iQIYI Q3 2024 Earnings Call Transcript

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November 21, 2024

There are 5 speakers on the call.

Operator

Thank you for standing by, and welcome to the ITE Third Quarter 2024 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Q3 2024 earnings conference call. The company's results were released earlier today and are available on the company's Investor Relations website at ir. IQIYI.com. On the call today are Mr.

Speaker 1

Yu Gong, our Founder, Director and CEO Mr. Jun Wang, our CFO Mr. Xiaohui Wang, CCO, Chief Content Officer Mr. Youxia Duan, Senior Vice President of our Membership Business Mr. Xiaohua Yang, Senior Vice President of Movies and Overseas Business and Mr.

Speaker 1

Gang Wu, Senior Vice President of Brand Advertising Business. Mr. Gong will give a brief overview of the company's business operations and the 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.

Speaker 1

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 are not limited to, those outlined in our public filings with the SEC. ICE does not undertake any obligation to update any forward looking statement, except as required under applicable law.

Speaker 1

I will now pass on to Mr. Gong. Please go ahead.

Speaker 2

Hello, everyone, and thank you for joining us today. Throughout our 14 year company history, our ability to reinvent ourselves and innovate has been our core alignment against our competitors, and this strategy has remained unchanged for navigating all kinds of challenges. At this moment, we have identified 2 key trends. 1st, consumer become more prudent because of macro heavy. Secondly, consumers are now facing more entertainment options, including the free mini and short dramas, which is growing rapidly.

Speaker 2

As always, we hold strong belief that premium long form videos remain one of the most fundamental and is replaceable forms of entertainment. Their unique ability to improve wide audience and the crowd provide emotion value is unmatched by any other form of entertainment. Meanwhile, facing evolving industry and market dynamics, we should proactively reach out to these new opportunities and to ensure our long term healthy and sustainable growth. That's why we have been making a series of strategic upgrades. Key initiatives include: 1st, we have optimized the production of dramas by refining the story, coloring, pacing, a plot structure and a character development so as to better match the audiences' view preference.

Speaker 2

This will further improve the popularity and bring better returns. 2nd, we have been upgrading and we will continue to upgrade our APPs to include mini and short drama as part of our content offerings. The main iQIYI app will maintain its focus on long form video content and subscription based model, complement by free mini and short dramas and advertising model. In contrast, the upgraded iqiyi lite app will focus on free mini and short dramas and advertising model, complemented by long form videos and subscription model. 3rd, we will increase investments in the acquisition and distribution of mini and short dramas.

Speaker 2

1st, we have optimized our membership products and services system by combating an authorized password sharing and introducing an attractively priced family account option. The goal is to enhance member conversions and expand the scale of membership. Beyond these initiatives, we would apply AI more widely across our ecosystem, expand our presence in overseas market and expand our presence in overseas market and explore possibility in IP, the derivatives and offline experience. We believe these efforts will enhance our revenue and have feasibility over the long term. Now, let's move on to the details of our core business segments.

Speaker 2

Starting with mini and short dramas, we are adapting our content strategy and business model to align with evolving market trends and consumer preferences by introducing mini and short dramas into our offering, distinct from long form video infomass, a storytelling style and audience rich, mini and short dramas serve as a great complement for our existing lineup of traditional long format dramas, movies and variety shows. Mini dramas feature episodes lasting 1 to 5 minutes in vertical formats and the short dramas spend 5 to 20 minutes in horizontal formats. This transfer format offers a quicker storytelling pace, cater well to users seeking quick entertainment breaks and have gained considerable popularity among audiences. From a business model perspective in the future, mini drama will be available to all members at no actual cost. Non members will enjoy the free to watch mini dramas or choose to pay per view to access those exclusive to members.

Speaker 2

Short dramas will mirror the approach taken with our long form content. They are free for members, while non members will have access to a great free to watch second window. This still offering caters to deliver viewer demand, while supporting the growth of our subscriber base and expanding our monetization opportunities. Moving on to long form videos, which are fundamental to our content ecosystem. Starting with the core genre category, we regained the number one position in viewership market share during the quarter, according to enlightened data.

Speaker 2

This was driven by the launch of multiple titles that gathered high acclaim from users. Notably, the 2nd season of Strange Tales of Tang dynasty, Kongjiao Weihua, become the 14th drama to break the iQIYI popularity index score of 10,000. Not only the series 3rd season is already in production, this IP has been expanding its influence from online to offline domains, score among dramas with less than 20 episodes. Other titles such as Interlace C, Touhoui, Born to be the 1, Rangue and Wind Directions, Yinphongde Qingqun, were all released to widespread praise. While we are proud of performance in crime and reality drama dramas, we recall that certain areas will be called improved.

Speaker 2

For example, the limited supply of key female oriented custom dramas in the Q3 impacted kick title driven members. To this end, we aim to enhance the steady supply in this genre. We are also better align competent genres with optimal broadcasting window going forward. So, variety shows our innovative new title, the king of the stand up comedy, we enforced our strong 1st presence in the comedy genre. According to enlightened data, it dominated the viewership charts for 10 consecutive weeks and largely outperformed other shows in the same genre.

Speaker 2

It also achieved the 2nd highest peak popularity ever recorded for iqiyi inclusive variety shows. What's more impressive is that the show has not only propelled some standout comedy to widespread fame, but also played a key role in boosting the industry and capturing the attention of audiences. For movies, we have maintained our leading position in viewership for 11 consecutive quarters according to enlightened data. The performance was underscored by the theoretical releases like Sysa, Dravawa and the normal stats, Guzuyizhi, which ranked 1st and second, respectively on our popularity index rankings. For animations, our production capabilities for Chinese animation continues to improve, as evidenced by an increasing share of revenue generated from our original titles.

Speaker 2

Along with the ongoing release of the highly popular How Dare You, Chunghui Yipo, we also launched The Legend of Sky Log, Shenmue, Shenzhen and A Moment But Forever, Nian Wu Shuang receiving positive feedback. Leveraging the exceptional quality of our premium content, we have earned broad recognition from reputable Chinese Industry Awards and the 34th Flying App Service Awards, we topped the list among online video platforms with 11 owners. We also secured 7 owners at the 32nd China TV Golden Eagle Awards, Fei Henjia. Turning to our content Jinjing. Will be disclosed an exciting lineup of over 300 titles that are set to premiere in the year 2024 2025.

Speaker 2

For casting dramas, fans of fortune, Samuang Movie was released and will be followed by the much anticipated female oriented drama, Love Song in Winter, Dong Zhe Moon, Embrace, Baiue Fanxing. In reality and suspense genres, audiences can look forward to We Are Criminal Place Under the Skin Season 2, BSV 2JiR, The Fire Life Season 2, Let's Meet Go By, Fongdonghe Hoya. Beyond dramas, our movie offering includes the already released hits Upstream, Nixing Ren Sheng, Houguo Rock, Chongqing and Tiger Wolf, Rabbit, Yu HuoZulu, with upcoming titles such as The Volunteer, The Battle of Life and Death, Zhejiang Zhu, Shihuang Zhejiang. Additionally, new online films and iqiyi original films are on the horizon. In terms of variety shows, we are introducing fresh IPs like My Zone for the Du Tang and the blooming journey, Yiwu Banghua.

Speaker 2

For animations, the Q4 pipeline features major titles like the inclusive Dragonborn Diner, Longu Samu and the original material art IPs weak driver in Tang dynasty. Moving on to membership services. Membership revenues in the 3rd quarter was RMB 4,400,000,000, down year over year. There are 3 areas that include the membership revenue performance. First, as I previously mentioned, although we launched good quality titles in the quarter, there is room for improvement in the supply of premium female oriented and Asian custom dramas, which are especially appealing to members driven by Hit titles.

Speaker 2

2nd, amid the current micro headwinds, users strong to Hit titles have grown more cautious in spending and a broader selection of entertainment options is also seeking to capture their budget and attention. Thus, the high base effect from last year continued to play a part in our current figures. Our innovative value added services continued to gain traction among users. Notably, we launched the express package for 13 dramas in the quarter, leading to more than 40% sequentially growth in cash purchase, reaching a historical high. Additionally, we further enhanced member benefits to encourage upgrades to high tier plans and boost member engagement.

Speaker 2

This includes more than 20 offline events such as fun meetings, early screening events and the family fun days. As always, our primary goal for membership services is to maximize revenue performance to fulfill this goal and to proactively adapt to the current consumer segments. We are making modification to our membership offering key initiatives in group. First, we are combating an authorized membership account password sharing to enhance our account security. Meanwhile, on the member's task, we introduced the family account option as a better solution for our account sharing.

Speaker 2

Through this program, monthly out renewing Golden VIP members have the option to add a separate family account for just RMB8 per month. Each account, both primary and the family and will maintain separate user profiles and ensure an interrupt and personal lives, so we own experience. Secondly, the other supported basic membership plan, which was previously inclusive to iQIYI Lite has now been expanded to major iQIYI products. This initial performance is in line with our expectation. Last but not least, content serves as one of the key drivers of our membership business, integrating mini and short dramas with our top quality long form video titles introduced a unique mix that caters to deliver real preference.

Speaker 2

Moving on to the advertising business. Advertising revenue during the 3rd quarter was RMB1.3 billion, down year over year. Performance has remained the highlight during the quarter, again the steady growth annually, driven by the solid performance in e commerce, Internet and the mini driver sectors. The growth was also fueled by our advancement in AI applications with CPM for AI powered apps, improving by over 20% compared to traditional ads. WAN brand revenue declined annually due to weak advertiser segments and amid the macro headwind, especially, we proactively reduced the investments in variety shows in response to the macro headwinds to avoid financial setbacks, which led to a major decrease in brand ad revenue.

Speaker 2

Nevertheless, content related ads remained popular among brand advertisers, Titles such as The King of Sandoz Comedy, The Moon is Shining and The Strange Tale of Tang Dynasty Season 2 attracted the largest share of ad budgets on our platform. Going forward, we will focus on expanding our advertiser base, especially among local brands and capturing a greater share of budgets from top tier clients. Moving on to technology and products. We are making solid progress in driving technology innovations to improve user experience and operational efficiency. For example, we have made upgrades to our products across all devices, which include interactive bullet chat capabilities, improved audio quality, better video showing and download options and refined recommendation features.

Speaker 2

We have also made further progress in advancing the industrialization of the entertainment business as our virtual production technology has now reached the mass production stage. IQIYI is one of the first streaming platform in China with ability to handle the handheld watchful production process for dramas, including production, cost evaluation, technical design and supervision. This capability allows us to manage multiple projects simultaneously. In addition, the driver Shadow Lab, using Chang'an, is the 1st in China to apply the latest version of unreal engine into virtual production. We have also upgraded the IT virtual production studio with technical indicators meeting the highest standards both in China and internationally.

Speaker 2

This type upgrade is expected to effectively enhance our mass production capability moving forward. Our recent advancement showcased our product utilization of AI to improve business efficiency. AI plays a central role in advancing our operations, especially in content translation and the algorithm for our overseas business. Our AI driven approach has enabled efficient and highly accurate multi lingo translation and the multi tone doubling Drama particularly reducing the time additive to release Chinese content overseas and cutting down on translation costs. Moreover, we have developed an AI system capable of rapidly generating, plot text for our content library.

Speaker 2

This innovative tool has shortened what you said to be a month long manual task into a matter of days. In fact, we have produced class tasks for over 12,000 movies, achieving an impressive accuracy rate of over 92%. The casting process has seen similar improvement with AI, relentlessly analyzing and matching actors to the right roles, which largely builds up producers' decision making workflow. Finally, for our business performance in region outside of Mainland China, we recorded solid performance in our overseas business in the Q3 with both total revenue and membership revenue and the membership service revenue gained annual and sequentially growth. Notably, membership revenue from Hong Kong, UK, Brazil and Australia grew over 40% annually.

Speaker 2

The average daily number of subscribing members overseas also increased annually and sequentially with Brazil, Mexico, Hong Kong and Thailand seeing annual growth exceeding 45%. The influence of C dramas continued to strengthen overseas. In the Q3, total views of last rebounding by Chongqing, helped the viewership ranking across multiple markets, including the U. S, Australia, Japan and South Korea. Additionally, we successfully expanded the inflow of original production, a strange tales of Pan dynasty assistance beyond Mainland China.

Speaker 2

The seller made international rebuild with a print mail in Singapore at the end of July. Market the 1st ever overseas print mail screening for our premium C dramas. For local content, we launched a number of dramas that received positive feedback amongst us. The Lady and Her Lovers recorded the highest daily revenue among all Thai dramas released on our platform in 2024. The show also ranked 1st on Google in Thailand, which they outperformed other shows in the same time slot.

Speaker 2

As we head into the Q1, we will continue to expand our local partnership and explore additional monetization opportunities. This includes, depending the bundled package cooperation with telecom providers in Thailand, Malaysia, Singapore and Hong Kong. In addition, we aim to amplify the inform of our content and the increased membership benefits soon diversify offline events. On November 1, we hosted our 1st iDuoI conference outside of Mainland China as we proceed soon. The remaining months of Q4, we are set to launch our series of appreciation events and promotion for members.

Speaker 2

Additionally, we are excited about the forthcoming international rollout of more high quality content. Notably, our talent show, Jai LiveWise, was introduced on October 26 and has already received a positive reception from our audience. In summary, looking ahead, we remain committed to driving innovation and advancements across our business, catering to the dynamic entertainment needs. Our targeted initiatives such as launching mini and short dramas, while bringing rich entertainment experiences and further strengthening our commercial capabilities. These efforts are supported by our deep knowledge of both content and the users, coupled with our vast industry resources.

Speaker 2

In parallel, we will deepen our adoption of AI technology at once our overseas expansion and fully leverage the potential of our IP. These strategic efforts are aimed at driving our company towards greater the tender ability and success. Now let me pass it to onto Jun to go through our financial performance.

Speaker 3

Thanks, Mr. Gong, and hello, everyone. Let me walk you through the key numbers. In the Q3, the total revenue were RMB 7,200,000,000, down 10% annually. The membership services revenue reached RMB 4,400,000,000, down 13% annually for three reasons as previously discussed by Mr.

Speaker 3

Gong. For online advertising, revenue decreased by 20% year over year to RMB 1,300,000,000. This was primarily due to the decrease in brand ad business, partially offset by the growth in performance ad business. Xiamen distribution revenue reached RMB814 1,000,000 and grew 52% annually and other revenues decreased by 8% annually to RMB729 1,000,000. Moving on to costs and expenses.

Speaker 3

The content cost was RMB 4,000,000,000, down 5% annually, primarily due to lighter movie offerings in the quarter. The total operating expenses were RMB 1,400,000,000 down 5% annually, primarily driven by the more disciplined management of the marketing spending. Turning to profits and the cash flows. The non GAAP operating income was RMB369 1,000,000 and its corresponding margin was 5%. The operating cash flow totaled RMB 243 1,000,000 positive for 10 consecutive quarters.

Speaker 3

At the end of Q3, we had cash, cash equivalents, short term investments and a long term restricted cash included in the prepayments and other assets a total of RMB 4,700,000,000. For the detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q and A.

Operator

Thank you. Your first question comes from Sooking Zhang with CICC. Please go ahead.

Speaker 4

Thanks management for taking my question. My question is about mini and short dramas. As Gongbo mentioned in the prepared remarks, the company has enhanced the integration of mini and short dramas. Can management elaborate a little more on it? And what's your strategy for mini and short dramas?

Speaker 4

Thank you.

Speaker 1

The CEO, Mr. Gong, is answering this question. Starting from the end of September this year, we added mini dramas and short dramas into our content ecosystem. And these two types of content are very much differentiated from traditional long form video content. So they are very good complement to our content offering.

Speaker 1

Especially for this year, the 3 mini dramas models have been rising significantly. And then the user scale is at a pretty sizable scale and has been growing. So now is a good time to enter. Okay. So for mini dramas, we classify them as they are 1 to 5 minute long in vertical format.

Speaker 1

And then for short dramas, they are 5 to 20 minutes long in horizontal format. And for now, we're focusing on the mini drama center. In the past 2 years, we participated in a mini drama participating in the performance atmos. And we have been actually innovated in this media drama sector by innovating different models and formats. For users, it used to be participating or watching the content by free or pay per view.

Speaker 1

And we now introduced a subscription model to this business model. And for parent subscribers, they can watch vast majority of the mini dramas for free. And then pretty soon in the future, they will watch everything

Speaker 2

for mini dramas for free.

Speaker 1

For the 3rd business model, there are 3, advertising models and then or they can do pay per view. And we actually introduced a subscription model to the business model, and we believe this will be positive and is constructive for the membership retention and also to get new users. In terms of content strategy, we will develop the mini dramas through various methods, including the licensed copyright, full price buyouts and profit sharing. Going forward, we'll focus on the premium head content of the mini dramas. And then eventually, we will develop our unique style that's generated by iQIYI, belongs to iQIYI.

Speaker 1

And we hope in the future that for ICE's mini dramas in terms of the content of production quality and also the value provided to users, it will be a further improvement from the current level. Thank you.

Operator

Your next question comes from Li Zhang with Bank of America. Please go ahead. Thank you, management, for taking my question. I want to follow-up on the short drama side. Can you share with us the competitive edge in investing in short drama and any impact to our content costs

Speaker 1

in the future? Thank you. The CEO, Mr. Gong, is answering this question. So in terms of our advantage in mini dramas, first of all, we have advantage in product and technology.

Speaker 1

For mini dramas, currently, a material amount of the traffic is happening on the mobile side. So on the mobile side, we have 2 major applications, the IT app and also IT light. So for these two apps, we have very mature technology and infrastructure and also a good user base. And actually, a good size and actually a good portion of the users are subscribers. So basically, based on that, when we add new content genres to this and then combine it with a good upgrade to the application, it will be a good adaptant to the current strategy.

Speaker 1

For the 1st upgraded version of the IT app actually has been released already. We're doing the AP test right now. So most of the users, when you download it or upgraded the application, you will see the changes. For IT app, it will continue to focus on the long term video content. From the business model perspective, it will be majority focused on the subscription model.

Speaker 1

And for IT Light application, it will focus on mini dramas and short dramas, mainly driven by the advertising model. The vast majority of the content providers for mini dramas are ITE's existing partners. So, collaborations in these new categories have further expanded and are deepened our partnership scope, allowing us to rapidly scale up in these areas and then at a relatively low cost. So basically, the operational rules or the principles in terms of managing these two type of content, the long form video content versus mini from our relatively similar, don't have major changes. So it will be pretty fast for our teams to pick up and then master in this.

Speaker 1

In terms of the funding for the content for mini dramas, it comes from 2 apps. First of all, we'll lower the investment in terms of the low ROI of long form video content. And then secondly, then we will scientifically and also rationally increasing the budget for Mini. And that's it. Thank you.

Operator

Your next question comes from Maggie Yi with CLSA. Please go ahead.

Speaker 4

Good evening. Thank you for this opportunity to ask questions. My question is on the membership. In October, we announced the launch of family account option, wondering if management can share more insights into the strategic consideration around this initiative, especially given the current macro environment and consumer trends? What's our expectation on this strategy over near term and longer term?

Speaker 4

How's the initial feedback we received from consumers and users so far since the introduction? Thank you.

Speaker 1

Thank you, Maggie. And we will invite Mr. Zhuan, who is in charge of this business segment to answer this question. ITE's family account is a high cost effective shared membership service plan we introduced to enhance the user experience for family members. They better serve users' independent and diverse viewing needs and user scenarios.

Speaker 1

The Sankey account and the primary account are actually standalone membership accounts with individual passwords and also playback history. So this not only effectively improves the user experience, but also protects the account security. And as you know that the video consumption needs of the elderly and the young demographics are steadily increasing and the family account is actually designed to effectively address their challenges in account management and accessing child content. The membership account is an innovative attempt in the membership product model, which has positive impact on improving membership conversion and revenue. So going forward in the future, we'll continue to combat password sharing and offer users more cost effective choices and aim for the long term healthy development of the membership business.

Speaker 1

The Family, account was actually officially launched on November 12, and we will observe the performance for some time before sharing the user feedback and data outcomes with everyone. Thank you.

Operator

Your next question comes from Zhi Zhao with Guangfa. Please go ahead.

Speaker 4

I will translate myself as Doctor. Yu Gong has mentioned the long form video fundamentals to IT's content ecosystem. My question is about your strategy for production of dramas. Could you share with us about the length, scene and innovative direction of your future drama series? Thank you.

Speaker 1

Thank you. And we will invite Mr. Xiaohui, our Chief Content Officer, to take this question. We believe although there have been some cyclical fluctuations in the industry, we believe that the recovery of the market confidence and user demand, long form videos will still be one of the strongest demand among users in the mid to long term. We believe it will remain at the core of ITE's content ecosystem as well.

Speaker 1

So going forward, we will enhance the sustainability of a diverse high quality content supply through powerful performance measures, continue to achieve a win win situation for both content quality and commercial revenue. Based on the insights into societal sentiment and also the changes in user viewing preferences, we believe we will comprehensively upgrade the production and operational mechanisms for dramas, films, animations and variety shows. We will improve the production and content launch efficiency, focus resources on creating high quality works and strengthen the commercial aspect of the content. For content planning, we will structurally optimize the process by improving the coordination of the number of new dramas, episodes and genres, and we'll reasonably reduce the number of key main drama releases each year. We will strictly curate project selections to prioritize excellence and concentrate resource allocations on premium content with high commercial value.

Speaker 1

So from inception, all projects will embody commercial appeal, mass market resonance and contemporary relevance. For content evaluation, we will establish stricter assessment standards that focus more on revenue capability and innovation ability within the framework of the content related cost ratio. For content creation, we will optimize scripts and filming techniques to align with users' evolving viewing purposes. And simultaneously, we will aim to deepen our understanding of social trends and create works that resonate more profoundly with contemporary societal emotions and taste. For content production, we'll strengthen project management and public control, mostly monitor project progress and work with partners to reduce costs and improve production efficiency.

Speaker 1

And from a team building perspective, we are committed to the continuous improvement in our in house studio mechanisms. Our studios, which are structured around the producers, focus on consistently attracting high quality talent from the market. We aim to cultivate healthy internal competition by establishing mechanisms that reward innovation and promote distinct content styles. The strategy ensures ongoing evolution through a process of natural selection where only the excellence selection where only the excellence drives. And that concludes the answer to this question.

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 the call today. If you have further questions, do not hesitate to contact us. Thank you again.

Speaker 2

Bye bye. Thank you.

Operator

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

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