Ladies and gentlemen, thank you for standing by and welcome to the Zhihu Inc. First Quarter 2024 Financial Results Conference Call. At this time, all participants are in the listen-only mode. After the speakers' presentation, there will be a question-and-answer 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 Zhihu's first quarter 2024 financial results conference call. Joining me today are Mr. Zhou Yuan, our Founder, Chairman, and Chief Executive Officer and Mr. Wang Han, our Chief Financial Officer. Before we get started, I'd like to remind you that today's discussion will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Other information regarding these and other risks and uncertainties is included in our public filings 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. Additionally, the matter will discuss today will include both GAAP and non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and 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 at ir.zhihu.com. I will now turn the call over to Mr. Wang Han, CFO of Zhihu. Han please go ahead.

Thank you, Yolanda. Hello everyone. Thank you for joining Zhihu's first quarter year 2024 earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman, and CEO of Zhihu. The first quarter of 2024 marked a significant turning point for Zhihu. Strategically, we concentrated on our core strengths and the most crucial aspects of our development in AI area. This involved a series of tactical adjustments, including resource reallocation and organizational optimization. From an operating perspective, our top priority is the -- in the short-term is to achieve profitability. The element of AI has disrupted the traditional Internet business model, which relies on expanding user base behind the user engagement and boosting user add value to gain market share. In AI era, the focus has shifted to high-quality content and user value. Zhihu's core value lies not only in processing Chinese highest quality content library, but also in our unique content creation mechanism and our communities for fashion atmosphere, which foster continued emergence of new high-quality contracts. Zhihu users are not passive recipients of information, but are active participants in content creation and knowledge sharing. These core strengths provide us with the first-mover advantage in exploring new business models and positioned us uniquely in the market, increasing our pricing power. Following our proactive reduction in community-related user acquisition cost, the size of our user base decline to something great in line with our expectations. However, engagement among our monthly active users increased; core user retention sustained its growth momentum and daily active users' spend also increased significantly. Furthermore, our efforts to enhance trustworthiness' within the Zhihu community continued to drive community prosperity. Our strategy for [Indiscernible] scenario-oriented content ensures a continued stream of authentic in-depth, high-quality content based on our users' own experiences. As…

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Xueqing Zhang from CICC. Please go ahead.

[Foreign Language] Thanks management for taking my question. My question is about the breakeven package, could management update with us on your timetable to achieve a quarterly breakeven and what's the latest progress? Thank you.

This is Wang Han, CFO of Zhihu. Our profitability target remains unchanged. We expect to achieve a quarterly non-GAAP net profit in the fourth quarter of this year. At the end of the first quarter and the start of the second, we strategically refined and restructured our approaches, driving a notable reduction in losses. Starting from the second quarter, you will see more pronounced improvements across other matrix. The core philosophy behind this lease adjustment is what we shared at last earnings. We will always prioritize user quality over user scale. We are dedicated to protecting and elevating our core users' experience and ensuring continuous flow of high-quality content or Corvus. We believe that our industry is undergoing a fundamental shift as we move from the Internet era to the AI era. In the Internet era, the dominant logic here is to maximize user engagement through large user bases and metrics like AD load and ECPM. But currently, in AI era, advancements in LLM and compute power are amplifying the importance of top-tier users and high-quality content. So, the most crucial factor for Zhihu going forward are first of all, having sufficient capital to invest in high-performance chips; second, having the highest quality content and data; and third, having the highest quality and productive content creators. So, Zhihu has been a pioneer in these aspects. First, our substantial investments have made us one of only a select few platforms in China with a license to operate -- to self-operate LLM; and second, we already have natural advantages, thanks to our abundant high-quality content and high-quality user base. The advent of AI era presents a golden opportunity for Zhihu to return to what we do best, that is high-quality Q&As. This has enabled us to make strategic adjustments with confidence and [Indiscernible]. Next question, please.

Sure. Thank you. The next question is from the line of Steve Chu [ph] from Goldman Sachs. Please go ahead.

[Foreign Language] Good evening. Thank you for taking my questions. I would like to ask about the user trends post your selling and marketing discipline strategy and what are the future strategy to further improve your user engagement? Thanks.

[Foreign Language] Thanks, Steve, for your question. This is Zhou Yuan, Zhihu's CEO. Our sales and marketing strategy adjustment is based on a quality of branded approach. Overall, these adjustments are in line with our expectations. While our core user retention rates maintain its growth momentum, our DAUs time spend also increased significantly. The sales and marketing strategy adjustment is just one part of our broader community strategy. Our efforts to build and enhance the community's content and the atmosphere are also crucial to improve the activeness of our users. The trustworthiness of Zhihu is primarily from our professional users. Many professionals and industry experts whose professional value is often underestimated, have found a platform for discussion and sharing on Zhihu. We have very high penetration rates among professionals in various industries. For example, Zhihu has the highest concentration of AI industry professionals and the senior technical executives from leading LLM companies who engage in cutting-edge discussions on our platform. The number of our blue label certified AI participants grew by 130% year-over-year as of the latest. Thus, one important aspect of community daily operation is to enhance the experience for our core content creators. For example, recently, our Zhihu plan in the community, in which by optimizing the revenue distribution Argo [ph], the revenue in a broader range of knowledge-related fields such as science and engineering increased by 30% to 50% quarter-over-quarter. These adjustments have been happening in Q2. Our approach to support creators' focuses on operations driven with the enhanced efficiency through product development and research. And accordingly, on the content distribution wise, we will prioritize professionals in-depth and authentic content. Secondly, it comes from professional in-depth and authentic content. Zhihu gathers a diverse range of real user experience and insights. For example, the recent incidents involving [Indiscernible] in the open source still became a hot topic on Zhihu with Chief Scientists personally responding. AI industry professionals, open source communities, operators, and lawyers from both domestic and international communities participated in the discussion generating widespread attention and dimension. The influence generated by this content is not just ordinary traffic from curious out -- onlookers, but rather it empowers more people to gain common knowledge behind the news through professional insights, providing a sense of fulfillment. We will continue to upgrade our operational systems in line with our content fulfillment standards. Thirdly, but nonetheless, the community culture and atmosphere in the second quarter, we began integrating and streamlining our operational system and community governance, including the user service team to enhance our community culture of sincerity, expertise, and respect. For example, the proportion of professional in-depth and original content in discussion on training topics is steadily increasing, in line with our expectations. Thanks. Thank you for the question.

Thank you. Our next question is from the line of Daisy Chen from Haitong International. Please go ahead.

[Foreign Language] I'll translate myself. Good evening management. Thanks for taking my question. I'd like to -- I have two questions about AI. The first one is I'd like to ask about the recent development of our AI publications, such as the AI power search feature, which was announced in next quarter. Do we have any new products? And can management elaborate more about how that product empower Zhihu community? And -- for example, does management see any positive impact on the user activity or behaviors? Following that, I think I have second question. We noted that already announced the partnership with OpenAI to bring its Q&A content into Open products. And they also reached a deal with Google to authorize its data for some AI training that would bring it to roughly over -- roughly $60 million per year to raise revenue. So, my question is about whether we consider similar approach business model to add more revenues to the group? Thank you.

[Foreign Language] Thanks for your two questions. This is Zhou Yuan, Zhihu's CEO. In the late March -- sorry, I will just answer the first question. In late March, we introduced a beta version of our AI search feature Discovery -- named Discovery. The initial results of the testing phase has been very promising. Users utilizing our AI search become notably more active. We regard this as a positive indicator, demonstrating a significant expansion in our users' content construction scenarios. So, building on the feedback and usage patterns from the past two months, we are excited to announce that we will launch a new version of AI search by the end of June. This version will have a fresh product name. And it will initially be available on our PC platform. We believe that our PC platform is a crucial scenario of productivity and efficiency, perfectly complementing the mobile end. In the AI era, the quality of user and content far overweighs the importance of quantity. Our AI search function relies on the high quality and trustworthy content within our community, and it enabled it to provide users with high-quality search results. We believe that AI search serves as efficient tool-based scenario, while the community offers a multiuser online interaction environment. These two have strong complementary characteristics. Integrating AI search with our community ecosystem will be our central product development focus moving forward. And for the second question, indeed, many companies are interested in acquiring Corvus from us, but we haven't made the decision yet. Thank you. Thanks for the two questions.

Thank you. Our next question is from the line of Cici from CLSA. Please go ahead.

[Foreign Language] What's the long-term growth outlook for vocational training business? And how could commonly differentiate yourself from other educational institutions? Thank you.

Thank you for your question, Cici. This is Zhou Yuan, Zhihu's CEO. In the first quarter, our vocational training business continued to outperform the industry with a year-over-year growth rate of 35.9%. This is primarily driven by the robust growth of our community-enabled self-operated offerings. Notably, the AI, AGI, and software, and other vocational SKUs and interest courses mentioned in the opening remarks, not only received positive feedback, but also demonstrated improved profitability. Unlike other educational institutions, Zhihu [Indiscernible] is built on the foundation of high-quality content and accumulated knowledge orienting from our community, which naturally extends to supervised learning services. And this process is primarily driven by the needs of our users who are also potential learners of our vocational training business. As we shared in last quarter, Zhihu's community mechanism continuously identifies and rapidly validates our users' demands in vocational subsegment, providing us with a significant customer acquisition advantage. Community user and content creators effectively supports our course development, resulting in high labor efficiency across existing offerings. Besides our community-based approach means that when learners' needs are satisfied, they can, in turn, contribute back to the community, fostering the development of subsequent programs and exempting learners' lifetime value. This helps mitigate the common challenge of low renewal rates in the vocational training industry. And our future growth strategy, target enhanced profitability. First of all, we will continue to expand into subsegments across three main categories; academy improvements, career enhancements, and vocational SKUs and interest. Our primary focus will remain on vocational SKUs and interest, which are with higher certainty and better profit margins. We aim to enhance our learners' renewal and the repurchase rate by leveraging Zhihu's unique advantages, thereby increasing our average GMV. Second of all, we will further improve the ROI of our resources investment and leverage AI to enhance internal operational efficiency. Our goal is to achieve operational breakeven as soon as possible. This is in line with Zhihu's overall top priority. Thanks. Next question, please.

Thank you. The next question is from the line of Vicky Wei from Citi. Please go ahead.

[Foreign Language] Thanks management for taking my questions. My question is related to the membership business. How should we think of membership business competition landscape and business strategy? Would you please share some color about genuine stories, paying user behaviors, and also other business such as IP operation business update? Thank you.

[Foreign Language] Thank you, Vicky, for your question. This is Han, Zhihu's CFO. In terms of the competitive landscape, we remain the leader in this segment. While we have experienced competition from other big Internet companies as well as some fluctuations in content creator numbers and the submissions. A significant number of content creators have returned to Zhihu notably, confirming that Zhihu provides the best environment for short story creators to thrive. And I would like to share two points on our strategic plan. Zhihu's excellence in short-form story segment has been widely recognized. However, some views this actively. As of the presence of stories on our platform dilutes the quality of our content library. So, on this, we would like to share some insights. We believe that literature itself is undeniable valuable content. After all, the novel [ph] price has a literature price, and New York Times has a bestseller list of novels, but we have concluded by separating the display and distribution of story content from non-story content, we can provide better experience for users with different preferences. The best library and book stores globally also categorize fiction and non-fiction separately to enhance users' experience. Therefore, we launched the stand-alone Yin Yang Story app. Yin Yang Story achieved a nearly 40% quarter-over-quarter increase in MAU for Q1 2024, reaching millions of users. This segmentation allows us to optimize each domain for specific user preferences without affecting the experience of the other group of users. And second of all, Zhihu's short story, [Indiscernible] has become the most popular premium revenue sharing drama on the market. The premium short drama [Indiscernible] adapted from Zhihu's short story has achieved excellent market results, becoming the highest revenue share in short drama to-date. Its success has raised major reading platforms awarenesses of the value of Zhihu's short story copyright. Premium channels are approaching us for collaboration, further allocating the value of our IPs. How should we understand short story IP's value? So, in our recent discussion with the academic community, we share that short story may represent the most advanced format of content evolution as the precisely and quickly showcase the latest authentic and value trend. Short story may be as much as five years ahead of novels, which in turn are five years ahead of film and television production. We look forward to sharing more Zhihu IP content success story with all of you in the future. Thank you for your question.

Thank you. The next question is from the line of Thomas Chong from Jefferies. Please go ahead.

[Foreign Language] Thank you management for taking my question. My question is about marketing and services. So, I want to ask about online marking revenue outlook and our long-term strategy. Thanks.

Thank you for your question. This is on Wang Han, Zhihu's CFO. As we mentioned in last quarter, Zhihu is committed to enhancing the community's trustworthiness even at the cost of satisfying some short-term low-quality revenue. As such, we proactively refined our commercial content and distribution mechanism, resulting in an expected CCS decrease. However, our brand advertising increased by 40% year-over-year during the non-peak season and performance advertising delivered quarter-over-quarter growth compared to Q4 2023. For the rest of 2024, we will focus on improving performance advertising through enhancing AI and data infrastructure. In long-term, we believe that Zhihu's commercial potential should be assessed with Zhihu's brand premium instead of only focusing on in-platform traffic. Let's take an example. Many emerging domestic 3C tech brands showcased their R&D technologies and principles on Zhihu. They believe that only on Zhihu can be popularized their tech in a sufficiently professional and in-depth approach and establish market awareness for new product categories. We even integrate and upgrade their product based on Zhihu's data and the user feedback. In the consumer industry, most of the products on the market are actually quite similar. The main difference is the level of investment in advertising and promotion. However, products that can earn a solid reputation among professional users within Zhihu community likely have a generating competitive edge. You might have same phrases like Zhihu high phrase followed by the rest of the title or Zhihu [Indiscernible] plus rest of the title in many articles. These validates the trust premium and the endorsement value of Zhihu's content compared to that of content from other Internet platforms. We are quite confident that in commercial area, Zhihu has great potential to further enhance brand's credibility. Thank you for your question.

Thank you. That concludes today's question-and-answer session. At this time, I will turn the conference back to Yolanda for any additional or closing remarks.

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

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