Zhihu Inc. Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2024 Financial Results Conference Call. Today's conference call is being recorded. And at this time, I would like to turn the conference over to Ms. Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to Zhihu's Third Quarter 2024 Financial Results Conference Call. Senior management 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 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 our public filings 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. Additionally, the matters 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, CFO of Zhihu.

Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu's Third Quarter 2024 Earnings Call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman, and CEO of Zhihu. We delivered solid third quarter results across key financial metrics, thanks to our continued focus on efficiency enhancement and cost reduction. Gross profit margin improved by over 10 percentage points year-over-year, reaching 63.9%, the highest level since our listing. Total costs and operating expenses decreased by more than 35.6% and 30.5%, respectively, leading to a net loss of RMB 9 million, down 96.8% year-over-year. Our efforts to optimize the community ecosystem are also yielding positive results. Group user engagement in the third quarter propelled a sequential increase in our user base. Furthermore, we further enhanced content creators' experience across our community, fostering a renewed sense of confidence in driving more active contribution. This, in turn, has cultivated a professional insightful community atmosphere built with a balanced rational optimism. Furthermore, in line with our commitment to exploring AI applications, we launched the professional search feature for Zhihu Zhida at the end of October. This initiative marks a significant step in our differentiated approach to enhancing product capabilities and elevating the user experience, leveraging our massive pool of high-quality data and content. I'll delve deeper into Zhihu Zhida later in the call. Now let me focus on users and content. This quarter marked the third consecutive period of our refined user strategy. We achieved sustained improvements across key user metrics alongside a sequential recovery in user growth. MAU for Q3 rebounded quarter-over-quarter to 81.1 million despite our continued reduction in community-related promotional spending. Overall user engagement across the Zhihu community also increased sequentially with core user retention showing significant year-over-year growth. Additionally, daily active user time spent rose nearly 20% year-over-year and maintained its upward trend quarter-over-quarter. As we continued to elevate the experience for content creators and core users, we saw a notable rise in both the scale and engagement of high-tier content creators with the number of income-generating content creators increasing by over 25% year-over-year. Since the beginning of this year, we have deepened our focus on cultivating new high-tiered content creators across diverse fields. By offering advanced creative tools and signature initiatives unique to Zhihu, we fostered their growth and enriched the Zhihu library with the steady influx of diverse, authentic, and professional content. Throughout the third quarter, Zhihu delivered highly differentiated, rewarding, high-quality content to Internet users nationwide through in-depth professional discussions on major societal events. For example, the 2024 Zhihu Science season launched in tandem with the Nobel Prize announcement sparked a wealth of contributions across the Zhihu community, including predictions, insights, and educational content. Among the content, discussions on the 2024 Nobel Prize in physics alone generated over 1.5 million interactions within the Zhihu community. This dynamic engagement earned Zhihu the reputation of being the second home of the Nobel Prize. As of the end of the third quarter, Zhihu had a massive cumulative content volume of 854.5 million theses, representing a year-over-year growth of 14.9%. This includes 641.4 million Q&A entries, an increase of 11.8% compared to the same period last year. The Zhihu community now boasts a total of 77 million content creators, marking an 11.6% year-over-year rise. As the experience of both content creators and users have continued to improve, the Zhihu community, distinguished by professional discourse and rational optimism, has grown stronger. This progress is underscored by a steady decline in negative feedback from users and a notable increase in positive interactions. Average daily engagement per DAU has consistently risen quarter-over-quarter with the monthly average of uploads surging by over 25% year-over-year in the quarter. Next, I would like to share some details about the progress we have made with Zhihu Zhida. We have capitalized on Zhihu Zhida's extensive content library and robust source tracking capabilities to achieve rapid traffic growth and earn excellent reputation across the industry. According to newly released data from Similarweb, Zhihu Zhida's traffic reached 4.7 million in September, a remarkable increase of over 180% compared to August. In Bfinance AI product rankings for September, Zhihu Zhida ranked third among Chinese products in terms of sequential page view growth. Additionally, it claimed the second position on the domestic web growth leaderboard, earning a spot in the top 3 for 2 consecutive months. In October, we introduced professional search for Zhihu Zhida, a new feature meticulously crafted to meet the evolving needs of a wide range of users engaged in academic research and professional work. We integrated over 50 million Chinese and English academic articles from specialized content sources such as Wikipedia and Zhihu to enhance Zhihu Zhida's ability to fulfill users' search inquiries with high-quality content. Professional search also supports file uploads and comprehensive document sourcing, providing tools like single article in-depth reading and source-specific Q&A to address users' academic research and professional needs. Moving on to our business performance by segment. Our paid membership business continued to demonstrate steady growth momentum in the third quarter. The number of subscribing members rose by 11.5% year-over-year to 16.5 million, while the segment delivered revenue of RMB 459.4 million, increasing its revenue contribution to 54%. In late August, content creators on Zhihu produced a series of derivative works inspired by Journey to the West, a classic Chinese tale that also forms the core of the season's most popular domestically produced 3A game. These works presented a reinterpretation of the classic saga. Also, building on game momentum, we launched the Journey to the West special series featuring multiple stories that compare Asian and modern perspective to highlight the classic story's timeless allure, a release that has resonated strongly with our users. Turning to marketing services. In the third quarter, revenue from our marketing services was RMB 256.6 million, a 33% decline year-over-year. Although brand advertising and CCS decreased compared to last year, we're encouraged by our key clients growing recognition of Zhihu's brand and the high value they attribute to our users. This progress validates our commitment to optimizing our commercial ecosystem and enhancing the Zhihu community's trustworthiness as a strong and viable growth path for our marketing services. According to the iResearch report released in late October, Zhihu has established itself as the most trusted content community for consumer decision-making. Furthermore, the survey findings indicated that nearly 50% of users reported making purchases after reading product recommendations on Zhihu. In this year's Double 11 event, we also established the Zhihu reviewers' jewelry in their recommended campaign, providing consumers with professional, authentic, and timely answers to their purchasing questions. This quarter, brand advertising delivered solid year-over-year performance in eSports. Top clients in the automotive and fast-moving consumer goods sectors also ramped up their advertising spending on Zhihu. International FMCG brands particularly noted that Zhihu's high-quality user base aligns well with their target demographic. Consequently, despite tighter budgets across the broader advertising network, they opted to increase their allocations on Zhihu. In addition, our ongoing improvements in data analysis and operational efficiency have generated positive returns on investment for this premium client. For our CCS business, after a rigorous crackdown on low-quality content, we have gradually integrated high-tiered content creators from the Zhihu community into our CCS program, driving a steady increase in premium content contribution. This quarter, customer satisfaction and repurchase rate have significantly improved compared to the beginning of the year while content creators have benefited from increased earnings. Next, our vocational training business. We continue to streamline the segment structure and strategy this quarter. We transitioned from a wide array of niche offerings to a focused selection of high-performing categories where we hold a competitive edge. While overall revenue declined by 27.4% year-over-year, mainly due to our streamlined acquired business, our self-operated courses demonstrated strong year-over-year growth, along with notable improvements in profitability sequentially. Our self-operated business, closely connected to our community, continues to perform strongly with increasing predictability and profitability. Programs in high-demand categories such as media production and film post-production remain extremely popular among learners, reflecting long life cycle potential. Furthermore, our business structure optimization in the third quarter effectively enhanced overall ROI, allowing us to strategically allocate resources towards high-efficiency program categories, thereby supporting greater operational stability. Moving forward, we'll focus on narrowing this business segment's losses and aim to achieve breakeven as soon as possible. In summary, the third quarter highlighted our unwavering commitment to strategic refinement and execution, delivering financial results that once again exceeded our expectations. Commercial and operational efficiencies have been critical metrics during our operations, empowering us to optimize our use of company resources. Looking ahead, we will remain dedicated to enhancing the user experience and strengthening the trustworthiness of our community. We're strategically refining our operational model to unlock the full potential of Zhihu's brand and high-value user base. With robust fundamentals and a steady focus on achieving profitable growth, we are confident of creating value and delivering meaningful returns for our shareholders. This concludes Mr. Zhou Yuan's remarks. Now I will review the details of our third quarter financials. For a complete overview of our third quarter 2024 results, please refer to our press release issued earlier today. Our commitment to enhancing operational efficiency through disciplined cost control drove significant margin expansion in the third quarter. These efforts also led to narrowing losses, propelling us even closer to profitability. We achieved our lowest quarterly loss since our U.S. IPO in this quarter, demonstrating our momentum in building a more resilient business and sustainable value creation. Our marketing services revenue for the quarter was RMB 256.6 million compared with RMB 383 million in the same period of 2023. This decline is largely a result of our strategic ongoing optimization of service offerings with a focus on margin improvement. Paid membership revenue for the third quarter was RMB 459.4 million, slightly decreased from RMB 466.8 million in the same period last year. Notably, our average number of monthly subscribing members sustained its growth trajectory both year-over-year and sequentially. This progress was propelled by the growing quality of Zhihu's premium offerings, which are consistently attracting new paying members from both within and beyond the Zhihu community. Vocational training revenue for the quarter was RMB 105.1 million compared with RMB 144.8 million in the same period of 2023. This decrease was primarily due to our strategic refinement of acquired business with a focus on prioritizing the faster-growing self-operated programs. Our gross profit for the third quarter was RMB 540.1 million compared with RMB 548.5 million in the same period of 2023. Boosted by our enhanced operating efficiency, our gross margin also further improved year-over-year, reaching 63.9%, a record high. Our total operating expenses for the quarter were RMB 624.5 million, a 30.5% decrease from RMB 898.6 million in the same period last year. Selling and marketing expenses decreased by 27.4% to RMB 388 million, down from RMB 534.3 million in the same period of 2023. This reduction was primarily driven by more disciplined promotional spending and a decrease in personnel-related expenses. R&D expenses for the quarter decreased by 28.2% to RMB 179.3 million, down from RMB 249.7 million in the same period of 2023. This reduction was primarily attributable to more efficient spending on technological innovation. G&A expenses decreased by 50.1% to RMB 57.2 million from RMB 114.6 million in the same period of 2023. This decrease was primarily attributable to lower share-based compensation expenses. Consequently, our GAAP net loss for the third quarter narrowed significantly, decreasing by 96.8% year-over-year. Our adjusted net loss on a non-GAAP basis was RMB 13.1 million compared with RMB 225.3 million in the same period of 2023. Our adjusted net loss margin decreased more than 20 percentage points year-over-year to 1.5% in the third quarter. As of September 30, 2024, the company has cash and cash equivalents, term deposits, restricted cash, and short-term investments of RMB 5 billion compared with RMB 5.5 billion as of December 2023. From our Hong Kong IPO until September 30, 2024, we had repurchased 31.1 million Class A ordinary shares at an aggregate price of USD 66.5 million from the open market and canceled such shares. We also repurchased a total of 10.1 million Class A ordinary shares at an aggregate price of USD 16.5 million to be utilized upon vesting of restricted shares in the future. In addition, we had repurchased another 33 million Class A ordinary shares at an aggregate price of USD 38.5 million via tender offer, which were completed on November 8, 2024. In total, the company has purchased 74.2 million Class A ordinary shares for a total price of USD 121.5 million. As we approach the end of 2024, we'll continue to elevate content quality and enhance the experiences of both users and creators across the Zhihu community by harnessing the power of innovation and technology. We remain committed to optimizing resource allocation, advancing towards profitability, and unlocking the potential of Zhihu's brand and high-value user base. By building a more dynamic platform, we'll further foster our user engagement and support content creators' success, firming our position as a leader in knowledge sharing and community value. 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.

And the first question will come from Xueqing Zhang with CICC.

Congratulations on further reducing loss in the third quarter. Could management share more color on the commitment about achieving a breakeven in the first quarter? And what's the outlook for 2025? What will be the main drivers?

Thank you for your question, Xueqing. This is Wang Han, Zhihu's CFO. We have been firmly focused on our Q4 breakeven target this year. Achieving a significant reduction in losses in both Q2 and Q3 has further boosted our confidence in reaching this goal. After reducing adjusted net loss by nearly 80% year-over-year in Q2, we further decreased the adjusted net loss by 70% quarter-over-quarter and 94% year-over-year for Q3. Our adjusted net margin in Q3 of last year was 22%, while this year, it is only 1.5%. So the path to breakeven in Q4 now is quite clear. The two strategic priorities for '25 are quite clear. First of all, from a financial perspective, our primary objective is to sustainably reduce annual losses and potentially approach profitability on a full-year basis. On the operational front, our focus is to enhance core users' experience and engagement level and strengthen Zhihu's content reputation and trustworthiness across all platforms. Creating an environment that encourages our most professional users to actively participate and contribute remains the foundation of Zhihu's identity. For our other business models, we will continue to innovate centered around Zhihu community's professionalism and trustworthiness. This approach will comprehensively leverage Zhihu's unique advantages. So to be more specific, in terms of our marketing services, we will continue to reduce low-quality and untrusted commercial content. We aim to innovate and make improvements through business model refinements and data infrastructure updates, building Zhihu's commercialization on a solid and trustworthy foundation. We are working to achieve breakeven within the vocational training business while strengthening its integration and interaction with the Zhihu community. This will establish a faster feedback mechanism for user demands and accelerate service capability development. For our paid membership business, we will also leverage community content and user feedback to create a better product mechanism for this business and to further enhance Yan Selection members' renewal rate and consequently increase the lifetime value, LTV, of our paid members. So in summary, our fundamental driver here is still a healthy prosperous community, along with a sustainable business ecosystem that can fully integrate and interact with the community itself.

The next question will come from Daisy Chen with Haitong International.

My question is about the users and the community. This quarter, we noted that Zhihu's MAU has improved and stopped the sequential decline. At the year of the beginning, you made some sequential adjustments to the community and the users. Can management provide more details on the adjustments you have done? And what are the key strategies you think that are successful? What changes were made on Zhihu's community and users' behavior? And one more question is about when do you expect Zhihu's MAU to recover to positive year-on-year growth?

Thank you, Daisy. This is Zhou Yuan, Zhihu's CEO. So I will just start with the answer to your second question. Our MAU numbers may be influenced by 2 factors here. First of all, the reduction in community-related promotion spending may lead to the loss of low-frequency users. And second, our focus on enhancing our core users' experience. Consequently, the high-frequency users have been growing. The combination of these 2 factors may not guarantee the overall numerical MAU growth next year. However, what is certain is that we will continue to increase the investment in our core users' experience. What I want to address here is that the improvement in Q3 actually stems more from the work we've done in the first half of the year. I believe we have still a long way to go. Community work is pretty much like working as a farmer. The work we're doing now may contribute to the improvement in 2 years later. As to improvements we've made so far this year, we've been focusing on algorithm optimization to encourage more professional in-depth and authentic content and increase their visibility in our community. We significantly increased the weighting of likes, follows, shares, and other high engagement metrics as they often align with our criteria for high-quality content. As a result of these adjustments, user retention has also risen. This shows that our users are eager to consume high-quality content across various professional views. For our content creators, we have been continuously improving the creation experience and income mechanism for them by enhancing the user experience in multiple ways. For example, from a community perspective, we strictly control AIGC content but have been integrating user-friendly AI tools into our creation tools to improve creation efficiency. We also recently reinstated the Zhihu column feature, which was popular among creators and core users with upgraded product mechanisms. In the remainder of the year, we will continue this upgrading. In terms of creators' revenue mechanisms, for 3 consecutive quarters this year, the number of creators earning income has grown by over 25% year-over-year with a better diversified revenue stream. At the same time, Zhihu continues to prioritize income opportunities for those mid-tier and long-tier creators. The professional, authentic, and in-depth content has gained more visibility across various dimensions in the community. The latest data reveals that the average exposure share of relatively low-quality content on the recommendation page has decreased by over 40% compared to the beginning of the year, while negative feedback from users has dropped by more than 30%. Positive interactive behaviors have grown steadily. Going ahead, we will take a systematic approach, step-by-step to enhance our community ecosystem. I believe this is a long-term project. Just as I mentioned earlier, it's like working as a farmer. Thank you again for your question.

The next question will come from Lincoln Kong with Goldman Sachs.

My question is about the Zhihu product upgrade as well as Zhihu Zhida. Recently, we launched this Zhida professional search function. Can management share with us what other features could be added to this Zhida in the future? And how might this integrate with the Zhihu community, or monetization efforts and AI strategy into our product?

Thank you for your question, Lincoln. This is Zhou Yuan, Zhihu's CEO. The launch of Zhihu Zhida's professional search feature is fundamentally about scenario-oriented updates. Our thinking is that the workflow in different scenarios is the most critical factor in addressing the needs of different user groups. Workflow represents a fundamental need, and this is also the direction for Zhida's iteration. For example, professional search is tailored to suit academic research and professional work scenarios across finance, law, health care, and other fields. When searching for specific professional concepts or questions, users can directly access full text papers and take advantage of extended features such as single article detailed reading and customized Q&A with specified scope. Additionally, users can upload papers, and this allows for a personalized Q&A and in-depth analysis. This means that for specialized knowledge in a vertical field, like from getting an overview of a topic, collecting related literature and rating, analyzing documents to answering follow-up questions, and offering comprehensive breakdowns and insights, this capability can also be generalized across multiple scenarios. Besides that, Zhihu Zhida can provide a one-stop solution. We believe that one of the future directions for upgrading Zhihu Zhida is integration with Zhihu community itself. However, at this stage, we're not ready to reveal too much about this, specifically new features. Thank you, Lincoln, for your question.

The next question will come from Vicky Wei with Citi.

Hello, can you hear me?

Yes.

Okay. Sorry. Will management share some color about the fourth quarter outlook for the advertising business and the CCS business adjustment progress? My second question is related to the membership business. Will management share some insights on the competition landscape, user growth, and ARPU trend?

Thank you for your question, Vicky. I will take this question. The first question is about the advertising or the marketing services business. This is Wang Han, Zhihu's CFO. To fundamentally safeguard and potentially enhance the differentiated advantage we gain from our high-value audience and brands, we will continue to reduce low-quality, untrustworthy commercial content. To that end, we will remain focused on innovating and transforming our product mechanism and data infrastructure. Recently, we have been reviewing and refining our collaboration models with quality content creators and brands to further bolster the trustworthiness of Zhihu community. We are resolute in our commitment to making this adjustment, even if it means temporarily sacrificing some low-quality content. The know-how here is that Zhihu is increasingly validating its commercial strength and expertise specifically focusing on helping brands build premium value with high-quality and high-value audiences. In the second quarter, we shared examples such as Toshiba's refrigerator launch campaign in Zhihu as this first stop for a new product and Vivo's collaboration with Zhihu's lighthouse program to promote their Blue Heart AI accessibility feature. Some similar cases in our Q3 also highlighted the premium value of the high-end brands and audiences. For example, TCL's new embedded refrigerator gained strong word of mouth and seeding effect through Zhihu's first stop for new product campaign, achieving better-than-expected results. Similarly, Bulgari, during this year's Qixi Festival, chose Zhihu as the primary platform for its nationwide campaign, recognizing Zhihu's high concentration of affluent, high-conception users. These examples perfectly illustrate our trustworthy and high-quality content value and ability to deliver commercialization results, driving win-win outcomes for ourselves. For your second question, I believe it is about our paid membership business. We are not seeing significant changes in the competitive landscape here. Zhihu Yan Yan story continues to hold its leading position in the short-form paid content sector. In the third quarter, our average monthly subscribing members achieved double-digit growth both year-over-year and quarter-over-quarter, reaching 16.5 million. The growth momentum for our paid memberships relies on Yan Yan story's premium content advantage. We are exploring multiple channels to expand our paid membership space, including within Zhihu community and beyond Zhihu community. We aim to further foster the brand recognition and positive word of mouth of Yan Yan itself. Our strategy does not intervene directly in paid members' ARPU. Rather, the core focus is on enriching our members' benefits, which we believe will lead to an increase in the lifetime value, LTV, for our paid members. In this quarter, through our premium paid membership, we significantly boosted demand and order growth by expanding the content offerings in audiobooks and video dramas. Additionally, Yan Yan story's ability to transfer its premium IPs into video content is constantly being unleashed. In the third quarter, two works by Yan Yan story creators were selected for the most potential IP list. The short drama adapted from these works achieved over 10 million views within just 7 hours of its release and inspired over 100 million discussions. Looking ahead, we expect to launch new product formats and more membership benefits based on the synergy between Yan Yan story and the Zhihu community. So please stay tuned.

The next question will come from Stella Wang with TH Capital.

My question is about the advancement in optimizing the vocational training business. Could the management share some insights about this progress and what's the financial target in the long term?

Thank you for your question. This is Wang Han, Zhihu's CFO. Currently, the primary goal of our vocational training business remains improving efficiency and accelerating loss reduction with the goal of achieving breakeven for this segment itself by the end of '25. To that end, our Q2 and Q3 adjustments primarily focused on scaling back unprofitable course offerings and low-margin acquired business. This allowed us to concentrate more resources on expanding our strong performing courses, resulting in improved overall efficiency and profitability. From a management perspective, both operating losses and net losses for the vocational training segment declined quarter-over-quarter for Q3. Looking ahead, we aim to bolster a faster and closer integration between the vocational training business and the community. This will enable us to quickly validate new demands, leverage precise customer acquisition advantages and build brand reputation and user recognition. We expect this effort to deliver substantial empowerment and eventually translate into sustained positive unit economics. This adjustment process will span the fourth quarter of this year and continue throughout next year.

The next question will come from Cici Cheng with CLSA.

It's very encouraging to hear that the company is on track to achieve breakeven in the first quarter. In light of this, does the company have any plans to consider a shareholder arrangement post breakeven in order to enhance shareholder return, and does the company prefer share repurchase or dividends?

Thank you for your question. This is Wang Han, Zhihu's CFO. As we mentioned earlier, since our Hong Kong IPO, we have repurchased over USD 120 million worth of shares via various means, including open market buybacks and tender offers. The total number of shares that we repurchased exceeds 25% of the total issued and outstanding shares. On the one hand, this results in a significant enhancement in shareholders' value. On the other, this clearly demonstrates the management's strong confidence in the undervaluation of its assets. It’s worth mentioning that in early November, we completed a share buyback via tender offers in both Hong Kong and the U.S. market. This is our first practice in the market, and for a total consideration of over HKD 300 million. We will continue to do buybacks on the open market to further demonstrate management's confidence. At the same time, we are also accelerating our path to profitability and positive cash flow. With this foundation, we will consider exploring more diverse methods for shareholder returns.

This concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Ms. Yolanda for any closing remarks. Please go ahead, ma'am.

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

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