iQIYI Inc (IQ) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the iQIYI First Quarter 2018 Earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today April 27, 2018.

I would now like to hand the conference over to your first speaker today, Ms. Dahlia Wei. Thank you and please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining iQIYI First Quarter 2018 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 Dr. Yu Gong, our Founder and Chief Executive Officer, and Mr. Xiaodong Wang, our Chief Financial Officer.

Dr. Gong will give a brief overview of the Company's business operations and highlights, followed by Xiaodong who will go through the financials and guidance. After their prepared remarks, Dr. Gong and Xiaodong will be joined by our Vice President of Investment during the Q&A session to take your questions.

Before we continue, please note that 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 and may cause actual results to differ materially from 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 statements, except as required under applicable law.

With that, I would now turn the call over to Dr. Gong. Please go ahead.

Hello, everyone, and thank you for joining us for our first earnings call as a public company. I would like to take this opportunity to thank our shareholders as we are now publicly listed on the NASDAQ. The successful listing was a monumental milestone in our history and also marks the beginning of a new journey for us. We will continue to work tirelessly to fulfill our mission, which is to become a technology-based entertainment giant that brings fun and joy to people and their families.

Let me now turn to our performance for the first quarter of 2018. In the first quarter, both of our two major business categories, advertising services and membership services delivered strong growth. In particular, we have continued to see significant growth momentum from our in-feed advertising business unit.

Total revenues for the first quarter was RMB4.9 billion, up 57% year-over-year. Online advertising services revenue was RMB2.1 billion, an increase of 52% from the same period in 2017. We saw improved efficiency in our advertising business as we launched several very successful self-produced variety shows during this quarter.

Advertisers are increasingly recognizing our content production strength at various creative advertising formats that we have rolled out on our platform. For example, we integrated advertisements into the content of our shows so that viewers perceived the ad as a well-connected component of the content itself.

We are constantly(inaudible) developing new formats and options to enable advertisers to substantially improve the effectiveness of their ads with significant ROI enhancement. This showcases our deep understanding of our content and how we are able to apply this deep understanding into better serving our users, clients and partners.

As I mentioned earlier, another driver in the advertising categories is our in-feed advertising, which saw robust growth year-over-year. During the first quarter, we launched a few independent apps within our iQIYI product matrix, namely, Nadou, rebranded from iQIYI headlines, and "iQIYI comics and animation", our comics-focused app. These independent apps greatly enhanced our feed-based product traffic and ad inventory and contributed to the strong growth of in-feed advertising.

Our membership business also continues to show strong growth momentum, with revenue growth growing at 67% year-over-year to RMB2.1 billion during the quarter. The number of subscribing members increased 71% year-over-year to over RMB61 million as of March 31, 2018. This strong performance highlights our leading position in the industry. The growth of our subscribing members was driven by the high-quality content on our platform as well as strong seasonality trend of the Chinese New Year.

We hereby are also happy to announce that as part of our strategy partnership with JD.com, the two companies will launch a joint membership program in which subscribing members will be entitled to premium services and privileges of both "iQIYI VIP" and the "JD Plus" at just RMB198 per year. The partnership leverages both parties' strength in brand, content, traffic and massive paying user base. We believe it will broaden our membership pool, strengthening the stickiness of regular users and the build a solid intelligent commercial alliance that brings better experiences and more benefits to our users.

In March 2018, according to iResearch, iQIYI's MAU and DAU as well as user time spend on mobile apps, once again ranked number one in the online video industry. In addition, iQIYI's PC MAU, DAU and user time spent also ranked number one.

Now, let me give you some updates on our content. We believe original content production is the key underpinning of our content strategy. In the first quarter, we have achieved new milestones.

Firstly, in variety shows, in the first quarter, we released a number of highly popular self-produced variety shows, Idol Producer, a boy group survival reality show which premiered in January, quickly become another phenomenal success with its appeal to hundreds of millions of young viewers. Idol Producer's video view level exceeded that of the Rap of China during the comparable period last year.

Idol Producer recently finished its first season with a huge success. The show's nine finalists formed an idol group called Nine Percent, which have gained widespread popularity among youngsters, not only in China, Southeast Asia and Japan, but also among Asian fan base in North America.

iQIYI signed Nine Percent and now has the co-agency management rights for the next 18 months where we will share in all of the revenues from commercials, concerts and album distribution deals and advertising endorsements. This, again, showcases our diversified business model and strong capabilities in terms of monetizing one single IP in many different ways.

Another two self-produced variety shows, Hot Blood Dance Crew, a dancing reality show; and Clash Bots, a hybrid science and entertainment reality show debuted on iQIYI late in the quarter. These two shows also generated significant traffic and quickly become popular hits. I look forward to providing you with further updates on these two shows next quarter after they finished their first season. These successful shows demonstrate our deep understanding of users and our ability to produce engaging content and improves our user stickiness.

Secondly for drama series, we have been expanding our self-production capabilities to replicate the success we have had from the original variety shows. Recently, in early April, two of our self-produced dramas, Tientsin Mystic and the Burning Ice were recognized with honors at the New York Festivals International Television and Film Awards. Tientsin Mystic was awarded a silver medal for Best Visual Effects and a bronze medal for Best Director. Burning Ice was awarded the bronze medal for Best Crime Series. These awards are strong testimonies for our self-production capabilities and will enhance our position within the entertainment industry.

We currently have several hit drama titles streaming our platform, including The Great Adventurer Wesley, which we co-produced with the famous Hong Kong Director Wong Jing. For the rest of the year, we are working with a stellar lineup of well-respected directors and producers on a variety of highly anticipated new drama projects, including Bureau of Transformer produced by Chen Kuo-fu; and Sword Dynasty produced by Feng Xiaogang, The Golden Eyes starring Lay Zhang, who was one of the mentors on the show Idol Producer, and Original Sin, which is sister drama series to Burning Ice, sharing the same director and producer.

We have also collaborated with Taiwan local partners in producing four great idol drama series. In particular, one of them, Meet Me @1006, debuted simultaneously on iQIYI and several leading local TV stations, and recorded the highest viewership ratings in their respective time slots on both TTV and EBC. The copyright of these drama series has also been licensed to Singapore, Malaysia, Indonesia, Australia, New Zealand and North America.

Thirdly, in original movies, we established iQIYI Pictures, our own film production label three years ago and have already produced a number of hits. Youth, for example, a movie we co-produced and was directed by the renowned Director Feng Xiaogang, premiered in December of 2017 and has so far generated over RMB1.4 billion at the box office. Blue Amber, produced by iQIYI Pictures, was shortlisted for the Asian New Talent Award at the Shanghai International Film Festival. More recently, The Pluto Moment, a film we produced, was selected as part of Cannes' Directors' Fortnight lineup.

Building on these success, we're targeting to release five theatrical films in 2018. In addition, Chosen, an Internet movie we co-produced with Sony Pictures, premiered in January in China and was a successful hit. This movie has been licensed to Netflix for international distribution and it's being launched gradually in over 200 countries and regions globally.

Now, I will discuss our technology. Leveraging our deep experience in AI and the Big Data analytics, we are able to better understand our content, our users as well as our partners, all of which in turn supports our content production, procurement and monetization.

Earlier this month, we became the first Chinese member of the Alliance for Open Media, a nonprofit industry organization for the development of open, royalty-free technology for multimedia delivery. Founding members include global technology giants such as Apple, Amazon, Google and Facebook. We are currently working with the organization to augment and promote cutting-edge, open source and royalty-free video technologies. As a member, we will be able to participate in the formulation of industry standards and help promote ultra-fast, high quality video technology for years to come.

During this quarter, our self-development digital right management, DRM system, was officially certified by ChinaDRM Lab. ChinaDRM Lab is a government-authorized organization that maintains a set of technical standards and programs for preventing the illegal use of video content copyright. Such standards have been recognized by major international organizations. iQIYI was the first in the industry to be certified by ChinaDRM and this self-developed technology will provide a more stable technical performance at low costs.

Building on the comprehensive content library and the solid technology foundation, we are also catering an IP ecosystem to flourish on our platform by collaborating with all kinds of upstream and downstream partners. As part of our unique business model, we try to incubate our IP and monetize it through multiple ways and then diversified our revenue streams by adapting our content for a series of IP-related businesses, including publishing, IP licensing, online literature, online game, live broadcasting, e-commerce and others.

A few days ago, we celebrated our eighth anniversary. When we looked at our history, we are especially proud of the fact that we have again and again pioneered new business models, content formats, content delivery modes, advertising options that have been setting industry standards. Looking forward, we will continue to focus on producing original content, developing AI technology, fostering our unique corporate culture that features a harmonious combination of engineering and creative talent and nurturing our diversified monetization model which we call the Netflix-plus model. We believe that all of these factors will help us capture the tremendous opportunities in the fast-growing entertainment industry in China and generate sustainable value for our shareholders.

With that, I will have Xiaodong to go over with the financials.

Hello, everyone. I'm pleased that we delivered a very good first quarter after our IPO. Let me go through our financial highlights.

We use net revenues to calculate all percentage changes and the margins from this quarter to exclude the VAT impact per the new GAAP requirements, the details of which can be found in our earnings release issued earlier today.

The first quarter of year 2018, iQIYI's total revenues were RMB4.9 billion, representing an increase of 57% from the same period last year. The increase was primarily attributed to the robust growth of our membership and the advertising services.

Membership services revenue was RMB2.1 billion, up 67% from the same period in the year 2017. The increase was primarily driven by the significant growth of subscribing members. Our subscribing members reached 61.3 million with a paying ratio of over 97.4% as of March 31, 2018, increased by 71% from the 35.8 million as of March 31, 2017. The growth was driven by a series of premium content titles as well as various initiatives we rolled out during the Chinese New year.

Online advertising services revenue was RMB2.1 billion, representing an increase of 52% from the same period during the year 2017. The increase was driven by both brand and in-feed ads. In terms of brand ads the number of subscribers and average spending per customer continued to grow, benefitting from hot content premiered this quarter. On the in-feed ad side, we have seen a strong momentum continued in this quarter ever since we started this initiative in late 2016.

Content distribution revenue was RMB266.7 million, an increase of 44% from the same period in the year 2017.

Other revenues were RMB405 million, an increase of 51% from the same period in 2017. The increase was primarily driven by a strong performance from various major verticals in this category, especially film distribution, online literature as well as IP licensing and the derivatives. Different from our U.S. peers, we offer not only video content but also other services that enable us to generate multiple sources of monetization to maximize our revenues.

Moving on to cost of revenues, our costs of revenues were RMB4.8 billion, an increase of 44% from the same period in year 2017. The major component of cost of revenue was content costs which mainly consists of amortization and expense of original contents, licensed copyrights and revenue-sharing costs for content uploaded by partners and the cost incurred for live broadcasting host. The increase was primarily driven by increased investments in our overall content offerings. The absolute number of content costs was RMB3.9 billion, an increase of 54% from the same period in year 2017.

Our original content cost increased by more than 100% year-over-year and made up of growing part of the total content cost. We expect this trend to continue in the future.

Turning to the operating expenses, SG&A expenses in the first quarter were RMB704.2 million, an increase of 42% increase from the same period in year 2017. The increase was primarily due to the increased channel and marketing expenses associated with the pre-installation of iQIYI's app, as well as branding and the content promotional expenses.

Our R&D expenses were RMB387.3 million, up 44% year-over-year. The increase were primarily due to the growth of people cost.

Operating losses in the first quarter were RMB1.1 billion, compared with operating losses of RMB1 billion in the same period of last year. Our operating loss margin narrowed down to 22%, compared to operating loss margin of 34% in the same period last year.

Total other income was RMB666.2 million, compared with the total other expenses of RMB79.1 million during the same period of the year 2017. In the first quarter of 2018, we recognized RMB186.6 million of fair value gain arising from one of our private company investments in accordance with the new financial instruments accounting standard adopted on January 1, 2018 and RMB474.2 million of foreign exchange gain arising from the appreciation of the RMB against the U.S. dollars.

Loss before income tax was RMB396.2 million, compared with the RMB1.1 billion during the same period last year.

Income tax expenses were RMB0.5 million, compared with the income tax expense of RMB0.8 million during the same period last year.

Net loss attributable to iQIYI, Inc. was RMB395.7 million, compared with RMB1.1 billion during the same period of the year 2017. Fully diluted net loss per ordinary share was RMB1.97, compared to RMB5.37 in the same period of the 2017.

As of March 31, 2018, the Company had cash, cash equivalents and short-term investments of RMB896.1 million. We received all the proceeds from the IPO in the early April and I would like to once again, express our thanks to iQIYI investors and the capital market as we listed on the NASDAQ global market last month.

Turning to the second quarter guidance, for the second quarter of 2018, iQIYI expects total revenues to be between RMB5.8 billion and RMB6.04 billion, representing an increase of 42% to 48% year-over-year. The forecast reflects iQIYI's current and preliminary view, subject to change.

This concludes our prepared remarks. I would now turn the call to the operator and open the floor for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions).

The first question is from Thomas Chong from Credit Suisse. Please ask.

Hi, good morning, Dr. Gong, Xiaodong and Dahlia. Thanks for taking my questions. I have three questions. The first question is about the membership services. Can management comment about the paying subscribers' market size as well as competitive landscape? Are we actually seeing -- we are creating or enlarging the market size with our peers?

And my second question is about the monetization of regional contents. How do we see the monetization potential and are we seeing better than expected monetization on our content.

And my final question is about the overall online video competitive landscape, how would we see the trends going forward in particular, the content cost on licensed content? Thanks.

(Spoken in Foreign Language).

(Spoken in Foreign Language).

(Spoken in Foreign Language).

Okay, translate it for us.

(interpreted) Yes. So, probably translate for the first question first, yes, your questions about paying members and the landscape and also the total market size, I think the competition for the paying members mostly between iQIYI and Tencent. I think for the competition in the -- for the paying members, have significantly higher barrier compared with advertising services.

Looking at the paying membership, if we want to attract paying members, you need to have more premium content, at the same time, you also need to have more systematic design of the technology and the product, including, for example, the diversified source of the traffic as well as a well-design of the privilege for the members.

So, the trend-wise, I think, we are seeing more and more members, paying members purchasing more than one membership across the platforms -- video platforms. And overall, this increase of the paying members are driven by the increase of the original premium content because original premium contents are mostly exclusive -- kind of being provided by the video platforms as the exclusive content then which is the catalyst for driving the conversion of the membership. As a result, for iQIYI, our service strategy is to further enhance our original content production as our key strategy.

Your second question was about monetization for the original content, and it is certain that the original contents have better monetization capability compared with the licensed the content.

Comparatively speaking, the main revenue source for the -- the main monetization format for the licensed content is the pre-rolls and post-rolls and, with the increase -- for the increase of the members, we believe the growth of this revenue will be -- the growth of this monetization format is perceived to be limited compared with the way we can monetize the original content.

looking at the original content, we can introduce the advertisers at a very early stage of the content production and they're using various formats for the advertisement into the production as the -- in a way such as the product placement and this will be perceived as the integral part of the content itself.

And in addition to that, for original titles, we will be -- we will have the flexibility of making different monetization arrangements to maximize the output. For example, our original shows, we cut it into three airing windows. For the first window, we put in the member-only mode so that we can convert the paying members. For the second window, we actually make it available for all the users so that we can generate advertisement revenue. Then for the third window, we put it back to the membership only zone to encourage the member retention.

And in addition to that, the third thing I would like to highlight is that for original content, we have the full rights, which actually helped us to -- for example, to monetize the content in many scalable ways. For example, we can cut a long-form video into a series of short-form video and put the short-form video and display it in our app in a format of the feed. We can actually generate in-feed advertisement leveraging the same content.

The third question is about market landscape. As you know, there are three major players in this market. And it is our belief that the online video market in China is not going to be monopolized by any of the one players. Instead, we see each could have its own unique position similar to what happened in U.S. cable market. But there are pre conditions for that. I think in the U.S. market, what we have seen is that each cable operator actually provides exclusive unique content and it's the uniqueness of the content which helps them to use the differentiated market positioning and it tells us that in order to compete effectively, we need to enhance our capability to provide original content.

And so that -- that this strategy will also offering additional merits. For example, by creating more of our unique original content, it will help us actually to -- it will help us to be less reliant on purchasing of the external content and to avoiding the pure price wars.

So, the second reason in addition to the content, the differentiated content, the second reason was to believe the market will not be monopolized. This market has been experiencing the exponential growth in the past. And in order to get more users and access more market share, each of the online video platform has invested significantly, including the capital and the resources. And with the market being matured over time, we do believe that in the mature -- when the market is approaching a mature stage, each of the player will be more focused on the efficiency and the focus on operating efficiency will help -- will require them to develop their own set of the strategies to be effectively differentiated.

Then the third reason is that when the market is growing, the business model in this space is actually evolving as well. We do believe that as you're probably aware, our business model has been evolving and evolving business model can bring differentiations across three platforms over time.

Thank you. Your next question comes from the line of Ella Ji of China Renaissance. Your line is now open.

Hi. Thank you --

Ella, actually this is [Dahlia]. Ella? Hi, Ella. Due to time limit, can we limit the questions to one and if you can speak Chinese, can you ask your question in Chinese first and then repeat that question in English. That will be very helpful. Thank you.

Okay, sure. (interpreted) So, just a quick follow-up is I wonder if Dr. Gong can share with us in terms of the original exclusive contents, how long do you think will take for the three major platforms to produce a meaningful amount of the exclusive contents by themselves?

And then my question is actually about the content spending. I wonder if you can share with us the schedule of your content spending for the rest of the year, understand that because we see that in the first quarter, the content spending is a little bit light comparing to our expectation. And also, if you could kindly share any color regarding the breakdown between drama series and variety shows and also maybe between original and licensed. (Spoken in Foreign Language).

(interpreted) I'll answer the first question. I think our satisfactory target is to have the original content accounting for one third of the total content spending and which probably will contribute to something around 20% to 25% of total traffic and this is a mid- to long-term goal and we believe it's somewhere achievable in about three to five years.

I'll say something about the detailed number that you asked, but I'm not quite sure to answer all your questions, I'll just to try answer your question but if I missed something just let me know.

You mentioned certain breakdown of different types of content, for example, original versus licensed content. I think still because it's only one month after IPO, we don't see like major change from what we said during the period.

As you see it now original content still account for small percentage of the total content cost and is somewhat between 10% or 20%. like for certain category for example, variety shows, the original content percentage already exist like 50% to 60%. So, majority of the variety show already comes from our self-produced ones.

So, basically, that I think the first part and second, between like a variety show and drama series, drama series is definitely the much, much bigger ones because [张润丰1]we say it's the biggest traffic source and then we're also mentioned before that we might need only like six to seven pop variety shows for the whole year, but for drama series, the demand would be like somewhere between like 10 to 20 titles.

And then typically -- the variety shows only have like 10 to 12 episodes per season unlike drama series. And usually in China, it's like say 50 or even I think the shortest one could like be 12 to 24 episodes. So, basically, give you some idea why drama series still account for a very big part of the total content cost.

And the outlook of the whole year in content spending, yes, you're right, but due to the various reasons you can see like the -- somehow the revenue growth rate in the first quarter is faster than the content expenditure. But I think still the way we said it before, I still think this is a very important year as we plan to invest heavily on the original content, while keep certain levels of licensed content to keep the competition strength.

So, basically, I think still, I would expect a total content cost increase this year to be faster than the total -- the revenue growth speed. So that I think could have some idea of the total content allocate for the rest of the year. Did I miss something else?

No. It was very good. Yes. Thank you very much and congratulations on your first successful public quarter.

The next question is Eddie Leung of Merrill Lynch. Please ask your question.

Good morning. (interpreted) So, my question is about the potential competition and impact from the emerging short-form video platforms in China on our industry. Thank you.

(interpreted) So, thanks, Eddie. As you know, the long form -- the online video site for the long-form video actually has traditionally been taking time of the regular time spend from TVs and from offline entertainment services. This has happened historically.

And looking at short-form video in the recent years, we believe the same trend apply to them as well. They are also taking the user time spend from the TV and from more offline entertainment services.

So, this is -- we are clearly aware of this and for iQIYI, this is -- for iQIYI, since we are strategically positioned as the one-stop entertainment service provider for Chinese users, we are dedicated to do both the long-form video and also the short-form video.

In the scripts I mentioned, we launched, for example, a few independent apps including Nadou which is positioned to providing the short-form video services for the users. And the same happened to Paopao, our social network. Most of the feeds in Paopao are also short-form video.

The next question is from Alicia Yap of Citigroup. Please ask.

Hi. Good morning. (interpreted) Thanks for taking my question and congrats on the first public quarter results. My question is actually related to the membership subscription business. Given the strong additions that we saw in the February and also the entire quarter, what could be the new membership sub-growth that we should expect for the second quarter and also the rest of the year? And with your recent promotional package of one year free with subscriptions for one-year package, how has the tractions from users so far and how should we be thinking of the membership growth versus the ARPU trends for the rest of this year? (Spoken in Foreign Language).

This is Xiaodong. I think first what I want to address here is let's say from what we saw in the first quarter definitely I think the market, the subscriber market is bigger than we have thought before. So, we see huge market potential, that's why you see and we launched several market campaigns to seize the market opportunities to be more aggressive in grabbing the members.

I'm not actually -- not quite sure what you your quote like buy one year, to get a one year free, I'm not quite sure which one you're actually referred to it. I think the major campaign we launched in the first quarter is we have a discount for the new members for RMB6 per months -- for the first month for the new users similar to what Netflix did in North America, they have like a trial period. We don't offer like free trial period but with some discount for those new members.

Let's compare, actually, I think it has helped a lot. It helped us to accumulate some of the members while we see the churn rate and other metrics related to the membership and stickiness still a very good, we don't see any deteriorations on those metrics. So, we think it's effective. So, probably, we will continue those kinds of activities in the next few quarters.

So, potentially, you are right, the ARPU could have been lower than what you saw last year, but I don't think it would be like, basically, even lower than what you already seen in the first quarter. So, I think, those would be a guide for the ARPU in the remaining of the year.

And what's your next question, actually?

(Spoken in Foreign Language).

(interpreted) Yes. I would also like to comment on what you have mentioned earlier buying one year for the next year free, that's free membership for the next year. I think that this is probably the case where we have been making a lot of pilots across a wider spectrum of demographics to understand the consumer behavior.

For example, we have been [providing] designed program just to get the first month free and joining that as a free trial. We also are encouraging users to pay only RMB0.01 for the first month to get a free -- almost free member and, again, the rest of the year -- paying for the rest of the year, if you're happy with the content. We also encourage the users to pay, for example, only RMB6 for the first month and then if you are happy would come and stay with us and paying for the rest of the year.

And when we are doing all the pilots, we were segmenting the users across different regions, across different terminals etc, but we will continue to do that. Most likely, you have seen in certain, for example, the geography area, etc. You could have seen such tests. But this will not be a major component of most of our members. So, just to add on that.

Your next question comes from the line of Ming Xu of UBS. Your line is now open.

(interpreted) So, basically, two questions. First is on the revenue contribution from the in-feed ads. So, could the management share the contribution inside the total advertising revenue and is there any target to share? And secondly is on the content cost side, we noticed competitors are spending more on like niche content, also sport related content. So, I'd just like to know our plan on this. Thank you.

It's Xiaodong. I will answer your first question and then let Dr. Gong comment on your second one.

I think we've said it before that our in-feed ads account for like say over 10% of the total advertising service revenue last year and I think, this year, certainly it's definitely higher because the growth speed of in-feed ads is much, much faster than the traditional branding one. I would expect, I think at least, it would be over 15%, maybe close to 17%, depends on how fast we can generate the in-deed ads revenue as well as how the branding advertisement going in the next few quarters, just to give you some ideas.

(interpreted) Yes. I will comment on the second question regarding the content categories such as the non-fiction, record films as well as the sports. For the non-fiction, record films, so we have been working with BBC and have rolled out a series of pilots as well. And so far, the ROI for this particular category of the content is not -- has not reached our satisfactory level. We will continue to do more tests but so far we do not have the plan to significantly increase the investment in this category.

Then the second is the sports. We should -- actually, we shared a view with Netflix. the difficulty of the sports live broadcasting over the internet, [yes]. It cannot be -- we do not have the original capabilities to produce, for example, a sports category. As such, I think the ROI, generally speaking, is not as high as what we could see in other categories and we do not have a strategy to increase investment in this segment either.

And well, the ROI, I would like to add that the ROI is not satisfactory and the advertisement revenues generated from these two categories of the content is also, actually on the performance compared with other categories and they are not the catalyst for membership conversion as well.

Okay. (Spoken in Foreign Language). One question. (Spoken in Foreign Language).

(interpreted). Yes, for entertainment and the films.

I just want to add one thing. When we say we were focused to invest on those [four categori es], actually, we, generally speaking, we manage it like the original content strategy well and mainly cover those categories. But we discussed during the roadshow and the other [AP] meetings, we talked about how we are going to cover the long tail content through our IP partner account. I think we'll let some of our partners to help us to cover those long-tail content. So, in further like to build our content library, I think let the partner strategy help on how we're going to build the entire content library.

And we'll take the final question from Alex Yao of JPMorgan. Please ask.

(interpreted) So, my first question is about the long-term content cost upside versus the monetization upside because the top in-house produced content in China currently, they're running at roughly RMB10 million per episode versus the top original content in the U.S. hitting almost $13 million. That suggest the potential 10 times increase in terms of content cost per episode. If that's the case, how do you think about the monetization potential? Will we be able to increase the monetization by 10 times to offset the long-term cost increase?

The second question is about regulatory environments. Apparently, the online regulatory environment is tightening since earlier of this year. What are the potential implication to our content operation and the sourcing strategy? For example, last year, (inaudible) was a big hit in the market. This year, will content like those, you know, not super mainstream, be gaining a lot of traction? Thank you.

(interpreted) Regarding your first question, I would like to distinguish two concepts. The first concept is a purchase price and the second concept is the production cost. And these concepts actually are not the same.

For us, looking at ourselves, if we are doing the original content, then the best in class -- for the best in class titles for each episode, the production cost will be somewhere between RMB7 million to RMB8 million instead, which includes a best in class actors, actress, etc.

And looking at the U.S. side, the average cost for the average drama episode is about $3 million to $4 million and for the production cost for the best in class dramas range between $6 million to $8 million per episode. And when you're referring to the price for each drama episode that has reached as high as RMB10 million per episode is actually referring to the purchase price. And the purchase price for the content, generally speaking, refers to the purchase of third-party-owned drama IPs.

So, in this context, what we would like to -- happily to see is that if we can increase the percentage of the original production, actually they help us on the cost control because the in-house original production starts with the idea then further evolves into the script and the screenplays. And during this creation process, it does not invite the bidding and as a result, this will not be a pure price war and this is the case when at least for short term, when the three platforms collectively identify, for example, a hot title and bid for that. This explains the difference between the production cost and the purchase price.

In addition to that, you also asked us about the monetization capability. I would say that in short term, you probably will not see monetization go as high as 10 times growth. However, as I've explained before, the increase percentage of the original production also bring better monetization power.

So, our strategy actually focus on original production, on one hand help us to control the cost; on another hand, actually increase -- helps on the monetization. And this strategy can help us in achieving our business goals.

So, with the second question about the government regulation, I think this regulatory framework has been placed for over 10 years for us as the long-form video platform. Actually, it starts from ever since our inception. And actually, we had been very adaptive to the regulatory requirements.

And comparatively speaking, I think other apps such as news, the short-form videos and also the social apps, probably they are facing more regulatory pressure if they want to be in compliance. And giving one example, I think, the audiences are aware of The Rap of China and I think The Rap of China has been aired and enjoyed huge success and this also brings some of -- some of the difficulties for -- after the show was aired. And we have been adaptive. We produced a new format. And for this year, we are going to launch the season two and it will have the same English name, The Rap of China, but it will have a new Chinese name and one that gives us the -- introduce that new format.

I think we can conclude the call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

[张润丰1]You know