4Q23 Non-GAAP net loss was better than we expected
Zhihu announced 4Q23 results: revenue of 1.14 billion yuan, up 2.2% year on year, better than Bloomberg's agreed expectations ($1.07 billion) and our expectations ($1.07 billion), mainly due to better than expected advertising revenue performance; non-GAAP net loss of $91.31 million, better than Bloomberg's agreed expectations ($181 million) and our expectations ($185 million). In addition to revenue performance exceeding expectations, gross margin also increased significantly.
Development trends
The C-side business showed outstanding year-on-year growth, and the B-side advertising business still needs to resume. 4Q23 Zhihu MAU was 99 million, down 10.4% from the previous month. The company's performance report indicates that future plans focus more on core user experience rather than market user growth. C-side business: Member business revenue in the fourth quarter was 456 million yuan, an increase of 13.3% over the previous year. Yanyan Story product updates include the launch of a new “audio” content module and the addition of an “automatic reading” function; the series “To Have a Dark Fragrance” adapted from Zhihu IP's “Washing Lead” was launched on Youku in October 2023, and IP influence was amplified. In the fourth quarter, the vocational education business revenue was 169 million yuan, an increase of 100% over the previous year. Entering the peak exam season, some users concentrated on completing courses before taking the exam. B-side business: Marketing service revenue in the fourth quarter was 465 million yuan, down 18.7% year on year. In addition to external environmental impact, the platform also actively adjusted the operation of some low-quality commercial content to enhance community trustworthiness.
Gross margin increased significantly, and non-GAAP net loss narrowed sharply compared to the same period last year. In 2023, the company continued to benefit from the optimization of projects such as bandwidth servers and labor costs. Gross margin increased significantly year-on-year, and gross margin rose further to 59.1% in the fourth quarter. In terms of costs, the company drastically cut inefficient marketing channels. In 4Q23, community customer acquisition investment fell by more than 40% year on year. In addition, personnel optimization also led to a decrease in related expenses. Overall, the 4q23non-GAAP net loss ratio narrowed sharply to 8%. The company stated in the financial results that it expects to achieve non-GAAP net profit profit in 4Q24.
“Knowledge Academy” officially operates independently, and the short story launches the “3A” program. Zhihu held an education conference, saying that the community itself has gathered the content supply and user needs of vocational education, and the industry is expected to usher in a period of reshaping under the impetus of AI technology. Zhi Academy now has 6 education sub-brands, covering more than 30 course categories, and has served more than 20 million students. In addition, Zhihu released the “Short Story 3A Plan” at the 2024 Discovery Conference. Yanyan Story has reached content distribution cooperation with products such as Huawei Reading and Hupu, and has also reached strategic cooperation with Kuaishou to explore the development of short dramas and the opening of a copyright library. Looking ahead to 2024, we recommend focusing on the C-side business's monetization potential and progress in achieving break-even goals.
Profit forecasting and valuation
Considering that the company's emphasis on community ecology has an impact on revenue in the short term, we lowered 2024/2025 revenue by 27%/31% to $37/4.1 billion, adjusted the 2024 non-GAAP net loss from $170 million to $400 million, and adjusted the profit forecast for 2025 from non-GAAP net profit of 130 million yuan to non-GAAP net loss of 188 million yuan. Currently, the company's US/Hong Kong stock trading is 0.8/0.7 times 2024/2025 P/S. In response, we lowered our target prices for US and Hong Kong stocks by 29%/27% to HK$1/16, all corresponding to 1.1/1.0 times 2024/2025 P/S, and the upside of the target price for US stocks and Hong Kong stocks was 40%/42%, respectively.
risks
The recovery in the marketing service business fell short of expectations, C-side business growth slowed, cost reduction and efficiency fell short of expectations, and transaction liquidity risks.