iQIYI, Inc. (IQ) CEO Tim Gong Yu on Q3 2021 Results – Earnings Call Transcript

iQIYI, Inc. Q3 2021 Earnings Conference Call November 17, 2021 6:30 AM ET.

Company Participants

  • Tim Gong Yu – CEO
  • Chang You – IR
  • Xiaodong Wang – CFO
  • Xiaohui Wang – COO
  • Wenfeng Liu – CTO
  • Xianghua Yang – SVP

Conference Call Participants

  • Ella Ji – China Renassaince
  • Alicia Yap – Citigroup
  • Thomas Chong – Jefferies

Operator

Good day and thank you for standing by. Welcome to the iQIYI Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After speak is presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to speaker today, Ms. Chang You, IR Director of Company, please go ahead.

Chang You

Thank you, Operator. Hello, everyone. And thank you for joining iQIYI’s Third Quarter 2021 Earnings Conference Call. The Company’s results were released today and are available on the Company’s Investor Relations website at ir.iQIYI.com. On the call today, our Mr. Gong, our Founder, Director, and CEO, Mr. Xiaodong Wang, our CFO, Mr. Xiaohui Wang our CCO, Chief Content Officer, Mr. Wenfeng Liu, our CTO, Chief Technology Officer, and Mr. Xianghua Yang, Senior Vice President of our membership business. Mr. Gong will give a brief overview of the Company’s business operations and highlights, followed by Xiaodong, who will go through the financial and guidance. After their prepared remarks, Xiaohui, Wenfeng, and Xianghua will join Mr. Gong and Xiandong in the Q&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 but not limited to those outlined in our public filings with the SEC. iQIYI, does not undertake any obligation to update any forward-looking statement, 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. Thank you for joining us today. In the third quarter, we’re faced a lot of volatility as we navigated through a particularly challenging operating environment. We’ve experienced uncertainty in terms of content scheduling, which resulted in softer than expected top-line performance. Despite of the short-term volatility, we are delighted to see encouraging signs across multiple operating metrics. Our leading market position remains intact as we continue to be number one in various user metrics according to third-party data. We firmly believe there are a couple of eternal truth when it comes to entertainment. The first is that audiences constantly demand high-quality entertainment contents such as movies and dramas. And the second is that creators have infinite potential to develop excellent material. With this market dynamics in mind, we think we have a tremendous space for growth and development. During the quarter, we continue to enhance the production capabilities of our original content, explore new genres to diversify into and expand our user base by refining our products and the overall user experience. Meanwhile, we have been driving the industrialization of video production to improve the efficiency of our operations. We believe all of these developments will enable us to navigate through the short-term challenge. And we’re on the right path to achieve long-term success. Now, let’s go through the performance of our business segments in the third quarter. Let’s start with the membership. During the quarter our membership services revenue grow both annually and sequentially. Our core strategy is to cater to the demands of specific user segments with diversified content and continuously improve member benefit that enhance the member experience and driving new member sign up and user retention.

At the same time, we are focused on raising ARPU and improving the long-term monetization of our membership business by developing innovative, new business models, adjusting our price points, eliminating ineffective discounts and pushing through operational initiatives. However, as I mentioned earlier, the uncertainty of our content scheduling caused fluctuations in terms of subscriber numbers. In the future, we will continue to enhance our library of content across different genres and strengthen our ability to withstand risks related to content scheduling. In the third quarter, memberships services revenue grew by 8% year-over-year, mainly due to the success of hit dramas such as One And Only, [Indiscernible], and Forever and [Indiscernible],Ever, which were launched in the third quarter as well as the continued interest in dramas launched at the end of the second quarter, such as, My Dear Guardian and The Rebel. As of September 30, the total number of the subscribers was 103.6 million. The sequential fluctuation was mainly due to delays in the release of some highly anticipated content. Meanwhile, the major content that we did release in third quarter was less diversified in terms of genres. Despite the soft performance. We are happy to see that subscriber growth on TV devices and from overseas maintained good momentum. We believe that higher conversion of users on TV devices and the continued expansion of our overseas user base will be a significant drivers of future subscriber growth. On the other hand, our ARPU recorded both annual and sequential growth. The annual growth rate of 10% was mainly due to the successful price adjustment that was rolled out last November. We expect the ARPU of our membership business will continue to improve going forwards driven by our content and our multiple operating initiatives.

The member experience is one of the most important subjects that we focus on. On October 4th, we proactively canceled the paid advance viewing model, ahead of our peers. This should further help improve the member experience. and that supports subscriber growth and retention and lay a solid foundation for the long-term monetization of our platform. In addition, we continue to enhance member benefits on our platform via our cooperation with top industry partners. In terms of new services and the new business model, one of our key focuses is to promote the development of cloud cinema. Primarily across three content categories. theatrical films distributed via a PVOD model, premium films only distributed via online platform and the iQIYI Original Films. Since 2020, theatrical release of feature films have been hit significantly by COVID -19 pandemic. The cloud cinema model, will reduced reliance of online video platform on theatrical films. Also it enables users to watch new films soon after their offline release at a price that is cheaper than a traditional movie ticket, which further maximize the monetization potential of each film. During our third quarter, we had released our new life, Kungfu Stuntmen and the Malignant under our Cloud Cinema model. This films fall in different genres, namely comedy, action, and suspense, which helps to satisfy the demands of different user cohorts. In addition, our first original PVOD film Northeastern Bro was launched in October and received positive user feedback since its launch. In terms of overseas expansion, we were able to significantly expand our user base with DAUs, increasing sequentially in a number of Southeast Asia countries. Downloads of the IQiyi app remained on top of the chart across various regions. It rank number 1, in Thailand, Malaysia, and Vietnam. Unforgettable Love, Forever and Ever, and other domestic blockbusters drove continued growth of our overseas revenue. We’ve also recently kicked off the development of six overseas original dramas including 4 Korean and the 2 Philippines originals.

In addition, we continue to expand our cooperation with local partners, including multiple media platforms and operators in Malaysia, Thailand, and Singapore. We also launched our advertise system and signed annual cooperation framework agreements with numerous advertisers and successfully expanded local sponsorship for our Sweet ON Theater.

Moving on to the advertising. During the quarter our advertising revenue came in soft, mainly due to a drop in brand ad revenues. The decline was mainly due to the delay of key content, including dramas and variety of shows. We continue to work on developing new innovative variety shows, which we are doing to diversify our content and de -risks our business from content scheduling uncertainty.

We are still refining and fine tuning some of these productions and it’s going to take some time to win over advertisers and stimulate their parties with these new genres. The softness of our brand advertising business was also due to the overall challenging micro-economic environment in China. Revenue from performance ads increased steadily both year-over-year and sequentially during the quarter. Our iQIYI Lite app was the main driver behind this. As opposed to our main apps, iQIYI Lite mainly focused — focuses on lower-tier cities. There is a low overlap with our main app, which mainly focused on brand ads. iQIYI Lite is expected to be a great complement that drives new growth of our advertising business. The year-over-year growth of Performance ads also benefits benefited from one, an improvement in our monetization capabilities driven by our technology and two, contribution from key sectors, including internet service and e-commerce. The sequential growth was also partially driven by the growth in our ad inventory during the summer vacation.

Looking forward to the fourth quarter, we have observed some slowdown in China’s overall macro economy, which might negatively impact on our advertising business. Nonetheless, we’re proactively adapting ourselves to the environment to minimize our potential exposure. Moving over to content, we have experienced increased uncertainty in terms of content and scheduling, and a prolonged content approval processes since our last earnings call. Although we prepared a rich slate of content during the quarter, some of the top dramas and the variety shows in our pipeline experienced launch delays. Going forward to offset these types of the risks, we are looking to further expand and enrich the diversity of our content portfolio, explore new and different categories and deepen user awareness of our diversified content offerings, all in an effort to derisk our business from content scheduling issues in the future.

In addition, we actively responded to the guidelines issued by then various government authorities and to promote the health of entertainment and online media industries. We believe these actions will further resolve long existing problems in the industry, which should help us to further optimize content costs, eliminate the chaos in content production and promotion, and reduce irrational industrial combination. Overall, these changes should be beneficial for supporting a healthy development of the industry over the long-term. I will — I will also like to highlight our content strategy, efficiency in content production and operation has always been a primary target that we strive for and we are now putting even more focus on it. We’re proactively taking initiatives to improve the efficiency of our operations and reduced ineffective investments in content by cutting projects that are expected to generate low ROI.

The online video industry has rapidly developed over the past decade and now we’ve gotten to a point where content is king and the efficiency is key. We’re happy to see the continued results of our progress to optimize content costs driven by enhanced production capability, disciplined content spending and improved operations. The important metric we use to track efficiency of our content spending is content related cost ratio. Simply speaking, this metric is calculated by dividing the total costs related to our title by the revenue generated by it. Based on this measurement, we can see the operating efficiency of our overall content in 2021 (including both licensed and original serial dramas) have improved substantially from last year. We will continue to use this metric as an effective tool in managing the efficiency of our investments in content and operations. For example, One and Only and Forever and Ever which created synergy in terms of IP and they are quite innovative in terms of both content creation and the broadcasting models.

Also, these two titles, are good examples that demonstrated our increased efficiency in content operation as measured by the content-related cost ratio. The performance of One and Only was 13% points improved than last year’s drama Love is Sweet, which features the same leading actress and belong in the same genres. We will also like to share some highlights on the performance of our vertical content theater model strategy. We have always been the industry pioneer in terms of content innovation and operation. Our theater model strategy is definitely one of our successful attempts. This model helps us to build recognition among audiences and advertisers in genres which is beneficial for attracting new users and driving up user retention. It offers better ROI as it brings the synergy among different titles.

Within the same content genre, and thus provides more flexibility in working with advertisers. For example, we observed that the recent broadcast of The Pavilion and Wisher boosted the viewership of Mist Theater’s first season titles. ] Specifically, the daily video view and user time spend for The Bad Kids increased by more than two times since the new season of The Mist Theater was launched. Looking forward to the fourth quarter, although we predict that uncertainty will remain in the market, we will continue to execute our diversified content strategy in addition to the new season of Mist Theater launched in the fourth quarter. Other key titles include the dramas series Feng Qi Luoyang, the variety show, Super Sketch Show and Action, and animated content such as Deer Squad 2 and Princess Doremi. The Super Sketch Show premiers in mid-October. The show was highly acclaimed by audiences and solidified our market leadership in variety shows.

Moving on to technology, advanced technology is the foundation of our business and we are constantly developing new technology to improve the user experience, increase user penetration, develop innovative new content formats and enhance content production and the efficiency of our operations. And at the same time, technical innovation is key to the industrialization of video production in the industry. ’and it will be greatly beneficial for improving the probability of success increasing ROI simplifying the production management process, reducing production costs and increasing the viewing experience. We continue to make progress in terms of user penetration. The users scale of iQYI Lite grew rapidly.

Our peak DAUs increased by nearly 2 times sequentially and the user retention and monetization has also improved in terms of user profile as I mentioned earlier. iQIYI Lite is mainly focused on lower-tier cities. So the growth we have seen with this app speaks to our success in penetrating into these regions. In terms of content production and efficiency improvements, we continue to apply AI technology to effectively reduce production costs during the quarter. For example, operating costs can be effectively reduced with our proprietary intelligent, translation tools. We have fully replaced the manual translation with automated AI translation for the B- level (and below) dramas in Malaysia. Going forward, once we’ve fully adopted this technology for our overseas business, it will save us hundreds of millions of RMB in translation costs in the future.

In terms of industrialization of video, we have launched and applied multiple technology and the products to our content production, which reduced the production costs, increased efficiency and improved the user experience. Take our proprietary multi view capture system as an example, The system significantly shortens the shooting time, and volume of manual work and supports the full production process from camera deployment, video shooting to post-production, make content production more efficient. Other intelligent tools launched include our script supervisor management products, which can be used in the mid-stage production process. The products have been applied to 16 variety show, including some of the external works in production.

Also a management tool for the post production editing process has been used by a number of post production companies in the third quarter, improving transcoding efficiency by 3.7 times. In summary, we are proactively adapting ourselves to the current environment. We continue to be a pioneer when it comes to content in innovation and operation. Meanwhile we are seeing a promising growth trajectory for our new initiatives, such as iQIYI Lite and overseas business. Our original content and especially our theater-model content is highly recognized by users and advertisers and we will continue to take the lead in rolling out new technologies and tools for intelligent production and driving the industrialization for the long-form video production process, which should help to further optimize our operating efficiency. We have evolved along with the changes in the online video market over the past decade. The experiences we have accumulated and our expertise are exactly in line with where the industry is heading. We value the current challenges as a precious learning opportunity. We continue to believe that what does not defeat us make us stronger. With that, I will turn it over to Xiaodong to talk about our financials.

Xiaodong Wang

Good morning and good evening everyone. Let me review our key financial highlights for the third quarter. Our total revenue reached RMB 7.6 billion. Membership service business continued to be our largest business pillar with revenue increase 8% year-over-year and accounted for 57% of our total revenue. Online advertising revenue decreased 10% year-over-year primarily due to less premium content launched during the quarter and the challenging macroeconomic environment in China. Our content distribution revenue achieved a 60% growth on a year over year basis as we distributed more content and titles to other platform during the quarter, our cost of revenues increased 10% from the same period last year, among which content costs increased 13% from the same period in 2020.

The increase in content costs were mainly due to the more investment original content during the quarter. Our operating loss margin on GAAP basis was 18% remain largely flat compared to the same period of last year driven by our disciplined investment strategy. As of September 30th, 2021, the Company had a cash, cash equivalents, restricted cash, and short-term investments of RMB $11 billion for detailed financial data, please refer to our press release on our IR website. For the fourth quarter of 2021 iQIYI expects total net revenue to be between RMB at $7.08 billion and RMB is $7.53 billion. We’re expecting a 5% decrease to 1% increase year-over-year. This forecast reflects iQIYI as a current and preliminary view, which may be subjected to changes. I will now open the floor for Q&A. Thank you.

Chang You

Operator, please open the floor to questions.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions]. For the benefit of all participants in today’s call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. [Operator Instructions] Your first question comes from the line of Ella Ji from China Renassaince, please go ahead.

Ella Ji

Thank you. [Indiscernible] First question is relating to the recent improvement plans. You had a local province government. Just to wonder, how is that going to affect our future business? A second question is relating to the future membership growth potential. I guess the wonder regarding the future membership is it going to be mainly from lower tier cities or still from the major tier cities? From the reactivate of the older members. Third question is, I just want to know what is the — could management share the — anything new or exciting or promising relating to the variety shows going forward? Thank you.

Tim Gong Yu

[Foreign Language]

Chang You

I’ll translate Mr. Gong ‘s feedback. For the first one in terms to your question regarding the Consumer Council. So this applies to all industry players. So our feedback comes from the two aspects. The first one comes from the product design and the second one comes from the operation flows of the product. The first one is for product design, we’ve been also communicating with the Consumer Council, also collecting feedback’s from our customer service department. Our goal is to increase the user experience, trying to lower the accidental clicks of any unnecessary steps. So, overall the user experience will be increased and improved. And from the business model perspective, we’ve been also communicating with Consumer Council in terms of the user agreement to make sure all the messages are communicated clearly with the users. So that’s the first question regarding the consumer council related questions. And the second one is our penetration into the different tiers of cities. For now, for the high tier cities, the first and second tier cities, the penetration is high. And for the lower tier cities, the penetration is relatively low for this point.

And our iQIYI app lite is the main app that targets this user demographic. For iQIYI Lite, right now we offers a lot of the free content, so the users consumes the free content and then they actually will see the advertisements for that. So right now on the advertising side for iQIYI Lite performance ad has a high percentage of revenue contribution. So I think going forward, iQIYI Lite needs 1 or 2 years for improvement and for growth, and we will keep working on this application. And for our main iQIYIs app, that’s still going to be our main target for elevating our operations, optimize user experience, optimize products, and optimize the product features.

Tim Gong Yu

[Foreign Language]

Chang You

So the third question I’ll switch over to Xiaohui, our CCO to answer the question.

Xiaohui Wang

[Foreign Language]

Chang You

Okay. Xiaohui, responded to the talent show question. So because of the fan culture, that’s been existing in this entertainment sector for a long time so that it does have some impact on the variety show segment. So for now, the Koreans based or Korean style talent show that’s prohibited in the video space. But however, there is still a lot of ample room for growth in terms of variety shows. We can focus on the areas that come — for genres that’s like comedy, emotional, and also some talent show, but that’s not related to the Korean style.

And we also launched our new comedy variety show called the Super Sketch show, which is the new content genre that we innovated originally. So based on its first feedback since its launch, we have seen promising user feedback and viewership from this show. Our variety show performance is back to number 1 position in the market. Going forward especially in the fourth quarter, we’ll still launch innovative variety show content genre, for example, like we mentioned in the opening remarks [Indiscernible], “Action”. That’s also an innovative variety show that will be introduced to the users. Thank you.

Ella Ji

Thank you very much.

Operator

Thank you. Once again, due to time constraint, please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. Please, limit your questions to one at a time. Your next question comes from the line of Alicia Yap from Citigroup. Please, go ahead.

Alicia Yap

Hi. Thank you. [Foreign Language]. So my question is related to the overall longer-term outlook for the long-form video industry. Will there be any change of the strategies for your self-developed content over all the content genre and even for example, the type of — the length of this drama series, the type of the drama that you plan to produce? In addition, can long-form video monetization model break out beyond the current membership subscriptions and advertising? If so, what could be the new model? Thank you.

Tim Gong Yu

[Foreign Language]

Chang You

Okay. So for right now, I think the biggest problem for the online video space is the supply shortage contributed from various reasons. The first one is, of course, the biggest one, the COVID-19. So for example, the number of movies launched since COVID-19 is only less than half 50% of 2019 level. And for the traditional satellite TV series, the quantity is only 1/3 of the past. And for the new form of Internet series, or the web series, we experienced major delayed because of the stronger censorship. And even though the content was launched but the quality got taken at discount or there’s some less promising feedback from the quality, so explicitly speaking. These are the reasons that contributed to the supply shortage for the video content. Also, if you’re taking the short-form video reason, that also contributed to this because it’s also taking the user time spent, and that this is 1 of the biggest, I guess, factor that contributes to user behaviors. And for your questions about monetization models, I think we have been working on taking the full process of the entire IP Chain. So for example, if we have a good IP, whether it’s from the script level, whether it’s from the story level, we wanted to take this through the whole entire process of the IP lifecycle. We can develop this into a TV series, movies, games, also franchise products, etc. So I think that going forward, if you’re looking at the long-term perspective of this industry, a healthy model will be the advertising revenue plus the subscription revenue plus the PVOD model. Altogether, it’s better than our investment level. So that will be our angle. And we think it’s a sustainable model going forward in the long-term prospect of the online video industry.

Tim Gong Yu

[Foreign Language]

Chang You

Okay. I think if you look at the overall grand picture of the online or actually the entertainment space movie started 126 years ago. And we believe the consumer demand — the user demand for high quality premium content is eternal and also the creative talent for this area is continuous. So all of these it just needs time to grow the space. I think for our online video space, we strongly believe there’s ample room for growth in the future, it’s just now that we are proactively adapting ourselves to the new environment to embrace all the changes in the environment. But we think we are the very experienced team with expertise in this industry, that will enable us to face the challenges and be a successful player in the industry.

Tim Gong Yu

[Foreign Language].

Chang You

Thank you.

Alicia Yap

[Foreign Language].

Operator

Thank you. The next question comes from the line of Thomas Chang from Jefferies. Please go ahead.

Thomas Chong

[Foreign Language]. Thanks, management, for taking my questions. I have a question regarding overseas competition. We have just talk about using technology and achieve efficiencies for the translation process. I just want to get some understanding how we think about the competitive landscape in different market, and will we step up the investment in overseas going forward? Thank you.

Tim Gong Yu

[Foreign Language]

Chang You

Our Senior Vice President Xianghua, in charge of the membership service will answer this question. For our goal for overseas business, our primary goal is to export our original content to various regions around the world. So the first situation we will encounter, of course, is the translation situation. And also different regions have different culture and different backgrounds. So our goal initially, was to find countries with similar cultural background. For example, the countries in the Southeast Asia region, and also for North America, because there are a lot of the Chinese folks in that area so we also introduced some of the content in that region as well.

Xianghua Yang

[Foreign Language]

Chang You

Okay. So of course, going forward, we’ll continue to bring more premium content to the overseas business. And based on our internal data, we know that a lot of our series are very welcomed by the young audiences in the overseas region.

Operator

Thank you. That due to time constraint, that was the last question. And I would like to hand the call back to management for any closing remarks.

Tim Gong Yu

[Foreign Language]

Chang You

I will summarize our short-term goal and also the long-term goal for our Company. As you guys know that in our opening remarks, we mentioned we are facing a lot of challenges in the short-term related to the government regulatory environment. However, we’ve been proactively adapting ourselves to this new environmental situation. So we expect for the next 1 or 2 quarters, we think the regulatory environment will become the new norm and is stable. And our main goal going forward first, is to reduce our loss and we will further optimize our content costs based on our industrialized initiatives for video industrialization.

And also we will to execute strongly according to our strategy and we will eliminate or drop the content that doesn’t fall in line with the policy and so at the same time we will also want to explore new monetization opportunities. So that’s our overall strategy for the short-term and also for the long-term. Thank you. So thank you everyone for joining us. Feel free to reach out to us if you have any questions and we’ll talk to you next quarter. Thank you.

Tim Gong Yu

Thank you. Bye.

Operator

Thank you. That concludes the conference today. Thank you for participating. You may all disconnect now. Thank you all.

Source: Seeking Alpha

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