(IQ) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by.

Welcome to the iQIYI Third Quarter 2021 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Chang You, IR Director of the company.

Please go ahead.

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 are Mr. Yu 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 financials and guidance.

After their prepared remarks, Xiaohui, Wenfeng and Xianghua will join Mr. Gong and Xiaodong 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.

Hello, everyone.

Thank you for joining us today.

In the third quarter, we faced a lot of volatility as we navigated a particular challenging operating environment.

We experienced uncertainty in terms of content scheduling, which resulted in softer-than-expected top-line performance.

Despite the short-term volatility, we are delighted to see encouraging sign across multiple operating metrics.

Our leading market position remains intact as we continue to rank #1 in various user metrics according to third-party data.

We firmly believe there are a couple of eternal truths when it comes to entertainment.

So firstly is that audiences consistently demand high-quality entertainment content, 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 tremendous space for growth and development.

During the quarter, we continued 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 are 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 grew both annually and sequentially.

Our core strategy is to cater to the demands of specific user segments with diversified content and continuously improve membership, improve member benefits that enhance the member experience and drive new member sign-ups 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 other operation initiatives.

However, as I mentioned earlier, the uncertainty of our content scheduling caused a fluctuation 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 schedule.

In the third quarter, membership services revenue grew by 8% year-over-year, mainly due to the success of hit dramas such as One and Only, (foreign language) and Forever and Ever, (foreign language), 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, (foreign language) and The Rebel (foreign language).

As of September 30, the total number of subscribers was 103.6 million.

The sequential fluctuation was mainly due to delays in the release of some highly anticipated content.

The major content that we did release in the third quarter was less diversified in terms of genres.

Despite of the soft performance, we are happy to see the 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 significant drivers of future subscriber growth.

On the other hand, our ARPU recorded both annual and sequential growth, as the annual growth rate of 10% was mainly due to the successful price adjustment that we rolled out last November.

We expect the ARPU of our membership business will continue to improve going forward, 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 4, we proactively canceled the paid advance viewing model, (foreign language) ahead of peers.

This should further help improve the member experience and thus support subscriber growth and retention and laid a solid foundation for the long-term monetization of our platform.

In addition, we continue to enhance member benefits on our platform with 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 3 content categories.

Theatrical films distributed via PVOD mode, a PVOD model, Premium films only distributed via online platform and iQIYI original films.

Since 2020, theatrical release of feature films have been hit significantly by the COVID-19 pandemic.

The Cloud Cinema model will reduce the reliance of online video platform on theatrical films.

Also it enables users to watch new films soon after their off-line release at a price that is cheaper than a traditional movie ticket, which further maximize the monetization potential of each film.

During the third quarter, we released Our New Life, (foreign language) KungFu Stuntmen, (foreign language) and Malignant, (foreign language) under our Cloud Cinema model.

These films fall -- in different genres namely comedy, action and suspense, which helps to satisfy the demands of different users for us.

In addition, our first original PVOD film, Northeastern Brother (sic) [Brother Northeast], (foreign language) was launched in October and received a 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 remains on top of the chart across various regions and rank #1 in Thailand, Malaysia and Vietnam.

Unforgettable Love, (foreign language) went viral and other domestic blockbuster drove -- continued growth of our overseas revenue.

We also recently kicked off the development of 6 overseas original dramas, including 4 Korean and 2 Philippine originals.

In addition, we continued to expand our cooperation with local partners, including multiple media platforms and operators in Malaysia, Thailand and Singapore.

We also launched our ad system, signed annual cooperation framework agreements with numerous advertisers and successfully expanded a local sponsorship for our Sweet ON Theater.

Moving on to advertising.

During the quarter, our advertising revenue came in soft, mainly due to a drop in brand ad revenue.

The decline was mainly due to the delay of key content, including dramas and variety shows.

We continually work on developing new variety shows, which we are doing to diversify our content and de-risk 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 simulate their budgets 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 app, iQIYI Lite mainly focuses on low-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 drivers new growth of our advertising business.

The year-over-year growth of performance ads also benefit 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 macroeconomy, which might negatively impact our advertising business.

Nonetheless, we are proactively adapting ourselves to the environment to minimize our potential exposure.

Moving over to content.

We experienced increased uncertainty in terms of content scheduling and a prolonged content approval process since our last earnings call.

Although we prepared a rich slate of content during the quarter, some of the top dramas and variety shows in our top line -- in our pipeline experienced launch delays.

Going forward, to offset these types of risk, we are looking to further expand and enrich the diversity of our content portfolio with new and different categories and deepen user awareness of our diversified content offerings, all in an effort to de-risk our business from content scheduling issues in the future.

In addition, we actively responded to the guidelines issued by the various government authorities 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 cost, eliminate chaos in content production and promotion and then reduce the irrational industry competition.

Overall, this change should be beneficial for supporting the healthy development of the industry over the long term.

I would also like to highlight our content strategy.

Efficiency in content production and operation has always been the primary target that we strive for and we are now putting even more focus on it.

We are proactively taking initiatives to improve the efficiency of our operations and reduce ineffective investments in content by cutting projects that are expected to generate a low ROI.

The online video industry has rapidly developed over the past decade.

And now we have gotten to a point where content is king and efficiency is key.

We are happy to see the continued results of our progress to optimize content cost, driven by our enhanced production capability, disciplined content spending and improved operations.

An important metric we used to track the efficiency of our content spending is content-related cost ratio.

Simply speaking, this metric is calculated by dividing the total cost related to a title by the revenue generated by it.

Based on this measurement, we can see the operating efficiency of our overall content in 2021 have improved substantially from last year.

We continue -- we will continue to use this metric as an effective tool in managing the efficiency of our investments in content and our operations.

For example, One and Only and Forever and Ever were our 2 dramas launched in this quarter.

These 2 titles were both adapted from the same novel, which created synergies in terms of IP, and they are quite innovative in terms of both content creation and the broadcasting models.

Also, these 2 titles are good examples that demonstrate our increased efficiency in content operation as measured by the content-related cost ratio.

The performance of One and Only was 13 percentage points improved than last year's drama Love is Sweet, (foreign language), which features the same leading actress and belong in the same genres.

We would 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 different genres in which beneficial for attracting new users and driving up user retention and offers better ROI as it brings synergies among different titles within the same content genres, and that provides more flexibility in working with advertisers.

For example, we observed that the recent broadcast of The Pavilion, (foreign language) and Wisher, (foreign language) boosted the viewership of Mist Theater's first season titles.

Especially the recent daily videos and user time spent for The Bad Kids increased by more than 2x 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 drama genre Feng Qi Luoyang, and the variety shows Super Sketch Show (foreign language), and Action (foreign language) and animated content such as Deer Squad 2 and The Princes DoReMi.

The Super Sketch Show premiered in mid-October.

The show was high -- 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.

At the same time, (foreign language) technical innovation is key to the industrialization of video production industry and it will be greatly beneficial for improving the probability of success, increasing ROI and simplifying the production management process, reducing production cost and increasing the viewing experience.

We continue to make progress in terms of user penetration, the user scale of iQIYI Lite grew rapidly.

Peak DAUs increased by nearly 2x 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 low-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 B-level dramas in Malaysia going forward.

Once we fully adopt 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 products to our content production, which reduced the production cost, increased efficiency and improve the user experience.

Take our proprietary multiview capture system as an example, (foreign language).

The system significantly shortens the 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 script supervisor management product, which can be used in the mid-stage production process.

The product has been applied to 16 variety shows, 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 fourth quarter, improving transcoding efficiency by 3.7x.

In summary, we are proactively adapting ourselves to the current environment.

We continue to be a pioneer when it comes to content innovation and operations.

Meanwhile, we are seeing a promising growth trajectory for new initiatives such as iQIYI Lite and overseas business.

Our original content, especially our theater-model content is highly recognized by users and advertisers.

We will continue to take the lead in rolling out our technologies and the 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 change 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.

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 increased 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, and we distributed more content titles to other platforms 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 in original content during the quarter.

Our operating loss margin on a GAAP basis was 18%, remained largely flat compared to the same period last year, driven by our disciplined investment strategy.

As of September 30, 2021, the company had cash, cash equivalents, restricted cash and short-term investment 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 7.08 billion and RMB 7.53 billion, representing a 5% decrease to 1% increase year-over-year.

This forecast reflects iQIYI's current preliminary view, which may be subject to change.

I will now open the floor for Q&A.

Thank you.

Operator, please open the floor to questions.

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

(foreign language) First question is relating to the recent improvement plans that you had with a local province government.

I just wonder how is that going to affect our future business.

Second question is relating to the future membership growth potential.

Just 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?

And third question is I just wonder what is the -- could management share the -- anything new or exciting or promising relating to the variety shows going forward.

(foreign language)

[Interpreted] I will translate Mr. Gong's feedback.

For the first one, in terms of your question regarding the consumer council, so this kind of applies to the all industry players.

So our feedback comes from the 2 aspects.

The first one comes from the product design and the second one comes from the flow of the product.

The first one, for product design, we've been also communicating with the consumer council, also collecting feedback 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 the 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 our penetration in different regions 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 at this point.

And our iQIYI Lite is the main app that targets this user demographics.

For iQIYI Lite, right now, we offer a lot of the free content, so the users consume the free content and then they actually will see the advertisement for that.

So right now, on the advertising side for iQIYI Lite, performance ads has a high percentage of revenue contribution.

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 iQIYI app, that's still going to be our main target for elevating our operations, optimize user experience, optimize products and optimize the product features.

(foreign language)

[Interpreted] The third question, I'll switch over to Xiaohui, our CCO, to answer the question.

(foreign language)

[Interpreted] Okay.

Xiaohui responded to the talent show question.

Because of the fan culture that's been existing in this entertainment sector for a long time, so it does have some impact on the variety show segment.

So for now, the Korean-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 -- 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 (foreign language), 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 the show.

Our variety show performance is back to #1 position in the market.

Going forward, especially in the fourth quarter, we'll still launch innovative variety show content genres, for example, like we mentioned in the opening remarks, (foreign language) "Action".

That's also an innovative variety show that will be introduced to the users.

Thank you.

(Operator Instructions) Your next question comes from the line of Alicia Yap from Citigroup.

(foreign language) So my question is related to the overall longer-term outlook for the long-form video industry.

Would there be any change of the strategies for your self-developed -- like, self-developed content?

Overall, the content genre and even, for example, the type of -- the length of the drama series, the type of genre 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?

(foreign language)

[Interpreted] 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.

For example, the number of movies launched since COVID-19 is only less than half, 50% of 2019 level.

And for a traditional satellite TV series, the quantity is only 1/3 of the past.

And for the new form of Internet series, or web series, we experienced major delays because of the stronger censorship.

And even though the content was launched, but the quality was got taken a discount or there's some less promising feedback for the quality.

So theoretically speaking, these are the reasons that contributed to the supply shortage for the video content.

And 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 this is one of the biggest, I guess, factor that contributes to user behaviors.

And for your questions about monetization models, I think we have been working, taking the full process of the entire IP chain.

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 life cycle.

We can develop this into TV series, movies, games, also franchise products, et cetera.

I think 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 is better than our investment level.

So that will be our end goal, and we think it's the sustainable model going forward in the long-term prospect of the online video industry.

(foreign language)

[Interpreted] Okay.

I think if you look at the overall grand picture of the online or actually the entertainment space, movies started 126 years ago or about 100 years ago.

And we believe the consumer demand, the user demand for premium high-quality premium content is eternal.

And also the creative talent for this area is continues.

So all of these, it just needs time to grow the space.

So 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 all the challenges and be a successful player in the industry.

The next question comes from the line of Thomas Chong from Jefferies.

(foreign language) I have a question regarding overseas competition.

We have just talked about using technology and achieve efficiencies through the translation process.

I just want to get some understanding how we think about the competitive landscape in different markets?

And will we step up the investment in overseas going forward?

(foreign language)

[Interpreted] Okay.

Our Senior Vice President, Xianghua, in charge of the membership service, will answer this question.

For our goal for overseas business or primary goal is to export our original content to various regions around the world.

So the first situation we'll encounter, of course, is the translation situation.

And also, different regions have different cultures, different backgrounds.

So our goal initially was to find countries with similar customer 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.

We also introduced some of the content in that region as well.

(foreign language)

[Interpreted] 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 folks, young audiences in the overseas region.

Due to time constraint, that was the last question.

And I would like to hand the call back to management for any closing remarks.

(foreign language)

[Interpreted] Okay.

I will summarize our short-term goals 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 be stable.

And our main goal going forward, first is to reduce our loss and we will further optimize our content cost based on our industrialized initiatives for video industrialization.

And also, we will execute strongly according to our strategy, and we will eliminate or drop the content that doesn't go in line with the policy.

And at the same time, we will also explore new monetization opportunities.

So that's our overall strategy for the short term and also mid to long term.

Thank you.

Thank you, everyone, for joining us.

Feel to reach out to us if you have any questions, and we'll talk next quarter.

Thank you.

Thank you.

Bye-bye.

Thank you.

That concludes the conference today.

Thank you for participating.

You may all disconnect now.

Thank you all.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]