Zhihu Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 29, 2023

There are 5 speakers on the call.

Operator

and welcome to the Zhuhu Inc. 3rd Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a Q and A session. Today's conference is being recorded.

Operator

At this time, I would like to turn the conference over to Ms. Iris Lu, IR Manager. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Hello, everyone. Welcome to our Q3 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Former Chairman and Chief Executive Officer of Finance Mr.

Speaker 1

Li Da Hai, Chief Technology Officer and Mr. Hari Xia, 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 Litigation Reform Act of 1995.

Speaker 1

Forward looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U. S. Securities and Exchange Commission.

Speaker 1

The company does not assume any opportunity 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 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 IR website at ir. Zuhu.com.

Speaker 1

I will now turn the call over to Mr. Harishya, CFO of Zuhu.

Speaker 2

Thank you, Ares. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yan, Founder and CEO of Zhihu. Hello, everyone. Thank you for joining Zhihu's Q3 2023 earnings call.

Speaker 2

During the quarter, we made considerable progress in our multi engine commercialization across the entire community, boosting our total revenue by 12.1% year over year. Notably, revenues from our membership and vocational training business increased 39.2% and 85.6% year over year, contributing 45.7% and 14.2% of our total revenues, respectively. Throughout the quarter, we continued to unlock the vitality and prosperity of the Zhuhu community, inspiring our content creators' high quality production, while continuously expanding our user base and encouraging user interaction. Our number of MAUs reached another milestone for the quarter, rising to 100 and $10,500,000 We continue to view cost control and operational efficiency as one of our strategic priorities. Consequently, we witnessed a 5 percentage points increase in our gross margin, bringing it to 53.7% for the quarter, along with a notable 10.1% reduction in our non GAAP net loss compared to the previous year.

Speaker 2

Going forward, I will be dedicated to leading the team to enhance our operating efficiencies and further narrow losses. Now I'd like to dive into the details of our Q3 initiatives and discuss our progress concerning content and the creators and the commercialization progress. Let's start with our content and the content creators. As of Q3, the accumulated pieces of content across the Zhihu community reached 743,700,000, representing a year over year increase of 28.4%. In addition to expanding our overall content library across various verticals, since our users kind of in July, we have specifically focused on spending and enriching content related to new generation professionals' evolving demands, including their career growth, lifestyle and consumption related scenarios.

Speaker 2

Furthermore, to bolster our community ecosystem, we continue to focus on the organic commercialization of our content. At our Zhihu Business Conference in September, we announced the official release of a new commercial content product, Zhuyao, designed for credentialed professionals. With this product, professionals can answer questions, share product experience and provide industry insights as experts in their specific fields. Alongside these initiatives, we also enhanced our new generation professional content creators by providing high quality traffic support through our Marco influencer incubation plan, leading to greater and more direct influence on users' consumption decisions. We also launched a data product, the Zhihu LiuShu Mini Program, which can help our merchants and the brands capture precise market growth potential by analyzing trending topics, industry research, and many other factors as a valuable part of our marketing services.

Speaker 2

We also drove increased operational efficiency and performance across the Zhuhu community in the Q3 as we continued to elevate our content supply by integrating AI and other technologies, by enhancing algorithms and AI powered content comprehension, we were able to deliver more customized and balanced content to users, especially content with a higher commercial value. Content creators continue to contribute to immerse value to the Zhuhu community. During the quarter, in addition to enhancing our content library, we strove to inspire new content creators to join us while also increasing support for our existing content creators. During Q3, the average financial income of content creators who received the financial income from our platform increased by more than 30% year over year. We stimulated both the quantity and quality of their production by actively engaging in operating activities.

Speaker 2

Simultaneously, we provided support through improved community governance and strengthened interest protection mechanism. Additionally, we intensified our crackdown content. To promote the sustainable growth of our dynamic and the flattish income ecosystem, we adopted a more active approach to our multi engine commercialization in this quarter. As a result, our membership business maintained its accelerated growth momentum and the revenue contribution from the vocational training business continued to increase. This stands as a strong testament to our outstanding content monetization capability and the effectiveness and the resilience of our business model.

Speaker 2

Our total revenue for the quarter was RMB1.0 billion, up 12.1% year over year. Among our various revenue streams, paid membership revenue grew by 39.2% year over year and average monthly prescribing members increased by 35.9% year over year to 14,800,000. This strong revenue performance was boosted by our persistent efforts to broaden content coverage, while improving content distribution efficiency. Jiho IT products have begun to demonstrate huge potential within the online entertainment industry in China. Our content and blockbuster IP have garnered broad recognition beyond the Juhu community, amplifying the potential for audience based growth.

Speaker 2

A hit TV drama, Sense of Time, adapted from novel Xi Tianhua on the Zhihu platform, debutated on Youku in October to broad market acclaim. We believe that the strong sense of connection and the broader peer of the original stories in Zhihu's library offer great opportunities for film and television adaptation, which will further unlock our content ecosystem's growth in the monetization potential for our valuable IPs. Zhuhu has already accumulated more than 100,000 IPs in its library, including short stories and science fiction, etcetera. There are currently many other Zhuhu works in the film and the television pipeline and we look forward to sharing more details of these projects once they are available. By leveraging our technology and operation capabilities, we are confident we can share the massive value and influence of our IPs with our users, content creators and business partners.

Speaker 2

We will continue advancing the development of our high quality IP content and integrate AI technologies from content creation to commercialization. In an array of functions and tools we have recently launched or improved such as our AI GC powered illustration tool, Writer Assistant have significantly boosted content creation. Meanwhile, our updated interactive functions, together with our broader and more diverse content categories, have effectively expanded our user coverage. Moving forward, we will continue to strengthen our commercialization capabilities through innovation and exploration to increase ARPU. Moving on to marketing services.

Speaker 2

In the Q3, our marketing services were still affected by the overall fluctuations in the macro environment. Despite these challenges, our cornerstone verticals, especially those advertisers' products requiring a relatively longer decision making process with high values, have been widely recognized among brands and manufacturers. For example, IT and 3C and home appliance continue to make solid progress. Together, these increased significantly by double digits year over year, highlighting the effectiveness of our content centric marketing solutions. To further unleash the commercial value of the Chuhu community's of high quality content, traffic and other opportunities for brands and manufacturers, we have been consistently upgrading our products and expanding content consumption scenarios.

Speaker 2

We have enhanced our partnerships with 3rd party e commerce platforms such as Taobao for traffic data and analysis. This includes live monitoring of comprehensive indices, including traffic volume, user engagement, user acquisition and transaction number. This enables merchants and brands to enhance the ROI through more optimized performance based marketing. Our newly launched content product also helps to maximize the value of the credential professionals and influence on users' consumption decisions. Furthermore, we continue to upgrade our underlying technology capabilities to achieve better ROI for our brands through our smart advertisement allocation model and streamline order placement functions.

Speaker 2

Boosted by these efforts, our advertising business recovery has begun to pick up sequentially in the Q4. Moving forward, we are confident that our operational effectiveness and enhanced brand recognition will enable us to capture the market's growth potential. Moving on to our vocational training business. We have been striving to broaden and diversify our program offerings by identifying and fulfilling users' demand for academic and vocational qualifications as well as employment skills. Our well rounded product and service spectrum now covers postgraduate entrance examination, civil service examination, ESG, CFA and CPA examinations, language testing, writing analytics skills and AGI among others.

Speaker 2

As a result, vocational training revenue soared 85.6% over year in the Q3. We will continue to adjust our service offerings to capture market growth. We also boosted the operational efficiency of our vocational training business and focused on resources on post merger integration during the quarter. The resulting optimized ROI in user acquisition significantly strengthened our business product competitiveness. Furthermore, we remain confident in the opportunities that the AI revolution is bringing to education industry.

Speaker 2

As such, we continue to fortify our R and D capabilities and integrate AI into products and services to improve user experience. During the quarter, we released the AI powered paper correction tool, which sets a new benchmark for user experience in the vocational training industry. We also expanded our AI technology application scenarios to improve our sales conversion and users' interactive learning experience. Our strategic investment in AI technology is playing a pivotal role in our development as we approach our next stage of growth. Our large language model Zhihai 2ai, which received regulatory approval in early November, has now reached 100,000,000,000 level parameters.

Speaker 2

With regulatory approval secured, Zhihaiju AI can serve more users and commercial clients, marking another milestone in the process of transforming the Zhihu community into Chihu Intelligent Community. We believe Chihai Du AI's advantage lies in the ability to naturally combine large language model with specific scenarios powered by superior content understanding and inference abilities. We will gradually open our large language model benefiting our users and partners while preparing the sustainable growth of the entire industry. We will better empower our content creators and users in various scenarios while enabling brands and manufacturers to reap the benefits and reach their operational targets. In short, Zhihu's success and resilience are underpinned by our dynamic ecosystem with high quality content at its core.

Speaker 2

With progress across content and the commercialization of our diverse revenue streams in this quarter, we are well positioned to capture driving healthy and sustainable growth while enhancing profitability. Going forward, we will continue to seek and seize opportunities to empower users and creators with advanced technology, creating value for all our stakeholders. This concludes Mr. Zhou Yuan's remarks. Now I will turn to our financial details in the Q3 for a review of our Q3 2023 results.

Speaker 2

Please see our press release issued earlier today. I'm pleased to announce another solid quarter with accelerated progress in our multi engine commercialization, driven by robust growth in paid membership and the vocational training business. Our total revenues for the quarter increased with strong resilience, rising by 12.1 percent year over year, which is in line with our management's guidance provided previously. As we consistently broadened and diversified our products and service, Pay membership revenue for Q3 increased by 39.2 percent year over year, while vocational training revenue increased by 85.6 percent from the same period of last year. Our gross margin for Q3 first expanded by 5 percentage points year over year to 53 point 7% as we focused on higher margin business and projects.

Speaker 2

Our ongoing improvement cost control measure and operating efficiency enhancements also improved the company's bottom line. Accordingly, our non GAAP net loss for Q3 narrowed by 10.1 percent from the same period of 2022. Our paid membership revenue for the quarter was RMB466.8 million, up 39.2 percent from RMB 335.4 million for the same period of 2022. This increase was prepared by the continued growth of our subscribing members, which increased by 35.9% year over year to 14,800,000. Our vocational training business revenue for the Q3 was RMB144.8 million, up 85.6 percent year over year.

Speaker 2

This organic growth came from new courses offerings provided by our existing business and notably our newly launched online courses for ESG related examination preparation received excellent feedback from our users. The remainder of the revenue growth was attributable to the acquisition of MBM Master, which is acquired previously. Our marketing services revenue for the quarter was RMB383 1,000,000. Despite the overall industry challenges, Our cornerstone verticals, including IT and 3C and home appliance, maintained their growth momentum, increasing significantly by double digit year over year. Gross profit for the Q3 increased by 23.4% year over year to RMB548.5 million with gross margin expanding to 53.7 percent from 48.7% for the same period of 2022, primarily due to our enhanced monetization efforts as well as our improved efficiency in cloud services and the bandwidth optimization.

Speaker 2

Total operating expenses were RMB 898.6 million for the Q3 compared with RMB 723 1,000,000 for the same period of 2022. Selling and marketing expenses for the 3rd quarter increased to RMB584.3 million from RMB 78.3 million for the same period of 2022, as we continue to invest in promoting our products and brand names. Research and development expenses increased to RMB249.7 million for the 3rd quarter from RMB160.8 million for the same period of 2022. The increase was primarily attributable to our increased spending on technology innovation as we believe strongly in the potential opportunities in large language model technology. General and administrative expenses increased for the quarter to RMB114 point 6,000,000 from RMB83.9 million in the same period of 2022 due to increase in rental expenses and an increase in share based compensation expenses from our acquired business.

Speaker 2

In this quarter, we incurred approximately RMB18 1,000,000 relocation expenses as we moved into our new headquarters in Beijing, Driven by our ongoing efforts to control costs and operational efficiency improvements, our GAAP net loss for the quarter was RMB278.4 million, narrowed by 6.5% on a year over year basis. Our non GAAP adjusted net loss, which primarily excludes share based compensation expenses and amortization of intangible assets resulting from business acquisition was RMB225.3 million for the Q3, narrowed by around 10% from the same period last year. As of September 30, 2023, the company had cash and cash equivalents, term deposits and short term investments of approximately RMB5.7 billion compared with RMB6.3 billion as of December 21, 2022. As of September 30, 2023, we repurchased approximately 18,300,000 Class A ordinary shares for a total of US42.6 million dollars 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.

Speaker 2

Let's turn the call over to the operator for Q and A, Sanxin. Thank you.

Operator

Thank you. We will now begin the question and answer session. The first question today comes from Steve Ke with Goldman Sachs. Please go ahead.

Speaker 3

Thanks for taking my questions. So first, congratulate So first, congratulating on receiving the approval for our large language model, Zhihai 2 AI. Could management share with us the latest progress of our large language model as well as the future monetization

Speaker 2

roadmap?

Speaker 1

Thank you, Steve, for the question. This is Zahailei, CTO of Zuhu. To summarize, Zuhu is well positioned as a content community that has high quality content and data on its platform and we have made tremendous progress in terms of building up our large language model capabilities in the past few months. And in the future, our key focus will be on the application of And more specifically speaking, our is now upgraded to 100 billing level parameters of multi model large language model. And in early November, we have obtained the regulatory approval for our large language model.

Speaker 1

In terms of application, internally we have used our Zhihai2 model into different first aspects of our daily operations. And speaking of content comprehension, our large language model has been used on the content classification, our content search and recommendation to enhance its operating efficiency. For example, in the past, our content classification system upgrade takes about 1 quarter and now it's shortened to 2 weeks. In this way, we will enhance our user engagement and In terms of our marketing services, our largest model helps us to refine the titles of our content converse articles and help us to refine our content products to enhance our commercialization conversion rate. Our matching module, large language module also facilitates the generation of cover pictures of stories of our members paid membership business.

Speaker 1

And in this way, user will be able to interact with the virtual characters of our short stories and get an in-depth understanding of the content of the story. Speaking of our vocational training business, our large language model helps the system to correct the access for our students and also help our tutors to enter the basic or frequent from the students in this way to enhance the operation efficiency of our vocational training business. In terms of our content auditing, the large language model with the help of our large language model, the in-depth meaning identification abilities, the large language model is able to filter low quality content and identify the non compliant content of our questions and user reviews in this way to enhance the overall efficiency and So this summarizes our past explorations in terms of the utilization of large language models in our community. So in terms of our future plan, with the approval of the regulator with the approval of the regulators, we plan to utilize our Zhihai2 AI into more products or functions that can be accessed by our users to enhance our content creation and consumption experiences. To Juhu is a very important opportunity.

Speaker 1

And through the R and D of Zheihai to AI start language models and continuously upgrade our basic model capabilities, we will provide better experiences for our users and content creators and also enhance our commercialization efficiency. Thank you for your questions.

Operator

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

Speaker 1

Thanks for taking my question and congratulations on another solid loss. The membership business once again demonstrates strong growth this quarter. What's the strategy for this business in the future? And how does the company view the recent development trend of Michael drama series? Thank you.

Speaker 1

This is Zhou Yuan, CEO of Juhu. As you can see that as our CFO have introduced previously, in the Q3 this year, our revenue from paid membership business has increased year over year by 39.2% and we have accumulated average monthly paying users for about 15,000,000. And currently, we have accumulated a mass outing space and concentrated interface for our paid membership

Speaker 2

business.

Speaker 1

And based on our content business Fairview, our paid membership business is experiencing resilient growth. And firstly, we have explored our content IP commercialization currently. And in October, our hit drama, State of Time, have released on Youku and have received broad market appeal from the market. And secondly speaking, our paid membership business has constantly improved in terms of our operating efficiency with the help of technology innovation. As Seth has mentioned just now, with the approval of AI large language model, Our AI technology will facilitate us in terms of the writers' assistants and also the cover picture generation for our stores in our paid membership business.

Speaker 1

And another aspect I would like to mention is that AI will not only help us to enhance operating efficiency, but it will still help us to create more in-depth interaction with the content of the stories. For example, the interaction with virtual characters in the stories. And in this way, we will create more in-depth content consumption and help to increase our ARPU for our paid membership business. And the final aspect I would like to mention is that we are constantly exploring different means of media for our paid membership business. And in our end selection business, not only the short video dramas you have mentioned that is developing very rapidly in China recently, but we also have about 100,000 number of stories or content in our paid membership business.

Speaker 1

And we will constantly evaluate our media and to help us to enhance our paid membership business.

Speaker 2

And Shaojun, this is Henry, the CFO of the company. So thanks for your question. To compensate the right answers to our CEO about the short form TV drama. We believe it's a huge market with a brilliant potential. And as the CEO mentioned, Jihu was the equipment was very large.

Speaker 2

We accumulated more than 100,000 storey in the library. So we believe that the market will recognize the Zhuhu's IP the scarcity value of the Zhuhu IPs in this very, how to say, unique and booming market. Thank you.

Operator

The next question comes from Vicky Wei with Citi. Please go ahead.

Speaker 1

Thanks management for taking my questions. Will management provide some color about the recent progress of the marketing service business and the performance of the Double 11 performance? How should we think of 2024 outlook for this business? Thank you. Thank you, Vicky, for your questions.

Speaker 1

This is Zhou Yuan. To introduce some of the noticeable progress of our Double 11 campaign, our content commerce solutions business has made some historical marks for the past Double 11 campaign. So for some of the specific progress or metrics we have achieved for the Double 11 campaign, during the Double 11 period, our relevant content search volume has increased year over year by about 188 And in terms of our average selling price of our commerce products, the average selling price have achieved more than RMB 1300. In terms of different verticals of our content of our marketing services, firstly speaking, for our IT, 3C and home appliances sector, the business volume have achieved double digit growth year over year. And for other sectors like outdoor and consumption and cosmetic products, the growth is also noticeable.

Speaker 1

We have established corporations or partnerships with a lot of e commerce platforms in terms of our data and other FX. And during the Double eleven period, the transaction volumes and the new client rate for our marketing services have also increased noticeably. For some of the verticals of our marketing services, the conversion rates or the conversion rate of these verticals have reached about 8%. So that is to say among 100 of the people who have visited our platform, about 8 of them have been successfully converted. We have been targeting new generation professionals starting from this year.

Speaker 1

It's one of our key targeted users. And in this year, we have noticed some trend, interesting trend. For example, some of the lifestyle related consumptions have increased significantly in our platform. For example, some of the cameras and washing machines or high quality IT3C products. Another interesting trend we have noticed is that in our content platform, our users is very reliant on the introduction of the professionals in their introductions of their different products, especially some detailed metrics of these products.

Speaker 1

For some of the products such as LED or different electronic devices, the transaction volume has almost doubled or tripled in our platform. Another thing is that thanks to our continuously improved data establishment and our data cooperation with different e commerce platforms, the data capabilities of our platform has significantly improved. And in this way, our content commerce solutions and content recommendation capabilities have also converted or translated into higher ROI for performance based marketing

Speaker 2

services.

Speaker 1

And finally, as the outlook for next year or Q4 of this year, in the Q4 of this year, we have noticed a recovery trend for our marketing services And with the enhancement of our performance based marketing solutions, we are confident that next year, our marketing services will see a more noticeable recovery. Thank you for your questions.

Operator

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

Speaker 1

Thank you for taking my question. My question is about the education business. We noted that Zuhu's education segment year on year growth rate is quite strong this quarter. So can management share your views on the growth rate and margins for your organizational education business for the next few quarters? Thank you.

Speaker 1

Thank you, Stacy for your question. This is Zhou Yuan. In terms of our revenue from the vocational training business is rapidly growing. For this quarter, the revenue from vocational trainees has grown 85% year over year compared to the same period last year. And during the first half of this year, the revenue of vocational training business is already comparable to the full year last

Speaker 2

year.

Speaker 1

And speaking of the different varieties of the vocational training courses provided by our business, it's actually serving the similar demand of the same audience, the same target group of our platform, the new generation professionals. And our courses help them to grow in terms of their personal development and their career development and also education certification. And in our platform is we already have about more than 10 kinds of courses in our platform. And we have paid attention to the data in terms of the user growth in our business operations and I will give a more specific example. In this quarter, the vocational training business has seen a very interesting trend for some of the genres provided in our platform such as ESG or artificial intelligence related courses.

Speaker 1

It's very catered to the growing demand of the market to fulfill the career growth of our users. For example, the AI related courses have seen almost doubled or tripled growth in recent months. And moving on to the future, I think our key focus will be focused on the expansion of the different kinds of courses in our platform. And also with the help of AI, our operating efficiency will be enhanced. We have seen that there is a large room for improvement for the digitalization or enhancement in this industry.

Speaker 1

And what we are doing currently is that we are focusing on integration and operating efficiency enhancement for this segment. As with the help of the business expansion and commercialization, we are confident that the investment or commitment we have made in this segment will be seen in the future.

Speaker 2

To conclude, we have the vocational training business, okay? So I think this vocational training business will achieve more than like a 20% year over year growth in next year. But we are still as Zhou Yan, our CEO mentioned, we made a technology investment integration in this business. So we believe that is still like in the investment stage of the business. Thank you for your question.

Operator

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

Speaker 3

ahead.

Speaker 4

Thanks management for taking my questions. My question is about margin and the OpEx trend. Can management comments about the outlook for our GP margin as well as the OpEx outlook? On that front, can management comment about the timing to achieve breakeven? Thank you.

Speaker 2

Okay. Hi, Thomas sorry, Thomas. Thank you for the question. So our outlook for the GP margin that will be somehow be more certain or more sustainable at around maybe 53% to 55 percentage points per as we are improving our utilization of as you may know, as we introduced in the remarks that we said that we improve our utilization of the cloud services and focus on improving the operation efficiency for the cost control. And as you can see, we have a shift in our revenue structure and those to see the business, for example, like paid membership as well as the vocational training business, maybe their margin is not as high as the advertisement business.

Speaker 2

But going forward, we believe that we will keep that around the GP margin be between 53% to 55%. That's question 1. About our OpEx trend, we believe that we have seen some like opportunities that to lower the percent of our sales marketing as a percent of our revenue in the next year because we are a content platform. So we believe that there is still some room space to do more like a better cost control in the OpEx spending. And about the breakeven point, we believe that will happen in the next year.

Speaker 2

Yes, thank you for your question.

Speaker 4

Thank you.

Operator

The next question comes from Eileen Lin with China Renaissance. Please go ahead. Eileen, your line is now open. I will translate myself. Thanks for taking my questions.

Operator

I have a follow-up question to Thomas' question. Management share more quarter to quarter trends for the breakeven timing? And is there any color you can share on the selling and marketing expense?

Speaker 2

Hi, Eileen. This is Henry. Thank you for your question. Because we are in the year end budgeting work streams. So I think we will update with the markets our progress about the breakeven point.

Speaker 2

We believe that will be somehow some quarter, maybe 1 quarter next year. About just just marketing, as I mentioned in the previous question, we believe that there is still some like percentage point space to lower our sales marketing as a percent of our total revenue in the next year and in the next quarter. Yes, that's my answer to your question.

Speaker 1

Okay. Thank you.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Iris for any closing remarks.

Speaker 1

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

Operator

The conference has now concluded. Thank you for attending today's

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