iQIYI, Inc.
Q3 2019 Earnings Call Transcript

Published: 7 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing and welcome to the iQIYI Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. I must advise you that today’s 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 third 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, thank you for joining us for the third quarter 2019 earnings call. Despite a challenging environment, we delivered another quarter of growth, with total revenues increasing 7% year-over-year to RMB7.4 billion. We continued to strengthen our platform, expand our user base and improve user engagement by offering high-quality content and a superior entertainment experience. We solidified our leading industry position with mobile app and MAU, DAU and user time spent ranked first in most of the months throughout the year, according to various third-party data sources. Let me start our membership business. As of September 30, 2019, total subscribers reached 105.8 million, a 31% increase year-over-year and a quarterly net addition of 5.3 million. Subscription revenue grew 30% year-over-year and contributed more than half of our total quarterly revenues for the first time. We continued to make strides in delivering our premium content, upgrading membership experiences and penetrating further into low-tier cities, which have collectively contributed to subscriber growth. High quality content remains the primary motivation for users to pay for the subscription. We released multiple premium titles during the quarter that were immensely popular among our subscribers, including original dramas series Arsenal Military Academy, Love and Destiny; licensed titles, Go Go Squid!, A Little Reunion, exclusive drama My Mowgli Boy and the new episodes for our exclusive animation series, One Piece among others.

[Xiaodong Wang:]

Good morning everyone. Let me go through our financial highlights. For the third quarter of year 2019, iQIYI's total revenues were RMB7.4 billion, up 7% year-over-year. Membership services revenue was RMB3.7 billion, up 30% year-over-year. This was driven by the solid growth in the number of subscribing members, which reached 105.8 million at the end of the third quarter, thanks to our premium content as well as our various operational initiatives. Online advertisement service revenue was RMB2.1 billion, down 14% year-over-year, mainly due to the challenging macroeconomic environment in China, delay of certain content launches and the intensified competition in in-feed advertising. Content distribution revenue were RMB680.4 million, down 18% year-over-year mainly due to the delay of certain content launches this quarter, as well as the high base in the same period of previous year. Other revenue were RMB932.3 million, up 12% year-over-year. The increase was mainly driven by the growth of game business following several new game launches this year by Skymoons. Moving on to cost of revenues. Our cost of revenues were RMB8.2 billion, up 7% year-over-year. The increase was primarily driven by the higher content costs as well as other cost items. Content cost were RMB6.2 billion up 3% year-over-year. Turning to the operating expenses, SG&A expenses were RMB1.3 billion, up 4% year-over-year primarily due to increased sales and marketing expenses of game business associated with the consolidation of Skymoons, as well as the higher marketing spending for certain iQIYI apps. Our R&D expenses were RMB703.2 million, up 26% year-over-year. The increase was primarily due to the -- due to our continued investment in R&D personnel. Operating loss were RMB2.8 billion compared with operating loss of RMB2.6 billion in the same period last year. Operating loss margin was 38% compared to the operating loss margin of 37% in the same period last year. Total other expenses were RMB826.8 million compared with a total other expense of RMB539.4 million during the same period last year. The year-over-year increase was mainly due to the increased interest expenses associated with our financing activities and the high foreign exchange loss related to exchange rate fluctuation. Loss before income tax was RMB 3.7 billion compared with the loss of RMB3.1 billion in the same period last year. Income Tax expense was RMB16 million compared to the income tax benefit of RMB6.1 million in the same period year 2018. Net loss attributable to iQIYI was RMB3.7 billion, compared with a loss of RMB3.1 billion during the same period of year 2018. Diluted net loss attributable to iQIYI per ADS was RMB5.04. As of September 30, 2019, the company had cash, cash equivalents, restricted cash and short-term investments of RMB13.9 billion. Turning to the fourth quarter 2019 guidance, we expect total revenue to be between RMB6.86 billion and RMB7.28 billion, representing an increase of minus 2% to 4% year-over-year. This forecast reflects iQIYI’s current and preliminary view, subject to change. This concludes our prepared remarks. Now I will open to Q&A.

[Operator:]

Thank you. Ladies and gentlemen, we will begin the question-and-answer session. Your first question comes from the line of Thomas Chong from Jefferies. Please ask the question.

[Thomas Chong:]

Thanks Management for taking my questions. I have a question on the 2020 strategies, in particular, in online advertising as well as our net adds in membership for next year, given the fact that we are penetrating into lower-tier cities, is there any differences in the user acquisition strategies versus top-tier cities in the past? And my second question is relating to the content cost, is there any color about how we should think about this line next year? Thank you.

[Tim Gong Yu:]

To answer your first question on advertising, we have two kinds of advertising. One is brand ads and the other is performance based ads. For brand ads, because given the challenging macro environment we actually haven't seen any sign of improvement for next year. So we tend to be conservative on brand advertising. For performance ads, because we have taken a lot of initiatives to refine our technology and product. So we are relatively more optimistic on the performance ads versus brand ads. And for membership penetration into lower-tier cities. You're very right that we are already at a very high penetration ratio in first and second tier cities compared to the lower tier cities. So we are trying to focus more on the third-, fourth- and fifth-tier cities. And the initiatives we are taking to improve penetration include

[Xiaodong Wang:]

I think we explained before content cost itself coming in the absolute dollar amount, it doesn't tell much about the status of our business, because we think content cost is kind of investment. For example, licensed copyrights you can call it passive investments, originals or self-produced content you can call it active investments. All these investments are actually necessary for the business, as Dr. Gong Yu just explained I don't think those passive investments or the license copyrights will still account for a major part of our business, because as we explained before the importance of iQIYI originals. So we will keep an eye and focus on the investment on iQIYI originals. And then for this active investment, I think the important thing is whether we have enough return for this investment instead of absolute dollar amount. So let's get back to the original target about the content cost as a percentage of revenue. We will continue to keep the original targets to lower the number down to somewhere below 70% next year, I think that’s still consistent with our original targets. Thank you.

[Thomas Chong:]

Thank you.

[Operator:]

Your next question comes from the line of Diying Ji from China Renaissance. Please ask your question.

[Diying Ji:]

So my first question is if Dr. Gong can provide us an update of the regulation environment in the current quarter and outlook for next year? My second question is regarding the ROI of the lower-tier city market. How is your ARPU, how is the ARPU comparing to major-tier cities and how is the content cost comparing to the major tier comparing to the contents that major tier cities people like? Thank you.

[Tim Gong Yu:]

For the content regulation we have seen some gradual loosen up after the October 1st holiday, for example, for the costume drama genre, we have launched a new drama called that’s targeted for the young generations in low-tier cities. And also there's another type we call it remake of some classic video content, those are two already released. But again, the content approval is not like all of a sudden, overnight, it's all approved, it will take some time, it's a gradual process. And for penetration into low tier cities, we have incubating many genres or vertical types of content for example, some are targeted for youth groups and some are targeted for female oriented groups in low tier cities. And you need to keep in mind that content don't have a very clear border line between first-tier cities and low tier cities. For example, when we make some content for low tier cities we also need to at least cater to a part-- a partial of the higher-tier cities as well. So indeed the content cost and ROI does not vary that much in high tier cities and low tier cities. I want to add some comments, in the pipeline I just mentioned, for example The Great Master, the Sword Dynasty and the Qing Yu Nian, those are all used to be the type of content that under content regulation we expect those content will be gradually released either towards later of fourth quarter or the beginning of the first quarter of next. Thank you.

[Diying Ji:]

Thank you very much.

[Operator:]

Your next question comes from the line of Zhi Yi Chen from Goldman Sachs. Please ask your question.

[Zhi Yi Chen:]

So quickly translating myself. Thanks for taking my question. I have a question for the CEO is, I wonder how do we see the long form video positioning in the overall video space, especially potential opportunity in the 5G era? And my question for the CFO, Xiaodong for the fourth quarter guidance, which we are still seeing revenue deceleration despite the pipeline has been supposedly recover after the restriction. So just wondering what's driven this potential deceleration? And if I may add in one question on why we're seeing the other revenue growth to decelerate so much this quarter? Thanks.

[Tim Gong Yu:]

I think there are three types of video platforms in China, one is the long-form professional video, which focuses on the movies, drama, or variety show content which basically is accompanying the content from the traditional cinema and TV screens to the streaming platform. And number two is we call it a mini video or the live broadcasting platform, which focuses on the internet celebrities or we call it internet influencer, this kind of content. And we also have the short form video which I'm talking about something like Xigua or Haokan from Baidu. I think if you look at the long form video, if you look at MAU and the growth rate is actually at low-- at a single digit right now. The good thing is we have a lot of monetization model for long-form video including advertising, membership and many others. For brand ads, as you all know, the macro environment impacted that growth, but we hope it will regain momentum in the future. And for membership, we have seen dramatic growth in the past years. And we hope in next year and the year after, we'll continue to see relatively high growth rate. And we also develop other additional channels, including gaming, licensing and other derivative revenues, for long-form videos. And for short-form video, we actually also have some initiative there we launched iQIYI Jisuban recently and that's a lite app and we will be monetizing that to performance ads. Thank you.

[Xiaodong Wang:]

Good morning, it's Xiaodong. It’s November 7, and almost half of the fourth quarter has passed, but we still feel the future tense tells what we're talking about the potential content release in the fourth quarter. So you now will have the sense that most of those contents that will be released at the end of the fourth quarter, which would contribute limited financials in this quarter. So that’s why we provided relatively soft guidance, even we see better trends now. And about the other revenue, it also has something to do with content because you know, there is two kind of other revenues, one is like the further monetization of our traffic and the other one is further monetization of our IP. So, for the traffic part because of the game business we can manage it to contribute some in the past few quarters, but for the IP related other revenues, because of lag on the control certain content, we don’t have a lot of new IP released this year that’s why you see a relatively slowing down trend of other revenue. But once we are back to the normal track next quarter or even next year, you would see more iQIYIs originals come online, more IP will generate from those content offering and then gradually we’ll see the increase of other revenue. Thank you.

[Zhi Yi Chen:]

Thanks very much.

[Operator:]

Your next question comes from the line Binnie Wong from HSBC. Please ask your question.

[Binnie Wong:]

Sorry, I’ll translate my question. On the first question here is on the softer outlook right, actually we do see that the softness is actually due to -- in terms of the advertising or actually on the subscription revenue side. And then in terms of the recovering trend as you said that like the blockbuster movies, are we expecting that those were happening more into -- like are we confident that the blockbuster ones will get approval and we’ll be releasing in 1Q 2020 or is it that it could might still see some delay? Is it okay to be say that the worst in terms of the regulatory environment should be over and then into 2020 we should expect a better outlook that’s recovering from here? And then second question is also on the advertising side, I want a better understanding is it on structurally, because of the rising inventories in the short video space, on the competition side that because that’s why it also affect the long form video advertising? Or is it not really not structurally it’s more just because of the regulation environment here. And that we will see the recovery trend again, pretty much as soon as to content approval release and then we’ll see that recovery trend right away?. And then last question is also on the content cost. Basically content cost this quarter spike up to 84% of revenue, so earlier guidance in terms of retaining at a range of 70% to 80% is it sill realistic to see? Thank you.

[Tim Gong Yu:]

So, I think, since Q2 and Q3 we do have some content regulation that has some impact on our pipeline especially on the costume drama, if you look at these three platforms since June actually only one costume drama for each platform so far. So you can see the regulation is quite strict at that time. But as I said, the content process is gradually getting released and we are able to release more drama in our pipeline and still I think as I said, the two kind of content, costume drama as well as remake of classic video content. We can gradually see some loosen up, but I cannot guarantee like 100% when that will be released, but my estimation is we should be able to release, the delayed content or the backlog in our pipeline of this year in Q4 or in Q1 next year that's my best estimation. And also for your second question on advertising, we do see some impact from short-form video platform including