Earnings Labs

iQIYI, Inc. (IQ)

Q1 2022 Earnings Call· Thu, May 26, 2022

$1.10

-1.35%

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Transcript

Operator

Operator

Thank you all for standing by, and welcome to the iQIYI First Quarter 2022 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 IR Director, Mrs. Chang You. Thank you, please go ahead.

Chang You

Analyst

Thank you, operator. Hello, everyone, and thank you for joining iQIYI’s first quarter 2022 earnings conference call. The company’s results were released today and are available on the company’s Investor Relations website at ir.iqiyi.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO; Mr. Xiaohui Wang, our CCO, Chief Content Officer; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; Ms. Xiangjun Wang, our CMO, Chief Marketing Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business; and Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Business. Mr. Gong will give a brief overview of the company’s business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, Xiaohui, Wenfeng, Xiangjun, Youqiao, Xiangjun will join Mr. Gong and Jun in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but not limited to thus 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. With that, I will now turn the call over to Mr. Gong. Please go ahead.

Yu Gong

Analyst

Hello, everyone. We recorded quarterly non-GAAP operating profit for the very first time. This demonstrates the effectiveness of our new strategy and execution. Last quarter, we announced that our goals for this year are to reach non-GAAP operating breakeven for the full-year of 2022 and to reach quarterly non-GAAP operating breakeven as early as possible. I’m very pleased to see our performance exceeded our goals. What are the driving forces on our path to profit? I would name four. First, the premium content. The debut of new content such as a top-notch dramas solidifies our market leadership and led to healthy growths of both subscriber base and the ARM. The influence of these new dramas was further elevated through our creative content marketing strategy. Meanwhile, the library content also played a crucial role. We used effective operations to drive traffic to our extensive library content and enhanced user stickiness. Secondly, refine our operations on content scheduling and promotions. Thirdly, increasing operation efficiency, which means delivering superior services based on an effective cost and expense control. Lastly, driving our sales performance through various initiatives to boost our monetization on membership and ad sales. With these four aspects, profitability is a natural result. Therefore, we believe the performance in the first quarter is replicable as we continue to execute this operational methodology in the future quarters. On premium content, we are confident about our future pipeline. On efficiency management, we will continue to focus on driving efficiency to -- by leveraging the power of technology while maintaining the current lean corporate structure. By using the same methodologies, we will continue to achieve desired results in the future. Now let’s go through the performance of our business segments in the first quarter of 2022. Let’s start with memberships. For the first quarter, we…

Jun Wang

Analyst

Thanks, Mr. Gong, and hello, everyone. Now let me walk you through our key financials for the first quarter 2022. Starting with the revenues, in first quarter, our total revenues reached RMB7.3 billion, we booked healthy growth on our membership services with RMB4.5 billion, which was our largest revenue contributor. Our membership services revenue increased by 4% annually and 9% sequentially, primarily driven by ARM, or average revenue per membership, which achieved a positive annual growth for nine quarters in a row. And our subscriber base also grew by 4.4 million as our premium show attracted more paying members. The solid performance of membership services was partially offset by the relatively weaker advertising services revenue due to macro headwinds. Now move to the cost and expenses. The first quarter cost of revenue was RMB6 billion, representing a cost savings of RMB1.1 billion compared with the same period last year. This leads to consistent gross margin expansion in the past three quarters from 7% in third quarter 2021 to 12% in fourth quarter 2021 and to 18% in the first quarter of 2022 on a GAAP basis. In the meantime, our total operating expenses decreased 35% annually and 34% sequentially after we completed our organizational realignment second half last year. Our Q1 was also the third quarter in a row that we saw the decrease in total OpEx. The expanded gross margin and decreased expenses combined contributed to our first profitable quarter. Behind this profit is not magic but science, and it takes three quarters to get where we are. Our non-GAAP operating loss was RMB1 billion two quarters ago, which shrink to RMB516 million last quarter then turned to a profit of RMB327 million in the first quarter of 2022. The trend is clear, what is driving this trend is our consistent efforts in improving our operational efficiency and scalability. We have become nimbler and more focused, which help us in better adapting to the changing environment and best positioned to capture the long-term growth opportunities in the future. In March 2022, the company completed a private round of $285 million. At the end of first quarter, the company had cash, cash equivalents, restricted cash and short-term investments of RMB5.2 billion, we believe we have sufficient funding to satisfy our operational needs in the foreseeable future. For detailed financial data, please refer to our press release on our IR website. With that, I will now open the floor for Q&A.

Operator

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Thomas Chong from Jefferies. Please ask your question.

Thomas Chong

Analyst

[Foreign Language] Thanks management for taking my questions. My question is about our overall strategy. How do we execute and reflect in our financials? And in particular, we are making profitability on a quarterly basis in Q1. On the other hand, how should we think about the outlook in the next couple of quarters? Thank you.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Okay. I will translate what Mr. Gong just mentioned. They are coming from five aspects. First, we have many years of accumulations of head premium content. For example, on the key TV drama series and also variety shows, movies, children’s content and animation. And second, we are -- we refined our operations including content scheduling and promotions and then to increase the overall operational efficiency. And third, we also improved the content operations in many different areas, have stringent control over the full content production process. Four, we’re also driving the sales capability and efficiency, including boosting our monetization our membership and also ad sales. And five, increase the overall ROI. We will terminate the business that has poor ROI and low future potential.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

The earlier mentioned five aspects are the continuous efforts that we’ll be focusing on, and that will drive the profitability in the mid to long-term. And also, we’re also focusing on new business initiatives. For example, overseas business and iQIYI Lite that will help the overall development and growth of our mid to long-term as well.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Thank you.

Operator

Operator

Thank you. Your next question comes from the line of Lei Zhang from Bank of America. Please ask your question.

Lei Zhang

Analyst

[Foreign Language] Thanks management for taking my question and congrats on breakeven. We have seen many cost saving and breakeven in first quarter. So wondering, do you see any impact of our cost control barrier to our operating metrics, like user time spent and revenue? Secondly, can you give us some updates on your content strategy going forward? Thank you.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Okay. So for overall speaking, our control of cost and also expenses are for the purpose of increase the overall efficiency for our business. Content is our biggest cost item and also investment. So for very important premium head content, we will not lower our investment in this area at all. We will probably decrease the investment in the low ROI content genre and content categories. And based on our many years of internal studies, user data and also our reference to the overseas streaming business, we can tell that the top line, the revenue upside depends on the head premium content. So for overall, the low-performing content that’s really dragging our whole performance down and also creating loss. So these are the areas we will continue to put efforts on going forward.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

So even though that reaching the market #1 is not our primarily goal, but according to our third party data and Enlightent data, it shows that iQIYI was still number one in terms of the market effective video views for top TV drama category. And then at the same time, our original content also had excellent performance for viewing time for dramas, the movies, and children’s content consistently improved on an annual basis.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Okay. So for going forward, this year, our very important key focus is to drive efficiency. And then that will make us to focus on the investment in the head premium content as well as increased overall ROI and focusing on the content that generates high ROI. And then going forward to the next two years, we will continue to focus on the premium head content and that will bring profit and also to bring good returns to our business.

Yu Gong

Analyst

Thank you.

Chang You

Analyst

Thank you. And then I think our CFO also has some points to add.

Jun Wang

Analyst

[Foreign Language] I would just quickly translate myself. So supplementing to what Mr. Gong has shared I would say that people care about the new releases each quarter. But on the other hand, we also need to notice that our new releases is also in the form of the investment, after the debut, it will flow into our library, which will generate Lifelong traffic over time. So as a result, I think our business model in general, with the combination of the new releases and library, is very much defensible and manageable.

Operator

Operator

Q - Alicia Yap

Analyst

Alicia Yap

Analyst

Hi, thank you. [Foreign Language] My question is related to the membership subscription business. So how does management see the future more longer-term growth trend for the membership revenue? Will that mainly driven by the increased penetration rate for paying user? Or is that increase from the ARPU? And how much room we can further increase our paying ratio? In terms of near-term, can management share how has the demand for the membership service trending given the prolonged lockdown in Shanghai and other cities. Have you seen any uptick on the subscription from the lockdown or the membership more is driven by the content? Thank you.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Okay, so based on our experiences with COVID in the past two years, the first wave came from 2020 and then the second wave came from this year. So we kind of find the pattern in terms of dealing with the pandemic. So in the short term, there are some uplift in terms of -- for the consumption of digital entertainment and digital content online. And over the long-term, because there might be some impact in terms of the entertainment opportunities or entertainment choices from offline. So there might be some impact in terms of the, for example, the movies to be launched, et cetera and that might push the popularity and also the penetration of online media entertainment. But I think -- very importantly, we think the success of our membership business really, really depends on the premium content. So that’s really driving our membership growth in terms of the revenue as well as subscriber growth. And also that coming from the more penetration or higher penetration for the paying services or paying habits in China, that will also contribute positively to our business.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Okay. So for overall long-term speaking, we are still very confident and very optimistic of the long-term growth of our membership business. I think our premium content that’s really driving the positive membership growth in terms of the subscribers and also for the revenues and also for ARM.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

Our main goal is really trying to keep growing our membership services revenue. So we don’t set the goal in terms of really growing the absolute number of subscribers or the ARM.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

So I would like to first talk about ARM that’s driving our business. So we’re very happy to see that among our industry peers, there are some price adjustments on that front as well. So they are sending really positive signals and also guiding the whole industry moving towards a positive direction.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

And then second point is very important that I would like to raise for everyone because we think premium content is really driving the whole membership growth. And also, we’re driving the quality of the premium content and also very stable supply reserve building a good reserve of premium content, that’s really supporting our future business growth for the membership services.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

And for the third point, we think the recognition from users for IP is very important for the future growth as well. We’re happy to see the whole industry as well as users as well as government are sending positive signals of recognizing the power of IP, and we’re focusing on IP protection and really driving the antipiracy issues of the company.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

And also, the very first I mentioned three points related to our ARM growth that I talked about earlier. Now I would like to talk about from growing the users. First, we think users are upgrading the consumption behaviors. If you look at the content offerings, whether it’s for the long-form video or the short-form videos. For long-form videos, I think overall speaking, the content are driven by the paid content as well as long-tail content that really brings the echo of the users. And I think we’re very good. We’re very happy to see that there are more users are getting the habit of buying subscriber memberships. So that’s sending a very positive sign to our business.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

And also another point to the subscriber numbers is because right now, we think the overlap or the overlap of content is pretty high among our peers, which means there are less number of really exclusive content for each platform. So that’s kind of pulling back some of the paying willingness for the subscribers. I think if you look at the Mainland China area, one user that’s subscribing to multi-platforms, the ratio of that is 1.2, which is lower than many of the overseas streaming business.

Yu Gong

Analyst

[Foreign Language]

Chang You

Analyst

And a couple of reasons that’s contributing to the high overlap of content among our competitive peers. One is from the economic aspect because selecting content that’s not really exclusive will bring lower content cost. That’s the first point. And then the second point is the original content production capability is relatively low at this point among all the industry peers. So I think going forward, if we could increase the production capabilities going forward, especially the head original content that will drive down the overlap between our content among the industry peers.

Yu Gong

Analyst

Thank you.

Chang You

Analyst

Thank you.

Operator

Operator

Thank you. In the interest of time, I would now like to hand the conference back to management for any closing remarks.

Chang You

Analyst

Thank you, everyone, for participating in our call today. Feel free to reach out to the IR team if you have further questions. Thank you, and see you next quarter.

Yu Gong

Analyst

Thank you.

Chang You

Analyst

Thank you, bye-bye.

Operator

Operator

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