Good day and thank you for standing by. Welcome to the iQIYI Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After speak is presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to speaker today, Ms. Chang You, IR Director of Company, please go ahead.

Thank you, Operator. Hello, everyone. And thank you for joining iQIYI’s Third Quarter 2021 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, our Mr. Gong, our Founder, Director, and CEO, Mr. Xiaodong Wang, our CFO, Mr. Xiaohui Wang our CCO, Chief Content Officer, Mr. Wenfeng Liu, our CTO, Chief Technology Officer, and Mr. Xianghua Yang, Senior Vice President of our membership business. Mr. Gong will give a brief overview of the Company's business operations and highlights, followed by Xiaodong, who will go through the financial and guidance. After their prepared remarks, Xiaohui, Wenfeng, and Xianghua will join Mr. Gong and Xiandong in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but not limited to those outlined in our public filings with the SEC. iQIYI, does not undertake any obligation to update any forward-looking statement, except as required under applicable law. With that, I will now turn the call over to Mr. Gong. Please go ahead.

Hello, everyone. Thank you for joining us today. In the third quarter, we're faced a lot of volatility as we navigated through a particularly challenging operating environment. We've experienced uncertainty in terms of content scheduling, which resulted in softer than expected top-line performance. Despite of the short-term volatility, we are delighted to see encouraging signs across multiple operating metrics. Our leading market position remains intact as we continue to be number one in various user metrics according to third-party data. We firmly believe there are a couple of eternal truth when it comes to entertainment. The first is that audiences constantly demand high-quality entertainment contents such as movies and dramas. And the second is that creators have infinite potential to develop excellent material. With this market dynamics in mind, we think we have a tremendous space for growth and development. During the quarter, we continue to enhance the production capabilities of our original content, explore new genres to diversify into and expand our user base by refining our products and the overall user experience. Meanwhile, we have been driving the industrialization of video production to improve the efficiency of our operations. We believe all of these developments will enable us to navigate through the short-term challenge. And we're on the right path to achieve long-term success. Now, let's go through the performance of our business segments in the third quarter. Let's start with the membership. During the quarter our membership services revenue grow both annually and sequentially. Our core strategy is to cater to the demands of specific user segments with diversified content and continuously improve member benefit that enhance the member experience and driving new member sign up and user retention. At the same time, we are focused on raising ARPU and improving the long-term monetization of our membership…

Good morning and good evening everyone. Let me review our key financial highlights for the third quarter. Our total revenue reached RMB 7.6 billion. Membership service business continued to be our largest business pillar with revenue increase 8% year-over-year and accounted for 57% of our total revenue. Online advertising revenue decreased 10% year-over-year primarily due to less premium content launched during the quarter and the challenging macroeconomic environment in China. Our content distribution revenue achieved a 60% growth on a year over year basis as we distributed more content and titles to other platform during the quarter, our cost of revenues increased 10% from the same period last year, among which content costs increased 13% from the same period in 2020. The increase in content costs were mainly due to the more investment original content during the quarter. Our operating loss margin on GAAP basis was 18% remain largely flat compared to the same period of last year driven by our disciplined investment strategy. As of September 30th, 2021, the Company had a cash, cash equivalents, restricted cash, and short-term investments of RMB $11 billion for detailed financial data, please refer to our press release on our IR website. For the fourth quarter of 2021 iQIYI expects total net revenue to be between RMB at $7.08 billion and RMB is $7.53 billion. We're expecting a 5% decrease to 1% increase year-over-year. This forecast reflects iQIYI as a current and preliminary view, which may be subjected to changes. I will now open the floor for Q&A. Thank you.

Operator, please open the floor to questions.

Certainly. [Operator Instructions]. For the benefit of all participants in today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. [Operator Instructions] Your first question comes from the line of Ella Ji from China Renassaince, please go ahead.

Thank you. [Indiscernible] First question is relating to the recent improvement plans. You had a local province government. Just to wonder, how is that going to affect our future business? A second question is relating to the future membership growth potential. I guess the wonder regarding the future membership is it going to be mainly from lower tier cities or still from the major tier cities? From the reactivate of the older members. Third question is, I just want to know what is the -- could management share the -- anything new or exciting or promising relating to the variety shows going forward? Thank you.

[Foreign Language]

I'll translate Mr. Gong 's feedback. For the first one in terms to your question regarding the Consumer Council. So this applies to all industry players. So our feedback comes from the two aspects. The first one comes from the product design and the second one comes from the operation flows of the product. The first one is for product design, we've been also communicating with the Consumer Council, also collecting feedback's from our customer service department. Our goal is to increase the user experience, trying to lower the accidental clicks of any unnecessary steps. So, overall the user experience will be increased and improved. And from the business model perspective, we've been also communicating with Consumer Council in terms of the user agreement to make sure all the messages are communicated clearly with the users. So that's the first question regarding the consumer council related questions. And the second one is our penetration into the different tiers of cities. For now, for the high tier cities, the first and second tier cities, the penetration is high. And for the lower tier cities, the penetration is relatively low for this point. And our iQIYI app lite is the main app that targets this user demographic. For iQIYI Lite, right now we offers a lot of the free content, so the users consumes the free content and then they actually will see the advertisements for that. So right now on the advertising side for iQIYI Lite performance ad has a high percentage of revenue contribution. So I think going forward, iQIYI Lite needs 1 or 2 years for improvement and for growth, and we will keep working on this application. And for our main iQIYIs app, that's still going to be our main target for elevating our operations, optimize user experience, optimize products, and optimize the product features.

[Foreign Language]

So the third question I'll switch over to Xiaohui, our CCO to answer the question.

[Foreign Language]

Okay. Xiaohui, responded to the talent show question. So because of the fan culture, that's been existing in this entertainment sector for a long time so that it does have some impact on the variety show segment. So for now, the Koreans based or Korean style talent show that's prohibited in the video space. But however, there is still a lot of ample room for growth in terms of variety shows. We can focus on the areas that come -- for genres that's like comedy, emotional, and also some talent show, but that's not related to the Korean style. And we also launched our new comedy variety show called the Super Sketch show, which is the new content genre that we innovated originally. So based on its first feedback since its launch, we have seen promising user feedback and viewership from this show. Our variety show performance is back to number 1 position in the market. Going forward especially in the fourth quarter, we'll still launch innovative variety show content genre, for example, like we mentioned in the opening remarks [Indiscernible], “Action”. That's also an innovative variety show that will be introduced to the users. Thank you.

Thank you very much.

Thank you. Once again, due to time constraint, please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. Please, limit your questions to one at a time. Your next question comes from the line of Alicia Yap from Citigroup. Please, go ahead.

Hi. Thank you. [Foreign Language]. So my question is related to the overall longer-term outlook for the long-form video industry. Will there be any change of the strategies for your self-developed content over all the content genre and even for example, the type of -- the length of this drama series, the type of the drama that you plan to produce? In addition, can long-form video monetization model break out beyond the current membership subscriptions and advertising? If so, what could be the new model? Thank you.

[Foreign Language]

Okay. So for right now, I think the biggest problem for the online video space is the supply shortage contributed from various reasons. The first one is, of course, the biggest one, the COVID-19. So for example, the number of movies launched since COVID-19 is only less than half 50% of 2019 level. And for the traditional satellite TV series, the quantity is only 1/3 of the past. And for the new form of Internet series, or the web series, we experienced major delayed because of the stronger censorship. And even though the content was launched but the quality got taken at discount or there's some less promising feedback from the quality, so explicitly speaking. These are the reasons that contributed to the supply shortage for the video content. Also, if you're taking the short-form video reason, that also contributed to this because it's also taking the user time spent, and that this is 1 of the biggest, I guess, factor that contributes to user behaviors. And for your questions about monetization models, I think we have been working on taking the full process of the entire IP Chain. So for example, if we have a good IP, whether it's from the script level, whether it's from the story level, we wanted to take this through the whole entire process of the IP lifecycle. We can develop this into a TV series, movies, games, also franchise products, etc. So I think that going forward, if you're looking at the long-term perspective of this industry, a healthy model will be the advertising revenue plus the subscription revenue plus the PVOD model. Altogether, it's better than our investment level. So that will be our angle. And we think it's a sustainable model going forward in the long-term prospect of the online video industry.

[Foreign Language]

Okay. I think if you look at the overall grand picture of the online or actually the entertainment space movie started 126 years ago. And we believe the consumer demand -- the user demand for high quality premium content is eternal and also the creative talent for this area is continuous. So all of these it just needs time to grow the space. I think for our online video space, we strongly believe there's ample room for growth in the future, it's just now that we are proactively adapting ourselves to the new environment to embrace all the changes in the environment. But we think we are the very experienced team with expertise in this industry, that will enable us to face the challenges and be a successful player in the industry.

[Foreign Language].

Thank you.

[Foreign Language].

Thank you. The next question comes from the line of Thomas Chang from Jefferies. Please go ahead.

[Foreign Language]. Thanks, management, for taking my questions. I have a question regarding overseas competition. We have just talk about using technology and achieve efficiencies for the translation process. I just want to get some understanding how we think about the competitive landscape in different market, and will we step up the investment in overseas going forward? Thank you.

[Foreign Language]

Our Senior Vice President Xianghua, in charge of the membership service will answer this question. For our goal for overseas business, our primary goal is to export our original content to various regions around the world. So the first situation we will encounter, of course, is the translation situation. And also different regions have different culture and different backgrounds. So our goal initially, was to find countries with similar cultural background. For example, the countries in the Southeast Asia region, and also for North America, because there are a lot of the Chinese folks in that area so we also introduced some of the content in that region as well.

[Foreign Language]

Okay. So of course, going forward, we'll continue to bring more premium content to the overseas business. And based on our internal data, we know that a lot of our series are very welcomed by the young audiences in the overseas region.

Thank you. That due to time constraint, that was the last question. And I would like to hand the call back to management for any closing remarks.

[Foreign Language]

I will summarize our short-term goal and also the long-term goal for our Company. As you guys know that in our opening remarks, we mentioned we are facing a lot of challenges in the short-term related to the government regulatory environment. However, we've been proactively adapting ourselves to this new environmental situation. So we expect for the next 1 or 2 quarters, we think the regulatory environment will become the new norm and is stable. And our main goal going forward first, is to reduce our loss and we will further optimize our content costs based on our industrialized initiatives for video industrialization. And also we will to execute strongly according to our strategy and we will eliminate or drop the content that doesn't fall in line with the policy and so at the same time we will also want to explore new monetization opportunities. So that's our overall strategy for the short-term and also for the long-term. Thank you. So thank you everyone for joining us. Feel free to reach out to us if you have any questions and we'll talk to you next quarter. Thank you.

Thank you. Bye.

Thank you. That concludes the conference today. Thank you for participating. You may all disconnect now. Thank you all.