iQIYI, Inc. Q2 2021 Earnings Conference Call August 12, 2021 7:00 AM ET
- Fan Liu – Head of Capital Market of iQIYI
- Tim Gong Yu – Founder and Chief Executive Officer
- Xiaodong Wang – Chief Financial Officer
Conference Call Participants
- Ella Ji – China Renassaince
- Merrill Lynch – Bank of America
- Alicia Yap – Citigroup
- Piyush Mubayi – Goldman Sachs
Good day and thank you for standing by. Welcome to iQIYI Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I will now like to hand the conference over to Ms. Fan Liu, Head of Capital Market of iQIYI to read the opening remarks and Safe harbor statement. Please go ahead.
Thank you Operator, and thank you for joining iQIYI Second Quarter 2021 earnings conference call. The Company’s readout was released today and is available on the Company’s Investor Relations website at ir.iQIYI.com on the call today, are Mr. Yu Gong, our Founder, Director, and CEO. Mr. Xiaodong Wang our CFO. Mr. Xiaohui Wang our CCO, Chief Content Officer. And Mr. Wenfeng Liu our CTO, Chief Technology Officer.
Mr. Yu Gong will give a brief overview of the Company’s business operations and highlights followed by Xiaodong who will go through the financials and the guidance. After their prepared remarks, Xiaohui and Wenfeng, we’re joined the mid-term goal and Xiaodong 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. 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 and are not limited to those outlined in our public filings with the SEC. SEC undertakes 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. Gong please go ahead.
Tim Gong Yu
Hello, everyone. For the second quarter, we maintained favorable momentum from the first quarter, with total revenue approaching the high end of our 3-year guidance. Our operating loss narrowed for the 5 consecutive quarters on a year-over-year basis due to our effective cost and expense control.
During the quarter, we continued to lead the market in multiple operating metrics. According to the third-party data, we ranked at the top of the new form video industry in terms of mobile MAU s, mobile DAU s and the total yields of time span.
First, let’s start with our Membership business. As of June 30th, our total number of subscribers reached 106.2 million. This represented 0.9 million [Indiscernable] sequentially heightened uncertainty or content launch during the second quarter. Our membership growth was mainly due to three factors; 1, our premium content, in partially summer, performed well, which helped to drive the number of subscribers to increase, for example drama launched in June including [Indescernible] [indescribable] well received by our all-in in addition films, such as the Detective Chinatown [indiscernible]. Second, we saw strong memberships grow on TV devices at the [Indiscernable] summer location.
Three, we’re further dependent of roughly in pension. Driven by our premium content and, efficient operation. We continuously improved the commercial overall subscribers, the number of our overseas subscribers at the end of contract [Indiscernable] 1 million [Indiscernable] our domestic producer content to the overseas users. We also [Indiscernable] in the local or low content for example, we launched our first original drama [Indiscernable] “My roommate is coming home in May.” Which was [Indiscernable] effect. In addition [Indiscernable] was launched for the first time in the overseas market and again, [indiscernible] keeping pace with the domestic success of [Indiscernable] scouting, mode and improving the retention of first as first to take user cohort with the sequence of [Indiscernable] content.
That’s likely a sequential decline of memberships. So it’s revenue was mainly due to the volatility of subscriber number during the [Indiscernable] Which were mainly as attributable to one, lack of block path, to continue the popularity from Q1 which caused the, our utility of subscribers number, particularly in the first half of Q2. Two delayed launches of premium content to the end of Q2. This time though, volatility of our membership [Indiscernable] grew nicely, average monthly, saw high single-digit Growth Year-over-year during the [Indiscernable] mainly due to the price adjustment, we launched [Indiscernable] number last year.
With more premier and diversified content deposit valuable to be launched in the second half of the year. We remain confident in our need on the long-term subscriber and ou [Indiscernable] Furthermore, we also [Indiscernable] paid space for paid online videos. During the corner, we launched our own Cloud Cinema brand. The brand includes three major categories. The actual movies launched under PVO mode, as we’ve hit online movies. And our original movies.?The revenue showing initial of PVO? movies to content premiers increased to 42%, which is higher than [Indiscernable] release.
By doing this, we hope to explore a new area for growth and establish a new online distribution ecosystem to movies. Moving over to our Adverstising business. Our total Advertising revnue increased by 15% year-over-year but declined slightly quarter-over-quarter. The year-over-year growth was mainly attributable to the purchase of food and beverage advertising, partially offset by the decline in revenue due to our Company’s delay.
We expect this — We expect both brand and performance to increase in the[ Indiscernable] quarter due to [Indiscernable] and inventory increased during the summer vacation. [Indiscernable] app recorded second [Indiscernable] growth year-over-year during the quarter, mainly due to an improvement in our major commerce during the contracts such a lot of dilemma [Indiscemible] might be our garden and are [Indiscernable] performed about in terms of popularity, word of mouth and peer reviews. This helps to drive [Indiscernable] to the peak level over the past few years.
Performance weekend year-over-year Growth during the quarter, mainly driven by the contribution of key industry such as, Internet movies, e-commerce platforms, and the internet service app. We also enhanced our monetization capabilities. With our products and the technology which helped to significantly improve our effective [Indiscernable] Meanwhile, new resources from connected TVs and ads alike both performing well. Now, moving over to content.
Although we current preference [Indiscernable] timing in content, scattering during the second quarter, we have maintained our leading Asia in terms of the total number were revealed off top contents across categories, from dramas and the variety shows to the animations and the children’s content.
According to third-party data, were revealed of our drama and our variety show, our content were nearly 40% and over 33%, respectively, of the overall market viewership. Animation content, including children’s cartoons, has — had over 48% market share. During the quarter, we launched our series of classic titles, the content per [Indiscernable] caters to user demand and further [Indiscernable] realized that development and the innovation of our iQIYI.
To give you some examples, one for dramas, we launched a improved a title, the [Indiscernable] which was a heat among our [Indiscernable] of users, that drama topped a number of grudgingly in-place launch and well, revealed. 8.3 on average, by over 220,000 [Indiscernable] content on AirBar wonder they? use the user reading platform. Other include the trademark, such as A Love for Dilemma, My Dear Guardian [Indiscernable] and others well received on our platform. In addition, allows for the landmark. Also era onto [Indiscernable] and the Dragon TV, which helps to attract a lot TV [Indiscernable] back to the [Indiscernable] platform.
Following the success of the mix [Indiscernable] we continue bolden our Company offering [Indiscernable] we’re working to meet that diversifying of users soon with new mode enhancing their user experience well attracting the fans in niche segment. In May, we launched three [indiscernible] image, Moonlight, [indiscernible]. and that they will become you successfully gained popularity and word of mouth. Well, while this shows, we continue to innovate new original content across various [Indiscernable] original titles such as, Detective Adventures [Indiscernable] We’ve got Housework Season 3 and Working Mom. So [Indiscernable] were especially hot shows during the quarter.
Animation also produced animation in multiple, even fishy land, yet you maintained its popularity throughout the quarter. Other launch includes, No Time up to Between Earth, and produced the cartoons, The Tales of Wonderkeepers. For online movies in April, we exclusively released the rate. [indiscernible] which have to now, it stop [Indiscernable] it’s about to break RMB 30 million and the well received by other. For all note film, pretty soon the back names I’m talking to that, which was produced by iQIYI Pictures, was released the [Indiscernable] during the quarter, the cumulative of them have surpassed RMB 400 million so far.
It has received [Indiscernable] rebuilt and the commercial return. And then same time, another two movies for deals to buy [Indiscernable] features started shocking. In effect, new quarter. And another for imposed the production and excited to be released soon. In addition, iQIYI original films have 14 films under development. For the second half of the year, we have a better pipeline than either the first half of the year or the second half of last year, in terms of numbers of titles, quality and the [Indiscernable]
Meanwhile, we will continue to push to launch our [Indiscernable] content on time for the second half, key dramas include transitional dramas with regular number of episodes, such as [indiscernible]. as well as what we call [Indiscernable] brand, such as [indiscernible] shows, we are focusing on developing innovative new content across a number of things, such as the already launched Game of [Indiscernable] [indiscernible] and new generation hip hop projects. Upgraded version of the [Indiscernable] of China, as well as what’s your name and foreign [Indiscernable] production. For animation and the children’s content. We’re expanding our content elaborate. We are also employing the area of in-house production.
A couple of exciting title included are already released, self-produced 3D animation in malls over the golden [Indiscernable] age. [indiscernible] and the [Indiscernable] In addition, out house content after successfully broadcasting, the Euro 2020, we will present full competitions of Premier League for the next 4 seasons. On May 2022, FIFA World Cup qualification in Asia as well as [Indiscernable] and other [Indiscernable] events. Moving over,to technology. Advanced technology is the cornerstone of our business. Among other thing s, it allows to continuously develop innovative content, enhance the user [Indiscernable] and improve our operating efficiency. During the quarter, we were pleased to see that IT [Indiscernable] that target users in low tier cities have relative pick up.
The peak [Indiscernable] exceeded 1.3 million and the average user time spent exceeded the symmetry on our IT and mobile app, the number is — as of last quarter. In terms of demographics, users on iQIYI Lite consists mainly of elder and young people, groups that tend to have more spare time, mainly in low-tier cities, into the average of DAU overlap between iQIYI Lite and our main app, it’s around 7%. In Asia, we continually work hard to improve the technology of our recommendation engine of the users [Indiscernable] [Indiscernible] with almost appreciate its content for our last elaborate. We believe nearly 70% of all the AUS were driven by our content library during the second quarter.
Recently, we also made progress in the industrialization of video production by utilizing our intelligent production to that. Even though we currently launched the production business intelligence system, PDS PDIF, internally, P, it’s a professional data system for our content production in, as a BI, business intelligence product design.
And develop to centering content producers. PI offers the producer one-stop data inquiry authorization analyst, evaluation to some part of their decision making on their first day of our launch [Indiscernable] our producer tried to try it out the systems. In the future, as well [Indiscernable] they’re promoting? internally under the [Indiscernable] Our in-house studio is leasing a year, promoting the industrialization of video production [Indiscernable] it, as well as in our [Indiscernable] ecosystem. In general. We’re still in early of industrialization of video production, The supply of high-quality content especially of peak vertical content needs to be applied by.
Our content strategy is to focus on high-quality content across selected verticals while providing more premium market receipts so that we can optimize subscribers coming to Asia and the conversion. We admit that there is a still large gap between us and our global peers.
In the future, leveraging our deep understanding of users, our highly innovative in-house production teams, as well as our advanced technologies for industrialization production, we believe we are well-positioned to address content challenge to narrow the gap with our global peers and capture future market opportunities. With that, I will turn it over to Xiaodong to talk about our financials.
Good evening, everyone. Let me review our key financial highlights for the second quarter. Our total revenue reached RMB 7.6 billion. Membership business continued to be our largest business pillar, accounting for 52% of our total revenues. Our advertising business continued to rebound with 15% increase on a year-over-year basis. Our other revenues achieved a 20% growth on a year-over-year basis.
As we continue to diversify, our monetization channels, our cost of revenues was flat compared with the same period last year among which content costs would also remain stable. Our opening loss margin on a GAAP basis narrows out to 15% from 17% in the same period last year. And our Net loss narrowed for the fifth consecutive quarters on a Year-over-year basis, driven by our disciplined investment strategy.
As of June 30th 2021, the Company had cash equivalents, restricted cash, and short-term investments of RMB 12.3 billion. For detailed financial data’s, please refer to our press release on our IR website. For the third quarter of 2021, we expect a total revenue to be between RMB 7.62 billion and RMB 8.05 billion, a 6% to 12% increase Year-over-year. This forecast reflects iQIYI ‘s current and preliminary view subject to change. I will now open the floor for Q&A. Thank you.
[Operator Instructions] Please ask your question in Chinese first and then translate your questions into english. Participate and restrict to one question at each time. Please standby while we compile the Q&A work form. Your first question comes from Ella Ji from, China Renassaince. You start your questions.
And thank you for taking my question. My first question is, actually, I would love to hear [Indiscernible] [Indiscernable] So my first question is, for management you could elaborate on the latest regulatory environment, especially overall directions regarding the content. Thank you.
Tim Gong Yu
[Indiscernible] [Indiscernible] [Indiscernible]
Hello, Ana. So its content 4 major parts. So firstly, because we have major platform zone, the content censorship is main area we’re look at. So actually, the basic principle for content censorship hasn’t been changed over the pass of several years. So for this year, because the key events and the July 1st key event, there is a tightened censorship environment in the second quarter. After that, it will actually return to the normalized regulation pace.
And the second area is for actually, we see the tightened regulation for the overall Internet industries, not only for us. So this area mainly focus on the 2 parts. One is the anti-monopoly regulation. But for us, the video industry, particularly for the long-form video industry, is actually a fully competitive industry. So we actually force the limited impact from the IT monopoly regulation. And it’s 2 — the second part is on the data security.
So we observed that the government has implemented more tightened and specific guidelines for the mixed part. Internally we already in-housed our [Indiscernable] and also the technology part to [Indiscernable] and implement it and the more specific approach, on this area. And last one for the education industry, because this is some area people ask frequently. Education is not our main area business area we are looking at.
But just because of the tightened regulation, this area, we foresee that the students are the keys, have — might have more time than other things apart form the study. So entertainment is one of the key area that they might spend more time on.
Tim Gong Yu
[Indiscernible] [Indiscernible] [Indiscernible] So just a quick, a follow-up which is regarding the content because we have seen some rather creative action regarding the show video industry that they’re promoting, more positive, positive, content. I just wonder if that could also affect the [Indiscernable] video content in both their dramas as well as the variety shows. Thank you.
Tim Gong Yu
[Indiscernible] [Indiscernible] Hello this [Indiscernable] I think probably, you mentioned that are like, released regulation regarding the even kind of censorship on the cell phone videos. I think at that point you just said for long-form video, so we have always been really kind of approach for us as harder. So I think if anything, we have seen director or directorial impact, our opinion should be positive because those social media, they haven’t go through all this kind of process before. Now, I think we’re on the same track right now. We have more experience how to handle this. And we have — and let’s say where they go through all these kind of things for the past decade. Thank you.
Okay. Thank you for addressing that question. So if I may have a second one regarding the lite version, [Indiscernible]. So could management elaborate on the recent progress of iQIYI Lite because we are [Indiscernable] iQIYI Lite app has quite impressive user Growth in the least in the months. Thank you.
Tim Gong Yu
Ok. I will introduce like iQIYI Lite APP app briefly, and I will turn over to our CTO [Indiscernable] and to elaborate. And so we have a developed like, like APP for around half a year. So, behind the — this projects, we are actually trying to target. the now major users we are targeting right now. So our core users right now, actually the users aging between 25 to 39 years old users. And we cover some young generation and older people but that is not enough. So over the past 1 or 2 years recently, we observed that more and more new users.
They are actually now to have formulated a habit to use [Indiscernable] So we try to develop new product that can target this kind of a new users and incentivise this kind of a new users to use our products and watch our content. Right now, up to now, the app satisfy our expectation. So I will turn over to our CTO [Indiscernable] to elaborate more.
Tim Gong Yu
Okay. Actually like APP, it’s a personalized product targeting the lower-tier safety users. Since the launch, we have observed a very solid user growth. As of the end of second quarter, the weekly DAU has surpassed 1 million — 100 — sorry, 1 million milestones. And the user overlap between IT like APP and IT men app is extremely remote. So as we just mentioned, you will see in our prepared remarks, it’s only 7% and this ratio continued to go down. we observed that the users for our iQIYI Lite APP prefers to consume more [indiscernible] rather that new content and in terms of the user time spent performed, also, very well.
And we try to acquire the new users through as advertising around the channels with relatively high penetration into the lower-tier cities. And also through the user-sharing approach. And also we tried to improve the user retention through the personalized recommendation and also the [Indiscernable] and convenience interaction and also improving the adaption capability as to the low foundational smartphones. So right now, the user retention for our iQIYI Lite APP is also very good.
Tim Gong Yu
It’s so our CEO and has something to add. So this kind of initiative, I mean iQIYI Lite APP. It’s also consistent with our idea that we believe there would be a consumption upgrade in terms of the content for the Chinese users. So basically, we effect most kind of the users, they previously — they don’t watch the TV dramas on a films. And it is kind of the entertainment content. When they have a chance to access to the high-quality entertainment content there will be spending more time on this kind of entertainment content and so from our initial data set, it seems that our phases got, demonstrated through these kinds of user retention rates and also user growth.
Tim Gong Yu
Your next question comes from Eddie Leung from Bank of America, Merrill Lynch. Please go ahead,
[Indescernible] [Indiscernible] So my question is about content cost. We have seen a pretty good cost control done in the past on separate orders. While the Company has always been pretty conservative in guiding the content calls going forward, so I’m wondering when we look at the cost control in content, for example, in the past quarters, how much of it was due to the delay of some of the hot content and how much was coming from the benefits of lower production and licensing costs? Thank you.
This is Xiaodong. I think, if you’re talking about like 1 or 2 quarters combined [Indiscernable] it’s going to be caused by the delay of certain content. But if you look at the past few quarters, the numbers, you see the collective optimize our content costs, which actually is more driven by the efficiency improvement on content investment.
We see the price stabilized since year 2018 and given the facts, we have more content launched in the past few quarters. basically, we have more control on the quality and the efficiency of the content management. But of course, it’s, I don’t think presumptive is the right word here because even effect, we are going to expand the category of our content investment including original movies and the overseas content.
That’s why we see the potential slightly increase on a dollar amount of [Indiscernable] and but the percentage of revenue definitely I think you’ll continue to see the optimized trend in the next few quarters. Thank you.
As a reminder, please restrict to one question at each time. Your next question comes from Alicia Yap from Citigroup. Please, go ahead.
Hi. Thank you. [Indiscernible] My question is local management give us the longer-term prospects of the long-form video industry in China will the current model between the membership subscriptions and the advertising model remain in place, any breakthroughs in terms of content production for monetization model? Especially I think management, talking about the industrialization in the video productions. So how would that actually transform future monetization model for the video industry? Thank you.
Tim Gong Yu
[Indiscernible] [indiscernible] [Indescernable] [Indiscernible]
Okay. So, Alicia, my — I actually have a very positive view for this industry personally. My positive view is due to — there are 2 parts. One is that in terms of penetration, we still have very low penetration in terms of the paying viewers. So our pay ratio — paying ratio is also low. So in China, there is only a small percentage of people willing to pay for professional and high-end entertainment content.
And now, we expect that more and more people will actually join these charging users when with a change of the consumption upgrade of the content, we just mentioned before. And in terms of the monetization, our — right now, our core users are the people aged between 20 to 40, but we don’t have sufficient content for the people. aging higher than 14 years old, and also for the younger generation, we also don’t have a sufficiently due to content for them.
So right now, we are trying to amplify our content supply to satisfy this kind of a user’s need. So based on that, we expect the penetration ratio and also the paying ratio will continue to improve. And in terms of the monetization model for trying, in China for most of the Internet verticals, when the new users join the platform, they often time, offering users or they will consume that advertising with their let’s say more and more enjoyed our content, they will start to pay, for our content and there will be no advertising for them. But this kind of users we’re trying to, will convert into the high output users through our membership package and also the pivot method.
Tim Gong Yu
[Indiscernible] [Indiscernible] [Indescernable]
As you have observed, we went through some kind of qualitative of the uncertainty we can set the content launch. I think that the more fundamental reason behind that is that we haven’t been able to offer sufficient supply — content supply, and more diversified content supply. And so as we mentioned in the Shareholder letter, in the last quarter, we believe the industrialization of a video content production is the key to solve, these issues.
The key thing is that we try to in-house the forecast in-house them certainty or improve the forecast, accuracy for the fourth cycle of the content production so that we can lower risk and lower the cost, accordingly. So from the — since those first quarter, we have enhanced our investment in this kind of bringing industrialization of our video content production.
As we have mentioned previously, in this quarter, we start to roll out the Production Business Intelligence System, PBIS. This kind of a tool can enable our producers to forecast the chunk in the traffic and the monetization on the what they need for the project.
Yes. Thank you.
Thank you. Your last question comes from Piyush Mubayi from Goldman Sachs [Indiscernible]
Thank you for taking my question. When I look at your content cost as an indication of how you are industrializing content production. Your content spend was about at its peak, 84% of revenue and it’s come down gradually and it’s looking like it is about 67% of revenue. With industrialization where does that content spend come down to and how long do you think it will, come down to that track level that you think it can get to.
That’s my first question, and related to that, if I may, you’ve moved into IT sports in a major way with the EPL, and a price point that looks like it’s 19 or 20 Renminbi per month on a headline basis based on the price I’ve seen. What is being the initial indication of demand for EPL on your platform. Thank you.
This is Xiaodong I will come [Indiscernable] the first question. I think and industrialization of the content — content production is mainly to increase the supply and the quality of the content. Definitely as a percent of [Indiscernable], it were continued to contribute it’s positive effect, because of the, let’s say, better monetizing the ability of this content of [Indiscernable] I think, in the past few years, the main driver of the content is more like the slightly increase of the hit ratio and the quality of the content.
And the more diversified the content, strategy is like [indiscernible]. But I think within the next 3 to 5 years, definitely you will see significant improvement on the efficiency of the content production given the progress we expect to achieve [Indiscernable] industrialization of the content production. And for the sports. I’m not quite following your question regarding the [Indiscernable] because sports, it’s not like we tried as a user directly for the nominal price you saw on the website.
Actually, it’s more like a revenue share between iQIYI and our [Indiscernable] who actually run sports business. So it has very little impact on the ARPU of the membership business or the revenue of iQIYI because they only have, I think a very, very low percentage of the total memberships or subscription business. Thank you.
This concludes the question-and-answer session. I will now pass the line to the management for closing remarks. Thank you.
Thank you, everyone to joining our call today. So please feel free — if you have any questions, feel free to reach out. And so, let’s speak our next quarter. Thank you.
Tim Gong Yu
This concludes today’s conference call. Thank you for participating. You may now disconnect.