Zhihu - Q4 2022
March 22, 2023
Transcript
Operator (participant)
Welcome to the Zhihu Inc. fourth quarter and full year 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's 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 Ms. Yolanda Liu, Senior IR Manager. Please go ahead, ma'am.
Yolanda Liu (Senior Investor Relations Manager)
Thank you, operator. Hello, everyone. Welcome to our fourth quarter and full year 2022 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and the 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 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 company's prospectus and other public filings as filed with 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 reconciliation of GAAP to non-GAAP financial results, please see earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.zhihu.com. I will now turn the call over to Mr. Zhou Yuan, Founder, Chairman, and the CEO of Zhihu.
Zhou Yuan (Founder, Chairman, and CEO)
Thank you.
Speaker 9
Thank you. First of all, I would like to introduce our CFO and Director, Henry Sha. Henry joined Zhihu in January this year and comes to us with impressive corporate and capital market experience. We are delighted to have Henry as part of our senior management team, and we look forward to working with him to further unleash Zhihu's competitive advantages and to aim more long-term value for our shareholders. Now, I would like to invite Henry give my prepared remarks. Go ahead.
Henry Sha (CFO)
Hello, everyone, thank you, Mr. Zhou, for the kind words. I joined Zhihu in January this year, and I'm excited to be part of the leadership team. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman, and CEO of Zhihu Inc. Thank you for joining Zhihu's fourth quarter and the full year 2022 earnings call. 2022 was a difficult year, presenting multiple challenges, including the COVID resurgence and an economic turmoil, which disrupted our operating conditions and profoundly impacted all aspects of society. Despite the headwind throughout the year, we are delighted with our solid fourth quarter and full-year performance. With solid fusion of our community ecosystem first strategy, we continued to expand our high-quality content footprint and encourage user engagement across the Zhihu community with a broad array of content creator incentive programs.
Fueled by these efforts, our average MAU steadily throughout 2022 to 101 million by year-end. Our accumulated content creators increased to 63.1 million by the end of 2022, with a 14% year-over-year increase. This thriving community ecosystem empowered Zhihu to meet the year's challenges with gems and resilience. In Q4, our total revenues increased by 9% year-over-year to RMB 1.1 billion, representing our third consecutive quarterly revenue increase. Among total revenues, our customer-oriented business, including paid membership and the vocational training business, grew at a faster pace, further diversifying our revenue stream. Revenue from our paid membership totaled more than RMB 400 million in the fourth quarter, with an accelerated year-over-year growth rate of 93%, while vocational training growth rate reached 281%.
At the same time, our continuing efforts to reduce costs, optimize our organizational structure. The improved overall efficiency over the past several quarters has paid off. For this quarter, we recorded another consecutive quarter with both improved gross margin and narrower losses. Our adjusted net loss decreased by 44%, and our adjusted net margin narrowed to -12% from -24% in the same period of last year. With respect to our enterprise-oriented business compromise of online advertising and the CCS, the pandemic related disruptions and a sluggish consumption of demand in 2022 imposed great challenges on the online advertising market. Zhihu was no exception, particularly as the COVID-19 resurgence hampered our normal operations during the fourth quarter.
We responded proactively to the challenging conditions and took steps to streamline our online advertising and CCS products and services to further improve the community's user experience. While online advertising and CCS revenues combined decreased by 22% year-over-year in the fourth quarter as a result, we were pleased to see a 24% sequential revenue increase and certain of our core verticals achieving a growth both quarter-over-quarter and year-over-year. Turning now to our users and content. As a leading company-centric community, Zhihu is committed to helping people find answers to their questions. To better increase user time spent on Zhihu and encourage their engagement in our community, we concentrated our resources to continually broaden the coverage of fulfilling content and improve our inquiry search algorithm.
We also released an array of efficient tools and functions to inspire content creation in the past year, and further optimize the content creation process to improve both the creation experience and the production quality. As of the end of Q4, the accumulated pieces of content in our community grew to 649.3 million, including 505.9 million questions and answers, representing a year-over-year increase of 31% and 70% respectively. While Zhihu users greatly value the content with knowledge and expertise they find throughout our community, their diverse interests are driving growing demand for additional premium and entertainment content, including thought-provoking and entertainment short stories, among many other formats. To precisely identify and satisfy users' varying demands, we enhanced our technical capabilities with appropriate recommendation algorithms.
We also encouraged our creators to expand their creative horizons to cover more consumption scenarios within the Zhihu community, while further enhancing our incentive mechanism to reward their efforts. This helped to expand the influence of our top content creators beyond the Zhihu community and facilitated even broader content coverage among targeted audience. For example, we hosted our Zhihu marathon competition for story creation in the second half of 2022, which successfully showcased our content creators' story writing abilities and elevated our brand influence. On a related note, early in March this year, we launched an independent APP, Yanyan Story, centered on our premium content and paid membership services. With this immersive service model will bring our users a more personalized and enjoyable reading experience, while also benefiting both content creators and our community with effective monetization opportunities.
We are delighted to see many content creators in the Zhihu community receiving fruitful financial rewards while enjoying the content creation process. In the fourth quarter, the number of our premium content creators who earn income and the average income earned by premium content creators increased by 63% and 18% year-over-year respectively. Our paid membership revenue for full year 2022 exceeded RMB 1.2 billion, with a year-over-year growth of 84%. Moving forward, we will continue to build out our channel network and iterate our algorithm to ensure a more satisfying user experience across different need-driven scenarios. Moving on to our vocational training business. Among Zhihu's total user base, over 80% are between 18 and 40 years old.
As China is now experiencing profound change in its population structure, major education system reforms, and need for employees reskilling, we are seeing fast-growing demand for career development and academic enrichment from people aged 18 to 40, which aligns perfectly with the needs of our user demographics. Daily education related searches have continuously increased over the past quarters, accounting for a meaningful portion of our total daily search in Q4, with ongoing growth momentum. To better serve this increasing demand, we shift the world from the third-party cooperation for education products and proactively expanded our online courses offers to build a proprietary closed-loop education service system, differentiating ourselves from traditional players in the industry. Our course offerings cover three major categories. First, design premium academic programs covering postgraduate entrance examination, IELTS, TOEFL and GRE, among other exams. These highly targeted courses mostly serve users age 18 to 25.
Second, to meet demand from users 25 and older for vocational qualification exam preparation, we released the premium courses covering judicial examinations, teacher qualification, CPA certification, among many others. Finally, we designed and released a suite of products and services that are looking to further develop individual careers and skills, appealing to a broader user demographic. With a unique business model, better testifies the demand flowing from education related search inquiries on our platform and empowers us with organic traffic and sales leads. At the end of 2022, we have completed our preliminary layout for all three education categories, utilizing both organic and M&A approaches. Before I wrap up, let me briefly brief touch on Zhihu's strategic thinking and planning with respect to large language models or known as LLM using generative AI technology.
We were impressed by the development of such revolutionary technology led by groundbreaking products like ChatGPT at the beginning of 2022. To further explore and embrace the massive opportunities it may bring, we have already begun investing resources into AI-based LLM and related technology developments, evaluating several application scenarios utilizing AI's technical capabilities, such as an AI assistant for content creators, among others. As a leading content-centric community, we will continue to enhance and invest in such capabilities to harness AI's possibilities, as we believe our unique content and instrumental data assets will be a valuable knowledge reserve for promoting the development of AI technology in China. Furthermore, as we enter the AI-empowered stage, we are confident we possess the capabilities and technology may require in terms of content assessment and risk control measures.
In summary, as we move to 2023, we will continue to invest in content quality and upgrade our algorithm system, further growing our user base and improving user experience. Meanwhile, we will continue to strengthen our multiple growth engines by elevating our premium experience to attract new paying subscribers and often enhance the marketing products and effective advertising solutions. By leveraging our refined algorithms, we can boost the advertising ROIs to serve brands and advertisers better. Given the massive potential opportunity and Zhihu's unique strengths, vocational training has become the anchor for our second growth driver. We will continue to explore our core users' needs and develop our offerings along the entire educational service chain, exam improvement, vocational qualification, examination preparation, and career and skill development.
We believe that with our users as an organic entry point, we can further optimize the value of our closed user ecosystem from course development, customer acquisition, and cross-delivery to teaching and data analysis. We remain confident in different business segments, potential and synergies within Zhihu's community. Finally, while providing all the support necessary to encourage interaction across our community, we will continue to adopt proven risk control measures and investing wisely in AI-based LLM and related technology based on reasonable long-term ROI. At the same time, we will continue to enhance our multiple growth engines and refine our operating efficiency. This concludes Mr. Zhou Yuan's remarks. Okay, this is Henry Sha. I will now turn to our financial details for the fourth quarter for review of our full year 2022 results. Please see our earnings release earlier today. As our CEO remarked, 2022 was a challenging year.
However, we believe challenges come along with new opportunities. Our efforts to explore and fulfill our users' needs with refined products and service offerings while inspiring engagement from all parties in the Zhihu community continued to bear fruits across various measures. Despite the pandemic's impact in the fourth quarter and the macro headwinds, our fourth quarter's total revenue reached RMB 1.1 billion, up 9% year-over-year and 22% quarter-over-quarter, representing another resilient quarter of growth in 2022. Looking more closely at the drivers behind the revenue growth, our user-oriented business, which consists of paid membership and vocational training services, has increased enormously and contribute a great portion to our total revenue in the fourth quarter.
By leveraging on a broad and premium content coverage and online course offerings, we are confident we will continue to grow our user-oriented business in 2023. Our paid membership and the vocational training service contributed 36% and 8% of our total revenues respectively in this quarter. Our paid membership revenue in this quarter was RMB 402.5 million, an increase of 93% year-over-year, driven by continued growth in the number of subscribing members. The average member of our subscribed members increased to 13 million in Q4, up 100% year-over-year, as we further enhance and diversify our premium content offerings and strengthen Zhihu's brand image. We are confident we will continue to harness this segment's potential growth opportunities.
Vocational training revenue in the third quarter was RMB 34.6 million, a significant increase of 281% from RMB 22.2 million in the same period of 2021. This jump was primarily due to the enriched slate of offers we provided through both self-developed and business acquisition approaches, which greatly elevated the attractiveness of our services. In 2022, we will accelerate the build-out of our education platform by further enhancing our technical capabilities, including CRM system, database, and integrated service offerings. We are effectively meeting our students demands with more diversified online courses. Moving to our enterprise-oriented services, which primarily include our advertising and the CCS business. Due to the pandemic's impact and the challenging environment throughout the past year, the overall advertising market remained soft in the fourth quarter of 2022.
Our total revenues from advertising and CCS decreased year-over-year by 23% to RMB 72.4 million in the fourth quarter, while we witnessed continued positive growth momentum in some industries such as IT and 3C and automobiles. Gross profits for Q4 was RMB 628.5 million, up 31% from the same period of 2021. Gross margin also achieved a steady contribution quarterly increase, reaching 66.4% due to our enhanced monetization efforts and improved efficiency in bandwidth and further utilization. Total operating expenses for Q4 were RMB 844.8 million, compared with RMB 855.1 million in the same period of 2021.
Sales marketing expenses for Q4 were RMB 509.2 million, up 80% year-over-year from RMB 470.2 million in the same period of the last year. The increase was primarily due to our increased promotional spending to strengthen Zhihu's brand and service offerings. Research and development expense for Q4 slightly increased by 2% to RMB 212.5 million from RMB 208 million in the same period of last year. The increase was primarily driven by the higher salary and welfare expenses of research and development personnel, together with employee benefit costs in Q4, which was associated with our optimization of organizational structure.
General and administrative expenses for Q4 was RMB 123.1 million, decreasing by 30% from RMB 176.9 million in the same period of 2021. Percentage-wise, general expenses decreased to 11% of total revenue from 17% in the same period of 2021. The decrease was mainly due to lower share-based compensation expenses, partially offset by increased employee benefits costs associated with our organizational structure optimization in this period. Our continued cost control measures over the past several quarters, combined with organizational structure of optimization and overall efficiency improvements, accelerated the narrowing of our loss in the fourth quarter. Our GAAP operating loss margin narrowed about 70 percentage points and 11 percentage points year-over-year and quarter-over-quarter respectively.
Our GAAP net loss in the quarter was RMB 179.5 million, narrowing by 53.2% on a yearly basis, and about 40% sequentially. Accordingly, our loss margin improved by 21 percentage points and 17 percentage points year-over-year and quarter-over-quarter, respectively.
Our adjusted net loss on a non-GAAP basis, which primarily excludes share-based compensation expenses and amortization of intangible assets related from business acquisition, was RMB 134.1 million for Q4, down by 44% from the same period last year, with the adjusted net loss margin of 12%. Moving to our balance sheet. As of December 25th, 2022, the company had cash and cash equivalents, term deposits and short-term investments of RMB 6.3 billion. As of December 31, 2022, we have repurchased 6.5 million Class A ordinary shares at a total cost of $16.7 million. This concludes my pre-prepared remarks on our financial details this quarter. Let's turn the call over to the operator for Q&A session. Thank you.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Steve Kee with GS. Please go ahead.
Speaker 8
[Foreign language].
Speaker 9
Good evening, management. Thanks for taking my question. Zhihu has a very unique positioning within the China tech space, with very high quality tech-based content and has a very unique positioning especially for the training of Chinese-based large language model. During the prepared remarks, management has also mentioned the future integration between Zhihu's current business model as well as the large language model. Could management elaborate more on Zhihu's specific strategies on both 2B front as well as the 2C front? On the 2B front, will we cooperate with some of the upstream large language models and also strategy on a self-developed large language model?
On the 2C front, how do we plan to utilize AIGC to empower our content creators, especially for the creation of content, common solution content, as well as the membership content? Thank you.
Henry Sha (CFO)
Thank you for your question, Mr. Henry. We invite our Chief Technology Officer on this call to answer your question. Dahai, please.
Li Dahai (CTO)
[Foreign language].
Speaker 9
Hello, I'm Dahai. I'm CTO of Zhihu. Zhihu is actually an open company. We're actually doing kind of evaluation of self-development and also cooperate with many other third parties to see which one works better to empower our contents in our community.
Li Dahai (CTO)
[Foreign language].
Speaker 9
Zhihu has our own advantage in the data area, especially in the vertical and professional fields. We believe this accumulated data will place us in a unique position in the AIGC technology revolution.
Li Dahai (CTO)
[Foreign language].
Speaker 9
We are currently exploring in both model layer and also application scenarios, hoping to bring our users a differentiated and fresh user experience in terms of the QA and content consumption driven by the technology innovation. That's all. Thank you.
Operator (participant)
The next question comes from Vicky Wei with Citi. Please go ahead.
Vicky Wei (VP)
[Foreign language].
Speaker 9
Thanks management for taking my questions. Will management share some color of what is the priority for the company in 2023? How should we think of the investment focus for 2023? Thank you.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
Hello, everyone, this is Zhou Yuan. I do have like several key points to share with you. First of all, moving forward, we'll continue to stay with our ecosystem come first strategy. In year 2020, we did see that we make a lot of achievements by adopting this strategy.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
To help you better understand our business. In 2023, we have actually separate our business models into two parts. One is the first revenue driver of like community business. The second driver is come from education related business.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
For our first revenue driver, the community business, we expect MAU of this business will maintain a healthy growth in the year. There's community business consists of our CCS and advice-advertising business, which is for servicing for like a 2B, and also it includes the CN services, which is the paying members. Both these two services will be the major drivers for the improvement of this business line.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
In the past years, our second like revenue driver education related business, also we keep sharing achievements both in the like users and also the revenues.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
In 2023, we believe that our second like revenue drivers will achieve faster and higher quality growth. We have already have like internal evaluation and strategy planning for the next two to three years. We'll stay with our development pace and strategy to grow this business.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
I believe that you have seen the data for this business line in our recently released earnings release. We believe that driven by our further upgrades of technology and also our cooperate of third parties, together with our self development programs, the quarterly revenue for this business line is expected to break through RMB 100 million in coming quarters.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
In the coming year, we will continue our investments in their technology part because we believe as our technology-driven company, this upgrade of the technology will not only improve our operational efficiency, but also will bring more growth opportunities to us. Thank you.
Henry Sha (CFO)
Yeah, this is Henry. Let me supplement our CEO's answer to you. CEO just mentioned about our education, our vocational training business, is our revenue forecast for the next quarter that will surpassing RMB 100 million. That's all. Thank you.
The next question.
Operator (participant)
The next question comes from Ashley Xu with Credit Suisse. Please go ahead.
Speaker 9
Hey. Thank you. My question is related to the recent trend in the recovery of our advertising and CCS business. Could management share more color about the performance in key verticals? Thank you.
Henry Sha (CFO)
Thank you, Ashley. This is Henry. I will help answer this question. I think, for the several next quarters, the recovery of the advertising business still highly depends on the recovery of other macro economy in China. I would believe that still will take some time, also apply to the verticals within both CCS and branding advertisement. Thank you.
Operator (participant)
The next question comes from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong (Regional Head of Internet and Media)
Thanks management for taking my questions. If you're looking into Q4 GP margin, it comes in better than expectations, and the losses is also less than consensus estimate. I'm just wondering how we should think about the GP margin and the breakeven timing, if there's any color on that front. Thank you.
Henry Sha (CFO)
Thank you, Thomas. This is Henry. I will help answer this question. Saying in Q4, I think the GP margin is about 56%, so which is improved sequentially and also year-over-year in comparison with last year. The major reason is that the first, the content and the operational cost was saved during this quarter, because I think during our efficiency improvement, the advertisement execution cost is also optimized. As well as the server and the bandwidth cost. The server utilization was improved. The bandwidth cost was also saved during this quarter. We believe that we still will have some room for cost saving in the server and bandwidth utilization in this year.
We believe that in Q1, you know, our business is also a very, like, have a seasonality. Q4 is high season all over the year. We believe that the GP margin in Q1, Q2, cannot be comparable with like that in Q4. Also, I will need to remind you investors that our revenue structures also get changes in the past one year. Now the 2C business, including membership subscribing as well as the education business, they're also growing very faster with a faster pace than our advertising and the CCS business. This will also have some impact on our GP margin, but we believe that our GP margin will be around like 50% on average. This concludes my answer for you.
Thomas Chong (Regional Head of Internet and Media)
Thank you.
Henry Sha (CFO)
Thank you, Thomas.
Operator (participant)
The next question comes from.
Henry Sha (CFO)
Next question.
Operator (participant)
The next question comes from Xueqing Zhang with CICC. Please go ahead.
Speaker 9
Hey. Hello. My question is related to paid membership business. The membership business once again demonstrates strong growth this quarter. We noticed the launch of an independent app, Yanyan Story, recently. Just wondering what's the strategy for this business and how do you see the growth in 2023? Thank you.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
In the past, quarters, in the past years, we actually have some accumulation experience across various areas, including content creators and content consumers, as well as rich marketing knowhow.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
This accumulation, experience, actually, we see is a new trait, of the current, novel reading, market. We see that currently the premium, novels, for in their consumption scenario is the current, market trend, for this business.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].。
Speaker 9
We believe that our accumulation in this marketing knowhow and also the number of customers will give us good solid positioning for the further growth for the year of 2023.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].。
Speaker 9
You just mentioned in your question that APP rollout. This is kind of like a testing exploration we just released. Behind this exploration, we have like a planning for the investment in two areas.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
First of all, definitely we can invest in their creation ecosystems. This creator ecosystem will be like the major focus, will continue to be the major focus for us in the year 2023.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
Second one is on the consumer side. We actually have tried several explorations and a new and independent, like, app's development is one of that which will provide a unique and better experience for the users to give them like a more precise recommendation.
Zhou Yuan (Founder, Chairman, and CEO)
Thank you.
Speaker 9
Thank you.
Henry Sha (CFO)
To supplement our CEO's answers for you. We believe that the membership business will still achieve the high growth in the coming quarters and in 2023. Thank you, Xueqing.
Next question.
Operator (participant)
The next question comes from Yiwen Zhang with China Renaissance. Please go ahead.
Yiwen Zhang (Research Analyst)
[Foreign language]. My question regarding with our second growth driver, the education segment. What's our medium to long term goal? How should we think about our investment scale and for the growth driver?
Is it mainly driven by organic or M&A driven? Thank you.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
Education related business has actually become our second growth driver. In the past years, we have achieved a remarkable achievement.
Zhou Yuan (Founder, Chairman, and CEO)
[Foreign language].
Speaker 9
We believe this is a very massive market with a lot of opportunities. We are very optimistic. We will continue to do the investment and also upgrade this business line centered on our current offerings. From the develop strategy, we think that for the vocational education business, both the organic and M&A approach are both very important. I think that to grow this business through this two approach will be our strategic plannings for the future. We'll continue to invest on the technology as well. We will continue to invest on the content and across the community side and driven technology. Thank you.
Henry Sha (CFO)
Thank you, our CEO and Mr. Henry. I will also supplement our CEO's answer to you, Yiwen. Two points. The first one, when we are evaluating those M&A opportunities in the vocational training sectors, we are reviewing, evaluating the targets rightly and really emphasize on this ROI on each of the M&A projects. For now, we don't have like a significant, like, a large plan or a significant investing on those segments or on this industry. I think that's all like a small, like, investment for our company in terms of the total consideration of ten. Secondly is about one more thing is about the regulation.
We believe that the vocational training business should be encouraged by the government because it will largely solve the jobs problem in China now. That concludes my answers for you. Thank you.
Operator (participant)
This concludes today's question and answer session. At this time, I'd like to turn the conference back to Yolanda for any additional or closing remarks.
Yolanda Liu (Senior Investor Relations Manager)
Thank you. 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 very much.
Operator (participant)
This conference has now concluded. Thank you for attending today's call.