Zhihu Inc. (NYSE:ZH) Q3 2022 Earnings Call Transcript

Zhihu Inc. (NYSE:ZH) Q3 2022 Earnings Call Transcript November 30, 2022

Zhihu Inc. beats earnings expectations. Reported EPS is $-0.41, expectations were $-0.79.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2022 Financial Results Conference Call. At this time all participants are in listen-only mode. After the speakers’ 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 Ms. Jingjing Du, Head of Investor Relations. Please go ahead, ma’am.

Jingjing Du: Thank you, operator. Hello, everyone. Welcome to our third quarter 2022 financial results conference call. Joining us today are Mr. Zhou Yuan, our Chairman and CEO of Zhihu; and Mr. Sun Wei, our CFO. Before we start, we would like to remind you that today’s discussion may contain forward-looking statements, which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today’s announcement and this discussion. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see our 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. Sun Wei, our CFO.

laptop-3087585_1280

Sun Wei: Thank you, Jingjing. I’m pleased to deliver today’s opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu. Thank you for joining Zhihu’s third quarter 2022 earnings call. We’ve delivered another quarter of solid execution on our community ecosystem first strategy and are delighted with the strides we have made promoting our community’s prosperity. Starting from the beginning of this year, we shifted our specific focus toward growing quality users and further bolstering the strength and resilience of our content-centric business model. In Q3, the activeness rate of our app users at DAU over MAU reached its highest level in the past three quarters of this year, and the time spent per daily active users climbed both year-over-year and quarter-over-quarter.

Despite the still challenging macro environment, our community ecosystem demonstrated strength and resilience during the third quarter. Total revenues were up by double-digit on a year-over-year basis as we continue to expand and optimize our content offerings and enhance our content creators user experience. Furthermore, our initiative to heighten operating efficiencies drove significant improvements in our bottom line performance for the quarter. In Q3, total revenues reached RMB 911.7 million, increasing by 11% compared with the same period last year and net loss narrowed by 39% quarter-over-quarter. Our paid membership retained robust growth momentum increasing by 88% year-over-year and contributed 37% of the total revenue during the quarter.

Meanwhile, vocational training services continue to accelerate their contribution to total revenues with a 458% growth rate year-over-year. Continuing efforts to refine our business lines and improve operational efficiencies during the quarter helped to make our ecosystem stronger and more resilient. The Zhihu community is striving and becoming more healthier and healthier. The result of our efforts gives us further confidence to invest in long-term growth while striving for profitability in the near-term. Now, I’d like to share some more details on third quarter achievements. The first part is by users. At Zhihu, our differentiated fulfilling content and a unique content-centric ecosystem not only resonated with users, but also well-positioned us to address their evolving demands.

In turn increasing user interaction attracts more content creators and inspires their creation driving the healthy and sustainable growth €“ community growth. With this in mind, since the beginning of this year, we have shifted our focus from user expansion to quality user growth, which has produced remarkable achievement in the third quarter. On top of our record high activeness rate for our app monthly active users DAU over MAU in Q3, the time spent per user grew by 26% year-over-year and 14% quarter-over-quarter reaching 29 minutes. Average MAUs were down in Q3 by approximately 4% year-over-year as expected. We continuously expand the breadth and depth of our high quality content to support user interaction and introduce timely and fulfilling new content.

For example, our GaoKao related content significantly drove up the time that young users spend on our platform during the summer vacation period. Moreover, our timely content offerings during the quarter not only attracting more male users, but also encourage them to engage more deeply in rational discussions within the community. In Q3, we also continue to innovate in content format development, aiming to encourage user interaction in more diversified content formats. In particular, our new thought format has caught on quickly among creators and users alike. Thanks to its flexible nature and broad appeal. It’s now becoming a more frequent format for both content creation and content consumption. Accordingly, in Q3, the new active follows one of the ways that our users interact with each other grew by 16% year-over-year and 19% quarter-over-quarter.

Second part is about content. We believe that when we better meet user demand for more high quality content, higher quality user growth is the net result. In Q3, we continue to improve user experience and enhance our competitiveness by expanding our content offering, diversifying our multimedia content format and further enhancing our recommendation algorithm. As of the end of Q3, the cumulative pieces of content in our community reached 579 million, representing a 26% year-over-year increase. Of these, 485 million were questions and answers representing a year-over-year increase of 22%. Our scenario-oriented content cultivation approach has proven to be effective not only in exploring and satisfying the demands of our various user groups, but also in motivating concentration and boosting content consumption.

For example, during the last summer vacation period, we presented Wilderness Talks on your free time an eight-part series of high quality, self-produced programs where in our content creators exchanged their thoughts with other young people on how Generation Z sees the world. Through this innovation format, we were able to share a brand new world from Gen Z’s perspective and help our viewers better understand their view on life. The series resonating content attracted many young viewers generating MAU penetration rate of 28.4% for the quarter. Content offerings associated with self-improvement also proved popular with users between 18 and 25. Driven effectively by these scenario-oriented activities the percentage of new users between 18 and 25 among our total new MAUs was four percentage points higher compared to the same period last year.

In September, we further expanded our content offering in our career development segment through diverse content formats, including videos, live streaming, talks and text and picture, T&H. The expanded content format generated huge interest. For example, the thought provoking video speech, how we should get along with our work, presented by historian produced over 20 million views within just two weeks. Here in September, more than 13% of our DAUs consumed career development related contents and their retention rate was higher than that of our overall DAUs by 15 percentage points. Moving to content creators, our content creators are the most important assets in driving sustainable growth within our community ecosystem. As end of Q3, our cumulative number of creators has reached a new high reaching 61.2 million, a year-on-year increase of 15%.

We are committed to providing our content creators with an enhanced creation experience as well as fruitful rewards. We work towards this goal by leveraging the solid foundation of our content-centric ecosystem, and by providing a broad array of creator-centric programs. In Q3, we are delighted to see thousands of content creators from a cross section of ranking levels and the verticals including eSports, career development and education. We received financial incentive from the RMB 100 million from and the future plan. In Q3, average income per content creator increased by 47% compared with the same period last year. Furthermore, on September 13, we officially launched the program under the Zhihu platform. will award specific subsidies to the top 10 content creators who make significant contributions in the field of science or humanity.

The third part is about community culture. In line with our community ecosystem first strategy, we are committed to better serving our users and content creator with clearer community rule and guidance, better products and features and enhanced protection. In future our regular surveys show significantly increase user satisfaction with our community governance and services. In addition, these surveys also indicated a significant improvement in content creators’ net promoter scores across an array of subcategory scores, including creating tools, growth guide, creator benefits, and a copyright protection. As a leading online content community during the quarter, we continue to fulfill our social responsibilities by leveraging our technological capabilities to promote rational, multidimensional, and the constructive discussions on our timely content offerings.

For example, we enhance the emotional monitoring function on our Zhihu hot list to ensure a professional and a rational community environment. Next part is about monetization. However, growing content library, thriving creator ecosystem and the flourishing community, are the assets that differentiates us in this class, evolving and highly competitive market. During the third quarter, our high quality content-centric communities saw sustainable improvement in our monetization ecosystem, enhancing the resilience of our business model and creating new growth drivers for our longer term development. Our paid membership has maintained a year-over-year growth every quarter for the past three years. In the third quarter of 2022, revenue from paid membership increased by 88% year-over-year, contributing 37% to our total revenues.

At the same time, our average monthly paying users exceeded ten million for the quarter. These achievements were driven by the expansion of our premium content library, especially in the vertical targeting male users. Meanwhile, the enhanced influence of our premium content endorsed with the exclusive e-book rights also contributed to this growth. Better satisfied user demand for a sustainable supply of premium content with further strength support for premium content creators to encourage their creation efforts and enhance their creation experience. In Q3, we were pleased to see an increasing number of our premium content become mature commercial IP. This in turn rewarded their creators with the better income. Furthermore, our upgraded copyright protection features helped content creators trust and reliant on the Zhihu community.

In the third quarter, the average income earned by premium content creators increased by almost 30% compared to the same period last year. Earlier this year, we set a target to help 100 creators earn more than RMB1 million, while our paid membership plan, we are now setting a new target on planning to launch a new ambitious program creator. A new super novel program established and the future plan will have greater funding resources and we’ll aim to help 500 content creators earn more than RMB1 million over the coming three years. We first established our vocational training and business team in 2019 to better meet our users evolving needs for knowledge related content. Now, after nearly three years of development, we are well positioned in the rising demand markets with our trusted brands, improve technical capabilities and mature team structure.

In the third quarter, revenue from our vocational training business was quadrupled year-over-year and contributed 9% to our total revenue, clearly demanding this business segment as our emerging growth drivers. During the quarter, we continue to expand our core offerings facing our user’s undergoing scenarios and in two major categories, academic improvement and career promotion. We further enhance our technical capabilities, including our CRM system, and improve our operational efficiency to better support the robust growth of this business. Our effective customer acquisition strategy paired with diverse high quality program drove a 300% year-over-year increase in vocational training paying users in the quarter. In Q3, we acquired a new vocational training brand in Zhihu that specialized in professional teacher qualification certification.

See also 11 Best Hardware Stocks To Buy  and 12 Best Growth Stocks To Buy According To Soros.

In doing so, we further broaden our vocational training program coverage to better meet our users needs. Going forward, we will continue to explore greater growth opportunities to drive the sustainable development of our community ecosystem. Now moving to our advertising and accounting commerce solution, based by challenging microdynamics in Q3, Zhihu continue to gain traction in marketing budget share and increase greater recognition from brands and merchants. Our CCS and advertising business maintain its growth in our leading industry, including IT and 3C, automotive, and gain. The quarter’s top five revenue contributors for CCS and advertising were IT and 3Cs, cosmetics, e-commerce, automotive, and education. We continue to upgrade our Zhihu platform in the third quarter with additional improvements in the platform infrastructure.

We also released a new version of the commercial value index to further improve matching efficiency between brands and content creators. Due to continuing weak market, big market conditions for online advertising, CCS revenue decreased slightly in Q3 year-over-year, but show a double-digit quarter over quarter growth. Total income earned by content creators through the Zhihu platform continued sustainable growth in Q3. We have long been dedicated to delivering better marketing performance through technology and innovation. As such, our incentive IT based, sorry €“ our invented IT based marketing campaigns has become an attractive extension of our traditional advertising program. The IT based campaign we released, including curiosity labs, auto lab, ingredients lab, and the tutorial lab have gained great market reformation by advertisers in various industries such as consumer goals, automobiles, and e-commerce.

In Q3, we launched a new visiting factory IT campaign. Content creators as experts in different views were encouraged to visit the factory and R&D facilities of different brands seeking answers submitted by our users. This campaign has received positive feedback from both our users and the brands. The resulting high quality content helps our users better understand this brand’s product and enhance their trust in each brand to transparent communication. To sum up our long-term strengths are impacted and our fulfilling content and the user quality are well recognized by brands and merchants. We expect that we will continue to win market share in the growing content marketing industry. And moving forward, we will continue to expand our portfolio of marketing solutions to empower our clients in reaching their goals.

Meanwhile, we will continue to enhance Zhihu’s competitiveness to broaden our fulfilling content, drive user engagement, improve operating efficiency, and further enhance our trustworthy community culture. The road ahead is long and will involve many challenges, but with determination, perseverance, and our goal insight Zhihu is well positioned to further pass the growth and the profitability. This concludes Mr. Yuan’s remarks. I will now turn to our financials. In the third quarter, our community ecosystem first strategy continues to effectively strengthen the resilience of our content-centric business model. As evidenced by our solid operating and financial performance, total revenue grew by 11% year-over-year reaching RMB911.7 million in Q3, and our net loss margin narrowed significantly by 26 percentage points over Q2.

Thanks to our discipline cost countermeasures. The strength of our multiple growth engines in the content-centric business model, once again proved itself in the third quarter with a further balanced revenue structure. CCS and our advertising business combined contributed 51% of our total revenue. At the same time, the paid membership and the vocational education accounted for 37% and 9% of total revenue respectively in the quarter, up 4 and 3 percentage points quarter-over-quarter respectively. Our paid membership maintains rapid growth momentum in Q3 with revenue increasing by 88% year-over-year to RMB3.4 billion. The average number monthly paying users reach a record high of 10.9 million, representing a percentage rate of 11.2% amounted total average MAU in the Zhihu community.

And notably, the revenue from our emerging growth engines, vocational training was an over twelvefold year-over-year increase to RMB78 million in the quarter. Revenue from CCS and our advertising business came under pressure in Q3 impacted by the overall weak market conditions for online advertising. Total combined revenue for CCS and advertising for the quarter was down 23% year-over-year, and the 3% quarter-over-quarter. Gross profit for Q3 was RMB4.4 billion. Gross margin was 48.7% up 1 percentage point compared to the last quarter, remaining at the high end across industry. The quarter-over-quarter improvement in gross margins was primarily attributable to our continuous rigorous cost control and ongoing efficiency improvement. During the quarter, our relatively fixed cost mainly including cloud services, bandwidth, and the personnel cost, along with the content cost continue to decline as the percentage of total revenue.

Continuing our effort starting from the beginning of this year, it further works to optimize operating expenses and the streamline operating efficiency in the third quarter. Our work is yielding food. Total operating expenses for the quarter €“ for the third quarter were RMB7.2 billion leading to our improved operating margins both year-over-year and a quarter-over-quarter. As we continue to shifting our focus from user expansion to user engagement built on marketing expenses decreased by more than 10% quarter-over-quarter. For our R&D and G&A expenses will continue to optimize the expense structure to improve our operational efficiency and R&D and G&A expenses as a percentage of revenues decreased by 9 percentage points and 3 percentage points quarter-over-quarter respectively.

We are exactly reducing our net loss. Our GAAP net loss for the quarter was RMB297.6 million compared with the net loss of RMB487 million in previous quarter. Our adjusted net loss, which primarily excludes share based compensation expenses, was RMB250.6 million for Q3 compared with RMB443.8 million last quarter. As of September 30, 2022, the company had cash and Cash Equivalents, term deposits, restricted cash and short-term investments of RMB6.6 billion. And as of September 30, 2022, we have repurchased approximately 4.9 million Class A ordinary shares at a total cost of US$13.2 million. This concludes my prepared remarks on our financial performance for this quarter. Let’s turn the call over to the operator for the Q&A session. Thank you.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Thank you. Today’s first question comes from Steve Qu with Goldman Sachs. Please go ahead.

Steve Qu: Thank you for taking my questions and congrats on the progress of cost contained initiatives. I have a question on MAU, so noticing that your MAU has declined over the quarter, yet the time spent and monetization efficiency per MAU was much better. Did you shift your strategy from pursuing absolute MAU growth to extract the lifetime value for the high quality user? And could you share some insights on our long-term user growth potential? Thank you.

Zhou Yuan: Thank you for this question. The answer from Mr. Zhou Yuan, the CEO of the company. At the beginning of the year, we set our annual strategy as a year of transitioning that is to keep our community ecosystem first, and that means a good experience for content creators, fulfilling content as well as a good atmosphere for the community. And more importantly, that is to have a commercialization that goes in line with our current community or simply to achieve stability €“ profitability as soon as possible. In the year, while we are pushing forward our strategy of year of transitioning and community ecosystem, first, we had make some adjustment. We believe that our volume numbers remained quite stable and we had hit our strategy target such as revenue and volume output targets.

In the past year, we have made quite a lot of effort in fulfilling content optimization, quality control, as well as the algorithm improvement on the user side, the rewarding to the content creators as well as upgrades of our product. And I would like to talk a little bit more details about this. Be more specific, we keep improving the experience of the content creators. They are more active on our community. High level content creators on this quarter had an increase of 27% increase of daily activity rate, and they keep injecting high quality professional content to our community. And in May this year, we have launched our high yen plan4.0. And in this system, the content creators with specialties in key areas are enjoying better tools and growth support, as well as rewards to their content creation.

And the average income per income making creator had a revenue increase of 47% in Q3 year-over-year. Second is ever growing fulfillment content that we have due to the optimization on the product and algorithm that we provide to the users, and they have better experience in consuming our content and they go deeper in consumption and as well as the intensity of content consumption gets better. And the third quarter, you can see that our daily time spent per user has been as long as 29 minutes with an increase of 26% year-over-year and 14% quarter-over-quarter. The third point is that we keep optimizing our community atmosphere and our community services, both for the users and content creators. On the user side, there is satisfaction rate for our governance of community and services, both increased significantly.

And on the content creator side, their net promoter scores, as well as other subcategories for satisfaction rates such as creator tools, growth as well as revenues are all seeing very nice growth. And the last point is that our users are getting more active. For instance, our app DAU and MAU are getting increase for three quarters consecutively, and also we believe that we focus more on the commercialization that goes more in line with our community, so that our high quality users will keep giving us drivers for commercial growth so that we can develop a virtual cycle of healthy community and sustainable business growth. In the third quarter our app pool had a year-over-year growth of over 15%. So overall speaking, we believe that improvement for the ecosystem takes time and there are a lot of details to attend to, and it takes time for us to generate greater value for the community through a better ecosystem.

And if you improve the user experience this will organically drive up the user base in a more sustainable way. And for the long-term, we believe that it is the most efficient method that we have for the user base growth. Overall speaking, our target remains unchanged that is to drive profitability. And for the short-term, we do see some slightly changes in our users. And for the third quarter, to be more specifically, our monthly viewers grow by 23% year-over-year. And we see that our users are getting more consumption on our content and will keep increasing and improving their content consumer experience €“ consuming experiences and create more commercial values out of our community.

Operator: Thank you. And our next question today comes from Xueqing Zhang with CICC. Please go ahead.