iQIYI Q1 2023 Earnings Call Transcript

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May 16, 2023

There are 4 speakers on the call.

Operator

Thank you for standing by, and welcome to the IQI First Quarter 2023 Earnings Conference Call. All participants are in the listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Chang Yu. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining IQI's Q1 2023 earnings conference call. The company's results were released today and available on the company's Investor Relations website at ir. Icd.com. On the call today are Mr.

Speaker 1

Chief Technology Officer and Mr. Liu Cao Ban, Senior Vice President of our Membership Business. Mr. Gong will give a brief overview of The company's business operations and highlights, followed by Jin.

Speaker 2

Hu will go through

Speaker 1

the financials. After the prepared remarks, Before we proceed, please note that the discussion today will come are subject to risks and uncertainties that may cause the actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not 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. With that, I will now turn the call over to Mr.

Speaker 1

Gong. Please go ahead. Hello, everyone. We started

Speaker 2

of High Quality Growth. Our company's live view once again demonstrated its power. ITM maintained its dominant leading position in Germany, reaching new highs in market share. Our long standing original company strategy both put once again the more cost In particular, the whole membership services revenue reached a new high The average daily number of total subscribers number approached 129,000,000, Quarterly net addition of over $17,000,000 which marks the 2nd consecutive quarter with quarterly $170,000,000 which reflects the usual seasonality following the Non GAAP operating income exceeded RMB1 1,000,000,000 in Q1, as trading for the 6th As we mentioned last quarter, we believe these recent solid results are just the start of our phase of High quality growth. In Q1, we witnessed the part of premium 1.1000000 and a Currently, our businesses can be classified into 3 stages: core, Now let's go through the performance of our business segments in detail regarding this membership services.

Speaker 2

Membership sales were up 24 Our subscribers numbers reached RMB178.9 million in Q1, Sequentially, net addition of over RMB17 marking the 2nd consecutive quarter with We take the dynamic and the elements of hope to our membership business Based on many factors, including content supply, user demand and the market environment, This allowed us to drive continuous improvement in both membership revenue and user experience. The above mentioned strategy has helped us build stronger, longer and a broader relationship with our users. We saw a further outstanding valuation of our membership structure and stronger user engagement in Q1. The function of annual subscribers increased significantly year over year We have the lifetime value and the long term retention rate also improved. In addition, Our membership profile reached even broad reduced cohort in Q1.

Speaker 2

We saw strong growth From both subscribers, this LiveSpring Privilege and iQIYI have supported basic subscription package, which targets differentiated user and more credits. So what drove the strong growth in Q1? 1st, the once in flight premium content we released drove new subscribers and improved user retention. Among the strong content offering, the more cost For a number of live calls and has advanced performing dramas, which generated the highest membership revenue 2nd, we continue to refine our membership business operations, increasing numbers via the presentation with enhanced benefits. For example, we improved subscribers' In addition, we upgraded our membership center, introducing various Looking forward to 2023, we will continue to focus on driving high quality growth and to pursue further growth in revenue, subscribers and ARMs.

Speaker 2

Moving on to content. During the quarter, our content methodology was named highly Effective and our brand image has diversified and high quality premium content powerhouse Conference for the 5th consecutive quarter. Our regional company continued to account For the majority of drama supply and revenue, our original content accounted for 70% of the key drivers we released in Q1, the highest in our history. We distributed around 20 premium dramas to CCTV and the following show and live TV stations, including the markups, Everyday and Light and Mail Super. Also, volume and revenue As an online media entertainment service provider, our goal is to systematic increase the Please wish all of our premium content.

Speaker 2

Our long term commitment to original content enabled us with Structural advantage in the industry. So yes, we have successfully built 3 strong PIROS that supports our premium content offering, then they optimize the content production, having For content production, we effectively improved our indirect light retail content production coverability So please look at content management mechanism and the content production tools. We believe this creates Effective competitive barriers that are difficult for our 2 business. For content management mechanism, We have accomplished an efficient and comprehensive mechanism running through the full process For Huang, product innovation through assessment, production, promotion, Corporation and distribution. For content production tools, we have built in house developed system to support In the 12 last, we saw production based on API, big data and cloud computing.

Speaker 2

Through these matters, we can further improve our content consumption and our operational We have a compelling, creative culture and talent combination First, in addition to providing competitive economic incentives, we give We are encouraging fresh young talents in addition to work with young known and experienced creators. We also nurture young and emerging talents and help them develop their potential. Have generated some awards of note. Also starting from Q2, a number of key cast members will be released, Lineup of dramas in other categories will also be released. A number of oriental variety shows We will also be launching Q2, including both the 20th season of gift shows and the debut of new titles.

Speaker 2

Yes, I do. For the competitive adventure, Z, please also anticipate the Launch of flagship titles such as the lack of China 2026. Looking ahead, we plan to increase For Q2, please also anticipate to see new releases in other countries, including The Garden Legend and IOK. Moving on to advertising. 5% year over year.

Speaker 2

The performance at revenue grew 75% annually And SG and A revenue contribution reached a new quarterly high. We successfully acquired In addition, we optimized our algorithm to strengthen our targeting and improve ad which is a new hub for the domestic advertising market. Despite that, we observe Variety shows and diversified ad products and the launch of number of variety shows in Q2 We are culturally optimistic towards the overall brand advertising market this year. Consumption is still recovering in the first half of the year, I will answer. In terms of asset classes, we are optimistic about the MIMCT sector, which includes food and beverage, travel, domestic cosmetic brands, Moving on to technology and the products.

Speaker 2

Fanico's innovation is one of our core values, which is critical in driving video inverse realization and improve company production efficiency. For workflow production, the technology has been applied In 2 of our key original dramas, 2 sites that are founded that this and high decision making system that captures every critical moment In the entire content production process, for example, the system can complete ARR revenue projection in just a few minutes. This can also generate estimated content related cost ratio, Monetary Process Management can utilize these tools to monitor production process, and Information Technology for providing user friendly access payment for LZ We also actively inquiring how Generative AI applications built upon large language model can improve content John Wick has AI technology and the impact mandate in all new business scenarios, including On the review process, we have initiated the integration of the regenerating AI technology Large library model in power intelligent production systems will achieve higher performance and better income By combining large memory model applications with computer vision and audio models, We can gain deeper insights into video content resulting in significantly improved quality and production Efficiency of promotional images and videos for use in advertising and content marketing, Text to image and text to video applications are also valuable tools In comics and animation production processes, I would like to discuss High quality growth and events again recorded operating profits.

Speaker 2

For an added supported basic subscription package, The number of subscribers grew by over 17% sequentially and Driven by the outstanding performance of 3 different content, the membership revenue achieved solid growth in the quarter. The membership revenue growth rate exceeded 90% annually in geographies in regions, including the U. S, with revenue growth of 54% annually from the top to viewership Thank you for the question. Coming into Q2, we have a solid pipeline of premium content, including key,000 dramas and original Chinese dramas, which would drive the growth Our solid first step into the new stage of high quality growth. After 13 years of development, Our industry leading brand includes a deeply embedded in the mindset of users and industry talent.

Speaker 2

We are confident about the future prospects of the industry. And as a mining leader, Our business has strong resilience and promising growth potential. We treasure the trust and the Support of our stakeholders and we will keep pushing ourselves to unleash Thank you, Mr. Huang, and hello, everyone. Q1 was another record setting quarter for us, as Mr.

Speaker 2

Huang mentioned. We achieved historical highs across all key aspects. Not only we achieved all time high in total revenues In the membership services revenue, we also further improved our profitability, cash flow and balance sheet. The exceptional Q1 result was once again driven by the success of our original content strategy. To be more specific, we booked RMB8.3 billion in total revenues, hitting quarterly all time high, up 15% annually and 10% sequentially.

Speaker 2

Membership services revenue continues to serve as the biggest growth driver with revenue exceeding RMB5.5 billion, up 24% annually and 17% sequentially. Meanwhile, our advertising revenue and talent distribution revenue up by 5% 16%, respectively, on annual basis. Moving on to the cost and expenses. Our cost of rent increased by 10% sequentially, among which the content cost increased by 7% sequentially. We launched a more diversified premium content, original content In the Q1, as Q1 is a typical high season with Chinese New Year holiday, The total operating expenses increased both annually and sequentially, mainly due to the increase in SG and A expenses, We devote more resources in marketing as we believe this will amplify our company influence, For Q1, we continue to strengthen our profit and cash flow generating capability.

Speaker 2

Non GAAP operating income exceeded RMB1 1,000,000,000, expanding for the consecutive quarter. More importantly, free cash flow also exceeded RMB1 1,000,000,000. In Q1, we raised approximately US1 $100,000,000 through follow on income affordable note offering. We also repurchased approximately RMB340 1,000,000 principal amount of the convertible model due to 2026. At the end of Q1, the company had cash, cash equivalents, restricted cash, short term investments And the long term reserve cash included in the prepayment and other assets of RMB6.3 billion in total.

Speaker 2

This RMB6.3 billion cash balance does not include the payment of around US1.2 billion dollars to the paying agent To meet the company's repurchase obligation on April 1, 2023, for the convertible notes due 2025, which was classified as prepayment of other assets on the balance sheet. The repurchase has been completed in April 2023. To conclude, The Q1 results demonstrated the success of our high quality growth strategy. We will continue to focus on execution and are confident in our ability to generate more value for our stakeholders in the long run. For detailed financial data for the Q1, please refer to our press release on our IR website.

Speaker 2

Now we will open the floor for Q and

Operator

A. Thank you. Your first question comes from Xuexing Zhang from CICC. Please go ahead.

Speaker 1

And I will translate myself. Thanks for taking my question and congratulations to Riyadh. My question is related to content and content cost. What's the trend of company investments for this year and in the longer term? And what's the level of this year's production compared to previous years.

Speaker 1

Also regarding to the current costs on the income statement, how does management think about the growth rate I would like to invite our CFO, For this year and over the mid term, the overall content cost will remain stable with marginal increase. Secondly, we will continue to invest I'm sorry, compared with last year, the number of For dramas, starting from Q2, we'll start to launch this year's key costume dramas, Including, for example, Stories of Kunming Place, Palace, Dead Time, the Lotus Casebook, Lucky 7 Times and etcetera. We will also launch modern dramas including Finally, right eyes in the park, as husband, as wife, we are criminals and etcetera. For our variety shows, Q2 will mark strong return of our original variety shows, including both returning seasons of hit shows and the debut of new titles. Investors may refer to the detailed content pipeline list, which was released last week during our IT Awards Conference for more detail.

Speaker 1

I will add on to what Xiaohui just mentioned and explain the finance perspective. You mentioned that content investment for content investment and content cost from the financial And then we believe for this fact, it will remain stable with margin Our original content has been increasing steadily and it has been the main driver of our high quality growth over the past period. And right now, because of the original content, the proportion is relatively at a high percentage. So we anticipate going forward that Okay. For our original content, the Content launch schedule.

Speaker 1

So because of this, we can launch the content more at ease and more on our own pace. And for now, we have a full system from producing the original content to broadcasting. And this is a very systematic, programmatic approach that we're taking in managing our original content. So Our funding is relatively stable and our need for capital is relatively stable as well. And From the financial aspects, we anticipate to see the continuous performance of the above management 2 points going forward.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Lincoln Kong from Goldman Sachs. Please go ahead.

Speaker 3

So thank you, management, for taking my question. The question is about the competition. So how do we see the competition landscape has changed or evolved in the current market. And over the next 2 to 3 years, will we expect any of the other peers We'll increase their investment in order to grab more market share in the team space and how do IQ

Speaker 1

We have been maintaining our market leadership for the past period. And right now, we think that the entire long term video industry has gone through a pretty structural change Over the past period, the irrational investment style and the progress growth is no longer We have never been the most deep pocket player in the market. So we actually put more focus into original content And we have seen very promising results and have been seeing excellent results on this As we have maintained and noticed definitely market leadership on this front and have built very concrete competitive strength on this area. And going forward, we will continue to enforce our competitive strength to ensure market leadership over the long So we also utilized technology to improve our overall Production process, for example, from the screening process to innovation to production, to actually content launch and entire cycle of the Original production can be covered. Here are technology driven tools.

Speaker 1

And using these tools, We can largely manage and also forecast our original content. So in order to secure very stable And also in the meantime, we will also utilize AIGC to improve our production efficiency and improve Our overall original content quality to also to decrease the content cost of that. So going forward, these are the tools and technologies that we can use to enforce our market leadership position. Thank you.

Speaker 3

Great. Thank you.

Operator

Thank you. Your next question comes from Daniel Chen with JPMorgan. Please go ahead.

Speaker 2

So my question is related to the membership assets. So So could management provide some color on the outlook of the subscriber number in the Q2 and also longer term? Also, how should we think about the overall growth for the membership service in this year and longer term? And also what's our major strategy for membership business in 2023? Thank you.

Speaker 1

Our Senior Vice President of Membership Business, Yoo Seo Dan, is answering this question. So for Q1, driven by Second is that the Q2 membership services revenue and subscriber base will still have good year on year growth. And we estimate that for Q2, the sub date and the revenue will be the best performing second quarter in our history. From the quarter on quarter perspective, it is expected that the sub base and revenues in Q2 will have some sequential dip, mainly reflecting the seasonal pattern after the Chinese New Year holiday. And but overall, we remain optimistic about the subscriber base and revenue outlook for this year, mainly because of the 2 factors The first reason is we are still very confident about the content pipeline At the constant loss schedule for this year, especially during winter window such as summer vacation, Our highly efficient content production mechanism, strong operating and technical capability And also the top talent will empower us to steadily grow the number of high quality content compared to last year.

Speaker 1

The second factor is we are seeing the proportion of annual subscribers increase significantly year on year. Although it might not have the short term uplift effect on ours, but the long term benefit is significant It represents longer and closer relationship with our subscribers and this will drive the annual And also improve the annual revenue performance and also improve the cash flow And also the second point is the lifetime value and the long term retention rate of our various membership packages have also increased. And also that we saw strong growth from both subscribers with large screen privileges Okay. The main strategy for our membership business this year is to reach high quality which means maximizing user experience and in return strengthen our subscriber base, LTV and offsprings. Thank you.

Operator

Thank you. The next question comes from Alicia Yap with Citigroup. Please go ahead.

Speaker 1

Can management share with us what is your view of brand advertising outlook this year? And what is the ad demand for each major subvertical industry looks like? In addition, wondering if you have So I'll talk about brand advertising performance ad separately. So for brand advertising, the performance of that is very closely related with macroeconomic development. And we are seeing the overall ad Reflection in the advertising market will lag by 1 or 2 quarters.

Speaker 1

Actually, after April, We are seeing a gradual recovery of brand advertising and we are still very cautiously optimistic And so overall, we are very confident, still very confident in the long term development of the brand advertising market As iQIYI is one of the platforms with the highest user quality, the strongest willingness and ability to pay in the China Internet Looking at the sub sectors, the FMCG, retail and travel, entertainment and also health industries, we covered the samples so far. Q2 is the peak season for FMCG, And on food and beverages and the toiletries industry, so we expect Q2 should have Positive growth, both annually and sequentially. And at the same time, Q2 also has key marketing campaigns such as June 18. So the ad budget of some e commerce platforms should also expect to see We are optimistic about the long term prospects of the new energy vehicle sector The performance ad market will gradually recover in 2023 with moderate recovery in the domestic market And especially for ICE in particular because we have optimized our algorithm and also to integrate ourselves Efforts show on our Q1 performance our quarterly performance were actually above the market industry And also, I'm going to look into the future quarters, we expect to see strong growth Overall, the performance ad market is currently showing pretty big budget growth in the areas such as online services, game watches, e commerce, travel and local lifestyle.

Speaker 1

Thank you.

Operator

Thank you. I'll now hand the conference back to Ms. Yu for closing remarks. Over to you, ma'am.

Speaker 1

Thank you. And please note that the previous And I would like to thank again for everyone's participation on the call today. And please do not hesitate to contact us if you have further questions.

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