iQIYI, Inc. ($IQ)

Thank you for standing by, and welcome to the iQIYI's First Quarter 2026 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 First Quarter 2026 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; Ms. Ying Zeng, our Interim CFO; Mr. Xiaohui Wang, our Chief Content Officer; [ Mr. Youqiao Duan, ] Senior Vice President of our Membership business; and Mr. Xianghua Yang, Senior Vice President of International and overseas, online gaming business. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by , Ying 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 required under applicable law. I will now pass on to Mr. Gong. Please go ahead.

Hello, everyone, thank you for joining us today, the avoidance of [indiscernible] landscape is fundamentally reshaping entertainment and creating incredible opportunities for iQIYI. That we shall at iQIYI value of creation in the new area from 3 [indiscernible] creating our core today, igniting new growth engines and building for the long term. Let's start with the first prospective reinforcing our core fundamental foundational set. Premium content remains the cornerstone of our strategy. And in Q1, we reformed its compelling appeal for audiences of the worse lineup of heat drama, including the Punishment 2, Born to Be Alive, Sheng Ming Shu, [indiscernible] and How dare you!? [indiscernible] dominant position in the core drama category, Enlightent data moving from our commitment to content quality stronger than ever designed to deliver experience that profoundly connect with viewers. This focus is vitalizing our core operations evidenced by the sequential growth in membership revenue. We are also highly encouraged by the supportive domestic value landscape, which is accelerating the company's approval programs and try stronger capital efficiency. Importantly, these regulatory policies are unlocking innovation across new formats. This includes short-form dramas -- 15 to 25 minutes per episode with flexible episode counts and Internet feature films from Rouen, which are limited to 3 chapters of 60 minutes each. These formats are not only shortened production cycles and lower capital barriers, but also attract a broader pool of creative talent, enabling more innovative story telling than traditional long-form content. Furthermore, there are perfectly suited for AI integration, ultimately enriching our portfolio and maximizing our ROI. Looking ahead, we plan to launch over 100 short-form dramas in 2026, while steadily building our Internet feature film slate. By continually delivering premium long-form content while strategically expanding into new formats, we are reinforcing our foundational strengths. Importantly, this expansion is efficient, allowing us to capture new opportunities without putting additional pressure on our overall content costs. Second, we are igniting new growth engines. Among our emerging business segments, our overseas business has established it as a proven second growth driver. In Q1, overseas membership revenue surged by over 40% annually. This success stemmed from a highly differentiated market positioning compared to global peers, we focus on premium Asian content tailored primarily for young female demographics within our Asian content portfolio, key dramas whose global influence continue to rise serve as the key catalyst for our international expansion, complemented by our growing slate of local content. Geographically, we are anchoring our presence in Southeast Asia. We are also expanding into high-growth markets in the Middle East and Latin America with Brazil as a key focus. We are also deeply integrating AI across our global operations to drive efficiency. Parallel to our market expansion, we are maximizing IP value through our experience business, expanding our content value from online to offline and extending the IP life cycle. For IP-based consumer products, we are driving deeper user engagement through merchandising while empowering popular IPs to generate both casting window and long tail monetization. Finally, our foray into offline experience is yielding encouraging results. Our first IT event in Yangzhou has gathered solid initial feedback, allowing us to rapidly accumulate operational experience to apply to other locations. Thirdly, we are laying a robust foundation for long-term growth powered by AI and our decentralized platform. AI is breaking down the historic barrier that was made quality content costly, time consuming, igniting explore growth in both creators and content value, anticipating that this accelerating shift will soon outgrow the traditional centralized media platform model. We have strategically pivoted to build an upgraded and vibrant decentralized social media ecosystem. This will unlock substantial value decentralized ecosystem greatly expands content supply, allowing us to meet diverse demand at a whole new scale. creators will have greater opportunities to breakthrough NSSC, retaining full ownership of their IP and converting it into fair attractive returns. We are also cultivating private traffic, building loyal fan base and gathering valuable data from direct user interactions. Meanwhile, for IQ originals, we are sharpening our focus on premium content, while the decentralized platform drive scale original will serve as our signature offerings. Additionally, we are building a comprehensive support system so creators can focus purely on creativity. One key pillar is Nado Pro, a proprietary platform for great content production. Nado Pro is powered by both public and self-deployed large models, but it goes beyond generic models. It built upon our years of technology infrastructure and deep content expertise. We transform years of industry know-how into AI agent and combine them with our core IP and digital assets to deliver accessible platform capabilities. Nado Pro offers one-stop services from content creation to operations and commercial collaborations. Beyond Nado Pro, we offer professional training and workplaces. We also facilitate financing solution, connecting talent with capital from our own funds and external investor networks. Now let's explore what define iQIYI's long-term investment value and how we are uniquely positioned to lead in the AI area. Our confidence rests on 2 core pillars. First, how to replicate competitive moat. We p a unique blend of deep content expertise and cutting-edge technology. We have a proven DNA of innovation from pioneering general specific the brands to now leading the AIGC transformation in the industry. Crucially, we process a vast high-quality IP library that is essential in the AI area, alongside a high engaged user base that we are committed to serving with excellence. Second, a long-term structural enhancement to our business economics. AI is poised to address major industry pain points expanding our margins and maximizing capital efficiency. At the same time, our decentralized platform will boost content diversity to capture broader audiences while iQIYI originals focus on crafting enduring premium IPs together. These initiatives fuel our diversified monetization system, expanding membership, advertising and offline experiences, unlocking IP value across both domestic and global markets. Before we dive into Q1 details, I want to emphasize our core philosophy, the true power of technology is to empower humanity, not replace it -- it will serve audiences with deeply resonate content. It will empower creators to overcome human limitation, turning their best inspiration into reality with absolute efficiency and freedom. Ultimately, it will elevate the entire industry, unlocking new avenues for growth and helping more creators, especially young talent, realize both their creative vision and commercial value. Now let's move on to the detailed performance in Q1. Let's start with content. We are pioneering AI-driven storytelling and talent cultivation. In Q1, we unveiled Peter Paul AI filter featuring a slate of 16 titles across science fiction, [indiscernible] each running 11 to 20 minutes. Nado Pro powered the key production process from capture design and setting to storylling, demonstrating AI transformative potential in professional content creation. In terms of our long-form drama performance, the punishment 2 became our second franchise with 2 seasons exceeding the 10,000 iQIYI popularity score. Pursuit of Jade also surpassed 10,000, while our in-house produced custom drama, How dare You! exceeded 9,000. Both Pursuit of Jade and How dare you! Resonated strongly with young female audiences, further solidifying our connection with these key demographics. Furthermore, we secured our leadership in realistic and suspense genres. Born to be Alive earned the highest rating reaching among all domestic drama releases in Q1 and [indiscernible] and our Suspense brand was also well received by users. For variety shows, our in-house production Wander Together [indiscernible] invited market share ranking for the first quarter. For animation, we expanded our offering with 4 key original titles among this, the long running, the Great Ruler, continued to captivate audiences and Season 2 of How dare you! achieved a strong synergy with its drama series adoption. For micro dramas, original production contributed over half of revenue from this category in Q1. AIGC has emerged as a powerful driver for content releases. In Q1, we launched more than 3,000 AI-generated micro dramas, further enriching our offerings. Finally, for micro animation and AI native format, we are rapidly expanding our library, which featured over 14,000 titles as of quarter end, with viewership continuing to rise steadily. Next, let me show our Q2 content pipeline. Our drama series lineup features a rich variety of titles from historical epics to niche genres, including [Foreign Language] among the already released titles Born with Luck gained wide popularity driven by its innovative storytelling combining comedy and mystery and surpassed iQIYI popularity score of 10,000, becoming the third to reach such mark this year. For films, our pipeline includes original online movies, [Foreign Language] For licensed titles, we will release the hits on our platform like [Foreign Language] For licensed titles, we will release the hits on our platform like [Foreign Language] along with the online film, the Legend Hunter [indiscernible] for variety shows, we will continue to captivate audience with established franchise such as 5HA Season 6, Become A Farmer Season 4, The Rap of China 2026 and Yes I Do Season 6 while launching new IP like of [Foreign Language] For microgram, we have a diverse slate schedule, including diverse slate schedule, including Perfect Match [Foreign Language] and the Spring Rise of Phoenix. For animation and children's content, we will continue the long running against and build a localized adoption of the BBC classic [Foreign Language] Now turning to membership business. Revenue grew sequentially, primarily driven by premium titles, including Pursuit of Jade, The Punishment 2, How are You! And [indiscernible]. Operationally, our refined upselling strategies and value-driven membership options successfully encouraged users to extend their plans, driving a year-over-year increase in average subscription duration for monthly subscribers this quarter. Additionally, our higher membership continued to scale, driven by a highly different value proposition that features free express package. Next, moving on to advertising business. For brand ad revenue contribution from targeted dramas recorded double-digit annual growth with titles like Born to be Alive, How dare You! And the Pursuit of Jade gained strong recognition from advertisers sector-wise, food and beverage, Internet services and e-commerce all achieved double-digit annual growth. Furthermore, we are expanding our advertising appeal across new content formats. For example, we partner with leading advertisers to coproduce [indiscernible] of content for micro dramas, creating new avenues for brand integration. On the technology front, AI continued to empower our advertising operations. We leverage Nado Pro to produce marketing materials and combine AIGC capabilities with our IPs to generate high-quality ad content. During Q2, our focus will be on maximizing ad sales across premium variety shows, dramas and traditional display ads with further enhancing monetization on large screens. Concurrently, we will continue to leverage AI to optimize advertising efficiency. For performance ads, the advertiser mix is healthier and more balanced. Revenue from small and midsized advertisers recorded strong annual growth with sustained improvements by sector. Internet services, e-commerce and mini games delivered outstanding quarterly results. Additionally, monetization efficiency for micro drama immersive ads measured by revenue per inventory unit increased by over 60% year-over-year. For the rest of the year, our strategy for performance ads focused on 4 key areas: First, expanding our client base across high-growth verticals, including Internet services, short-form videos, mini games and AI tools; second, capturing greater market share during peak window such as major e-commerce festival. Third, enhancing monetization efficiency through AI-powered capabilities. Finally, tapping into additional ad budgets by harnessing a more diverse content ecosystem and upgraded ad placement system. Moving on to our business performance in regions outside of Mainland China. Membership revenue increased by over 40% annually in Southeast Asia markets. Membership revenue from Indonesia grew by over 80% annually. Meanwhile, Portuguese and Spanish-speaking regions demonstrated robust growth with membership revenue from Brazil and Mexico both grew by over 500% annually. Average daily subscribers reached a new high. The global influence of dramas continue to expand, notably Pursuit of Jade led performance across multiple markets and secured top position on our international platform viewership rankings and topped Google trends among all free dramas broadcasted during the same window in 15 markets and set a record as the most such Chinese drama [indiscernible]. Beyond C-dramas, we are scaling original local production to elevate the appeal of our content library, particularly in key Southeast Asia markets in Q1. Our first original Thailand show, Running Man Thailand delivered exceptional results, setting multiple new records for variety shows on our international platform. Google Trends confirmed its position as the most popular variety show over the past 3 years, and the title earned strong recognition from advertisers. Meanwhile, our first original Indonesia drama is on track to premium in Q2, marking a further step in our localization journey. Our overseas micro drama business also gained momentum with growing revenue contribution fueled by both licensed and original content. Our original production pipeline consistently delivered new releases across multiple language, including English, Thai, Korean and Indonesian. Next, our experience business. We focus on 2 core areas: IT-based consumer products and IT led. For IT-based consumer products, our self-operated merchandise delivered solid performance with collectible cars from pursuit of seeking a new sales record in this category. For offline experience business, our first IT lab in Yangzhou performed in line with expectation and was highly acclaimed for its design, immersive experiences and technology-enabled interactions. Going forward, we will continue refining operations and introducing new creative offerings to encourage repeat visits and on-site consumption. Furthermore, we are leveraging our experience gained in Yangzhou to drive to development of new locations in Kaifeng and Beijing, which are progressing smoothly. Now I would like to hand it to Ying for the financials. Thank you

Thanks, Mr. Gong, and hello, everyone. Let me walk you through the key numbers for Q1. Total revenues were RMB 6.2 billion, down 8% sequentially. Membership services revenue reached RMB 4.2 billion, up 2% sequentially, driven primarily by our diverse lineup of key dramas. Online advertising revenue was RMB 1.2 billion, down 8% sequentially, primarily due to seasonality. Content distribution revenue reached RMB 358.7 million, down 54% sequentially, primarily because less number of dramas we distribute to third parties. Other revenues were RMB 426.7 million, down 22% sequentially. Moving on to cost and expenses. We adopt a disciplined strategy in Q1. Content cost was RMB 3.7 billion, down 2% sequentially. Total operating expenses were RMB 1.2 billion, down 10% sequentially. Moving on to cash flow. Net cash provided by operating activities were RMB 186 million, reflecting some encouraging early signs in financial performance driven by our new business initiatives. Turning to bottom line and cash balance. Non-GAAP operating loss was RMB 149 million, and non-GAAP operating loss margin was approximately 2%. As of the end of Q1, we had cash, cash equivalents, restricted cash, short-term investments and long-term restricted cash, including prepayments and other assets at a total of RMB 4 billion. The sequential decrease in cash balance was primarily due to the repurchase of our 6.5% convertible senior notes due 2028 which reduced our outstanding debt, further strengthening our capital structure. At quarter end, the company had a loan of USD 636.6 million to PAG recorded under the line item of prepayments and other assets. We remain committed to delivering shareholder value over the long run. In March, we announced a proposed listing on the main board of the Hong Kong Stock Exchange and our first share repurchase program of up to USD 100 million effective through September 2027. Up to now, we have repurchased a total of approximately 6.45 million ADS for a total cost of USD 8 million. For 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.

[Interpreted] And my question about Nado Pro. The company previously launched Nado Pro AI agent for film and television content creation. Could management share more details about the recent progress of Nado Pro and any specific examples of its practical applications. In addition, how does management view the future commercialization prospects for Nado Pro?

[Interpreted] The CEO Gong is taking this question. So Nado Pro is iQIYI's proprietary platform for studio-grade content production. It is powered by public large models, but it goes beyond generic models. It's actually built upon our years of tech infrastructure and deep content expertise. For example, we have transformed years of industry know-hows from key areas such as screen writing, filming and post production into AI agents and combine them with our core IP and digital assets to deliver accessible platform capability. Creator tools previously used only within iQIYI such as the script evaluation and shop-based reference search have now been incorporated to Nado Pro. Nado Pro has been available to all creators across the industry since April 20. We now currently have over 10,000 active creators on board, ranging from traditional production companies to independent creators. Content productions cover a wide variety of formats, including the long-form dramas, micro dramas, micro animation and for videos and also for some commercial app content among which about 100 of them are IT original titles project.. Nado Pro actually recently launched a creator community as a platform for creators to interchange experiences and for some feedback and that will feed internal development for the upgrades in the coming versions. And also, this platform will feature some commercial matchmaking features upcoming next. And then these will empower the creators with the full cycle from content creation to commercial monetization. In addition, the international version of Nado Pro is in development and will be online soon. Regarding Nado Pro's commercial prospects, it will serve as a stand-alone product to boost actually monetization capabilities. And it will continue to reiterate and continue to improve the development and also to roll out the upgraded version to create more better features.

Next question comes from Vicki Wei with Citi.

[Interpreted] Would management share some latest progress about the industry antiprivacy update?

Thanks. We will invite our Chief Content Officer, Xiaohui to take this question. Please go ahead.

[Interpreted] For the antipiracy situation, we actually have observed very positive progress. Around the end of April and early May, the National Radio and Television Administration launched a targeted campaign to crack down on the piracy distribution of drama content across illegal websites, browsers, search engines and cloud storage services. The industry regulators actually attached great importance to this issue and have established clear requirements for the prevention and handling of online copyright infringement, including some of the initiatives. To give you guys some examples. For example, we established a rapid response mechanism for infringement content, enabling real-time communication within copyright owners and platforms to ensure swift response and removal. Second, the new policies and regulations actually enforce dual responsibilities for platforms and local authorities requiring provincial and municipal bureaus to fulfill their local management duties, for example, enhancing monitoring and improve processing efficiency. The platforms must resolve and remove infringing content within 24 hours of receiving a report or notice. For newly released dramas, hit series or key titles, the removal must be completed within 4 hours. And third, building a coordinated enforcement mechanism, regularly reporting on infringement status, takedown and typical cases for repeat offenders who will be publicly named and handed over to copyright and police authorities for investigation and prosecution. This targeted campaign will be integrated with routine regulatory enforcement. Looking ahead, the National Copyright Administration's Sortnet 2026 anti-piracy special campaign has designated online copyright infringement and piracy as its top priority, signaling even stricter enforcement measures. Currently, we're happy to see the efficiency of handling infringement has improved significantly, and we believe the policy issue will be substantially mitigated in the future. We believe strong copyright protection safeguards the commercial interest of all industry stakeholders, with the willingness to invest in high-quality content creation and foster a virtuous cycle of content supply. And for iQIYI, we will continue to upgrade our technology and operational mechanism to co-build a healthy copyright ecosystem, ultimately helping to drive user growth and revenue of our long-form video business.

Your next question comes from Jenny Yuan with UBS.

[Interpreted] So let me translate myself. So membership business saw a sequential recovery in the first quarter. In particular, overseas business delivered a robust growth momentum. So how does management view the sustainability of this improving trend? And how should we think about the membership business outlook into second quarter and beyond?

Thanks, Jenny. We'll invite the Senior Vice President of Membership business to take on those questions. Go ahead, please.

[Interpreted] In Q1, driven by a strong slate of premium content and refined operational strategies, our membership revenue delivered sequential growth in the first quarter. We have a rich content pipeline for Q2. A number of recently launched titles actually have performed well. Notably, Born with Luck surpassed 10,000 on iQIYI's Popularity Index, powered by its distinct suspense plus comedy narrative style. And in addition, we have also an expanded slate for the second quarter, including the long-form dramas, for example, Echoes of Thousand Moons, the Epic of -- The Heir and for variety shows, we have Hahahahaha Season 6 become a farmer Season 4, and we believe this content will effectively reaching a broad membership base. Looking ahead, looking for Q2, we're looking at our operations and the sales priorities. For example, we're focusing on reactivating dormant members. optimizing variety shows schedules to offer more content for members and expanding large screen membership via joint operating initiatives with smart TV manufacturers and also leveraging the June 18 e-commerce festival to boost annual and bundled membership. And together, we believe these efforts will expand our subscriber base and expand subscription cycle. And looking ahead, as the stability and consistency of our premium content pipeline continues to strengthen and coupled with our ongoing optimization of our membership operations, -- we believe our membership business will maintain a steady development trajectory.

Your next question comes from Thomas Chong with Jefferies.

[Interpreted] Congratulations on the fast growth of your overseas business. just now we talk about the fast growth in Southeast Asia. So may I ask about our investment strategies in Southeast Asia market? And also, can you share about some of the differences or similarities in terms of the audience preference in domestic versus overseas?

Thank you, Thomas. We'll invite our Senior Vice President of our overseas business, Mr. Xianghua to take on this question.

[Interpreted] Okay. Well, I will take this part into 2 segments. First, for the key markets. Currently, our key markets are performing pretty well. And then for the Southeast Asia market has been growing quickly. And for the market that's crucial for our Southeast Asia, we'll continue to invest in countries such as Thailand, Indonesia, Malaysia, Vietnam and Philippines. And also for some of the emerging markets that's been also growing pretty well, for example, North America, Brazil, et cetera. So we'll continue to invest in these areas and markets. Let's start with content. So for us, our key differentiation is our C drama. So that will continue to be our key in terms of getting users and especially for the content that's favorable and liked by young female users. And in key areas that I mentioned earlier, that will increase the promotional activities and marketing activities for the market. For example, for user growth, using content to attract and also to retain users. And for local content, we control and also have a good pace in terms of the content investment and also in terms of the volume that we're investing into the local content. We also focus for the young female users like genre and content for local production. Third for our mature markets, we'll continue to cooperate with telecom carriers and also e-commerce platforms to increase our membership scale, and we will continue to use this strategy to replicate to other markets that we're trying to explore. In terms of the user demographics for overseas audiences is majority focusing on the young female users who are under 40 years old. For the user behaviors for overseas market, each major market is a bit different. Some of them have higher user subscription cycles, better cycles, better retention than others. But overall speaking, the ARPU for overseas memberships are higher than the domestic ones.

Your next question comes from [indiscernible].

[Interpreted] I will translate the question myself. Seeing iQIYI's efforts in Nado Pro and fostering AI-driven creation and talent cultivation, how do we view the competitive landscape in the AI era?

[Interpreted] For long-form video, in the past, our challenge has been the investment scale or the amount that we invest in content is massive. The content cost is high, which means the investment risk is high, which leads to less number of titles that's been invested and rolled out for the industry. And for any content that we invested, we typically focus on the premium head content. That becomes -- that was the cycle that we faced and the challenge we faced. For AI, it actually fundamentally improves the situation. Under the AI model, the content cost is much cheaper. The production cycle and production period is shorter which means there are more titles, more number of titles will be rolled out and introduced in the industry. And because there are more content, there are more choices for users to enjoy. So user scale will increase under the new AI model. So overall speaking, we think it's greatly beneficial for long-form video to improve its business fundamentals and economics and also to attract more users to the platform. To better accommodate this industry trend, we rolled out a number of initiatives, for example, the Nado Pro we discussed and also the IGI account, which means the users can upload their content to our platform. Under the revenue share model, they will have the opportunity to introduce their content to more users to enjoy and to increase the revenue performance and also monetization capabilities. So under this whole backdrop, we believe the content cost will be lower and the number of video content will be increased. If we look back for the past 10 years of the Internet and especially for short-form video and also micro drama in the recent years, we believe the technology is the fundamental driver in terms of the industry boom and industry development. So we think under this AI era, we think it becomes a great opportunity for the long-term video to have better economics and better industry dynamics.

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

Thank you, everyone, for participating on the call today. If you have further questions, don't hesitate to contact us. Thank you.

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