iQIYI Q2 2023 Earnings Call Transcript

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August 22, 2023

There are 8 speakers on the call.

Operator

Thank you for standing by, and welcome to the iQiyi Second 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 Ms. Chang Yu, IR Director of the company. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining ITE's Q2 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. Yun Gong, Our Founder, Director and CEO Mr.

Speaker 1

Jun Huang, our CFO Mr. Xiaohui Wang, our CCO, Chief Content Officer Mr. Wenfeng Liu, our CTO Chief Technology Officer Mr. Youqiao Duan, Senior Vice President of our Membership Business and Mr. Gang Wu, Senior Vice President of Brand Advertising Business.

Speaker 1

Mr. Gang 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 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, but are not limited to, those outlined in our public filings with the SEC. ITE does not undertake any obligation to update any forward looking statement except as required under applicable law. I will now pass on the floor to Mr.

Speaker 1

Gong. Please go ahead.

Speaker 2

Hello, everyone. Thank you for joining us today. Our focus of the quarter remains firmly on generating high quality growth. Our original content strategy Continued to deliver top notch titles, which in turn brought The strongest second quarter performance in our history in terms of key metrics such as total revenues, profits, free cash flow and average daily subscribers during the quarter. Also, We maintained our industry leading position across various key aspects.

Speaker 2

The exceptional quarterly results clearly demonstrate the resilience and immense Long term growth potential of our business. Now let me walk you soon the key developments In the Q2, firstly, we maintained our industry leading position in drama market share For 6 consecutive quarters, according to Enlightened, our original dramas Continue to play major role in terms of content supply and the revenue contribution. Notably, testing,

Speaker 3

And in

Speaker 2

January 1, Yinxiangfua generated Highly positive quarter of month reviews. Reinforcing our brand image and Diversify on the high quality premium content powerhouse. 2nd, from a financial perspective, We have the best 2nd quarter revenue performance in our history, up 17% year over year. We recorded double digit annual revenue growth across all key business lines: Membership services revenue grew 15% annually and advertising revenue grew 25% annually. Meanwhile, non GAAP operating income hit RMB 7 $86,000,000 grew by 129 percent annually, marking the 6th consecutive quarter of Our profitability, furthermore, our ability to generate Cash further stressing with free cash flow reaching RMB 872,000,000, Positive for our consecutive quarters.

Speaker 2

Our performance in the second quarter represents Another solid step in our pursuit of high quality growth. As we previously As mentioned, iQIYI and the handheld industry have been completely transformed with We have seen growing return on investments for the handheld Streaming Industry. And as an industry leader, iQIYI largely enhanced original content ability to financial performance and a new market standard that address overall Industry advancements. In light of this, we aim to enhance the long term health Now let's dive deeper into the performance of our core business segment, starting with membership services. During the quarter, Both membership revenue and the number of subscribers hit all time high for our 2nd quarter.

Speaker 2

Membership revenue exceeded RMB4.9 billion, up 15% year over year. Look at the key drivers behind. Monthly earned for the quarter reached RMB 14.8 2, increasing both annually and sequentially. This was driven by our refined operating strategy. For example, we optimized our pricing strategy, which effectively narrows the gap Between listing and actual rates, average daily number of total subscribers in Q2 reached 111 point 2,000,000, up 13% year over year, primarily driven by a stable supply of content Our subscriber base declined on sequential basis, primarily due to: 1,

Speaker 1

It's

Speaker 2

time that we are encouraged by the continuous Optimization of membership structure. The absolute number and proportion of annual subscribers Both had a meaningful growth year over year. I would like to reiterate The goal of our membership business is to maximize user experience, which in turn Going forward, we are more focused on the overall economics, Not just the pure subscriber growth. We have dynamically Adjust and carefully balance the number of subscribers and are based on multiple factors, including confident supply, user demand and the market conditions. More importantly, We strive to enhance the overall healthiness and revenue growth, the sustainability of our membership business, Providing exceptional user experience is key to do so.

Speaker 2

We established The loyalty program that includes diversified privilege and benefits, the long term loan Numbers can enjoy more favorable pricing and the privilege, Reinforcing user's perception that earlier in enrollment and the long term The subscription offer greater benefits. Just recently, we rolled out the Express Package program, which grants early access to the finale of our hit drama, The Lauter's case book will follow. Within the NPS event, Over 6,000,000 subscribers have used their membership points to access the pref package. Our first Express package event received very positive feedback among members As membership points are linked to the duration and continuous subscription, Members with longer subscription materials are entitled to higher reward points and also We expect this Initiative will further strengthen subscriber loyalty and drive member retention rate. Moving on to content.

Speaker 2

We continue to execute our original content strategy and reinforce our brand image as a In the first half of twenty twenty three, We have already released 2 dramas that broke the 10,000 popularity In that score, as I mentioned earlier, we maintained the top position in the drama market share for 6 quarters In a row, original content remains the primary driver to our content supply and revenue Among all major dramas released during the Q2, original content Accounting it for 67%, we think there are a share of revenue contribution remaining high. We kick off our summer 2023 lineup with the release of 10,000 Popularity Index Score. This was a nice show that brought such scores in our history. And the second title that is sold this year. In addition, 13 years of dust Under our Mr.

Speaker 2

Seltzer brand and the beauty of resilience, Arun also received Critical acclaim for their appealing stories. And at the same time, our original variety shows They are strongly termed, and their popularity remains as strong as ever. Our market share for total market shows Was the highest in the industry all coming to enlightened. Even more Impressive was the market share for all inclusive variety shows, which doubled sequentially. The highly anticipated show launched in Q2 include our flagship, This season of the draft of China was a true hit And the strongest of the highest popularity index score for our officials.

Speaker 2

Moreover, we completed A holistic commercialization of the show, which expanded its culture Influence into other verticals, including concerts, artist agency and merchandise. Much as Tencent Music and NetEase Cloud Music are driving RevPAR high music revenue for this IP. The third reason of the Interactive and Venture Suite generated the highest popularity in that score of any reason. Additionally, become a farmer wrapped up in the 2nd quarter, gained critical acclaim With a nomination for the Best Variety Show at the well known 28th Shanghai TV Festival, Mongolia Awards. We are also excited to see original content as widely recognized across TV stations in China In Q2, we distributed 30 dramas to broad TV networks, Including CCTV and the following show, some of the channels with whom we have built a long term partnership.

Speaker 2

So this partnership, we are able to expand our content rich and the growth Heading into the second half of the year, We have a wide range of exciting and diversified premium content in the pipeline. Our summer 2023 has been bolstered by highly anticipated Asian custom dramas, Including the Lauter's Casebook, which was the latest under the 10th drama that bought the 10,000 popularity index, We will follow. Moreover, we are broadening our presence in the For this summer season, we have been on Some of the high quality new releases in both online drama series and off line theatrical movies As media companies self compete for users' attention, Our top notch content offering have allowed us to maintain our leading position in the drama category. This once again proves our strength in the content business. Forward issues of Our pipeline in the second half will consist of both sequels A strong comeback and other key programs include less BBQ, Yiqi, Road Harbor, Housework Talent, And as you wish, Yipa Zhang Yuelli, which integrates cross overs from our key dramas.

Speaker 2

Our pipeline also includes other numerous exciting releases, including films such as As well as Orange War Animation, including the Great Ruler, Abu Dhabi, War

Speaker 4

Aero,

Speaker 2

Moving on to advertising business. We are delighted to see accelerated recovery. Our total annual revenue recovered to RMB1.5 billion, up 25% annually And 7% sequentially. Both brand ads and performance ads recorded Annual and sequential growth in Q2. Performance ad revenue traveled year over year and reached a and its growth accelerated on a sequential basis.

Speaker 2

This solid performance was driven by a combination of factors: 1, the current higher share of ad budgets During the June 18th shopping festival, to target and efficient operations Browse higher budget from key sectors such as Internet Services, E Commerce and Games 3, optimizing agrocent for better ad performance and monetization efficiency Number 4, applying generative. Generative AI to enhance ad creation and ROI. Brand and revenue also grow annually and sequentially, benefiting from several factors: 1, Q2 being the high season for food and beverage sectors 2, increased ad budgets during the June 18th shopping festival compared with last year 3, more robust pipeline of variety shows contributing to an expanded ad inventory And a low base effect when compared to the same period last year. We also observed increasing demand for ads related to key dramas. With improving quality of Iqiyi Originals, the number of advertisers signed annual contracts and the contract rate Both increased meaningfully as compared to the same period last year.

Speaker 2

Paid dramas Adapting as tested over 4 ks brand advertisers generated highest ad revenue among all The dramas launched this year. Heading into the second half, we remain cautiously Optimistic about the outlook of overall advertising market. Well, we noticed a static As I said, we found in consumption settlement. We do aware that The macroeconomic recovery will have a lagging effect on the brand advertising business. That said, we still hold positive view of the long term growth of cyclical factors, including food and beverage as well as both that benefit from reopening policies and recovering on a relative faster pace.

Speaker 2

Moving on to Technology and Products. Technicolor Innovation is one of our core values. We keep improving content production and operation efficiency by driving technology innovation, Such as generative AI, we have been applying generative AI generative AI Initial results. For example, so large language model scripts And can rapidly be processed to extract key information effectively, Accelerating the assessment process and improving budgeting and resource management, Our internal data shows that the accuracy rate of scene and character Breakdown, aimed by generative AI, has exceeded 90% so far. And besides generative AI can quickly assess intricate The story is about to enhance the user experience by improving search results, Recommendation and the playback interactive experience.

Speaker 2

Moreover, The generative AI has also been helping us in creating advertising ideas and boosting monetization performance. To give you an example, performance as using generative AI to produce Content increased ROI by 20 percentage points. Next, I'd like to give you some updates on our growth and early stage business. I'll start with IT Light, which continues to generate high quality and healthy growth. This is being driven by our Improving monetization capabilities.

Speaker 2

Impressively, iQIYI has already been At the operating level for 3 consecutive quarters, our total revenue reached historical in Q2, up 35% year over year, with membership revenue increased by 87 Thanks. Let's talk about business performance in regions outside of Mainland China. Our premium content continues to grow in popularity, and we saw solid membership revenue growth, In particular, Hong Kong, the U. S. And Canada had annual growth of more than 50%.

Speaker 2

The cultural influence of high quality oremo Chinese drama is growing rapidly. That's the beauty of Reliance Steelix atop the broadcasting list in various markets, including Southeast Asia and North America. With plenty of Premium titles in pipeline for the Q3, we continue we will continue to fortify our competitive edge For developing premium Chinese video content, we will also continue to develop a closed loop In terms of content marketing and promotion, user growth and subscriber acquisition, Promoting Chinese content to a wider range of audience in the overseas market. In summary, We are pleased with solid progress in our pursuit of high quality growth. Looking forward Looking forward to the second half of this year, we will keep focusing on The long term sustainability and the health of business is strengthening our competitive position in the long run.

Speaker 2

Our robust premium content pipeline will continue to create the flywheel effect, Reinforcing the online improvement of our business fundamentals. On Top of exceptional results, we will also closely monitor the right opportunities and make selective Strategic investments to further fill the next phase of growth. We appreciate Now let me pass to Jim to go soon, our financial performance.

Speaker 3

Thanks, Mr. Gong, and hello, everyone. As Mr. Gong mentioned earlier, we recorded our best ever second quarter results across multiple key financial metrics, such as total revenues and core membership services revenue, while the profits and the free cash flow remained robust. In addition, our balance sheet healthiness was further improved.

Speaker 3

Now let me walk you through key numbers. Total revenues increased by 17% annually to RMB7.8 billion, setting an all time high for 2nd quarter performance. We secured double digit annual revenue growth across all business segments. Membership services revenue Continue to serve as the most powerful growth engine with revenue exceeding RMB4.9 billion, Up 15% annually, online advertising spend upped its growth As revenues reached $1,500,000,000 with an accelerated annual growth rate of 25%, which was fueled By the growth in both brand and performance ads, with performance ads being the key driver and to a lesser extent from brand advertisement. The content distribution revenue and other revenues rose by 15% 16%, respectively, on annual basis as well.

Speaker 3

Moving on to costs and expenses. Our cost of revenues increased by 10% annually, among which, calendar costs increased by 7% annually. This was primarily driven by an increase in number of original drama and variety shows launched during the quarter. Total operating expenses grew by 11% annually, largely due to the increase in SG and A expenses. We devoted more resources in marketing as we believe this could amplify our content influence, Increased subscriber attractions and enhanced the strong momentum generated by our original content offerings.

Speaker 3

Turning to profits and cash flows. Non GAAP operating income reached RMB786 1,000,000, Up 129 percent annually, positive for 6 consecutive quarters, free cash flow reached RMB 872,000,000 positive for 4 consecutive quarters. During the quarter, As part of our liability management initiatives, we repurchased a total principal amount of USD $133,600,000 above our convertible senior notes due 2026. In addition, the total interest bearing debt decreased significantly quarter over quarter. As of the annual second quarter, The company has cash, cash equivalents, restricted cash, short term investments and long term restricted cash included in the prepayments and other assets totaling of RMB6.1 billion.

Speaker 3

To conclude, the 2nd quarter results once again demonstrated that we are making solid progress in delivering high quality growth, We are well positioned to generate greater value for our stakeholders in the long run. Now we will open the floor for Q and A.

Operator

Thank then repeat in English. We ask that questions are limited to 1 per person. Please rejoin the queue to ask any follow-up questions. Your first question comes from Shikun Zhang of CICC. Please go ahead.

Speaker 4

Good evening, management. Thanks for taking my question. My question is related to the membership business. The ARM has maintained stable growth in the past two quarters. So what's the longer term targets for ARM?

Speaker 4

Also, how should we think about the outlook for the membership service in the second half of this year and the longer term? Thank you.

Speaker 1

Thank you. We will invite Mr. Zhuang, who's responsible for the electric business, to answer the question. Okay. Our membership business development has different focuses and strategies at different stages.

Speaker 1

In the initial establishment and rapid growth phase, the primary goal was to maximize the number of subscribers, which was focusing on growing the sub base. When the sub base reached a significant size, for example, When our sub base was first in the market that exceeded $100,000,000 in 2019, our objective shifted To membership revenue based on the revenue based on the market condition and our own strategy adjustments, so no longer purely Our membership revenue is determined by Interface, subscriber lifetime and ARM. Our goal is not only to focus on the current quarter revenue, But to achieve long term and substantial growth in membership revenue, taking a more long term perspective in business planning In the future, we'll continue to adhere to the strategy we mentioned earlier. So first, We will continue to encourage subscribers to subscribe for a long period, increasing the proportion of long term subscribers. We have already seen continuous annual growth in the scale and also the percentage of annual subscribers, and we hope this trend will continue.

Speaker 1

Secondly, we will continue to systematically promote membership loyalty, particularly by enhancing the value perception of long term We have already implemented a series of measures. For example, First, we provided discounted price and privileges for long term subscribers, reinforcing members' understanding that We introduced a membership loyalty program that contains membership point system, which favors long term loyal subscribers. We believe this will improve user retention rate and enable the For example, We rolled out the recent, the Lotus K Food Express package program, which was a meaningful application upgrade of our membership point. During the 8 day event, over 6,000,000 subscribers have used their membership points to access the Express package. Overall, we believe with the improvement in membership value We believe that the membership loyalty and retention will naturally increase, driving the long term growth in ARM and also membership revenue.

Speaker 1

Thank you.

Operator

Our next question will come from Li Zhang of Bank of America Securities. Please go ahead.

Speaker 5

Thanks management for taking my question. We have seen that key long form video player launched several content this I'm with Group Performance. So I want to see how should we look at the change in environment and How should I see, take the competitive advantage in content perspective? On the same time, we noticed that offline entertainment actually saw strong recovery, especially in movie. Do we see any impact or benefit to our business?

Speaker 5

Thank you.

Speaker 1

Thank you, Ray. We will invite our For this summer, we've seen the industry have a better supply of high public content, whether it's online dramas Our offline theatrical movies, all of these are actually competing for users' attention. We I'm also pleased to see the flourishing of the long form video industry. We believe with the improved comp quality, The industry vitality has been activated, and we believe the market prosperity is beneficial for everyone. Under this backdrop, we have maintained our leading position in online dramas, driven by our high quality original content.

Speaker 1

We have been leading the industry for 6 consecutive quarters in terms of the overall drama market Share and also the exclusive market share. Once again, we have withstood the test in Q2, which demonstrated our advantage and sustainability in the content business. As everyone knows, the content industry is a long term business, and the key to long term success Life in the ability to continuously produce and supply high quality content. In the core drama category, Due to the nature of longer production cycle for dramas, our competitive advantage in this area is difficult to surpass in the short term. Additionally, core market players are establishing Differentiated advantages focusing on original content and exclusive content.

Speaker 1

As such, The content differentiation has been greatly improved and the competition environment has been more benign and irrational. We believe that our advantage in the content business are foreseeable and sustainable, supported by 4 strong pillars: Our mature and continuously improving content production mechanism, strong operating capabilities, leading technology capabilities and our top industry talent. In the future, we will continue to be firmly adhered to innovations, premium content, diversification and continuously seeking new breakthroughs through innovations and research. Upsell, while ensuring the quality of projects, We will carefully plan our projections to ensure a long term sustainable supply of diverse premium content. Regarding the recovery of offline entertainment, on one hand, we will continue to focus on our strength, Concentrating on the production and operation of our content online, on the other hand, the recovery of offline theatrical movies We'll benefit online video platforms.

Speaker 1

After the 2nd window, movie supply will recover and increase. Thank you.

Operator

Our next question today will come from Alicia Yap of Citigroup. Please go ahead.

Speaker 5

Hello. Thank you. So good evening, management. Thanks for taking my question. Wonder if management could share with us what's your view on the overall brand advertising market outlook for the second half this year.

Speaker 5

Have you observed any major shift of budget sentiment from advertiser? And will

Speaker 1

Can you

Speaker 5

modify any of your advertising strategy? Thank you.

Speaker 1

Thank you, Alicia. We'll invite Our Senior VP of Renata Business, Wu Gang, to answer the question. IT's overall advertising business has been in a continuous recovery phase With rent advertising rebounded in Q2, growing both year on year and also quarter on quarter. As the economy recovery takes time to reflect in the brand advertising segment market, We hold a cautiously optimistic attitude towards the brand advertising market for the second half of this year. So we are an indispensable choice for advertisers in enhancing their brand influence.

Speaker 1

We have been seeing increasing definition from advertisers for our content and also innovative products. The contracting amount of content marketing advertisement has been driven by top notch dramas and variety shows, And there has been a strong preference and assistance from advertisers for our innovative ad products. Under the current macro environment, brand advertisers from different sectors are formulating corresponding advertising strategies Based on the strategic vision, also the long term market view, among which certain brand advertisers with forward looking Looking at the specific sectors, we are optimistic for the food and beverage industry, cosmetic and personal care industry As well as the transportation industry, which also includes the new vehicle new energy vehicle. Thank you.

Operator

Our next question today will come from Linqing Kong of Goldman Sachs. Please go ahead.

Speaker 6

So thank you management for taking my question. So my question is about the performance and the pricing here. We've seen continued recovery of our performance as in the first half. How do we think about the second half outlook for this set of business? Thank you.

Speaker 1

Thank you, Lincoln. We'll invite our CTO, Wenfeng, to answer this question. Performance ad revenue has maintained its annual growth for 5 consecutive quarters, with the growth rate Continues with Ashley, the growth rate continues continuously accelerating and its contribution in total ad revenue has continued to increase, It is expected that the performance app sector will continue to strong growth in second half of this year, benefiting from our improved market capability, attracting more advertising budget from key industries Such as Internet Services, E Commerce and Gaming. Now also, we believe with the algorithm optimization And the support of generative.ai, app performance app results will bring In the future, we think the performance ad advertiser will pay more attention To cost effectiveness and also the advertising performance, striving to achieve efficient conversion and also to maximize returns on investment. We will going forward, we will continue to strengthen ad creativity, content Personalization and interactivity.

Speaker 1

We will also leverage new technologies like generative AI to lower app production cost And also enhanced an ad delivery efficiency adapting to the ever changing market and user demand. From the app sector's perspective, for the second half of this year, we think we have a positive outlook Different factors, for example, the traditional e commerce platform, live streaming e commerce,

Operator

Our next question will come from Maggie Yih of CLSA. Please go ahead.

Speaker 7

Thank you, management, for taking my question. Noted the company has generated very strong operating cash flow and free cash flow this quarter and has also repurchased Our convertible notes, please could you share with us more about your thoughts on the company's debt level management and plans for financial resources in the coming quarters?

Speaker 1

Thank you. Thank you, Maggie. We will invite Mr. Jun, our CFO, to answer this question.

Speaker 3

Sure. Thanks, Maggie, for the question. I think for the interest of time, I will just answer the question in English directly. So I think this is a question that we constantly receive, an inquiry that we constantly receive from investor community as well. And our answer is very straightforward.

Speaker 3

1st and foremost, we are in a process of continuously improving Our capital structure, we are still finding, making, trying every effort To make our balance sheet more healthy healthier and more robust, and this is what we do. And secondly, I think within our framework of doing that, there are 2 things that really matters. The first and the most important thing is actually to continuously generate sizable free cash flow. Just remember, generating sizable cash flow means natural deleverage regardless of whether We will conduct the debt buyback or not. And this is really a key, and this is what we have been very proud To see our progress in the past couple of quarters.

Speaker 3

And the second thing is to develop a serious And a comprehensive set of the choices to see what we can do to benefit our shareholders best. And this set of choices won't include, for example, the debt by debt, but it will also include to explore the opportunity To invest for state returns and as we all know, the extraordinary environment has been extremely dynamic That would rise the interest rate and actually provide return opportunities for the company with free cash flow. So with that being said, I think our overall principle remains the same. We explore every opportunity to create value for our stakeholders, including our Shareholders and our supporting debt holders then but without compromising The safety of our business, for sure. That's it.

Speaker 3

Thank you.

Operator

This will conclude our question and answer session. At this time, I'd like to hand back to management for closing remarks.

Speaker 1

Thank you, everyone, for participating in the call today, and please do not hesitate to ask us

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