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

Thank you for standing by, and welcome to the iQIYI's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Third Quarter 2024 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. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO, Mr. Xiaohui Wang, CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our Membership business; Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Systems and Mr. Gang Wu, Senior Vice President of Brand 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, the management team will participate 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 are 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 the required under applicable law. I will now pass on to Mr. Gong. Please go ahead.

Hello, everyone, and thank you for joining us today. Through our 14-year company history, our ability to reinvent ourselves and innovate has been our core advantage against a competitor, and this strategy has remained unchanged for navigating all kinds of challenges. At this moment, we have identified 2 key trends: First, consumer become more prudent because of macro headwind; secondly, consumer are now facing more entertainment options, including the free mini and the short dramas, which is growing rapidly. As always, we hold strong belief that premium long-form videos remain one of the most fundamental and irreplaceable forms of entertainment. Their unique ability to include wide audience and the crowd provide emotionality is unmatched by any other form of entertainment. Meanwhile, facing evolving industry and the market dynamics, we should proactively reach out to these new opportunities and to ensure a long-term healthy and sustainable growth. That's why we have been making a series of strategic upgrades. Key initiatives includes: first, we have optimized the production of dramas by refining the storytelling pacing, the plot structure and character development so as to better match the audiences' view preference. This will further improve the popularity and bring better returns; second, we have been upgrading and we'll continue to upgrade our apps to include mini and the short drama as part of our content offering. The main iQIYI app will maintain its focus on long-form video content and subscription-based model, complement by free mini and the short dramas and advertising model. In contrast, the upgraded iQIYI Lite app will focus on free mini and the short drama and advertising model, complemented by long-form videos and the subscription model; third, we will increase investments in the acquisition and the distribution of mini and short dramas. First, we have optimized our membership products and services system by combating unauthorized password sharing and introducing an attractively priced family account option. The goal is we enhance member conversions and expand the scale of membership. Beyond these initiatives, we would apply AI more widely across our ecosystem, expand our presence in overseas market and explore possibility in IP, the [ real world tips ] and the offline experience. We believe these efforts will enhance our revenue and profitability over the long term. Now let's move on to the details of our core business segments. Starting with mini and short dramas, we are adapting our company's strategy and the business model to align with evolving market trends and the consumer preferences by introducing mini and the short dramas into our offering, distinct from long-form video in formats, storytelling style and audience reach. Mini and the short dramas serve as a great complement for our existing lineup of traditional long-format dramas, movies and variety shows. Mini dramas feature episodes lasting 1 to 5 minutes in vertical formats, and the short dramas spend 5 to 20 minutes in horizontal format. This transfer format offers a quicker storytelling pace, cater well to users seeking quick entertainment breaks and have gained considerable popularity among audiences. From a business model perspective in, the future, mini drama will be available to all members at no actual cost. Nonmembers will be enjoy the free-to-watch mini dramas or choose to pay per view to access those exclusive to members. Short dramas will mirror the approach taken with our long-form content. They are free for members while nonmembers will have access to a great free-to-watch second window. This [ still ] offering caters to deliver viewer demands -- viewer demand while supporting the growth of our subscriber base and expanding our monetization opportunities. Moving on to long-form videos, which are fundamental to our content ecosystem. Starting with the core genre category, we regained the #1 position in viewership market share during the quarter according to enlightened data. This was driven by the launch of multiple titles that gathered high acclaim from users. Notably, the second season of Strange Tales of Tang Dynasty, [Foreign Language], become the 14th drama to break the iQIYI popularity index score of 10,000. Not only is it serial, third season is already in production. This IP has been expanding its influence from online to off-line domains, showcasing our success in IP development. Also, the new release, For The Young Ones, [Foreign Language], received the highest iQIYI popularity index score among dramas with less than 20 episodes. Other titles such as: the internet -- Interlaced Scenes, [Foreign Language]; Born to Be the One, [Foreign Language]; and Wind Directions, [Foreign Language], were all released to widespread praise. While we are proud of performance in crime and reality drama genres, we recall that certain areas where we can improve. For example, the limited supply of key female-oriented costume dramas in the third quarter impacted hit title-driven members. To this end, we aim to enhance the steady supply in this genre while also better align content genres with optimal broadcasting window going forward. For variety shows, our innovative new title, The King of the Stand-up Comedy, [Foreign Language], will enforce our strong presence in the comedy genre. According to enlighten data, it dominated the viewership charts for 10 consecutive weeks and then largely outperformed other shows in the same genre and also achieved the second highest peak popularity ever recorded for iQIYI exclusive variety shows. What's more impressive is that the show has not only propelled some standout comedy to widespread fame, but also played a key role in boosting the industry and capturing the attention of audiences. For movies, we have maintained our leading position in viewership for 11 consecutive quarters according to enlightened data. The performance was underscored by the theatrical releases like Successor, [Foreign Language], and the No More Bets, [Foreign Language], which ranked first and second, respectively, on our popularity index ranking. For animations, our production capabilities for Chinese animations continue to improve as evidenced by an increasing share of revenue generated from our original titles, along with the ongoing release of the highly popular How dare you!?, [Foreign Language]. We also launched The Legend of Sky Lord, [Foreign Language], and A Moment But Forever, [Foreign Language], receiving positive feedback. Leveraging the exceptional quality of our premium content, we have earned broad recognition from reputable Chinese industry awards and the 34th Flying Apsaras award. We can -- we topped the list among online video platforms with 11 honors. We also secure 7 honors owners at the 32nd China TV Golden Eagle Awards, [Foreign Language]. Turning to our content [Foreign Language]. Turning to our content pipeline. We remain committed to providing our users with top-notch long-form video. This was highlighted during the iQIYI iJoy Conference. Our flagship marketing event where we disclosed an exacting lineup of over 300 titles that are set to premier in the year 2024 and 2025. Forecasting dramas, Fangs of Fortune, [Foreign Language], was released and will be followed by the much anticipated female-oriented drama: Love Song in Winter, [Foreign Language]; [ Embrace ], [Foreign Language]. In reality and suspense genres, audiences can look forward to: [ We are Criminal Place ], [Foreign Language]; Under the Skin Season 2, [Foreign Language]; The [indiscernible] Season 2, [Foreign Language]; [ Let Wind Go By ], [Foreign Language]. Beyond dramas, our movie offering include the already released hit Upstream, [Foreign Language]; [indiscernible], [Foreign Language]; and the Tiger Wolf Rabbit, [Foreign Language], with upcoming titles such as The Volunteers: The Battle of Life and Death, [Foreign Language]. Additionally, new online films and iQIYI original films are on the horizon. In terms of variety shows, we are introducing fresh IPs like My Zone, [Foreign Language], and [ Blooming Journey ], [Foreign Language]. For animations, the Q4 pipeline features major titles like the exclusive Dragon Ball DAIMA, [Foreign Language], and the original material art IP, [ Weak Driver in Tang Dynasty ], [Foreign Language]. Moving on to membership services. Membership revenues in the third quarter was RMB 4.4 billion, down year-over-year. There are 3 areas that will improve the membership revenue performance. First, as I previously mentioned, although we launched good quality titles in the quarter, there is room for improvement in the supply of premium female-oriented and Asian costume dramas, which are especially appealing to members driven by hit titles. Second, amid the current micro headwinds, users are drawn to hit titles have grown more cautious in spending, and a broader selection of entertainment options is also seeking to capture their budget and attention. Thirdly, the high base effect from last year continued to play a part in our current figures. Our innovative value-added services continue to gain traction among users. Notably, we launched express package for 13 dramas in the quarter, leading to more than 40% sequentially growth in cash purchase, reaching a historical high. Additionally, we further enhanced member benefits to encourage upgrades to high tier plans and boost member engagement. This includes more than 20 offline events, such as fun meetings, early screening events and family fun days. As always, our primary goal for membership services is to maximize revenue performance. To fulfill this goal and to proactively adapt to the current consumer segments, we are making modifications to our membership offering. Key initiatives include, first, we are combating unauthorized membership account password sharing to enhance our account security. Meanwhile, on the member accounts, we introduced the family account option as a better solution for account sharing. Through this program, monthly [ out ] renewing Golden VIP members have the option to add a separate family account for just RMB 8 per month. Each account, both primary and family, and are -- will maintain separate user profiles and ensure an uninterrupted and personalized experience. Secondly, the other supported basic membership plan, which was previously exclusive to iQIYI Lite has now been expanded to major iQIYI products. This initial performance is in line with our expectation. Last, but not the least, content serves as one of the key drivers of our membership business, integrating mini and short dramas with our top quality long-form video titles introduced a unique mix that caters to deliver viewer preference. Moving on to the advertising business. Advertising revenue during the third quarter was RMB 1.3 billion, down year-over-year. Performance has remained the highlight during the quarter, again steady growth annually, driven by the solid performance in e-commerce, Internet and the mini drama sectors. The growth was also fueled by our advancements in AI applications with the CPM for AI-powered ads, improving by over 20% compared to traditional ads. On brand ads, revenue declined annually due to a weak advertiser segments and amid the macro headwind. Especially, we proactively reduced investments in variety shows in response to the macro headwind to avoid financial setbacks, which led to a major decrease in brand ad revenue. Nevertheless, content-related ads remained popular among brand advertisers. Titles such as The King of Stand-up Comedy, The Moon is Shining and the Strange Tales of Tang Dynasty Season 2 attracted the largest share of ad budgets on our platform. Going forward, we will focus on expanding our advertiser base, especially among local brands, and capturing a greater share of budgets from top-tier clients. Moving on to technology and products. We are making solid progress in driving technology innovations to improve user experience and operational efficiency. For example, we have made upgrades to our products across all devices, which include interactive bullet chat capabilities, improved audio quality, better video showing and download option and refined recommendation features. We have also made further progress in advancing the industrialization of the entertainment business as our virtual production technology has now reached the mass production stage. iQIYI is one of the first streaming platform in China with ability to handle the [ handheld ] watchful production process for dramas, including production, cost evaluation, technical design and supervision. This capability allows us to manage multiple projects simultaneously. In addition, the drama Shadow Love, [Foreign Language], is the first in China to apply the latest version of unreal engine into virtual production. We have also upgraded the IT virtual production studio with technical indicators meeting the highest standards, both in China and internationally. These tech upgrades is expected to effectively enhance our mass production capability moving forward. Our recent advancement showcased our utilization of AI to improve business efficiency. AI plays a central role in advancing our operations, especially in content translation and the dubbing for our overseas business. Our AI-driven approach has enabled efficiency -- efficient and highly accurate multilingual translation and the multi-tongue dubbing at drama, particularly, reducing the time additive to release Chinese content overseas and cutting down on translation costs. Moreover, we have developed an AI system capable of rapidly generating plot text for our content library. This innovative tool have shortened what used to be a month-long manual task into a matter of days. In fact, we have produced plot text tax for over 12,000 movies, achieving an impressive accuracy rate of over 92%. The casting process has seen similar improvement with AI, relentlessly analyzing and matching actors to the right roles, which largely builds up producers' decision-making workflow. Finally, for our business performance in region outside of Mainland China. We recorded solid performance in our overseas business in the third quarter with both total revenue and membership revenue and the membership service revenue gained annual and sequentially growth. Notably, membership revenue from Hong Kong, U.K., Brazil and Australia grew over 40% annually. The average daily number of subscribing members overseas also increased annually and sequentially with Brazil, Mexico, Hong Kong and Thailand seeing annual growth exceeding 45%. The influence of C-dramas continue to strengthen overseas. In the third quarter, total views of Love's Rebellion, [Foreign Language], helped the viewership ranking across multiple markets, including the U.S., Australia, Japan and South Korea. Additionally, we successfully expanded the inflow of original production, like Strange Tales of Tang Dynasty, [Foreign Language], beyond Mainland China. The [ Successor ] made international debut with a premiere in Singapore at the end of July, marked the first-ever overseas premier screening for our premium C-dramas. For local content, we launched a number of dramas that received a positive feedback. Among these, The Lady and Her Lovers recorded the highest daily revenue among all Thailand, all Thai dramas released on our platform in 2024. The show also ranked first on Google in Thailand, which we outperformed other shows in the same time slot. As we head into the first quarter, we will continue to expand our local [ content ] and explore additional monetization opportunities. This includes deepening the bundled package cooperation with telecom providers in Thailand, Malaysia, Singapore and Hong Kong. In addition, we aim to amplify the inflow of our content and increase membership benefits, so diversifying off-line events. On November 1, we host our first iJoy Conference outside of Mainland China. As we proceed soon, the remaining months of Q4, we are set to a series of appreciation events and promotion for members. Additionally, we are excited about the forthcoming international rollout of more high-quality content. Notably, our talent show, Starlight Boys, was introduced on October 26 and have already received a positive reaction from our audience. In summary, looking ahead, we remain committed to driving innovation and advancements across our business, catering to the dynamic entertainment needs. Our targeted initiatives, such as launching mini and short dramas while bringing in rich entertainment experiences and further strengthening of commercial abilities. These efforts are supported by our deep knowledge of both content and the users, coupled with our vast industry resources. In parallel, we will deepen our adoption of AI technology, advance our overseas expansion and fully leverage the potential of our IP. These strategic efforts are aimed at driving our company towards greater [indiscernible] and success. Now let me pass it to -- on to Jun to go through our financial performance.

Thank you, Mr. Gong, and hello, everyone. Let me walk you through the key numbers. In the third quarter, the total revenue were RMB 7.2 billion, down 10% annually. The membership services revenue reached RMB 4.4 billion, down 13% annually for 3 reasons, as previously discussed by Mr. Gong. For online advertising, revenue decreased by 20% year-over-year to RMB 1.3 billion. This was primarily due to the decrease in brand ad business, partially offset by the growth in performance ad business. Content distribution revenue reached RMB 814 million and grew 52% annually, and other revenues decreased by 8% annually to RMB 729 million. Moving on to cost and expenses. The content cost was RMB 4 billion, down 5% annually, primarily due to lighter movie offering in the quarter. The total operating expenses were RMB 1.4 billion, down 5% annually, primarily driven by the more disciplined management of the marketing spending. Turning to profits and cash flows. The non-GAAP operating income was RMB 369 million and its corresponding margin was 5%. The operating cash flow totaled RMB 243 million positive for 10 consecutive quarters. At the end of the third quarter, we had cash, cash equivalents, short-term investments and the long-term restricted cash included in the prepayment and other assets a total of RMB 4.7 billion. For the detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q&A.

[Operator Instructions] Your first question comes from Xueqing Zhang with CICC.

[Foreign Language] My question is about mini and short drama. As Gong mentioned in the prepared remarks, the company has enhanced the integration of mini and short dramas. Could management elaborate a little more on this? And what's our strategy for mini and short dramas?

[Foreign Language]

[Interpreted] [ The CEO, Mr. Gong, is answering this question ]. Starting from the end of September this year, we added mini drama and short drama into our content ecosystem. And these 2 type of contents are very much differentiated from a traditional long-form video content. So they are a very good complement to our content offerings.

[Foreign Language]

[Interpreted] Especially for this year, the free mini dramas model has been rising significantly. And then the user scale is at pretty sizable scale and have been growing. So now is a good time to enter.

[Foreign Language]

[Interpreted] Okay. So for mini dramas, we classify them as they are 1 to 5 minutes long in vertical format. And then for short drama, they're 5 to 20 minutes long in horizontal format. And for now, we're focusing on the mini drama sector.

[Foreign Language]

[Interpreted] In the past 2 years, we participated in a mini drama [ survival ], participating in the performance [indiscernible].

[Foreign Language]

[Interpreted] And we have been actually innovating in this mini drama sector by innovating different models and formats. For users, it used to be participating or watching the content by free or pay per view. And we now introduced the subscription model to this business model. And for parent subscribers, they can watch a vast majority of the mini drama for free, and then pretty soon in the future, they will watch everything for -- mini dramas for free.

[Foreign Language]

[Interpreted] For the -- per business model, there are free advertising model and then -- or they can do pay per view. And we actually introduced a subscription model to the business model, and we believe this will be positive and constructive for the membership retention and also to get new users.

[Foreign Language]

In terms of content strategy, we will develop mini dramas through various methods, including the licensed copyrights, whole rights buyouts and profit sharing.

[Foreign Language]

[Interpreted] Going forward, we'll focus on the premium head content of mini dramas. And then eventually, we will develop a unique style that's generated by iQIYI, belong to iQIYI.

[Foreign Language]

[Interpreted] And we hope in the future that for iQIYI mini dramas, in terms of the content production quality and also the value provided to users, it will be a further improvement from the current level.

[Foreign Language]

Thank you.

Your next question comes from Lei Zhang with Bank of America.

[Foreign Language] Want to follow-up on the short drama side. Can you share with us the competitive edge in investing short drama? And any impact to our content costs in the future?

[Foreign Language]

[Interpreted] [ The CEO, Mr. Gong, is answering this question ]. So in terms of our advantage in mini dramas, first of all, we have advantage in product and technology. For mini dramas, currently, materially -- a material amount of the traffic is happening on the mobile side. So on the mobile side, we have 2 major applications, the iQIYI app and also iQIYI Lite. So for these 2 apps, we have very mature technology and infrastructure and also a good user base. And actually a good size and actually a good portion of the users are subscribers. So basically, based on that, when we add new content dramas to this and then combine with a good upgrade to the application, it will be a good adoption to the current strategy.

[Foreign Language]

[Interpreted] For the -- the first upgraded version of the iQIYI app actually have been released already. We're doing the APE test right now. So most of the users, when you download the -- or upgraded the application, you will see the changes.

[Foreign Language]

[Interpreted] For iQIYI app, it will continue to focus on the long-form video content. From the business model perspective, it will be majority focused on the subscription model. And for iQIYI Lite application, it will focus on mini dramas and short dramas, mainly driven by the advertising model.

[Foreign Language]

[Interpreted] The vast majority of the content providers for mini dramas are iQIYI's existing partners. So collaborations in these new categories have further expanded and are deepened our partnership scope, allowing us to rapidly scale up in these areas and then at a relatively low cost.

[Foreign Language]

[Interpreted] So basically, the operational rules or the principles in terms of managing these 2 type of content, the long-form video content versus mini series, I mean, from -- are relatively similar, don't have a major changes. So it will be pretty fast for our teams to pick up and then master in this.

[Foreign Language]

[Interpreted] In terms of the funding for the content for mini dramas, it will come from 2 [indiscernible]. First of all, we'll lower the investment in terms of the low ROI of long-form video content. And then secondly, then we will scientifically and also rationally increasing the budget for mini series.

[Foreign Language]

[Interpreted] And that's it. Thank you.

Your next question comes from Maggie Ye with CLSA.

[Foreign Language] My question is membership. In October, we announced the launch of family account option. Wondering if management can share more insights into the strategic consideration around this initiative, especially given the current macro environment and consumer trends. What's our expectation on this strategy over near term and longer term? How's the initial feedback we received from consumers and users so far since the introduction?

Thank you, Maggie, and we will invite Mr. Duan, who's in charge of this business segment to answer this question.

[Foreign Language]

[Interpreted] iQIYI's family account is a high cost effective shared membership service plan we introduced to enhance the user experience for family members. They better serves users' independent and diverse viewing needs and user scenario.

[Foreign Language]

[Interpreted] The family account and the primary accounts are actually stand-alone membership accounts with individual passwords and also playback history. So this not only effectively improves the user experience, but also protect the account security.

[Foreign Language]

[Interpreted] And as you know that the video consumption needs of the elderly and the young demographics are steadily increasing, and the family account is actually designed to effectively address their challenges in account management and accessing child content.

[Foreign Language]

[Interpreted] The membership account is an innovative attempt in the membership product model, which have positive impact on improving membership conversion and revenue. So going forward in the future, we'll continue to combat password sharing and offer users more cost-effective choices and aim for the long-term healthy development of the membership business.

[Foreign Language]

[Interpreted] The family account that was actually officially launched on November 12 and that we will observe the performance for some time before sharing the user feedback and data outcomes with everyone. Thank you.

Your next question comes from [ Zei Zhao ] with Guangfa.

[Foreign Language] I will translate myself. As Dr. Gong has mentioned, the long-form video are fundamentals to iQIYI's content ecosystem. My question is about your strategy for production of dramas. Could you share with us about the lens seen and innovative direction of your future drama series?

Thank you. And we will invite Mr. Xiaohui Wang, our Chief Content Officer, to take this question.

[Foreign Language]

[Interpreted] We believe -- although there have been some cyclical fluctuations in the industry, we believe that the recovery of the market confidence and user demand, long-form videos will still be one of the strongest demand among users in the mid to long term. We believe it will remain at the core of iQIYI content ecosystem as well. So going forward, we will enhance the sustainability of a diverse high-quality content supply through powerful performance measures, continuing to achieve a win-win situation for both content quality and commercial revenue.

[Foreign Language]

[Interpreted] Based on the insights into societal sentiment and also the changes in user viewing preferences, we believe we will comprehensively upgrade the production and operational mechanisms for dramas, films, animations and variety shows. We will improve the production and content launch efficiency, focus resources on creating high-quality works and strengthen the commercial aspect of the content.

[Foreign Language]

[Interpreted] For content planning, we will structurally optimize the process by improving the coordination of the number of new dramas, episodes and genres. And we'll reasonably reduce the number of key main drama releases each year. We will strictly curate project selections to prioritize excellence and concentrate resource allocations on premium content with high commercial value. So from inception, all projects will embody commercial appeal, mass market resonance and contemporary relevance.

[Foreign Language]

[Interpreted] For content evaluation, we will establish stricter assessment standards that focus more on revenue capability and innovation ability within the framework of the content-related cost ratio.

[Foreign Language]

[Interpreted] For content creation, we will optimize scripts and filming techniques to align with users' evolving viewing purposes. And simultaneously, we will aim to deepen our understanding of social trends and create work that resonate more profoundly with contemporary societal emotions and taste.

[Foreign Language]

[Interpreted] For content production, we'll strengthen project management and public control, mostly monitor project profits and work with partners to reduce cost and improve production efficiency.

[Foreign Language]

[Interpreted] And from a team building perspective, we are committed to the continuous improvement in our in-house studio mechanisms. Our studios, which are structured around the producers, focus on consistently attracting high-quality talent from the market. We aim to cultivate healthy internal competition by establishing mechanisms that reward innovation and promote distinct content styles. This strategy ensures ongoing evolution through a process of natural selection, where only the excellence [indiscernible]. And that concludes the answer to this question.

There are no further questions at this time. I'll now hand back to management for closing remarks.

Thank you, everyone, for participating in the call today. If you have further questions, do not hesitate to contact us. Thank you again.

Bye bye. Thank you.

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