iQIYI, Inc.
Q3 2021 Earnings Call Transcript

Published: 17 Nov 2021

[Operator:]

Good day and thank you for standing by. Welcome to the iQIYI Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After speak is presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Ms. Fan Liu, IR Director of Company, please go ahead.

[Fan Liu:]

Thank you, Operator. Hello, everyone. And thank you for joining iQIYI’s Third Quarter 2021 Earnings Conference Call. The Company's results were released today and are available on the Company's Investor Relations website at ir.iQIYI.com. On the call today, our Mr. Gong, our Founder, Director, and CEO, Mr. Xiaodong Wang, our CFO, Mr. Xiaohui Wang our CCO, Chief Content Officer, Mr. Wenfeng Liu, our CTO, Chief Technology Officer, and Mr. Xianghua Yang, Senior Vice President of our membership business. Mr. Gong will give a brief overview of the Company's business operations and highlights, followed by Xiaodong, who will go through the financial and guidance. After their prepared remarks, will join Mr. Gong and Xiandong in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but not limited to those outlined in our public filings with the SEC. ICE, does not undertake any obligation to update any forward-looking statement, except as required under applicable law. With that, I will now turn the call over to Mr. Gong. Please go ahead.

[Tim Gong Yu:]

Hello, everyone. Thank you for joining us today. In the first quarter, we're faced a lot of volatility as we our particular challenge through operating environment. We've referenced uncertainty in terms of confidence gathering, which resulted in software --software, than if padded at the top-line performance. Despite of the short-term order to this day, we are delighted to see encouraging signs approaching multiple corporate operating metrics. Our leading market position remains intact as we continue to grab number one in where our views are metered. I'll turning to server timed data. We formally believe there are a couple of eternal truth when it comes to entertainment. The first is that audiences consistently demand high-quality entertainment and contents such as movies and dramas. And 2. Is that creators have infinite potential to develop excellent material. With this market dynamics in mind, we think we have a tremendous space for growth and development. During the quarter, we continue to enhance the production comparability of our low content, explore new gyros to diversify into and expand our user base by refining our products and the overall user experience. We have been driving the industrial life leisure of video production to improve the efficiency of our operations. We believe all of these developments will enable us to navigate soon the short-term challenge. And we're on the right path to achieve long-term success. Now, let's go through the performance of our business segments in the fourth quarter. Let's start with the membership. During the quarter our membership services revenue grow both annually and sequentially. Our core strategy is to cater to the demands of first-of-its user segments with diversifying content and continuously improve membership. Improvement or benefit that enhance the member experience and driving new member sign up and the yields are retention. At the same time, we are focused on raising and improving the long-term monetization of our membership units by developing innovative, new business models, adjusting our price point, eliminating ineffective discounts and pushing soon other operation in major tips. However, as I mentioned earlier, the uncertainty of our of black tulle tour Asian in terms of subsequently numbers, a few ultra without continually enhance our elaborate of content across different general strength or ability to withstand risks related to Company with . In the so-called memberships services, revenue grew by 8% year-over-year, mainly due to the success of hit dramas such as One And Only, , and Flyover and , which we launched in the third quarter. All right. I'll ask the continual the interest in dramas lunched after the end of the second quarter. And such as, As of September survey, the total number of the subscribers worth 103.6 million. The sequential black was mainly due to delays in the release of some a highly anticipated content. The email. The major content that they didn't relate to the email protocol was less, diversified in terms of generous. His plans are soft performance. We are happy to see that. Subscriber growth on TV devices on the front offices are maintained over them momentum. We believe that higher conversion of users on TV devices and the continued expansion of our overseas user base will be a significant drivers of our future subscriber growth. On the other hand, we have recorded both annual and sequential growth. As the annual growth rate of 10% was mainly due to the senseless success for price adjustment that walled throughout last November. We passed the ark of our membership business, we'll continue to improve going towards driven by our content on multiple operating initiatives. The member experience is one of the most important subjects that we focus on. On October 4th, we actively console paid one's view model, to get ahead of our peers. This show further help improve the member experience. And that's grow, grow and the retention. And then lay a solid foundation for the long-term monetization of our platform. We continue to enhance member benefits on our platform where our core operation with top industry partners. In terms of new services and the new business model, one of our key focuses is to promote the development of cloud cinema. Primarily across three content categories. Say our films distributed modal premium fields only distributed Well, online platform, Since 2020 there's an article release of future films have been hit significantly by COVID -19 pandemic. They call the cloud cinema model, will reduced reliance of online video platform on sale. They are actual films also enables users to watch new films. And so after their offline release at a price that is cheaper than our traditional movie ticket, which further maximize the monetization potential of each film. During our talk we had released our and the malignant under our cinema model. This films for in different genres, namely comedy, action, which counts to satisfy the demands of different yields on The issue our first original film North Eastern brother, Sunbae and , was launched in October and received positive user feedback since its launch. In terms of overseas expansion, we were able to significantly expand all new surveys with IOS, increasing sequential number of Southeast Asia countries. Some laws of the ITS app remained on top of the chat across various regions in rank number 1, in Thailand, Malaysia, and Vietnam. and other domestic blockbusters continue the growth of our overseas revenue. We've also recently kicked off the development of safe overseas, there are no dramas including Gore, the Ring and the 2 Philippines originals. We continue to expand our cooperation with local partners, including multiple media platforms and operators in Malaysia, Thailand, and Singapore. We also launched or system inside annual coverage and framework agreements with numerous. Other one has their successfully expanded local sponsorship for our three arm sales. Moving onto the advertising during the quarter our advertising revenue came in soft, mainly due to our job in brand ad revenues. The decline was mainly due to the delay of key content, including dramas and variety of shows. We continue our work on developing a low retail new variety shows, which we are doing to diversify our content on the de -risks our business from content scrolling uncertainty. We are still refining and fine tuning some of these productions and it's going to take some time to win over and what and simulate their budgets with this new genres. The softness of our brand advertising business was also due to the overall challenging micro-economic environment in China. Revenue from performance has increased the standard at both year-over-year and sequential during the quarter. Our iQIYI would like to ask what's our main driver behind this. As opposed to our main apps iQIYI has mainly focused -- focuses on low shares they have. There is a low overlap with our main app, which mainly focused on brand ads. iQIYI is excited to be our great complement and the drivers for new growth of our advertising business. The year-over-year growth of Performance ads also benefits strong, while an improvement in our monetization comparability, driven by our technology and a true contribution from key sectors, including internet service and e-commerce. Those sequential of growth was also partially driven by the growth in our hand inventory at during the summer vacation. Looking forward to the fourth quarter, we have observed some slowdown Internet overall macro economy, which might negatively impact on our advertising business. Nonetheless, we're proactively adapting ourselves to the environment to minimize substantial exposure. Moving over to content, we are increased uncertainty in terms of content and scheduling, and a pretty long content approval processes since our last earnings call. Although we prepared a rich slide of content and during the quarter, some of the top dramas and a variety of shows in our top line -- in our pipeline experienced launch delays. Going forward to offset this we are looking to further expand and enrich the we're thinking of our content in a portfolio, explore new and different categories and to deepen user awareness of our diversifying content offerings, owing our effort to the risk of business front continents gathering in the future. Here at the Asia, we activate responded to the lines issued the Biden various government to authority and to promote that health, entertainment and online media industries. We’ve delivered these actions. We are? Further with solve lung leading province? in the industry, which should help us to further optimize content costs, eliminate the cost in content production and promotion, and reduce the additional industry combination. Overall, these changes their short of year beneficial for supporting a healthy development of the industry over the long-term. I will -- I will also like to highlight our confidence strategy, even efficiency income in the production and operation has always been a primary and targets that we'll drive for and we are now putting out even more focus on it. We're proactively taking initiatives to improve the efficiency of our operations and reduced in effective investments in content by cutting projects that are expected to January, low ROI. The online video industry has rapidly developed over the past decade. Second, I don't know we've gotten to a point content is key and the efficiency is key. We're happy to see the continued results of our progress optimize content costs driven by enhanced production comparability. Disclaimed content expanding under improve operations are important metric they use to track efficiency of our continent spending. Content related cost ratio. Simply speaking, this metric is calculated by dividing the total costs related to our title. Pilot revenue, January get paid. Based on this measurement, we can see the operating efficiency of our overall content in 2021 have improved substantially from last year. They continue -- we will continue to use this metric as an effective tool in managing the efficiency of our investments in content and operations for example, One and only and For error and error which created synergy as the in terms of IP and their height innovative in terms of both content creation and the forecasting models. Also, these two titles, are examples that demonstrated on increased efficiency in content operation as manner by the continent related cost per ratio.. The performance of one and only was 13% points improved than last year's drama much from me, Tom pantry shop, which creature that leading actually under-building in. Jira's. We will also like to shelf some highlights on the performance of our vertical content and sales model strategy. We have always been the industry pioneer in terms of continent innovation and operation. On sales for model, that strategy is definitely a one of our successful attempts. This model helps us to build a recording share among audiences and advertisers in different channels, in which beneficial for attracting new user and driving up user retention and offers better ROI as it bring the synergy among different titles. We're seeing the same content in general. And it provides more flexibility in working with other . For example, we observed that the and the broadcast of the boosted the viewership of first season titles. user transplant for the iQIYIs increased by more than two times since the new season of The was launched. Looking forward to the fourth quarter, although we predict that uncertainty we'll remain in the market, we will continue to execute that well diversified continent strategy. The issuance to the new season of Mr. Sales are actually in the first key titles include our drop 1. Vocera,2. funky, 3. Luoyang, 4.the therapy show, 5. Supras cash show. guys have and action type habit and unlimited content such as and Cat Show premiers October. The show what hiring the show was highly acclaimed, by all solid market leadership, in shows. Moving onto technology, other ones technology as the foundation of our business and we are continually developing new technology to improve the user experience, increase user penetration, and develop -- and more we take new content in the format and enhance content production and the efficiency of our operations. Unless things had -- how many call in is key to the industrialization of video production in the industry. And it's will be greatly beneficial for improving the probability of including ROI in simplifying the protection management process, reducing production costs and enhancing the viewing experience. We continue to make progress in terms of user penetration. The users scale of iQYI grew rapidly. Peak DAUs increased by nearly 2 times the sequential and the user retention and monetization has also improved in terms of user profile as I mentioned earlier. is mainly focused on low for the growth we have seen with this app speaks to our success in penetrating into these regions. In terms of content production and efficiency improvements may continue to apply AI technology to effectively reduce production costs during the quarter, so operating costs can be effectively reduced with our proprietary intelligent, the translation tools. We have fully replaced the manual translation with automated AI translation for the verbal dramas in Malaysia, doing for work. Once we've fully adopted this technology for our overseas business, it will save us hundreds of millions of RMB in translation costs in the future. In terms of industrialization of video, we have launched an applied multiple technology and the products, the 12 content production, which reduced the production costs, increased efficiency on the improve the user experience. Take off prior to the multi video capture as an example, versus some significant shorting time, of manual work either for the full production process from camera department. We do shop -- we do shopping to boost up production, make content production more efficient. Other intelligent tools include script management products, which can be used in that mid-stage production process. The products have been Sixth weren't a shows including some of the Axon Network swing production. Also a management tool for the post-op production editing process has been used to buying number of posts production companies and will focus on improving transcoding efficiency by 3.7 times. In summary, we are particularly adjusting ourselves to the current environment. We continue to be a pioneer when it comes to content in Malaysia and Indonesia. Meanwhile we are seeing a promising growth trajectory for our new initiatives, such as ideal lights on the overseas business. Our original content is fast relaid, all sales are vote model content as highlighted Axon Network, buying yields enough. Advertisers, we are continuing to take the lead in rolling out our technologies and tools for intelligent production and driving the industrialization for the long-form protection programs, which showed how to further optimize our operating efficiency. We have involve along with generously in the online video market over the past decade. The experiences we have accumulated and all expertise are example in line with how the industry is hiding. We value the current metallic as our learning opportunity. We're coming here to believe that what does not kill us make us stronger. With that, I will turn it over to Xiaodong to talk about our financials.

[Xiaodong Wang:]

Good morning and good evening everyone. Let me review our key financial highlights for the third quarter. Our total revenue reached R&B 7.6 billion. Membership service business continued to be our largest business pillar with revenue increase 8% year-over-year and accounted for 57% of our total revenue. Online advertising revenue decreased 10% year-over-year primarily due to less premium content launched during the quarter and the challenging macroeconomic environment in China. Our content distribution revenue achieved a 68% growth year over year basis. We distribute more content potholes to other platform during the quarter, our cost of revenues increased 10% from the same period last year, among which content costs increased 13% from the same period in 2020. The increase in content costs were mainly due to the more investment were going to content during the quarter. Our operating loss margin on GAAP basis was 18% remain larger flat compared to the same period of last year driven by our disciplined investment strategy. As of September 30th, 2021, the Company had a cash equivalents, restricted cash, and short-term investments of RMB $11 billion for detailed financial data, please refer to our press release on our website. For the first quarter of 2021 iQIYI expected total net revenue to be between RMB at $7.8 or some point -- or $8 billion and our RMB is $7.53 billion. We're expecting a 5% decrease to work with some increase year-over-year. This forecast reflects iQIYI as a current preliminary view, which may be subjected to charges. I will now open the floor for Q&A. Thank you.

[Fan Liu:]

Operator, please open the floor to questions.

[Operator:]

Certainly. . For the benefit of all participants in today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. Your first question comes from the line of Ella Ji from China Renassaince, please go ahead.

[Ella Ji:]

Thank you. First question is relating to the recent improvement plans. You had a local province government. Just to wonder, how is that going to affect our future business? A second question is relating to the future membership growth potential. I guess the wonder regarding the future membership is it going to be mainly from lower tier cities or still from the major tier cities? From the reactivate of the older members. Second question is, I just want to know what is the -- could management share the -- anything new or exciting or promising relating to the variety shows going forward? Thank you.

[Tim Gong Yu:]

[Fan Liu:]

I'll translate Mr. Gong 's feedback. So for the first one in terms to your question regarding the consumer console. This is -- applies to the full industry players. So our feedback comes from the two aspects. 1. Is the product design and so we have been -- the first one comes from the product design and the second one comes from the flow of the product. So the first one for product design, we've been also communicating with the consumer console, also collecting feedback's from our customer service department. So our goal is to increase the user experience. I'm trying to lower the accidental clicks of any unnecessary steps. So, overall the user experience will be increased and improved. And from the business model perspective, we've been also communicating with consumer council in terms of also the user agreement to make sure all the messages are communicated clearly with the users. So that's the first question regarding the consumer council related questions. And the second one is our penetration into the different tiers of cities. For now, for our penetration in different regions, for the high tier city of the first and second tier cities, the penetration is high. And for the lower tier cities, the penetration is relatively low for this point. And our iQIYI app lite is the main app that targets this user demographic. For iQIYI Lite, right now we offers a lot of the free content, so the users consumes the free content and then they actually will see the advertisements for that. So right now on the advertising side for iQIYI Lite performance app has a high percentage of revenue contribution. So I think going forward, iQIYI Lite needs 1 or 2 years for improvement and for growth, and we will keep working on this application. And for our main iQIYIs app, that's still going be our main target for elevating our operations, optimize user experience, optimize products, and optimize the product features.

[Tim Gong Yu:]

[Fan Liu:]

So the third question I'll switch over to Xiaohui, our CCO to answer the question.

[Xiaohui Wang:]

[Fan Liu:]

Okay. Xiaohui, responded to the talent show question. So because of the culture, that's been existing in this entertainment sector for a long time so that it does have some impact on the variety show segment. So for now, the Koreans based or Korean style talent show that's prohibited in the video space. But however, there is still a lot of ample room for growth in terms of variety shows. Example, from -- we can focus on the areas that's come -- for genres that's like comedy, emotional, and also some talent show, but that's not relatively to the Korean style. And we also launched our new comedy variety show called , the Super-scale show, which is the new content genre that we innovated originally. So based on its first feedback since its launch, we have seen promising user feedback and viewership from the shelves. Our variety show performance is back to number 1 position in the market. Going forward especially in the fourth quarter, we'll still launch innovative variety show content genre for example, like we mentioned in the opening remarks , action. That's also an innovative variety show that will be introduced to the users. Thank you.

[Ella Ji:]

Thank you very much.

[Operator:]

Thank you. Once again, due to time constraint, please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. Please, limit your questions to one at a time. Your next question comes from the line of Alicia Yap from Citigroup. Please, go ahead.

[Operator:]

ahead.

[Alicia Yap:]

Hi. Thank you. . So my question is related to the overall longer-term outlook for the long-form video industry. Will there be any change of the strategies for your self-developed content over all the content general and even for example, the type of -- the length of this drama series, the type of the drama that you plan to produce? In addition, can long-form video monetization model rig out beyond the current membership subscriptions and advertising? If so, what could be the new model? Thank you.

[Tim Gong Yu:]

[Fan Liu:]

Okay. So for right now, I think the biggest problem in the -- for the online video space is the supply shortage contributed from various reasons. The first one is, of course, the biggest one that the COVID-19. So for example, the number of movies launched since COVID-19 is only less than half 30% of 2019 level. And for our traditional satellite TV series, the quantity is only 1/3 of the past. And for the new form of Internet series, the web series we experienced major delayed because of the stronger censorship. And even though the content was launched but the quality got taken a discount or there's some less promising feedback from the quality, so we're actually pleased speaking. These are the reasons that contributed to the supply shortage for the video content. Also, if you're taking the short-form video reason, that also contributed to this because it's also taking the user time spend, and that this is 1 of the biggest, I guess, factor that contributes to user behaviors. And for your questions about monetization models, I think we have been working on taking the full process of the entire IP Chang. So for example, if we have a good IP, whether it's from the script level, whether it's from the story level, we wanted to take this through the whole entire process of the IP lifecycle. We can develop being this into a TV series, movies, games, also franchise products, etc. So I think that going forward, if you're looking at the long-term perspective of this industry, a healthy model will be the advertising revenue plus the subscription revenue plus the pivot model Altogether, it's better than the -- our investment level. So that will be our angle. And we think it's a sustainable model going forward in the long-term prospect of the online video industry. Yes.

[Tim Gong Yu:]

[Fan Liu:]

Okay. I think if you look at the overall grand picture of the online or actually the entertainment space movie started 126 years ago, or about 100 years ago. And we believe the consumer demand -- the user demand, and for high quality premium content is internal and also the creative talent for this area is continuous. So all of these it just needs time to grow the space. So I think for our online video space, we strongly believe there's ample room for growth in the future, it's just now that we are practically adapting ourselves to the new environment to embrace all the changes in the environment. But we think we are the very experienced team with expertise in this industry, that will enable us to face the challenges and be a successful player in the industry.

[Tim Gong Yu:]

.

[Fan Liu:]

Thank you.

[Alicia Yap:]

.

[Operator:]

Thank you. The next question comes from the line of Thomas Chang from Jefferies. Please go ahead.

[Thomas Chong:]

. Thanks, management, for taking my questions. I have a question regarding overseas competition. We have just talk about using technology and achieve efficiencies for the translation process. I just want to get some understanding how we think about the competitive landscape in different market, and will we step up the investment in overseas going forward? Thank you.

[Tim Gong Yu:]

[Fan Liu:]

So, our Senior Vice President and Treasurer for the membership service will answer this question. So for our goal for overseas business, our primary goal is to export our original content to various regions around the world. So as the first situation we have currently is, of course, is the translation situation. So and also different regions have different cultured different backgrounds. So our goal initially, was to find countries with similar customer background. So for example, the countries in the Southeast Asia region, and also for North America, because there are a lot of the Chinese folks in that area so we also introduced some of the content in that region as well.

[Xianghua Yang:]

[Fan Liu:]

Okay. So of course, going forward, we'll continue to bring more premium content to the overseas business. And based on our internal data, we know that a lot of our series are very welcomed by the young folks -- young audiences in the overseas area -- region.

[Operator:]

Thank you. That due to time constraint, that was the last question. And I would like to hand the call back to management for any closing remarks.

[Tim Gong Yu:]

[Fan Liu:]

I will summarize our short-term goal and also the long-term goal for our Company. As you guys know that in our opening remarks, we mentioned we are facing a lot of challenges in the short-term related to the government with regulatory environment. However, we've been proactively adapting ourselves to this new environmental situation. So we expect for the next 1 or 2 quarters, we think the regulatory environment will become the new norm and to be stable. And our main goal going forward first, is to reduce or reduce our loss and we will further optimize our content costs based on our industrialized initiatives for video industrialization. And also we will to execute strongly according to our strategy and we will eliminate or drop the content that doesn't fall in line with the policy and so at the same time we were also to explore new monetization opportunities. So that's our overall strategy for the short-term and also mid to long-term. Thank you. So thank you everyone for joining us. Feel free to reach out to us if you have any questions and we'll talk to you next quarter. Thank you.

[Tim Gong Yu:]

Thank you. Bye bye.

[Operator:]

Thank you. That concludes the conference today. Thank you for participating. You may all disconnect now. Thank you all.