Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Incorporated First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At 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 Ms. Zheng Jing Du, Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our first quarter 2021 financial results conference call. Joining us today are Mr. Zhou Yuan, Chairman and CEO of Zhihu; and Mr. Sun Wei, our CFO. Before we start, we would like to remind you that today's discussion may contain forward-looking statements which involve a number of risks and uncertainties. Actual results and outcomes may differ materially from those mentioned in today's announcement and this discussion. The Company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. As a reminder, this conference is being recorded. 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. Sun Wei, our CFO. Please?

Okay. Thank you, Xingxi [ph]. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu Inc. Thank you, everyone, for joining our first earnings call. I'm pleased to report that Zhihu delivered a strong set of results in the first quarter of 2021. Our user base and revenue both experienced significant growth during the period. In Q1, our user base continued to grow rapidly. Our average MAUs reached 85 million, representing a year-over-year growth of 38%. This is an impressive growth momentum we successfully managed to maintain. Even after the significant growth we realized in Q1 2020, currently most users spend more time online due to the COVID-19 pandemic. Our revenue increased significantly, growing 154% year-over-year to RMB478.3 million. This growth was largely attributable to our commitment to the execution of our content-centric monetization capabilities. Now I will elaborate a bit of our revenue growth by business line. Most impressively, our content-commerce solution also known as [indiscernible] plan continues to deliver expectation beating results, contributing RMB121 million in revenue during the first quarter. This compares with an annual revenue of RMB136 million from this business line in 2020. The strong growth momentum of [indiscernible] was reflective of the market recognition of its high marketing efficiency among merchants and brands. The number of customers for the business line experienced a tenfold increase compared with Q1 last year. In addition, our growing merchants and brand portfolio for the business line also represents a much broader industry coverage, such as fast-moving consumer goods, education, beauty and personal care as well as daily live services. We see great growth momentum in the bus line, delivering optimal marketing efficiency to our customers and contributing commercial content to our users. The Zhihu's advertising business continued its rapid growth…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Piyush Mubayi from Goldman Sachs. Please go ahead.

Congratulations on your numbers as well as the listing a couple of weeks ago. My first question centers around, MAU progression, which we note has done very well. May I ask you to talk through the MAU as of the end of the quarter? And where are you seeing that growth come through? And if possible, could you reflect on the trajectory you're observing at the end of the quarter and whether that quarter -- that trajectory can be maintained at that pace through the rest of the year potentially? That's my first question. My second question, at the time of the IPO, you talked about, you disclosed what the total visitor number was. And I wonder if we could go back and get a feel for how that visitor number has changed potentially since the last time we saw that number reported in the filings. Thank you.

The MAU growth in Zhihu has always been reason for [indiscernible]. We had a very high percentage of new users coming from the content created by the organic traffic, and in terms of performing our new users, we noticed that they are presenting the same features and behaviors generally. However, relatively speaking, I should say, the final new users are giving us a higher percentage on a year-on-year basis. Okay. In terms of our content, our ecosystem has been growing very sustainably, and we are well penetrating into a wider range of topic areas. In different scenarios, we are able to meet the demand from various uses. We have the best-in-class content as well as content creators in 10 knowledge areas. And we have been maintaining our advantage in our industry all the time. I can give you some example. For instance, our unique visitor number increased by 220% in material science and by 560% in microeconomics year-on-year. Whereas at the same time, we are also well positioned in other topic areas such as hobbies, for instance, in ACG, in 3Cs and in gaming, the content and content creators are also very active. These help us to attract more younger users. Our percentage -- the percentage of users under 25 years old are also on the rise. Okay. In terms of -- on top of knowledge sharing and interest discussion, we are also helping our users to solve their actual problems. These kind of content are also on the rise. For instance, we have a very popular topic that is about preparation for the exam for graduation schools in China. Right now, every day, there are more than 1 million users looking at those informations. And we're also helping our users to gain live skills such as cooking and we are also providing solutions for the newbies in the workplace. So these will help our users not only to share their views about their interest, but also solving their actual problems in their work and life. Okay. We see that in both retention rates and impact, these new contents are giving us very nice numbers in terms of users that we have, and we will continue to invest and gaining more and more users this way. Thank you. As to your second question, mostly viewers we are having right now is 460 million, maintain a stable level. And also, the percentage of MAU to monthly viewers, are also state of -- a stable uprising trajectory. Thank you.

The next question comes from Alex Xie from Credit Suisse. Please go ahead.

Thank you very much for taking my question and congratulations on very good results. I'll ask my questions firstly in Chinese and translate in a by myself. My first question will be about the progress in the video utilization strategy. Would you share some more figures about the scale of video consumption and the production? Also, what will be the key initiatives to further drive penetration of video in MAU and content creators? And my second question is about the GP margins breakdown and outlook. Can you show us about the segment business segment GP margins, such as for example, margins for Content-commerce solutions and the membership business? Also, how should we think about the GP margin trend in the rest of this year? Thank you.

Well, thank you. Mr. Zhou Yuan will address your first question about video strategy. So video content is a very important part in our ecosystem and in the past couple of months, you see that our value of video, both in terms of creation and consumption increased significantly. For those videos that are over 1 minute long, the daily uploading volume increased by 17x on the past quarter. And the average consumption on video also increased by over 60%. Okay. Our Zhihu community is very open and highly accommodating to different kinds of content creators, different kinds of media formats and given kind of user groups. So right now, you see video penetrated DAU is now over 30%. People do enjoy watching video on user platform. And also, as we are progressing in our product as well as technology innovation, video is going to be a very important element to content creators as one of their creation tools. And we believe that every answer on Zhihu should have a video version. Text and image as well as video are just part and parcel of our entire content library. Okay. As you can see in our community, video is presenting very nice growth rate. And also the content as well as the categories are looking very healthy. On the other hand, in the entire industry of video, mid-form video is still at a very early stage. If you look at many other similar content communities, if we put all uploading volumes of mid-form videos altogether, the daily uploading volume is only by hundreds of thousands. And we believe that going forward, this volume will explode to about -- to by millions on a daily basis. So we believe that this sector still has enormous potential. And we believe that we will be able to see more and more quality video content and video content creators in the community of Q3. And I also want to mention the ecosystem that we're building for video development. Unlike many other platforms, our community video strategy is driven by our ecosystem, which is very healthy that promotes the good quality to come out from the rest. And this again will import a healthy atmosphere that we are enjoying in our community. In Q1, we're actively taking some measures to control the low-quality content, meaning that it will give more exposure opportunities for better quality video. And also at the same time, our content creators for better quality videos are enjoying a wider space for the creation. And in the second quarter, we expect -- we hope to make some structural changes to the content videos as well as we further build on our ecosystem so that as an entirety, our video business will continue to grow very fast.

Yes. This is CFO of the Company, Sun Wei. I'll try to answer the second question from Alex, regarding the gross profit margin. I'll speak in Chinese and Grace will help on translation. Thank you. This is from CFO, Sun Wei, of Zhihu, and the answer to the gross margin is by 2021, our Q1 gross margin stood at 57%, which represented a very significant increase over the same period last year. The first reason for that is the economy of sales that we are enjoying as a result of increased revenue that we are seeing from our business. Both of our [indiscernible] and paid membership business represented over 100% increase where result advertisement grew by over 70%. Second reason is the significant mix change that you're seeing in our revenue. For instance, for our [indiscernible] business in 2020 first quarter accounted for only 1% of our total revenue, whereas by the Q1 2021 is accounting for 25%. And our revenue contribution from paid membership and advertisement stood at 67% and 30%, respectively, in the first quarter of 2020 whereas the percentage has now dropped to 45% and 26%, respectively. So therefore, you see that our higher-margin business that is [indiscernible] is contributing more to our gross margin as a whole. And the third reason is that we keep a very good control on our fixed cost items. For instance, the costs for brand bandwidth as well as for our servers are not increasing at the same place as we are increasing our user base and our business. Therefore, due to the economy of scale that we're getting from the fixed items of costs, we are also registering a higher gross margin. So the above mentioned three reasons are contributing to a higher gross margin this quarter. Going forward, I think in the next couple of quarters, we might see some slight changes in our gross margin level as we are seeing very nice perspectives in terms of the video content that we have. Therefore, we will invest a little bit more in encouraging the video creation and content creators by compensating them more on their content creation and video format. Thank you.

The next question is from Binbin Ding from JP Morgan. Please go ahead.

I'll translate it myself. So my question -- I have two questions. My first question is about the content commerce solution. So can management share some colors in terms of the drivers behind the strong growth in the first quarter? For example, what are the key industries or notable business customers who have contributed to the growth? And how does operating metrics such as click-through rate CPM look like in the first quarter? And how should we look at the trend in the rest of 2021. And my second question is about your sales and marketing expenses, which nearly tripled in the first quarter of '21 compared to the same period last year. Can management elaborate on the key investment areas of the investment of the sales and marketing investment? And how should we look at the trend in the following quarters? Thank you.

Thank you. Let me address the first question on content commerce solution. First, well, actually, in Q1, content commerce solutions speaks our expectations for that, which registered a revenue of 121 million accounting for about 89% of the end of the numbers that we got from the last year entirely increasing by over 100% and even on a quarter-on-quarter basis. As for the drivers behind Content-commerce solutions, I would say that we are very happy to see that both the number of the brands and merchants on our platform are on the rise as well increased by about 10x if you compare the number in Q1 2020. And because they are larger volumes of merchants working on our community platform, we are seeing very nice price out of the bidding from the merchants. Therefore, we have very nice CPC numbers as well. So in conclusion, I think I would say that both the volumes as well as the price are the drivers behind our CCS growth, Content-commerce solutions. Thank you. In terms of industry concentration, we see very nice popularities from the sectors such as FMCG, education, beauty progress, 3Cs and automobiles, whereas we're seeing very nice conversion rate from the CCS that we're having. And I would say for FMCG, education and beauty, they have been the biggest contributors to our merchant base and brand base. As to your second question, the increase of sales and marketing expenses in our Q1 -- well, I should say that in January, we were celebrating the tenth anniversary of Zhihu as a community. Therefore, we launched a number of brand campaigns heavily in the country such as nice party adventure as well as the award ceremony for a new generation of knowing, which is very welcomed by the community as a whole. And this helped us a lot in building our brand recognition, and that is why we see a jump in terms of our sales and marketing expenses, especially in this Q1. That said, I should say that we're still very secondly in terms of our sales and marketing expenses and looking at the efficiency of our marketing dollars spend. The CAC of our MAU to still stood at RMB37 per MAU and therefore are still keeping at a very low level. Thank you.

The next question is from [indiscernible] from CICC. Please go ahead.

I'll briefly translate myself, and congrats on a strong financial performance. My question is regarding the drivers of the advertising business. Since it is said that brand ads have strong performance, how do you view and project the growth of performance at low ratio and CPM? And maybe in terms of advertisers, is it because that you have gained more shares in their accounts or there are more pay or SME clients?

Thank you for the question. Well, our advertisement business revenue increased by 70% compared with the previous year that was mainly contributed by our brand advertisement. It used to account for the majority part of our advertisement income. That is because we have launched a new product as well as helping our brand advertisers building more values on our community by giving them better high-quality content that would accumulate in our communities and our advertisement income mainly comes from the KA. Our performance is accounting for less of a percentage versus the brands ads which is pretty much in line with our development strategy. And we look to work even harder for the brand advertisement and trying to gain more of their budget on advertisement. As for the ad load, going forward, we will keep our ad load unchanged. Instead, we will rely on the increase on our user base, the better and higher recognition of our Zhihu as a community and also diversifying our format so that there will be more forms for consumption on our advertisement on our community. Thank you.

Due to time constraints, that concludes today's question and session. At this time, I will turn the conference back to [indiscernible] for any additional or closing remarks.

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or TPG Investment relationship. Thank you.

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or TPG Investor Relations. Thank you.