Zhihu Inc. (NYSE:ZH) Q4 2023 Earnings Call Transcript

Zhihu Inc. (NYSE:ZH) Q4 2023 Earnings Call Transcript March 26, 2024

Zhihu Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Fourth Quarter and Full Year 2023 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 Yolanda Liu, Director of Investor Relations. Please go ahead, ma’am.

Yolanda Liu : Thank you, operator. Hello, everyone. Welcome to our fourth quarter and full year 2023 financial results conference call. Participants on today’s call include Mr. Zhou Yuan, our Founder, our Chairman and Chief Executive Officer and Mr. Wang Han, 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 and Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, other 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 filed with the U.S. SEC and Hong Kong Stock Exchange.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our IR website at ir.zhihu.com. I will now turn this call over to Mr. Wang Han, CFO of Zhihu. Han please go ahead.

Wang Han: Thank you, Yolanda. Hello, everyone. Thank you for joining Zhihu’s fourth quarter and full year 2023 earnings call. I am pleased to deliver today’s opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman and CEO of Zhihu. In ’23, we faced a plan of challenges and opportunities. Despite a dynamic macro environment and competitive industry landscape, we achieved substantial progress in commercialization and efficiency both in the fourth quarter and throughout the year. Furthermore, we made considerable strides in improving our bottom line, while actively exploring and investing in AI technology. Our primary focus in ’23 was motivating our content creators through a variety of incentive plans. As a result, the cumulative content creators on our platform increased by 13% year-over-year reaching 71.3 million by the end of ’23.

The cumulative pieces of content grew to 774.7 million up 19.3% year-over-year. Additionally, the average MAUs for the full year increased by 4% year-over-year. Our monetization progress remained robust throughout the year. We achieved a 16.5% year-over-year increase in our full year revenues to RMB4,199 million, with enhanced operating efficiency, our overall gross margin for 2023 improved by more than 4 percentage points year-over-year to 54.7%. Furthermore, our operating loss margin for 2023 significantly narrowed by 19 percentage points and adjusted net loss decreased by 44.9% on a year-over-year basis. During the fourth quarter, our dedication to user growth, resource allocation and operating efficiency improvements began to pay off. As high quality content continue to strive across the community, we proactively refined our user growth strategy and significantly reduced acquisition costs for new users.

Our focus shifted towards driving efficient and sustainable organic user growth by elevating engagement and retention rates among our highly active core users. We also continue to fortify our monetization models resilient through diverse growth drivers. Our total revenue for fourth quarter of 2023 reached RMB1.1 billion primarily fueled by the strong growth in our paid membership and vocational training business. Our increasing brand influence and expanded program offerings have strengthened competitiveness extending our revenue growth beyond Zhihu community. Together these two segments achieved a robust revenue growth of 28.3% year-over-year for fourth quarter of 2023. Enhancing cost control effectiveness and operating efficiency remained as our key strategic priorities during the fourth quarter.

We continue to invest judiciously in cutting edge technologies such as AI, while optimizing our fixed cost structure. These initiatives resulted in an expanded gross margin of 59.1% for the fourth quarter. We also drove a significant 31.9% year-over-year reduction in adjusted net loss, which reached its narrowest quarterly level since our U.S. IPO. As we move through 2024, we will further optimize our financial performance while elevating trustworthiness within the Zhihu community. We are confident that in area of AI generated content users will increasingly value professional, in-depth and authentic content as well as discussion and feedback from real users. By fostering an environment of trust, we can stimulate user interactions and inspire content creators’ passion and creativity ultimately driving organic community growth.

Meanwhile, we also believe that a prudent application of AI large language models can improve user experience and strengthen the feedback mechanism for content creators enhancing our community’s atmosphere and operating efficiency. Now, I would love to delve into the details of our initiatives and achievements in 2023 across content creators as well as our commercialization progress. Let’s start with our content and content creators. As I just mentioned, we revisited our user growth strategy in 2023 to promote organic community growth through high quality content and a thriving community ecosystem. We shifted our focus to boosting our core users’ activity and retention rate, but also reducing user acquisition costs. Consequently, our average MAUs in the fourth quarter were 99 million a slight decrease of 1.6% year-over-year.

However, we reduced user acquisition costs in fourth quarter by more than 40% year-over-year, accounting for less than 35% of total promotion and advertising expenses. This shift drove sequential increases in our daily active users’ time spent. Additionally in fourth quarter, we saw a significant year-over-year improvement in both the content creation contribution rate and next month retention rate for our highly active users. Regarding content, we further refined our current operations by deeply integrating training topics and user demands while continually strengthening recommendation technology. This initiative combined with our diverse incentive plans for content creators propelled rapid growth in our communities high quality content pool.

At the end of 2023, the cumulative pieces of content increased to 774.7 million among which the cumulative number of Q&A has reached 590.8 million. We also leveraged Zhihu’s position as China’s leading content centric community to encourage extensive professional discussions on training topics. For instance in 2023, the cumulative discussion volume related generative AI and large language models under application surpassed 1.2 billion across the Zhihu community. A distinguished group of founders and key developers from leading LLM companies joined the discussion on Zhihu contributing their valuable impact. Science and engineering related content was another standout increasing by 85.6% year-over-year in 2023. Our high-end plan continues to serve as a crucial incentive for content creators.

Since the release of high-end 5.0 in May 2023, we have consistently promoted professional content creation driving creativity and productivity through initiatives such as our Blue Label Certification. In 2023, this program covered 130 virtuals with nearly 200,000 users certified. Furthermore, we provided a broader way of avenues for content creators to earn income. During the fourth quarter, the total number of content creators who earned income on our platform increased by 17.4% year-over-year. As I previously mentioned, one of our top priorities for ’24 is to enhance the trustworthiness within the Zhihu community. To that end, we have been prudently empowering our community with AI, leveraging large language models to better connect human knowledge, experience and insight and make them more accessible to a broader audience.

At our recent discovery conference on March 20, we introduced a new search feature called Discovery leveraging our Zhihu to a large language model. This significant advancement in search scenario allows our users to initiate discussions directly with content creators across the entire Zhihu community with a single question. The content featuring discovery comes from professional content creators within the community. This feature facilitates more efficient knowledge sharing by enhancing search efficiency and a content consumption experience for Zhihu users. We are also providing feedbacks to our content creators. With enhancements like discovery, we aim to strengthen community development and drive the continued emergence of high quality trustworthy content.

We firmly believe that a combination of professional in-depth authentic content for culture of sincerity and respect as well as our transparent and efficient information mechanism will further enhance our community’s trustworthiness. This in turn will drive user engagement and retention throughout the Zhihu community building the efficient and sustainable organic growth of our user base in the long run. Moving into our multi-engine commercialization, the fourth quarter our total revenue increased by 2.2% year-over-year to RMB1.1 million empowered by our thriving community, paid membership and vocational training maintained their robotics growth. Together they expanded our monetization capability beyond the Zhihu community contributing more than 50% to total revenue for both the fourth quarter and full year 2023.

This strong performance underscores the resilience and effectiveness of our business models and diversified revenue growth engine. In terms of revenue growth by sector, vocational training and paid membership revenues led away, increasing by 28.3% to RMB625.2 million. Notably, revenue from vocational training doubled compared to the fourth quarter of last year, as revenue contribution remained at over 10% throughout 2023. While marketing services had yet to fully recover on a yearly basis, it picked up sequentially with quarter-over-quarter growth of 21.5% in the fourth quarter. Particularly display based advertising delivered sequential growth of over 33%. In addition, we saw rapid year-over-year growth in various verticals that requires a longer decision-making process such as IT, 3C and home appliance.

This highlights the wider role of Zhihu’s professional in-depth and authentic content in consumer decision-making. We continue to streamline and upgrade our CCS business offerings throughout 2023 to drive further marketing efficiency improvements and a lot greater commercial potential in this business segment. The increasingly diverse premium content has contributed to consistent growth in our payment membership business. In first quarter, our paid membership revenue increased by 13.3% year-over-year to RMB455.9 million. In fourth quarter of 2023, average monthly subscribers reached RMB14.2 million representing a 9.2% year-over-year increase. Average revenue per user, ARPU, also improved year-over-year. There were two primary growth drivers.

First, the expansion of both our high quality content categories and our target audience, Zhihu’s vast and diverse library of premium content encompasses not only knowledge-based content like columns, research papers and e-books, but also short stories that are gaining popularity among users. As of the end of 2023, our content library amassed 4.9 million visits, an increase of 15.7% year-over-year. Additionally, the number of premium content creators who earned income in Zhihu in ’23, Q4 surged by 36.8% year-over-year. During our NASA content library, many of our short stories originate from professional discussion in Zhihu Q&A community. Since the launch of Zhihu Yanyan story in May 23, it has emerged as a frontrunner in multibillion-dollar short story market in terms of both content production and consumption.

Today, the cumulative number of content creators on exit 600,000 with a cumulative of over 100,000 short stories published. Topical coverage has expanded beyond the platform’s original romance of professional and suspense genres to encompass over 180 subcategories. For the common categories popular among female users continue to grow, we’re also expanding into categories favored by male users such as science fiction and mystery. Meanwhile, the Zhihu community’s financial rewards effectively motivated our premium content creators. Over 100 content creators on Zhihu has earned more than RMB1 million. Also in ’23, the average monthly income of spine content creators on Yanyan was close to RMB10,000 nearly doubling the average income on other platforms.

Second, media format diversification and IP monetization have continued to bolster our users’ long-term value. In the first quarter, we introduced a variety of formats to boost content consumption including audiobooks and video dramas. These initiatives are carefully designed to provide our subscribers with an immersive and fulfilling storytelling experience. By leveraging our expanding media formats and deepening our penetration across the value chain, we’re expanding from short story market to a broader IP monetization market. The success of our short-form web posters clearly reflects strong IP development potential within the Yanyan Story platform. Moving forward, we will harness the power of AI and large language model technology to explore and develop integrated content formats further unleashing the value of Zhihu’s premium content.

This approach will help enhance our subscribers’ LTV in the long-term. Our vocational training business continued to grow robustly with fourth quarter revenue surged by 100.1% year-over-year. Looking ahead, we officially announced our development strategy focusing on digital empowerment for our Zhihu brand at our annual Zhihu Education Conference in January 2024. Zhihu is a vocational training platform dedicated to providing comprehensive and practical learning services for new generation professionals throughout their lifelong personal development journey. Currently, an expanded course offerings over three main categories, academic improvements such as postgraduate exams and English proficiency tests, career enhancements such as CFA, accounting and ESG exams, and other vocational skills in interest, such as writing, IT skills and AGI courses.

The vocational training sector offers immense opportunities for the one thing digitalization. AI and large language models are poised to revolutionize the industry, leading to efficiency improvements and significant shift in user experience. By leveraging AI, LLM and AI agent applications in vocational training scenarios, we can advance the digitalization of process such as job selection, exam practice and homework correction. Our vocational training business success underscores Zhihu’s unique position. We started as a community but we are expanding beyond it. Moreover, this rapid revenue growth will bring us greater scale advantages in terms of cost of dilution and efficiency improvement. We will continue to control and optimize this business cost and expenses to continually boost its overall operating efficiency.

In fourth quarter, marketing and services revenue decreased by 18.7% year-over-year but increased by 21.5% quarter-over-quarter. The year-over-year decline can be attributed to the challenging economic environment and heightened market competition, as well as our proactive efforts to prioritize user experience by reducing the distribution of commercial content that may negatively impact our users. However, the cornerstone verticals of our community continue to demonstrate robust growth. This reaffirms our core users’ recognition of our professional content’s value, particularly in the current environment, emphasizing cost effective and rational consumption. Specifically, the IT, 3C vertical grew by nearly 40% year-over-year in the fourth quarter of ’23.

This trend is also evident in other consumer verticals involving significant decision-making processes such as home renovation, tasks and order activities, which appeals to our core users. Zhihu’s unique content advantages and ongoing product efficiency upgrades empower brand and merchant to gain deep insights into users’ evolving mindset, allowing them to influence decision making and purchase behavior. Furthermore, we have established a feedback mechanism for data collaborations with e-commerce platforms like Taobao and JD.com, Leveraging virtualized data to help brands and merchants achieve their business objectives more effectively by boosting ad card rates, store visits and category penetration rates as well as lowering customer acquisition costs.

Our market services made substantial progress during the Double 11 period, with average conversion rate from Zhihu to brand online stores reached 6% across our verticals. Moreover, both transaction rates and new customer acquisition rates outperform the industry. As we progress through 2024 and elevate the community’s trustworthiness, we will also continue to build out our scientific trust based marketing system across two primary aspects. First, we will continue to upgrade our underlying capabilities to further improve the efficiency of commercial content recommendation. Since the beginning of this year, we have sought to cover major advertising categories with a library of rated and label SKUs so that we can establish a user evolution system empowered by AI.

So this will allow more suitable products to be recommended by a broader base of content creators. Second, we will strive to maintain a high level of user experience especially for our highly active users. The user submitted a feedback indicating no interest for a piece of content, the user will no longer seek commercial content for that product. Moving on to our key strategy for 2024, enhancing operating efficiency and accelerating profitability remain our core strategic objectives for sustainable growth. Alongside ongoing efforts to improve our commercialization efficiency, we’re committed to optimizing our cost and expenses structure. Efficiency will be a pivotal performance indicator at each BU level. This approach will expedite our journey towards profitability.

Meanwhile, we will prioritize initiatives that contribute significantly to the community’s long-term growth and sustainability. Additionally, we will deepen our commitment to protecting our core users’ engagement and creative contribution, reflecting the growing value we place our trustworthy community culture and professional in-depth and authentic content. Finally, in terms of AI investment, we’ll shift our focus to developing application scenarios. We’ll prudently integrate AI into our diverse professional and trustworthy community to provide Zhihu users with efficient access to our massive library of trustworthy answers and a lot greater expansion opportunities beyond it. This concludes Mr. Zhou’s remarks. Now I will review the details of our fourth quarter financials.

For a complete overview of our fourth quarter and full year 2023 results, please see our press release issued earlier today. While we continue to face various challenges, we remain resilient and devoted to our module engine monetization strategy. Our total revenue increased by 2.2% and 16.5% year-over-year for fourth quarter and full year respectively. We are also pleased to deliver measurable progress in refining our cost controls and operating leverage shaping a record high gross margin since our U.S. IPO and a significantly narrowed net loss for the fourth quarter. Our paid membership revenue for the quarter increased 13.3% year-over-year to RMB555.9 million. This growth was primarily driven by continued expansion of our subscribers which increased by 9.2% year-over-year to 14.2 million as a result of content enhancement and user experience improvement.

Our occasional training business revenue for fourth quarter surged by 100.1% year-over-year to RMB169.3 million. This impressive growth can be attributed to our ongoing efforts to expand our course offerings. All our courses are specifically designed to meet our users’ evolving demand covering areas such as academic improvement, career advancement and other vocational skills and interests. We continue to garner market recognition for our programs and drive sustainable development. The overall macro environment and uncertainties in advertising market pressured our marketing services throughout 2023. In fourth quarter, marketing services revenue declined by 18.7% year-over-year. However, they recovered by 21.5% quarter-over-quarter, driven by our product enhancement and sustained increasing performance in verticals such as IE and 3C and home appliance.

Gross profit for the first quarter increased by 7.1% year-over-year to RMB673.1 million, with gross margin expanding to 59.1%, its highest level since our U.S. IPO. Gross margin improvement reflects our enhanced monetization efforts as well as improved efficiency in cloud services and bandwidth utilization. Total operating expenses were RMB851.3 million for the fourth quarter, compared with RMB844.8 million for the same period of 2022. Selling and marketing expenses for the fourth quarter increased to RMB527.6 million from RMB509.2 million for the same period of ’22. As we continue to invest in product and service offering promotions with a prudent ROI based approach. Research and development expenses slightly increased to RMB232.6 million for the fourth quarter from RMB212.5 million for the same period of 2022.

The increase was primarily attributable to our increased spending on technology innovation. General and administrative expenses for the quarter decreased by 26% to RMB91.1 million from RMB123.1 million in the same period of ’22, primarily attributable to a decline in personnel related expenses as we continue to improve operating efficiency. Driven by our ongoing efforts to control costs and enhancing operating efficiency, our GAAP net loss per quarter narrowed significantly year-over-year by 42.6% to RMB103.1 million. Our non-GAAP adjusted net loss, which primarily excludes share based compensation expenses and amortization of intangible assets resulting from business acquisitions narrowed by 31.9% year-over-year to RMB91.3 million for the fourth quarter.

Moving forward, as we continue to optimize our cost structure, control our operating expenses and record growth driven by our multi engine monetization model, we expect to further enhance our operating leverage. As of December 31, 2023, we had cash and cash equivalents, term deposit and short-term investment on RMB5.5 billion compared with RMB6.3 billion as of December 31, 2022. Also as of December 31, 2023, we had repurchased RMB26.3 million plus A ordinary shares including ADS for a total of $58.5 million on both the New York Stock Exchange and the Stock Exchange of Hong Kong. This concludes my prepared remarks on our financial performance for this quarter. Let’s turn the call over to the operator for Q&A session.

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Q&A Session

Operator: [Operator Instructions] The first question is from Vicky Wei with Citi.

Vicky Wei: Will management share some color about the key strategic focus of Zhihu for 2024?

Zhou Yuan: This is Zhou Yuan, CEO of Zhihu. Moving forward to 2024, our key strategic focus will be on achieving profitability as soon as possible. To achieve this, we will optimize cost and expense structures to prioritize efficiency as the pivotal goal across our billing operations and for each business unit. And secondly, our key focus will be to protect the professional and in-depth consumption experience for Zhihu’s core users. We will focus on to enhance the retention and reputation for our high-quality and trustworthy content and to enhance a sincere and friendly atmosphere for communication between individuals. Last but not least, we will continue to focus to shift our focus on AI application to different real application scenarios, we will continue to enhance the search function, the convenience and the efficiency of our search function, and also our — to establish a feedback system that connects the designing and the establishing of these functions with the feedback system.

To summarize, in the next year, we will focus on our key objective that we started from a community but we are expanding beyond it. And moving forward, around our multi-engine growth, we will try to narrow the losses for some of our business that is still emerging and to achieve the overall profitability in the future.

Operator: The next question is from Xueqing Zhang from CICC.

Xueqing Zhang : The company just mentioned that the priority goal in 2024 is to achieve profitability. So what’s our timetable for breakeven? And could management elaborate a bit more on the path to achieve it?

Wang Han : This is Wang Han, CFO of Zhihu. To first start, we aim to achieve breakeven quarterly breakeven on the non-GAAP net profit level in the fourth quarter this year. As we all know that Zhihu has grown into a widely known name over the past 14 years, I believe many of you on this call, like myself, have been spontaneously opening the Zhihu app on our phone rather than being directed through any promotional link. Before I joined this company, I believe that Zhihu possesses a large base of genuine and loyal users. After I joined the company, I have reconfirmed this fact with numbers. The majority of active users in 2023 are those who have been with Zhihu since 2022, which is even larger than I previously expected. Additionally, as a user-generated content community, Zhihu has much lighter operating costs compared to other business models of other companies.

Our growth margin has maintained at over 50% for five consecutive quarters, reaching 59.1% in the fourth quarter last year. It is obvious that Zhihu’s core users will contribute notably high profits. In other words, as long as we proactively and prudently reduce brand promotion expenses with lower ROI, prioritize user quality over quantity, we believe that Zhihu can continue to narrow losses and progress towards profitability. Meanwhile, in terms of our commercialization model, Zhihu has developed its own approach which breaks through the limits of users scale by leveraging the community’s advantages. Our Yanyan Story and ZhiXueTang brand has shown us great potentials in this regard. We also expect similar potentials with our AI-empowered search discovery function, the real-time conversion-based interaction built on top of our high-quality, long-form text and graphic Q&A can unlock greater user and commercial potentials.

So to summarize, Zhihu will gradually explore a path to scalable profitability that differs from other social media platforms.

Operator: The next question is from Daisy Chen with Haitong International.

Daisy Chen : First of all, congratulations on the probable achievement of Zhihu’s efficiency improvement strategy. I saw that the Q4 also narrowed to single-digit level since 2021. But my question is about the membership business. I noted that the growth rate of the monthly paid users seems to decelerate in recent two quarters, but the number of the MPOs and the pay ratios remained about 14 million and 40% this quarter. Can I ask about how the management considers about the savings of the paid users? And how does you — how does management affect the growth rate of the membership at least in the next one or two quarters – two years? And what are the corresponding drivers?

Wang Han : This is Wang Han, CFO of Zhihu. I understand your question may involve three underlying sub-questions. Firstly, whether the percentage of paying members to Zhihu’s MAU has already become relatively high. And secondly is the potential growth ceiling of the short story sector. And thirdly would be the competitive landscape within the online literature sector. So firstly, the traditional logic of paying members is based on the concept of converting a subset of users from the entire user base. The selling would be the total number of users. However, Zhihu has pioneered a new growth trajectory for paying member growth. Zhihu’s premium content can attract users beyond the community to subscribe within the Zhihu community.

This not only eliminates the gross selling imposed by user base within the app but also brings in additional users to the community. In addition, these users’ consumption of non-story contents actually surpassed that of the story content, driving the overall content consumption growth. Secondly, regarding the competitive landscape, Zhihu is the largest platform to both produce and consume short stories across the entire internet. It is the preferred platform for many short story content creators to submit their work. Zhihu’s leading market position can be attributed to two factors, the support from the community and our distinctive value proposition. Content creators of Zhihu can find inspiration, engage in topic discussion, and develop plots in the course of Q&A discussion to naturally create innovative high-quality and high-volume contents.

This value of acquisition of ecosystem is irreplaceable. Additionally, most of the online literature apps available in the market operates through an advertising model focusing on maximizing users’ time spent, often resulting in lengthy, slow-paced and low information density. But in contrast, Zhihu operates through a subscription model which prioritizes the delivery of high-quality content that users are willing to pay for. This unique value proposition has established Zhihu’s distinct content characteristics and value position in the market. In terms of growth ceiling, the short story segment represents an emerging sector where Zhihu has taken part in establishing it as a pioneer. We have been actively expanding and striving to expand its selling.

Currently, our premium content primarily consists of text and graphics-based formats. However, there is a larger audience base and greater commercial potential in audio and visual contents such as radio play, audio books and short drama. Short stories actually share some similarities with short dramas than longer narratives. Zhihu stories are known for its brevity, engaging plot, rapid creation and real-world relevance. There are — these are essential elements to produce blockbuster short dramas. We already produced them. We recently announced a partnership with Kuaishou in the area of short drama. A great array of high-quality short story IPs will be increasingly valuable for Zhihu. Some of the short drama adapted from Zhihu IPs have already achieved remarkable market performance and we anticipate more success in the future.

Additionally, revenue from our IP copyrights currently only represents a small percentage of our total revenue. As the market increasingly recognizes the value of our Yanyan’s IP, revenue share from film and television copyrights will gradually increase.

Yolanda Liu: Operator, we can continue with the next question, please.

Operator: The next question is from Eileen Lin with China Renaissance.

Eileen Lin : I have a question related to education. Can management share more color on Zhihu’s education development, such as student-based or strategic focus? And how AI can be integrated into the education business?

Zhou Yuan: This is Zhou Yuan, CEO of Zhihu. As we all know that our vocational training business has been growing rapidly in the recent quarters and it has achieved synergies between our self-operated vocational training business and our acquired vocational training business. So firstly, our self-operated business is closer tied to our community yielding higher profits and will swiftly responding to evolving user demands, while our acquired business segments offers greater demand certainty and larger addressable market. Our community has continually empowered our vocational training business. Firstly, we’ll be able to discover the specific demands, the evolving demands of our users, and with — and achieve greater certainty in terms of our course offerings compared to other industry players.

For example, some of our cornerstone course offerings, for example, the writing courses, the multimedia training courses, the artificial general intelligence courses, they actually stemmed from the Q&A discussions within the community and catered to the evolving demands of our users. In the future, we will continue to leverage our advantages to expand our course offerings, especially to expand beyond the evolving needs and also the greater needs with — the demands with greater certainty for our course. The beyond our community empowerment, the users and content creators within the community can not only inspire and support the research and development of our new course offerings, but also empower multiple existing premium courses. Our labor productivity stays at the top rank in the industry, and as our course offerings become mature, the scale of the economies will continue to strengthen.

And moving forward, we can further cultivate our content creators in our community to become our teachers, helping all content creators to achieve their financial goals. So our users of our content course offerings, they are comes to Zhihu with the aim to improve themselves and they also serve as the users for our vocational training business. Our vocational training is actually expanding beyond our community now. The users will not only generate word of mouth effects, but also generate high-quality commercial content based on their learning experience, attracting new students. This greatly improved our acquired business also improved the conversion rate and our — to continue to maintain a dynamically optimal customer acquisition ROI in their respective segments.

So beyond that, our ZhiXueTang brand actually formed a closed-loop ecosystem that can empower our self-operated business in return. We believe that the expenses and costs with our expenditure will be further diluted with the growth of our revenue from the vocational training business and our commercialization efficiency will be further elevated. We believe that also AI technology will highly enhance our efficiency and revolutionize our user experiences. We will start from the core needs of our users and promote the application of AI large language model to empower the full process of our education in different scenarios. We believe that in the next one year or two years, we aim to expand the application of AI large-language model across the full process of our vocational training business.

Operator: The next question is from [Lu Qingzu ] with Goldman Sachs.

Unidentified Analyst: I’m asking about advertising business on behalf of Lincoln Kong. Can management shed more light on advertising business including strategic priority and outlook for online marketing services for 2024?

Wang Han : This is Wang Han, CFO of Zhihu. In the fourth quarter of 2023, In addition to the external and macro factors, the main reason for the delayed year-over-year recovery is that we have proactively enhanced the commercial content governance. In order to foster the trustworthiness within the Zhihu community, we chose to phase out some near-term low-quality business income. However, at the same time, we have made remarkable strides across our businesses. To start with, the retention rate, average revenue per user and content consumption volume of high-quality users across our core verticals have all been steadily increasing. Secondly, the consumption power and high-quality of Zhihu users have been further recognized in the industry.

According to third-party surveys, 72% Zhihu users are willing to pay a higher price for quality products. In addition, as much as 86% of Zhihu users have made repeat repurchases on JD.com during the past year, with a target group index, namely TGI, reaching an impressive 502 significantly outperforming the industry leverage. In addition, we are optimizing our closed-loop data ecosystem. We have strengthened our data partnership with e-commerce platforms such as Taobao and JD.com through initiatives such as Xinji Plan and [Qingji Plan]. By providing visualized data, we assist brands and merchants to better validate the value and ROI of their promotional efforts to drive further increase in marketing services order placement. In 2024, we expect to remain in a period of product upgrading and adjustment for our marketing services business.

We will continue to explore business models that can foster stronger trustworthiness while optimizing our data infrastructure.

Operator: The next question is from Cici Cheng with CLSA.

Cici Cheng: Can management share some color on user growth target for 2024? And how can we model the long-term self-enlarging cost ratio?

Wang Han : This is Wang Han, CFO of Zhihu. This year, we took a proactive approach to adjust our user growth strategy. Instead of simply pursuing a larger-scale MAU, we will be focused on improving our core users’ retention rate and further enhancing the trustworthiness within our community, ultimately, we will establish a commercialization model that is unique to Zhihu. It is worth mentioning that although our sales and marketing expenses as a portion of revenue may seem significant, the direct user acquisition costs for our app were only half of the total promotional costs — less than half of the total promotional expenses. The absolute amount of customer acquisition costs in the fourth quarter of 2023 increased by only 40% year-over-year, while our MAU only experienced a slight decline.

That demonstrates the loyalty of Zhihu’s core users. Zhihu has a group of users with the highest quality and greatest value. We believe that serving them well will yield substantial commercial rewards. We do not need to follow the other mass market social entertainment platforms to pursue user growth at any cost. We should follow our own path. As we approach an era of AI generated content, authentic and trustworthy human generated content will become increasingly scarce across the internet. Zhihu represents the place to generate and share genuine, high-quality content, possessing a unique value proposition in the market. AI technology will enable us to blaze a trail that is different from traditional time spent framework and explore new business models with greater potential.

The way that Zhihu forms is actually the place that is demanded by the market in the age of AI technology.

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

Yolanda Liu: Thank you, operator. Thank all of you once again for joining us today. If you have any further questions, please contact our IR team directly or PSN Financial Communications. Thank you.