iQIYI Q3 2023 Earnings Call Transcript

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November 21, 2023

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to the ITE Third Quarter 2023 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Chaoyu, Investor Relations Director of ITE. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Q3 2023 earnings conference call. The company's results were released earlier today and are available on the company's Investor Relations website at ir.ite.com. On the call today are Mr. Yu Feng, our Founder, Director and CEO Mr.

Speaker 1

Jun Wang, our CFO Mr. Xiaohui Wang, our CCO Chief Content Officer Mr. Wenfeng Liu, our CTO Mr. Yuqiao Duan, Senior Vice President of our Membership Business and Mr. Shanhua Yang, Senior Vice President of Milk Movies and Overseas Business.

Speaker 1

Mr. Gong will give a brief overview of company's This is operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, the management team will participate 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.

Speaker 1

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, There are no 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 hand on to Mr.

Speaker 1

Gong. Please go ahead.

Speaker 2

Hello, everyone. Thank you for joining us today. Our focus of the quarter Our total revenues grew 7% year on year, while profit performance was far more remarkable. Gross profit and the non GAAP operating profit had annual growth of 23% and 71%, Respectively, the impressive financial results demonstrate the strength of our robust Operating leverage, anchored by our exceptional content, which serves as our Core competitive advantage. IQIYI is a signature brand for top tier content.

Speaker 2

According to the Enlightened Data, we have been leading the industry in drama viewership For 7 consecutive quarters, our original dramas remained as a key driver For content supply and the revenue contribution, meanwhile, a diverse Of high quality titles, premiered were highly acclaimed by users. Notably, the long term case book, Yanghalo, was the 10th genre in our history to break The 10,000 Popularity Index Fund. During the quarter, membership services Revenue grew by 19% annually, mainly driven by a 12% annual increase in ARM. Two key factors contributed to the revenue growth. Firstly, in part by the higher appeal Of our inclusive content, we have reduced the discounts provided for membership purchases Well, direct on the channel sales.

Speaker 2

Our content is compelling enough to drive purchasing decisions in its own. Secondly, we have upgraded our member benefits and services, resulting In increased value perception among our members and boosted membership retention rate, The enhanced member benefits encompass a wide range of upgrades. For example, Optimizing the viewing experience from mobile devices to large screen TV, members can now enjoy content In signing 4 ks, 8 ks and even in adoption The audio experience is equally enhanced With a shift from ordinary sterile sound to the immersive and captivating Private Care, industry leading haiku, femoral sound and our member perks Don't stop there. We go beyond the online realm, extending our offering to exciting offline experiences, such as inclusive concerts. These upgrades have transformed entertainment, providing user a Diversified, personalized and immersive entertainment experiences.

Speaker 2

We are very pleased to see users' Appreciation for our content and services translates into our growth. Alongside membership services, advertising revenue was our 2nd growth Driving during the quarter, our premium content and enhanced marketing capability Both brand ads and the performance ads booked annually and sequentially growth. Entering into Q4, we are cautiously monitoring the macro environment Impact on the advertising market, we will upgrade our marketing capabilities To weather potential challenges as we continue to seek out new growth opportunities in the future. Now, Let's dive deeper into the performance of our core business segments, starting with membership services. In the Q3, membership services revenue exceeded RMB5 1,000,000,000 for the 2nd time in our history, representing a strong annual increase of 19%, Driven primarily by ARM growth, we would like to reiterate That the primary goal for our membership services is to drive long term and sustainable revenue growth.

Speaker 2

Membership revenue is driven by 3 components, namely, on subscriber lifetime and subscriber base, And the subscriber lifetime are all current key focus in Driving the long term economic value of membership facilities. In the 3rd quarter, ARM reached RMB15.54, up 12 Present annually and 5% sequentially. The average daily subscriber increased by 6 The current ARM level in our views is still very affordable compared with The price of other consumer products, we will continue to drive sustainable ARM growth over the long term, Backed by several factors. 1st, as we just mentioned, membership purchase decision Increasingly being made based on content and the membership and the member benefits Rather than discounts, very importantly, our ability in Consistently delivering high quality premium content will be further improved. 2nd, Our member experience offers a compelling value for the menu.

Speaker 2

We will continue enhancing our offering with new value added services that increase members' Finally, we see significant potential to further upgrade in dating gold members to Platinum and Star Diamond membership tiers, which amount a higher price yet offer more privilege. Our member privileges and benefits have A proven high attractive and the way it spreads their appeal to remain strong. For example, the use price packages is one of the content privilege we have developed to fund members, which enable subscribers to redeem their number points to unlock early access To finally, episodes of hit drama series. This model Was applied to 2 key drivers in the 3rd quarter attracted over 10,000,000 participating members, Demonstrating the significant value of perception attached to these benefits In line with our strategy to foster deeper connections between our loyal members And our premium content, Song IP, the web work tips, Club concerts are another important component of membership offering. We held the Mr.

Speaker 2

Lotus Facebook theme concert, which created immersive excitement. Lastly, we have developed a dedicated e commerce platform for merchandise related to our IPs. Members As discussed repeatedly, our primary focus is on enhancing member loyalty retention And the lifetime value of our membership privilege and the benefits, our loyalty program is closely Tied to the duration of membership and we strive to improve the service experience and the value perception, Especially for our long term members, for instance, users who opt to auto renewal Long term plans all become premium members are weighted elevated benefits, including Faster accumulation of member points That can be redeemed for content related perks and merchandise. As a result, We observed meaningful year over year growth in both the quantity and proportion of annual plan Subscription in the 3rd quarter. Moving on to content.

Speaker 2

Content is our core Competitive advantage. IQIYI's annual drivers continue to be the main driver in terms of content For this year summer season, our drama lineup covered diverse genres such as Asian customs, Realty and suspense, the Asian custom detective drama, The Lauter's Kid book Become the dark horse hit of the summer. It was our 10th drama to break our 10,000 Popularity in that score and the dramas same concert, we have generated over 230 trending search topics and attracted over 320,000,000 likes, we are happy to see the significant long lasting impact with This series as it continue to dominate the enlightened list Even after its series finale, other hit dramas such as Asian Custom In Perfect Victims, Wamexuan HaiRen's serials focus on social issues And criminal suspense serials, The Lost 11th Floor, Xiaoshi Shifeng, all well received by Audiences reflect the quality and depth of our drama lineup. For various shows, sequels to our classic IPs such as the 3rd season of the Big Bang And Housework Talent made strong comebacks. The Big Band Suite achieved outstanding performance in both advertising and the membership revenue.

Speaker 2

We also launched diverse innovative new IPs including our very first variety show and the drama crossover Our cultural variety show, Glory is Back Beijing and a cuisine show, that's barbecue, which attract A wide variety of users. On a separate note, we are also making good progress In realizing the commercial potential of our printing IPs, notably, sales of the Lauter's Casebook Merchandise exceeded RMB18 1,000,000. We have also introduced merchandise based on our Original children's IPs are spending the full range of children's products, including daily life, Learning, food and offline entertainment. Turning into Q4 and next year, We are committed to deliver diversified and high quality content on continuous basis. We have a highly anticipated slate of dramas aside from the already launched hit We also pre held a stellar drama Pipeline will be released.

Speaker 2

This includes major Asian customer titles, Our Journey to Like Detective Chinatown Season 2, Panjita, Like Our Flowy For variety show, our pipeline covers a wide range of themes, including our 1st original physical Competition show We Never Stop, Shunpa and our Heath show become a farmer We'll introduce its first spin offshore Hai, Young Farmers. We also have an exciting lineup of children's cartoon and animation. For our children's cartoon, we are going to And brand new title, Mega Mail, for original animation, The great ruler, and against the gods are still trending are set for release. Moving on to advertising business, We are delighted to see accelerated recovery during the 3rd quarter. Total advertising revenue reached RMB1.7 billion, up 34% annually and 12% Revenue from brand S recorded double digit growth both annually and sequentially, Driven by several factors, notably our premium original content such as Big Band Season 3 And Lavyou 7 times attracted to stronger advertising demand.

Speaker 2

Advertising budgets Allocated towards variety show and the drama increased by 7% 28% year on year, respectively. Breaking it Down by sector, we saw increased ad budget from food and beverage, while sectors like Internet services, Transportation and Healthcare also recovered. Revenue from performance apps recorded strong annual Revenue growth of over 70% mainly due to 2 factors: 1st, Targeted and efficient operations gained higher budget share from sectors such as Internet So with this, e commerce and the games. 2nd, the effective use of generative AI enhanced Monitoring the overall advertising market. We acknowledge That the consumption segment takes time to fully bounce back, Operating lagging effect on brand advertising business.

Speaker 2

Nevertheless, based on our unparalleled Content quality and extensive user profile, we are the go to platform for advertisers seeking Optimal advertising opportunities. For performance as we are optimistic on second On sectors such as Internet services, e commerce and shop drivers, and we will Continue to fine tune our algorithm and leverage generative AI to enhance ad creation and Maximize Efficiency. Moving on to technology and products. Our commitment is centered around fostering technology innovation to empower The entertainment ecosystem creating value for our users and content creators. Firstly, We harness the power of technology to elevate the entertainment experience for our users.

Speaker 2

And secondly, we empowered our content creators by equipping them with the latest tools and the resources to AI to enhance the user experience has yielded significant progress. Notably, we have pioneered the use of generative AI in 3 key Search categories, character search, a plus search and actual search By applying advanced content analysis, we are now capable of Automatically generating Weibo clips and the drama highlights, this cutting edge technology has been in play mandate across hundreds of call dramas on our platform, greatly improving Such accuracy and user engagement, user Directed to a drama from AI plus search spend an average of 40% more time One more exciting user experience optimization is the introduction of karaoke mode in the Big Bang Suite. This innovative and interactive feature Same lastly integrates some lyrics into the on screen display During bad performance sessions, allowing viewers to sing along and creating a more immersive With meaningful viewer engagement and the time spent increased by users Activity this feature. In terms of content production and operation, we are promoting the Application of generative AI in various user cases during the rapid technology development of the video industry. Now, the role of generative AI is involving from Miao embedded to a co pilot made in every phase of workflow By leveraging this transformative technology, we are empowering creators in every Aspects of their work from planning and development to production and the promotion of content, This approach not only enhance efficiency, but also unlock new potentials.

Speaker 2

We are seeing great initial results. For example, we use generative AI producing low cost, In our key programs such as testing, Chengdu, the big band season 3, etcetera. In addition, we are expanding the reach and the influence of apps by using generative AI. Finally, for our business performance in regions outside of Mainland China, our premium content In overseas membership revenue, in the 3rd quarter, membership revenue in Japan, Korea, the U. S.

Speaker 2

And Hong Kong All increased by over 50% annually. The solid performance was driven by the rising influence of our high quality CPAP powered by a number of popular On our overseas platform during its broadcasting period, meanwhile, the Lauter's Kissbook's Popularity extended the year, mainly like the China, at the top Our overseas platform in both total video view and viewing time in the 3rd quarter And remarked number 1 in total video views in Southeast Asia, East Asia and North American market. For the Q4, we will continue to drive high quality growth in addition to enhancing plan for Our operation and the channel expansion, we are dedicated to Bolster our content pipeline to capitalize on the strong Momentum of Chinese drama will introduce localized dramas in Thailand, Maize and Taiwan to further expand our influence. In summary, We have accomplished strong results in the Q3 with other emphasis on Delivering high quality growth. As we look ahead, our dedication to enhancing user experience, Strengthening competitive edge in original content, maximizing member value and Hanifing, the power of advanced AI technology remains steadfast.

Speaker 2

Going into next year, we will culturally increase investment in both our core and Innovative business established a solid foundation for sustainable long term growth. Now let me pass to Wang Jun for Goh Song, our financial firm.

Speaker 3

Thanks, Mr. Gong, and hello, everyone. We have delivered a strong Q3 results as you can see. The growth of ARM shall drive the growth of the membership services revenue, Profits and the free cash flow and our operating leverage led to margin expansion on year over year basis. This demonstrates the capability and scalability of our business model.

Speaker 3

Now, let me walk you through the key numbers. The total revenue increased by 7% annually to RMB8 1,000,000,000 driven by growth in both membership The membership services revenue exceeded RMB5 1,000,000,000, Up 19% annually, primarily driven by the increase in ARM. Online advertising revenues Reached RMB1.7 billion with annual growth rate of 34%. This was fueled By the growth in both brand and performance ads, with performance ads showing stronger growth momentum. Now moving to the costs.

Speaker 3

Our quality costs and expenses remain relatively stable year on year. Total cost of revenue was RMB5.8 billion, up 2% annually. Content cost as a component Cost of revenues was RMB4.2 billion, down 3% annually. Total operating expenses were RMB1.4 billion, down 2% annually. Turning to profits and cash flow, The non GAAP operating income reached RMB 895,000,000, up 71% annually, positive for 7 consecutive quarters.

Speaker 3

The free cash flow reached RMB826 1,000,000 and has been positive for 5 consecutive quarters, representing our enhanced cash generating capabilities. At the end of Q3, the company had cash, cash equivalents, restricted cash, Short term investments and long term restricted cash included in the prepayments and other assets, the total of RMB7.2 billion. To conclude, our Q3 results reflected a strong execution of our strategy And the steady progress in driving high quality growth, we are dedicated to delivering long term value to all of our stakeholders. For detailed financials, please refer to our press release on our IR website. Now we will open the floor for Q and A.

Operator

Please then repeat your question in English for the benefit of everyone on the call. Please limit yourself to one question. Your first question comes from Xueping Zhang of CICC. Please go ahead.

Speaker 4

Thanks, management, for taking my question and congratulations on another strong quarter. My question is about And ARM has recorded solid growth this quarter. So what's your outlook for ARM in the Q1 and next year? Also, could you give us more color on how to improve the perceived value and the loyalty of membership? Thank you.

Speaker 2

Thank you. John Xiao will answer this question.

Speaker 1

Yes. The VP of Membership Business, Yes. For Q3, the arm exceeded RMB15 within our expectations. And then this is because our progress in content quality And also content quality and also membership privilege for the long term perspective. The result of that has been promising and more users have been willing to pay At a reasonable price for premium content and also quality services.

Speaker 1

We expect healthy growth in Arm to continue in Q4 with significant room for further improvement in the long term. Our confidence comes from 4 aspects. Content quality remains the primary determinant for our members' purchase decision and ability To consistently provide high quality and diversified content is strengthening continuously. 2nd, in comparison to other domestic daily consumer goods and similar products abroad, our current prices are relatively low. 3rd, with the growing demand for watching content on large TV screens, an increasing number of Golden members are upgrading to platinum and And 4th, the introduction of more member privileges and benefits such as Loyalty points, express package, club performances, member exclusive e commerce items and also IP merchandise will continuously All of the above four items I just mentioned gives us confidence that the ARM will continue to have Further, due to our relatively low pricing base, The absolute impact of ARM growth on user perception is relatively small.

Speaker 1

What users care about the most is Still the quality of content and the user experience, we have seen rapid increase in member conversions with the launch of recent premium content. This indicates that our strategy of leveraging quality content And user experience to enhance ARM and long term member value is correct and has gained user recognition, leading to sustainable growth in membership revenue. We will continue to pursue this direction. Thank you.

Operator

The next question will come from Lincoln Kang of Goldman Sachs. Please go ahead.

Speaker 3

So thank you management for taking my question. So my question is at this time juncture of the year, When we think about next year, how is our overall business plan strategy outlook and the focus area For next year. Thank you.

Speaker 1

For next year, for 2024, based on the current macro environment and also our current performance so far, Our goal for next year is still aiming for high quality growth. High quality growth, meaning the revenue and profit will both grow and profit will go at a faster pace. Okay. Secondly, we will cautiously appropriate an interest investment in core business to promote Long term growth, specifically, we will reasonably allocate more investment in top premium content to enhance our core membership business performance In ARM, member lifetime and sub base and also will drive the performance in advertising business. Okay.

Speaker 1

And thirdly, we will continue to explore the implementation Innovative technologies centered around generative AI. So there are 2 sides that's going to benefit from this. On the B2B side, we will increase investments in intelligent production to improve the industrialization and efficiency of the video industry. And on the B2C side, we'll explore new services and even new business models to cater to the consumer needs. And hopefully, this will become the 2nd or third growth new growth pillars going forward in the long term.

Speaker 1

And for the other 2 innovative and new growing business Such as overseas business and ITE Lite, if we can maintain profitability of these Two businesses we will hopefully to grow the revenue performance for these segments next year.

Speaker 2

Thank you.

Speaker 1

Thank you.

Operator

The next question comes from Daniel Chen of JPMorgan. Please go ahead.

Speaker 5

Thanks management for giving me the opportunity to ask question. My question is on the content cost and also content strategy. Could management please elaborate on What's our content strategy going forward and also the content spend outlook? Thank you.

Speaker 1

Yes. Our Chief Content Officer, Mr. Xiaohui, Our goal for in the future remains To consistently deliver high quality and diverse content, solidifying our core advantage in drama genre, For 2024, in terms of the drama category, while maintaining a stable overall number of releases, We will focus on increasing investment in top tier projects, which we normally call the S and A plus gradings, Continue to produce and supply high quality content is our number one goal. In Q1 of next year, We will launch a new season of Ms. Theater and a highly anticipated S grade production, strengthening our competitive advantage And making a strong kick off for the year.

Speaker 1

Based on the iQIYI's popularity index score, we have already seen 4 dramas this year that have exceeded a significant milestone of 10,000 score for this year. And we anticipate The performance for next year will be better than this year. Regarding variety shows, while keeping content costs relatively stable, we will increase the number of programs And upgrade our production team. In addition to the already market proven multi season variety shows, several Innovative projects will be gradually introduced starting from Q4 this year, such as our original physical competition show, We Never Stop, which will be launched at the end of November, and we have internally high expectations for that. In terms of business models, We will explore monetization models beyond advertising, membership and IP derivatives as well as for more IT development opportunities throughout its lifecycle.

Speaker 1

For movies, we will increase investment in films made for online distribution and top tier content feature films, While further optimizing the operating models for online films, theatrical releases and our ITE cloud cinema. For Quzhen's content, we will appropriately increase investment, Strengthen the influence of our multi season IPs and increase commercially oriented original content as well as expand PUGC content. Our primary objective will be increasing the revenue growth potential and expanding IP licensing and As for animation, Q3 was the best quarter we've had for original animation. We are confident in further increasing investment in original content next year and expect a moderate increase in the number of original titles. Thank you.

Operator

The next question comes from Thomas Chong of Jefferies. Please go

Speaker 4

ahead. Thanks management for taking my questions. May I ask about our overseas outlook as well as our strategies? Thank you.

Speaker 1

Our Senior Vice President, Jiang Ba, will answer this question. Thank you. Our overseas business started in 2019 and encountered the outbreak of COVID, which led us to adjust and slow down our progress over these 3 years. However, through these 3 years of exploration, we have also achieved fruitful results. Firstly, we have validated our business model.

Speaker 1

Although our overseas business is still small in scale, In 2023, we forecast to achieve revenue growth and profitability. We have experimented in different markets and identified methods for growth and profitability that can be gradually replicated in other markets. And secondly, we have validated the influence of iDE's original content overseas, Establishing our core competitiveness. Our goal is to establish our overseas platform as the home of beloved Asian content, And iQIYI's original Chinese dramas are our most evident advantage. Over the past years, Chinese dramas have witnessed significant viewership growth in certain markets and we have seen the potential of CPAP.

Speaker 1

Lastly, we began to build a comprehensive ecosystem in key countries, including cooperation with local regulatory agencies, content partners and channel partners. Through these Collaborations, we have already launched exceptional local drama content. We can bring outstanding content and culture from all over the world to IT users in China and also around the world through our global network. These advancements have inspired us largely. Building on these three achievements, We aim to strengthen collaboration with partners around the world using content as a medium and leveraging Technology platforms to facilitate cultural exchange and also explore new commercial opportunities.

Speaker 1

We will continuously empower and add value to everyone in our ecosystem. Thank you, Susan. Thank you.

Operator

The next question comes from Maggie Yee of CLSA. Please go ahead. Thank you, management, for taking my question. My question is about advancement we made in the application of generative AI technologies at iQiyi. And I'm particularly interested in understanding the results we have already achieved in terms of improvement in business efficiency as well as cost structure and also want to learn more about management's perspective on the long term impact of these technologies.

Operator

Thank you.

Speaker 1

Sure. Thank you, Maggie. And then we will have Wenfeng, our CTO, to answer this question. Okay. We believe the generative AI will have Significant impact on the entire video industry in the next 3 to 5 years, bringing significant changes in production methods, Cost structure and personnel structure.

Speaker 1

So currently, ITE has already started implementing generative AI in core areas Such as content planning, development, production and promotion, we have achieved a certain level of productivity In 4 major application scenarios, namely text, image, sound and video. And this has helped creators to improve quality, optimize efficiency and reduce cost. For example, in content planning base, we have used generative AI to compress the time required for short Since the evaluation feedback from project assessment process from several hours to a few minutes. In the development phase, the use of generative AI has assisted reducing the time required For manual reading from 3 to 4 days to about 1 hour, the accuracy of scene and character breakdown in scripts have also exceeded 90%. In the prediction phase, producers have effectively saved on design and production costs By using generative AI tools to generate character sketches and concept posters, in the promotion phase, High quality posters and dynamic videos generated by generated AI have been applied in on platform operations and off platform advertising for key projects such as Distant and the Big Band 3.

Speaker 1

In addition to content production, we also utilize AI generated creative tools for effective App material production for performance ad. Some industry have seen a 200% increase in app spending compared to before the use of AI. While using while Allo campaigns using AI generated materials have also experienced A 60% higher rate of investment compared to non AI materials. In the future, we will continue to explore more business scenarios and application opportunities, fully

Operator

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

Speaker 1

Thank you, everyone, for participating in today's call, and please do not hesitate to contact us if you have further information or questions. Thank you. Bye bye. We'll see you next quarter.

Speaker 2

Thank you.

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