iQIYI, Inc.
Q4 2019 Earnings Call Transcript

Published: 27 Feb 2020

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[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the iQIYI Fourth Quarter and Fiscal Year 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 fourth quarter and full year 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.

[Yu Gong:]

Hello everyone and thank you for joining us for our fourth quarter and the full year 2019 earnings call. We concluded the year 2019 with a solid ending. Q4 and the full year net revenues reached RMB7.5 billion and RMB29 billion, respectively, backed by the optimized structure of our content costs, which only grew moderately at single-digit percentage on a full year basis. We further solidified our industry-leading position in terms of our user scale, user stickiness, and a number of subscribers. We are pleased with a set of significant progress we made in 2019, including being the first among industry peers to hit the 100 million subscriber milestone, consistently developing innovative original content, pioneering new advertising solutions, and making new breakthroughs in technology development. I'll start my review with our membership business. As of December 31st, 2019, our total subscribers reached 107 million, a net addition of 19.5 million compared to year end 2018. Subscription revenues grew 36% year-over-year to RMB14.4 billion and contributed half of our full year 2019 total revenues. This reflects our dedication in delivering best quality content to our subscribers and our various operating initiatives to expand our subscriber base. In the fourth quarter, the release of a number of highly popular drama series drove subscriber growth, namely Qing Yu Nian, The Listener, Sword Dynasty and Spirit Sword Mountain among others. Typically, drama series have been the main driver of the subscriber growth, but with our portfolio of content expanding, we are beginning to see a wider range of content categories playing an increasingly important role. For example, hit theatrical movies, such as Ne Zha and The Captain, animation serials One Piece, as well as premium variety show, More Than Forever, all helped to drive our subscriber growth.

[Xiaodong Wang:]

Good morning, everyone. Let me go through our financial highlights. For the fourth quarter of 2019, iQIYI total revenues were RMB 7.5 billion, up 7% year-over-year. Total revenues in 2019 were RMB 29 billion, up 16% year-over-year. Membership services revenue for the fourth quarter were RMB 3.9 billion, up 21% year-over-year. Membership service revenue in 2019 was RMB 14.4 billion, up 36% year-over-year. The increase was primarily driven by the growth in the number of subscribing members. Online advertising services revenue for the fourth quarter was RMB 1.9 billion, down 15% year-over-year, primarily due to the challenging macro economic environment in China. Online advertising service revenue in 2019 was RMB 8.3 billion, down 11% year-over-year, primarily due to the macro headwinds, the uncertainty of certain content scheduling and intensified competition in advertising business. Content distribution revenue for the fourth quarter was RMB 878 million, up 68% year-over-year, driven by higher volume and the contractual price of the titles we distributed in the quarter. Content distribution revenue in 2019 was RMB 2.5 billion, up 18% year-over-year, driven by a number of premium content titles that we distributed during the year. Other revenues for the fourth quarter were RMB 874.4 million, down 21% year-over-year, primarily due to the soft performance of certain business lines, partially offset by strong growth in game business. Other revenues in 2019 were RMB 3.7 billion, up 30% from 2018, driven by the growth of number of business verticals, especially robust growth of our games business after the acquisition of Skymoons. Moving on to the cost of revenues. Our cost of revenues for the fourth quarter was RMB 7.9 billion, down 7% year-over-year, primarily due to the lower content costs, partially offset by the increase of other cost items. Content cost for the fourth quarter were RMB 5.7 billion, down 13% year-over-year. This was a combined result of certain major titles being launched later in the quarter as well as the less expenses recorded related to the original content. Cost of revenues in 2019 was RMB 30.3 billion, up 12% of 2018, primarily driven by the high content costs and other cost items. Content cost in 2019 were RMB 22.2 billion, up 6% year-over-year due to our continued investment in our comprehensive and diversified content library. Turning to operating expenses. SG&A expenses in the fourth quarter were RMB1.4 billion, up 15% year-over-year. SG&A expenses in 2019 were RMB5.2 billion, up 26% from year 2018. This was primarily due to the increased sales and marketing expenses related to certain iQIYI apps and our game business. The full year increase was also due to the higher share-based and personnel-related compensation expenses. Our R&D expenses in the fourth quarter were RMB711.3 million, up 17% year-over-year. Research and development expenses in 2019 were RMB2.7 billion, up 34% from the year 2018. The increase was primarily due to our continued investment in R&D personnel. Operating loss in the fourth quarter was RMB2.5 billion, compared with the operating loss of RMB3.3 billion in the same period of 2018. The operating loss margin for the fourth quarter was 34% compared to that of 47% in the same period of year 2018. Operating loss in 2019 was RMB9.3 billion compared to an operating loss of RMB 8.3 billion in 2018. Operating loss margin in 2019 was 32% compared to 33% in 2018. Total other income in the fourth quarter were RMB75.3 million compared with the total other expenses of RMB 34.8 million during the same period year of year 2018. The year-over-year variance was a combined result of foreign exchange gain due to the exchange rate fluctuation between RMB and the U.S. dollar, increased interest expenses associated with our financing activities, as well as the impairment loss for certain private company investments. Total other expenses in 2019 were RMB967.1 million compared to total other expense of RMB676.2 million during 2018. The full year variance was due to the increased interest expense, foreign exchange fluctuations, as well as the impairment loss and lower fair value gain for private company investment. Loss before income taxes for the fourth quarter was RMB2.5 billion compared with a loss of RMB3.4 billion during the same period of 2018. Loss before income taxes in 2019 was RMB10.2 billion compared to a loss of RMB 9 billion in 2018. Income tax expense for the fourth quarter was RMB22.6 million compared to income tax expense of RMB79.5 million during the same period in 2018. Income tax expenses in 2019 was RMB51.9 million compared to income tax expense of RMB78.8 million in 2018. Net loss attributable to iQIYI for the fourth quarter was RMB2.5 billion compared with a loss of RMB3.5 billion during the same period of 2018. Diluted net loss attributable to iQIYI per ADS for the fourth quarter was RMB3.43 compared to a diluted net loss attributable to iQIYI per ADS of RMB4.83 in the same period of 2018. Net loss attributable to iQIYI in 2019 was RMB10.3 billion compared to a net loss of RMB9.1 billion in 2018. Diluted net loss attributable to iQIYI per ADS were RMB14.14 for 2019 compared to a diluted net loss attributable to iQIYI per ADS of RMB 17.01 in 2018. As of December 31, 2019, the company had cash, cash equivalents, restricted cash and short-term investments of RMB 11.5 billion. Turning to our first quarter 2020 guidance. We expect total revenues to be between RMB 7.10 billion and RMB 7.52 billion, representing an increase of 2% to 8% year-over-year. This forecast reflects iQIYI’s current and preliminary view, subject to change. This concludes our prepared remarks. I will now turn the call to the operator and open to Q&A.

[Operator:]

Thank you, Xiaodong. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Alicia Yap from Citigroup. Please ask your question.

[Alicia Yap:]

[Yu Gong:]

[Operator:]

Your next question comes from Eddie Leung from Bank of America, Merrill Lynch. Please ask the question.

[Eddie Leung:]

[Yu Gong:]

[Operator:]

Your next question comes from Thomas Chong from Jefferies. Please ask the question.

[Thomas Chong:]

[Yu Gong:]

[Operator:]

Your next question comes from Wendy Chen from Goldman Sachs. Please ask your question.

[Wendy Chen:]

[Xiaodong Wang:]

[Operator:]

Your next question comes from Ella Ji from China Renaissance. Please ask your question.

[Diying Ji:]

[Xiaodong Wang:]

[Yu Gong:]

[Operator:]

We still got time for one last question. Our final question comes from Tiah Ho from T.H. Capital. Please ask the question.

[Tiah Ho:]

[Yu Gong:]

[Operator:]

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

[Dahlia Wei:]

Okay. Thank you, again. And if you have any other questions, please do feel free to contact us. Thank you.

[Yu Gong:]

Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of our conference call. Thank you for participating. You may all disconnect.