Hello, ladies and gentlemen. Thank you for standing by, and welcome to the Zhihu Inc. Second Quarter 2023 Financial Results Conference Call. [Operator Instructions]. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Iris Liu, IR Manager. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our second quarter 2023 financial results conference call. Participants on today's call will include Mr. Yuan Zhou, Founder, Chairman and Chief Executive Officer of Zhihu; Mr. Dahai Li, Chief Technology Officer; and Mr. Henry Sha, our Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different [from the views expressed today]. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. During today's call, management will also discuss certain non-GAAP financial measures, for comparison purpose only. For a definition of non-GAAP financial measures and 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 in our website at ir.zhihu.com. I will now turn this call over to Mr. Henry Sha, CFO of Zhihu.

Thank you, Iris. I'm pleased to deliver today's opening remarks on behalf of our CEO, Mr. Zhou Yuan. Hello, everyone. Thank you for joining us for Zhihu's second quarter 2023 earnings call. We continue to accelerate development across our business during the second quarter, achieving sustainable growth through effective execution of our community ecosystem first strategy. As we enriched our content library, user engagement increased throughout the Zhihu community, and our average MAUs continued to increase as well, rising to 109.4 million in the second quarter, representing 3.3% year-over-year growth and 6.9% sequential growth. Furthermore, our unremitting efforts to diversify monetization channels and upgrade our service capabilities during the second quarter drove robust growth in total revenue, which increased by 24.9% year-over-year. At the same time, we further enhanced operating efficiency, boosting our gross margin to 53.8%, up by 6 percentage points year-over-year. Our non-GAAP net loss narrowed significantly as a result of ongoing operating efficiency improvements by 49.9% compared with the same period last year, despite our newly initiated investment in generative AI technology. Speaking of generative AI technology development, following the launch of our first large language model Chat AI in April, we are currently conducting internal trials of AI applications, aiming to strengthen the vibrancy of our community and further unlock commercial value. Leveraging our vast content portfolio potential applications of this cutting-edge technology in our community could include more efficient content search and more customized recommendations for our users. AI technology could also help content creators increase productivity and creativity to further enrich Zhihu's content pool. Let me now move on to our users and content. In the second quarter, we focused on content quality enhancement, particularly by continuously enriching our professional content library and enhancing users' interaction with professional users. To that end, we upgraded…

We will now begin the question-and-answer session. [Operator Instructions]. Today's first question comes from Xueqing Zhang with CICC. Please proceed.

[Foreign Language] Management, thanks for taking my questions and congratulations on the solid results. My question relates to AI. You mentioned in the prepared remarks that you had some progress on AI empowered technology. Could management share with us more color that what's the specific application scenarios are involved and what's our advantage in AI empowered technology compared to others. Also, what changes will the utilization of AI bring to Zhihu. Thank you.

[Foreign Language] Thank you for the question. This is a Dahai Li, CTO of Zhihu. Zhihu community has abundant language, Chinese language database and in this AI technology evolution, we have unique competitive advantages. AI technology has a wide range of generic applications in our community to enhance our user experience and enhance our operating efficiency. We are now training about 20 billion parameters for our large language model, our beta testing results is significantly improved, and now we are expanding our large language model to about 80 billion parameters and reach 100 billion parameters towards year-end. We have been trying to identify the implied this meanings of our large language model, and we have made significant progress in terms of content categorization and SIM identification. In the future, the AI technology will be used in our community, and I will give some examples to the specific applications in our community. For example, in terms of content creator empowerment, in the future, AI technology will help us content creators to enhance their productivity and enhance their quality of creation, especially through, for example, recommending different writing styles according to the scenario and also writing correction. We will further enhance high-quality content through lowering the area for content creation. Next is for our content recommendation. AI technology will empower our content recommendation according to the scenario user relationship and help us to realize more accurate and more efficient content recommendation for our users to enhance their engagement and stickiness and in the future, we are exploring to apply AI technology for our marketing services content recommendation to enhance our commercialization efficiency. Thirdly is our content search. We are bisecting integrated search function that use AI technology to enhance the intelligence of our search function to enhance the accuracy results and also…

And this is Henry. I'm the CFO of the company. I will help to supplement the answer from Dahai and answer the second question raised by the CICC. Actually we believe that we have a very obvious differentiating points with the other large language model competitors on the market that we are in Zhihu, we have large number of the data accumulated in the past 10 years, which -- the answers and data contributed by our user more than like 100 million MAUs. . So we believe that in the simplified Chinese language environment, our user data and our content has scarcity value. And we are doing a lot of work in the anti- corrosion technology. And we are very, how to say, resistant to those like data abuse actions on the market, that we are defending ourselves from our competitors on data side. That's my answer to Xueqing. Next one.

Thank you.

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

[Foreign Language] Thank you for taking my question. This quarter, we have seen very strong membership growth from a year-on-year perspective. But the number of subscribers were facing some issue quarter-over-quarter given the pirating issue. So could management share with us your outlook on the membership revenue growth for the second half as well as your thoughts on the long-term growth profile, such as collaboration with [Weixin] or perhaps Q2 reading as well as your thinking of how to extend the lifetime value of the users beyond just charging the membership fees. Thank you.

[Foreign Language] Thank you for your question. So I'm going to -- this is CEO of Zhihu. I'm going to discuss about this question through both our short-term and long-term objectives or strategies for our paid membership business. We are providing premium short stories in our platform and we believe that we are forming a clear competitive advantage or differentiate from other traditional online reading platforms on this front. For example, our stories are very short and cater to the evolving needs of users, especially to users' recommended time in terms of their reading. Another thing is that, as mentioned in our previous earnings call, we have released our Yan Yan story application, and this forms as another channel for our user acquisition for our paid membership business. And inside this Yan Yan story application, our users can get more immersive and differentiated reading experience. And also for our Yan Yan stores, we are extending to form more partnerships with other platforms. And recently, we have formed partnership with Huawei Reading to enlarge our user base and extend our different content providing channels. I think that with all these efforts, in the second half of this year, our membership business is -- will keep the momentum and increase at very high trend in the future. In the future, I think the paid membership business will enhance its LTV through three fronts. First is through our AI applications in paid membership business as mentioned by our CTO, Li Dahai, just now and secondly is through the upgrade of different distribution channels for different formats as we are making progress. And thirdly, it's through unlocking IP value in the future.

Steve, this is Henry. I will further explain the trend you have seen, there is some fluctuation of the subscriber numbers between Q1 and Q2. Actually, in Q1, I think it's a high base during the spring festival. We have a promotion activity, which allowing the users to subscribe for the first month with RMB 9. I think it was a successful promotion activity in Q1 which created a high base of the subscribing members. And in Q2, we do not continue too much for that RMB 9 for the first month's activity. So there is some fluctuation. And also, we have already established a professional team for the antipiracy measures to take actions internally. So we are very confident to see the rebound or I say, sequential growth as well as year-over-year growth for the Q3 and Q4 for the paid membership business revenue growth. This is my answer for you. Thank you.

Thank you.

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

[Foreign Language] Good evening, management. Thanks for taking my question. I have one question regarding the marketing services. What is management's view on the recovery pace of the marketing services and how should we think of Zhihu's strategy to improve the marketing services competitiveness. Thank you.

Thank you, Vicki. This is Henry. Thanks for the question. So as we introduced earlier in the last quarter, we have been facing some like uncertainties from the macro economy for the second quarter. And also, we have seen that the entity will still be sustained for the second half of this year. But internally, we are doing several taking actions to phasing and to solve the problems for us. The first one that we are combining two teams together, as we introduced earlier that we combined our CCS team together with our advertising team and we have been seeing the demand, the increasing demand from our clients on the, how to say, the effective basis or the ROI basis, the advertising products like CCS, which I believe that will be still welcomed in the second half of this year. And secondly, we are improving our efficiency. As I said earlier on this call that we're taking actions to phase out some low-margin business from our advertising business to enhance our competitiveness to achieve the healthy growth continuously. So that's what our thoughts about our marketing services business. So for now, we cannot guarantee that we will achieve like the year-over-year growth in Q4. But we are confident that this business should be seeing the rebound trend in the second half of this year. Thank you.

Thank you.

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

[Foreign Language] Thanks for taking my question. My question is about the vocational training business. First of all, congratulations to the strong growth in this segment. Can I ask you about the current situation of our vocational training business from operation or deployment CapEx such as SPU of corrosion and promotion strategy. And can management share your outlook for the momentum of the second half and then next year as well as the revenue contributions from our long-term expertise and also any strategy what work do you think you need to do to actually those goals, if that goes right, can you share more color on the profitability of this segment? Thank you.

Thank you Daisy. This is Henry. I will help you answer your question. For the second half of this year, we believe that our vocational training business will still achieve the year-over-year and sequential growth for the second half of this year with more than like 100% year-over-year growth rate. I think for the full year, that will be 2x the growth in comparison with that in last year. And on the cost offerings of the education vocational training business, the product offerings, I think we have already almost complete the structure of our vocation training business, the allocation on that. by including, for example, national graduate students entrance examination as well as the IELTS, the English or foreign language teaching the courses as well as, for example, like the MBA courses as well as like the teachers' certification service offerings, et cetera, et cetera. So I believe that if we say that, that will form our organic growth going forward. And maybe in next one or two years, there is a one or two more acquisition will be formed like to provide some like the M&A growth looking forward. And about your question, the capability of our -- looking to like a whole vocational training business, I think we're still in the investment stage. So for example, I think for this whole year, the vocational training business will still bear a loss like the loss-making for the whole group. So that will be between RMB 100 million to RMB 200 million hit to our bottom line, like the P&L. That's our answer for your question.

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

[Foreign Language] So my question regarding our margin. Is there any update on reaching breakeven timetable? And what are the drivers for us to reach in such breakeven point. Thank you.

Thank you Yiwen. This is Henry. I think in the second half of this year, we will reaffirm and prioritize our loss reduction strategy for the rest of the year. And also, this is the main topic for the next year. I think the approach is two ways. First one, we will enhance our commercialization capability by booting our both marketing services business and to see the business by including the growth of the membership business as well as the vocational training business, which to see. We believe that there is some changing happening with our revenue structure. And we are confident that we will get a recovery in terms of the revenue growth for the second half of this year and the next year. The second way is to the more prudent investment as well as in the -- like the marketing spending. I think that we are doing a cost reduction program for the second half of this year. I think the loss reduction strategy is on track so far by looking to our Q2 business and the results. Does that answer your question?

Yes.

Thank you, Yiwen.

That concludes today's question-and-answer session. At this time, I would like to turn the conference back to Iris for any closing remarks.

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Piacente Financial Communications. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.