Good day and thank you for standing by. Welcome to iQIYI Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Fan Liu, Head of Capital Market of iQIYI to read the opening remarks and Safe harbor statement. Please go ahead.

Thank you Operator, and thank you for joining iQIYI Second Quarter 2021 earnings conference call. The Company's readout was released today and is 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. Xiaodong Wang, our CFO; Mr. Xiaohui Wang, our CCO, Chief Content Officer; and Mr. Wenfeng Liu, our CTO, Chief Technology Officer. Mr. Yu Gong will give a brief overview of the Company's business operations and highlights followed by Xiaodong who will go through the financials and the guidance. After their prepared remarks, Xiaohui and Wenfeng, we're joined the mid-term goal and Xiaodong in the Q and 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 and are not limited to those outlined in our public filings with the SEC. SEC undertakes 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. For the second quarter we maintained favorable momentum from the first quarter, with total revenue approaching the high end of our previous guidance. Our operating loss narrowed for 5 consecutive quarters on a year-over-year basis due to our effective cost and expense control. During the quarter, we continued to lead the market in multiple operating metrics. According to the third-party data, we ranked at the top of the long/mid-form video industry in terms of mobile MAUs, mobile DAUs and the total user time spent. First, let's start with our membership business. As of June 30, our total number of subscribers reached 106.2 million. This represented 0.9 million net add sequentially despite the heightened uncertainty of content launch during the second quarter. Our membership growth was mainly due to three factors; 1, our premium content, especially dramas, performed well, which helped to drive the number of subscribers to increase. For example, dramas launched in June, including: My Dear Guardian [Foreign Language] and The Rebel [Foreign Language] were well received by audience. In addition, films such as Detective Chinatown 3 and Break Through the Darkness [Foreign Language] also did well. Second, we saw strong membership growth on TV devices as we approach summer vacation. Three, we further deepened our overseas expansion, driven by our premium content and efficient operation, we consistently improved the conversion of our subscribers. The number of our overseas subscribers at the end of quarter exceeded 1 million. Apart from bringing our domestic produced content to the overseas users, we also made breakthrough in the local original content. For example, we launched our first original Korean drama series: My Roommate Is a Gumiho, in May, which was remarkable success. In addition, the Sweet On Theater was launched for the first time in overseas market, [Foreign Language], keeping…

[Operator Instructions] Please ask your question in Chinese first and then translate your questions into English. Participate and restrict to one question at each time. Please standby while we compile the Q&A work form. Your first question comes from Ella Ji from, China Renassaince. You start your questions.

And thank you for taking my question. My first question is, actually, I would love to hear [Indiscernible] So my first question is, for management you could elaborate on the latest regulatory environment, especially overall directions regarding the content. Thank you.

[Indiscernible]

Hello, Ella. [Interpreted] So it contains four major parts. So firstly, because we are a video platform, so the content censorship is the main area we look at. So actually, the basic principle for content censorship hasn't been changed over the past several years. So for this year, because the key events on the July 1 key events, there is a tightened censorship environment in the second quarter. After that, it will actually return to the normalized regulation pace. And the second area is for actually, we see the tightened regulation for the overall internet industries, not only for us. So this area mainly focuses on the 2 parts. One is the anti-monopoly regulation. But for us, the video industry, particularly for the long-form video industry is actually fully competitive industry, so we -- actually for the limited impact from the anti-monopoly regulation. And two -- second part is on the data security. So we observed that the government has implemented more tightened and specific guidelines for this part. Internally, we already enhanced our management and also technology part to follow it and implemented a more specific approach on this area. And last 1 for the education industry because this is an area people ask frequently. Education is not our main area, business area we are looking at. But just because of the tightened regulation on this area, we foresee that the students or the kids -- might have more time and then other things apart from the study. So the entertainment is 1 of the key areas that they might spend more time on.

Thank you.

Thank you.

[Foreign Language] So just a quick follow-up for just regarding your content because we have seen some regulatory directions regarding the short video industry that they are promoting more positive -- kind of the positive content. So I just wondered if that could also affect the long-form video content in both the drama as well as the variety shows.

[Foreign Language] m Gong Yu: [Foreign Language]

This is Xiaodong. I think probably, you mentioned like recently released regulation regarding the enhanced censorship on the short-form videos, I think Dr. Gong just said, for long-form videos, they have always been to kind of important for us. So -- if anything we have like indirect or direct impact, on our business should be positive because those short-form videos, they haven't go through all this kind of process before. Now I think kind of we are on the same track right now, we have more experience on how to handle this and we have let's say or they go through all these kind of things for past decade.

Thank you for addressing that question. So if I may, I have a second one regarding the lite version. [Foreign Language] So could management elaborate on the recent progress of iQIYI lite because we see that iQIYI lite app has quite impressive user growth in the recent months?

[Indiscernible]

[Interpreted] I will introduce iQIYI lite app briefly, and then I will turn over to our CTO, Wenfeng, to elaborate. So we have developed iQIYI lite app for around half a year. So behind this project, we are actually trying to target the nonmajor users we are targeting right now. So our core users right now are actually the users aging between 25 to 35 years old users. And we covered some young generation and elder people, but that is not enough. So over the past 1 or 2 years recently, we observed that more and more new users, they are actually not -- haven't formulated a habit to use iQIYI app. So we tried to develop a new product that can target this kind of new users and incentivize this kind of new users to use our product and watch our content. Right now, up till now the app satisfy our expectation. So I will turn over to our CTO, Wenfeng, to elaborate more.

[indiscernible]

[Foreign Language]

[Interpreted] iQIYI lite app, it's a personalized product targeting lower-tier city users. Since the launch, we observed a very solid user growth. As of the end of second quarter, the weekly DAU has surpassed 1 million -- 100 -- sorry, 1 million milestone. And the user overlap between iQIYI lite app and iQIYI main app is extremely low. So as we just mentioned in the CEO prepared remarks, it's only 7%, and this ratio continues to go down. And we observed that the users for our iQIYI lite app preferred to consume more content library rather than new content. And in terms of the user time spend performed also very well. And we try to acquire the new users through an advertising on the channel with relatively high penetration into lower-tier cities and also through the user sharing approach. And also, we try to improve the user retention through the personalized recommendation and also the -- and convenient interaction and also improving the adoption capability to the low-functional smartphones. So right now, the user retention for our iQIYI lite app is also very good.

[Indiscernible]

[Interpreted] So our CEO has something to add. So this kind of initiatives, I mean, iQIYI lite app is also consistent with our idea that we believe there would be a consumption upgrade in terms of the content for the Chinese users.

Thank you.

Thank you. So basically, we expect those kinds of users, they previously they don't watch the TV dramas, or the films and this kind of entertainment content. When they have a chance to access to the high-quality entertainment content, they will be spend more time on this kind of entertainment content. So from our initial data set, it seems that our thesis got demonstrated through this kind of user retention rate and also the user growth.

Thank you.

[Indiscernible]

Your next question comes from Eddie Leung from Bank of America, Merrill Lynch. Please go ahead,

[Foreign Language] So my question is about content costs. We have seen a pretty good cost control in the past, several quarters. While the company has always been pretty conservative in guiding the content costs going forward. So I'm wondering, when we look at the cost control in content, for example, in the past 1 or 2 quarters, how much was due to the delay of some of the hot content? And how much was coming from the benefits of lower production and licensing costs?

This is Xiaodong. I think if you're talking about like 1 or 2 quarters content cost, it could be caused by the delay of certain content. But if you look at the past few quarters numbers, you see the consecutive optimize our content costs, which actually is more driven by the efficiency improvement on the content investment. We see the price stabilize since year 2018. And given the fact, we have more original content launched in the past few quarters. So basically, we have more control on the quality and the efficiency of the content investment. But of course, it's -- I don't think conservative is the right word here because in fact we are going to expand the category of our content investment, including original movies and overseas content. That's why we see the potential slightly increase on the dollar amount of content cost but the percentage of revenue, definitely, I think you will continue to see the optimized trend in the next few quarters.

As a reminder, please restrict to one question at each time. Your next question comes from Alicia Yap from Citigroup. Please, go ahead.

Hi. Thank you. [Indiscernible] My question is can management give us the longer-term prospect of the long-form video industry in China. Will the current model between the membership subscriptions and the advertising model remain in place? Any breakthroughs in terms of content production for monetization model, especially I think management talking about the industrialization in the video production, so how would that actually transform future monetization model for the video industry?

[Indiscernible]

Okay. So Alicia, my -- I actually have a very positive view for this industry personally. My positive view is still down these 2 parts. One is that in terms of the penetration, we still have very -- still have a very low penetration in terms of the paying users. So our pay ratio -- paying ratio is also low. So in China, there is only a small percentage of people that are willing to pay for professional and high-end entertainment content. And we expect that more and more people will actually join this kind of iQIYI users when -- with the trend of the consumption upgrade of the content we just mentioned before. And in terms of the monetization, our -- right now, our core users are the people aged between 20 to 40. But we don't have sufficient content for the people aging higher than 40 years old. And also for the younger generation, we also don't have sufficiently do the content for them. So right now, we are trying to amplify our content supply and to satisfy this kind of users' needs. So based on that, we expect the penetration ratio and also the paying ratio will continue to improve. And in terms of the monetization model for -- in China, for most of the internet verticals, when the new users join the platform, they often time are free users. So they will consume their advertising, if they more and more enjoy our content, they will start to pay for our content, and there will be no advertising for them. But these kind of users will turn into -- will convert into the high-ARPU users through our membership package and also PVOD methods.

[Foreign Language]

[Interpreted] As you have observed, we went through some kind of volatility or the uncertainty in terms of the content launch. I think that the more fundamental reason behind that is that we haven't been able to offer sufficient supply, content supply and a more diversified content supply. So as we mentioned in the shareholder letter in the past -- in the last quarter, we believe the industrialization of video content production is the key to solve this issue. The key thing is that we try to enhance the forecast -- enhance the certainty or improve the forecast accuracy for the full cycle of the content production, so that we can lower risk and lower the cost accordingly. So from the -- since the first quarter, we have enhanced our investment in this kind of industrialization of video content production. As we have mentioned previously, in this quarter, we start to roll out the Production Business Intelligence System, PBIS, this kind of tool can enable our producers to forecast in the traffic and the monetization of the revenue for the project.

Yes. Thank you.

Thank you. Your last question comes from Piyush Mubayi from Goldman Sachs.

Thank you for taking my question. When I look at your content cost as an indication of how you are industrializing content production, your content spend was about, at its peak, 84% of revenue, and it's come down gradually, and it's looking like it is about 67% of revenue. With the industrialization, where does that content spend come down to? And how long do you think it will come down to that trough level that you think it can get to? That's my first question. And related to that, if I may, you've got -- you've moved into iQIYI Sports in the major world with the EPL at a price point that looks like it's RMB 19 or RMB 20 per month on a headline basis based on the price I've seen. What has been the initial indication of demand for EPL on your platform?

This is Xiaodong. I will comment on the first question. I think the industrialization of the content production is mainly to increase the supply and the quality of the content. Definitely, as a percentage of revenue, it will continue to contribute, it's positive. In fact, because of the, let's say, better monetizing ability of this content. But I think in the past few years, the main driver of the content is more like the slight increase of the hit ratio and the quality of the content. And the more diversified content strategies like the Mist Theater and so on. But I think within the next 3 to 5 years, definitely, you will see significant improvement on the efficiency of the content production given the progress we expect to achieve for the industrialization of the content production. And for the sports, I'm not quite following your question regarding the CPM because sports is not like we charge the user directly for the nominal price you saw on the website. Actually, it's more like the revenue share between iQIYI and our JV who actually run sports business. So it has very little impact on the ARPU of the membership business or the revenue of iQIYI because they only have a -- I think a very, very low percentage of the total membership or subscription business.

This concludes the question-and-answer session. I will now pass the line to the management for closing remarks. Thank you.

Thank you, everyone, to joining our call today. So please feel free -- if you have any questions, please feel free to reach us. So let's speak next quarter. Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.