iQIYI, Inc.
Q2 2019 Earnings Call Transcript

Published: 21 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing and welcome to the iQIYI Second Quarter 2019 Earnings Conference Call. I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Investor Relations Director of iQIYI, Dahlia Wei. Thank you. Please go ahead.

[Dahlia Wei:]

Thank you, operator. Hello, everyone, and thank you all for joining iQIYI's Second Quarter 2019 Earnings Conference Call. The company's results were released earlier today and are available on the company's investor relations website at ir.iqiyi.com.

[Tim Gong Yu:]

Hello, everyone, and thank you for joining us for our second quarter 2019 earnings call. I would like to begin by briefly going over some recent industry updates. So far this year, China's macroeconomic environment has been challenging amid international trade tension and other headwinds. Nevertheless, Chinese users are demonstrating more willingness to pay for high-quality content as they increasingly appreciate the value of premium entertainment experience. On June 22, our total subscribers surpassed 100 million, marking a historic milestone for the online (added by company after the call) industry. Also, we noted the issuing of the first batch of official 5G license in China, which we believe will bring enormous new opportunities for the online entertainment industry. As of June 30, 2019, our total subscribers reached 100.5 million, an increase of 50% year-over-year and a net addition of 3.7 million from previous quarter. The growth was driven by high-quality original content, targeted marketing as well as continuous enhancement of membership experience. To take a few examples. During the second quarter, we launched several original dramas such as The Thunder and the Bureau of Transformer. The Thunder was clearly a blockbuster title that attract a massive and broad audience, with the Bureau of Transformer, which incorporates mild science fiction and comic elements, attracted a younger demographic of viewers. Our wide variety of content caters to increasingly diversified user tastes, especially since our subscribers have reached a critical mass. In addition, we further deploy AI technologies to curate personalized content recommendation for our subscribers.

[Xiaodong Wang:]

Good morning, everyone. Let me go through our financial highlights. For the second quarter of the year 2019, iQIYI's total revenues were RMB 7.1 billion, up 15% year-over-year. Membership service revenue was RMB 3.4 billion, up 38% year-over-year. This was driven by the solid growth of number of subscribing members, which reached 100.5 million at the end of second quarter. This quarter's membership revenue growth was somewhat disproportionate to that of subscribers mainly because of the back-end loaded membership additions. Online advertising service revenue was RMB 2.2 billion, down 16% year-over-year mainly due to the challenging macroeconomic environment in China, delay of certain content launches, as well slower-than-expected recovery of our in-feed advertising. Content distribution revenue was RMB 517.9 million, down 4% year-over-year due to the impact of content delay this quarter. Other revenue was RMB 979.2 million, up 82% year-over-year. This increase was driven by the strong performance across various business lines, especially the robust growth of our game business after the acquisition of Skymoons. Moving to the costs of revenue. Our costs of revenue were RMB 7 billion, up 14% year-over-year. The increase was primarily driven by the higher content costs as well as other cost items. Content costs were RMB 5 billion, up 7% year-over-year.

[Operator:]

Your first question comes from Ella Ji from China Renaissance.

[Diying Ji:]

So my first question is could Dr. Gong please explain the impact of the regulatory environment change and how that's going to impact the relationships between upstream and downstream companies in the industry and your purchase -- trend of purchase decisions going forward. And my second question is just to confirm that, for yourself, is average ARPU stable? Or are you seeing any change to the average ARPU?

[Tim Gong Yu:]

[Dahlia Wei:]

Okay. Thank you for your question. Actually, the first question is a very good question. Our major upstream partners are content providers, including the licensors and also the customization producers, and outsourced producers for us. In the past year, the supply has been very stable. And actually because of the previous years -- because of the hot money inflow, the inventory and the -- supply is very sufficient. That helped to stabilize the pricing of content procurement. And in addition, as you all know, the later half of last year, because of the capped pay for actors, actually the license pricing is on a downward trend. And on the other hand, for our original content we have seen an increase in a lot of talent supply, including producers, screen copywriters, directors as well as actors and actress. I will give you an example here. For some major top-tier actor and actress, they're paid -- their salaries used to be somewhere between CNY 80 million to CNY 120 million, but now many of them have come down to a range to RMB 40 million to RMB 50 million, with -- which is in line with our we make with the other partners. So overall, the trend has been very stable and the market has become more mature, so we have gotten more negotiation power or, we'll say, bargaining power. And we will be more in control of our content costs. However, as you know, some of the content we purchased before over the last year will be aired gradually in Q3. And also because of some widely-known reason, some of the content will be delayed. So potentially some of the very expensive content will even be pushed back to Q4 or even Q1 next year. So that will have some impacts on our P&L. Thank you.

[Xiaodong Wang:]

Ella, I'll try to answer the second question. I think it's mixed results. And the main reason, as I just said in the earnings, is because of -- backend loaded members. I'll try to give some breakdown of the member addition by month. Actually, at end of April, I think, at that time, the total member is even lower than that of in January, so which gave you some rough idea how the pattern looks like during second quarter's. What I can tell you is actually the true ARPU of the members excludes certain onetime adjustments, and the fluctuation was less than 5%. So it's minor impact from like true ARPU fluctuation. It's mainly because of the mix and how it increased during the second quarter. Thank you.

[Operator:]

Your next question comes from Eddie Leung from Bank of America.

[Eddie Leung:]

So my question is more about monetization models. Beyond memberships and advertising, do management think about what other business models could be more significant in the medium to longer term given the fast growth of other revenue segment in recent quarters?

[Tim Gong Yu:]

[Dahlia Wei:]

One of our other revenues come from content distribution. We have made quite some progress there. We have distribute a lot of our original content to other channels and to other overseas market as well as to some OTT terminals. So we are very confident in this line, but we also need to bear in mind that there will be some potential limitation here because we need to -- balancing the accessibility of our content on other platforms to the growth of our own subscribers. And the second one is our online game business in which -- we acquired a game company. And this business has been growing very well, including both domestic and international markets. And we have been trying to make some IP bundled game productions which has bear a lot of fruit. And we -- apart from these two, we have other -- a variety of other revenues as well , for example, IP licensing. Although the scale of this business is very small, you can imagine the gross margin is actually quite good. And we also have some literature subscriptions revenues and other revenues. Accumulatively, these revenues become an increasing chunk of our revenues. Thank you.

[Operator:]

Your next question comes from Thomas Chong from Jefferies.

[Thomas Chong:]

I have 2 questions. First is about the paying subscribers' trend in Q3 and 2019; as well as, of course, about the long-term paying subs. And my second question is about content costs. Given that we see content cost as a percentage of revenue is lower than the Street expectations, how should we think about the content costs going into the second half and 2020?

[Xiaodong Wang:]

This is Xiaodong. I think we didn't provide a specific guidance for quarter on subscribers. What I can tell you is a general guidance of the total year's increase this year. I think it will be -- probably would be lower than we previous provided, the guidance we previous provided, but still it will be a robust growth of the total subscribing business. And we are quite confident we are still keeping the leading position of this business in China. Back to your question about the content costs

[Operator:]

Your next question comes from Wendy Chen from Goldman Sachs.

[Zhi Yi Chen:]

I have 2 questions. First, regarding our next quarter guidance, which is -- has go into a relatively low growth rate compared to the -- to previous quarters. So just wondering where do we see the major pressure coming from, whether that's from the subscription business or the advertising business. Second question is, amid this content delay cycle that we are seeing, whether we see the user time spend growth have changed trend recently.

[Tim Gong Yu:]

[Dahlia Wei:]

Let me answer your second question first. In terms of user time spent on our platform, actually we -- saw more than 10% year-over-year growth in first half of '19 versus 2018. This is actually higher than last year's user time growth versus the year before last year, so you can see the trend. It's pretty well, really good. And to your first question

[Tim Gong Yu:]

[Dahlia Wei:]

I will also add some comment on the recent regulation environment in terms of the contents delay. I think the -- in terms of the short-term or, say, the temporary new regulations, that will have an impact on us, for sure, but that will probably last until mid of October, after the national holidays. And in the long term, I think, although some of the -- I think most of the temporary constraints will fade away, but some of the regulations will persist in the mid to long term. But we think the long-term constraints -- or limitation, are very limited because, as you know, the -- our production cycle is very long, 12 to 18 months. So after we absorb and understand the regulation changes, we can be better prepared. Hence the mismatch of new regulations and our production cycle, but after a few quarters preparation, in the future, we will still have a lot of room, plenty of room to create very innovative new content which is in compliance with the developing regulations.

[Operator:]

Your next question comes from Alicia Yap from Citigroup.

[Alicia Yap:]

My questions is related to the ARPU for the third quarter. So given we see some of the pressure. And also I think there was some bundling joint venture program, so will that be affecting the ARPU for the third quarter on the membership subscription side? And then for content, do we have any interest into sports content licensing? And lastly, any change on the competitive landscape?

[Xiaodong Wang:]

Alicia, this is Xiaodong. I will answer your first question and then let Dr. Gong Yu comment on your second one. I think -- for the ARPU in the third quarter, I don't think there will be any major reason you will see, like, significant deterioration on ARPU that I just explained. All the promotion campaign, they will have only minor impact on the total ARPU or earning of every quarter. And I actually will expect the ARPU in the third quarter will be at least about the same or even better than that of last year. So basically I don't see those joint membership or also the promotion campaign will have like significant negative impacts on ARPU. And I will pass to Dr. Gong to comment on your second question, about the sports content.

[Tim Gong Yu:]

[Dahlia Wei:]

Okay. Thank you for your second question. I think sports content is obviously a very important racetrack for us as well, but it's a very expensive one. And also, this sports content, it's almost impossible for us to self-produce. We can never produce original tournaments or buy our own tournaments to produce sports content. So that's why. Those reasons are why we formed the joint venture last year to operate our sports content, and we even being a minority shareholder of that JV. And whether or not to license or-- what to license is totally in discretion of their own JVs management team. As far as we understand, some of the, sports content, the pricing is coming down compared to 2 years ago. Some of them come up. So I think we will respect to the JV's own management team to make the right decision in terms of which sports content to license.

[Tim Gong Yu:]

[Dahlia Wei:]

For your questions on competitive landscape. I do not think there's much change now compared to 6 months ago. I will suggest some third-party data for you, among others, of course. The first two is iResearch and QuestMobile, which provides the platform matrix, for example, DAU, MAU and total time spent. That give you a sense of the market share situation. And if you want more granularity about content， content genres or, individual, vertical channels, I think you can go to Enlightent, in Chinese, , to investigate more about the content ranking.

[Operator:]

Your next question comes from Tian Hou from T.H. Capital.

[Tianxiao Hou:]

So 2 questions. One is about the content control. Will the content control be a little bit less in (corrected by company after the call)? Or another way to ask the question

[Tim Gong Yu:]

[Dahlia Wei:]

Thank you for your questions. For your first question. Our -- the content volume in Q3 will definitely be higher than in Q2, but if you compare it to the Q3s in previous years, that will be definitely lower than in previous years. That's why our Q3 guidance is kind of soft compared to previous years. And for your second question

[Xiaodong Wang:]

And this is Xiaodong. I just want to clarify Dr. Gong's comments about content costs in the third quarter. And what Dr. Gong said is the volume of the content we are going to release in the third quarter will be lower than last year, not the cost. I think the -- if you're talking about the dollar amount, you see it might be probably slightly increased because of the high unit costs of these drama and other content, but definitely you will see a lower increase rate compared to the previous quarters. Thank you.

[Operator:]

We will be taking one final question, and your last question comes from Tina Long from Crédit Suisse.

[Yuanyuan Long:]

So my question mainly lies on SG&A costs. So from a lot of from other Internet companies, it seems like their selling and marketing costs are actually on a downtrend. So I want to know what's actually driving the rise in the selling -- SG&A this quarter.

[Xiaodong Wang:]

This is Xiaodong. I think the main driver of the SG&A increase is the sales and marketing expense. You will spend on a lot of things, including game, as we mentioned in the earnings, and other apps and service we try to promote in the -- in recent quarters. Because if you noted, in the other revenue I think increase very fast, which actually means we tried to monetize the traffic and IP through our content offerings, which means we try to provide different service for our users. And in the short period, you will see some promotion investment in this new service. And also, another reason of the increase in SG&A is the acquisition of Skymoons, which result additional about 200 million SBC cost every quarter. So that's another reason why you see increase in the recent quarters. Thank you.

[Operator:]

I would now like to hand the conference back to Dahlia. Please continue.

[Dahlia Wei:]

Thank you all for joining our call today. If you have any additional questions, please feel free to contact us later. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.