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

Thank you for standing by, and welcome to the iQIYI Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Chang Hu, Investor Relations Director. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Fourth Quarter and Fiscal Year 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. 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 Movie and Overseas business; and Mr. [ Dan Hu ], Senior Vice President of [ the ] Advertising 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, Youqiao, Xianghua and Gong 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 risk 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 the 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 wrapped up a remarkable year of turnaround, with outstanding performance in 4Q '22. Our market share reached its oracle high, so rare are on membership revenues, operating profit and free cash flow to its perfect tick. In Q4, we launched 3 blockbuster dramas with subscribing members 10x, growing by over 40% annually and 30% sequentially, which is unprecedented. As a result, we continue to gain market share. Our leadership in terms of effective bill to bills in the drama category remained unchallenged, according to enlightened data. Strong content performance brought the highest quarterly membership revenues in our history, up 15% annually and 13% sequentially. In Q4, our average daily rate number of total subscribing members was 111.6 million, and represents a sequential net additions of more than 10 million. The number of subscribing numbers -- members as of the end of December was 119.7 million, represents a net addition of over 13 million compared with end of September. In the meantime, our Advertising business continued to recover, with a sequential growth rate of 25%. Now move on to profit. We had a record-setting quarter of RMB 979 million non-GAAP operating profit, up 87% compared with last quarter. The non-GAAP operating margin continued to expand for the fifth consecutive quarter and reached 13% in Q4, a showcase of operating leverage embedded in our business model. In Q4, free cash flow reached over RMB 840 million, grew by 4.7x compared with Q3. We are -- we have been generating positive free cash flow for 2 consecutive quarters. The outstanding Q4 performance is not a surprise. In fact, our Q4 performance may jump with the gap if we look ahead for 2 or 2 years -- 4 months or 2 years. The driving force behind our talent and the future success is our ability to produce and deliver highly quality popular or new content, which is our unique -- unique core competence. iQIYI in now the master of Cheongsam. iQIYI's brand presentation has been evaluated from iQIYI as capable of creating blockbusters, so iQIYI is the blockbuster powerhouse. As the perfect footnote to our statement, right after the closing of 4Q '22, we launched original drama, The Knockout [Foreign Language] has become another megahit, broke records across our key markets. The fastest to break iQIYI popularity index of 10,000 times peak popularity index, highest daily user time spent, largest with daily audience and highlight the membership revenue. The Knockout also generated tremendous social balance and become a true nationwide phenomenon. The success of the show demonstrates that the production and the operation of our original content has entered into a -- what true cycle of flywheel effect have been released. The stable premium common supply drive user growth improved cost efficiency and profitability, which supports a company to create more premium content. Therefore, we firmly believe the success is replicable, and we could exceed our past performance in the future. Why do we believe that our original term of production comparability is unique and cannot be easily covered? Because creating blockbuster has no cost cut to get where we are today. We invested in numerous resources including time, capital, talent and technology, which initiated our original content strategy backed in 2014 and made substantial performance in 2022, after almost a decade of persistent efforts. In the most recent 2 years, our investment in original content almost reached [ RMB 7 Billion ]. With time and money, we have established in-house studios that bring together the industry's most creative talent. We have also gradually established our compliant, data-driven and highly-efficient decision-making system that can capture every critical moment in the entire life cycle of content production. As a result, we've witnessed the gradual record of high-quality renewal dramas. Among the key dramas we launched each year, the propulsion of original prevention increased from 20% in 2018 to over 50% in 2022. For 2022, the original content accounted for over 68% of blockbuster dramas and also contributed over 60% of the revenue during the newest window in Q4. The total subscribing members times on original content doubled year-over-year, and we conclude that we enjoy the structural advantages that are very difficult to others to imitate. The entry barrier is extremely high. In the past 12 months, we have completed 3 rounds of capital raising, with pre fleet totaled around USD 1.3 billion to remove debt overhang. We truly appreciate the generous support of our investors who are as confident as we are in the future of iQIYI. With a healthier balance sheet and cash generating business, the management will be able to focus on how accelerating the company's growth, creating more value for our investors. Looking ahead to 2023, we will start a brand new journey. We have upgraded our 2023 annual goal to achieve high-quality growth. Under this strategy, our goal is to achieve growth in revenue and operating profit. To realize high-quality growth, we will continue to invite in our core business, will remain cautious while assessing material new business opportunities. We will continue to invest in top premium content to maintain a high-quality yet worthy the common pipeline and to invest in high ROI marketing at members benefit. Also, we have our close eye on industry opportunities powered by technical advancements such as artificial intelligence, generative content, AIGC, and other innovative technologies. We will explore AIGC application and scenarios in the long-form video industry together with our strategic partner, Baidu, in the areas such as improving content, production efficiency, company distribution and promotion. We believe the AIGC strategy will help iQIYI to unlock even more potential to further improve our overall business efficiency and generate greater value. Now, that goes from the detailed performance of our business segments, starting with membership services. Membership services revenue was RMB 4.7 billion, the highest in our corporate history, reflecting an increase of 15% annually and 13% sequentially as we had a very strong quarter of blockbuster content. We utilized the opportunity to attract and grow our subscriber base with a marginal increase environment. Our subscriber base has a strong growth in Q4. The average daily user of total subscribing member was 111.6 million and an addition of 10.6 million compared with Q3. The total number of subscribing number was 119.7 million as of the end of December, a net initial of 13.5 million compared with the end of September. Very importantly, we are glad to see the improvement in membership structure with a propulsion of annual subscribers increased significantly in Q4 compared to the same period last year. We believe the higher subscription rate for annual packages will help to improve stickiness and the long-term monetization. In Q4, our monthly ARM was RMB 14.17, up 2% sequentially. We further increased our membership pricing in December, which will drive our increase in the future. For our membership business, we are committed to grow revenue. In the long term, we believe our ARM will have plenty of room to grow when we continue to upgrade content quality and bring more value to our users. In the short term, we strategically choose to optimize the growth of subscriber base and the membership duration so that more people can enjoy our content, and the relationship between the platform and the user becomes more enduring. A good example is that as the monthly ARM of the annual package is lower than the monthly package, we will be enrolled more annual subscribers. Our average ARM might be impact in the short term, however, we value the relationship with subscribers and we believe the long-term trust we built with subscribers will bring more strategic value. In Q4, we continued to expand our inclusive membership benefit package, including exclusive iQIYI brand souvenirs and a limited-time discounted offers inclusve bank events. Moving on to content. In Q4, we continue to lead the market with dominant market share. According to Enlightent data, we remain #1 in terms of factory we will built for both overall dramas and inclusive dramas categories, which incorporate new highs in the past 2 years. For variety shows, we also ranked #1 in terms of effective video bills with launch of popular or remote programs, including super natural tool [Foreign Language] and for 2022, [Foreign Language]. 2022 was the hardest year for our dramas. We had most number of blockbusters that covered the worst thing and even released across the year. First, we launched the 5 dramas with popularity in depth of over 10,000 in a single year, well, 4 of them are originals. Not only have we brought our content quality to the next level, we significantly improved our financial performance and generated on capability and large scale. Second, our content releases convert that works. Since including Modern , A Life Long Journey, [Foreign Language] and [Foreign Language], the Asian cartoons epics.and New Life Beginning, [Foreign Language]. Suspense for [Foreign Language] of Tang Dynasty, [Foreign Language], and the fantasy and use inspiration, The Heart of Genius, [Foreign Language]. Third, the timing of all releases was evenly throughout the year, the 5 blockbusters with popularity index of 10,000 were released at the beginning of year during summer vacation and during winter. Other high-quality dramas were released as regular inflows during the year. Users can turn to iQIYI and watch the most current case shows at any time. We also maintained the best war of month in the industry. Among the top 10 highest-rated Chinese dramas, [Foreign Language] in 2022, 7 were iQIYI-hosted dramas and 4 were original production. Our original titles, Ordinary Greatness and White Bloom ranked first and the third with [ past talent ]. As we move on to 2023, we will maintain our strong momentum and plan to launch a number of highly-anticipated dramas. Original production Unchained [ Lust ], [Foreign Language] and The Knockout were launched in Q1 on the high [ play ] plan by user. The Knockout become another market to nationwide phenomenon. Just to name a new highlight -- highlights. First, it has the highest auto new liability index call, and it's the drama that broke the popularity index of 10,000. Second, generated, fueled social brand and high reward of month score was 9.1, only very selected Chinese drama have such high scores. Third, the drama was broadcast on the national TV network, including CCTV and BRTV, all of which had outstanding viewership. Just on CCTV network alone, The Knockout has been watched by over 300 million audience so far. During 2023, a variety of key dramas will be launched such as Asian cartoon epics. the [ Dinner Hunters ], [ romance ], [Foreign Language], Story of [ Huangyu ] palace, [Foreign Language], The Fourth -- The Spirit Matchmaker, [Foreign Language]. [ Modern Scene ] dramas such as [ A month to go ], [Foreign Language], Take Out Home, [Foreign Language], and We Are Here in [ Your Palace ], [Foreign Language]. For our original variety shows, we will continue to launch multi-sales in shows and introduce new programs. We built a focus on building franchise value and enhancing synergy between dramas and variety shows. Please also anticipate to see a set of well-craft original movies, children content and animations. Advertising business recovered sequentially in Q4. Total ad revenue were RMB 1.6 billion in Q4, up 25% sequentially and down 7% annually, which was significantly narrowed from the 25% annual decline in Q3, exceeding our expectations at the beginning of the quarter. In particular for Q4, brand ads returned to double-digit [ central ] April and the year-over-year decline continued to narrow, better than our expectations. The sequential growth was benefited from, first, field dramas and variety shows attract various. Second, the domestic reopening boosted advertising, advertisers' confidence and increased ad demand. Third, growth in sectors such as the internet services, communications and sales count. Heading into 2023, we believe reopening will support economic recovery. We are positive about brand [ apps ] for the full year 2023, and expect to see healthy growth compared with 2022. For performance apps, we achieved a strong revenue growth both sequentially and annually driven by algorithm of optimization and tailored official initiatives for advertisings from e-commerce, internet services and online game services. We believe that iQIYI's core user group is highly attractive for advertisers, and with our appealing content and advanced technology, we will be able to effectively help advertisers to increase their brand [ improve ]. In the future, we will adopt multiple strategies to improve our ad business. We will focus on growing our brand new scale and offer tailor capaigns on large screens. Meanwhile, we will continue to develop the ad-supported basic subscription package on iQIYI Lite, which is similar to Netflix's low price, ad-supported initiative. We believe the solid growth in iQIYI Lite basic subscription package will drive ad inventory on our platform and lead to ad revenue growth. Moving on to technology and products. Technical innovation is 1 of our core values. Our continuous promote video industrialization and improve efficiency, incumbent production and distribution to innovative technologies. We start to explore AIGC-related opportunities since May, mid-2022, and have seen promising results. We believe our rich video entertainment resources, combined with cutting-edge technologies, will empower iQIYI to further improve efficiency in content production, distribution and other areas. On February 15, we announced the strategy of operation with Baidu and both companies will join the -- this form, the AIGC application scenario, soon Baidu's Ernie Bot. We anticipate that companys future and the promotion are 1 of the earliest areas to be in placement, and this cooperation will further accelerate our program in AIGC-related areas. We look forward to implement more applications as we strengthen our technology advancement in the future. Moving on to new business, first iQIYI Lite in Q4. iQIYI Lite reached a breakeven for the first time and recorded solid revenue growth, both annually and sequentially. We continued to develop monetization model of iQIYI Lite, and the new ads supported basic subscription package was well received by users. Moving on to overseas business in Q4. Overseas membership revenue increased 30% year-over-year and the growth rate in America and Canada exceeded 70%. Original content, especially original dramas performed as well. Our original Chinese drama, New Life Begins, achieved the top rankings in Thailand, Philippines, Indonesia and the South Korea only 3 days after it launched. We are also delighted that our original dramas released in Q4 attract advertising budgets. In 2022, we successfully completed an iconic turnaround with substantial improvement in financial performance, business operations and market share. Meanwhile, our unique content production methodology helped up to produce a continual stream of blockbusters, embracing our core values. Our industry-leading original content production ability and superb operational capability are our core competitive strength and a key to our rapid growth in the long term. As we move through 2023, we are committed to delivering high-quality growth. We firmly believe our best days are yet to come. We will further release the flywheel effect of our business and bring higher value to our users, partners and stakeholders. Now, let me pass on to Jun to go through our financial performance.

Thank you, Mr. Gong, and hello, everyone. Q4 was a representing quarter for our membership revenue, operating profit, operating cash flow and free cash flow. The operating margin continued to expand driven by operating leverage. In addition, we raised around USD 1.3 billion over the past 12 months to remove that overhead. With operational and financial performances in great conditions, a significant capital structure enhancement, the management will be able to focus on delivering high-quality growth in the long run. Now, I would also like to give this opportunity to review the overall performance for the year 2022 for iQIYI. First, we delivered what we promised earlier in the year. We set the goal of reaching non-GAAP operating profit -- operating breakeven for the full year of 2022 and ended up with a non-GAAP operating profit of RMB 2.2 billion, far exceeding our expectations. Then we shifted our operational focus from cost down in Q1 and Q2 to scale up in Q3 and Q4, and roll out our common growth strategy in the mid of the year, which resulted a very healthy expansion of market share, membership services revenue and profit in the second half. The momentum continues beyond December 31, 2022. In addition, we also promised to protect the interest of all stakeholders and fix the immense challenge of that overhead despite the extremely volatile market, and we made that as well. Secondly, we humbly ask our investors to look beyond iQIYI specific achievements and revalued a long-form video industry as a whole. iQIYI continued to outperform to deliver alpha, but our entire industry was quickly recovering for the entire 2022 as well as to deliver beta, driven by the structural change on the supply side. This quantity, more quality, more concentrated supply of platform originated content leads to higher ratio and more efficient cost control. On the demand side, as Mr. Gong mentioned, long-form video remains a fundamental entertainment needs for the mass market. Over time, the higher quality content naturally lead to the higher willingness to pay, hence the higher ARM, and we are in a merchant cycle, and we'll see a more promising future. Certainly, we would like to thank everyone who supported us in a very dramatic 2022, including our users, employees, content partners, our shareholders and supportive bondholders and creditors. Our commitment in achieving healthy business growth remains unchanged, and we are more confident than ever in our ability to generate value for our stakeholders in the long run. For detailed financial data for Q4 end of year 2022, please refer to our press release on our IR website. Now, we will open the floor for Q&A.

[Operator Instructions] The first question is from Xueqing Zhang from CICC.

[Interpreted] And I will translate myself. Congratulations to a remarkable performance, which means that the cards came -- were received in January. So how do management think about overall content stream in the first quarter? And as you mentioned in the letter to investors, people know iQIYI as a blockbuster powerhouse. Can management show us that how to make and more original blockbusters in the future? And last, how should we think about the number of subscribing members in the longer term?

[Interpreted] First of all, the Q1 content was excellent. Exceeded our expectations. And for the overall content performance, we invite our CCO, Xiaohui, to answer the question. And in regards to the membership business, we will invite our Senior Vice President, Mr.Youqiao Duan, to answer your question.

[Interpreted] As a media platform, 1 of the main goals for iQIYI in the past 10 years is to systematically improve the success rate of operating blockbusters. Looking at the content performance in the past year, whether it's the drama Love Between Fairy and Devil, Wild Bloom, New Life Begins, Shaping Under Current, Homesick are the recent knockout. We can see the community and diversity of iQIYI blockbuster content. First, core competitiveness is talent. Under our in-house studio strategy, we have established a number of levers and distinctive in our studios, which gathered the most creative talents in this industry. These talents are also in line with the distinctive characteristics of the creative industry. At the same time, we have also established a strong supporting native platform which provides a sophisticated mechanism that is conducive to improving the efficiency in content production and increasing the probability of hit ratios. The second is our internal development content management system. We have established a complex, data-driven and efficient decision-making content production management system which covers every critical moment in the entire cycle of content production. The third 1 is operations. We have won a strong content operational capability which runs through contemplation, production, scheduling, promotion and et cetera. The fourth is innovative and intelligent technology. We use intelligent production technology to effectively improve producton, efficiency and the [ safe ] cost, which provides strong guarantee for our content production. The fifth is in the treatment side. After years of experiences in the industry, we have clear insights in terms of the content creation and accurate graph of the appetite of the trained entertainment consumer budget. These are definitely our core competitive advantages. Therefore, our current content production mechanism and strong operational capability will guarantee us with a stable and continuous supply of top premium content in the future.

[Interpreted] In 2022, we continued to develop our membership business operations, membership sales and subscriber base, and have achieved healthy growth momentum. In 2022 Q4, the subscriber base made a breakthrough of the fluctuating subscriber range of the past 2 years. We are optimistic that the subscriber base will continue to grow in 2023. Our number of subscribers reached nearly 120 million by the end of December, and thanks to the high-quality content, our subscriber base continues to maintain a high level and continue to grow since the beginning of the year. The structure of our subscriber base is optimized. The annual membership package and the large team subscribers are growing well, which will help improving the platform's membership stickiness and long-term monetization ability. In the long run, resuming of domestic subscriber base depends on the number of people consuming the long-form digital content, the number of families and the industry's competitive landscape. Currently, the number of subscribers still have a lot of room to go compared with the number of internet population and the number of families in China. In the future, the membership business has good prospects in both direct-to-consumer sales and also channel sales market. In the direct-to-consumer to consumer sales market, there is a fundamental demand for long-form video membership in the mass entertainment market. In the channel sales market, video membership package has also become 1 of the preferred products favored by our partners and the telecommunication, internet services and financial sectors. Last but not least, as our content quality continues to improve, it will definitely increase subscribers' willingness to pay and the improvement of our monetization ability in the future.

The next question comes from Lei zhang from Bank of America [ Merrill Lynch ].

[Interpreted] Congrats on the strong results. My question is mainly on the online industry. We noticed that a major player have focusing on ROI and content quality in 2022. I'm wondering how should we see the industry development in the future?

[Interpreted] I think right now, it's the industry's consensus that we believe there is a fundamental demand for long-form video membership in the mass entertainment market. Maybe a few years ago, there were some players who doubted this, but I think right now, everybody in this market reaches a comment on customers on this. At the end of 2021, we think we were the first to foresee that there are changes in the online video market that will lead to a new stage of rational development for the entire industry. The focus of the long-form video competition will shift from repeating on content quantity to content quality, and more players will pursue the improvement in operational efficiency and profitability. And based on the past 1 year and more experience, we can win and establish increasing quality of video content leads to higher ROI. And I think based on that, we think the results in 2022 also proves that our insight of the structural change of the industry is correct. Our excess turnaround of the business performance last year, I think, was attributable to the improvement in original content production. And the same for the industry peers, I think there are more sufficient supply of content and also a higher hit ratios and better additional cost control. We think the high-quality content is evident will lead to higher willingness to pay, which enables us to form a virtue cycle for content production among divisions. And we also believe eventually, there is the chances for 1 single user to subscribe to multiple unleveraged packages among the video industry peers. We believe our -- we achieved our iconic turnaround last year as we continue to lead industry. And also at the same time, our goal for next year is achieving head quality growth, meaning that will achieve quality growth in terms of revenue and also for profit as well. I understand that this brings some of the pressure for our peers in the industry, but I think as a leader in this industry, it will decline and then increasing ROI will also lead the entire industry to recover better ROI performance quickly and driven by the structural changes as we mentioned earlier. And then I think this will eventually lead to a healthier industry and eventually, every player in the industry will benefit from it.

Your next question comes from Lincoln Kong from Goldman Sachs.

[Interpreted] So my question is about AIGC-generated content, so especially the application in the video space. So how do management think about the potential TAM and the potential applications are going to operate this space? Especially we also noticed recently, our company has a written cooperation with Baidu. So in that sense, what aspects should we expect more concrete plan related to this cooperation?

I want to invite our CTO, Wenfeng, to answer this question. Please go ahead.

[Interpreted] Our iQIYI corporate provision is to be a technology-based entertainment giant. We believe that technology innovation is also always 1 of the key factors to promote the evolution of the video industry. We have been investing in artificial intelligence for computing audio and video technology, and improve the efficiency and quality of content production and intense viewer experience. AIGC is a powerful engine for data processing and also comes in production using the AI technology. By applying the AIGC technology to further expand iQIYI capabilities in content creativity, improve content production efficiency and [ follow ] and user experience. We have been exploring the application of AIGC in the video space since mid-2022. We have been exploring in the following aspects. For the [ increasive ] stage in the future, content creators can use iQIYI's intelligent production system during the scripting process. Not only that it will trigger more creative inspiration, but it will also improve efficiency and reduce costs. In the production stage in the future, iQIYI's intelligent production system can intelligently analyze and process the script through the use of AIGC to essentially analyze the script and extract the story out. In addition, such technology not only can help the content producers in find the project, but it could also provide more valuable information regarding billing process for post-production and marketing, improving the overall efficiency and quality of video content production. In terms of content marketing and promotion, AIGC can produce a large number of marketing videos and marketing materials to improve the efficiency and effect of content marketing. In the future, content recreators can also use AI to automatically generate, did your commentary script further improve the efficiency and quality of the video [ resolution ]? This can briefly enrich short-form video content that promote our dramas, variety shows, films, et cetera, attracting more users to watch iQIYI's content. It will also especially benefit in promoting our extensive selection of library content, effectively extending the life record of these contents. And also, AIGC can produce personalized poster images for any content, helps content to find its audience and the user will have improved content recommendation experience. The video search experience will also be improved. Through the [ conversation ] of AI capabilities, users can search a spot, find out a story of a particular team or binge watching recommendations et cetera, helping the users -- they can help the users to find content more effectively. We believe that the combination of AIGC's technology and iQIYI's rich online video entertainment resources can further promote the development of the video industry and improved user experience. We will continue to increase our investment in this area. On February 15, 2023, we announced a strategic cooperation with Baidu, and both companies were really exploring AIGC application scenarios through Baidu's learning bots in the areas such as content creation rules, company distribution of promotions, content search, novel creation, et cetera. We believe it will further expand iQIYI's production capabilities in content creativity, production efficiency and user experience.

This is the last question for today. I'll now hand back to iQIYI's management for closing remarks. .

Thank you, everyone, for joining the call today, and please do not hesitate to reach out to us if you have further questions. Thank you.

Thank you. Bye-bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.