iQIYI, Inc. (IQ) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the iQIYI First Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to IR Director, Mrs. Chang Yu. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's First Quarter 2022 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. Vivian Wang, our CMO, Chief Marketing 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, Xiaohui, Wenfeng, Vivian, Youqiao, Xianghua will join Mr. Gong and Jun in the Q&A session. 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 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. With that, I will now turn the call over to Mr. Gong. Please go ahead.

Hello, everyone. We recorded quarterly non-GAAP operating profit for the very first time. This demonstrates the effectiveness of our new strategy and execution. Last quarter, we announced that our goals for this year are to reach non-GAAP operating breakeven for the full year of 2022 and to reach quarterly non-GAAP operating breakeven as early as possible. I'm very pleased to see our performance exceeded our goals. What are the driving forces on our path to profit? I would name 4. First, the premium content. The debut of new content, such as top-notch dramas, solidified our market leadership and led to healthy growth of both subscriber base. And the influence of these new dramas was further elevated through our creative content marketing strategy. Meanwhile, the library content also played a crucial role. We used effective operations to drive traffic to our extensive library content and enhanced user experience. Secondly, refining our operations on content scheduling and promotion. Thirdly, increasing operating -- operation efficiency, which means delivering superior services based on effective cost and expense control. Lastly, driving our sales performance through various initiatives to boost our monetization of membership and sales. With these 4 aspects, profitability is a natural result. Therefore, we believe that -- we believe the performance in the first quarter is replicable as we continue to execute this operational methodology in the future quarters. On premium content, we are confident about our future pipeline. On efficiency management, we will continue to focus on driving efficiency to -- by leveraging the power of technology while maintaining the current lean corporate structure. By using the same methodologies, we will continue to achieve desired results in the future. Now let's go through the performance of our business segments in the first quarter of 2022. Let's start with memberships. For the first quarter, we continued to deliver a solid membership performance. Membership revenue was RMB 4.5 billion, up 4% annually and 9% sequentially. The average daily number of total subscribing members for Q1 was 101.4 million, a net addition of 4.4 million from the previous quarter. Our monthly ARM was RMB 14.69 during the quarter, up 8% annually and 4% sequentially. Q1 was the fifth consecutive quarter that we achieved 8% or above annual ARM growth. Our premium new content and our extensive library content were the main drivers behind our positive performance. Our values for membership -- for members translate into higher member acquisition, retention and ARM. We expect to see solid membership revenue growth on a year-over-year basis for the quarters down the road. Content is king. Among the new releases during the first quarter, A Lifelong Journey, [Foreign Language]; Under the Skin, [Foreign Language]; Life is a Long Quiet River, [Foreign Language], were the outperformers. A Lifelong Journey became a blockbuster, acclaimed by the whole nation, loved by the audience across all age groups and backgrounds. It tells a story of China's transformation in the past 50 years from the perspective of ordinary people. We are happy to see A Lifelong Journey was able to achieve word-of-mouth popularity, social value and commercial success. It also shows our deep understanding of the industry and the ability to balance our social obligation and user appetite. Under the Skin is a detective drama, focusing on social evils. It became a dark horse in the market with very high user stickiness. Life is a Long Quiet River, an original drama that portrayed the daily life and stories of Shanghai urban families, also performed very well in terms of traffic and revenue as popularity index exceeded 9,200 at its peak. In addition, we are also seeing the -- from the long-tail, effect of premium content as they continue to generate solid viewership after series finales. One of the key strategies with popular IPs is serializing its production. The original live comedy, Vacation of Love Season 2, [Foreign Language], is an example of multi-season approach in which we develop new plot lines for additional seasons of our popular content. The revenue sharing drama, Shining For One Thing, [Foreign Language], also became a dark horse and has set a new record for revenue sharing dramas on our platform. To better connect with users, we also created distinctive brand for our featured vertical content categories, namely iQIYI Theaters. In the first quarter, we launched our third vertical content theater, Laugh On Theater, focusing on comedy in general. Two titles were launched in Q1 and the third title to be released soon. These comedians are good leisure and entertainment choices and provide user a new outlet to release daily pressures. Now with Mist Theater, Sweet On Theater and Laugh On Theater, our platform successfully covers the 3 most leisure genres by our core users, namely suspense, romance and comedy. Going forward, we will continue to explore other content genres under iQIYI Theaters that bring targeted and diversified experience to users. In summary, we attract users through premium new releases and retain users through our extensive and diversified library content. We employ various operational initiatives to increase user loyalty and brand awakening. All of this will contribute to a solid base of subscribers and lay a good foundation for future growth. We are pleased to see the value we've provided to our users was widely recognized, which translated to a great monetization capability. Moving on to content. After explaining on how we achieved our first quarter success, next how do we replicate our success in the future. We will focus on systematic approach in building our content business from production to operations. Our goal is under the premise of maintaining iQIYI's overall competitiveness and leadership, which means we would acquire the most appropriate content with optimal ROI and maximize monetization with a reasonable number of titles. As we continue to enhance our in-house production capabilities, enrich our premium content inventory and refine our content operations, we will be able to expand our advantage as an integrated platform and improve our overall efficiency across various aspects, including content production, content scheduling and promotion. Meanwhile, we utilized technology to further improve our production capability and increase our efficiency. Investment in content is our biggest organizational focus, which makes it the key in achieving our goal of optimizing cost and efficiency. We have placed stringent control over the full content production process from script development, preproduction to shooting and postproduction. We also emphasize efficiency in content production, content release and fund utilization. As for our content reserves, we have dedicated ourselves in building our original content offering and enhancing production capability in the past few years. We have established one of the largest and the most professional team of producers in the industry. We also want to highlight that despite the recent resurgence of the COVID in some regions in China, we are relatively comfortable with our content reserve, especially in the core drama category, as we have a diversified pipeline of dramas for this year. Benefited from our solid reserve of original content and the experience gained from operating under COVID in the past 2 years. Therefore, we currently expect to see limited impact from COVID in our future drama pipeline. Looking ahead to the second quarter and the full year 2022, our key focus is to improve the overall content quality. We will continue to introduce premium content to our users, increase the quality of our offering and leverage the platform's advantage to build iQIYI's content ecosystem. Meanwhile, we would enforce our brand awareness through making multi-season production for our long series and utilize our successful theater model to enforce our advantage in some vertical genres. Benefiting from our rich content reserve, we will be able to launch a series of titles in the second quarter. For dramas, the key titles we have released in Q2 include Left Right, [Foreign Language]; My Sassy Princess, [Foreign Language]; The Wind Blows From Longxi; and Day Breaker, [Foreign Language]. All have been well received by users. For the rest of the second quarter, key dramas to be released include highly anticipated original titles. A Love Never Lost, [Foreign Language]; Ordinary Greatness, [Foreign Language]; The Lord Of Losers, [Foreign Language], the third drama under Laugh On Theater will also be premiered. For this year's Sweet On Theater, 5 new series will be launched. For variety shows, we will launch the second season for last year's hit show, The Detectives' Adventures, [Foreign Language]. For animation and children's content, we will continue to launch new titles under our multi-season strategy. Also, we have prepared a rich and diversified slate of premium content for this year's summer season, covering all major genres that target different user cohorts. We continue to produce and release original movie to enrich our content ecosystem. Man on the Edge, [Foreign Language], was released in theaters on April 15, and its cumulative box office surpassed RMB 130 million. On April 1, we upgraded the online film distribution collaboration model with our partners. The revenue sharing model is now based on the user viewing time instead of video views in the past. Promotional resources will be allocated based on the audience participation and content performance such as viewing time, membership conversion rates and user reviews. The new model enables high-quality films to stand out and may significantly improve our operational efficiency, providing a win-win solution for both producers and our platform. Now I'd like to quickly talk about our progress in IP development. Premium content also translates into additional monetization opportunities as we continue to push our strategy of building our IP franchise and increasing monetization capability. In last December, we launched the first title of the iQIYI Chinese Historic City Universe franchise, Feng Qi Luo Yang. We have signed with over 20 partners to franchise with popular IP in various formats, such as toys, jewelry, apparel, food and beverages. Moving on to advertising. For Q1, the total advertising revenue declined both annually and sequentially due to the current macro headwinds. The soft ad demand negatively impacted our brand ad business to some extent. Despite the challenging macro environment, premium content contributed to drive strong attraction from advertisers. For example, A Lifelong Journey and Life is a Long Quiet River, both had very good advertising performance. The drama, A Lifelong Journey, itself attracted 25 advertisers to our platform. For Q1, the sequential growth of our performance ad business was benefited by our growth in ad inventory, but partially offset by the weak macro environment. iQIYI Lite was contributing to the increase in ad inventory. Monthly average DAUs reached 5 million in Q1 and surpassed 5 million, starting in April. Given the major monetization methods for iQIYI Lite, its performance ads, it effectively supplemented our ad inventory and mitigated the adverse impact of the macro environment in Q1. We upgraded our ad placement platform, which was widely adopted by advertisers. The new version is more user-friendly and increased monetization efficiency by nearly 20% compared to the previous version. The upgraded ad placement platform helped advertisers to cover more ad slots, get more exposure for their products and improve ROI by leveraging smart algorithm. Moving on to technology. Technology is fundamental to support our development. We continue to use AI technology to improve content production efficiency and promote the industrialization of online video industry. Technology helps us to optimize cost, promote information security and copyright protection and improve the entertainment experience of users. In the first quarter, our proprietary AI dubbing technology, IQ-Dubbing, was widely used in our film offerings. For our movie channel, more than 20 foreign movies used this technology to complete dubbing in Mandarin before launching on our platform, saving costs as well as increasing revenues for both new and library films. IQ-Dubbing was also used in our overseas business. For example, we launched a new film in Thailand using IQ-Dubbing that received a very strong user feedback and generated strong revenue performance. AI dubbing is effective in optimizing costs and driving revenues for long-tail content. The technology also safeguards our system architecture and provides data security and enables antipiracy protection of our platform. In the quarter, our proprietary digital rights management, DRM, solution completed in the Farncombe Security Audit, which is recognized worldwide as an in-depth measure of our solution's ability to protect premium content. So far, we are the only domestic streaming platform in mainland China that completed such certification, reflecting our strong ability in digital media security protection. Moving on to our new business. We are also exploring growth opportunities from new business initiatives. We are delighted to see continued strong momentum for our overseas business and iQIYI Lite. For our overseas business, driven by our continued efforts in enhanced products and user experience, the membership revenue and advertising revenue for our overseas business both recorded solid annual growth during the first quarter. iQIYI Lite is a great supplement to our main iQIYI app and continues to achieve strong performance across various operating metrics in the quarter. iQIYI Lite is mainly focused on the performance ad monetization model, which is significantly different from the subscription-centered monetization model of our main app. Overall, the user demographics, monetization model and content consumption behaviors on iQIYI Lite are largely different from our main apps. The user overlap between iQIYI Lite and the main app further declined in the quarter. The DAU overlap was around 4% in March. Meanwhile, we observed that the consumption of library content on iQIYI Lite was significantly higher than the main app, largely enhanced realization of long-tail library value. We believe iQIYI Lite has ample potential for growth in both user scale and monetization abilities. In summary, Q1 was a breakthrough quarter for the company. We delivered what we have promised, reaching non-GAAP operating profit earlier than anticipated that demonstrated our outstanding execution, professionalism and strong unity of everyone within iQIYI. The encouraging first quarter results also demonstrated that the long-form video industry can generate sustainable operation -- operating profit. We have a clear value proposition for our users. Not only that, we offer latest premium content available in the market. We also have extensive and diversified content library that every user can find his or her favorite. This value proposition is unique and the happiness we offer to users far exceeds the price we demand. Looking forward, the pandemic situation in Shanghai and Beijing to create additional challenge and the time for full recovery remains unknown as of today, which could impact our Q2 performance. Regardless, we still strive to deliver another quarter of non-GAAP operating breakeven after the first quarter success. We would like to wrap up by thanking all our stakeholders, including our shareholders, business partners and employees who share our belief in the positive prospect of long-form video. We understand that many of our stakeholders follow our business development closely and pay close attention on areas such as whether blockbuster content can be developed, delivered every quarter or if our business will be impacted by some short-term market headwinds. Honestly, we would not worry about what will change. We focus on what will not change in the next 5 years or 10 years. And we will invest heavily into these areas to meet user demands, that is, processing a collection of highly differential, premium content and highly effective platform that delivers sustainable value to our users. Meanwhile, we will continue to seek new opportunities through innovation and expand our values in the ever-changing market. With that, I'll hand over to Wang Jun, who will go through our financials.

Thanks, Mr. Gong, and hello, everyone. Now let me walk you through our key financials for the first quarter 2022. Starting with the revenues. In first quarter, our total revenues reached RMB 7.3 billion. We booked healthy growth on our membership services with RMB 4.5 billion, which was our largest revenue contributor. Our membership services revenue increased by 4% annually and 9% sequentially, primarily driven by ARM, or average revenue per membership, which achieved a positive annual growth for 9 quarters in a row. And our subscriber base also grew by 4.4 million as our premium show attracted more paying members. The solid performance of membership services was partially offset by the relatively weaker advertising services revenue due to macro headwinds. Now move to the cost and expenses. The first quarter cost of revenue was RMB 6 billion, representing a cost saving of RMB 1.1 billion compared with the same period last year. This leads to consistent gross margin expansion in the past 3 quarters from 7% in the third quarter '21 to 12% in the fourth quarter '21 and to 18% in the first quarter of '22 on a GAAP basis. In the meantime, our total operating expenses decreased 35% annually and 34% sequentially after we completed our organizational realignment second half last year. Our Q1 was also the third quarter in a row that we saw the decrease in total OpEx. The expanded gross margin and decreased expenses combined contributed to our first profitable quarter. Behind this profit is not magic but science, as it takes us 3 quarters to get where we are. Our non-GAAP operating loss was RMB 1 billion two quarters ago, which shrunk to RMB 516 million last quarter, then turned to a profit of RMB 327 million in the first quarter of 2022. The trend is clear. What is driving this trend is our consistent efforts in improving our operational efficiency and scalability. We have become nimbler and more focused, which help us in adapting to the changing environment and best positioned to capture the long-term growth opportunities in the future. In March 2022, the company completed a private round of USD 285 million. At the end of first quarter, the company had cash, cash equivalents, restricted cash and short-term investments of RMB 5.2 billion. We believe we have sufficient funding to justify our operational needs in the foreseeable future. For detailed financial data, please refer to our press release on our IR website. With that, I will now open the floor for Q&A.

[Operator Instructions] Your first question comes from the line of Thomas Chong from Jefferies.

[Foreign Language] My question is about our overall strategy. How do we execute and reflect in our financials? And in particular, we are making profitability on a quarterly basis in Q1. On the other hand, how should we think about the outlook in the next couple of quarters?

[Foreign Language]

[Interpreted] Okay. I will translate what Mr. Gong just mentioned. They are coming from 5 aspects. First, we have many years of accumulation of head premium content. For example, on the key TV drama series and also variety shows, movies, children's content and animation. And second, we are -- we refined our operations, including content scheduling and promotions and then to increase the overall operational efficiency. And third, we also improved the content operations in many different areas, have stringent control over the full content production process. Four, we're also driving the sales stability and efficiency, including boosting our monetization, our membership and also app sales. And five, increase the overall ROI. We will terminate the business that has poor ROI and low future potential.

[Foreign Language]

[Interpreted] The earlier mentioned 5 aspects are the continuous efforts that we'll be focusing on, and that will drive the profitability in the mid- to long term. And also, we're also focusing on new business initiatives. For example, overseas business, iQIYI Lite, that will help the overall development and growth of our mid- to long term as well.

Your next question comes from the line of Lei Zhang from Bank of America.

[Foreign Language] And congrats on breakeven. We have seen many cost saving and breakeven in first quarter. So wondering, do you see any impact of our cost control barrier to our operating metrics, like user time spent and revenue? Secondly, can you give us some updates on your content strategy going forward?

[Foreign Language]

[Interpreted] Okay. So for overall speaking, our control of cost and also expenses are for the purpose of increasing the overall efficiency for our business. Content is our biggest cost item and also investment. So for a very important premium head content, we will not lower our investment in this area at all. We will probably decrease the investment in the low ROI content genres and content categories. And based on our many years of internal studies, user data and also a reference to the overseas streaming business, we can tell that the top line, the revenue upside depends on the head of premium content. So for overall, the low-performing content that's really dragging our whole performance down and also creating loss. So these are the areas we will continue to put efforts on going forward.

[Foreign Language]

[Interpreted] So even though that reaching the market #1 is not our primarily goal, but according to our third-party data,[ Enlighten ] data, it shows that iQIYI was still #1 in terms of the market effective video views for top TV drama category. And then at the same time, our original content also had excellent performance, for viewing time for dramas, movies and children's content consistently improved on an annual basis.

[Foreign Language]

[Interpreted] Okay. So for going forward, this year, our very important key focus is to drive efficiency. And then that will make us to focus on the investment in the head premium content as well as increased overall ROI and focusing on the content that generates high ROI. And then going forward to the next 2 years, we will continue to focus on the premium head content as that would bring profit and also to bring good returns to our business. Thank you. And then I think our CFO also has one point to add.

[Foreign Language] [Interpreted] I will quickly translate myself. So supplementing to what Mr. Gong has shared, I will say that people care about the new releases each quarter. But on the other hand, we also need to notice that our new releases is also in the form of the investment. After the debut, it will flow into our library, which will generate lifelong traffic over time. So as a result, I think our business model, in general, with the combination of new releases and library, is very much defensible and manageable.

Your next question comes from the line of Alicia Yap from Citigroup.

[Foreign Language] My question is related to the membership subscription business. So how does management see the future more longer-term growth trend for the membership revenue? Is that mainly driven by the increased penetration rate for paying user? Or is that increase from the ARPU? And how much room we can further increase our paying ratio? In terms of near term, can management share how is the demand for the membership service trending given the prolonged lockdown in Shanghai and other cities? Have you seen any uptick on the subscription from the lockdown or the membership more is driven by the content?

[Foreign Language]

[Interpreted] So based on our experiences with COVID in the past 2 years, the first wave came from 2020 and then the second wave came from this year. So we kind of find the pattern in terms of dealing with the pandemic. So in the short term, there are some uplift in terms of -- for the consumption of digital entertainment and digital content online. And over the long term, because there might be some impact in terms of the entertainment opportunities or entertainment choices from offline, so there might be some impact in terms of, for example, the movies to be launched, et cetera and that might push the popularity and also the penetration of online media entertainment. But I think -- very importantly, we think the success of our membership business really, really depends on the premium content. So that's really driving our membership growth in terms of the revenue as well as ARM as well as the subscriber growth. And also that coming from the more penetration or higher penetration for the paying services or paying habits in China, that will also contribute positively to our business.

[Foreign Language]

[Interpreted] So for over our long-term speaking, we are still very confident and very optimistic of the long-term growth of our membership business. I think our premium content, that's really driving the positive membership growth in terms of the subscribers and also for the revenues and also for ARM.

[Foreign Language]

[Interpreted] Our main goal is really trying to keep growing our membership services revenue. So we don't set the goal in terms of really growing absolute number of subscribers or the ARM.

[Foreign Language]

[Interpreted] So I would like to first talk about ARM that's driving our business. So we're very happy to see that among our industry peers, there are some price adjustments on that front as well. So they are sending really positive signals and also guiding the whole industry moving towards a positive direction.

[Foreign Language]

[Interpreted] And then second point is very important that I would like to leave for everyone because we think premium content is really driving the whole membership growth. And also, we're driving the quality of the premium content and also very stable supply reserve, building a good reserve of premium content. That's really supporting our future business growth for the membership services.

[Foreign Language]

[Interpreted] And for the third point, we think the recognition from users for IP is very important for the future growth as well. We're happy to see the whole industry as well as users as well as government are sending positive signals of recognizing the power of iQIYI, and we're focusing on IP protection and really driving the antipiracy issues of the company.

[Foreign Language]

[Interpreted] And also, at the very first, I mentioned 3 points related to our ARM growth that I talked about earlier. Now I would like to talk about growing the users. First, we think users are upgrading the consumption behaviors. If you look at the content offerings, whether it's for the long-form video or the short-form videos, for long-form videos, I think, overall speaking, the content are driven by the paid content as well as long-tail content that really brings the echo of the users. And I think we're very good. We're very happy to see that more users are getting the habit of buying subscriber memberships. So that's sending a very positive sign to our business.

[Foreign Language]

[Interpreted] Also, another point to the subscriber numbers is because right now, we think the overall overlap -- or the overlap of content is pretty high among our peers, which means there are less really exclusive content for each platform. So that's kind of putting back some of the paying willingness for the subscribers. I think if you look at the mainland China area, one user that's subscribing to multi-platforms, the ratio of that is 1.2, which is lower than many of the overseas streaming business.

[Foreign Language]

[Interpreted] A couple of reasons that's contributing to the high overlap of content among our competitive peers. One is from the economic aspect because selecting content that's not really exclusive will bring lower content cost. That's the first point. And then the second point is the original content production capability is relatively low at this point among all the industry peers. So I think going forward, if you -- we could increase the production capabilities going forward, especially the head original content that will drive down the overlap between our content among the industry peers.

Thank you. In the interest of time, I would now like to hand the conference back to management for any closing remarks.

Thank you, everyone, for participating in our call today. Feel free to reach out to the IR team if you have further questions. Thank you and see you next quarter.

Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]