Zhihu Q1 2023 Earnings Call Transcript

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May 24, 2023

There are 5 speakers on the call.

Operator

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

Operator

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

Speaker 1

Thank you, operator. Hello, everyone. Welcome to our Q1 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman and Chief Executive Officer of Juho Mr.

Speaker 1

Li Da Hai, Chief Technology Officer and Mr. Haru 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 include 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 well with the U. S. Securities and Exchange Commission.

Speaker 1

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 purpose 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 website at ir. Zihu.com.

Speaker 1

I will now turn this call over to Mr. Harry Sha, CFO of Jihu.

Speaker 2

Thank you, Eric. I'm pleased to deliver today's opening remarks on behalf of of Mr. Zhou Yan, Founder and CEO of Zhuhu. Hello, everyone. Thank you for joining Zhuhu's Q1 2023 earnings call.

Speaker 2

We are delighted to start 2023 with a solid Q1 highlighted by sustained revenue growth and a significantly narrowed net loss both beating the market consensus. While continuously expanding our user base over the past 2 years, we have also been closely following and capturing the evolving demand for short form online reading, including both knowledge sharing and novels. In addition to the various Yian Selection membership services, we launched a new app Yan Yan Story in major app stores recently to serve the broader user's content demand. As a part of Zhihu's product matrix, Yan Yan story will not only contain content generated from the Zhihu community, but also provide more differentiated content. Moreover, Yan Yan Story will cover users from different tier cities and support more audiobooks by offering more effective essential trends for content creators.

Speaker 2

Yian's selections are bouncing the premium content paired with our widely recognized brand name compared to the number of average monthly trading members to a record high of 14,900,000 in the Q1, representing 116% year over year and 14.5 percent sequential growth respectively. We also continued to advance our technological development during the quarter through a combination of internal initiatives and a joint development efforts as we actively explored the possibilities and potential of revolutionary AI technology. Zhuhu is now equipped with large language model technology that has 20,000,000,000 parameters. We launched our first language large language model or LLM, Zhihai to AI in April aiming to enable our content creators to generate high quality content more efficiently. Additionally, our users may utilize our LMM memorization function to consume more content and accelerate their readings in a more enjoyable way.

Speaker 2

At the beginning of 2023, we optimized our organizational structure by combining advertising and accounting and commerce solutions or CCS to enhance the overall competence and operational efficiency of our combined marketing services business. This upgrade has empowered us to better utilize the resources within the Juho community and provide our clients with more effective and comprehensive marketing solutions. As we optimize our marketing services business, I will personally spend more time on the segment and monitor its execution. Starting from the recent months, we have already seen a revival of advertisers engagement in e commerce and the 3C sectors. We are confident that our marketing services will achieve sequential growth in the Q2 and pickup growth momentum in the second half of the year.

Speaker 2

Now let me move on to our users and content where we have made remarkable progress especially in our short form content. In the Q1, we continue to broaden our content coverage and deepen our penetration across our cornerstone verticals, optimizing our content composition and the format to better satisfy users' evolving needs to use their fragmented time efficiently and obtain information quickly. To that end, we significantly upgraded our ideal tab on the APT making it a short form content pool to complement the long form knowledge based content currently available in Zhihu's community. We also expanded our short form content library to cover more lifestyle and consumption scenarios in response to users' needs. By upgrading an array of tools and functions such as picture editor and video captions among many others, We provided a more efficient scenario to inspire creativity for new content creation.

Speaker 2

This exciting progress in content successfully drove an increase in the number of users in our community, driving our MAUs in March to more than 110,000,000. We achieved a reacceleration in MAU growth in the 5th quarter and expect MAUs will grow up to $120,000,000 within 2023 to mark another historical high. While we remain dedicated to further solidifying Zhihu's leading position as a platform for users to discuss and exchange ideas. We are also looking for ways to enhance our offerings by incorporating AI's knowledge within our community. At the Zhihu Discovery Conference in April, we introduced our AI strategy along with our first LN, Shihai 2 AI.

Speaker 2

Through investment and joint development efforts, we are accelerating our progress in integrating AI knowledge across various application scenario throughout our ecosystem. The trending topic summary is our first to trial AI function. By leveraging AI's language learning ability to collect thoughts and integrate answers, the trending topic summary is able to summarize answers and present them to our users in an intuitive and a clear manner. We are now opening this LLM summarization function to more users via the Zhuhu mobile app. By further capitalizing on our unique advantages in both the data layer and the application layer, Zhihu is committed to becoming an important developer and ultimately a leading contributor to the industry's overall development in this area of AI technology.

Speaker 2

Net, our membership business driven by our premium content offerings and continuously expanding brand influence, our paid membership business grew rapidly during the quarter delivering robust increases on both an annual and a sequential basis. Paid membership revenue for the Q1 increased by 105.2% year over year while average monthly FlyBeam members grew by 116% year over year to 14,900,000 in this quarter. We streamlined the content creation procedures to improve efficiency and enforce the community compliance to protect the content creators rights and benefits. As a part of our multi brand strategy, we launched our new app YanYan Story featuring numerous user favorite functions such as a story search, audio books and recommended reading list. This new app will help us attract more membership subscribers beyond the Juhu community while building a distinct user base seeking for more concentrated reading experience inside the Juhu community cohort.

Speaker 2

We hope YanYan's differentiated content will also differentiated content will also penetrate massive Internet users from Tier 2 and Tier 3 cities in China. Now moving on to our vocational training business. Revenue from vocational training business increased by 117.6 percent year over year to RMB107 1,000,000 in this quarter. We grew our footprint in the vocational training industry value chain by organic growth and business acquisition. To see the greater potential in the graduate students entrance examination market, we recently completed the acquisition of MBA Master, a training institution specializing in preparation for MBA entrance exam examinations in China.

Speaker 2

Completing the integration of MBA master has further enhanced our industry competence with an improved business structure and enriched service offerings. Additionally, we continue to expand our vocational training services across major categories by developing programs that are in high demand in this evolving market, including civil service examination, ESG, judicial examination and a story writing among others. As I mentioned earlier, we are integrating AI technology into our course offerings as we look to enhance the overall quality and user experience. Encouraged by the positive feedback we have received our first new AI empowered program, we will continue to deepen our exploration of innovative technologies. Before I conclude, I'd like to provide a brief update on our EIC efforts.

Speaker 2

We published our EIC Annual Report for 2022 last month, presenting Zhihu's long standing commitment to social responsibility. As a leading online content community in China, our top priority and the greatest asset is and will always be our people, our employees, our content creators, our users and our society. Therefore, we strive to holistically improve our ecosystem for each of these stakeholders throughout 2022. With the initiatives including upgraded leadership development system for employees, our high end campaign 4.0 incentive plan for content creators, an array of programs to protect and serve our most vulnerable users including minors, those with disabilities and seniors. We also leveraged our wealth of knowledge content to promote childhood education particularly in new areas as we believe education equality and the growth and the development of China's young generation are critical to societal progress.

Speaker 2

Going forward, we will remain committed to our stakeholders improving their lives as we seek new ways to create value for our society and our planet sustainably. Looking ahead to the rest of 2023, we will remain focused on both monetization and the user growth. Marketing services and the paid membership have become our major revenue drivers during our continued expansion of the vocational training business and an LLM development. We will further expand the discussion and search scenarios in the Zuhu community as we leverage our resources and refined experience to study and respond to the evolving needs, thereby better serving both users and the clients. Thanks to our organizational optimization and operational efficiency improvements.

Speaker 2

In the Q1, our non GAAP net loss narrowed to RMB120 1,000,000 with adjusted net loss margin narrowed to 12.1%. We expect our business growth will continue accelerating and we are confident we will achieve 20% year over year increase in MAU as we strive to make innovative breakthroughs. We also believe our passion for progress and dedication will continue to empower our strength and resilience as we grow in this exciting and dynamic industry. This concludes Mr. Zhou Lian's remarks.

Speaker 2

I will now turn to our financial details in the Q1 for a review of our Q1 2023 results. Please see our press release issued earlier today. We were excited to commence 2023 with a strong Q1. Both our top line and the bottom line beat the street consensus while we operating while our operating cash flow and positive for the first time since our initial public offering. Total revenue for the Q1 increased by 33.8% year over year to reach RMB994.2 million effectively beating the market consensus.

Speaker 2

Our paid membership and the vocational training services continuously exited a robust growth during the quarter, increasing their contributions to total revenue to 46% and 11% respectively. However, as a variety of macro factors continue to affect the overall online advertising market, advertising spending remained sluggish in the Q1. To mitigate the impact, we optimized our organizational structure during the quarter, enabling us to better utilizing our community resources and enhance our service capability by integrating brand advertisement and CCS. Starting from the Q1, our advertising business is now combined with the TCS into marketing services to align with our new strategy and upgraded business structure. Our paid membership revenue for the quarter was RMB454.8 million, up 105.2 percent year over year from RMB221.7 million in the same period of 2022.

Speaker 2

Our average monthly subscriber members grew by 116% year over year to 14,900,000 which is a record high. Our appealing premium content and outstanding user experience continue to attract a broader user base even beyond our Jifu community. The company's marketing services revenue the quarter was RMB392.1 million. We are encouraged to see some recent signs of recovery in our marketing services in the recent months. And we expect our marketing services business to gain faster recovery during the second half of this year.

Speaker 2

Our vocational training business revenue for the quarter reached RMB107 1,000,000 representing a year over year increase of 170.6 percent from RMB39.5 million in the same period of 2022. Moving forward, we will continue to enhance our service capabilities and advance our footprint in the industry through both organic growth and business acquisition. Gross profit for the Q1 increased by 52.7% year over year to RMB512.2 million. Gross margin expanded to 51.5 percent from 45.1% in the same period of 2022 representing more than 6 percentage points expansion, thanks to our enhanced monetization efforts and the improvement of our cloud services and bandwidth utilization efficiency. We were particularly happy to see our investments in research and development rewarded us with the savings in the cloud service utilization.

Speaker 2

Total operating expenses for the Q1 were RMB729 1,000,000 down by 25.9 percent from RMB983.7 million in the same period of 2022. Selling and marketing expenses decreased by 12% to RMB445.6 million from RMB556 million in the same period of 2022. The decrease was primarily due to our in the promotion spending and the decrease in salaries and welfare expenses for sales and marketing related personnel. In the meantime, the number of Juhu's MAUs recovered significantly to 110,000,000 in March. We will remain dedicated to driving user growth through our ongoing content ecosystem first strategy.

Speaker 2

Research and development expenses increased RMB183 1,000,000 from RMB 166 point 5 million in the same period of 2022. The increase was primarily attributable to the increase in the salaries and the welfare of research and development personnel as well as the increased expenditure in Q4's large language model training for this year's largest technology upgrades. Our large language model will gradually serve a broader user base in the Juhu community going forward. General and administrative expenses decreased by 67.7 percent to RMB 100 400,000 from RMB310.6 million in the same period of 2022, primarily due to the lower share based compensation expenses recognized and the decrease in professional service fees. Benefiting from our ongoing operation efficiency improvements and the cost control strategy, we greatly narrowed our net loss in Q1.

Speaker 2

Our GAAP net loss in the quarter was RMB179 1,000,000 narrowing by 17.9% year over year. Our adjusted net loss on a non GAAP basis which primarily excludes the share based compensation expenses and amortization of intangible assets resulting from business acquisition was RMB120.2 million for the Q1 down by 67.3% from the same period of last year with an adjusted net loss margin of 12.1%. In this quarter, we generated RMB69.9 million operating cash flow marking the first time we have achieved positive operating cash flow with our IPO. This milestone demonstrates Zhuhu's revenue diversification and the business model and certainly generate positive cash flow from its operations and represents an additional step towards becoming a profitable company. Now moving to our balance sheet.

Speaker 2

As of March 31, 2023, The company had cash and cash equivalents, term deposits and short term investments of approximately RMB6,000 258,000,000 compared with RMB 6262 1,000,000 as of December 31, 2022. Also as of March 31, 2023, we have repurchased approximately 6,900,000 Class A ordinary shares at an aggregate price of US17.8 million dollars This concludes my prepared remarks on our financial performance for this quarter. Let's turn the call over to the operator for the Q and A session. Thank you.

Operator

Yes, Thank you. At this time, we will begin the question and answer session. And the first question comes from Vicki Wei with Citi.

Speaker 1

Good evening, management. Thanks for taking my questions and congrats on the stronger than expected quarter. Will management share some color on the company AIGC Technology strategy? And how should we think of the AI investment and the future monetization

Speaker 2

strategy questions will be answered by our Chief Technology Officer,

Speaker 1

This is Li Da Hai, CTO of the company. To answer your question, Zuhu is having unique positioning in terms of Chinese based database in China, and we are uniquely positioned in the artificial intelligence revolution in China, especially in a lot of different verticals for professional field content accumulation. Zuhu is open minded towards AI revolution. And in early April, we have released Zhehai to AI, our large language model. We released Zhehai to AI through both internal investment and joint development with other companies.

Speaker 1

These have largely enhanced our speed of development and also brought along team and knowledge flow between different teams. Now we are having about 20,000,000,000 parameters in terms of our latest LLM and we are planning to reach about 100,000,000,000 parameters for our large language model towards the end of this year. Thank you.

Speaker 2

Hi, Vicki. A second question about our investments in this area. I think still I think we are in the progress of doing the new plan for these large language model training. We believe is one of the most important technology development projects for this year. But I think the impact on the P and L that were no more than the RMB300 1,000,000.

Speaker 2

Thank you, Vicki. Thank you.

Operator

Thank you. And the next question comes from Steve Ku with Goldman Sachs.

Speaker 3

Congrats on the positive operating cash flow as well as the MAU crossing the $110,000,000 milestone. Could you please share with you the driving forces behind our strong MAU growth, as well as our strategy and changes in user behavior and your outlooks for the future MAU growth? Thanks.

Speaker 1

This is Zhou Yuan, CEO of the company. In the past year, we have made a lot of remarkable progress in terms of content ecosystem first strategy. This also helped us to grow our MAU through a robust growth. And during the Q1 of this year, MAU has also experienced steady growth.

Speaker 2

I will help you translate Mr. Zhu Yuan's answer to you. So first one that our user acquisition strategy was executed well. The efficiency of the user acquisition was improving in the past quarter. And second, we have some like adjustment of an tune on the product and on the content.

Speaker 2

As I presented during the remarks in the course before, We are now focusing on the short form content, as you may know. So we have a long form, very large base of long form knowledge library. And now we are going to provide more short form content, which is very welcomed by our users. 3rd one that we are more focusing on the people within between the age between 18 to 35 years ago with a job in maybe Tier 1, Tier 1, Tier 3 cities in China. This large group of users we estimated will be beyond around like 300,000,000 or 400,000,000 people population has a large potential for us.

Speaker 2

Lastly, but importantly, we believe the AI driven technology, the larger language model of the technology will be applied to more scenarios on Juho's mobile app. This we believe will help improve our user experience and then drove our user growth going forward. Thanks for the question. And back to your question about the user behavior changing in recent months, I have some numbers to be shared with you. The first one about the user engagement and user time spent on mobile app has been unchanged in comparison with Q4 last year, but still between but still between 27 to 28 minutes due to the date.

Speaker 2

And our membership, the people who are driving our membership and spend even more longer time like 15 minutes per user per day. This is my answer to your question. So the users beyond 30 years old is growing the cohort according to our internal statistics. And the second is the female users is also increasing in terms the percentage of the total user cohorts. Thanks.

Speaker 2

That answers your question.

Operator

Thank you. And the next question comes from Zhuqing Chang with CICC.

Speaker 1

Management share with us the recovery progress of marketing business. What time does management expect to return to positive growth? And we noticed that the revenue from advertising and been merged into the marketing services business this quarter. So just wondering the company's consideration for the adjustment. Thank you.

Speaker 2

Thank you, Xixin. This is Henry. I will have answered the question. So the first one, we have seen some rebound or recovery in the Q2, but we believe that the headwinds of the market was still there. And we still have been seeing some sluggish of the clients of the advertiser or the advertisers, but the rebound was coming from the 3C and the e commerce sector.

Speaker 2

So we think the obvious recovery should be seen in the second half of this year. But the second question that because we have a business upgrading our advertising products, So and according to our company levels new strategy, we believe that these adjustments about the CCS and advertising will increase our marketing and competitive competence to increase our power of the our whole integrated marketing solution for our clients. So and also can support our more longer term growth. So that will make the change. That answers your question.

Operator

Thank you. And the next question comes from Eileen Lin with China Renaissance.

Speaker 1

Thanks management for taking my question. I have a question regarding Zhihu's new app, Yan Yan Story. Can management share more details about future plans, long term growth potential and likely monetization method other than membership? Thank you. Genya Story is our newly released application.

Speaker 1

We have released we have received a lot of positive feedbacks from the market for this new story application and we are generally optimistic about the future trend of future growth of this application. The Yan Yan story application compared with our original Zuhu Jihu Yan selection has a lot of clear differentiation. And the YanYan Stories application is focused on premium short stories, and it provides immersive and concentrated reading experience for users. It also help us to attract more users from the Yanyan story outside the Quhu community. We believe that for this year, the yen selection will continue its healthy and robust growth in terms of those year on year growth and sequential growth.

Speaker 1

And in the future, we believe that with the improvement of the general macroeconomic condition in China, we will also generate IP gains from the application.

Speaker 2

And to supplement CEO's answers to you, first, I believe that YinYang will be positioned as maybe different tier cities users in China. And Yinyan's content will not be all the same as ZhiHU's content, so that's the depreciation. And the second from the product level, for example, Yan Yan will provide like audio books or the flying bullet chat function. These are very welcome the function by our users, which is quite different from the Zhuhu mobile app. That's our answer for you, Eileen.

Operator

Thank you. The next question comes from JJ Chen with Haitong International.

Speaker 4

Congratulations Can management share the mid and long term strategy for this segment and for Edeco, how to maintain the growth momentum for this segment? And can management also please provide more color on the recent update for this segment?

Speaker 1

Thank you, Daisy, for your question. Vocational training is one of the 2nd growth drivers that we have been building on recently. And we think Zuhu is naturally uniquely positioned to do the vocational training business. Firstly, it is because our user base is have a lot of overlap with the target users for vocational training. And secondly, is that our content to our vocational training services have a closed loop.

Speaker 1

And thirdly is that our technology and data has will increase the efficiency of our vocational training. We have made a lot of tremendous progress in the last year. Our long term goal for orchestration training business is to enhance the efficiency and quality for this industry. And we have been focusing on 2 directions. Firstly, is that we are diversifying to provide comprehensive services for our clients.

Speaker 1

And secondly is that we will utilize our data and technology to enhance the efficiency to provide better services for our customers.

Speaker 2

To supplement the CEO's answers to you, Daisy, the company is very emphasizing the focus on the recent development of the creative knowledge to be applied to the whole education or professional training industry. And we believe that our large language model training will also empower our professional training businesses in the future. Thanks.

Operator

That's

Speaker 2

our answers to your question. Next.

Operator

Thank you. The next question comes from Thomas Chong with Jefferies.

Speaker 4

So I'll transfer myself. Thanks management for taking my question. So my question is how should we think of the GP margin outlook and the timing to reach breakeven? Thanks.

Speaker 2

Thank you, Ren. So my answer to your question is quite straightforward. The first one, we are seeing some progress in the gross margin improvement in this year and in this quarter. So but we believe that we it's too early to say that what kind of the gross margin to be achieved within the next few quarters. But believe us that we are doing the strict like cost control strategy as well as improving our efficiency.

Speaker 2

So we believe that we are on the way to improving our portfolio. The second question is that because we have to like the new investments and like in the R and D in development for our large language model training. So this also has some impact on our P and L forecast for the rest of the year. So we believe that our breakeven point will be the some quarter next year in 2020. That's our answer to the question.

Operator

And this concludes the question and answer session. I would like to turn the call to Iris Liu for any closing comments.

Speaker 1

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

Operator

Thank you for attending

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Zhihu Q1 2023
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