Zhihu Q2 2023 Earnings Call Transcript

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August 23, 2023

There are 7 speakers on the call.

Operator

and welcome to the Ziho Inc. 2nd 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.

Operator

Today's conference is being recorded. 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 Q2 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman and Chief Executive Officer of Zhe Hu Mr.

Speaker 1

Li Da Hai, Chief Technology Officer and Mr. Harishya, 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 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. The company does not assume any obligation to update any forward looking statements, except as required under applicable law.

Speaker 1

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 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 in our website at ir. Zihu.com. I will now turn this call over to Mr.

Speaker 1

Henry Xia, CFO of Zuhu.

Speaker 2

Thank you, Harris. I'm pleased to deliver today's opening remarks on behalf of our CEO, Mr. Zhou Yuan. Hello, everyone. Thank you for joining us for Juhu's Q2 2023 earnings call.

Speaker 2

We continued to accelerate development across our business during the Q2, achieving sustainable growth through effective execution of our community ecosystem first strategy. As we enriched our content library, user engagement increased throughout the Zhuhu community and our average MAUs continued to increase as well, rising to RMB109.4 million in the 2nd quarter, representing 3.3% year over year growth and 6.9% sequential growth. Furthermore, our remaining efforts to diversify monetization channels and upgrade our service capabilities during the Q2 drove robust growth in total revenue, which increased by 24.9% year over year. At the same time, we further enhanced operating efficiency, boosting our gross margin to 53.8%, up by 6 percentage points year over year. Our non GAAP net loss narrowed significantly as a result of ongoing operating efficiency improvements by 49.9% compared with the same period last year, despite our newly initiated investment in generative AI technology.

Speaker 2

Speaking of generative AI technology development, following the launch of our 1st large language model, shihai2ai in April, we are currently conducting internal trials of AI applications aiming to strengthen the vibrancy of our community and further unlock commercial value. Leveraging our vast content portfolio, potential applications of this cutting edge technology in our community could include more efficient content to search and more customized recommendations for our users. AI technology could also help content creators increase productivity and creativity to further enrich Zhihu's content pool. Let me now move on to our users and content. In the Q2, we focused on content quality enhancement, particularly by continuously enriching our professional content library and enhancing users' interaction with professional users.

Speaker 2

To that end, we upgraded our content creator incentive scheme, High End Plan 5.0 in April, providing selected content creators with an array of supportive tools as well as better user traffic support and financial rewards for their high quality work. With these efforts, we were encouraged to see increased growth momentum in both the volume of content created and the number of the content creators. By the end of the second quarter, our 66,600,000 cultivated content creators had contributed 700 and 11,300,000 pieces of content covering over 1,000 verticals. To further refine the content quality, we also upgraded our professional identity verification functions in this quarter. Many of our content creators who have been endorsed by our Blue Medal Professional Identification of veterans in specific industries such as Internet, finance, legal, engineering, etcetera.

Speaker 2

With credentials from well known enterprises, colleges and institutions. Professional identity status has broadened enhanced credibility, greater recognition of their professional content and up to 10x more user interaction post identification. A growing number of professional users have collectively contributed content, underscoring Zhuhu's reputation as a professional community with high credibility. Our reliable professional and abundant content made Zhihu a desirable destination for users to search for answers and follow trending topics. Discussions on trending topics in valid formats such as Q and A, live streaming and ideas.

Speaker 2

Enlivened the Zhuhu community also, in addition to enjoying our discussion content, consumers are becoming more reliant on Zhihu's detailed and informative commerce content as a decision making reference. Moving forward, we will continue to focus on content quality while expanding our content library, creating value for our user across all aspects of studying and consumption. Users have always been the cornerstone of the Zhihu community. Our content encourages users to stay and grow on our platform, driving our average MAUs to 109,400,000 in the 2nd quarter. Furthermore, increasing user engagement is critical in promoting the healthy development of our ecosystem.

Speaker 2

Many of our long term frequent users started their journey on Zhihu when they were students. Now they are between 18 40 years old with higher education and have become new generation professionals. They want to share their insights, experience and the stories and to become key opinion professionals. Zhihu has expanded its content verticals to capture key opinion professionals involving interest accordingly. This deepening generational engagement reflects Zhihu's peerless ability to captivate users for the long term and serve them at different stage of life.

Speaker 2

In addition, by leveraging Zhihu's strong run awareness, content library and AI powered technology, we are confident Zhihu can further extend coverage in lower tier cities by attracting more professionals, young generations and consumers. Meanwhile, we will continue to support content creators and uphold a high standard of community governance, reinforcing our healthy culture of sincerity, expertise and of sincerity, expertise and respect. Now let me go into the details of our commercialization progress. Let's start with our membership business, which sustained its strong growth momentum in the Q2. Paid membership revenue for the 2nd quarter increased by 65.6% year over year, while average monthly subscribing members grew by 65.3% year over year, reflecting our dedication to expanding premium content coverage.

Speaker 2

In the Q2, we continued to enhance the effectiveness of our story creation tools and upgrade our financial reward plans to inspire passion among content creators while protecting their rights and benefits through enhanced anti piracy measures. The number of Zhehoo core premium content pieces increased by more than 200% year over year during the quarter. Also, the number of membership content creators who earned income from Zuhu increased by almost 50% year over year. Thanks to creators' passion and their premium content contributions, our users were able to enjoy a larger content library with superior quality. In the second half of this year, we will further differentiate ourselves with our content and membership products from those of our competitors and expand our content categories to cover the evolving needs of both male and female members.

Speaker 2

We will also expand our content distribution channel by partnering with more platforms such as Huawei among smartphone manufacturers. What's more, a web drama series adapted from a novel in Zhihu content library was recently launched on Tencent Video platform, disseminating our premium content to a broader audience in a visual format. We anticipated that more of our premium stories will be adapted, unlocking our IP value going forward. Next, our vocational training business, which continued to deliver excellent results with its revenue increasing by 213.3% year over year and 35.1% quarter over quarter. Following the acquisition of NBA Master in the 2nd quarter, we were able to further optimize our program offerings.

Speaker 2

Meanwhile, by encouraging professionalism and his sincerity in our community for young professional users, we increased their interest in sharing and learning vocational skills on Zhihu, driving organic growth across our proprietary vocational training offerings. While our vocational training business is still in the early stage, we will continue to invest in human resources and technology infrastructure to build a solid foundation. As a leading content centric community, Zhihu's unique proposition enables us to deeply understand our users' evolving learning demands then satisfy those demands through well selected targeted programs. Moving on to marketing services. Back in the Q1 of 2023, we combined advertising and the content of commerce solutions or CCS into marketing services.

Speaker 2

This change helped to optimize our organization structure and synergize resources By strengthening our service capabilities and optimizing the service offerings, we are able to provide more precise, comprehensive marketing solutions and improve operating efficiency. In Q2, we recorded a sequential quarterly revenue increase of 5 point 3% with expanded gross margin. Among the various industries we serve, IT and 3C and home appliance stood out, growing significantly by double digits both year over year and sequentially, benefiting from increasing ROI across the related sectors within Chuhu community. Going forward, we will continue to streamline our marketing service offerings and optimize recommendation algorithm to meet advertising clients' evolving needs. Overall, as we move into the second half of twenty twenty three, we will focus on enhancing our efficiency to further narrow our losses and advance our progress in terms of profitability while prioritizing healthy and sustainable growth across all of our business segments.

Speaker 2

Before I conclude, I would like to specifically highlight our progress in generative AI technology. As I mentioned earlier, Zhehuo has been focusing on innovatively applying large language model technology into our services and products over the past several quarters. We are currently exploring AI's potential application to enhance users' content search experience, optimize algorithms and improve content creation efficiency. For instance, we aimed to develop search tools that analyze our Q and A content pool to present a more precise and better summarize the results, thereby improving both the accuracy and efficiency of content searching. In addition to these breakthroughs, we have been empowering our internal operating system with AI technology to further increase its data monitoring and operational capabilities.

Speaker 2

Moving forward, we will continue to invest prudently in generative AI technology to create new AI powered functions that can improve the content creators' creation experience as well as enhance our service capabilities. We firmly believe that AI powered technology's true value lies in empowering human beings across all aspects of life as an extension of our innate capabilities. This concludes Mr. Zhou Yuan's remarks. Now I will turn into our financial details for the Q2 For a review of our Q2 2023 results, please see our press release issued earlier today.

Speaker 2

We delivered solid results for the Q2 of 2023 on the heels of a strong Q1. Our total revenues for the Q2 increased by 24.9% year over year, which is in line with management guidance. Our gross margin further expanded by 6 percentage points and our non GAAP net loss margin narrowed by 20 2 sorry, 32 percentage points both on a year over year basis, thanks to our effective ongoing cost control measures. Guided by our community ecosystem first strategy, we continued to expand our premium content library and assimilate content creators' passion for creation, preparing prosperity across Zhihu's vibrant community. Both our paid membership and vocational training services continue to grow robustly, increasing by 65.6% and 213.3%, respectively, on a year over year basis.

Speaker 2

We also further improved our operation efficiency with streamlined organizational structure and product offerings. As a result, while our quarterly marketing service revenue decreased by 13.7% year over year, it picked up sequentially for growth of 5.3% quarter over quarter. In particular, our cornerstone vertical of our advertisement business, IT and CCC and Home Appliance outperformed with a high double digit year over year increase. Our paid membership revenue for the quarter was RMB449.1 million, up 65.6 percent from RMB271.2 million in the same period of 2022. This increase was attributable to the rapid growth of our subscribing members.

Speaker 2

For the Q2, our average monthly subscribing members reached 14,000,000 increasing by 65.3 percent year over year. In Q3, we anticipated the paid membership revenue will achieve both sequential and year over year growth. Our vocational training business revenue for the Q2 increased by 213.3% year over year, reaching RMB144.5 million from RMB46.1 million in the same period of last year. As we continue to enrich our program offerings through both M and A and self developed products as well as enhance our service capability with cutting edge technology. We are confident we can harness even more of this industry's massive potential.

Speaker 2

Our marketing services revenue for the quarter was RMB412.7 million compared with RMB478.1 million in the same period of the last year. During the quarter, we focused on better utilizing our resources and phased out some low margin marketing services and products, all of which contributed to the margin improvement of the quarter. We expect these strategic adjustments in marketing services business to generate a recovery growth and increase our resilience in the face of macroeconomic uncertainty in the second half of this year. Gross profit for the 2nd quarter increased by 40.7 percent year over year to RMB562.1 million with gross margin expanding to 53.8 percent from 47.8% in the same period of 2022, demonstrating the effectiveness of our refined monetization efforts as well as our improvements in cloud services and the bandwidth utilization efficiency. Total operating expenses were RMB889.3 million in the Q2 compared to RMB860.3 million in the same period of last year.

Speaker 2

Selling and marketing expenses increased slightly to RMB540.6 1,000,000 from RMB532.4 in the same period of 2022 as we continue to invest in promoting our product offerings and branding, while remaining prudent in our overall marketing related spending. Research and development expenses increased to RMB236.2 million from RMB223.6 1,000,000 in the same period of last year. The increase was primarily attributable to our increased spending in technology innovation as we believe such investment will better position us in the competitive landscape over the long term. General and administrative expenses increased to RMB112.5 million from RMB104.3 million in the same period of 2022 due to the increased share based compensation expenses. Our ongoing efforts to control costs and improve operational efficiency continued to bear fruit.

Speaker 2

Our GAAP net loss for the quarter was RMB279.1 million, down by 42.7 percent 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 RMB222.3 million for the 2nd quarter, decreasing by approximately 50% from the same period last year. Non GAAP net loss margin for the quarter was 21.3%, narrowing significantly by 32 percentage points from a year ago. We will still prioritize loss reduction for the rest of the year. Our net cash used in operating activities was RMB58.3 million for the first half of twenty twenty three, a significant reduction from RMB515.1 million for the same period of last year, highlighting our improved operating efficiency and the shift in our revenue structure.

Speaker 2

As of June 30, 2023, the company had cash and cash equivalents, term deposits and short term investments of approximately RMB6.2 billion compared with RMB6.3 billion as of December 31, 2022. 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 section. Thank you.

Speaker 3

You.

Operator

Today's first question comes from Zohrong Jiang with CICC. Please proceed.

Speaker 4

Good evening, management. Thanks for taking my question and congratulations on the solar question relates to AI. You mentioned in the prepared remarks that you had some progress on AI in power technology. Could management share with us more color that what's the specific applications and scenarios are involved? And what's your advantage in AI empowered technology compared to others?

Speaker 4

Also, what changes will the utilization of AI bring to Zhe Hu? Thank you.

Speaker 1

Thank you for the question. This is Sarah Haili, CTO of Zhe Hu. Zhe Hu community has abundant language, Chinese language database. And in this AI technology evolution, we have unique competitive advantages. Media Technology has a wide range of generic applications in our community to enhance our user experience and enhance our operating efficiency.

Speaker 1

We are now training about 20 FAIR parameters for our large language model. Our business testing results is significantly improved and now we are expanding our large language model to about 80,000,000 parameters and reach 100,000,000,000 parameters towards year

Speaker 4

end.

Speaker 1

We have been trying to identify the implied steep meanings of our large language model and we have made significant progress in terms of content categorization and same identification. In the future, the AI technology will be used in our community and I will give some examples to the specific applications in our community. For example, in terms of content creator empowerment, in the future AI technology will help our content creators to enhance their productivity and enhance their quality of creation, especially through, for example, recommending different writing styles according to the scenario and also writing correction. We will further enhance high quality content to lowering the barrier for content creation. Next is for our content recommendation.

Speaker 1

AI technology will empower our content recommendation according to the scenario user relationship and help us to realize more accurate and more efficient recommendation for our users to enhance their engagement and stickiness. And in the future, we are exploring to apply AI technology for our marketing services content recommendation to enhance our commercialization efficiency. Thirdly is our content search. We are beta testing integrated search function that use AS technology to enhance the intelligence of our search function to enhance the accuracy results and also to make the search results more customized and correct and users can easily get what they want in a summarized way. Next is our content auditing.

Speaker 1

AI will help us to identify the safe balance of content and help us to increase the efficiency of our content auditing. And also to save some the operational cost for our content auditing. Next is for our application scenarios in our different business. AI will also further increase our operating efficiency. I will also give some examples on that front.

Speaker 1

For our paid membership business, AI technology will empower our the front covers and pictures in our short stories and also enhance the quality and efficiency for our picture generation. Next is for our Vocational Training business. GA Technology is going to promote the digitalization and intelligent business of our vocational training and also help our users to get more customized course recommendation and coaching solutions. Another thing is that AI will help us to correct the updates and homework for our users. So to summarize our AI applications, we believe that AI evolution is actually a very important opportunity, a once in a lifetime opportunity for Zhehui.

Speaker 1

And we are trying to use our Zhehui 2 AI technology, which is released in April this year to enhance our technology capabilities and to empower our users and content creators to obtain more better user experience and help us to increase the commercialization efficiency. Thank you very much. That's it for my answers.

Speaker 2

And this is Henry, the CFO of the company. I will help to supplement the answers from Da Hai and answer the second question raised by the CICC. Actually, we believe that we have very obvious differentiated points with our with the other large language model competitors on the market that we are in Zhihu, we have a large number of the data accumulated in the past 10 years, which the answers and data contributed by our user, more than like 100,000,000 MAUs. So we believe that in the simplified Chinese language environment, our user data and our content has its same set as scarcity value. And we are doing a lot of work in the anti corona technology.

Speaker 2

And we are very, how to say, resistant to those like data abused actions on the market that we are defending ourselves from our competitors on data side. Thanks. That's my answers to Xueqing.

Operator

The next question is from Steve Hsu with Goldman Sachs. Please proceed.

Speaker 3

Thank you for taking my question. This quarter, we have seen very strong membership growth from a year on year perspective. But the number of subscribers were facing some issue quarter over quarter given the pirating issue. So could management share with us your outlook on the membership revenue growth for the second half as well as your thoughts on the long term growth profile, such as collaboration with Weixin or perhaps QQ Reading, as well as your thinking of how to extend the lifetime value of the users beyond just charging the membership fees? Thank you.

Speaker 1

This is CEO of Juhu. I'm going to discuss about this question through both our short term and long term paid membership business. We are providing premium short stories in our platform, and we believe that we are forming a clear competitive advantage or different from other traditional online reading platforms on this branch. For example, our stories are very short and cater to the evolving needs of users, especially to use the users' fragmented time in terms of their reading. Another thing is that, as mentioned in our previous earnings call, we have released our Yanyan story application, and this forms as another channel for our user acquisition for our paid membership business.

Speaker 1

And inside this Yanyan Story application, our users can get more immersive and differentiated reading experience. And also for our YYENYA STARZ, we are expanding to form more partnerships with other platforms. And recently, we have formed partnership with Huawei Reading to enlarge our user base and extend our different content providing We're excited that with all these efforts, in the second half of this year, our paid membership business is will keep the momentum and increase at a very high trend in the future. In the future, I think the paid membership business will enhance its LTV through 3 fronts. Firstly, it's through our AI applications in paid membership business, as mentioned by our CTO, Li Da Hai just now.

Speaker 1

And secondly, it's through the upgrade of different distribution channels for different formats as we are making progress. And thirdly, to unlocking IP value in the future.

Speaker 2

Hi, Steve. This is Henry. I will further explain the trend you have been seeing. There is some fluctuation of the subscribing numbers between Q1 and Q2. Actually in Q1, I think it's a high base during the spring festival.

Speaker 2

We have a promotion activity, which allowing the users to subscribe for the 1st month with RMB 9. I think it was a successful promotion activity in Q1, which created a high base of the subscriber members. And in Q2, we do not continue too much for that RMB9 for the 1st month activity. So there is some fluctuation. And also, we have already established a professional team for the anti currency measures to take actions internally.

Speaker 2

So we are very confident to see the rebound or I say sequential growth as well as a year over year growth for the Q3 and Q4 for the pay membership business revenue growth. That's my answer for you.

Speaker 3

Thank you. Thank you.

Speaker 2

Next.

Operator

The next question comes from Vicky Wei with Citi. Please proceed.

Speaker 4

Good evening, management. Thanks for taking my questions. I have one question regarding the marketing services. What is management view on the recovery pace of the marketing services? And how should we think of Zhihu's strategy to improve the marketing service competitiveness?

Speaker 4

Thank you.

Speaker 2

Thank you, Vicki. This is Henry. Thanks for the question. So as we introduced earlier in the last quarter, we have been facing some like uncertainties from the macro economy for the Q2. And also, we have been seeing that the uncertainty will still be sustained for the second half of this year.

Speaker 2

But internally, we are doing several taking actions to in facing and to solve the problems for us. The first one that we are combining 2 teams together as we introduced earlier that we combined our CCS team together with our advertising team. And we have been seeing the demand, the increasing demand from our clients on the, how to say, the effective basis or the ROI basis, the advertising products like CCS, so which I believe that will be still welcomed in the second half of this year. And secondly, we're improving our efficiency. As I said earlier in the on this call that we're taking actions to phase out some low margin business from our advertising business to enhance our competitiveness to achieve the healthy growth continuously.

Speaker 2

So that's what our thoughts about our marketing services business. So for now, we cannot guarantee that we will achieve like the year over year growth in Q4, but we are confident that this business should be seeing the rebound trend in the second half of this year. Thank you.

Speaker 4

Thank you.

Operator

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

Speaker 5

I'll transfer myself. Thank you for taking my questions about the vocational training business. First of all, congratulations to the strong growth in this segment. Can I ask you about the current situation of our vocational training business from operation or deployment of assets such as the FQ of the curriculum and the promotion strategy? And can management share your outlook for the momentum of the second half and the next year as well as the revenue contributions from our long term perspective?

Speaker 5

And also any strategies or what works do you think you need to do to achieve those goals? Besides the growth rate, can you share more color on the profitability of this segment? Thank you.

Speaker 2

Thank you, Daisy. This is Henry. I will help you answer your question. For the second half of this year, we believe that our vocational training business will still achieve the year over year and the sequential growth for the second half of this year with more than like 100% year over year growth rate. I think for the full year, that will be 2x growth in comparison with that in last year.

Speaker 2

And on the course offerings of the education, vocational training business, the products offerings, I think we have already almost complete the structure of our vocation training business, the allocation on that, including, for example, national graduate students entrance examination as well as the IELTS, the English or foreign language teaching courses as well as, for example, the certification, service offerings, etcetera, etcetera. So I believe that if we say that that will form our organic growth going forward. And maybe in next 1 or 2 years, there is 1 or 2 more acquisition will be formed like to provide some like the M and A growth looking forward. And about your question, the probability of our looking to like a whole vocational training business, I think we're still in the investment stage. So for example, I think for this whole year, the vocational training business will still bear loss, like the loss making for the whole group.

Speaker 2

So that will be between RMB 1,000,000 to RMB 200,000,000 hit to our bottom line like the P and L. That's our answer to your question.

Operator

The next question comes from Yuan Zhang with Chinese Renaissance. Please proceed.

Speaker 6

So my question here regarding our margin. Is there any update on reaching breakeven timetable? And then what are the drivers for us to reaching such breakeven point? Thank you.

Speaker 2

Thank you, Yiban. This is Henry. I think in the second half of this year, we will reaffirm and prioritize our loss reduction strategy for the rest of the year. And also this is the main topic for the next year. I think the approach is 2 ways.

Speaker 2

First one, we will enhance our commercialization capability by boosting our both marketing service business and to see the business by including the growth of the membership business as well as the vocational training business which is to see. We believe that there's some changing happening with our revenue structure And we are confident that we will get a recovery in terms of the revenue growth for the second half of this year and the next year. The second way is to the more prudent investments as well as in the marketing spending. I think that we are doing a cost reduction program for the second half of this year. I think the loss reduction strategy is on track so far by looking to our Q2 and business and the results.

Speaker 2

Does that answer your question?

Operator

That concludes today's question and answer session. At this time, I would like to turn the conference back 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 or Pearson Financial Communications. Thank you.

Operator

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

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