Earnings Labs

iQIYI, Inc. (IQ)

Q2 2024 Earnings Call· Thu, Aug 22, 2024

$1.10

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Transcript

Operator

Operator

Thank you for standing by, and welcome to the iQIYI Second Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Chang You, IR Director of the company. Please go ahead.

Chang You

Analyst

Thank you, Operator. Hello, everyone, and thank you for joining iQIYI’s second quarter 2024 earnings conference call. The company’s results were released earlier today and 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. 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, 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 not are 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 the floor to Mr. Gong. Please go ahead.

Yu Gong

Analyst

Hello everyone. Thank you for joining us today. In the second quarter, we saw intense competition for top content. While we aired a series of diversified premium content. Certain titles did not meet our high expectations, putting pressure on our financial results. After a great deal of hard work, we have overcome the short term fluctuation in our content slate performance. As a matter of fact, we view the vibrant competition within the long-form video sector as constructive which have enhanced its appeal over other entertainment formats and also provided us a valuable opportunity to review and refine our tactics. It helps us gain a better understanding of user preference and improve our business for future growth. We firmly believe that ultimately, the success in the long-form video business depends on the stable supply of premium content and the ability to achieve balance in both content quality and commercial benefits. With this in mind, our goal is to further improve the overall success rate of our content portfolio and more importantly, the stability of content performance. In fact, as the summer season unfolds, our premium content has gained strong momentum. The release of acclaimed titles such as Interlaced Scenes, the Strange Tales of Tang Dynasty Season 2, and How Dare You has boosted our key operating metrics and brought us back to the leading spot in terms of market share in the key drama category in July, according to Enlightent data. Notably, the second season of Strange Tales of Tang Dynasty becomes the 14th drama to break our popularity index score of 10,000. For iQIYI, in addition to delivering high quality content, providing great user experience stands as another cornerstone of our business. As we remain committed in enhancing member benefits. We are also refining our content distribution algorithm to…

Jun Wang

Analyst

Thanks Mr. Gong, and hello everyone. Let me walk you through the key numbers. In the second quarter, the total revenues were RMB7.4 billion, down 5% annually. The membership services revenue reached RMB4.5 billion, down 9% annually, primarily due to fluctuations in the content slate performance as previously discussed. For online advertising, revenues decreased by 2% year-over-year to RMB1.5 billion. This was primarily due to the decrease in brand ad businesses, which again is due to the decrease of the variety shows we had during the quarter. That was partially offset by the healthy growth of the performance ad businesses. Content distribution revenue reached RMB698 million and grew 2% annually. Other revenues increased by 16% annually to RMB784 million, partially driven by the increase of revenue derived from talent agency services and third-party cooperation. Moving on to costs and expenses. Content cost was RMB4.1 billion, down 2% annually. Total operating expenses were RMB1.4 billion, flat annually. This was in line with our disciplined marketing spending strategy. Turning to profits and cash flow, the non-GAAP operating income was RMB501 million and its corresponding margin was 7%. The operating cash flow totalled RMB411 million and remained positive for nine consecutive quarters. As of the end of the second quarter, we had cash, cash equivalents, short-term investments and long-term restricted cash included in prepayments and other assets, totalling RMB8.6 billion. We have prudently managed our financial resources, striving to improve the overall health of our business and to optimize the financial leverage of our balance sheet. In August, we have completed the repurchase right offer for our convertible notes in 2026. An aggregate principal amount of US$395 million was validly surrendered and repurchased, and only $157,000 aggregate principal amounts of the notes remained outstanding. For detailed financial data, please refer to our press release on our IR website. I will now open the floor for Q&A.

Operator

Operator

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

Xueqing Zhang

Analyst

[Foreign Language] Thanks management, for taking my question. My question is about the competition landscape. We noticed that other platforms had some blockbusters this year, and our market share, which has been leading in recent years, has also fluctuated. How does management view the current competition landscape for long videos, and what are your strategies? Thank you.

Chang You

Analyst

[Foreign Language] We will invite our CCO, Xiaohui, to answer this question.

Xiaohui Wang

Analyst

[Foreign Language]

Chang You

Analyst

The intense competition within the industry has always been present. And this competition actually helps us to improve the overall quality and the richness the industry’s content, enhancing the competitiveness of the long-form video sector compared to other forms of entertainment, such as we often mentioned short-form video. At the same time, it also motivates us to continually improve content quality in the future. We’ve always emphasized that the ultimate goal in the long-form video competition is to sustain a high-quality, diverse content supply and achieve a win-win situation between the content quality and the commercial benefit.

Xiaohui Wang

Analyst

[Foreign Language]

Chang You

Analyst

Looking at our long-term market share performance, iQIYI has actually maintained a leading position in the core categories of drama and film for a long period of time. Although we experienced some fluctuation in our drama market share in Q2, but after a thorough review and a targeted optimization, we’ve overcome the short term difficulties and returned to the number one position in drama category market share.

Xiaohui Wang

Analyst

[Foreign Language]

Chang You

Analyst

In balancing the content quality and commercial returns, iQIYI’s performance continues to lead. The drama series To the Wonder and The Strange Tales of Tang Dynasty Season 2 are great examples, and we believe this advantage will further enhance in the future.

Xiaohui Wang

Analyst

[Foreign Language]

Chang You

Analyst

Going forward, we will remain dedicated to creating high-quality content tailored for mainstream and female audiences. Enhancing our social insights and innovation, optimizing content scheduling strategies and strengthening the management in every facet of our in-house studios. And we believe these initiatives are all aimed at improving the stability of our high-quality, diverse content supply.

Xiaohui Wang

Analyst

[Foreign Language]

Chang You

Analyst

Our current drama reserve accommodates the viewing demand of the mainstream audience. We have a relatively ample reserve specifically for the core genres of ancient costume dramas aimed at female audiences as well as for the mystery suspense and the reality themed dramas.

Xiaohui Wang

Analyst

[Foreign Language]

Chang You

Analyst

We will also continue to strengthen our capabilities for IP serialization development. For example, The Strange Tales of Tang Dynasty Season 2, which launched in Q2, is a successful case of serialized content development. And the third season will soon be introduced. In the future, the well-loved series such as The Fearless and Under the Skin also launched their second seasons. And The Ingenious One Season 2 is also in preparation. Thank you.

Operator

Operator

Your next question comes from Lincoln Kong with Goldman Sachs.

Lincoln Kong

Analyst · Goldman Sachs.

[Foreign Language] Thank you, Management, for taking my questions. My question is about the membership business. How should we think about the prospects of membership growth in the future, especially for our subscribers, as well as the ARPU growth? Thank you.

Chang You

Analyst · Goldman Sachs.

We’ll invite our Senior VP of Membership Business, Youqiao Duan, to answer this question.

Youqiao Duan

Analyst · Goldman Sachs.

[Foreign Language]

Chang You

Analyst · Goldman Sachs.

From a perspective of membership structure, our cornerstone members represent a stable base of our subscribers and have remained steady. Fluctuations actually mainly come from the members who are attracted by new and popular content. As the summer season arrives, our content offerings have positively influenced the return of these hit driven users and retention of long-standing members.

Youqiao Duan

Analyst · Goldman Sachs.

[Foreign Language]

Chang You

Analyst · Goldman Sachs.

In Q2, our ARM, which is the average revenue per member, maintained a solid year-over-year growth. The current level of ARM provides us with flexibilities in terms of operational tactics. In the near future, our focus will be on expanding the scale of our membership, but the ultimate goal remains to maximize membership revenue.

Youqiao Duan

Analyst · Goldman Sachs.

[Foreign Language]

Chang You

Analyst · Goldman Sachs.

In the future, we also plan to implement more proactive measures to optimize account sharing and combat piracy, thereby supporting the long-term healthy growth of our membership business. We’ll share specific plans with every one as the progress is made. Thank you.

Operator

Operator

Your next question comes from Maggie Ye with CLSA.

Maggie Ye

Analyst · CLSA.

[Foreign Language]

Chang You

Analyst · CLSA.

Good evening, and thanks for the chance to ask questions. Regarding our overseas business, we’ve seen very decent revenue growth in past quarters by high-quality local production in addition to distribution of our premium Mandarin content. As iQIYI international celebrates its 5-year anniversary, can management share your latest thoughts on business strategy and plan for our overseas business? Thank you.

Yu Gong

Analyst · CLSA.

[Foreign Language]

Chang You

Analyst · CLSA.

We’ll invite our senior VP, Xianghua Yang, who is responsible for the overseas business, to answer this question.

Xianghua Yang

Analyst · CLSA.

[Foreign Language]

Chang You

Analyst · CLSA.

We started expanding into the overseas market in 2019 and have achieved initial success. In 2023, our overseas operations actually reached full-year operating breakeven. Our goal for 2024 is to boost revenue growth while continuing to increase profit. And for Q2 this year, the total revenues for overseas and also membership revenue both maintained healthy year-over-year and also quarter-over-quarter growth.

Xianghua Yang

Analyst · CLSA.

[Foreign Language]

Chang You

Analyst · CLSA.

In terms of content, we have discovered an optimal content mix suitable for our overseas markets, and we aim to further increase content offerings through different measures. For example, the popularity for Chinese language content overseas has significantly increased, becoming a major source of our top content for our overseas platform. In fact, over the past three years, over half of the 20 most popular shows on iQIYI overseas were Chinese dramas, most of which were iQIYI originals. This demonstrates the influence of Chinese language content and the strength of our original offerings. And in the future, we’ll continue to use Chinese dramas as the foundation of our overseas content offerings and actively explore opportunities to increase production of local original content. And also, from the technology perspective, we will utilize AI technology to empower the different aspects of the long-form video industry, enhancing the production efficiency of iQIYI’s localized original content overseas.

Xianghua Yang

Analyst · CLSA.

[Foreign Language]

Chang You

Analyst · CLSA.

Regarding our local partnerships, we have already established deep connection and cooperation with local telecom operators in certain regions. And going forward, we aim to expand our partnerships to telecom operators in additional countries and to increase our collaboration with local partners. And we believe these will enhance our brand awareness and content influence overseas. And for our long-term objectives is to make iQIYI’s overseas platform the home of beloved Asian content, expanding the influence of Chinese language content while also increasing the coverage of local content, and continue to explore diversified IP monetization models.

Jun Wang

Analyst · CLSA.

[Foreign Language]

Chang You

Analyst · CLSA.

And our CFO, Wang Jun, just added to this. And he mentioned that in 2023, our overseas business actually reached full year operating breakeven. This is based on the fact that -- from a management accounting perspective.

Jun Wang

Analyst · CLSA.

This is based on the BU management account.

Chang You

Analyst · CLSA.

Correct, correct. And this is a very healthy trend that has developed over the past year. Thank you.

Operator

Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong

Analyst · Jefferies.

[Foreign Language] Hi, good evening. Thanks, management, for taking my question. As iQIYI has a lot of good IP, can management share your strategy of unlocking the IP potential in different areas rather than membership and advertising? Thank you.

Yu Gong

Analyst · Jefferies.

[Foreign Language]

Chang You

Analyst · Jefferies.

Our CEO is answering this question. He mentioned that content IP is the core asset of our company. Promoting the monetization of content IP in various forms, including off-line business, is an important and sustained effort that is key to enhancing our long-term value and competitiveness. We actually describe this IP-based business model with a metaphor called eating a fish in multiple ways, which actually emphasize our ability to transform each piece of our content IP into numerous prospects, for revenue, thereby, we believe this will maximize its value across different markets and platforms.

Yu Gong

Analyst · Jefferies.

[Foreign Language]

Chang You

Analyst · Jefferies.

With many years of focus producing original content, actually, the value of our company’s IP assets has grown significantly. For instance, two years ago, in Q2 2022, our original dramas accounted for over half of our quarterly new release key dramas. And this proportion now has stabilized at around 70%. And also our high-quality, original dramas have not only found success during their initial broadcasting period, but also have demonstrated a sustainable long tail effect, which maintained popularity over an extended period of time.

Yu Gong

Analyst · Jefferies.

[Foreign Language]

Chang You

Analyst · Jefferies.

We actually hope that the off-line experience business will become our second growth curve in the future. And we also noted the shift in consumer behaviour change in domestic offline commerce and cultural tourism sectors, where the premium content IP actually plays an increasingly important role in creating engaging experiences. For example, our vast library of high-quality video content IPs actually serve as our core strength in this area. For example, we leveraged the IP from the recent hit drama title called The Strange Tales of Tang Dynasty beyond its online presence, successfully introducing an immersive VR experience in cities like Beijing and Xi’an, these are key cities in China. In addition, we’ve developed new derivative products such as card games designed to appeal to the taste of a younger demographic, further extending the IP’s reach and impact.

Yu Gong

Analyst · Jefferies.

[Foreign Language]

Chang You

Analyst · Jefferies.

And for the operational model, actually, we actually favoured a light asset approach which has a promising prospect for incremental revenue under limited cost.

Yu Gong

Analyst · Jefferies.

[Foreign Language]

Chang You

Analyst · Jefferies.

Actually based on our experiences this approach has actually been validated in terms of off-line experiences. And this model is now being able to be replicated and scaling.

Yu Gong

Analyst · Jefferies.

[Foreign Language]

Chang You

Analyst · Jefferies.

In addition to what I just mentioned, the VR theater experiences that I mentioned earlier, we’re also exploring further initiatives centered around our IP. For example, our Qixiaobei which is the IP merchandise stores, now also QiBubble Park, which is a theme park designed for children. And these initiatives are actually developing in collaboration with our partners similar to what I just mentioned, the light-asset approach. And the aim is to provide users with a very comprehensive and engaged entertainment experience. Thank you.

Operator

Operator

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

Chang You

Analyst

Thank you, everyone, for participating in the call. And if you have further questions, please don’t hesitate to contact us. Thank you.

Yu Gong

Analyst

Thank you. Bye-bye.

Operator

Operator

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