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Operator: Ladies and gentlemen, thank you for standing by, and welcome to Zhihu Inc. Fourth Quarter and Full Year 2022 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jingjing Du, Senior IR Manager. Please go ahead, ma’am.

Jingjing Du: 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 provision 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 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 a 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 CEO of Zhihu.

Zhou Yuan:

Jingjing Du: 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 look forward to working with him to further Zhihu’s competitive advantages and to create more long-term value for our shareholders. Now I would like to invite Henry give my prepared remarks.

Henry Sha: Hello, everyone, and thank you, Mr. Zhou, for the kind words. I joined the Zhihu in January this year, and I’m excited to be part of the leadership team and I am pleased to experience opening remarks on behalf of Mr. Chairman. I am Chairman and the CEO of Zhihu. Thank you for joining Zhihu’s Fourth quarter and full year 2022 earnings call. 2022 was a difficult year presenting multiple challenges, including COVID resurgence and economic turmoil, which disrupted our operating conditions and profoundly impacted all aspects of society. Despite the headwinds throughout the year, we are delighted with our solid fourth quarter and full year performance. With the solid execution of our Community Ecosystem First’ Strategy, we continue to expand our high-quality content and footprint and encourage user engagement across the Zhihu community with a broader array of content creator incentive programs.

Fueled by these efforts, our average MAUs grew steadily throughout 2022, to $101 million by year-end. Our accumulative content creators increased to 53.1 million by the end of 2022 with a 14% year-over-year increase. Its striving Community Ecosystem empowered Zhihu to mitigate challenges with strength 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 streams. 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 the vocational training growth rate reached 281%.

At the same time, our continued efforts to reduce cost, optimize our organizational structure, and 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 narrowed the losses. Our adjusted net loss decreased by 44%, and our adjusted net margin narrowed to minus 12% from minus 24% in the same period of last year. With respect to our enterprise-oriented business compromised of online advertising and CCS. The pandemic-related disruption and a sluggish consumption of demand in 2022 imposed the 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 a good step to streamline our online advertising and CCS products and services to further improve the community’s user experience. While online advertising and CCS revenue combined, decreased by 23% year-over-year in the fourth quarter as a result. We were pleased to see a 24% sequential revenue increase and a certain of our core verticals achieving a growth both quarter-over-quarter and year-over-year. Turning now to our user and content as a leading company center community, Zhihu is committed to helping people find answers to their questions to better increase user time spent at Zhihu and increase their engagement in our community. We concentrated our resources to continually broaden the coverage of our fulfilling content and improve our inquiry switch algorithms.

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 production quality. As of the end of Q4, the accumulated pieces of content in our community were between 649.3 million, including 505.9 million questions and answers, representing a year-over-year increase of 31% and 20%, respectively. While Zhihu greatly value the content with knowledge and expertise defined throughout our community, the diverse 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 incentivize users value demand, we enhanced our technical capabilities, which are .

We also encouraged our creators expand their creative horizon to cover more consumption scenarios with the Zhihu community while further enhancing our incentive mechanism to reward their assets. This helped to expand the influence on our top content creators beyond the Zhihu community and facilitated even broader content coverage among targeted orders. For example, we hosted our Zhihu Marathon competition for store creation in the second half of 2022, which successfully showcased our content creators and elevated our brand influence. early in March this year, we launched an independent dollars, centered on our premium content and paid membership services. With this immersive service model we will bring our users a more personalized and enjoyable leading experience while also benefiting both content creators and our community with monetization opportunity.

As a result, we are delighted to see many content creators in the Zhihu community, received a purposeful financial rewards while enjoying the company creation process. In the fourth quarter, the number of our premium content creators who earned income and the average income earned by premium content creation increased by 63% and 80% year-over-year, respectively. Also, 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 satisfied user experience across different scenarios. Moving on to our vocational training business, amounting to total user base, over 80% are between 18 and 40 years old.

As China is now experiencing a profound change in its population structure, major education system reforms and need for employee , we see a fast growing demand for development and academic enrichment from people aged 18 to 40, which aligns perfectly with the needs of our user demographic. Daily education-related search has continuously increased over the past quarter accounting for a meaningful portion of our total daily search in Q4 with ongoing growth momentum. To better serve this increasing demand, we work from the third-party corporation for education products and proactively expanded our online courses office to build a education service system, differentiating our specs from traditional players in the industry. Our course offerings cover 3 major categories: first, design premium academic programs covering post-graduate entrance examination, is, TOEFL and GRE among other exams with highly targeted courses mostly serve users aged 18 to 25: second, to meet the demand from users 25 and elder for vocational qualification we released the premium courses covering judicial examination, teacher qualification, PPA certification, among many others.

Finally, we design and release the tailored products and services that is looking to further develop and skills appealing to a broader user demographics. With the unique business model, better justifies the better — the demand showing from education-related search inquiries on our platform and empowers us with organic traffic . At the end of 2022, we have completed our preliminary layout for all three education categories utilizing both organic and M&A projects. Before I work up, let me briefly touch on Zhihu’s strategic thinking and planning with respect to large managed models or known as LOMs, we will generate latest AI knowledge. We were impressed by the development of such revolutionary technologies led by groundbreaking products like chatGPT at the beginning of 2022.

To further explore and embrace the massive opportunities in , we have already begun investing resources into AI-based LOMs and related technology development, evaluating several application scenarios, utilizing our AI technical capability, such as an AI assistant for content creation, among others. As a leading content-centric , we will continue to enhance tech capabilities to AI 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 capability and technology may acquire content, assessment and risk control measures. In summary, as we move to 2023, we will continue to invest in content authority and upgrade our algorithm system, further growing our ease 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 offering enhanced marketing products and effective advertising solutions. By leveraging our refiner algorithm, we can boost advertising ROI to serve brands and advertisers better. Given the market potential opportunity and unique strength, vocational training has become the anchor to our second growth driver. We will continue to explore our core users’ needs and develop our offerings along the entire educational service chain, training expanded improvements for qualification examination preparation and career and a key development. We believe that with our users at an organic entry point, we can further optimize the value of our ecosystem from cost development, customer acquisition and the cost delivery to teaching and data analysis.

We remain confident into the business segment potential and synergies with . Finally, well making all the support necessary to encourage interaction across our communities. We will continue to adopt prudent cost control measures and investing wisely in AI-based LOMs and related technology. Based on a reasonable long-term ROI at the same time, we are continuing to enhance our notable growth engines and refine our operating efficiencies. This concludes Mr. Zhou Yuan’s remarks. Okay. This is Henry. I will now turn to our financial details in the fourth quarter for a review of our full year 2022 results. Please see our earnings released earlier today. As our CEO remarks, 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 product and service offers while inspiring engagement from all parties in the Zhihu community continue to bear fruits across various matrics. Despite the pandemic 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 quarter of growth in 2022. Looking more closely at the drivers behind revenue growth of user-oriented business, which consists of paid memberships and vocational training services has increased robustly and contribute a great portion to our total revenue in the fourth quarter, leveraging our broadened 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 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 number of our creative members increased to 30 million in Q4, up 130% year-over-year as we further enhance and diversify our premium content offerings and strength of Zhihu’s brand image. We are confident we will continue to harness this segment’s potential growth opportunities. Vocational training revenue in the quarter was RMB 84.6 million a significant increase of 281% from RMB 22.2 million in the same period of 2021.

This jump was primary due to enriched offers we provided through those fast developed and business acquisition approaches, which greatly elevated the attractiveness of our services. In 2023, we will the buildout of our education platform and further enhancing our technical capabilities, including CRM system data base and integrated service offerings thereby better administering our creative demand with more diversified online courses. We reach our enterprise oriented facilities which primarily include our advertising and the CCS business. Contributing from pandemic impact and the challenging environment of the past year, the overall advertising margin remained in the fourth quarter of 2022. Our total revenues from advertising and CCS increased year-over-year by 23% to RMB 572.4 million in the fourth quarter, while we win the continued quarterly growth momentum in some industry such as IT, and Automotive.

Gross profit for Q4 was RMB 628.5 million, up 31% from the same period of 2021. Gross margin also achieved still constituted quarterly increase, reaching 56.4% due to our enhanced monetization efforts and improved efficiency and value 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 and marketing expenses for Q4 were RMB 509.2 million, up 8% 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 strategy 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 primally driven by the higher salaries and welfare expenses of research and development personnel together with the employee severance 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, G&A 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 the increased employee severance costs associated with our organizational structure optimization in this period. Our continued cost control measured over the past several quarters, combined with the organizational structure optimization and overall efficiency improvement accelerated the leveling of our loss in the fourth quarter.

Our GAAP operating loss margin narrowed by 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 a 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 composition expenses and amortization of intentional assets resulting from 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 23, 2022, the company had cash and cash equivalents, term deposits and the short-term investments of RMB 6.3 billion.

Also as of December 31, 2022, we have repurchased 6.5 million Class A ordinary shares at a total cost of USD 16.7 million. This concludes my preprepared remarks on our financial details this quarter. Let’s turn the call over to the operator for Q&A session. Thank you.

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Operator: The first question today comes from Steve with . Please go ahead.

Unidentified Analyst: Zhihu has a very unique positioning within the China tech space, space with very high-quality text-based content and has a very unique positioning, especially for the training of Chinese-based large language model. So during the prepared remarks, management has also mentioned the future integration between the Zhihu’s current business model as well as the large language model. So could management elaborate more on Zhihu’s specific strategies both 2B front as well as 2C front. Our 2B front, where we collaborate with some of the upstream large language models and also strategy on a self-developed large language model. And 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?

Henry Sha: Thank you for your question. This is Henry. We will invite our Chief Technology Officer on this call to answer your question. Dahai, please.

Li Dahai:

Jingjing Du: I am Dahai, CTO of Zhihu. Zhihu is actually a open company. We are actually doing kind of evaluation of self-development and also with many other third parties to see which one works better to empower on our content in our community.

Li Dahai:

Jingjing Du: Zhihu has our advantage in the data area, especially in the vertical and the professional sales, we believe this accumulative data will place us in a unique position in the AIGC technology revolution.

Li Dahai:

Jingjing Du: 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.

Operator: The next question comes from Vicky Wei with Citi.

Vicky Wei: Will management give some color or what is the priority for the company in 2023? How should we think of the investment focus for 2023?

Zhou Yuan:

Zhou Yuan: 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 comes first strategy. In year 2020, we did see that we make a lot of achievements by adopting this strategy.

Zhou Yuan:

Zhou Yuan: To help you better understand our business, in 2023, we have actually separated our business models into two parts. One is the first revenue driver of like community business. The second driver come from education-related business.

Zhou Yuan:

Zhou Yuan: For our first revenue driver, the community business, we expect MAU of this business will maintain a healthy growth in the year. The community business consists of our CCS and advertising business, which is for sort of like a B-end. And also, it includes the C-end services, which is paying members. Both these two services will be the major drivers for the improvement of this business line.

Zhou Yuan:

Zhou Yuan: In the past years, our second like revenue driver education related business, also sharing on our achievements both in like the users and also the revenues.

Zhou Yuan:

Zhou Yuan: So in 2023, we believe that our second like revenue drivers were achieved on factor and higher quality growth. We have already have like internal evaluation and the strategic planning for the next 2, 3 years. We will stay with our development on pace and the strategy to grow this business.

Zhou Yuan:

Zhou Yuan: I believe that you have seen the data for this business line in our recently released earnings release. We believe that is driven by our further upgrades of technology and also our corporate third parties together with our sales development programs. The quarterly revenue for this business line is expected to break through RMB 100 million in coming quarters.

Zhou Yuan:

Zhou Yuan: In the coming years, we will continue our investments in the technology part because we believe as a technology-driven company, this operated technology will not only improve our operational efficiency, but also will bring more growth opportunities to us.

Henry Sha: This is Henry. I will have — let me supplement our key advantage with you. We had mentioned about our education or vocational training business, our revenue forecast for the next quarter that will be in RMB 100 million.

Operator: The next question comes from Ashley Xu with Credit Suisse.

Ashley Xu: 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?

Henry Sha: Thank you, Ashley. This is Henry. I will help answer the question. I think for the next quarters, recovery of the ad business still highly depends on the recovery of our macroeconomic — economy in China. So we believe that will take some time. Also apply to the verticals within both CCS and branding advertisement.

Operator: The next question comes from Thomas Chong with Jefferies.

Thomas Chong: If you look into Q4 GP margin, it comes in better than expectations and the losses is also less than consensus estimate. So I’m just wondering how we should think about the GP margin and the breakeven timing, if there’s any color on that front.

Henry Sha: This is Henry. I will help answer this question. So in Q4, I think the GP margin is about 56%, so — which has improved sequentially and also year-over-year in comparison with last year. The major reason is that the first, the operational cost was stayed during this quarter because I think during our efficiency improvement, the advertisement execution cost is also optimized as well as the server and funding costs, the utilization has improved, the funding cost was also stayed during this quarter. We believe that we still have some room for cost saving in and fund utilization in this year. But we believe that in Q1, our business is also a very heavy seasonality. Q4 is a high season over the year. So we believe that the deep margin in Q1, Q2 cannot be comparable with like that in Q4.

And also, I will need to remind the investors that our revenue strategies also get changed in the past 1 year. And now the business, including membership subscribing as well as the education business, they’re also growing very fast with a faster pace than our advertising and the CCS business. So this will also have some impact on our GP margin, that we believe that our GP margin will be around like 50% on average on average. This concludes my answers for you.

Operator: Next question comes from Xueqing Zhang with CICC.

Xueqing Zhang: My question is related to membership business. The membership business demonstrated strong growth this quarter, and we noticed the launch of independent at recently. So just wondering what strategy for this business, and how do you see the growth in 2023?

Zhou Yuan:

Zhou Yuan: 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 know-how.

Zhou Yuan:

Zhou Yuan: This accumulated experience, actually, we see is the new trade of the current novel reading market. We see that currently the premium novels for — in the consumption scenario is the current market trend for this business.

Zhou Yuan:

Zhou Yuan: We believe that our accumulation in this market know-how and also the number of customers will give us a solid position for the further growth for the year 2023.

Zhou Yuan:

Zhou Yuan: You just mentioning your question about the app rollout. This is kind of like a exploration we just released, but behind this exploration, we have like a planning for the investment in two areas.

Zhou Yuan:

Zhou Yuan: First of all, definitely, we’re going to invest in their creation ecosystem. This greater ecosystem will be like the major focus, will continue to be the major focus for us in the year 2023.

Zhou Yuan:

Zhou Yuan: Second one is on the consumer side. We actually have tried on several explorations and the new and independent like app development, it’s one of that which will provide a unique and better experience for the users to give them like more price recommendation.

Henry Sha: To supplement our CEO’s answers for you. We believe that the membership — subscribing membership business will still achieve the high growth in the coming quarters and in 2023.

Operator: The next question comes from Yiwen Zhang with China Renaissance.

Yiwen Zhang: So my question is regarding with our second growth driver of the education segment. What’s our medium to long-term goal? And how should we think about our investment scale and for the growth driver there? Is it driven by — mainly driven by organic or M&A demand?

Zhou Yuan:

Zhou Yuan: Education-related business has actually become our second growth driver. In the past year, it has achieved a remarkable achievements.

Zhou Yuan:

Zhou Yuan: We believe this is a very massive market with a lot of like opportunities. We are very optimistic, so we will continue to do the investments and also upgrade this business line centered on our current offerings.

Zhou Yuan:

Zhou Yuan: From the development 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 key approach will be our strategic planning for the future.

Zhou Yuan:

Zhou Yuan: And we will continue to invest on the technology as well. We will continue to invest other content across the community-driven technology.

Henry Sha: Thank you, our CEO and this is Henry. I will also supplement the CEO viewpoint. Two points, the first one, we are evaluating this opportunity in the position of training sector, we will evaluate targets lightly and have an appetite on those ROI on each of the M&A projects. And for now, we don’t have like a significant like a large plan — significant investing on the segment on this industry. But I think that’s all more like an investment for our company in terms of the considering — total contribution to pay. Second is about — one more thing is the regulation. We believe that the vocational training business should be encouraged by the government because it will largely solve the job problem in China now. That concludes my answer to you.

Operator: 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 Lian Liu: Thank you. Thank you once again for joining us today. If we have any further questions, please contact our IR team directly or Piacente Financial Communications. Thank you very much.

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