In the past, amid discussions surrounding Zhihu (02390, ZH.US), there have always been doubts about the company's commercialization prospects.

However, as Zhihu has made substantial progress in narrowing losses over and over again this year, Zhihu is probably closer than ever to achieving a positive feedback cycle of profit.

According to the financial report for the third quarter of 2023 disclosed by Zhihu recently, during the Q3 period of this year, Zhihu achieved revenue of 1,022 million yuan, an increase of 12.1% year on year; gross profit of 549 million yuan, corresponding gross profit ratio of 53.7%, an increase of 5 pct over the same period last year; and adjusted net loss narrowed 10.1% year on year, another big step away from loss reduction.

In a context where the pace of macroeconomic recovery remains uncertain, Zhihu not only achieved resilient revenue growth, but also effectively contained losses. This is the best “footnote” for the company's multi-engine commercialization strategy to achieve phased results.

Scale and profit operate in the same direction

In the historical stage of alternating economic cycles, it is difficult for most market players to balance scale and profit at the same time: when pursuing scale, they tend to increase profit pressure, while maintaining profits will inevitably cause scale to stagnate. This is probably a particularly profound feeling for most growing companies.

However, judging from Zhihu's financial reports for recent quarters, it seems that the company has mastered the “key” of development to improve both scale and profit.

During the 23Q3 period, Zhihu's revenue and adjusted net loss data all moved in a positive direction. Judging from the revenue structure, although the company's marketing service business did not perform very well due to the impact of the general environment, the paid reading business and vocational education business “ran fast against the wind” and successfully took over the growth banner.

Data show that in the third quarter, the revenue share of Zhihu's paid reading business surged 39.2% to 467 million yuan, and the revenue share rose to 45.7%, taking over the marketing service business as Zhihu's largest source of revenue; while the vocational education business was Zhihu's second growth curve, the year-on-year increase in revenue during the period reached 85.6%, and the scale increased to 145 million yuan, accounting for a record high of 14.2%. The positive impact of this business on the company's overall revenue deepened.

On the profit side, thanks to Zhihu's continuous increase in commercialization efforts and the company's increased efficiency in the use of cloud services and bandwidth, the company's gross margin reached another level of 53.7%. At the same time, Zhihu's adjusted net loss was further optimized, and the loss narrowed by more than 10% compared to the same period last year.

It is easy to see that under the framework of the multi-engine strategy, Zhihu's ability to grow countercyclically when dealing with fluctuations in the external environment has made great progress, and the “multi-legged” parallel growth pattern is also expected to provide a steady stream of driving force for the company's long-term value transition.

Multi-engine strategy stimulates growth potential

According to the Zhitong Finance App, the reason why Zhihu was able to hand over a high-quality “report card” for the three quarterly reports is underpinned by Zhihu's clear and unique community tone, as well as the strong newcomer attributes of the core user group. Based on this solid foundation, the multi-engine business structure, like a perpetual motion engine, brings new momentum to Zhihu's growth.

Zhihu, which has the biggest consensus on professionalism, has now become the Internet community where new workers in modern society gather the most.

According to the “New Employee Population Insights White Paper” published by Kantar Consumer Index, the value of the new types of talents represented by new hires is outstanding, while Zhihu is the Internet platform with the highest “concentration” of new hires. According to reports, newcomers generally believe in professionalism and rationality, and 94% believe that professional product quality information is essential for building trust. Projecting at the consumption level, the new employees have also shown strong spending power and a forward-looking view of consumption. For example, over 72% of people are willing to pay a premium for quality, while the average purchase price of FMCG products is more than 20% above the average of netizens.

Perhaps it is also because new hires actually represent a new consumer group, so from a commercialization perspective, deep intersection with this group means being infinitely close to commercialization. And Zhihu used professional discussions to connect this group of new professionals who were born across generations and continued to grow, which also contributed to its current ambition and strength to explore more possibilities for commercialization.

Taking Zhihu's paid reading business as an example, this business is based on Zhihu's community ecology and has found a unique business path: on the content side, Zhihu has created a massive library of high-quality content, including Yanyan stories, e-books, journal articles, etc., to provide users with a diverse digital reading experience; on the creator side, Zhihu has incubated and nurtured a large number of outstanding native creators, and has made creators reap considerable benefits through the membership system.

According to information, at present, the content of Yanyan stories in Zhihu's paid reading content library has reached 100,000, making it the largest short story production base on the entire network; the number of creators in the paid reading business has also reached hundreds of thousands, and the number of creators in the paid reading business has exceeded 100, of which the number of creators with revenue exceeding one million has surpassed 100.

The supply of high-quality content will naturally also receive positive feedback from the market. In the third quarter, the average number of Zhihu monthly paid subscription members reached 14.8 million, and the year-on-year increase in caliber reached 35.9%. This also reflects users' high recognition of Zhihu's paid content.

Meanwhile, in order to better expand the paid reading content matrix and consumption scenarios and consolidate its leading edge in the short story circuit, Zhihu also launched the Yanyan Story App in May of this year, operating Yanyan Story as an independent product and content category. Up to now, the story of Zhihu Yanyan has sold film and television rights for nearly 100 films. For example, in October, the film and television drama “Calling for a Dark Fragrance” adapted from “Seirinhua” was broadcast on Youku and sparked widespread discussion.

On the other hand, as a new type of business that has grown in the community, Zhihu's vocational education business has also unleashed huge potential for growth. Earlier this year, Zhihu established the “Zhihu Zhi Academy” education brand, and relied on a business model based on self-operation+investment, and rapidly grew into one of the current Internet education platforms covering the most diverse businesses. According to reports, at present, Zhihu's vocational education brand has thoroughly covered various fields such as postgraduate studies, examinations, teaching materials, CPA, CFA, MBA, and workplace skills, etc., and the industry's influence and user reputation are rapidly climbing.

Furthermore, it is worth mentioning that as an innovative company with technological genes, Zhihu is also forward-looking, vigorously and actively laying out the AI model circuit. At present, the large Chinese model “Zhihaitu AI” developed by Zhihu has begun to be used in many learning scenarios at Zhihu Zhi Academy, and intelligent teaching product functions such as AI intelligent assessment correction, intelligent homework correction, and AI academic affairs pilot have been introduced one after another.

Using the Q3 financial report as an entry point, it is easy to see that Zhihu has achieved impressive performance in balancing scale growth and optimizing loss reduction. The financial data, especially the strong growth of the two major businesses of paid reading and vocational education, also sends a value signal that Zhihu is making great strides towards commercialization. In the future, as the multi-engine strategy progresses further, the “gold content” of Zhihu's fundamentals is expected to increase further. Whether from a business perspective or a capital market perspective, the company's prospects are worth looking forward to.