Zhihu Inc. Q2 FY2024 Earnings Call

Thank you, Operator. Hello, everyone. Welcome to Zhihu'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 would 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 Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further 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 applicable law. Additionally, the matter we will discuss today will include both GAAP and non-GAAP financial measures for comparison purposes 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.zhihu.com. I will now turn the call over to Mr. Wang Han, our CFO. Please go ahead.

Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu's second quarter 2024 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, and Chairman, and CEO of Zhihu. 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 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 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 Zhihu'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 active 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 Zhihu 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 Zhihu reached 830.9 million, a 16.8% year-over-year increase. The cumulative number of content creators within the Zhihu community grew by 12.5% to 74.9 million during the quarter, indicating a continued rise in the proportion of highly active users engaged in content creation. To further bolster user engagement, Zhihu continued to foster rational, optimistic, in-depth discussions around prominent social issues and world events this quarter. For example, during the annual Gaokao period, we strategically enhanced the community's support for Gaokao users by elevating the first-hand experiences shared by previous examinees, optimizing search functionalities, and refining recommendation algorithms. Accordingly, the volume and quality of Gaokao-related answers rose markedly, with three-day and seven-day classroom response rates 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 life 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, content 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 Zhihu users on our high-quality content continued to rise, accompanied by a significant increase in user interactions. Average daily engagements per year grew by nearly 40% year-over-year, with the monthly average increasing by over 47% year-over-year and more than 13% quarter-over-quarter. As we progress in our development of cutting-edge technology, we consistently strive to push boundaries and expand application scenarios. The official launch of Zhihu Zhida in late June marked a significant step in our exploration of AI-powered search functionality. Zhihu Zhida's deep integration with 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 a 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 Zhida's total visit increased by 430% compared with June, as we continue to leverage Zhihu's self-developed LLM to refine Zhihu Zhida's performance and user experience. By the end of July, user retention doubled compared to early July. Zhida'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 Zhida's PC platforms through our ongoing improvements in product features, algorithms, and performance. Simultaneously, we are set to officially launch and upgrade Zhida Tab on the Zhihu app, which will effectively complement the desktop version. Zhida not only provides professionals with effective tool-based scenarios but also has vast potential for exploration in user interaction and content creation through the power of the Zhihu community. Moreover, we aim to reach a broader audience with Zhida, relying on its performance and reputation rather than extensive advertising and promotion. Our effective strategic planning and execution is reflected not only in our growing user engagement and flourishing community but also in 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 robust growth, increasing by 17% and 28.4% year-over-year, respectively. This performance underscores our effective monetization capabilities and substantial commercial potential of our high-value user base within the 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 while 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 distribution platform increased more than six-fold compared with the same period last year. As we move into the second half of the year, we will continue to enhance our marketing services, grounded in the trustworthiness of our community. Our efforts will focus on the following key areas. First, by leveraging our AI and LLM capabilities and enhanced data infrastructure, we aim to further boost conversion efficiency for brands and merchants, while also enhancing our own product and operational efficiency. Second, we will capitalize on our community's professional discussion environment and the trustworthiness 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 strategies, 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 continued to unlock our high-quality strong story IPs monetization potential. On July 9th, the short drama Love in a Dream premiered on Tencent Video. This marks another successful adaptation from Zhihu's Yanyan Story library, following the acclaim of our prior adaptations. Next, I will review our Vocational Training business. We strategically optimized our business structure in the second quarter, focusing on efficiency enhancement and concentrating on self-operated offerings that align closely with our community to provide greater certainty and profitability. We 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 for the quarter. GMV for our vocational skills and interest programs achieved over 50% year-over-year growth this quarter, with AI and AGI-related programs continuing 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 will remain confident and committed to achieving quarterly profitability targets. Meanwhile, we will continue to improve our segmented, engaging user experience and enhance the Zhihu 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 unlock Zhihu's growth and commercialization potential, driving the company'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 2024 results, let us 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 disciplined 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 have achieved notable improvements in both gross margin and adjusted net loss. Remarkably, this quarter represents our lowest quarterly loss since our U.S. IPO. Our marketing services revenue for the quarter was RMB 344 million, compared with RMB 412.7 million in the same period of 2023. This decline primarily reflects our deliberate ongoing refinement of service offerings to strategically focus on margin improvements. Pay membership revenue for the second quarter decreased slightly by 3.7% year-over-year to RMB 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 2023. This decrease was mainly due to our strategic refining of acquired business, prioritizing self-operated programs that offer 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 2023. 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 this quarter were RMB 740.4 million, a 16.7% decrease from RMB 889.3 million in the same period of last year. Our selling and marketing expenses decreased by 22.9% to RMB 417 million, down from RMB 540.6 million in the same period of 2023. 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 209.3 million, down from RMB 236.2 million in the same period of 2023. 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 2023. Our GAAP net loss and non-GAAP 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, 2024, the company has cash-in-cash equivalents term deposits, restricted cash, and short-term investments of RMB 5.1 billion, compared with RMB 5.5 billion as of December 31, 2023. As we advance into our second half of 2024, we will persist in our commitment to rigorous strategic execution, driving us closer to profitability. At the same time, we will diligently explore innovative avenues to deliver enduring value to our shareholders. This concludes my prepared remarks on our financial performance for this quarter. I will now turn the call over to the operator for the Q&A session.

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 breakeven target? Thank you.

Thank you for your question. This is Wang Han, CFO of Zhihu. Our profitability goals remain unchanged and resolute. We still plan to achieve a quarterly non-GAAP net profit in this fourth quarter. 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 streamlining costs and expenses but also recorded our lowest absolute quarterly loss since our IPO. And from the current progress in the third quarter, our loss reduction work should also be more pressing, so please stay tuned. Thank you, Vicky.

The next question comes from Xueqing Zhang with CICC. Please go ahead.

Thanks, management, for taking my question. My question regards your user base. How has Zhihu managed to maintain a stable database despite scaling down community promotion expenses? And a follow-up question on your AI search. Can management share the progress of AI search? What's the user metrics after the launch of Zhihu Zhida? How does management feel about its potential commercialization? Thank you.

The proactive user strategy adjustments we have made over the past two quarters have all been quality-oriented, prioritizing our core user experience. As you mentioned, our user base's core is user retention improvement for us. The user retention improvement stems from the enhancement of high-quality content, and the core of this improvement lies in a focus on in-depth content cultivation. This in-depth cultivation approach comprises two meanings: one is in-depth operation, and the other is in-depth content. Thus far, it seems to be working well. Our user base is quite stable. Thank you for your question. I will continue to answer your second question. We successfully launched Zhihu Zhida on the PC platform at the end of June. In the past period, our work has focused on two main areas: optimizing the model and upgrading and optimizing the end. The optimization of the model has led to significant improvements in user retention with a marked increase in the number of high-frequency users, or what we call heavy users. As for the end optimization, we started by enhancing the functionality of our PC platform, which is an important productivity scenario. This work will continue for some time. Meanwhile, we are preparing to launch Zhihu Zhida on our mobile platform, with features still in planning. The goal of this end enhancement is to reach more users. The combination of model and end optimization is translating into our user growth. Overall, we are seeing positive changes in terms of product usage, time spent by users, and both next day and seven-day user retention. Our primary focus is on improving the experience for heavy users. Commercialization is not the priority at this moment. Thank you, Xueqing, for your question.

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

My question is about advertising. Our performance app and brand app have shown good performance during the 618 Shopping Festival. What are the drivers behind this, and what are our advantages? Thanks.

Thank you for your question. This is Wang Han, CFO of Zhihu. Zhihu is becoming increasingly clear about its commercial strength and expertise, specifically in helping brands build premium value with high-quality audiences. I'd like to share two practical cases. The first example is our successful collaboration with a media outlet to achieve both positive word-of-mouth and self-worth for a refrigerator priced over 60,000 yuan. During this 618 Shopping Festival, Toshiba's premium flagship star-rated refrigerator achieved positive ROI through Zhihu'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. The second example is our Lighthouse project IT collaboration. The Lighthouse of the community illuminates the warmth of the product. We helped Vivo promote the Blue Heart AI accessibility feature. This initiative combined social value with strong marketing results. The in-platform topic gained over 1.3 million reads, 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 brands and our community. These successful cases categorized by high value and strong word-of-mouth demonstrate that Zhihu's strength in professional discussion forums unlocks the commercial potential of high-value users. By becoming the center of trust for this audience, this is the most natural path for Zhihu's commercialization. Thank you for the question.

The next question comes from Yu Chen Zu with Guangfa Securities. Please go ahead.

What are the main drivers behind the growth of Zhihu's paid user base? And how can we assess the outlook of this segment? Thank you.

Thank you for your question. This is Wang Han, CFO of Zhihu. Our two drivers remain the growth of our subscribing members and the increase in ARPU. In terms of the user scale of our paid members, as we mentioned previously, with a massive market beyond the Zhihu community, we will continue to explore multiple channels to expand our user base. Firstly, the MAU of the 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 distribution channels further demonstrated the spillover effect of the Zhihu Yanyan Stories brand, with paid members growing year-over-year in this quarter. Regarding ARPU growth, the key is enriching membership benefits. We have launched a premium membership that includes privileges such as audiobooks and radio dramas with differentiated pricing. Orders in this category have been steadily increasing. As the reputation and influence of Zhihu Yanyan Stories continues 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.

The next question comes from Daisy Chen with Haitong International. Please go ahead.

Thank you for taking my question. My question is about vocational training. How do you view the future of your self-operated part-time business? Currently, we know that the economy and consumption are relatively weak. Do you think it is an opportunity or a challenge for your goals? Thank you.

Thank you for your question, Daisy. This is Wang Han, CFO of Zhihu. 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. Additionally, the stable and favorable regulatory policies in the education industry have sustained improved performance and the market value of companies in this sector, which positively influences our valuation benchmarks. 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 the 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, we will continue to actively seek suitable targets with high standards that can integrate well with our community and have good operational and profitability levels. In the long term, we believe that the synergy between the vocational training business and our community will significantly empower this business segment. Rapidly validating new demand, acquiring customers precisely, and building a strong reputation will ultimately translate into a competitive advantage in our unit economics model. 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 our financial communications team. Thank you all.

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