Updated Transcript Provided by The Company:.

Ladies and gentlemen, thank you for standing by. And welcome to the iQIYI Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today. Investor Relations Director of iQIYI, Fan Liu. Thank you. Please go ahead..

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's fourth quarter and fiscal year 2020 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 Mr. Yu Gong, our Founder, Director and CEO; Mr.

Xiaodong Wang, our CFO; Mr. Xiaohui Wang, our Chief Content 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 the guidance.

After their prepared remarks, Xiaohui 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 are not limited to those outlined in our public filings with the SEC.

iQIYI doesn't undertake any obligation to update any forward-looking statement except as required under applicable law. With that, I would now turn the call over to Mr. Gong. Please go ahead..

One, IMF delivery standard adoption. We took the lead in adopting the IMF delivery standard in China. Applying this standard, we collaborate with domestic production companies to standardize the process of post-production, network delivery, sample submission for censorship and production by online platform.

Additionally, it can unify our delivery standards with the international mainstream OTT platforms such as Netflix and HBO. Currently, we have adopted the standard in self-produced dramas and we expect it can double our delivery efficiency. Two, iQIYI's proprietary intelligent film and television production system.

This provides an intelligent script dismantling function which can identify the scenes, characters and other elements from the scripts. This analysis can achieve a 95% accuracy rate. Furthermore, the efficiency is greatly improved by more than 20 times versus the manual work.

For example, the dismantling of a 200,000-character script can be completed within minutes. The system has been used in many self-produced dramas such as Good Life, Out of the Dream, Crush and My Treasure. During the quarter, we maintained our leading position in TV time spend and traffic.

We believe that larger screen is an important future trend in the long-form video industry. Compared with developed markets like the United States, China's TV user time, traffic and monetization have greater growth potential. We entered into a formal agreement with BMW China in December.

The agreement allows us to create a connected car service on BMW's luxury models, with updated film and drama content and with an AI-driven interactive experience. In terms of VR, we stick to our strategy that allows us to capitalize on content through various approaches.

On content, iQIYI's VR full-sensing interactive movie, Virus Crisis, was launched in November. Another movie, The Mystery of Kunlun [foreign language]will be launched in Q1. We are also advancing the offline operations that utilize our VR contents.

Following the opening of our flagship VR full-sensing cinema in Shanghai, similar stores are being delivered or are under trial operations in Beijing, Shenzhen, Ningbo, Suzhou, et cetera.

You may have also noticed that our VR devices subsidiary, which mainly focus on VR hardware, recently completed Series B financing round of more than RMB 100 million. This is China's largest financing in VR arena since the end of 2019.

This round of financing will be used for research and development of the key VR technologies, algorithms, new products and the construction of a more robust content ecosystem. 2020 conclusion and the 2021 outlook. 2020 has been an unusual and challenging year for us as well as other players in the industry.

On one hand, our Mist Theater became industry benchmark for self-produced content and generated both strong reputation and ROI. This validated the success of the vertical content theater model. On the other hand, COVID-19 pulled forward quite a lot of users' consumption of long-form videos in the first quarter.

And the lack of content, especially the scarcity of movies in the first 9 months caused great volatility in our subscriber numbers. However, as we began to aggressively launch more content in the second half of the fourth quarter, our subscribers' retention rate started to improve steadily.

In 2021, our more than 50 in-house studios will enter full production. These studios focus on diversified content categories that cater to the viewing demands of different user cohorts. We expect the originality of our platform as well as the diversification of our content will be largely improved.

This will undoubtedly promote sustainable development of our membership business. At the same time, we strive to make breakthrough in movies, especially original movies. Despite the recent resurgence of COVID-19 in multiple regions in China, we will try our best to cope with the interruptions to our shooting schedule.

We believe that with the possible large-scale promotion of vaccines later this year, the pandemic will be well contained, and our business can restart the growth since then. With that, I'll turn it over to Xiaodong to talk about our financials..

Morning, everyone. Let me review our key financial highlights for December quarter. For the fourth quarter, total revenues reached RMB 7.5 billion. Membership business continued to be our largest business pillar, accounting for 51% of our total revenue.

Our advertising business remained stabilized both on year-over-year and Q-over-Q basis despite the weak seasonality. Our cost of revenues decreased 14% year-over-year, mainly due to the 10% year-over-year decline of the content cost. SG&A expenses decreased 6% year-over-year.

As a result, our operating loss margin narrowed to 18% from 34% in the same period last year. As of December 31, 2020, the company had cash, cash equivalents, restricted cash and short-term investments of RMB 14.3 billion.

We closed our USD 800 million convertible senior notes offering and a public follow-on offering of 40 million ADSs at a price to public of USD 17.5 per ADS on December 21, 2020.

The underwriters exercised their option in full to purchase additional USD 100 million aggregate principal amount of the notes and their option in part to purchase 4.6 million additional ADSs, which closed on January 8, 2021. For details on our financial data, our CB and the follow-on offering, please refer to our press release on our IR website.

For the first quarter of 2021, we expect total revenues to be between RMB 7.07 billion and RMB 7.53 billion, an 8% to 2% decrease year-over-year. This forecast reflects iQIYI's current and preliminary view, subject to change. I will now open the floor for Q&A..

[Operator Instructions] Your first question comes from Thomas Chong from Jefferies..

[Foreign Language] I have a question regarding the membership revenue. Management has just talked about the number of studios in 2021 will be more than 2020 producing diversified content as well as some data points showing the recovery in terms of the paying subs.

Can management talk about how we should envision the medium to long-term paying subs trend? And on the other hand, how we should think about the ARPU outlook in the coming years?.

[Foreign language].

[Interpreted] Okay. So as you may know, we actually run a peak in terms of our subscriber numbers in the first quarter last year.

However, because of several reasons, for example, our first reason is our COVID-19 pandemic where lack of theatrical movies supply in most of the time last year, so this will actually impact our film supply in our platform as well. The second reason is we actually got negatively impacted by our drama supply delay.

And also, there are some censorship impact for our drama category. Third reason is that our advertisers' budgets have also negatively impacted our variety show supply. There is also some reason for our animations content delay. So all these reasons actually lead to a quite significant volatility for our subscriber numbers last year.

However, we have seen a very significant improvement for this situation coming into this year. We have actually seen a very improved -- a very good improvement in terms of both our self-produced content broadcasting and also the licensed content supply.

And also, as you have already observed during the Spring Festival, during our Chinese New Year, we have seen very strong performance for the theatrical movies. That will actually suggest that we will also see a quite good performance for the films category in our platform as well.

So overall, we see a very good improvement for the subscribers growth trend up to now..

[Foreign language].

[Interpreted] I need to add on a point. We -- although we see a very healthy growth trend for subscribers, we also have some certainty for the growth -- subscribers' growing trend. We need to keep -- we need to remind investors to keep that in mind..

[Foreign language].

[Interpreted] We expect growth for our ARPU. However, it won't as a very big magnitude because it's basically for our pricing adjustment, we just raised the pricing on the Android devices to the same level as the iOS. So that will actually lead to not very big overall improvement for our overall ARPU..

Thank you..

Thank you..

[Operator Instructions] Your next question comes from Eddie Leung from Bank of America Merrill Lynch..

[Foreign language] So I have 2 quick questions. The first one is a follow-up on our first quarter. Wondering if there is any outlook or points to note about the content cost in the first quarter given more content being released? And then the second question is about the so-called big screen strategy mentioned before.

We noticed that there has been more -- there have been more users accessing video content via smart TVs. So wondering whether there has been any change in the time spent for users on TV versus mobile and PC and whether there will be any indication on our production strategy..

[Foreign language].

[Interpreted] Okay. I will turn over to Xiaodong for the -- for your question for the content cost. For the TV side, we have already observed that Internet-connected TV and have already -- as similar or even slightly higher traffic share than the mobile devices. Mobile devices include the phones plus tablets.

So our TV side, we have already contributed more than 40% of our user traffic. So the combined user traffic share of the TV side and the mobile side have already been 90%..

I think when we talk about like, say, releasing more key content or blockbuster content, the keyword here is not more, but hit or blockbuster. So as we discussed before, I think and if we talk about, like, say, total content cost investment for our membership business, the entire investment, I think, would have been about the same level.

What we are going to do is to increase the quality of the content and not the number -- or the quantity of the content for now. But you're right, to some extent, if we are talking about like, say, some new drivers of the content cost, you might have observed some slightly content cost increase.

For example, we are going to expand slightly in overseas areas to enhance the foundation of our future growth. I think when we talk about like, say, additional or new business scope or areas, you will only by then observe like, say, some content cost increase.

Otherwise, if you talk about like, say, our core business, we remain, as we discussed before, the outlook, the content cost will be well controlled. Thank you..

Your next question comes from Yiwen Zhang from Citi..

[Foreign language] So the first part is on the user preference change on drama series and this implication on self-production capabilities and subs add. In the past year, we have -- we may have like one blockbuster in one year, but now we have several large titles year-on-year.

I believe that users are like show a more diversified content preference and also different content format or preference as you were. This is the first part. And the second part on the content broadcasting strategy. Noted in the past, we sometimes would swap drama series with the other video guys. Now we also sort content on the variety show.

Can you talk about what drives this?.

[Foreign language].

[Interpreted] Okay. So as you have mentioned, [foreign language]is actually -- was actually a phenomenal success, not only in China, but also in various overseas countries. You have mentioned that there are fewer blockbusters in recent years. I would say this is actually in a more perception sense. So that might be attributable to 2 reasons.

One is the tightened regulation or tightened censorship. Second is that we have observed there are more and more entertainment consumption methods. For example, if you observed over the past years since '17, '18 and '19, we have observed higher theatrical movie consumption and also we have seen like the popularity of the short-form video.

However, I would say it's more from a perception way that you have felt that there are fewer blockbusters.

However, from the data point perspective, not only for the numbers of the title, numbers of the top blockbusters, all the user traffic from the top TV dramas or variety shows, we have actually seen very stable numbers for the so-called blockbusters.

So if you see for the overall industry per year, we have around 6 to 10 TV dramas that we can call top blockbuster TV dramas. So we observe that our users have actually elastic demand for the TV dramas. So this is actually a very strong -- it's actually a very stabilized demand.

And also, we have -- doing very -- a number of innovation in terms of our content. For example, you have observed that we recently launched [foreign language]. This is actually a very creative format of the TV dramas and it has generated very strong user traffic..

[Foreign language].

[Interpreted] And also for the variety shows, as you have observed, our Qipa Talk, it's already -- in its seventh consecutive year of running. However, we observed the improving traffic for this new season. It's actually seeing consecutively improving traffic for all seasons of our Qipa Talk.

This is actually validates our success of our IP operation from a variety show..

[Foreign language].

[Interpreted] Okay. For your question about the barter transaction of the allying production, it actually needs to be said case by case. For example, for some licensed drama shows which are mainly broadcasting on the TV station, those are mostly will be broadcasting in multiple platforms.

Then for example, the also -- for the variety shows for [foreign language], that was produced by an independent studio, which is actually co-invested by both iQIYI and Tencent..

[Foreign language].

[Interpreted] The principle for -- whether we want to be the self -- I mean, only broadcasted by our platform, only 2 reasons. One is the self-produced content and the secondary reason is about the pure Internet broadcasting content.

So for all our platforms, there will be like some of these kind of content will be actually only by -- only broadcast in one platform..

[Foreign language].

[Interpreted] Thank you..

Your next question comes from Alex Xie from Crédit Suisse..

[Foreign language] So I would like to ask about the cost control side. You did very well in Q4 '20, and we have seen year-over-year decrease in OpEx.

How should we think about it, the trend in 2021?.

This is Xiaodong. I think generally, definitely we can believe the trend will continue in the next few years. When we talk about like a cost expense, I think there are 2 main elements, the content cost and some expenses.

When we talk about the content cost, as I just said, if you look at the core business, not only as a percentage of revenue, but even the dollar amount, I think you will see a very healthy growth trend in the next few years.

The only driver will increase the content costs -- as we just mentioned, there will be only 2 other drivers that could possibly increase the content cost in the next few years. One is the category of the content. We are talking about like, say, entering to some new areas like iQIYI original movies.

And the second one is when we talk about like expansion to the overseas regions. I think these are the only 2 drivers that could raise the content costs in the next few years. But from time to time, you might observe something like fluctuation of the content cost because of like, say, the efficiency of the development, something like that.

And besides the content cost, I think the only major items left is something like the marketing expenses, including the content cost -- content promotion, some like, say, branding or family app promotion, something like that. Definitely, I think you will observe economy of scale in the next few years.

So gradually, those cost or expenses as a percentage of revenue, you will observe a very healthy trend in the next few years..

And your final question comes from Zhijing Liu from UBS..

[Foreign language] What is the latest progress of our Suike app? What is the strategic importance of Suike’s mid-form video for our core long-form video business?.

[Foreign language].

[Interpreted] Happy New Year. And as you may know, Suike is already in the -- in its second year of operation. We have determined its position. It's actually a video-based interest community. So it's a comprehensive video community, which contains our short video content, middle video content and long video content.

However, the most viewed content is the short video content, which usually last for 5 to 6 minutes or to 10 minutes or something. It has a very comprehensive content categories. For example, they have some interest-based content, for example, slime. And also, of course, it includes a lot of popular TV drama or variety show content.

In terms of the user traffic for Suike, it has some volatility in over the past year. However, we believe if we execute our strategy correct, we can see a quite healthy trend for like traffic for Suike this year..

[Foreign language].

[Interpreted] Okay. Just to add on one point. So take Bilibili for example. As you may know, Bilibili has done a good job over the past year, and they try to penetrate. So they originate from ACG content, but they try to penetrate into a more user cohort. So this actually, for Suike, is actually in a contrast way.

So we originated from a more, I mean, mass user interest, but we try to penetrate into more vertical content category or like interest communities. And also, we want to add some elaboration for our pricing adjustments. I will turn over to Xianghua Yang, our Senior Vice President of our Membership business..

[Foreign language].

[Interpreted] Okay. I want to elaborate the impact from the pricing adjustment we did last November. So specifically, we raised the pricing on the non-iOS devices to the same level on the iOS level -- iOS devices. So our observation is that after the pricing adjustment, our orders on the iOS devices are actually improved.

However, there is some negative impact for our non-iOS orders on the non-iOS devices. However, overall, our ARPU is actually improved. And also, as you may know, we did some pricing guarantee program for the existing users on the non-iOS devices. We observed that for these kind of users, the next month retention rate is actually improved.

And also for some new added users, new added subscribers, their -- the first month retention rate is also improved..

[Foreign language].

[Interpreted] So overall, the impact from the pricing adjustment program has shown better -- actually was better than our expectations. And we believe the impact is very temporary and very minimal. However, this pricing adjustment will have a very positive impact for our ARPU and also the long-term subscriber growth..

Thank you..

I would now like to hand the conference back to management for closing remarks. Please continue..

So okay, this is the end to our earnings call. We will just keep in touch after the results. Happy New Year for 2021. Thank you..

Thank you..

Ladies and gentlemen, we have reached the end of our conference call. Thank you for participating. You may all disconnect..