iQIYI Inc (IQ) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the iQIYI's Third Quarter 2018 Earnings Conference Call.

(Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 31st of October 2018.

I would now like to hand the conference over to your first speaker today, Ms. Dahlia Wei, Investor Relations Director for iQIYI.

Thank you.

Please go ahead.

Thank you, operator.

Hello, everyone, and thank you all for joining iQIYI's Third 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, Director and Chief Executive Officer; and Mr. Xiaodong Wang, our Chief Financial Officer.

Mr. Gong -- 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, we will hold a Q&A session.

Before we proceed, 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 that may cause actual results to differ materially from our current expectations.

Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC.

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 Dr. Gong.

Please go ahead.

Hello, everyone, and thank you for joining us for the third quarter earning call.

We continued to deliver solid results during the third quarter.

Total revenues were RMB 6.9 billion, up 48% year-over-year.

The performance was primarily driven by robust growth in the number of subscribers which reached 80.7 million at the end of September, representing a record high of quality net addition of 13.5 million.

This quarter, we also observed further enhanced user reach, engagement level and time spent as summer time is a peak season for us during the year.

We ranked #1 across a number of operating metrics among our peers according to independent data tracking by major research firms.

This again reaffirms our industry-leading position and the competitive strengths.

We will start this quarter's business review with membership services which has become our biggest revenue contributor.

Membership revenue was RMB 2.9 billion, representing a 78% year-over-year growth.

Premium content continues to be the most important driver for membership growth.

We released the most popular drama of this year in China, Story of Yanxi Palace, during the quarter.

The mega-hit costume drama that we originally produced has set several records in the entertainment industry in China.

It harvested over 20 billion total video views and has become the single most successful title in terms of subscriber conversion in our history.

Along with our variety of other premium content, it greatly boosted our subscriber numbers.

Our joint membership program with JD.com continued to progress nicely in the third quarter, attracting a steady inflow of annual subscribers who wish to enjoy benefits from both companies.

In addition to JD.com, we continue to pursue opportunities to develop other cross-industry partnerships, including telecom carriers and commercial banks.

During the third quarter, we established a new cooperation with a number of respected online service providers to further broaden our subscriber base.

These partnerships not only helped us reach different geographic and demographic user groups but also help us to enhance the benefits and privileges for our members -- for our VIP members, all of which collectively contributes to membership growth.

Next, advertising business.

On the last conference call, we mentioned that we are cautious about advertising for the second half of this year.

Advertising revenue in the third quarter came in at RMB 2.4 billion, largely in line with our expectations.

Our advertising business went through some difficulties this year, mainly due to the following factors: first, the impact of the FIFA World Cup, which diverted advertising budgets to traditional TV; second, recent regulatory tightness, as a result of which, we cleaned up some in-feed advertisement from certain high-risk profile sectors.

In addition, certain regulation has particularly impacted some of our online game clients who used to spend heavily in advertising.

Despite these near-term headwinds, we remain committed to advertising business which is an important component of our business model.

We are trying to expand, diversify and optimize our client pool in our effort to be resilient to potential challenges and deliver sustainable growth.

Aside from our membership and advertising business, we are pleased to see our other business continue to scale as our Netflix Plus model gradually bears more fruit.

Content distribution, literature, gaming, IP licensing as well as talent agency business all recorded considerable year-over-year growth.

The strong performance of these businesses was again driven by our premium content.

Now let me go over some developments on the content side.

As we mentioned before, iQIYI's focus is on producing and selecting the highest-quality content.

Our third quarter results reflect this strategy as we continue to devote resources towards self-producing content based on quality and originality and innovation.

Nothing exemplifies this better than the ground-breaking success we have seen with Story of Yanxi Palace this quarter, which is one of the most iconic drama serials in China and broke all historical viewing records for dramas.

Story of Yanxi Palace has now been distributed to over 70 countries globally and has created widespread mania.

The remarkable success of the show validates our focus on producing and selecting the highest-quality content.

Turning to variety shows.

Season 2 of The Rap of China, our flagship original music reality show, debuted in mid-July with huge success.

The show reignited the craze for "R!

CH" culture across China, especially among younger generationS.

And together with our self-produced "Idol Hits" and Season 5 of "Qipa Talk", as well as exclusively licensed "The Voice of China", Our unmatched library of variety shows during the quarter achieved excellent results in terms of both audience ratings and monetization.

For the rest of the year, we have a strong pipeline of high-quality premium content, including self-produced dramas.

For animation and comics.

In early September, iQIYI's first original 3D animation title, Beyond the Ocean, received the Best Art Award at the first "AniSpark Domestic Original Animation Festival" held in Shanghai.

We began developing original animation titles in 2014 and have since launched 6 successful animated series.

For sports, we formed our joint venture with Super Sports Media, a leading service provider in China for sports marketing, sports culture, communications and copyright distribution.

The new joint venture will operate all sports-related content business, including the upgraded iQIYI Sports app, which brings together an extensive offering of sports content with smoother user experience.

Under this JV structure, we aim to attract more resources and investments for iQIYI Sports, which remains within and benefiting from our ecosystem.

For online literature, I want to highlight that iQIYI Literature app recorded significant growth in user engagement and traffic during this quarter, driven primarily by readers converted from video audience of the Story of Yanxi Palace.

Our project Yunteng continues to make remarkable progress in establishing cooperation with numerous production companies to adapt our literature IP into video content.

Finally, let me quickly review some progress on technology front.

We also -- we are always dedicated to applying the cutting-edge technology in our video business, especially in areas that help us better understand our user, better produce our content and better serve our partners.

For example, AI-based intelligence editing was applied to our variety show, including The Rap of China.

Production of the show involves dozens of cameras shooting from different angles at the same time.

We utilize AI to rapidly sort through and select the best shots taken, which is as precise as per frame during each second.

This allowed us to significantly reduce our time and workload for post-production.

An update on our DRM, digital rights management system.

After our self-development, DRM technology was certified by ChinaDRM Lab in April.

Recently, iQIYI also adopted Google's Widevine DRM technology to Chrome browser, which allows us to stream copyright-protected Hollywood content on our browser-based platform.

Our R&D team also optimized video loading and playback functions for these content to ensure clearer and smoother video playing.

We joined forces with Beijing Gehua CATV cable network and Baidu to launch our AI integrated set-top box, Gehua Little Fruit.

The partnership leverages Gehua's MVPD content service as massive user base and mature billing system as well as iQIYI's vast library of streaming video content and online video technology.

Also, the box device is embedded with Baidu's DuerOS operating system and AI-based voice recognition technology to improve usability and convenience.

This historic partnership makes the first attempt that traditional cable TV network in China has partnered with an Internet video streaming company and will help further expand iQIYI's coverage on TV front.

Lastly, I'd like to provide a great update on our VR products.

Sales volume of QIYU VR II headset product ranked #1 in the RMB 2,000-plus mid- to high-end VR all-in-one headset category on both JD.com and the Tmall platform.

The QIYU VR II was also recognized with the 2018 METIS Award for the VR and AR innovation.

The METIS Award is organized by the Ministry of Industry and Information Technology, the China Academy of Information and Communications Technology and Mobile Intelligent Terminal Technology Innovation and Industry Alliance, widely known as the "A.

M Turing Award".

This represents one of the highest honors in the field.

In conclusion, I'm pleased with our performance during the quarter.

Our major operating metrics and subscriber numbers all reached historic new high.

And our content ecosystem has never been stronger with such a wide range of engaging and popular entertainment content.

As we continue to generate more revenues from diversified business, our business model is starting to pay off.

We are also developing new cross-industry partnerships and expanding to new distribution terminals so that we can further leverage our platform advantage and our IP value.

I have strong confidence in our strategy and business model will generate long-term growth and value for our shareholders.

Now I will pass the call to Xiaodong.

Good morning, everyone.

Let me go through our financial highlights.

starting on January 1, 2018, iQIYI adopted ASC 606, a new revenue accounting standard that nets value from the revenue and cost of revenues line items.

To increase the comparability with Q3 2018 numbers -- 2017 revenue numbers for today's discussion has been adjusted net of VAT.

For the third quarter of 2018, iQIYI total revenues were RMB 6.9 billion, up 48% year-over-year.

The increase was primarily driven by a strong growth of our membership services.

Membership service revenue was RMB 2.9 billion, up 78% year-over-year.

The strong growth was driven by robust growth of number of subscribers, which reached 80.7 million, with a record net addition 13.5 million during the quarter.

Online advertising service revenue was RMB 2.4 billion, down 4% year-over-year.

As Dr. Gong just mentioned the decrease in advertising was primarily due to the FIFA World Cup impact as well as recent regulatory headwinds.

Content distribution revenue was RMB 834.6 million, up [220%] (corrected by company after the call) year-over-year, primarily due to a number of premium content titles that we distributed during the quarter.

Other revenues were RMB 831.1 million, up 157% year-over-year.

Other revenue was generated from live broadcasting, online game, online literature, IP licensing and talent agency.

The growth in other revenue reflects a strong performance across our various vertical business lines, as we continue to pursue a diversified business model that fully leverages the content value and the massive user traffic of our platform.

In particular, we started consolidating Skymoons into our financial since the deal was closed in mid-July.

Moving on to the cost of revenues.

Our cost of revenues were RMB 7.7 billion, up 66% year-over-year after deducting the value added tax in the same period in 2017.

This increase was primarily driven by the growth of content costs as we continue to invest in both self-produced content and licensed copyrights to strengthen our content ecosystem.

Content costs as a component of cost of revenues were RMB 6 billion, up 66% year-over-year.

Turning to operating expenses.

SG&A expenses in the third quarter were RMB 1.3 billion, up 66% year-over-year, primarily due to the increase in marketing expense related to iQIYI's mobile apps, content-related promotion and the branding expenses as well as the higher share-based compensation expenses arising from the acquisition of Skymoons.

Our R&D expense were RMB 558.4 million, up 63% year-over-year, primarily due to the growth of personnel-related compensation expenses.

Operating loss in the third quarter was RMB 2.6 billion compared with operating loss of RMB 1.1 billion in the same period of year '17.

Our operating loss margin was 37% compared to the operating loss margin of 23% in the same period last year.

Total other expense were RMB 539.4 million compared with total other income of RMB 15.6 million during the same quarter of year 2017.

In the third quarter of the year 2018, we recognized RMB 593.1 million of foreign exchange loss due to the depreciation of RMB against the U.S. dollar.

Loss before income tax were RMB 3.1 billion compared with RMB 1.1 billion during the same period of year 2017.

Income tax benefit was RMB 6.1 million, compared with the income tax expenses of RMB 0.8 million during the same period of year 2017.

Net loss attributable to iQIYI was RMB 3.1 billion compared with RMB 1.1 billion during the same period of year 2017.

Diluted net loss attributable to iQIYI per ADS were RMB 4.34 for the third quarter of year 2018.

As of September 30, 2018, the company had cash, cash equivalents and short-term investments of RMB 9.7 billion.

Turning to the fourth quarter guidance.

We expect the total revenue to be between RMB 6.48 billion to RMB 6.75 billion, representing an increase of 43% to 49% year-over-year.

This forecast reflects iQIYI's current and preliminary view, which is subject to change.

That concludes our prepared remarks.

I will now turn the call to the operator, and we'll move into Q&A.

(Operator Instructions) Your first question today comes from the line of Ella Ji from China Renaissance.

My question is about your online ad revenue line.

So first of all, can you give us some outlook expectation for the fourth quarter?

Do you expect that this World Cup and the regulatory impact will continue in 4Q?

And sequentially, how does 4Q ad revenue looking comparing to 3Q?

And then I also wonder if you can also provide more colors into the line.

So for example, between KA and SME advertisers, could you share more colors which are getting more hit?

And what categories?

And what's the exposure to these categories as a percentage of the revenue?

Ella, this is Xiaodong.

I don't think you've got -- you only raised one question.

You raised several questions.

Let me just try to make it simple.

Okay, I understand your question.

So basically, what I can tell you, we don't disclose the detail of like the revenue guidance.

But what I can tell you is definitely, the year-over-year decrease is abnormal.

So you will expect positive increase next quarter.

But as we addressed before, a lot of different facts which have different impact on our revenue in our advertising business.

So I think you will expect a normal increase in the fourth quarter.

And -- but you mixed a lot of facts together.

And what I was trying to tell you just now is from a year-over-year perspective, we expect some positive increase.

But as we discussed before, the third quarter is a peak year of ad business throughout the whole year.

So there will be some seasonality impact on ad revenue in the fourth quarter.

And the second part of your question, between like KA and SME, definitely, the FIFA World Cup will have like more impact on the key account as well as branding advertisers.

But, we do have some -- let's say, we try to make our revenue of SME more healthy.

So we did something in the third quarter that will have some impact on the revenue of SME-based ads.

But we expect those will come back in the next few quarters.

So definitely, I think we still have confidence that SME ad work will back to normal in the next few quarters.

(foreign language)

Dr. Gong just added further.

On the SME side, some categories that was hit by the regulatory is that one is the game industry because as you all know, there would -- there are fewer games launched this year.

So accordingly, there will be fewer advertising budget spent on the -- from the gaming sectors.

And also, in the third quarter, we also cleaned up some not-so-healthy advertisements on the in-feed side, so that also had some impact on SME clients.

Your next question today comes from the line of Thomas Chong from Credit Suisse.

On the membership revenue, how should we think about the subscriber's trend as we go into Q4?

Should we expect there will be a normal seasonality there?

And how should we think about the outlook in 2019?

And my second question is about content cost.

As we head probably towards the end of the year, how should we think about the growth momentum for content costs as we go into 2019?

(foreign language)

For the subscriber, because Q3 is the highest seasonality of the year, so we recorded a net addition of 13.5 million.

In Q4, we expect that we will continue to grow but may not be as strong or as big as 13.5 million that we saw in the Q3.

That will definitely continue to grow.

For the whole year 2019, we also have very positive view, and we expect the net addition for full year 2019 will be no less than the full year addition in year '18.

(foreign language)

Since this summer, we already observed the procurement price for TV series that we purchased from the TV drama series, that price already start to decrease.

But as you know, there will be a time lag of the purchase to broadcast on our platform, usually 6 months of time lag.

So the impact of content cost will only hit in next year 2019, and the impact will be limited.

But in the long run, we believe procurement price for licensed content will be on a downward trend.

Your next question today comes from the line of Eddie Leung from Merrill Lynch.

One quick follow-up on content costs, probably more about your cash outflow.

We've seen quite a bit of cash outflows in the past 2 quarters.

I suppose those will be related to content costs.

I'm just wondering is there any seasonality?

And how should we think about the cash outflow in the upcoming couple of quarters?

This is Xiaodong.

Actually, I think you raised a pretty good questions.

We don't see any seasonality for the cash flow because, actually, it's more related to the content cost investment we made in the, let's say, quarter before -- 2 quarters before.

I think that is actually depending the extra cash status of the company.

So basically, what I can tell you is the membership service continue to grow.

The mix impact between membership and ad revenue will help us on the cash inflow.

And -- but with more investment on the self-produced content you would expect like see what situation on the cash outflows.

So net-net, I will say it will impact almost the similar cash burn rate in the next few quarters.

Your next question today comes from the line of Piyush Mubayi from Goldman Sachs.

I have got 2 related questions.

And when I look at your subscriber revenues, they've done exceptionally well and your customers have been -- you've been able to retain the customers that you're adding, which leads me to believe, how do you think of the ratio of your paying customers to either DAU or MAU?

And if you could remind us how DAU/MAU have been progressing while the customer numbers have been growing rapidly?

And related to that is if you could just revisit your pricing -- how you think about pricing for the next 2 or 3 years because it appears the subscription business is doing a lot better than initially thought.

And also your success with Yanxi Palace is so powerful that it will give you the ability to price up.

I assume you've got more shows like that coming through.

And second, if you could take us through the economics of the 1 successful show, we'd love to hear the details.

I think I can do the first questions.

Actually, as we've discussed before several months ago, I think we expect that we will consider the price change once we see the steady growth of the membership service.

And now I think -- in fact, this probably seems to be much bigger than we expected with still the very fast growth.

And again, we still think that the strategy, it appears to be still correct.

So -- and let's say, we'll still be very cautious in the price change in the next few quarters at least until we see the slowdown trend of the membership growth.

And we don't think it's time yet.

But probably we will seek something else to increase our ARPU of our memberships business.

For example, we continue to extend the paying period of our subscribers around the year.

I think I'll tell you something about like around 6 months.

And now, I think we see very good trend that we increase the paying period to like additional 2 or 3 months.

So I think that's the basic strategy we are going to carry in the next few quarters, at least.

I think I will let Dr. Gong to comment on the second one.

(foreign language)

For a show, we internally look at 2 metrics to measure the success of a drama or a show.

One is the time -- viewing time of that show consumed by our users versus the total time spent in that specific time frame.

And secondly, we also look at the first actual payment that we collected from our -- the users who become -- converted to a subscriber on these dramas.

Although those 2 metrics might not be exactly precise to measure the subscription revenue, we think altogether, this will help us to gauge a rough amount of how the subscription revenue performed for this drama.

Your next question today comes from the line of Alicia Yap from Citi.

I have a follow-up questions on the advertising revenue.

Wonder -- if management can clarify, what are the not-so-healthy categories that you have cleaned up during the quarter?

And are these revenue gone and not recovered in the future?

And then other than specific sector impact, have you seen any impact from the macro softeners that's affecting the advertising budget sentiments, especially into your 4Q guidance as well as into the 2019?

Just quickly on housekeeping, if you could share revenues and total expense as related to the Skymoon consolidation would be helpful.

You've got a lot of questions.

The first one, I think, those -- so we're calling not-so-healthy segment is actually -- we have some customers which do not have the related license needed to put their ad on the Internet.

So we don't know whether there are like a good customer or a bad customer.

But from our perspective, because they don't have like, say, related documents to prove they are qualified advertisers so we just let them go.

I think that's the major reason why we see some like decline on our customer's numbers in the third quarter, our SME business.

And that's the -- everybody is talking about like the macro impact on SME.

Definitely, I think we will see some impact.

We don't know how long and how soon it will be.

But what I can tell you, as we said before, it's kind of like spread we put on a normal business.

We still have the confidence we can do better than the other competitors or players in the market.

So you can still expect -- as I told Ella just now, you will still see some positive increase in the next few quarters on our entire ad business.

And the third question for the detail of Skymoons, because it's not material.

So we don't disclose the details, but you can just imagine the cost is not material so it's not a big impact on the third quarter revenue.

(foreign language)

Dr. Gong just mentioned 1 more category that might be impacted from the cleanup was the -- some advertisement related to the merchants-related category.

And for the 2019, we expect advertising revenue will continue to grow, but the growth rate might be somewhat decelerated from the previous year's high growth rate.

Your next question today comes from the line of Karen Chan from Jefferies.

Just a bit of follow-up on the advertising revenue.

Just wondering how much of that third quarter decline is attributable to one off World Cup?

And also your practice of cleanup of SME and customers.

In other words, should we be seeing third quarter as kind of a trough and a sequential recovery in the following quarters?

Also a quick follow-up on the content cost, how should we think about content cost going into rest of the year in 2019, taking into consideration our content pipeline?

And from a longer-term perspective, the [pay cap control] on celebrities on both the drama variety show trend.

Okay.

So first, I cannot give you the exact number of the impact of FIFA World Cup because it's more of like, say, budget impact on our major advertisers.

We expected the revenue -- ad revenue to be like, say, increased during the third quarter, but actually we see a decrease trend.

So as I just said, it's definitely abnormal.

So we do have like very high confidence we will see healthy growth in next quarter.

But as I just said, you have to consider seasonality.

Third quarter, actually, typically is a strong quarter throughout the year, and the fourth quarter definitely is weak quarter of the year.

So I don't think you will see like say a sequential growth, like strong growth in the first quarter.

But from year-over-year perspective, definitely, we'll see some growth and a very healthy growth of the ad business.

And I think let's first -- okay, for the content cost and for the rest of years, the content cost, actually, we amortize the content cost throughout the year or even a little bit longer.

So what I can tell you is that you wouldn't see any decrease in absolute dollar amount of content cost in the remaining of the year because -- maybe like the titles we launched in the fourth quarter is about the same for the third quarter, but still, there will be some remaining impact of the content amortization in the fourth quarter.

So I would expect you will see some slightly increased but maybe not that big in the fourth quarter.

Your next question comes from the line of Xueru Zhang from 86Research.

I have question regarding to the Dolphin project, Haitun Jihua.

As we know, the format of the drama in this project is very similar to the TV series in U.S., which will be divided into seasons.

I wonder, will this become the mainstream in your original content portfolio?

And what is the early feedback from users?

And what is the implication on content cost going forward?

(foreign language)

The traditional TV drama series have a long -- in terms of episodes, it's many, many episodes, very long.

It's more fitful for the advertising monetization model.

As for project Dolphin, we follow the -- your -- North American drama pattern, which is more high-quality and also shorter length in terms of episodes.

For example, The City of Chaos is a drama we produced from the Dolphin project.

This is very short in terms of episodes and also very high-quality.

It's more fitful for the fee-based monetization model, which means we can attract more subscribers for this show.

(Operator Instructions) Your next question comes from the line of Wendy Huang from Macquarie.

Can you provide your top advertising industry categories?

And also, what are the new categories you mentioned earlier that you're planning to add?

And also on the -- given the revenue and also the content cost trend you mentioned, so should we expect the Q4's loss margin at a gross level to widen or narrow?

Lastly, on the content distribution revenue, that has a very tremendous growth this quarter.

What's the detailed reason behind that?

And how should we expect going forward?

Okay, I will let Gong Yu comment on the first part of the question.

And we didn't provide guidance on margins.

And I already gave you some colors on the revenue and the major part of the cost -- the content cost, so I think you can have some rough idea of margin picture in the fourth quarter.

Now I will let Gong Yu comment on the first part of your question.

(foreign language)

On the advertising side, we saw some softness from the FMCG side, but we are keep looking for new clients for the advertising.

For example, we saw the Internet services, actually, the very interesting sector and growing very fast.

Although it already enjoyed several years of growth already, but we continue to see more innovative business model and the new emerging companies coming into this sector.

So that will be a new sector that will add to our client pool.

(Operator Instructions) Your next question comes from the line of Binnie Wong from HSBC.

So I was wondering that -- like for Yanxi, it's definitely a big success, right?

And then how should we think about like in terms of the subscriber number, in terms of their retention ratios being on the platform?

And then can you just reiterate, in terms of our strategy, in terms of thinking about like, selecting this good, high-quality content generating, of course, very high investment for us, but then also high return for us in terms of the strong -- the advertising despite external factors affecting us?

How should we think about in terms of the -- into the fourth quarter?

Are there any other, like, promotions or any other things that we should think about when we think about the growth in subscriber number?

That will be very helpful.

I think, let's say, for the last part of your question, I don't think we will have, say, additional promotion or like the very unusual promotion.

You will see our offer actually is quite steady.

And also, you will see similar trend, when we look at the single -- the effect of single content like Yanxi Palace, we don't see any deterioration on the churn rate.

Definitely, you're right.

Well, there will be subscriber that come for the [content only], but we don't see any like the deterioration on our churn rate.

And so still, we believe our platform has become like, say, quite healthy attracting the new subscribers.

(foreign language)

Xiaodong, just to add 3 comments for your -- for this question.

First, the most important driver for the quick ramp-up of our subscriber numbers to premium the content.

We added more than 13 million new net additions of subscribers in this quarter, mostly driven by the hit content we launched.

And we do see some users -- some subscribers stop subscribing after our hit show Yanxi Palace come to an end in August.

So the number we announced is as of end of September is not our peak number in August.

Still, as I said, it's really the important -- very important driver comes from the premium content.

And secondly, the -- we also have multiple cooperation with a lot of industry partners.

For example, telecom operators, cable TV partners as well as JD.com and so on and so forth.

Those are also very important to expand our user coverage and reach.

Thirdly, it's not so important, but still, we do occasionally launch some holiday-related promotions to attract new users.

That's not so important as the first 2 factors but still contributed to the growth.

(foreign language)

With the Chinese Internet users become more sophisticated and the evolvement of Internet business coming into the stage, we observed that people are more willing to pay for intangible like knowledge or entertainment like video content.

So that's more than we previously thought.

So this next year, 2019, will be -- I think will be better than this year.

Your next question today comes from the line of Yanyan Xiao from Citic.

My question is about the -- your PGC content, specifically for the mobile device, also the vertical video or (foreign language).

You maybe publish it in November.

So how do you think this kind of content will differentiate from the former PGC content?

And do you think you can give us more color about this kind of -- specific kind of content?

(foreign language)

PGC content has been a very important component of our platform.

In terms of video view, the percentage of PGC increased from 40% at the beginning of the year to almost 60% by now.

So it's very important.

And the vertical format of content is also a trend that we observed appealed to our users.

So we launched some PGC in vertical content.

PGC, relatively, is lower quality and shorter in terms of length.

But in Q4, we are trying to do some innovation and try to penetrate vertical format into our PPC, more professionally produced, higher-quality content.

So in Q4, we will launch some vertical content to see -- to do some experiment to see how that apply to our subscription business and also our advertising business.

Your next question today comes from the line of Natalie Wu from CICC.

I've got a simple one.

Just given your current cash position in loss run rate, just wondering any plan for financing or controlling content cost in the future?

This is Xiaodong.

I think we proved from last quarters, we feel okay right now.

But I said last time, we will consider all kind of different alternatives for the future financing, but not necessarily -- probably not necessarily equity with other solutions.

Probably -- I don't know, convertible bonds, straight debt, whatever.

But definitely, we'll consider other possibility.

We are -- I think we -- operator, we can't -- I think it's time probably to conclude the call.

Ladies and gentlemen, that does conclude the conference for today.

We thank you all for your participation.

You may now disconnect.