Zhihu Inc. Q4 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Fourth Quarter and Full Year 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' 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 our fourth quarter and full year 2023 financial results conference call. Participants on today's call include Mr. Zhou Yuan, our Founder, our Chairman and Chief Executive Officer, and Mr. Wang Han, 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 and Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, other results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our public filings filed with the U.S. SEC and Hong Kong Stock Exchange. 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 IR website at ir.zhihu.com. I will now turn this call over to Mr. Wang Han, CFO of Zhihu. Han, please go ahead.

Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu's fourth quarter and full year 2023 earnings call. I am pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman and CEO of Zhihu. In '23, we faced a plan of challenges and opportunities. Despite a dynamic macro environment and competitive industry landscape, we achieved substantial progress in commercialization and efficiency both in the fourth quarter and throughout the year. Furthermore, we made considerable strides in improving our bottom line, while actively exploring and investing in AI technology. Our primary focus in '23 was motivating our content creators through a variety of incentive plans. As a result, the cumulative content creators on our platform increased by 13% year-over-year reaching 71.3 million by the end of '23. The cumulative pieces of content grew to 774.7 million, up 19.3% year-over-year. Additionally, the average MAUs for the full year increased by 4% year-over-year. Our monetization progress remained robust throughout the year. We achieved a 16.5% year-over-year increase in our full year revenues to RMB4,199 million, with enhanced operating efficiency, our overall gross margin for 2023 improved by more than 4 percentage points year-over-year to 54.7%. Furthermore, our operating loss margin for 2023 significantly narrowed by 19 percentage points and adjusted net loss decreased by 44.9% on a year-over-year basis. During the fourth quarter, our dedication to user growth, resource allocation and operating efficiency improvements began to pay off. As high quality content continued to thrive across the community, we proactively refined our user growth strategy and significantly reduced acquisition costs for new users. Our focus shifted towards driving efficient and sustainable organic user growth by elevating engagement and retention rates among our highly active core users. We also continued to fortify our monetization models resilient through diverse growth drivers. Our total revenue for the fourth quarter of 2023 reached RMB1.1 billion primarily fueled by the strong growth in our paid membership and vocational training business. Our increasing brand influence and expanded program offerings have strengthened competitiveness extending our revenue growth beyond Zhihu community. Together, these two segments achieved a robust revenue growth of 28.3% year-over-year for the fourth quarter of 2023. Enhancing cost control effectiveness and operating efficiency remained as our key strategic priorities during the fourth quarter. We continue to invest judiciously in cutting-edge technologies such as AI, while optimizing our fixed cost structure. These initiatives resulted in an expanded gross margin of 59.1% for the fourth quarter. We also drove a significant 31.9% year-over-year reduction in adjusted net loss, which reached its narrowest quarterly level since our U.S. IPO. As we move through 2024, we will further optimize our financial performance while elevating trustworthiness within the Zhihu community. We are confident that in the area of AI-generated content, users will increasingly value professional, in-depth, and authentic content as well as discussion and feedback from real users. By fostering an environment of trust, we can stimulate user interactions and inspire content creators' passion and creativity, ultimately driving organic community growth. Meanwhile, we also believe that a prudent application of AI large language models can improve user experience and strengthen the feedback mechanism for content creators, enhancing our community's atmosphere and operating efficiency. Now, I would love to delve into the details of our initiatives and achievements in 2023 across content creators as well as our commercialization progress. Let's start with our content and content creators. As I just mentioned, we revisited our user growth strategy in 2023 to promote organic community growth through high-quality content and a thriving community ecosystem. We shifted our focus to boosting our core users' activity and retention rate, but also reducing user acquisition costs. Consequently, our average MAUs in the fourth quarter were 99 million, a slight decrease of 1.6% year-over-year. However, we reduced user acquisition costs in the fourth quarter by more than 40% year-over-year, accounting for less than 35% of total promotion and advertising expenses. This shift drove sequential increases in our daily active users' time spent. Additionally, in the fourth quarter, we saw a significant year-over-year improvement in both the content creation contribution rate and next month retention rate for our highly active users. Regarding content, we further refined our current operations by deeply integrating training topics and user demands while continually strengthening recommendation technology. This initiative combined with our diverse incentive plans for content creators propelled rapid growth in our community's high-quality content pool. At the end of 2023, the cumulative pieces of content increased to 774.7 million, among which the cumulative number of Q&A has reached 590.8 million. We also leveraged Zhihu's position as China's leading content-centric community to encourage extensive professional discussions on training topics. For instance, in 2023, the cumulative discussion volume related to generative AI and large language models surpassed 1.2 billion across the Zhihu community. A distinguished group of founders and key developers from leading LLM companies joined the discussion on Zhihu, contributing their valuable impact. Science and engineering-related content was another standout increasing by 85.6% year-over-year in 2023. Our high-end plan continues to serve as a crucial incentive for content creators. Since the release of high-end 5.0 in May 2023, we have consistently promoted professional content creation driving creativity and productivity through initiatives such as our Blue Label Certification. In 2023, this program covered 130 virtuals with nearly 200,000 users certified. Furthermore, we provided broader avenues for content creators to earn income. During the fourth quarter, the total number of content creators who earned income on our platform increased by 17.4% year-over-year. As I previously mentioned, one of our top priorities for '24 is to enhance the trustworthiness within the Zhihu community. To that end, we have been prudently empowering our community with AI, leveraging large language models to better connect human knowledge, experience, and insight, making them more accessible to a broader audience. At our recent discovery conference on March 20, we introduced a new search feature called Discovery, leveraging Zhihu's language model. This significant advancement in search scenarios allows our users to initiate discussions directly with content creators across the entire Zhihu community with a single question. The content featuring discovery comes from professional content creators within the community. This feature facilitates more efficient knowledge sharing by enhancing search efficiency and content consumption experience for Zhihu users. We are also providing feedback to our content creators. With enhancements like discovery, we aim to strengthen community development and drive the continued emergence of high-quality, trustworthy content. We firmly believe that a combination of professional, in-depth, authentic content, and a culture of sincerity and respect as well as our transparent and efficient information mechanism will further enhance our community's trustworthiness. This in turn will drive user engagement and retention throughout the Zhihu community building the efficient and sustainable organic growth of our user base in the long run. Moving into our multi-engine commercialization, in the fourth quarter our total revenue increased by 2.2% year-over-year to RMB1.1 million, empowered by our thriving community. Paid membership and vocational training maintained their robust growth. Together they expanded our monetization capability beyond the Zhihu community contributing more than 50% to total revenue for both the fourth quarter and full year 2023. This strong performance underscores the resilience and effectiveness of our business models and diversified revenue growth engine. In terms of revenue growth by sector, vocational training and paid membership revenues led the way, increasing by 28.3% to RMB625.2 million. Notably, revenue from vocational training doubled compared to the fourth quarter of last year, as revenue contribution remained at over 10% throughout 2023. While marketing services had yet to fully recover on a yearly basis, it picked up sequentially with quarter-over-quarter growth of 21.5% in the fourth quarter. Particularly, display-based advertising delivered sequential growth of over 33%. In addition, we saw rapid year-over-year growth in various verticals that require a longer decision-making process such as IT, 3C, and home appliance. This highlights the wider role of Zhihu's professional, in-depth, and authentic content in consumer decision-making. We continue to streamline and upgrade our CCS business offerings throughout 2023 to drive further marketing efficiency improvements and realize greater commercial potential in this business segment. The increasingly diverse premium content has contributed to consistent growth in our payment membership business. In the first quarter, our paid membership revenue increased by 13.3% year-over-year to RMB455.9 million. In the fourth quarter of 2023, average monthly subscribers reached RMB14.2 million representing a 9.2% year-over-year increase. Average revenue per user, ARPU, also improved year-over-year. There were two primary growth drivers. First, the expansion of both our high-quality content categories and our target audience, Zhihu's vast and diverse library of premium content encompasses not only knowledge-based content like columns, research papers, and e-books, but also short stories that are gaining popularity among users. As of the end of 2023, our content library amassed 4.9 million visits, an increase of 15.7% year-over-year. Additionally, the number of premium content creators who earned income in Zhihu in '23, Q4 surged by 36.8% year-over-year. During our content library, many of our short stories originate from professional discussions in Zhihu's Q&A community. Since the launch of Zhihu Yanyan story in May '23, it has emerged as a frontrunner in the multibillion-dollar short story market in terms of both content production and consumption. Today, the cumulative number of content creators on exit 600,000 with a cumulative of over 100,000 short stories published. Topical coverage has expanded beyond the platform's original romance and professional and suspense genres to encompass over 180 subcategories. For the common categories popular among female users continue to grow, we are also expanding into categories favored by male users such as science fiction and mystery. Meanwhile, the Zhihu community's financial rewards effectively motivated our premium content creators. Over 100 content creators on Zhihu have earned more than RMB1 million. Also in '23, the average monthly income of spine content creators on Yanyan was close to RMB10,000, nearly doubling the average income on other platforms. Second, media format diversification and IP monetization have continued to bolster our users' long-term value. In the first quarter, we introduced a variety of formats to boost content consumption including audiobooks and video dramas. These initiatives are carefully designed to provide our subscribers with an immersive and fulfilling storytelling experience. By leveraging our expanding media formats and deepening our penetration across the value chain, we're expanding from the short story market to a broader IP monetization market. The success of our short-form web posters clearly reflects strong IP development potential within the Yanyan Story platform. Moving forward, we will harness the power of AI and large language model technology to explore and develop integrated content formats, further unleashing the value of Zhihu's premium content. This approach will help enhance our subscribers' LTV in the long term. Our vocational training business continued to grow robustly with fourth-quarter revenue surged by 100.1% year-over-year. Looking ahead, we officially announced our development strategy focusing on digital empowerment for our Zhihu brand at our annual Zhihu Education Conference in January 2024. Zhihu is a vocational training platform dedicated to providing comprehensive and practical learning services for new generation professionals throughout their lifelong personal development journey. Currently, we have expanded course offerings over three main categories, academic improvements such as postgraduate exams and English proficiency tests, career enhancements such as CFA, accounting, and ESG exams, and other vocational skills in interest, such as writing, IT skills, and AGI courses. The vocational training sector offers immense opportunities for digitalization. AI and large language models are poised to revolutionize the industry, leading to efficiency improvements and significant shifts in user experience. By leveraging AI, LLM, and AI agent applications in vocational training scenarios, we can advance the digitalization of processes such as job selection, exam practice, and homework correction. Our vocational training business success underscores Zhihu's unique position. We started as a community but we are expanding beyond it. Moreover, this rapid revenue growth will bring us greater scale advantages in terms of cost dilution and efficiency improvement. We will continue to control and optimize this business cost and expenses to continually boost its overall operating efficiency. In the fourth quarter, marketing and services revenue decreased by 18.7% year-over-year but increased by 21.5% quarter-over-quarter. The year-over-year decline can be attributed to the challenging economic environment and heightened market competition, as well as our proactive efforts to prioritize user experience by reducing the distribution of commercial content that may negatively impact our users. However, the cornerstone verticals of our community continue to demonstrate robust growth. This reaffirms our core users' recognition of our professional content's value, particularly in the current environment, emphasizing cost-effective and rational consumption. Specifically, the IT and 3C vertical grew by nearly 40% year-over-year in the fourth quarter of '23. This trend is also evident in other consumer verticals involving significant decision-making processes such as home renovation, tasks, and order activities, which appeals to our core users. Zhihu's unique content advantages and ongoing product efficiency upgrades empower brands and merchants to gain deep insights into users' evolving mindsets, allowing them to influence decision making and purchasing behavior. Furthermore, we have established a feedback mechanism for data collaborations with e-commerce platforms like Taobao and JD.com, leveraging virtualized data to help brands and merchants achieve their business objectives more effectively by boosting ad card rates, store visits, and category penetration rates as well as lowering customer acquisition costs. Our market services made substantial progress during the Double 11 period, with the average conversion rate from Zhihu to brand online stores reaching 6% across our verticals. Moreover, both transaction rates and new customer acquisition rates outperform the industry. As we progress through 2024 and elevate the community's trustworthiness, we will also continue to build out our scientific trust-based marketing system across two primary aspects. First, we will continue to upgrade our underlying capabilities to further improve the efficiency of commercial content recommendation. Since the beginning of this year, we have sought to cover major advertising categories with a library of rated and labeled SKUs so that we can establish a user evolution system empowered by AI. This will allow more suitable products to be recommended by a broader base of content creators. Second, we will strive to maintain a high level of user experience, especially for our highly active users. If users submit feedback indicating a lack of interest for a piece of content, the user will no longer seek commercial content for that product. Moving on to our key strategy for 2024, enhancing operating efficiency and accelerating profitability remain our core strategic objectives for sustainable growth. Alongside ongoing efforts to improve our commercialization efficiency, we're committed to optimizing our cost and expenses structure. Efficiency will be a pivotal performance indicator at each BU level. This approach will expedite our journey towards profitability. Meanwhile, we will prioritize initiatives that contribute significantly to the community's long-term growth and sustainability. Additionally, we will deepen our commitment to protecting our core users' engagement and creative contributions, reflecting the growing value we place on our trustworthy community culture and professional, in-depth, and authentic content. Finally, in terms of AI investment, we'll shift our focus to developing application scenarios. We'll prudently integrate AI into our diverse professional and trustworthy community to provide Zhihu users with efficient access to our massive library of trustworthy answers and greater expansion opportunities beyond it. This concludes Mr. Zhou's remarks. Now I will review the details of our fourth quarter financials. For a complete overview of our fourth quarter and full year 2023 results, please see our press release issued earlier today. While we continue to face various challenges, we remain resilient and devoted to our multi-engine monetization strategy. Our total revenue increased by 2.2% and 16.5% year-over-year for the fourth quarter and full year respectively. We are also pleased to deliver measurable progress in refining our cost controls and operating leverage, shaping a record high gross margin since our U.S. IPO and a significantly narrowed net loss for the fourth quarter. Our paid membership revenue for the quarter increased 13.3% year-over-year to RMB555.9 million. This growth was primarily driven by the continued expansion of our subscribers, which increased by 9.2% year-over-year to 14.2 million as a result of content enhancement and user experience improvement. Our occasional training business revenue for the fourth quarter surged by 100.1% year-over-year to RMB169.3 million. This impressive growth can be attributed to our ongoing efforts to expand our course offerings. All our courses are specifically designed to meet our users' evolving demand covering areas such as academic improvement, career advancement, and other vocational skills and interests. We continue to garner market recognition for our programs and drive sustainable development. The overall macro environment and uncertainties in the advertising market pressured our marketing services throughout 2023. In the fourth quarter, marketing services revenue declined by 18.7% year-over-year. However, they recovered by 21.5% quarter-over-quarter, driven by our product enhancements and sustained increasing performance in verticals such as IT, 3C, and home appliances. Gross profit for the first quarter increased by 7.1% year-over-year to RMB673.1 million, with gross margin expanding to 59.1%, its highest level since our U.S. IPO. Gross margin improvement reflects our enhanced monetization efforts as well as improved efficiency in cloud services and bandwidth utilization. Total operating expenses were RMB851.3 million for the fourth quarter, compared with RMB844.8 million for the same period of 2022. Selling and marketing expenses for the fourth quarter increased to RMB527.6 million from RMB509.2 million for the same period of '22. As we continue to invest in product and service offering promotions with a prudent ROI-based approach. Research and development expenses slightly increased to RMB232.6 million for the fourth quarter from RMB212.5 million for the same period of 2022. The increase was primarily attributable to our increased spending on technology innovation. General and administrative expenses for the quarter decreased by 26% to RMB91.1 million from RMB123.1 million in the same period of '22, primarily attributable to a decline in personnel-related expenses as we continue to improve operating efficiency. Driven by our ongoing efforts to control costs and enhance operating efficiency, our GAAP net loss per quarter narrowed significantly year-over-year by 42.6% to RMB103.1 million. Our non-GAAP adjusted net loss, which primarily excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, narrowed by 31.9% year-over-year to RMB91.3 million for the fourth quarter. Moving forward, as we continue to optimize our cost structure, control our operating expenses, and record growth driven by our multi-engine monetization model, we expect to further enhance our operating leverage. As of December 31, 2023, we had cash and cash equivalents, term deposits, and short-term investments of RMB5.5 billion compared with RMB6.3 billion as of December 31, 2022. Also as of December 31, 2023, we had repurchased RMB26.3 million in A ordinary shares including ADS for a total of $58.5 million on both the New York Stock Exchange and the Stock Exchange of Hong Kong. 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.

The first question is from Vicky Wei with Citi.

Will management share some color about the key strategic focus of Zhihu for 2024?

This is Zhou Yuan, CEO of Zhihu. Looking ahead to 2024, our primary strategic goal will be to achieve profitability as soon as possible. To do this, we will optimize our cost and expense structures, prioritizing efficiency across our billing operations and within each business unit. Additionally, we will focus on preserving the professional and in-depth consumption experience for our core users. We aim to enhance user retention and the reputation of our high-quality, trustworthy content while fostering a sincere and friendly communication atmosphere. Furthermore, we will continue to emphasize the application of AI across various practical scenarios, improving our search function's convenience and efficiency, as well as establishing a feedback system to align function design with user input. In summary, next year, we will concentrate on our core objective, expanding beyond our community roots. We will work on reducing losses in our emerging businesses to achieve overall profitability in the future.

The next question is from Xueqing Zhang from CICC.

The company just mentioned that the priority goal in 2024 is to achieve profitability. So what's our timetable for breakeven? And could management elaborate a bit more on the path to achieve it?

This is Wang Han, CFO of Zhihu. To first start, we aim to achieve breakeven quarterly breakeven on the non-GAAP net profit level in the fourth quarter this year. As we all know that Zhihu has grown into a widely known name over the past 14 years. I believe many of you on this call, like myself, have been spontaneously opening the Zhihu app on our phones rather than being directed through any promotional link. Before I joined this company, I believe that Zhihu possesses a large base of genuine and loyal users. After I joined the company, I have reconfirmed this fact with numbers. The majority of active users in 2023 are those who have been with Zhihu since 2022, which is even larger than I previously expected. Additionally, as a user-generated content community, Zhihu has much lighter operating costs compared to other business models of other companies. Our growth margin has maintained at over 50% for five consecutive quarters, reaching 59.1% in the fourth quarter last year. It is obvious that Zhihu's core users will contribute notably high profits. In other words, as long as we proactively and prudently reduce brand promotion expenses with lower ROI, prioritize user quality over quantity, we believe that Zhihu can continue to narrow losses and progress towards profitability. Meanwhile, in terms of our commercialization model, Zhihu has developed its own approach which breaks through the limits of user scale by leveraging the community's advantages. Our Yanyan Story and ZhiXueTang brands have shown us great potentials in this regard. We also expect similar potentials with our AI-empowered search discovery function. The real-time conversion-based interaction built on top of our high-quality, long-form text and graphic Q&A can unlock greater user and commercial potential. So to summarize, Zhihu will gradually explore a path to scalable profitability that differs from other social media platforms.

The next question is from Daisy Chen with Haitong International.

First of all, congratulations on the probable achievement of Zhihu's efficiency improvement strategy. I saw that the Q4 also narrowed to single-digit level since 2021. But my question is about the membership business. I noted that the growth rate of the monthly paid users seems to decelerate in recent two quarters, but the number of the MPOs and the pay ratios remained about 14 million and 40% this quarter. Can I ask about how the management considers about the savings of the paid users? And how does management affect the growth rate of the membership at least in the next one or two quarters – two years? And what are the corresponding drivers?

This is Wang Han, CFO of Zhihu. I understand your question may involve three underlying aspects. Firstly, whether the proportion of paying members to Zhihu's monthly active users has reached a significant level. Secondly, the potential growth ceiling of the short story sector. And thirdly, the competitive environment within the online literature sector. Firstly, the traditional logic of paying members is based on converting a subset of users from the overall user base. The target would be the total number of users. However, Zhihu has established a new growth path for its paying members. Zhihu's premium content can attract users from outside the community to subscribe within the Zhihu platform. This not only removes the limitations imposed by the total user base but also brings in new users to the community. Furthermore, the consumption of non-story content by these users actually exceeds that of the story content, which promotes overall content consumption growth. Secondly, concerning the competitive landscape, Zhihu stands as the largest platform for producing and consuming short stories across the internet. It is the favored platform for many short story creators to showcase their work. Zhihu's leading market position is due to two main factors: community support and our unique value proposition. Content creators on Zhihu can find inspiration, engage in discussions, and develop plots through Q&A interactions, naturally fostering innovation and high-quality, high-volume content creation. This ecosystem's value is irreplaceable. Moreover, most online literature apps operate on an advertising model that aims to maximize user engagement, often leading to prolonged, slow-paced, and low-information content. In contrast, Zhihu utilizes a subscription model that emphasizes high-quality content that users are willing to pay for. This unique value proposition has given Zhihu a distinctive edge in terms of content quality and market position. Regarding the growth ceiling, the short story segment is an emerging field where Zhihu has played a pioneering role. We are actively working to expand its reach. Currently, our premium content mainly consists of text and graphics, but there is significant potential for growth in audio and visual formats like radio plays, audiobooks, and short dramas. Short stories share similarities with short dramas rather than longer narratives. Zhihu stories are characterized by their brevity, engaging plots, quick production, and real-world relevance, all of which are essential for creating successful short dramas. We have begun this journey, recently announcing a partnership with Kuaishou focused on short drama production. A diverse collection of high-quality short story intellectual properties will become increasingly valuable for Zhihu. Some short dramas based on Zhihu's IPs have already performed exceptionally well, and we expect this trend to continue. Additionally, revenue from our intellectual property rights currently constitutes a small share of our total income. As the market comes to recognize the value of our Yanyan's IPs, we anticipate that the revenue from film and television rights will gradually rise.

Operator, we can continue with the next question, please.

The next question is from Eileen Lin with China Renaissance.

I have a question related to education. Can management share more color on Zhihu's education development, such as student-based or strategic focus? And how AI can be integrated into the education business?

This is Zhou Yuan, CEO of Zhihu. As we all know, our vocational training business has been growing rapidly in the recent quarters and it has achieved synergies between our self-operated vocational training business and our acquired vocational training business. So firstly, our self-operated business is closer tied to our community yielding higher profits and will swiftly respond to evolving user demands, while our acquired business segments offer greater demand certainty and a larger addressable market. Our community has continually empowered our vocational training business. Firstly, we are able to discover the specific demands and the evolving demands of our users and achieve greater certainty in terms of our course offerings compared to other industry players. For example, some of our cornerstone course offerings, the writing courses, multimedia training courses, and artificial general intelligence courses, stem from the Q&A discussions within the community and cater to the evolving demands of our users. In the future, we will continue to leverage our advantages to expand our course offerings, especially to meet evolving needs and also the greater demands with greater certainty for our courses. Beyond our community empowerment, users and content creators within the community can not only inspire and support the research and development of our new course offerings but also empower multiple existing premium courses. Our labor productivity stays at the top rank in the industry, and as our course offerings mature, the scale of economies will continue to strengthen. Moving forward, we can further cultivate our content creators in our community to become our teachers, helping all content creators to achieve their financial goals. Our users of our content course offerings come to Zhihu with the aim to improve themselves, and they also serve as users for our vocational training business. Our vocational training is actually expanding beyond our community now. The users will not only generate word of mouth effects but also generate high-quality commercial content based on their learning experience, attracting new students. This greatly improves our acquired business and also improves conversion rates and our ability to maintain a dynamically optimal customer acquisition ROI in their respective segments. So beyond that, our ZhiXueTang brand has actually formed a closed-loop ecosystem that can empower our self-operated business in return. We believe that the expenses and costs with our expenditure will be further diluted with the growth of our revenue from the vocational training business and our commercialization efficiency will be further elevated. We believe that AI technology will greatly enhance our efficiency and revolutionize our user experiences. We will start from the core needs of our users and promote the application of AI large language models to empower the full process of our education in different scenarios. We believe that in the next one or two years, we aim to expand the application of AI large-language models across the full process of our vocational training business.

The next question is from Lu Qingzu with Goldman Sachs.

I'm asking about advertising business on behalf of Lincoln Kong. Can management shed more light on advertising business including strategic priority and outlook for online marketing services for 2024?

This is Wang Han, CFO of Zhihu. In the fourth quarter of 2023, in addition to the external and macro factors, the main reason for the delayed year-over-year recovery is that we have proactively enhanced the commercial content governance. In order to foster the trustworthiness within the Zhihu community, we chose to phase out some near-term low-quality business income. However, at the same time, we have made remarkable strides across our businesses. To start with, the retention rate, average revenue per user, and content consumption volume of high-quality users across our core verticals have all been steadily increasing. Secondly, the consumption power and high-quality of Zhihu users have been further recognized in the industry. According to third-party surveys, 72% of Zhihu users are willing to pay a higher price for quality products. In addition, as much as 86% of Zhihu users have made repeat purchases on JD.com during the past year, with a target group index, namely TGI, reaching an impressive 502 significantly outperforming the industry average. In addition, we are optimizing our closed-loop data ecosystem. We have strengthened our data partnerships with e-commerce platforms such as Taobao and JD.com through initiatives such as Xinji Plan and Qingji Plan. By providing visualized data, we assist brands and merchants to better validate the value and ROI of their promotional efforts to drive further increases in marketing services order placement. In 2024, we expect to remain in a period of product upgrading and adjustment for our marketing services business. We will continue to explore business models that can foster stronger trustworthiness while optimizing our data infrastructure.

The next question is from Cici Cheng with CLSA.

Can management share some color on user growth targets for 2024? And how can we model the long-term self-enlarging cost ratio?

This is Wang Han, CFO of Zhihu. This year, we took a proactive approach to adjust our user growth strategy. Instead of simply pursuing a larger-scale monthly active users, we will focus on improving our core users' retention rate and further enhancing the trustworthiness within our community. Ultimately, we will establish a commercialization model that is unique to Zhihu. It is worth mentioning that although our sales and marketing expenses as a portion of revenue may seem significant, the direct user acquisition costs for our app were only half of the total promotional costs, less than half of the total promotional expenses. The absolute amount of customer acquisition costs in the fourth quarter of 2023 increased by only 40% year-over-year, while our monthly active users only experienced a slight decline. That demonstrates the loyalty of Zhihu's core users. Zhihu has a group of users with the highest quality and greatest value. We believe that serving them well will yield substantial commercial rewards. We do not need to follow other mass market social entertainment platforms to pursue user growth at any cost. We should follow our own path. As we approach an era of AI-generated content, authentic and trustworthy human-generated content will become increasingly scarce across the internet. Zhihu represents the place to generate and share genuine, high-quality content, possessing a unique value proposition in the market. AI technology will enable us to blaze a trail that is different from the traditional time-spent framework and explore new business models with greater potential. The way that Zhihu forms is actually the place that is in demand by the market in the age of AI technology.

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

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