iQIYI, Inc.
Q4 2021 Earnings Call Transcript

Published: 1 Mar 2022

[Operator:]

Good day. And thank you for standing by. Welcome to iQIYI Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Chang Yu , IR Director of the company, to read the opening remarks and the safe harbor statement. Please go ahead.

[Unidentified Company Representative:]

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's fourth quarter and fiscal year 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 are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO; Mr. Xiaohui Wang, our CCO, Chief Content Officer; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; Ms. Vivien Wang, our CMO, Chief Marketing Officer; Mr. Xianghua Yang, Senior Vice President of our Membership business; and Mr. Senior Vice President of Movies and Overseas Business. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, Xiaohui Wenfeng, Vivian, will join Mr. Gong and Jun and in the Q&A Session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provision 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. iQIYI does not undertake any obligations to update any forward-looking statements, except as required under applicable law. With that, I will now turn the call over to Mr. Gong. Please go ahead.

[Yu Gong:]

Hello, everyone. Thank you for joining us today. 2021 was a unique year for iQIYI. One year ago, we showed investors in our shareholder – shareholder letter than iQIYI deliver is producing and distributing premium entertainment content. to name a few, and we continue to run number one in various user metrics according to third-party data. Today, we will all elect two shareholders to recognize that iQIYI is leading the opening of a new chapter in Chinese long-form video industry, which involves a number of channels. The market competition shift from quantity to quality, the operational priority shifts from market share to business efficiency. Everyone, we think the industry is now taking a more balanced approach that result in higher business efficiency. Profitability and positive social impacts. These changes are positive. These changes are the consensus of industry leaders, including IT, and they will help the entertainment industry to achieve sustainable growth in the long term. These structural changes also brought near-term benefits resulting in a healthy fourth quarter for iQIYI. For instance, we proactively dropped a project that generated low ROI and had limited value creation. Meanwhile, we are more disciplined in investing in the noncore business and initiatives with low long payback periods. Our organization become a slimmer and nimbler. We are more focused on our core business that are resulting in significant improvement on cost structure and operating efficiency. The initial results have been very encouraging in the fourth quarter of 2021. The non-GAAP operating loss, a key measure for our business performance, decreased significantly by 45% annually and 52% sequentially, exceeding our expectations. The benefits from these changes will extend beyond Q4. We expect the non-GAAP operating loss to be further narrowed significantly in the first quarter of 2022. Our goal is to reach operating breakeven for the full year of 2022 on the non-GAAP basis, and we hope to reach quarterly non-GAAP operating breakeven as soon as possible. We believe that we are in the right direction in reaching our goal. We will continue to increase our operating efficiency and improve quality of our diversified content portfolio to content innovation, production refinement, industrialization of video production and diversified monetization methods. We firmly believe premium long-form video count is one of the core needs of human beings. Soon that is future of our short-term strategy and under which we have accumulated in the industry. In the industry, we will continue to produce and deliver more high-quality and diversified premium content to expand our member and user base over the long term. Now let's go through the performance of business segments in the fourth quarter and the full year of 2021. Let's start with membership. Our core business strategy remains focused on the three aspects that drive membership service growth

[Jun Wang:]

Thanks, Tim. Now let me walk you through our key financials for the fourth quarter. In this quarter, we introduced the concept of non-GAAP operating loss for their first time. We believe it will help our shareholders to better understand and track our business performances. So, starting with revenues, in fourth quarter our total revenues reached RMB7.4 billion, a solid performance considering macro headwind. Our Membership Services revenue increased by 7% year-over-year mainly driven by the growth of ARM, or Average Revenue per Membership. Our fourth quarter ARM increased by 14% annually and 4% sequentially. We expect the momentum to continue going forward. Next, moving to the cost and expenses. With ARM initiatives previously explained, the fourth quarter cost of revenue decreased by RMB277 million compared with the same time last year, the major contributor to the narrow of our operating losses. On the other hand, our operating expenses also decreased by RMB125 million, down by 6% year-over-year, along with one-time severance costs. As a result, our fourth quarter non-GAAP operating loss decreased significantly, down 45% annually from RMB941 million to RMB516 million, representing a saving of RMB425 million. Compared with the previous quarter, the non-GAAP operating loss is also narrowed by RMB557 million or 52% down sequentially. Heading into the first quarter of 2022, we expect to see further significant improvements in both GAAP and non-GAAP operating losses compared with the fourth quarter 2021. Again, this benefits from our initiatives in cost optimization and efficiency improvement. Our goal is to reach non-GAAP operating breakeven for the full year of 2022 and to reach quarterly non-GAAP operating breakeven as early as possible. As of December 31, 2021, the company had a cash, cash equivalents, restricted cash and short-term investments of RMB4.4 billion. For detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q&A.

[Operator:]

Thank you. The first question comes from the line of Alicia Yap from Citi. Please go ahead.

[Alicia Yap:]

Hello. Thank you. So thank you for taking my question. My question is related to the cost and the profitability. It seems like you have successfully narrowed down your loss ratio over the past few quarters. Can management elaborate how the company has managed to effectively lower the operating losses? I mean you mentioned about the full year breakeven time frame. So, is that indicating it's possible that you can even achieve profitability as soon as even second quarter or even the third quarter? Thank you.

[Yu Gong:]

In the fourth quarter, we proactively adjusted our operating strategy, which focuses on optimizing cost and improving operating efficiency to reduce our operating loss overall. The results have been very encouraging, and we also optimize our organization alignment, which will help to reduce our employee cost and also create a fatter operation and more elite team to help us to focus on the core business of IT and also to improve the overall operating efficiencies. On the content side, we are more focusing on the head premium high-quality content and for that aspect, we won't decrease the number of head content, but we will use content-related cost ratio to help us to identify the low-performing of content and proactively drop those content investments. Overall, our process for investment, procurement and operations will be refined to overall increase the operating efficiency. Also, we also built a promotional mechanism that focuses on increasing the revenue performance of the library content. It increases the content portfolio utilization also creating more inventory for the advertising side and also prolong the life spend of our content as well as increasing the subscriber revenue. And more importantly, for the industrial – video industrialization that we've been talking about, whether it's from the mid – short-term and midterm and long-term perspective, it's of course focus for our area. We'll continue to push for industrialization as it creates efficiency for content production and operations. So, the whole premise is to remain stable revenue performance and also remain stable market share as well as traffic, and we will lower the employee cost also trying to reduce the content costs and also the marketing expenses. Okay. So, for Q4, as you – all the investors will see, we have reduced our content costs as well as operating expenses and narrowing our OpEx approximately RMB500 million. And these positive impacts will continue to release in the next couple of quarters. As you mentioned about the breakeven timetable, first, I would like to mention that we will deliver our goal for the year. Our goal for the year is being where we'll try to reach non-GAAP operating breakeven for the full year of 2022 and to reach quarterly breakeven on a non-GAAP operating level as soon as possible. Yes. Operator?

[Operator:]

Thank you for the questions. The next question will come from the line of Thomas Chong of Jefferies. Please go ahead.

[Thomas Chong:]

Thanks, management, for taking my questions. My question is about the competitive landscape for the long-form video market. Is management seeing any changes that we need to anticipate in 2022? And number two is more about the content production and procurement side. Are we getting more and more rational going forward? And finally, in – on the policy or the regulatory environment side, are we seeing the sector is getting more stable? And what we should expect are any policies that may come out in the future? Thank you.

[Xiaohui Wang:]

Okay. So, for the overall competitive landscape for online video industry, we think, is entering a new chapter. Within this chapter, we focus more on the efficiency aspect, and hoping to reduce our operating loss and increase the profitability. So, this is kind of different compared to the competitive landscape from before. And before, driven by various reasons, the major players are more focused on the quantity of the content versus the quality and et cetera. So – and we think that the operating focus now is back to the operating efficiency is much more healthy as compared to the market share-driven aspect. For the content side, I think for content production, whether it's for the original production, is very different from the licensing content. Overall, the competitiveness within the industry should be relatively softer. Why because it – for the process for this is much longer as compared to the procurement for the license content. So, there are various key status or – key points that we can hit among the lines of this whole process. It gives us more in way in increasing the overall quality of our regional production. And third, regarding for the policies, right now, we think it's relatively stable. And as we have better comprehension of the whole online video regulation and industry and regulatory environment, we know the boundary of content production as well as content scheduling. So, the forecast capability increase overall. And that will help in terms of our subscriber growth as well as on the revenue advertising side. And in past two or three years our strategy focus has been in expanding our original production, scale and also improving the production capability. So, in 2022, everyone will see our original production capability and as far as the supply will increase significantly compared to before. And I think we now have an industry-leading team and also a good number of highly competitive original production in our pipeline. Thank you.

[Operator:]

Thank you for your questions. Next question comes from Eddie Leung of Bank of America Merrill Lynch. Please go ahead.

[Eddie Leung:]

So, my question is about the membership growth. We have seen a bit of a slowdown last year probably related to regulation and content issues. Just wondering any outlook for the membership growth into this year and future? Thank you.

[Yu Gong:]

Okay. For our overall member subscriber, we have seen some relatively pressure in growing the overall membership numbers because there's different aspects. One is there's the COVID impact as far as second, the regulatory environment uncertainties and third is our overall video production capabilities. So, all these are the negative impacts that will contribute somewhat to our overall membership growth. And secondly, I think for the overall online video – long-form online video, the user time spend have been decreasing that relatively two factors for the market, but we want to read that the importance of online video industry, the long-form video, we think, is a core need for human beings. And the importance is irreplaceable. I think for the overall Chinese online video market as well as the users, the market is being more mature, and this is a positive impact and positive factor for the overall industry. And third, for the large stream as we see, namely the iPad, the screens in the cars as well as the Smartphone, the number of screens have been increasing. There are different user behaviors for different streams. For example, for the cell phone, the most frequent use aspect is communication. But versus the large screens, I think the most used feature is for video viewing experience. So overall, this is a very positive impact or factors that would drive a future potential revenue growth as well as the subscriber growth as well as the ARM that we mentioned before. And overall, lastly, for the IP protection, we are seeing better improvement on this front, especially for the long-form video, IP production. So, all these will be beneficial factors to contribute to the overall growth of our revenue in the future. Thank you.

[Operator:]

Thank you for the questions. Due to the time constraints, I would now like to hand the call back to the management for closing.

[Unidentified Company Representative:]

Thank you for joining us today. Feel free to reach out to us, if you have further questions. Thank you.

[Operator:]

That does conclude today's conference call. Thank you for your participation. You may now disconnect the lines.