Zhihu's Revenue Rose 144% Year-on-Year

Key points:

• Zhihu’s revenue rose 144% year-on-year in its latest quarterly results, fueled by a big increase in ‘content commerce solutions’
• One of the company’s biggest challenges will be maintaining its credibility as it allows a growing volume of sponsored content onto its platform

By Doug Young

The latest earnings from Zhihu Inc. ZH are quite full of numbers and messages, as this Q&A specialist that’s often called the Quora of China charms investors with the story of its increasingly diverse revenue base. But the number that stands out from the rest is for a category called “content commerce solutions,” which has gone from nearly nil to accounting for a third of Zhihu’s total revenue over the last year.

More precisely, content commerce revenues reached 207.4 million yuan ($32 million) in Zhihu’s latest quarterly results released on Monday, up from just 12.7 million yuan a year earlier. In percentage terms, that means this particular category rose from just 5% of Zhihu’s total in the second quarter of 2020 to its current contribution of 32%, second behind only advertising revenue that made up 40% of the company’s second-quarter revenue of 638.3 million yuan.

The strong contribution from “content commerce” business helped Zhihu post a healthy 144% gain in total revenue year-on-year in its latest reporting quarter. That headline figure was cheered by investors, who bid up the company’s stock by 5.2% after the results were announced on Monday.

The latest close of $9.78 was symbolically significant, as it pushed Zhihu’s share price above the $9.50 price for its American depositary shares (ADSs) from its IPO nearly five months ago.

That movement on both sides of the IPO price seems to show that investors are unable to decide whether or not to like this company, which is quite popular among internet users but was having difficulty monetizing that popularity.

The similarly popular online encyclopedia Wikipedia faced a similar challenge in its early days, and ultimately decided to become a non-profit to protect itself from commercial interests that might damage its credibility. In Zhihu’s case, the company has decided to pursue the commercial path, putting itself in the position of having to try to maximize profits while still protecting its credibility to its millions of users.

Company founder and CEO Zhou Yuan gave a good example of this type of “content commerce” where Zhihu has found big revenue on the company’s earnings call, which we’ll detail shortly. But first we’ll look at an interesting user comment on this topic that came from a reader in response to a previous Bamboo Works article published in March around the time of its IPO. 

“Something Zhihu is reluctant to acknowledge: it publishes some Q&As, but they are not real Q&As but masqueraded advertising,” the reader said. “That is why the credibility of the answers in Zhihu is plummeting nowadays. Accordingly, it is losing the trust of many users and will be eventually ignored or deserted.”

While this particular user may have been slightly extreme, her argument nicely summarizes the biggest risk that Zhihu will probably face going forward, namely accepting money for some content and services while also trying to maintain its credibility. The example it gave on its call nicely illustrates a relatively transparent instance of offering such paid content. But there are undoubtedly many cases where the paid nature of such content may not be so obvious.

L’Oreal Promotion

That said, let’s look at the example given by Zhou on the company’s conference call, which involves a promotion by the cosmetics giant L’Oreal LRLCY. In that instance, the French company hired a researcher from China’s prestigious Chinese Academy of Sciences to “address the question (of) how to grow bigger hair – an issue that bothers many young people,” Zhou said, according to a transcript of the call.

Not surprisingly, the expert’s talk centered on a key ingredient that just happened to be contained in L’Oreal’s own hair-loss products, which were recommended in the talk that included all kinds of “easy-to-read text and images” and detailed “step-by-step guidance.”

Zhou doesn’t say how explicitly Zhihu stated L’Oreal’s role as the sponsor of this particular event. In fact, this kind of online event is becoming increasingly popular in China these days in a broader category of sponsored livestreaming that features celebrities or experts trying to sell a particular product or service. So we can’t really blame Zhihu for jumping on this particular bandwagon. But again, the company will need to be quite careful with its disclosure that this kind of activity is sponsored, or risk damaging its reputation and ultimately lose users.

That leads us into the rest of Zhihu’s latest results, which look relatively solid. The company’s monthly active users (MAUs) rose 46% to 94.3 million, while its average monthly paying members rose by an even stronger 121% to 4.7 million. It attributed the gains to its broader drive to focus on quality content, which is theme among many of China’s providers of user-generated content.

The company’s healthy growth in revenue and user numbers came at a cost. Specifically, its cost of revenue roughly doubled to 262 million yuan from 135 million yuan a year earlier. But the even stronger 144% revenue growth meant the company was able to improve its gross profit margin to 59% from 48% in the second quarter of last year.

Zhihu remained firmly in the red for the latest quarter, with its net loss more than doubling to 321 million yuan from 135 million a year earlier.

As we’ve said previously, investors seem uncertain on their view about this company. In the nearly five months since its New York trading debut, the stock has traded as high as $13.85 and as low as $6.81, representing big moves in both directions of the $9.50 IPO price. The company trades at a relatively lofty price-to-sales (P/S) ratio of 21, compared with a meager P/S of 3 for online search leader Baidu, which offers many similar services.

Here we should note that Zhihu’s stock has held up relatively well compared to other major Chinese internet names like Baidu, which have been hammered lately by uncertainty over the internet regulator’s attitude towards data security. It does seem slightly strange that Zhihu hasn’t been affected by those concerns too much, since it also possesses big amounts of user data. But for now, at least, investors seem relatively positive on the company as it shows growing signs of being able to monetize its popularity among Chinese internet users.