Will Zhihu collapse?

"Where there are questions, there will be answers." After 13 years online, $ZHIHU-W(02390.HK) is still losing money.

Zhou Yuan, the founder of Zhihu, has probably been asked more than once: "When will Zhihu turn a profit?"

Now, Zhihu is just one step away from profitability. The Q3 2024 financial report disclosed by Zhihu shows a net loss of 9 million yuan, narrowing by 96.8% year-on-year. The company is getting closer to the breakeven target set by Zhou Yuan, Chairman and CEO of Zhihu, at the beginning of the year.

Has Zhihu found the answer to its commercialization challenges?

1. Narrowing Losses: Cost Cuts and Paid Light Novels?

In Q3 2024, Zhihu's net loss was 9 million yuan, narrowing by 96.8% year-on-year. The significant reduction in losses is directly related to drastic cost-cutting measures.

Data shows that in Q3, Zhihu's total operating expenses were 624 million yuan, down 30.5% year-on-year and 15.7% quarter-on-quarter. The reduction was achieved through significant cuts in marketing, R&D, and administrative expenses. Specifically, marketing expenses fell 27.4% year-on-year to 388 million yuan, R&D expenses dropped 28.2% to 179 million yuan, and administrative expenses plunged 50% to 57.16 million yuan.

The sharp reduction in operating expenses has freed up profit space for Zhihu, driving the narrowing of losses.

One highlight in Zhihu's Q3 report is the growth in subscription members. The average monthly subscription members reached 16.5 million in Q3, a net increase of 1.8 million quarter-on-quarter. Most users subscribe to Zhihu's "Salt Selection" membership to read light novels.

The increase in subscription members has also boosted paid membership revenue. In Q3, paid membership revenue was 459 million yuan, accounting for 54.4% of total revenue, surpassing marketing service revenue for the first time to become Zhihu's largest revenue pillar.

2. Does Zhihu Have a Future?

To assess Zhihu's future potential, we need to look at its core business.

It's worth noting that before 2023, Zhihu's revenue came from five segments: advertising, paid memberships, content business solutions, vocational training, and others. Starting in Q1 2023, Zhihu reclassified its revenue into marketing services, paid memberships, vocational training, and others (e-commerce).

1. Three Consecutive Quarters of Revenue Decline Amid Intense Competition

In Q3, Zhihu's revenue fell 17.3% year-on-year to 845 million yuan, marking the third consecutive quarter of decline.

During the reporting period, all of Zhihu's business segments saw varying degrees of decline. Marketing services and vocational training revenue dropped significantly, with marketing services revenue down 33% year-on-year and 25.4% quarter-on-quarter to 257 million yuan, and vocational training revenue falling 27.4% year-on-year and 21.4% quarter-on-quarter to 105 million yuan.

Marketing services have been a core revenue source for Zhihu, but this segment has now declined for seven consecutive quarters. In Q3, it contributed 30% of total revenue, making it the second-largest revenue source after paid memberships.

Zhihu's business model is primarily content-driven, with diversified development. However, vocational training and e-commerce-related businesses are currently unable to shoulder the burden of future revenue growth. Vocational training contributes less than 15% of revenue, while other businesses contribute even less, at under 3%.

In fact, Zhihu began laying out its vocational education business as early as 2019. The company has built its education business framework through joint operations, self-operation, and external investments. It has also expanded its vocational education footprint through external investments.

In August 2021, Zhihu invested in Pinzhi Education, an online finance and accounting training company, marking its first investment in an education firm. In October of the same year, it acquired a stake in Papa Education, an online overseas exam preparation institution. By integrating these platforms, Zhihu further expanded its vocational education offerings.

In June 2022, Zhihu launched the "Learning Zone" on its app, providing free educational courses. In October, it completed the acquisition of Palm Gardener, a vocational education company whose product "Yiqi Kao Jiaoshi" focuses on teacher exam preparation services. In December, Zhihu introduced "Zhixue Tang," a dedicated teaching platform offering specialized adult vocational education services.

Several years later, the vocational training business has yet to become Zhihu's second growth curve as Zhou Yuan hoped. Moreover, in the civil service exam preparation sector, Zhihu faces competition from industry leaders like Offcn Education, which is also struggling with declining revenue and profits.

By comparison, Xiaohongshu, another community platform covering advertising and e-commerce, outperforms Zhihu by a wide margin.

Xiaohongshu's revenue primarily comes from advertising and transactions (including e-commerce and local services). Foreign media reported that Xiaohongshu's Q1 2024 revenue reached $1 billion, up 67% year-on-year (compared to $600 million in the same period last year), with net profit hitting $200 million, a 400% increase (compared to $40 million last year). For context, Xiaohongshu's full-year 2023 revenue was $3.7 billion, with a net profit of $500 million.

2. Small User Base Limits Ad Revenue Growth

The financial report shows that Zhihu's average monthly active users (MAUs) in Q3 were 81.1 million. Overall, Zhihu's MAUs are trending downward, with the historical peak of 110 million recorded in Q3 2023.

With MAUs declining rather than growing, achieving user growth will be challenging for Zhihu. The scale of MAUs directly impacts Zhihu's marketing service and paid membership revenue.

In terms of advertising, Zhihu's user base is far smaller than that of WeChat, Douyin, Kuaishou, Bilibili, and even Xiaohongshu. For advertisers, Zhihu seems less attractive in terms of brand exposure.

3. Will AI Search Be Zhihu's New Solution?

With the rapid development of large models, AI is reshaping search engines. Zhou Yuan is attempting to reinvent Zhihu, with AI search being one of his key focuses.

In June this year, Zhihu launched its new AI product "Zhihu Direct Answer," which generates responses based on creators' real Q&A data. It is Zhihu's first standalone AI product.

At the end of October, "Zhihu Direct Answer" officially launched the "Professional Search" feature, integrating professional content sources like VIP and Zhihu's curated content, covering over 50 million Chinese and English literature entries. It also supports file uploads and long document parsing, with features like single-document deep reading and source-specific Q&A, catering to professionals' productivity needs.

Zhou Yuan stated in the earnings report that "Zhihu Direct Answer" has seen rapid growth in user visits. The "Professional Search" feature represents Zhihu's differentiated exploration into deeper scenarios.

However, the AI search space is crowded with both new and established players.

On the evening of November 21, Robin Li revealed during Baidu's Q3 earnings call that AI features on Baidu App now cover nearly 70% of its MAUs, with over 20% of Baidu search results pages including AI-generated content, up from 18% last quarter.

On November 27, 360 launched its new AI search product "Nano Search" in Beijing, positioning it as a multimodal content creation engine that allows users to "search, learn, write, and create" in one place.

Domestically, AI search tools like Metasearch have attracted significant capital interest, while large-model assistants like Kimi, Zhipu Qingyan, and Doubao have also integrated AI search functions.

Before achieving commercialization, Zhihu's AI search will face formidable competition and an uphill battle.