Zhihu Q2 2024 Earnings Call Transcript

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August 22, 2024

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Zhuhu Inc. 2nd Quarter 2024 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 Yolanda Lu, Director of Investor Relations. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Hello, everyone. Welcome to Jupu's Q2 2024 Financial Results Conference Call. Senior Management joining me today are Mr. Zhou Yuan, our Founder, Chairman and Chief Executive Officer and Mr.

Speaker 1

Wang Han, our Chief Financial Officer. Before we get started, I'd like to remind you that today's discussion will include forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties.

Speaker 1

As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our public filings with the U. S. Securities and Exchange Commission and Hong Kong Stock Exchange. The company does not assume any obligation to update any forward looking statements, except as required under actives of law.

Speaker 1

Additionally, the matter we will discuss today will include both GAAP and 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 on our website at ir. Ryufu.com. I will now turn the call over to Mr.

Speaker 1

Wang Han, our CFO. Please go ahead.

Speaker 2

Thank you, Elena. Hello, everyone. Thank you for joining Zhuhu's Q2 2024 Earnings Call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yan, Founder, Chairman and CEO of Zhuhu.

Speaker 2

We're pleased to report another strong quarter. In the Q2, we achieved robust improvements in operating efficiency, with our gross margin raised by 5.8 percent percentage points year over year to 59.6%. Our total operating expenses decreased by RMB140 1,000,000 compared to same period last year, including a reduction of our RMB120 1,000,000 in marketing expenses. Our adjusted net loss declined by 79.9 percent year over year to RMB44.6 million, marking our lowest quarterly loss since our U. S.

Speaker 2

IPO. In the Q2, we made significant strides in enhancing the Zhuhu's community's trustworthiness and strengthening our core user experience. In addition to introducing an array of AI powered products and engrossing content initiatives, we proactively refined commercial content distribution and meticulously tailored our services to meet the diverse needs of various user groups. As a result, our community remains vibrant and continues to grow, exhibiting positive trends across key user metrics, such as core user retention rates and daily active user time spent. We expanded AI applications across our products and services during this quarter, aiming to provide users and clients with an enhanced experience.

Speaker 2

In late June, we officially launched Quhu JDA, marking a significant milestone in our AI search initiatives. Since its debut on the PC platform, we have observed a promising increase in user engagement and market reputation, highlighting new growth opportunities for us. Throughout the Q2, our laser focus on Cornerstone Verticals coupled with enhanced support for content creators has led to significant improvements in the experiences of both users and content creators within our community. As of the end of June, the cumulative business of content on Juhu reached 830,900,000, a 16.8% year over year increase. The cumulative number of content creators within the Juhu community grew by 12.5 percent to 74 900,000 during the quarter.

Speaker 2

This continued rise in the proportion of highly active users engaged in content creation. To further bolster user engagement, Jivu continued to foster rational, optimistic, in-depth discussions around prominent social issues and world events this quarter. For example, during the annual Gokao period, we strategically enhanced the community support for Gokao users by elevating the firsthand experiences shared by previous examinees, optimizing search functionalities and refining recommendation algorithms. Accordingly, the volume and quality of the Gaokao related answers rose markedly with 3 day and 7 day question response rate experiencing double digit growth. The surge in user engagement and the community interactions further solidified Zhihu's position as the most trusted platform for young people seeking guidance on pivotal life decisions, whether in the lead up to university or as they prepare to enter the workforce.

Speaker 2

We also implemented effective initiatives to draw users to our coverage of the Olympics. Within a week of the Olympic opening on July 26, content views related to the event soared to over 600,000,000 with over 500,000 discussions spanning topics such as science and technology, sociology, psychology and cultural arts. Thanks to these efforts, positive feedback from Juhu users on our high quality content continue to rise, accompanied by a significant increase in user interactions. Average daily engagements per DAU grew by nearly 40% year over year, with the monthly average of upvotes increasing by over 47% year over year and more than 13% quarter over quarter. As we progress in our development of the cutting edge technology, we consistently strive to push boundaries and expand application scenarios.

Speaker 2

The official launch of Zhihu Zhidai in late June marks a significant step in our exploration of AI powered search functionality. Zuhu Jira's deep integration with the content creators sets us apart from other AI driven search products. The majority of the content powering Zuhu Jira is derived from Zuhu's proprietary high quality content library, which allows users to trace concerts back to the original sources, explore more premium Q and As within the community and directly connect with content creators. We believe Juhu Juhu's unique ability to prioritize human elements and emphasize professional and authentic content that embodies collective humanism is especially valuable in an area increasingly dominated by AI generated content. In July, Zhihu Zhida's total visit increased by 4 30% compared with June as we continue to leverage Zhihu's self developed LOM to refine Zhihu Zhida's performance and user experience.

Speaker 2

By the end of July, 7 day user retention doubled compared with early July. Jira's multi round response capability also outperformed market peers, earning high praise from professionals. Moving into the second half of the year, we will continue to enhance our user experience on Jira's PC platforms through our ongoing improvements in product features, algorithms and performance. Simultaneously, we're set to officially launch and upgrade Jutai tab on the Juho app, which will effectively complement the desktop version. Jutai not only provides professional with effective tool based scenarios, but also with vast potential for exploration in user interaction and content creation through the power of the Zhuhu community.

Speaker 2

Moreover, we aim to reach a broader audience with Shida, relying on its performance and reputation better than extensive advertising and promotion. Our effective strategic planning and execution is reflected not only by our growing user engagement and flourishing community, but also by our significant improved operating efficiency. In the Q2, we further optimized operating efficiency across our business lines by leveraging AI technologies, propelling us towards our operational targets for this year. Now I would love to delve into more details of the progress we achieved across our multiple business lines for the Q2. First, our marketing services remained under pressure in the second quarter with revenue totaling RMB344 1,000,000, decreasing by 16.7% year over year.

Speaker 2

However, I want to highlight that within our marketing services, although our CCS is currently experiencing decline during its adjustment period, both brand advertising and performance based advertising exhibited robustly growth, increasing by 17% and 28.4% year over year, respectively. This performance underscores our effective monetization capabilities and substantial commercial potential of our high value user base within the community. Across all the industries we cover, the IT and 3C categories continue to lead in growth. Additionally, food and beverage, beauty, skincare, sports and outdoor industries experienced notable increases in the average order volume during the 618 shopping festival, up by 17.4%, 14.1% and 13.1%, respectively, compared with the same period last year. We remain committed to delivering high quality content that empowers our clients to drive their business growth.

Speaker 2

We're also supporting mid tier content creators with substantial commercial potential in achieving their financial goals. In this year's 6.1a Shopping Festival, the number of commercial content creators on increased more than 6 fold compared with the same period last year. As we move into the second half of the year, we'll continue to enhance our marketing services, grounded in the transport settings of our community. Our efforts will focus on the following key areas. First, by leveraging our AI and MLM capabilities and enhanced data infrastructure, we aim to further boost conversion efficiency for brands and merchants, but also enhancing our own products and operational efficiency.

Speaker 2

2nd, we will capitalize our communities' professional discussion environment and the transformation is among high value users to assist more emerging verticals, particularly those facing technological barriers to build stronger marketing awareness and commercial credibility. 3rd, we will foster closer connections with a great number of content creators to enhance their ability to earn financial rewards in line with their capabilities. Turning to our paid membership business. Our premium content has continued to distinguish itself with its unique market positioning and compelling stories, attracting many new users in the 2nd quarter. The number of subscribers members grew by 4.7 percent year over year to 14,700,000, while revenue contribution grew to 46%, reaching RMB 432,700,000.

Speaker 2

In addition to broadening our premium content offerings, we actively explored various new growth channels in the Q2, including co branded memberships and distribution channel expansion. For content creators, Zhuhu's premium content discovery mechanism not only provides content creators with opportunities for growth, creative fulfillment and revenue generation, but also foster an entirely new creation ecosystem within the industry. The Q2, the number of Zuho premium content creators earning income increased by 77.4% year over year. We also continue to unlock our high quality, short story IPs monetization potential. On July 9, the short drama Love and a Dream premium on Taehyung Video.

Speaker 2

This marks another successful adaptation from Zuhu YanYa Story Library following the acclaim of Jubi. Next, I will review our vocational training business. We strategically optimize our business structure in the Q2 with a focus on efficiency enhancement, concentrating on sub operated offerings and align closely with our community to provide greater certainty and profitability. We also recorded gains on certain adjustments to our acquired businesses in this quarter, achieving high margins. As a result of these effective measures, operating efficiency within the vocational training segment improved significantly despite a slightly decrease in the total revenue, which amounted to RMB133.6 million per quarter.

Speaker 2

GMV for our vocational skills and interest program achieved over 50% year over year growth this quarter with AI and AGI related programs, which continue to receive positive user feedback. Additionally, in response to students' evolving needs during the graduation season, we expanded our offerings to include career planning and overseas study advisory programs. In turn, this expansion encouraged valuable user contributions with beneficiaries enriching the community with high quality content and innovative operations as they share their insights and experiences. Moving forward, we will continue to strengthen our absolute advantage in specialized subject offerings. We're also utilizing AI technology to enhance operating efficiency and accelerate our progress towards profitability.

Speaker 2

In summary, our strong second quarter performance showcases our understanding of strategic planning and execution capabilities. As we move into the second half of twenty twenty four, we remain confident in and committed to achieving quarterly profitability targets. Meanwhile, we will continue improving our segments and engaging user experience and enhancing the Juhu community's trustworthiness to grow and nurture our user base. We're also advancing our AI development initiatives in reaching our product capabilities and facilitating operating efficiency improvements across the board. By fully leveraging our unique value proposition, we will further unlock Zhihu's growth and commercialization potential driving the company's long term sustainable development.

Speaker 2

This concludes Mr. Zhou Yan's remarks. Now I will review the details of our 2nd quarter financials. For a complete overview of our Q2 2019 full results, please refer to our press release issued earlier today. Throughout the Q2, we made significant strides in refining our cost structure and optimizing operating efficiency, while maintaining discipline, spending and proactively pursuing high ROI across our business lines.

Speaker 2

We accelerated our exploration of AI powered technologies, substantially enhancing our products and services. As a result, we achieved a notable improvement in both gross margin and adjusted net loss. Remarkably, this quarter represents our lowest quarterly loss since our U. S. IPO.

Speaker 2

Our marketing services revenue for the quarter was RMB344 1,000,000 compared with RMB412.7 million in the same period of 203. This decline primarily reflects our deliberate ongoing environment of service offerings to strategically focus on margin improvement. Pay membership revenue for the Q2 decreased slightly by 3.7% year over year to RMB432,700,000, but not only due to a marginal decline in our average revenue per subscriber members. However, our average number of monthly subscriber members grew by 4.7% year over year this quarter, demonstrating the effectiveness of our user growth strategies and promotions. Vocational training revenue for the quarter was RMB133.6 million, compared with RMB144.5 million in the same period of 2023.

Speaker 2

This decrease was mainly due to our strategic refining of acquired business, prioritizing self operated programs that offers high margins and greater profitability. Our gross profit for the 2nd quarter was RMB556.5 million compared with RMB562.1 million in the same period of 2023. Thanks to our enhanced operating efficiency, the gross margin has improved year over year for 7 consecutive quarters, reaching 59.6%, the highest level since our U. S. IPO.

Speaker 2

Our total operating expenses for the quarter was RMB740.4 million, a 16.7% decrease from RMB889.3 million in the same period last year. Selling and marketing expenses decreased by 22.9 percent to RMB417 million, down from RMB540.6 million in the same period of 203. This reduction was primarily driven by more disciplined promotional spending and a decrease in personnel related expenses. Our research and development expenses for the quarter decreased by 11.4 percent to RMB209.3 million, down from RMB236.2 million in the same period of 2023. This reduction was primarily attributable to more efficient spending on technological innovation.

Speaker 2

General and administrative expenses were RMB114,100,000 compared with RMB112,500,000 in the same period of 2023. Our GAAP net loss and non GAAP net loss for the 2nd quarter has both narrowed substantially, decreasing by 71.1% 79.9% year over year, respectively. As of June 30, 2024, the company has cash and cash equivalents, term deposit, restricted cash and short term investment of RMB5.1 billion compared with RMB5.5 billion as of the December 21, 2023. As we advance into our second half of twenty twenty four, we will persist in our commitment to rigorously strategic execution driving our closer to profitability. At the same time, we will diligently explore innovative avenues to deliver enduring value to our shareholders.

Speaker 2

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.

Operator

Thank you. We will now begin the question and answer session. The first question today comes from Vicky Wei with Citi. Please go ahead. Thanks management for taking my question.

Operator

Would management share some color about the progress of achieving breakeven target? Thank you.

Speaker 1

Thank you for your question. This is from Wang Han, CFO of Jupu. Our profitability goals remain unchanged and resolute. We still plan to achieve a quarterly non GAAP net profit on this Q4, and our 2nd quarter financial results fully validates our strong strategic planning and execution capabilities. After a single quarter of adjustments, we not only reduced our losses by streaming costs and expenses, but also recorded our lowest absolute quarterly loss since our IPO.

Speaker 1

And from the current progress of the Q3, our loss reduction work should also be more pressing. So please stay tuned. Thank you, Vicky.

Operator

The next question comes from Xueqingqiang with CICC. Please go ahead. Thanks management for taking my question. My question regards on the user base. How has Juhu managed to maintain a stable user base?

Operator

Is that scaling down community promotion expense? And a follow-up question on your AI search. Can management share the progress of AI search? What's your metrics after the launch of Zhe Hu Jida? How does management feel the potential commercialization?

Operator

Thank you.

Speaker 1

This is from Jifu's CEO, Zhou Yuan. The proactive user strategy adjustments we have made over the past 2 quarters were all quality oriented, prioritizing our core user experience. As you mentioned, for our user base, the core is user retention improvement for us. And the user retention improvement is from the improvement of high quality content. And the core of the improvement of high quality content is to rely on in-depth content cultivation operation approach.

Speaker 1

I will explain a little bit more here. This in-depth cultivation approach has 2 meanings. 1 is in-depth operation and the other is in-depth content. And so far, it seems to be working well. Our user base is quite stable.

Speaker 1

Thank you for your question. I will continue to answer for your second question. We successfully launched Jufu Jida on PC platform at the end of June. And over the past period, our work has focused on 2 main areas. The first, optimizing the model and the second, upgrading and optimizing the end.

Speaker 1

The optimization of model has led to a significant improvement in user retention with a significant increase in the number of high frequency users or what we call heavy users. As for the end optimization, we started by enhancing the functionality of our PC end, which is an important productivity scenario. And this work will continue for some time. Meanwhile, we are preparing to launch Juhu Jida on our mobile end, features of which are still in plan. The goal of this end enhancement is to reach is for us to reach more users.

Speaker 1

The combination of model and optimization is translating into our user growth. Overall, we were seeing positive changes in terms of product usage, user time spent and both next day and 7 day user retention. And for sure, right now, our primary focus is on improving the experience for heavy users. And the commercialization is not the priority at this moment. Thank you, Xiaoping.

Speaker 1

Thanks for your question.

Operator

The next question comes from Thomas Chong with Jefferies. Please go ahead. So I'll transfer myself. My question is about advertising. So our performance ad and brand ad had good performance during 6/18.

Operator

So what's the drivers behind and what are our advantages?

Speaker 1

Thank you for your question. This is from Zuhu CFO, Wang Han. Juhu is becoming increasingly clear about its commercial strength and expertise, specifically in helping brands to build premium value with high quality audience. I'd like to share 2 practical cases. The first example of these two cases is our successful collaboration with Midea to achieve both positive word-of-mouth and self worth refrigerator priced over RMB60 1,000.

Speaker 1

During this 6/1/8 shopping festival, Toshiba's premium flagship star rated refrigerator achieved positive ROI through Zuhu's first stop for new product purchases solution. By leveraging our high value community and users, we focused on human centered design and advanced technology for high end home appliance, successfully creating a differentiated discussion space for new products, achieving both positive word-of-mouth and strong sales. The second example is our lighthouse project IT collaboration. With the same the lighthouse of the community illuminates the warmth of the product. We helped Vivo promote the Blue Heart AI accessibility feature.

Speaker 1

This initiative combines social value with strong marketing results. The in platform topic gained over 1,300,000 rates and Zuhu's video channel set an all time high record of interactions with likes and favorites, surpassing 100,000 and over 40,000 shares. The video even received praise and a share from Vivo's Chief Marketing Officer, generating significant buzz and positive feedback for both brands and our community. These successful cases categorized by high value and strong word-of-mouth demonstrated that Jufu's strength in professional discussion forum unlocks the commercial potential of high value users By becoming the center of trust for these audience, this is the most natural path for Juhu's commercialization. Thank you for question.

Operator

The next question comes from Sooken Zhu with Guangfa Securities. Please go ahead. What are the main drivers behind the growth of Zhihu's gaming user base? And how can we assess the outlook of this segment? Thank you.

Speaker 1

Thank you for your question. This is from Zhehuo CFO, Wang Han. Our two drivers remain the growth are subscribing members and the increase in ARPU. In terms of user's goal of member pay members, as we mentioned previously, with massive market beyond Jupu community, we'll continue to explore multiple channels to expand our user base. Firstly, the MAU of YanYean Stories app in July saw a year over year increase of more than 36%.

Speaker 1

In the Q2, our exploration of co brand memberships and the distribution channels further demonstrated the spillover effect of the Jupu Yidian Stars brand with Pay member growing year over year in this quarter. Regarding ARPU growth, the key is embracing membership benefits. We have launched a premium membership that included privileges such as audiobooks and redo dramas with differentiated pricing. Order in this category has been steadily increasing. As the reputation and influence of Jifu Yan'an story continue to spread, we have more product formats and member benefits based on this advantage currently in development.

Speaker 1

So please stay tuned. Thank you for

Speaker 2

your question.

Operator

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

Speaker 3

My question is about the recreational treaty and how do you think of the future of your self operated part of this kind of disease and the country? We noted that the economy and the consumption is relatively weak. Do you think is there opportunity or a challenge for it goes? Thank you.

Speaker 1

Thank you for your question, Daisy. This is from Jufu CFO, Wang Han. The external environment is certainly a significant positive for our self operated vocational training business. Firstly, from a fundamental perspective, the pressure on the employment environment has rapidly increased the demand for professional or soft skills and comprehensive abilities. Additionally, the stable and favorable regulatory policies in the education industry have sustainable, improved and performance and the market value of the companies in this sector, which positively influences our valuation benchmarks.

Speaker 1

This year, the primary goal for our vocational training business is to improve efficiency and accelerate loss reduction. We have swiftly adjust some underperforming courses and acquire subsidiaries, reallocating more resources to strengthen our core programs and expand into new disciplines. In short term, this might mean sacrificing some low quality revenue, but we have simultaneously benefited from realized gains and profit improvements. In terms of acquisition side, we will continue to actively stake suitable targets with high standards, like the company can integrate it well with our community and have good operational and profitability levels. In long term, we believe that the synergy between vocational training business and our community will significantly empower this business segment in rapidly validating new demand, acquiring customer precisely and building strong reputation, ultimately translating into a competitive advantage in our unit economics model.

Speaker 1

Thank you. Thank you for your question.

Operator

That concludes today's Q and A session. At this time, I will turn the conference back over to Yolanda for any additional or closing remarks.

Speaker 1

Thank you, operator, and thank you all once again for joining us today. If you have any further questions, please don't hesitate to contact our IR team directly or TSMC Financial Communications. Thank you all.

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