectively, compared with the same period last year. We remain committed to delivering high-quality content that empowers our clients to drive their business growth. We're also supporting mid-tier content creators with substantial commercial potential in achieving their financial goals. In this year's 618 Shopping Festival, the number of commercial content creators on a traditional platform increased more than six-fold compared with the same period last year. As we move into the second half of the year, we'll continue to enhance our marketing services Granted, in the transverseness of our community, our efforts will focus on the following key areas. First, by leveraging our AI LLM capabilities and enhanced data infrastructure, we aim to further boost conversion efficiency for brands and merchants. We're also enhancing our own products and operational efficiency. Second, we will capitalize our community's professional discussion environment and the transverseness among high-value users to assist more emerging verticals. particularly those facing technological barriers to build stronger marketing awareness and commercial credibility. Third, we will foster closer connections with a great number of content creators to enhance their ability to earn financial rewards in line with their capabilities. Turning to our paid membership business, our premium content has continued to distinguish itself with its unique market positioning and compelling stories. attracting many new users in the second quarter. The number of subscribing members grew by 4.7% year-over-year to 14.7 million, while revenue contribution grew to 46%, reaching RMB 432.7 million. In addition to broadening our premium content offerings, we actively explored various new growth channels in the second quarter, including co-branding memberships and distribution channel extensions. For content creators, Zhihu's premium content discovery mechanism not only provides content creators with opportunities for growth, creative fulfillment, and revenue generation, but also fosters an entirely new creation ecosystem within the industry. In the second quarter, the number of Zhihu premium content creators earning income increased by 77.4% year-over-year. We also continue to unlock our high-quality straw-story IP monetization potential. On July 9th, the short drama, Love and a Dream, premiumed on Tencent Video. This marks another successful adaptation from Zhu Hu Yan Yan's story library, following the acclaim of Zhu Bi. Next, I will review our vocational training business. We strategically optimized our business structure in the second quarter with a focus on efficiency enhancement, concentrating on self-operated offerings and align closely with our community to provide greater certainty and profitability. Also recorded gains on certain adjustments to our acquired business in this quarter, achieving high margins. As a result of these effective measures, operating efficiency within the vocational training segment improved significantly despite a slight decrease in the total revenue, which amounted to RMB 133.6 million per quarter. GMB for our vocational skills and interest programs achieved over 50% year-over-year growth this quarter, with AI and AGI-related programs, and she continued to receive positive user feedback. Additionally, in response to students' evolving needs during the graduation season, we expanded our offerings to include career planning and overseas study advisor programs. In turn, this expansion encouraged valuable user contributions with beneficiaries enriching the community with high quality content and innovative creations as they shared their insights and experiences. Moving forward, we will continue to strengthen our absolute advantage in specialized subject offerings. We will also utilize AI technology to enhance operating efficiency and accelerate our progress towards profitability. In summary, our strong second quarter performance showcases our understanding of strategic planning and execution capabilities. As we move into the second half of 2024, we remain confident in and committed to achieving quarterly profitability targets. Meanwhile, we will continue improving our segment and engaging user experience and enhancing the Google community's trustworthiness to grow and nurture our user base. We will also advance our AI development initiatives, enriching our product capabilities and facilitating operating efficiency improvements across the board. By fully leveraging our unique value proposition, we will further develop to whose growth and commercialization potential driving the economy's long-term sustainable development. This concludes Mr. Zhou Yuan's remarks. Now I will review the details of our second quarter financials. For a complete overview of our second quarter 2014 results, please refer to our press release issued earlier today. Throughout the second quarter, we made significant strides in refining our core structure and optimizing operating efficiency, while maintaining discipline, spending, and proactively pursuing high ROI across our business lines. We accelerated our exploration of AI-powered technologies, substantially enhancing our products and services. As a result, we achieved notable improvements in both gross margin and adjusted net loss. Remarkably, this quarter represents our lowest quarterly loss since our UIS IPO. Our marketing services revenue for the quarter was RMB 304 million, compared with RMB 412.7 million in the same period of 2003. This decline primarily reflects our deliberate ongoing requirement of service offerings to strategically focus on margin improvements. Main membership revenue for the second quarter decreased slightly by 3.7% year-over-year to $432.7 million, primarily due to a marginal decline in our average revenue per subscribing members. However, our average number of monthly subscribing members grew by 4.7% year-over-year this quarter, demonstrating the effectiveness of our user growth strategies and promotions. Vocational training revenue for the quarter was RMB $133.6 million compared with RMB $144.5 million in the same period of 2003. This decrease was mainly due to our strategic refining of acquired business, prioritizing self-operated programs that offers high margins and greater profitability. Our gross profit for the second quarter was RMB 556.5 million, compared with RMB 562.1 million in the same period of 2003. Thanks to our enhanced operating efficiency, the gross margin has improved year-over-year for seven consecutive quarters, reaching 59.6%, the highest level since our U.S. IPO. Our total operating expenses for the quarter was RMB 740.4 million, a 16.7% decrease from RMB $889.3 million in the same period of last year. The volume of marketing expenses decreased by 22.9% to RMB $417 million, down from RMB $540.6 million in the same period of 2003. This reduction was primarily driven by more disciplined promotional spending and a decrease in personnel-related expenses. Our research and development expenses for the quarter decreased by 11.4% to RMB at 209.3 million, down from RMB 236.2 million in the same period of 2003. This reduction was primarily attributable to more efficient spending on technological innovation. General and administrative expenses were RMB 114.1 million compared with RMB 112.5 million in the same period of 2003. That consecutive gap net loss and non-gap net loss for the second quarter has both narrowed substantially, decreasing by 71.1% and 79.9% year-over-year respectively. As of June 30, 2004, the company has cash-in-cash equivalents, term deposits, restricted cash, and short-term investment of RMB 5.1 billion, compared with RMB 5.5 billion as of December 21, 2003. Profitability. At the same time, we would diligently explore innovative avenues to deliver enduring value to our shareholders. This concludes my prepared remarks on our financial performance for this quarter. I'll now turn the call over to the operator for the Q&A session.

Thank you. We will now 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please ask one question for each time. If you have any follow-up questions, please go back into the queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Vicky Wei. with Citi. Please go ahead. Thanks management for taking my question. Would management share some color about the progress of achieving break-even target? Thank you.

Thank you for your question. This is from Wang Han, CFO of Zhufu.

Our profitability goals remain unchanged and resolute. We still plan to achieve a quarterly non-GAAP net profit on this fourth quarter, and our second quarter financial results fully validate our strong strategic planning and execution capabilities. After a single quarter of adjustments, we not only reduced our losses by streaming costs and expenses, but also recorded our lowest absolute quarterly loss since our IPO. And from the current progress of the third quarter, our loss reduction work should also be more pressing, so please stay tuned. Thank you, Vicky.

The next question comes from Cui Qingsheng with CICC. Please go ahead.

谢谢管理层接受我的提问。 我的问题是关于用户基础的。 想了解一下知乎如何在减少社区投放费用的同时保持稳定的用户基础。 也想follow up一下关于AI搜索。 Thanks for taking my question. My question regards on the user base. How has Zhihu managed to maintain a stable user base despite scaling down community promotion expense? And a follow-up question on your AI search. Can management share the progress of AI search? What's the metrics after the launch? How does management feel the potential commercialization? Thank you.

OK.

This is from Zhifu's CEO, Zhou Yuan. The proactive user strategy adjustments we have made over the past two quarters were all quality-oriented, prioritizing our core user experience. As you mentioned, for our user base, the core is user retention improvement for us. And the user retention improvement is from the improvement of high quality content. And the core of the improvement of high quality content is to rely on in-depth content cultivation operation approach.

I will explain a little bit more here. This in-depth cultivation approach has two meanings.

One is in-depth operation, and the other is in-depth content. And so far, it seems to be working well. Our user base is quite stable. Thank you for your question.

Let me answer your second question. The second question is about our direct answer. When we were in June, we released a direct answer on the PC. I will continue to answer for your second question.

We successfully launched Zhifu Zhida on PC platform at the end of June. And over the past period, our work has focused on two main areas. The first optimizing the model and the second upgrading and optimizing the end.

OK.

The optimization of model has led to a significant improvement in user retention, with a significant increase in the number of high-frequency users, or what we call heavy users.

而这个端的优化,首先是对PC端功能进行优化。 PC是一个很重要的生产力场景。 这个工作我们在未来一段时间都不会停。 As for the end optimization, we started by enhancing the functionality of our PC end, which is an important productivity scenario.

and this work will continue for some time. Meanwhile, we are preparing to launch Zhugu Zhida on our mobile end, features of which are still in plan. The goal of this end enhancement is to reach, is for us to reach more users. 模型和端相存起来就转化了用户的增长了。

The combination of model and end optimizations is translating into our user growth. Overall, what we're seeing positive changes in terms of product usage, user time spent,

and both next day and seven day user retention.

And for sure, right now our primary focus is on improving the experience for heavy users.

And the commercialization is not the priority at this moment. Thank you, Jatin. Thanks for your question.

The next question comes from Thomas Chong with Jefferies. Please go ahead.

So I transform myself. My question is about advertising. So our performance ad and brand ad had good performance during 618. So what's the drivers behind and what are our advantages? Thanks.

Thank you for your question. This is from Zhihu CFO Wang Han. Zhihu is becoming increasingly clear about its commercial strength and expertise. Specifically, in helping brands to build premium value,

with high quality audience. I'd like to share two practical cases.

The first example of these two cases is our successful collaboration with

media to achieve both positive word of mouth and sell for refrigerator price over 60,000 yuan. 公知大师冰箱在618期间联动出户新品第一站的解决方案,实现了正向RI,依靠我们的高价值社区和用户聚焦于高端家电的人性化设计和智能科技感,成功打造了差异化的新品讨论场,赢得了口碑和销量的双方胜。 During this 618 shopping festival, Toshiba's premium flagship star-rated refrigerator achieved positive ROI through Juhu's first stop for new product purchases solution. By leveraging our high-value community and users, we focused on human-centered design and advanced technology for high-end home appliances successfully creating a differentiated discussion space for new products, achieving both positive word of mouth and strong sales.

第二个例子,我们首次启动的灯塔计划IP合作, 以社区的灯塔照亮产品的温度, 为vivo普及了蓝星AI的无障碍辅助功能, 兼具社会价值,人文关怀和良好营销效果。

The second example is our Lighthouse Project IT collaboration. With the same, the Lighthouse of the community illuminates the warmth of the products. We help people promote the Blue Hearts AI accessibility feature. This initiative combines social value with strong marketing results. .

The in-platform topic gained over 1.3 million rates, and Zhihu's video channel set an all-time high record of interactions with likes and favorites, surpassing

100,000 and over 40,000 shares. The video even received praise and a share from Vivo's chief marketing officer, generating significant buzz and positive feedback for both Brent and our community. 这些口碑好价值高的成功案例证明知乎凭借自身专业讨论场的优势发掘高价值用户的商业潜力。 These successful cases, categorized by high value and strong word amount, demonstrated that Zhihu's strength in professional discussion forums unlocks the commercial potential of high-value users. By becoming the center of trust for these audiences, This is the most natural path for Zhufu's commercialization. Thank you for the question.

The next question comes from Su Qianzhu with Guangfa Securities. Please go ahead.

Hey, Guan Lichen. Good morning. Thank you for accepting my question. What are the main drivers behind the growth of Zhihu's paying user base, and how can we assess the outlook of this segment? Thank you.

Thank you for your question. This is from . Our two drivers remain the growth of our subscribing members and the increase in our pool. .

In terms of the user scale of our paid members, as we mentioned previously, with Math and Market beyond Drupal community, we'll continue to explore multiple channels to expand our user base. Firstly, the MAU of Yanyan Stories app in July saw a year-over-year increase of more than 36%. In the second quarter, Our exploration of co-brand memberships and the distribution channels further demonstrated the spillover effect of the Zhihu YingYing Star's brand, with pay member growing year-over-year in this quarter.

Regarding our pool growth, the key is enriching membership benefits.

We have launched a premium membership that included privileges such as audiobooks and redo dramas with differentiation pricing. Order in this category has been steadily increasing. 随着知乎言言故事的口碑和影响力的外溢,我们还要更多基于此优势的产品形态和会员权益的开发的路上,敬请期待。 As the reputation and influence of the Triple Yen story continue to spread, we have more product formats and member benefits based on this advantage currently in development. So please stay tuned. Thank you for your question.

As a reminder, if you would like to ask a question, please press star then 1 to enter the question queue. The next question comes from Daisy Chen with Haitong International. Please go ahead.

My question is about the vocational training and how do you think of the future of your self-operated part of this kind of business? And we noted that the economy and the concept is relatively weak. Do you think it's an opportunity or a challenge for its goals? Thank you.

Thank you for your question, Daisy. This is from Zhufu CFO Wang Han. The external environment is certainly a significant positive for our self-operated vocational training business.

Firstly, from a fundamental perspective, the pressure on the employment environment has rapidly increased the demand for professional or soft skills and comprehensive abilities. 另外,教育行业监管政策的稳定和友好使得教育下到友商公司的业绩水平和市值水平都比较大提升,对我们在估值对标上也是比较积极的影响。 Additionally, the stable and favorable regulatory policies in the education industry have sustainable, improved performance and the market value of the companies in this sector, which positively influences our valuation benchmarks. 今年知乎职业培训的首要目标还是效率提升和加速减亏。 This year, the primary goal for our vocational training business is to improve efficiency and accelerate loss reduction.

We have swiftly adjusted some underperforming courses and acquired subsidiaries.

reallocating more resources to strengthen our core programs and expand into new disciplines. In short term, this might mean sacrificing some low-quality revenue, but we have simultaneously benefited from realized gains and profit improvements. In terms of acquisition side, we will continue to actively seek suitable targets with high standards, like the company can integrate it well with our community and have good operational and profitability levels. In long term, we believe that the synergy between vocational training business and our community will significantly empower this business segment in rapidly validating new demands, acquiring customer precisely, and building strong reputation ultimately translating into a competitive advantage in our unit economics model. Thank you. Thank you for your question.

That concludes today's Q&A session. At this time, I will turn the conference back over to Yolanda for any additional or closing remarks.

Thank you, operator, and thank you all once again for joining us today. If you have any further questions, please don't hesitate to contact our IR team directly or PSN Financial Communications. Thank you all.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.