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.

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.

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.…

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

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

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.

The next question is from Xueqing Zhang from CICC.

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?

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.

The next question is from Daisy Chen with Haitong International.

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?

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…

Operator, we can continue with the next question, please.

The next question is from Eileen Lin with China Renaissance.

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?

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…

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

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?

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.

The next question is from Cici Cheng with CLSA.

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

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.

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.

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.