Earnings Labs

Zhihu Inc. (ZH)

Q3 2023 Earnings Call· Wed, Nov 29, 2023

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third 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.

Iris Liu

Analyst

Thank you, operator. Hello, everyone. Welcome to our third quarter 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and Chief Executive Officer of Zhihu; Mr. Li Dahai, 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 the 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 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 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. Henry Sha, CFO of Zhihu.

Henry Sha

Analyst

Thank you, Iris. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu. Hello, everyone. Thank you for joining Zhihu's third quarter 2023 earnings call. During the quarter, we made considerable progress in our multi-engine commercialization across the entire community, boosting our total revenue by 12.1% year-over-year. Notably, revenues from our membership and vocational training business increased 39.2% and 85.6% year-over-year, contributing 45.7% and 14.2% of our total revenues, respectively. Throughout the quarter, we continued to unlock the vitality and prosperity of the Zhihu community, inspiring our content creators' high-quality production while continuously expanding our user base and encouraging user interaction. Our number of MAUs reached another milestone for the quarter, rising to 110.5 million. We continue to view cost control and operational efficiency as one of our strategic priorities. Consequently, we've witnessed a 5 percentage points increase in our gross margin, bringing it to 53.7% for the quarter, along with a notable 10.1% reduction in our non-GAAP net loss compared to the previous year. Going forward, I will be dedicated to leading the team to enhance our operating efficiency and further narrow losses. Now I'd like to delve into the details of our third quarter initiatives and discuss our progress concerning content and creators and the commercialization progress. Let's start with our content and content creators. As of Q3, the accumulated pieces of content across the Zhihu community reached 743.7 million, representing a year-over-year increase of 28.4%. In addition to expanding our overall content library across various verticals, since our users' carnival in July, we have specifically focused on expanding and enriching content related to new generation professionals' evolving demands, including their career growth, lifestyle, and consumption-related scenarios. Furthermore, to bolster our community ecosystem, we continued to focus on organic commercialization…

Operator

Operator

[Operator Instructions] The first question today comes from Steve Qu with Goldman Sachs.

Steve Qu

Analyst

[Foreign Language] So first, congratulating on receiving the approval for our large language model Zhihaitu AI. Could management share with us the latest progress of our large language model as well as the future monetization roadmap?

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

This is Dahai Li, CTO of Zhihu. To summarize, Zhihu is well positioned as a content community that has high-quality content and data on its platform, and we have made tremendous progress in terms of building out our large language model capabilities in the past few months. And in the future, our key focus will be on the application of our Zhihaitu AI into different business scenarios on our platform.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

And more specifically speaking, our Zhihaitu AI is now upgraded to 100 billion level parameters of multi-model large language model. And in early November, we have obtained the regulatory approval for our large language model. In terms of application, internally, we have used our Zhihaitu model into different search aspects of our daily operations.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

And speaking of content comprehension, our large language model has been used on the content classification, our content search, and recommendation to enhance its operating efficiency. For example, in the past, our content classification system upgrade takes about 1 quarter and now is shortened to 2 weeks. In this way, we will enhance our user engagement [indiscernible].

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

In terms of our marketing services, our large language model helps us to refine the titles of our content commercial articles and help us to refine our content products to enhance our commercialization conversion rate.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

Our multi-model large language model also facilitates the generation of cover pictures of stories of our paid membership business. And in this way, users will be able to interact with the virtual characters of our short stories and get an in-depth understanding of the contents of the stories.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

Speaking of our Vocational Training business, our large language model helps the system to correct the essays for our students and also help our tutors to answer the basic or frequent questions from the students, in this way to enhance the operation efficiency of our Vocational Training business.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

In terms of our content auditing, the large language model -- with the help of our large language model, the in-depth mainly identification abilities, the large language model is able to filter low quality content and identify the non-compliant contents of our questions and the user reviews, in this way to enhance the overall efficiency and accuracy.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

So this summarizes our past explorations in terms of the utilization of large language models in our community.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

So in terms of our future plans, with the approval of the regulators, we plan to utilize our Zhihaitu AI into more products or functions that can be accessed by our users to enhance our content creation and consumption experiences.

Li Dahai

Analyst

[Foreign Language]

Iris Liu

Analyst

AI at Zhihu is a very important opportunity. And through the R&D of Zhihaitu AI’s large language model and continuously upgrade our basic model capabilities, we will provide better experiences for our users and content creators and also enhance our commercialization efficiency.

Operator

Operator

The next question comes from Xueqing Zhang with CICC.

Xueqing Zhang

Analyst · CICC.

Congratulations on another solid result. The Membership business once again demonstrates strong growth this quarter. What's the strategy for this business in the future? And how does the company view the recent development trend of micro drama series?

Zhou Yuan

Analyst · CICC.

[Foreign Language]

Iris Liu

Analyst · CICC.

This is Zhou Yuan, CEO of Zhihu. As you can see that as our CFO has introduced previously, in the third quarter this year, our revenue from paid membership business has increased year-over-year by 39.2%, and we have accumulated average monthly paying users for about 15 million. And currently, we have accumulated a mass audience base and content creator base for our paid membership business.

Zhou Yuan

Analyst · CICC.

[Foreign Language]

Iris Liu

Analyst · CICC.

And based on our content business fared well, our paid membership business is experiencing a resilient growth. And firstly, we have explored our content IP commercialization currently. And in October, our hit drama, Scent of Time, has released on Youku and have received broad market appeal from the market.

Zhou Yuan

Analyst · CICC.

[Foreign Language]

Iris Liu

Analyst · CICC.

And secondly speaking, our paid membership business has constantly improved in terms of our operating efficiency with the help of technology innovation. As Dahai has mentioned just now, with the approval of AI large language model, our AI technology will facilitate us in terms of the Writer's Assistant and also the cover picture generation for our stories in our membership business.

Zhou Yuan

Analyst · CICC.

[Foreign Language]

Iris Liu

Analyst · CICC.

And another aspect I would like to mention is that AI will not only help us to enhance operating efficiency, but it will also help us to create more in-depth interaction with the contents of the stories, for example, the interaction with virtual characters in the stories. And in this way, we will create more in-depth content consumption and help to increase our ARPU for our paid membership business.

Zhou Yuan

Analyst · CICC.

[Foreign Language]

Iris Liu

Analyst · CICC.

And the final aspect I would like to mention is that we are constantly exploring different means of media for our paid membership business. And in our Yan Selection business, not only the short video dramas you have mentioned that is developing very rapidly in China recently, but we also have about 100,000 number of stories or contents in our paid membership business. And we will constantly innovate our media to help us to enhance our paid membership business.

Henry Sha

Analyst · CICC.

And Xueqing Zhang, this is Henry, the CFO of the company. To comment on the answers to our CEO about the short form, the TV drama, we believe it’s a huge market with brilliant potential. And as the CEO mentioned, Zhihu was equipped with a very large -- we accumulated more than 100,000 stories in the library. So we believe that the market will recognize Zhihu’s IP -- the scarcity value of the Zhihu Ips in this very, how to say, unique and booming market.

Operator

Operator

The next question comes from Vicky Wei with Citi.

Vicky Wei

Analyst · Citi.

[Foreign Language] Will management provide some color about the recent progress of the marketing service business and the performance of the Double 11 performance? How should we think of 2024 outlook for this business?

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

This is Zhou Yuan. To introduce some of the noticeable progress of our Double 11 campaign, our content commerce solutions business has made some historical marks for the past Double 11 campaign.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

So for some of the specific progress or metrics we have achieved for the Double 11 campaign, during the Double 11 period, our relevant content search volume has increased year-over-year by about 188%. And in terms of our average selling price of our commerce products, the average selling price has achieved more than USD 1,300.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

And in terms of different variables of our content -- of our marketing services, firstly speaking for our IT, 3C and home appliances sectors, the business volumes have achieved double-digit growth year-over-year. And for other sectors like outdoor and consumption and cosmetic products, the growth is also noticeable.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

We have established cooperations or partnerships with a lot of e-commerce platforms in terms of our data and other aspects. And during the Double 11 period, the transaction volumes and the new client rate for our marketing services have also increased noticeably.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

For some of the verticals of our marketing services, the conversion rate of these verticals has reached about 8%. That is to say, among 100 of the people who have visited our platform, about 8 of them have been successfully converted.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

We have been targeting new generation professionals starting from this year. It's one of our key targeted users. And in this year, we have noticed some trends, interesting trends. For example, some of the lifestyle-related consumptions have increased significantly in our platform, for example, some of the cameras and washing machines or high-quality IT, 3C products.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

And another interesting trend we have noticed is that in our content platform, our users is very reliant on the introduction of the professionals in their introductions of their different products, especially some detailed metrics of these products. For some of the products such as LED or different electronic devices, the transaction volume has almost doubled or tripled in our platform.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

Another thing is that thanks to our continuously improved data establishment and our data cooperation with different e-commerce platforms, the data capabilities of our platform has significantly improved. And in this way, our content commerce solutions and content recommendation capabilities have also converted or translated into higher ROI for performance-based marketing services.

Zhou Yuan

Analyst · Citi.

[Foreign Language]

Iris Liu

Analyst · Citi.

And finally, as an outlook for next year or Q4 of this year, in the fourth quarter of this year we have noticed a recovery trend for our marketing services. And with the enhancement of our performance-based marketing solutions, we are confident that next year our marketing services will see a more noticeable recovery.

Operator

Operator

The next question comes from Daisy Chen with Haitong International.

Daisy Chen

Analyst · Haitong International.

[Foreign Language] I will translate myself. My question is about the education business. We noted that Zhihu's education segment's year-on-year growth rate is still quite strong this quarter. So can management share your view on the growth rate and the margins for your Vocational Education business for the next few quarters?

Zhou Yuan

Analyst · Haitong International.

[Foreign Language]

Iris Liu

Analyst · Haitong International.

This is Zhou Yuan. In terms of our revenue from the Vocational Training business, it's rapidly growing. For this quarter, the revenue from Vocational Training has grown 85% year-over-year compared to the same period last year. And during the first half of this year, the revenue of Vocational Training business is already comparable to the full year last year.

Zhou Yuan

Analyst · Haitong International.

[Foreign Language]

Iris Liu

Analyst · Haitong International.

And speaking of the different varieties of the vocational training courses provided by our business, it's actually serving the similar demand of the same audience or the same target group of our platform, the new generation professionals. And our courses help them to grow in terms of their personal development and their career development and also education certification. And in our platform, we already have about more than 10 kinds of courses in our platform.

Zhou Yuan

Analyst · Haitong International.

[Foreign Language]

Iris Liu

Analyst · Haitong International.

And we have paid attention to the data in terms of the user growth in our business operation. And I will give a more specific example.

Zhou Yuan

Analyst · Haitong International.

[Foreign Language]

Iris Liu

Analyst · Haitong International.

In this quarter, the Vocational Training business has seen a very interesting trend. For some of the genres provided in our platform, such as ESG or Artificial Intelligence-related courses, it's very catered to the growing demand of the market to fulfill the career growth of our users. For example, the AI-related courses have seen almost double or triple growth in the recent months.

Zhou Yuan

Analyst · Haitong International.

[Foreign Language]

Iris Liu

Analyst · Haitong International.

And moving on to the future, I think our key focus will be focused on the expansion of the different kinds of courses in our platform. And also with the help of AI, our operating efficiency will be enhanced.

Zhou Yuan

Analyst · Haitong International.

[Foreign Language]

Iris Liu

Analyst · Haitong International.

And in this industry, we have seen that there is a large room for improvement or the digitalization or enhancement in this industry. And what we are doing currently is that we are focusing on integration and operating efficiency enhancement for this segment. And with the help of the business expansion and commercialization, we are confident that the investment or commitment we have made in this segment will be seen in the future.

Henry Sha

Analyst · Haitong International.

Daisy to conclude, so – we have the focus on our Training business, okay? So I think this Vocational Training business will achieve more than like a 20% year-over-year growth in next year. But as Zhou Yuan, our CEO mentioned, we made a technology investment, integration in this business. So we believe that it is still like in the investment stage of the business.

Operator

Operator

The next question comes from Thomas Chong with Jefferies.

Thomas Chong

Analyst · Jefferies.

[Foreign Language] My question is about margin and the OpEx trend. Can management comment about the outlook for our GP margin as well as the OpEx outlook? On that front, can management comment about the timing to achieve breakeven?

Henry Sha

Analyst · Jefferies.

So our outlook for the GP margin, that will somehow be more certain or more sustainable at around maybe 53% to 55% as we are improving our utilization. As you may know, as we introduced in the remarks that we said that we improve our utilization of the cloud services and the focus on improving the operation efficiency for the cost control. And as you can see, we have a shift in our revenue structure. And to see the business, for example, like Paid Membership as well as the Vocational Training business – maybe their margin is not as high as the Advertisement business, but going forward we believe that we will keep that around like -- the GP margin will between 53% to 55%. That’s question one. About our OpEx trend, we believe that we have seen some like opportunities to lower the percent of our sales marketing as a percent of our revenue in the next year. Because we are a content platform, so we believe that there is still some room space to do more like better cost control in the OpEx spending. And about the breakeven point, we believe that will happen in the next year.

Operator

Operator

The next question comes from Eileen Lin with China Renaissance.

Eileen Lin

Analyst · China Renaissance.

[Foreign Language] I will translate myself. I have a follow-up question to Thomas' question. Can management share more quarter-to-quarter trends for the breakeven timing? And is there any color you can share on the selling and marketing expense?

Henry Sha

Analyst · China Renaissance.

Eileen, this is Henry. Because we are in the year-end budgeting work stream, so I think we will update with the markets our progress about the breakeven point. We believe that will be somehow some quarter – maybe one quarter next year. About the sales and marketing, as I mentioned in the previous question, we believe that there is still some like percentage point space to lower our sales and marketing as a percentage of our total revenue in the next year and in the next quarter. Yes, that’s my answer to your question.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Iris for any closing remarks.

Iris Liu

Analyst

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.

Operator

Operator

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

Henry Sha

Analyst

Thank you all.