iQIYI, Inc.
Q4 2023 Earnings Call Transcript

Published: 28 Feb 2024

[Operator:]

Good day and welcome to the iQIYI Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Ms. Chang Yu, IR Director. Ms. Yu, the floor is yours, ma'am.

[Chang Yu:]

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. The company's results were released earlier today and 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; Mr. Youqiao Duan, Senior Vice President of our Membership business; and Mr. Xianghua Yang, 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, the management team will participate in the Q&A section. 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 are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements, except as required under applicable law. I will now pass the floor to Mr. Gong. Please go ahead.

[Tim Gong:]

Hello, everyone. Thank you for joining us today. After an iconic turnaround in 2022, we continued our success in 2023, delivering the best-performing year in the Company's history by focusing on high-quality growth. Both total revenue and non-GAAP operating profit in 2023 increased double-digit year-over-year and reached historical-high despite macro headwind. More importantly, our growth in profits substantially surpassed that of revenues. This demonstrated the resilience of our businesses and our operational excellence. Let’s take a closer look at the key metrics in 2023

[Jun Wang:]

Thanks Mr. Gong and hello everyone. We maintained our strong momentum in 2023. The impressive financial results once again demonstrated the resilience and scalability of our business model. With increased profits and enhanced liquidity, we have an even greater capacity to sustain long-term value creation for our stakeholders. Now, let me walk you through the key numbers

[Operator:]

[Operator Instructions]. And the first question will come from Xueqing Zhang of CICC.

[Xueqing Zhang:]

Given that other players have strong pipelines this year, what's your strategy on KPI for 2024 and the indicator is more constant? In the long term, is there anything can become a new driver?

[Tim Gong:]

Our CEO Gong Yu is answering this question. So our target for 2024 is to maintain high-quality growth. With that is that revenue and profits will both grow and the profit will outpace the growth of revenue. And this target was set by 2023 Q4, and that hasn't changed. It comes in different aspects of [indiscernible]. The first is related to content. First is we're recruiting the top-notch talent and producing a very high-quality content. That's the first one. And then the second one is by using very effective evaluation and decision-making process and also the management process to systematically increase the hit rate of our entire content offerings. And third is to utilize our content management program to really to improve the efficiency of our contract production and operations. In addition to what I just mentioned, we're also focusing on new business areas. Hopefully, that will become our second growth curve in the future include but not limited to first overseas business and also IP derivatives including both online and offline segment and also to utilize generate generative AI to really improve our operating efficiency and content capability. And then in terms of financial aspect, we'll invite our CFO Wang Jun to add on.

[Jun Wang:]

Sure. I will answer the question in English and thanks, Xueqing Zhang, for the question. I think that when we are looking at our financial numbers for 2024, we always focus on 2 key words, which are growing and health. Then the pursuit of the high-quality growth has been repetitively mentioned during our comments and is itself evidenced. Due to the time constraint, we will not get into details on this call, but we'll be happy to share color in future occasion. But in this call, we'd also like to highlight that in 2024, what you will observe the further improvement of the financial healthy net because we have a very solid growth in our opening cash flow, which deleveraged our balance sheet and actually offers 2 critical benefits. And first, in my view, I think it gives us a clear road map to decrease the average cost of the capital. The steady stable cash inflows actually gives us the ability not only to pay down existing debt, but also to tap into the low-cost capital pool such as long-term loans or investment-grade credit products which would otherwise not be available and such low-cost capital could be used gradually to replace the previous high-cost debt and mathematically is translating to a possible decrease of the total discount rate for the long-term model. So if our shareholders can agree with such argument, and I think starting from 2024 and going forward, you should probably increasingly take reference to our net income instead of opening profit to check the progress because our net income won't be able to capture and reflect this from the value creation from the derisking and deleveraging. And on top of that, as we previously discussed, it also offers us more tools, I think, to enhance the shareholders' returns. And this is the second critical benefit. I will not explain in this call and will be [indiscernible]. So as a result in summary, I think our goal -- our financial goal for 2024 is to deliver a healthier balance sheet and a stronger P&L to our investors.

[Operator:]

The next question we have comes from Lincoln Kong of Goldman Sachs.

[Lincoln Kong:]

Congrats on the solid 2023 result. So my question is about AIGC. How would the management view the latest generative AI technology, especially [indiscernible], how would the implication you will have to movie or drama industry as well as to themselves? And what's the company's spend in terms of the investment and strategy in this front?

[Tim Gong:]

We are very bullish on the opportunities that the development of generated AI technology and bring to the long-form video industry and believe that actively applying the technology can significantly intense creative efficiency and elevate the levels of creation and decision-making. It can also play a very important role in the planning, development plus production and promotion of content. In addition, the rapid advancement of generative AI technology enables artists to use this technology to create higher quality works with greater efficiency. This is particularly true for the creation and production of animated content powered by generative AI, which has the potential to break through the long-standing capacity barriers and drive changes in the industry landscape based on creative levels.

[Wenfeng Liu:]

We have been keeping a close eye on the latest development in the generative AI industry and actively establishing cooperation with market-leading companies in China and abroad. We are implementing the latest generative AI technologies in the content production process, especially by combining iQIYI's extensive long-form video from data with large language models for training and fine tuning. Our aim is to develop generative AI-powered vertical applications tailored for long-form video scenarios. And going forward in the future, we will step up our investment in R&D and application of generative AI technology. We plan to use this technology to develop and comprehensively upgrade our in-house intelligent production system thereby empowering the creation of iQIYI's professional video content. Thank you.

[Operator:]

Next, we have Lei Zhang of Bank of America Securities.

[Lei Zhang:]

We noticed that major players are more focusing on the top content last year and can you share with us your view on content and communication? And how should we stay competitive in terms of content in 2024?

[Xiaohui Wang:]

The competitive market dynamic is an ever present reality, while -- where the competition we think lies in the substantial sustainability of high-quality content [indiscernible] as well as achieving a balanced and a win-win situation in terms of content quality and also commercial returns. And in addition, capital is not the only sole barrier to competition. iQIYI's ability to maintain a market-leading position in the industry is actually underpinned by the accumulation of talent, control of industry resources and effective content review and management mechanism and support from our business intelligence system, and we believe all of which are indispensable. Our content creation [indiscernible] actually focus on 3 areas. First is to produce content with high public recognition and market returns. Second is to create innovative high-quality content. And third is to continuously focus on content efficiency and the number of key premium titles and social insights. In terms of the foreign drama category, there has been a clear improvement in the value of our content inventory actually as key premium content is critical to maintaining a high competitive edge in the market, we maintain a market-leading level of inventory reserve for premium titles. For 2024 lineup of our iQIYI originals and exclusive license from us, the premium key titles are expected to account for over 50%. And thank you.

[Operator:]

This will conclude today's question-and-answer session. I would now like to turn the conference call back over to management for any closing remarks.

[Chang Yu:]

Thank you, everyone, for supporting us and joining the call today. And if you have further questions, feel free to contact our team. Thank you.

[Tim Gong:]

Thank you. Bye.

[Operator:]

And we thank you for your time also today. The conference call has now concluded. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines. Take care.