Ladies and gentlemen, thank you for standing by. And welcome to the Zhihu Incorporated Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in 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. Jingjing Du [ph] Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our second quarter 2021 financial results conference call. Joining us today are Mr. Zhou Yuan, CEO and Chairman of the company; 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 the definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference will be available on our website at ir.zhihu.com. I will now turn the call over to Mr. Sun Wei, our CFO

Thank you, Jingjing. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu.

Thank you for joining Zhihu's 2021 second quarter earnings conference call. Our user base continued its rapid growth momentum during the second quarter. Our average MAUs reached 94.3 million, up 46% year-over-year, of which, over 96% are mobile MAU. Meanwhile, we continue to increase our platform's high quality content offering. As of June 30, the cumulative pieces of content on our platform reached RMB420 million, including 368 million questions and answers, representing a year-over-year increase of 48% and 43%, respectively. In the second quarter, our average number of monthly active content creators was 3.6 million. Within this number, we saw a 75% year-over-year increase in the average number of monthly video content creators. In the quarter, our content centric monetization approach continued to propel robust growth, evidenced by a 144% year-over-year increase in revenue to RMB338 million and a 121% year-over-year increase in average monthly paying members to 4.7 million. Our achievements in the second quarter are ultimately an outgrowth of our funding belief, which continue to be our long-term guiding force. By building a high quality content centric community characterized by reliability and trustworthiness, we have been able to fuel healthy user growth and outstanding community engagement. As our user numbers grow, the natural extension of user demand and valuable supplements to our content library in terms of new various formats have expanded our content centric monetization channel and have nurtured the flywheel effect of our ecosystem. In the second quarter, we further upgraded our high quality community content standards by introducing sense of fulfillment at the new benchmark in evaluating content value on Zhihu platform. As a result of promoting content with a sense of fulfillment and our strong efforts to build brand awareness, we saw a remarkable growth in younger demographics from various cities, as well as…

I will now start with our financial performance review for the second quarter of 2021. As previously mentioned, we delivered an outstanding set of financial results for the second quarter of 2021. We recorded total revenue of RMB638.4 million, representing a 144.2% increase year-over-year. As our content-centric business model continue to drive the growth of our business, our content-commerce solutions and paid membership together contributed over 50% to our total revenue. In the second quarter of 2021, our Zhi+ [ph] business contributed RMB 207.4 million in revenue, making Zhi+ our second largest business segment by revenue contribution in the quarter, representing an increase of 15 times over the same period of 2020. The strong growth momentum of Zhi+ reflects the market recognition of its high marketing efficiency among merchants and brands. The number of customers for the business line has increased ten-fold since the first quarter of 2020. In addition, our growing business partners and the brand portfolio for the business line also represents much broader coverage, including fast moving consumer goods, vocational education, beauty and in personal care, as well as daily live services. As we find and introduces the sense of fulfillment at the new evaluation standards for content in the second quarter, we see great growth potential for Zhi+ as we believe it will continue to unleash the great commercial potential of our platform going forward. Advertising revenue achieved RMB248.3 million for the second quarter of 2021, representing an increase of 48.4% over the same period of 2020. The key driver of this rapid growth is the increase of advertising spending of our business partners, as many sectors are showing strong past-pandemic recovery. FMCG, e-commerce and automotive are among the strongest in terms of advertising growth on Zhihu. Our paid membership revenue for the quarter was RMB154.9…

Thank you. [Operator Instructions] Our first question comes from Piyush Mubayi from Goldman Sachs. Please go ahead.

Thank you for taking my question. And my first question is about your MAU, which has grown very nicely. Could you just take us through the dynamics of what has led that to happen? And how close are you to the magic number of 100 million. And as you look at your third quarter guidance, could you give us a sense of where that MAU number will be that's going to drive the revenue guidance that you provided for third quarter? The second question concerns the mix in revenue between content commerce solution and advertising. How have you managed to grow your content commerce solutions so nicely in the quarter? If you could just take us through the dynamics that have led to that. And I just wondered on the regular on the performance advertising side, there's been a slight weakness. What is the cause of that, if you could take us through those two questions, that would be great. Thank you. Then I have a follow up question.

[Foreign Language]?

[Foreign Language]

This is the CEO and Founder of Zhihu Mr. Zhou Yuan. As for user growth, if you're familiar with our business, you may understand that the large proportion of our new users are actually attracted organically to our community by user created content

[Foreign Language]

And naturally, you understand that good content impose direct and genuine impact on our users and create attractiveness to these new users. And in different scenarios and different demands these kind of attractiveness to users displayed seasonality and cycles, which is very prominent. And I can explain in greater details now.

[Foreign Language]

Let us take Gao Kao examination as an example for this. Just two months ago, we had this Gao Kao exam in China nationwide. And during that period, over 35 million users have consumed Gao Kao-related content in our community. And this 35 million users are higher three times higher as three times the stat also who actually sat in the Gao Kao examination. And we know that a lot of them are actually not only the high school graduates who take the examination, but also their parents, their teachers and those who used to took this examination in the past.

[Foreign Language]

So this showcase a very obvious cycle of user activity or as we – or seasonality as we call it. And we are very happy to see that there are a lot of young users and users from different generations who are very active during certain periods and have a lot of interactions with one another.

[Foreign Language]

So at certain time of the year, we will organize specific activities according to different user groups and their specific demands, not only during Gao Kao period, but also in other periods of the year, we would do so and to create more uses and check them to our community.

[Foreign Language]

And also in the past two months, you see that we have launched a campaign called Seeking Answers in Science, where we have attracted over 800,000 creators on our platform to produce public education materials in science. And these materials has gained over 2.4 billion page views in total. And another example is a short video film that we have created to celebrate the Youth Day, the May 4, which is called the Reunion, and they are attracting users from various generations, including those who are born as early as in 1950s and those who were born as late as after 2000.

[Foreign Language]

So thanks to our deep insights into our users, we have a very nice outcome and nice efficiency in terms of user acquisition as a result of our campaigns and events. And you see that one thing that remains unchanged is that our content remained the main driver for us to attract users organically and they are able to see values in our community when they join us. Thank you.

[Foreign Language]

And we are also very happy to see that young users as a percentage to our total user base is on the rise. And our new users recruitment in new first tier cities and second tier cities kept a very healthy trend and that would give us a steady user increase going forward in the future. Thank you. And I have our CFO, Mr. Sun Wei, to make additional comments, please.

[Foreign Language]

So our analysts asked about when will we hit the target of 100 million active users? Well, we are now doing 990,000 - sorry, 99 million, and that is very close to our big target of 100 million. But I should say that our ultimate goal is to attract those users and make them stay and make them active in our community. So I think with all sorts of efforts that we are making, we have the right confidence to say that we could hit target of 100 million in Q4 and to make them stay inactive in our so-called. Thank you.

[Foreign Language]

So as to the question of Zhi+ business, why we had such a stellar quarter is because that our user on this regard has increased by over 100% in the last quarter.

[Foreign Language]

Because we have a 500% increase of the clienteles, our mechanism of Zhi+ became much more effective and the outcome looks quite positive. As you can see, the indicators such as CTR look very good. And also CBC under our bidding system increased as much as 20%.

[Foreign Language]

Despite the fact that our Zhi+ business is growing very fast and healthily, we still think that Zhi+ has huge potentials to unleash going forward. Because right now, we only have less than 50,000 pieces of content commerce solution content compared with our total content library of 420 million pieces of our content. This is still a very, very small or tiny proportion.

[Foreign Language]

So if I'm not mistaken, I think there was a question about regulation. We do might maybe specifically ask what kind of areas do you want to know more about the regulation.

We just want to know the impact of the sectors that have seen a slowdown on a kind of regulation. What is your exposure to those sectors?

[Foreign Language]

[Foreign Language]

Well, as for those specific areas that are heavy handedly treated by the government recently, I think that our client in our client mix, the exposure were like the percentage of the client in those areas are not very high. And therefore, our business exposure to regulatory crackdown is controllable. And we believe that for the long term, this is a positive sign for the Internet industry. We are part of it for the longer term. So we are positive about that. Thank you.

[Foreign Language] Operator The next question comes from Alex Xie from Credit Suisse. Please go ahead.

Hi, management. Thank you for taking my questions. And congratulations on a very strong quarter. My first question is about your video initiatives, so would you please elaborate more about the optimization of the structure in your video? Do you have more data points to show the impact of your adjustments? And when do you expect the optimization process to be completed. And what about the outlook of video penetration in the second half? The second question is about your major content-driven user acquisition event in the second half. So in the first half, we have seen a very successful impact from your tenth year anniversary as well as the Gao Kao event. What will be the key events that we should look for in the second half? Thank you.

[Foreign Language]

[Foreign Language]

Yes, as we explained in the opening remarks that our video content creators have been increasing dramatically by 75% monthly video creators in the second quarter. And the daily upload volume increased by three times.

[Foreign Language]

So I think that behind those nice numbers is our emphasis on the ecosystem, because we think that video business is not just a stand alone business, we believe that video content is part and partial of our content library at Zhihu. So in reality, I think the increase of video content and the active content creators of videos and consumers of videos are actually a reflection of our - of the changes in our ecosystem in our community.

[Foreign Language]

So our content creators and consumers are becoming active in consuming both detect and images, as well as the video. Maybe I can show you some numbers. For instance, in the area of engineering, technology, economics and laws, the consumption of tax and image increased by 136%, 112% and 58%, respectively. And the interaction increased by 102%, 111% and 134%, respectively.

[Foreign Language]

As for video consumptions, it has been also very active and the top areas are health, as well as humanities and digital devices. The actual numbers of the video consumptions and interactions to save time, I won't elaborate right now, and I can share the details of those numbers with you later on after this call.

[Foreign Language]

As the school year - the new school year is about to start pretty soon, and we will continue to encourage content creation and interaction encouragement in this - in the form of video with the help of our newest benchmark on the sensor fulfillment. We will focus on certain areas such as humanities, economics, career development and et cetera.

[Foreign Language]

The next question comes from Yan Zhao from CICC. Please go ahead.

[Foreign Language] My question is about the guidance on the second half expenses, operating expenses, especially for the sales and marketing. Could you give us more color about the specific investment directions for the sales and marketing expenses? Thank you.

[Foreign Language]

So as for operating costs in Q2 we had operating costs totaling at RMB727 million. And sales and marketing R&D putting together are contributing to 80% of that expenses. Well, as for sales and marketing, specifically, I should first of all point out that our MAU increased by 46% year-on-year, standing at 94 million users, which is actually beyond our target set for this quarter.

[Foreign Language]

And the cost we spend on each new MAU is less then RMB48, which is sitting at the lower end of the spectrum of the Internet industry. So this proves that our sales and marketing activities are quite successful, and we are seeing very good ROI out of our sales and marketing expenses. So we will keep an eye on our tech and our retention rate and we'll continue to spend sales and marketing money to acquire more MAUs and grow that number. Thank you.

[Foreign Language]

Our R&D is another key element to our operating expenses as we keep quoting great talent, especially R&D talents to support our business growth in Q2. The R&D expense increase is 40% year-on-year, whereas the revenue increase is 144%, which is by far higher than the rate of the R&D expenses growth. So that is a proof that we have been quite efficient in terms of R&D expenses.

[Foreign Language]

So entering into the second half of the year, we will keep spending on getting more users and getting better talents to join our business. And we will make sure that the expenses are reasonable, necessary and effectively used. And to have a stringent monitoring system on by rolling accounting methods to make sure that we spend the money wisely.

[Foreign Language]

Thank you. That's the end my answer for OpEx. Thank you.

The next question comes from Xueru Zhang from 86 Research. Please go ahead.

[Foreign Language] Good evening, management. Thank you for taking my questions. I have a follow-up questions on the regulatory front. I'm wondering, have you seen more step-up by the regulators on paying attention to the media content, the content within the app of data security or this will be a potential risk going forward? And what could be the impact on Zhihu from this aspect? My second question is on the user metric [ph] is a follow-up question on the user metrics for second quarter. If you could share the sequential trend for the DAU and time spend. Also, any update on the retention of the YanPlus business? And how should we expect the trend of user engagement traffic metrics on Zhihu in the future? Thank you.

[Foreign Language]

Well, Mr. Zhou Yuan will address the first question about the regulatory issues and data security. Well, we believe that the government's policy with regard to content and data compliances for the long-term health and safe development of our business and our industry at large.

[Foreign Language]

As for data security, we have been investing a lot in terms of technology and management approaches by upgrading our standards and better management of the data and, et cetera, to safeguard the security of the data that we have. And when it comes to content, where we are also taking up some measures to make sure that the content offer high quality and are properly produced in our community in Zhihu.

[Foreign Language]

And we have also conducted some industries survey to make sure that we are in a leading position in terms of the data security in our area, and we are also in constant communications with the competent regulators to make sure that we will shoulder our responsibility fully and properly.

[Foreign Language]

And in terms of content, I'll just say that under some topics and discussions that are highly popular in our community, we can also see the voices from the central media to participate and make contributions as well. So as the user of our communities will be able to understand some certain issues or current issues in a reasonable and comprehensive way.

[Foreign Language]

As for user metrics, this is from CFO, Sun Wei. So for Q2, our users keeps growing very well, and the time spent on app remained very stable compared with the past consecutive eight to nine quarters. And in terms of activity levels, you see that the ratio of DAU versus MAU remained 25%, which is quite stable, even we saw a slight increase in July. When it comes to paid membership in Q2, we are nudging towards 5 million members - paid members and the renewal rate for either monthly subscription or a six month subscription, both remained very stable. So they're looking very well.

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

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

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