Zhihu Inc. (NYSE:ZH) Q2 2024 Earnings Call Transcript

Zhihu Inc. (NYSE:ZH) Q2 2024 Earnings Call Transcript August 23, 2024

Yolanda Liu – Director, IR:

Wang Han – CFO:

Zhou Yuan – Founder, Chairman and CEO:

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Zhihu Inc., Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a Q&A session. Today’s conference is being recorded. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma’am.

Yolanda Liu: Thank you, Operator. Hello, everyone. Welcome to Zhihu’s second quarter 2024 financial results conference call. Senior management joining me today are Mr. Zhou Yuan, our Founder, Chairman, and the Chief Executive Officer, and Mr. Wang Han, our Chief Financial Officer. Before we get started, I would like to remind you that today’s discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in other 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 applicable law. Additionally, the matter we will discuss today will include both GAAP and non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhihu.com. I will now turn the call over to Mr. Wang Han, our CFO. Please go ahead.

Wang Han : Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu’s second quarter 2024 earnings call. I’m pleased to deliver today’s opening remarks on behalf of Mr. Zhou Yuan, Founder, and Chairman, and CEO of Zhihu. We’re pleased to report another strong quarter. In the second quarter, we achieved robust improvements in operating efficiency, with our gross margin raised by 5.8 percentage points year-over-year to 59.6%. Our total operating expenses decreased by more RMB 140 million compared to the same period last year, including a reduction of RMB 120 million in marketing expenses. Our adjusted net loss declined by 79.9% year-over-year to RMB 44.6 million, marking our lowest quarterly loss since our U.S. IPO. In the second quarter, we made significant strides in enhancing the Zhihu’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 timestamps. We expanded AI applications across our products and services during this quarter, aiming to provide users and clients with an enhanced experience. In late June, we officially launched Zhihu Zhida, 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 second quarter, 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 pieces of content on Zhihu reached 830.9 million, a 16.8% year-over-year increase. The cumulative number of content creators within the Zhihu community grew by 12.5% to 74.9 million during the quarter. This continued rise in a proportion of highly active users engaged in content creation. To further bolster user engagement, Zhihu continued to foster rational, optimistic, in-depth discussions around prominent social issues and world events this quarter. For example, during the annual Gaokao period, we strategically enhanced the community’s support for Gaokao users by elevating the first-hand experiences shared by previous examinees, optimizing search functionalities, and refining recommendation algorithms.

Accordingly, the volume and quality of Gaokao-related answers rose markedly, with three-day and seven-day classroom response rates experiencing double-digit growth. The surge in user engagement and 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. We also implemented effective initiatives to draw users to our coverage of the Paris Olympics. Within a week of the Olympic opening on July 26, content views related to the event soared to over 600 million, with over 500,000 discussions spanning topics such as science and technology, sociology, psychology, and cultural arts.

Thanks to these efforts, positive feedback from Zhihu users on our high-quality content continued to rise, accompanied by a significant increase in user interactions. Average daily engagements per year grew by nearly 40% year-over-year, with the monthly average of upwards 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. The official launch of Zhihu Zhida in late June marked a significant step in our exploration of AI-powered search functionality. Zhihu Zhida’s deep integration with the content creators sets it apart from other AI-driven search products. The majority of the content powering Zhihu Zhida is derived from Zhihu’s proprietary high-quality content library, which allows users to trace counselors back to their original sources, explore more premium Q&As within a community, and directly connect with content creators.

We believe Zhihu Zhida’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 430%, compared with June, as we continue to leverage Zhihu’s self-developed LLM to refine Zhihu Zhida’s performance and user experience. By the end of July, 70% user retention doubled compared with early July. Zhida’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 Zhida’s PC platforms through our ongoing improvements in product features, algorithms, and performance.

Simultaneously, we are set to officially launch and upgrade Zhida Tab on the Zhihu app, which will effectively complement the desktop version. Zhida not only provides professionals with effective tool-based scenarios, but also with vast potential for exploration in user interaction and content creation through the power of the Zhihu community. Moreover, we aim to reach a broader audience with Zhida, relying on its performance and reputation rather 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 significantly improved operating efficiency. In the second quarter, 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 second quarter. First, our marketing services remained under pressure in the second quarter, with revenue totaling RMB 344 million, decreasing by 16.7% year-over-year. However, I want to highlight that within our marketing services, although our CCS is currently experiencing a decline during its adjustment period, both brand advertising and performance-based advertising exhibited robust 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, while also supporting mid-tier content creators with substantial commercial potential in achieving their financial goals. In this year’s 618 Shopping festival, the number of commercial content creators on a distribution platform increased more than six-fold compared with the same period last year. As we move into the second half of the year, we will continue to enhance our marketing services, grounded in the trustworthiness of our community.

Our efforts will focus on the following key areas. First, by leveraging our AI and LLM capabilities and enhanced data infrastructure, we aim to further boost conversion efficiency for brands and merchants, while also enhancing our own product and operational efficiency. Second, we will capitalize our community’s professional discussion environment and the trustworthiness among high-value users to assist more emerging verticals, particularly those facing technological barriers, to build stronger marketing awareness and commercial credibility. Third, 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 strategies, attracting many new users in the second quarter.

The number of subscribing members grew by 4.7% year-over-year to 14.7 million, while revenue contribution grew to 46%, reaching RMB 432.7 million. In addition to broadening our premium content offerings, we actively explored various new growth channels in the second quarter, including co-branding memberships and distribution channel extensions. For content creators, Zhihu’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. In the second quarter, the number of Zhihu premium content creators earning income increased by 77.4% year-over-year. We also continued to unlock our high-quality strong story IPs monetization potential.

On July 9th, the short drama Love in a Dream premiumed on Tencent Video. This marks another successful adaptation from Zhihu’s Yanyan Story library, following the acclaim of [Indiscernible]. Next, I will review our Vocational Training business. We strategically optimized our business structure in the second quarter with a focus on efficiency enhancement, concentrating on self-operated offerings and aligned closely with our community to provide greater certainty and profitability. We also recorded gains on certain adjustments to our acquired business in this quarter, achieving high margins. As a result of these effective measures, operating efficiency within the vocational training segment improved significantly despite a slight decrease in the total revenue, which amounted to RMB $133.6 million per quarter.

GMV for our vocational skills and interest programs achieved over 50% year-over-year growth this quarter, with AI and AGI-related programs continued 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 advisor programs. In turn, this expansion encouraged valuable user contributions, with beneficiaries enriching the community with high quality content and innovative creations as they shared their insights and experiences. Moving forward, we will continue to strengthen our absolute advantage in specialized subject offerings. We will also utilize AI technology to enhance operating efficiency and accelerate our progress towards profitability.

In summary, our strong second quarter performance showcases our understanding of strategic planning and execution capabilities. As we move into the second half of 2004, we will remain confident in and committed to achieving quarterly profitability targets. Meanwhile, we will continue improving our segmented, engaging user experience and enhancing the Zhihu Community’s trustworthiness to grow and nurture our user base. We will also advance our AI development initiatives, enriching 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.

This concludes Mr. Zhou Yan’s remarks. Now I will review the details of our second quarter financials. For a complete overview of our second quarter 2024 results, let us refer to our press release issued earlier today. Throughout the second quarter, we made significant strides in refining our core structure and optimizing operating efficiency. While maintaining disciplined spending and proactively pursuing high ROI across our business lines, we accelerated our exploration of AI-powered technologies, substantially enhancing our products and services. As a result, we have achieved notable improvements in both gross margin and adjusted net loss. Remarkably, this quarter represents our lowest quarterly loss since our U.S. IPO. Our marketing services revenue for the quarter was RMB 344 million, compared with RMB 412.7 million in the same period of 2023.

This decline primarily reflects our deliberate ongoing refinement of service offerings to strategically focus on margin improvements. Pay membership revenue for the second quarter decreased slightly by 3.7% year-over-year to RMB 432.7 million. Primarily due to a marginal decline in our average revenue per subscribing members. However, our average number of monthly subscribing 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 RMB 133.6 million, compared with RMB 144.5 million in the same period of 2003. 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 second quarter was RMB 556.5 million, compared with RMB 562.1 million in the same period of 2023. Thanks to our enhanced operating efficiency, the gross margin has improved year-over-year for seven consecutive quarters, reaching 59.6%, the highest level since our U.S. IPO. Our total operating expenses for this quarter was RMB 740.4 million, a 16.7% decrease from RMB 889.3 million in the same period of last year. Our selling and marketing expenses decreased by 22.9% to RMB 417 million, down from RMB 540.6 million in the same period of 2023. 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% to RMB 209.3 million, down from RMB 236.2 million in the same period of 2023.

This reduction was primarily attributable to more efficient spending on technological innovation. General and administrative expenses were RMB 114.1 million compared with RMB 112.5 million in the same period of 2023. Our GAAP net loss and non-GAAP net loss for the second quarter has both narrowed substantially, decreasing by 71.1% and 79.9% year-over-year respectively. As of June 30, 2004, the company has cash-in-cash equivalence term deposit, redistricted cash and short-term investment of RMB 5.1 billion compared with RMB 5.5 billion as of December 21, 2003. As we advance into our second half of 2024, 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.

This concludes my prepared remarks on our financial performance for this quarter. I will now turn the call over to the operator for the Q&A session.

Q&A Session

Operator: [Operator Instructions] The first question today comes from Vicky Wei with Citi. Please go ahead.

Vicky Wei: Thanks, management, for taking my question. Would management share some color about the progress of achieving breakeven target? Thank you.

Wang Han: Thank you for your question. This is from Wang Han, CFO of Zhihu. Our profitability goals remain unchanged and resolute. We still plan to achieve a quarterly non-GAAP net profit on this fourth quarter. And our second quarter financial results fully validate 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. And from the current progress of the third quarter, our loss reduction work should also be more pressing, so please stay tuned. Thank you, Vicky.

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

Xueqing Zhang : Thanks, management, for taking my question. My question regards on your user base. How has Zhihu managed to maintain a stable database despite scaling down community promotion expense? And a follow-up question on your AI search. Can management share the progress of AI search? What’s the user metrics after the launch of Zhihu Zhida? How does management feel the potential commercialization? Thank you.

Zhou Yuan: This is from Zhihu’s CEO, Zhou Yuan. The proactive user strategy adjustments we have made over the past two 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. I will explain a little bit more here. This in-depth cultivation approach has two meanings. One 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. Thank you for your question. I will continue to answer for your second question.

We successfully launched Zhihu Zhida on PC platform at the end of June. And over the past period, our work has focused on two main areas. The first, optimizing the model. And the second, upgrading and optimizing the end. The optimization of model has led to significant improvements in user retention with 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 Zhihu Zhida on our mobile end, features of which are still in plan. The goal of this end enhancement is for us to reach more users. The combination of model and end optimization is translating into our user growth.

Overall, we are seeing positive changes in terms of product usage, user time spent, and both next day and seven-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, Xueqing, thanks for your question.

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

Thomas Chong : So I transfer myself. My question is about advertising. So our performance app and brand app has good performance during 618. So what’s the drivers behind and what are our advantages? Thanks.

Wang Han: Thank you for your question. This is from Zhihu CFO Wang Han. Zhihu 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 two practical cases. The first example of these two cases is our successful collaboration with media to achieve both positive word-of-mouth and self-worth refrigerator priced over 60,000 yuan. During this 618 Shopping Festival, Toshiba’s premium flagship star-rated refrigerator achieved positive ROI through Zhihu’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 help Vivo promote the Blue Heart AI accessibility feature. This initiative combines social value with strong marketing results. The in-platform topic gained over 1.3 million rates, and Zhihu’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 Zhihu’s strength in professional discussion forums unlocks the commercial potential of high-value users.

By becoming the center of trust for these audience, this is the most natural path for Zhihu’s commercialization. Thank you for the question.

Operator: The next question comes from Yu Chen Zu with Guangfa [ph] Securities. Please go ahead.

Unidentified Analyst: What are the main drivers behind the growth of Zhihu’s paid user base? And how can we assess the outlook of this segment? Thank you.

Wang Han: Thank you for your question. This is from Zhihu CFO Wang Han. Our two drivers remain the growth of our subscribing members and the increase in ARPU. In terms of the user scale of our paid members, as we mentioned previously, with massive market beyond Zhihu community, we will continue to explore multiple channels to expand our user base. Firstly, the MAU of Yanyan Stories app in July saw a year-over-year increase of more than 36%. In the second quarter, our exploration of co-brand memberships and distribution channels further demonstrated the spillover effect of the Zhihu Yanyan Stories brand with paid members growing year-over-year in this quarter. Regarding ARPU growth, the key is enriching membership benefits. We have launched a premium membership that included privileges such as audiobooks and radio dramas with differentiated pricing.

Order in this category has been steadily increasing. As the reputation and influence of Zhihu Yanyan Stories continues to spread, we have more product formats and member benefits based on this advantage currently in development. So please stay tuned. Thank you for your question.

Operator: [Operator Instructions] The next question comes from Daisy Chen with Haitong International. Please go ahead.

Daisy Chen : Thank you for taking my question. My question is about the vocational training. How do you think of the future of your self-operated part-time kind of business? Currently, we know that the economy and consumption is relatively weak. Do you think is there an opportunity or a challenge for its goals? Thank you.

Wang Han: Thank you for your question, Daisy. This is from Zhihu 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 a sustainable, improved performance and the market value of the companies in this sector, which positively influences our valuation benchmarks. This year, the primary goal for our vocational training business is to improve efficiency and accelerate loss reduction. We have swiftly adjusted some underperforming courses and acquired 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 seek 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 the vocational training business and our community will significantly empower this business segment. In rapidly validating new demand, acquiring customers precisely and building strong reputation, ultimately translating into a competitive advantage in our unit economics model.

Thank you. Thank you for your question.

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

Yolanda Liu: 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 PSN Financial Communications. Thank you all.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.