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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