1Q24 The adjusted net loss was better than our expectations
Zhihu announced 1Q24 results: Revenue of 961 million yuan, down 3.4% year on year, better than Bloomberg's agreed expectations ($926 million) and our expectations ($834 million), mainly due to marketing service business performance being slightly better than expectations; adjusted net loss of $136 million, better than Bloomberg's agreed expectations ($180 million) and our expectations ($169 million), mainly due to revenue performance exceeding expectations while cost and expense control was good.
Development trends
Returning to the core community ecosystem, revenue declined slightly year-on-year. 1Q24 Zhihu MAU had 89 million people, a year-on-year decrease of 13.1%, mainly due to the company's strategy shifting to focus on core community groups to enhance experience and sense of acquisition, and corresponding channel marketing contracted. C-side business: Membership revenue in the first quarter was 450 million yuan, down 1.1% year on year, with an average of 14.8 million monthly subscribers, which was basically the same as the previous year. In the first quarter, the vocational education business revenue was 145 million yuan, up 35.9% year on year, mainly due to the rapid growth of self-operated businesses empowered by the community, especially skill interest courses. B-side business: Marketing service revenue in the first quarter was 331 million yuan, down 15.7% year on year. In order to strengthen community trust, the team took the initiative to manage commercial content and distribution, but brand advertising revenue still achieved a year-on-year increase of more than 40%, and performance advertising revenue also increased month-on-month.
Gross margin increased significantly year over year, and cost control was better. Thanks to the company's continuous optimization of manpower, content, bandwidth, server costs, etc., gross margin increased by 5ppt to 56.6% year-on-year in the first quarter. In terms of expenses, the total absolute value of main operating expenses decreased by 9.8% month-on-month, but due to the negative impact of financial leverage due to the decline in revenue, operating rates increased slightly from month to month. Overall, the adjusted net loss rate for 1Q24 was 14.1%, which was a slight increase over the same period last year.
Focus on AI's continuous empowerment of all business lines. The company said at the performance conference that the value of leading users and high-quality corpus content in the AI era is expected to continue to expand. Zhihu already has an advantage in this area, and data licensing cooperation with external vendors is still being discussed and evaluated; the AI search beta data previously launched shows that it helps enhance user activity, and the company plans to launch a new version of the AI search function on the PC; in addition, AI is helpful in terms of content trending in the community, empowering vocational education businesses, and improving advertising effectiveness.
Profit forecasting and valuation
Considering that the adjustment of the community's ecological strategy still has an impact on revenue in the short term, we lowered our 2024/2025 revenue by 3%/5% to 3.6.39 billion yuan. However, considering cost savings, we maintained the 2024/2025 adjusted net loss forecast. Currently, the company's US and Hong Kong stocks are trading 0.6/0.6 times the 2024/2025 P/S. Considering that the short-term pressure on users and revenue continues to affect market sentiment, we lowered our target price for Hong Kong stocks by 31% to HK$11. As the company adjusted the ADS ratio (from the previous 2 ADS shares representing 1 common share to 1 ADS representing 3 common shares), we raised the target price for US stocks to 4.4 US dollars, all corresponding 0.8/0.7 times the 2024/2025 P/S, and the upside of the target price for US stocks and Hong Kong stocks is 38%/31%, respectively.
risks
The progress of 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.