Good day, and thank you for standing by. Welcome to the iQIYI First 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, Ms. Fan Liu, Investor Relations Director of iQIYI. Please go ahead..

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's First Quarter 2021 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 CCO, Chief Content Officer; and Mr. Xianghua Yang, Senior Vice President of our Membership business. On behalf of Mr. Gong, I will give a brief summary of the shareholder letter we sent out earlier today, followed by Xiaodong, who will go through the financials and guidance.

After our 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 does not undertake any obligation to update any forward-looking statements, except as required under applicable law. With that, I will kick start the call with a brief summary of our shareholder letter. As you may have noticed, we have sent out a shareholder letter earlier today. This is the first time since our IPO for Mr.

Gong to communicate with our shareholders with this format. In this letter, Mr. Gong shared some of his thoughts on the online video industry, its competitive landscape and our content strategy. To start with the industry dynamics and our competitive advantages.

From the perspective of users' mindset, video content can be defined as delicious, entertainment and interest based video, of which iQIYI mainly focuses on the latter 2. Our iQIYI app focuses on entertainment videos, and our Suike app on interest based videos.

The entertainment video market has extremely high entry barriers including the economies of scale, the overall understanding of the industry and its talents, as well as the industry's capital-intensive nature.

Empowered by our technology and database, our knowledge on the industry and our affiliation with key content talents, iQIYI has established a solid leadership. For interest based videos, we will continue to invest in Suike and expect that it will contribute to our core entertainment business. Next, about our approach to current challenges.

Though we are currently facing some challenges in our membership business, we still firmly believe that this business has huge potential.

Two supporting data; first, as of the end of the first quarter 2021, the number of accumulative paid accounts has exceeded 490 million; and two, in first quarter the monthly average number of subscribing members who have membership benefits for any given day has reached nearly 160 million.

For the volatility of membership business, we believe lack of high-quality content is the primary reason. We believe the solution lies in the increase of our in-house production capacity and the industrialization of video production.

To establish enough and highly productive in-house studios is an important prerequisite for the improvement of our content quality. We have now established over 50 in-house studios within 2 years. Most of these internal studios are focusing on original dramas and variety shows, and a few are concentrating on movies and animations.

As the capacity of our in-house studios is still far from enough, we will continue to expand our in-house production capacity and diversify the genres of our in-house studios. Through these in-house studios, we can amass outstanding talent in the content production industry and obtain more premium IPs and productions.

The industrialization of video production includes the restructuring of industry rules and intelligent production techniques. Thanks to the development of new technologies, our intelligent production system and tools are gradually improving.

This enables us to enhance the controllability of production schedules, content quality and financial risks, and further reduce costs and improving efficiencies. Now I would like to turn over to Xiaodong for first quarter updates..

Hello, everyone. We kicked off the year with a solid quarter. Our revenue increased both sequentially and year-over-year in the first quarter, which is above our previous guidance. Besides, in recent quarters, when revenues have been relatively stable, our content costs have been effectively controlled and losses have continued to narrow.

We continue to lead the market by launching a consistent stream of premium content. According to QuestMobile, our MAU, DAU and monthly time spent all ranked first in the industry in the first quarter of 2021. For our membership business, as of March 31, 2021, we had 105.3 million subscribers with 3.6 million net additions during the quarter.

Membership services revenue increased by 12% sequentially to RMB 4.3 billion. Subscriber growth was driven by several factors. First, our top content, in particular premium dramas, performed very well. For instance, our top drama, My Heroic Husband (foreign language) was a blockbuster during the Spring Festival.

Second, users spent more time on long-form video during major holidays, such as Spring Festival, driving up the overall traffic of our platform. Third, we introduced various innovative marketing initiatives during the holiday season.

In addition to overall membership growth, our sequential growth in membership services revenue was also due to 2 factors including first, an increased willingness to pay among users. Second, ARPU growth driven by the headline pricing adjustment in November 2020, which is well-accepted among users in the industry.

Meanwhile, we strived to expand our total addressable market, launching a new VIP plan for iQIYI Lite and expanding our footprint overseas. Though we still expect short-term volatility in our subscriber numbers, we remain confident in the mid and long-term development of our membership business.

This is based on our dedication to premium content as well as ongoing improvements to our original content ecosystem and in-house production capabilities. Moving on to advertising business. During the quarter, the overall advertising market continued to recover. Our online advertising services revenue increased by 25% year-over-year.

Even though the first quarter is a traditional slow season for our advertising business, we were able to achieve decent sequential and year-over-year growth. Like the trend in the fourth quarter of 2020, growth was mainly attributable to strong content marketing revenue.

Our content marketing revenue recorded decent growth driven by major variety shows and dramas. The content marketing revenue accounted for around 64% of our brand ad revenue in the first quarter, which was a peak for the last few quarters. This, again, validated advertisers' recognition of our premium content. Next for content.

We continued to lead the industry in terms of total number of top titles and viewership across the categories, including drama, variety shows, animation, children and other content. For dramas, our exclusive costume drama My Heroic Husband became an instant hit after its launch.

Its innovations in theme and style provided a whole new way of creating good costume drama which will have an impact on our future productions. In original movies, our original movie Underworld Crashed has been screened in theaters, reached a box office of over RMB 300 million, and has received high ratings from various platforms.

For the second quarter, key dramas in our pipeline include A Love for Dilemma, Court Lady, Crossroad Bistro, The Rebel, The Lion's Secret and others. Love for Dilemma and Court Lady were aired in April and well received by our users.

We kept promoting short drama theater brands with a brand featuring romantic content scheduled to launch on May 20 this year. We will also launch new content in Mist Theater later this year.

In animation, new content to be aired includes No Choice but to Betray the Earth, The Tales of Wonder Keepers and the light animation Immortal Father As a Son-in-law 3 as well as others.

Despite some expected uncertainties in our content schedule in the coming months, we believe that the impact will be mitigated by our diversified content pipeline, especially self-produced dramas. With over 10 years of iQIYI's growth, we strongly believe that long-form video is irreplaceable as an entertainment format.

In the meantime, through continuous technology innovations that empower content production, we will have the capability to increase our hit ratio, generate greater commercial value and expand the imagination for the next-generation of entertainment. As well, we look forward to bringing more good news to all shareholders.

Now let me review our key financial highlights for the first quarter. For the first quarter, total revenues reached RMB 8.0 billion. Membership business continued to be our largest business pillar, accounting for 54% of our total revenues. Our advertising business recorded notable rebound with 25% increase on a year-over-year basis.

Both content distribution business and other business achieved solid growth on a year-over-year basis. Our cost of revenues decreased 10% year-over-year, mainly due to the 9% year-over-year decline of the content cost. The decrease was primarily due to the decline of licensed content cost.

Our operating loss margin on GAAP basis continued to narrow by 16% year-over-year to 13% for the fourth consecutive quarter. As of March 31, 2021, the Company had cash, cash equivalents, restricted cash and short-term investments of RMB 13.3 billion. For detailed financial data, please refer to our press release on our IR website.

For the second quarter of 2021, we expect the total revenues to be between RMB 7.21 billion and RMB 7.65 billion, a 3% decrease to a 3% increase 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..

My question is about the regulatory environment in China.

How should we think about the regulations regarding the long-form video? And on the other hand, how we should think about our short-form video strategy? I mean the mid-form video strategies for Suike and any KPI data can be shared, that would be great?.

[Foreign language] Over the past 2 years, as you may have observed that the regulation intensity is almost stable. You can observe that before the some kind of a season, for example, and the upcoming July 1 day, there will be intensified or enhanced regulation or policy guidelines and management.

It will directly impact our content pipeline in the short-term and, of course, some uncertainties. For the Suike app, we right now don't have a very quantitative KPI. Over the past 1 year, we have been able to find Suike’s value proposition, which is based on the interest-based video community.

All the things including the user interaction, is still in the progress of the upgrading. And in terms of the content community ecosystem, it's still far from satisfactory. We still need to work hard on this. Until it has been quite satisfactory before the year-end. We won't have the very big promotion.

In terms of the user data, it won't be grow very rapidly in the near term. We will still have a very elaborate evaluation internally..

Your next question comes from Piyush Mubayi from Goldman Sachs..

My first question concerns the content cost spending, which is -- looks solid in this quarter in terms of control. I wondered if you could talk through the expectation for the rest of the year, and whether these levels be -- continue to improve on as we look forward for the rest of the year? That's the first.

The second is, as we look -- as we look at ARPU at this stage, following the competitions joining you with raising pricing or raising effective ARPUs, what is the outlook for where this number could go through for the rest of the year as you roll that higher price through? And where can you think -- where do you expect this to go? And the third is, you've spoken in the past about your move into the international markets.

Could you just give us a brief feel for the scale that you are likely to be able to attain and where you are at this stage?.

This is Xiaodong. I will answer the first question about the content cost. And then I will let Xianghua comment on ARPU trend and overseas business.

For the content cost, I believe the total content costs we spend this year will continue to be optimized in the next few quarters, which means that the percentage of revenue our -- definitely you will continue to see the trend of decreasing of the content cost.

But as we discussed before, I think we are thinking about like, in short term, we are thinking about like expand the original content to different categories, including movies and animations which could have some like the short-term volatility of the total content cost.

For a longer period, as the hit ratio improved, I think as we discussed before, the total spending on content costs even from like the absolute dollar amount perspective, I believe, will continue to be optimized in the next few years. Thank you..

[Foreign language] We are actually very welcome our peers to follow our suit. For the detailed information, I will turn over to Xianghua for the detailed information..

[Foreign language] Okay. So as you know, we actually adjusted our pricing last November. For this quarter, in terms of ARPU growth, on a sequential basis and also on a year-on-year basis, it's around 10%, and we expect this trend will continue.

Our international business is still in a very early stage, and it definitely is doing a very rapid growth stage. In terms of the future direction for the business, I think ASEAN region will be a major location we are looking at..

[Foreign language] Our current strategy for our International business is still very disciplined. We cautiously look at opportunities. The major concern here is that we don't have enough in-house original content, particularly in TV dramas and also variety shows. The capacity is far from enough.

It's more a case for overseas expansion because in terms of the content, it has actually very strong and characteristics for the regions. It's also more the case that in terms of the production capacity for the films and animations. It's also far from enough in terms of the capacity and diversity.

So we will continue to increase expanded capacity for our in house production. Particularly when for -- in terms of the acquisition content, the marginal cost for the acquisition content is still too high. So it's the major approach is still to enhance the in-house production capacity.

I want to add one point that overall -- since the IPO, our earnings call is mainly focused on this quarter and the next quarter. It's quite short term. We haven't been able to have a chance to talk about our long-term strategy or the thematic view.

So this time is our -- is the first time since our IPO and to use a shareholder letter to communicate with our shareholders. I understand that most of our analysts haven't been able to get some time to really read the shareholder letter.

I want to stress that the major challenge here is actually not that short-form video or other entertainment format is grabbing our time spend. Our biggest challenge for us is still the content itself on our platform.

In terms of the license content, on the TV drama categories, as you may know, the content for satellite TV content has been largely shrinked. This has caused the same issue for the content we can get on our platform.

On the films category, because of the COVID-19 pandemic outbreak and also because of the change of the broadcasting rules of Hollywood films, we also have a scarcity in terms of the films content supply in our platform.

Because of the shrinking of TV drama content for satellite TVs, we need to focus on our in-house production capacity to more mass audience in this market just because they need more content from our category. So as a result, we need to enhance the investments in terms of the numbers of the in-house studios we have.

And in addition, we need to increase our budgets or the investment on the films and also animation categories. We want to share some data with you guys. In terms of the membership time spent, 60% of the time spent on the drama, TV drama. In terms of the video viewership or the user traffic.

The first category is drama, second is film, and for animation and variety shows are still much less than former two. In addition to increase the numbers of in-house studios, we also needed to improve the industrialization magnitude of the video production. This -- the solution is meaning to take advantage of the technology. This includes 3 parts.

First, we need to increase the forecast of the financials and also user traffic via certain business intelligence techniques. Second, we need to take advantage of the AI or other technologies to systemize the video production systems in terms of reducing the cost and improving efficiency.

And third, we need to take advantage of the intelligent tools to reduce the cost and also improve the efficiency online. Over the past several years, we have already developed certain functions or certain tools in terms of the industrialization of video production, we haven't been able to systemize this work.

We want to improve this over the next first 1 or 3 years. So putting that in a word, our increased numbers of the in-house studios is the most important supporting pillar for us..

Your next question comes from Zhijing Liu from UBS..

I have 2 questions. We have seen greater fluctuation of subscriber growth since last year.

How can we mitigate such volatility? And secondly, we are supposed to see more original contents launched in second half, can we expect a prominent improvement of content quality in short-term?.

[Foreign language] The primary reason behind the volatility of our member -- subscribing members is the lack of the content on our platform. We have observed clearly that if we have good content, we will have incoming users falling into our platform. If we don't have the good content, the users will leave rapidly. So this is a very clear phenomenon.

So the key solution here is that improving the content quality, which will be main thing in the second half. I recommend that you look at our app.

We have the new feature here which is calling the upcoming new content, which include the content, which have already specified launching date and also including some content with the uncertain launching date. If you look at our feature right now, you will find that we have 78 new titles, which will be launched in the coming quarters..

Our next question comes from Eddie Leung from Bank of America Merrill Lynch..

Just 3 quick questions. The first one is a follow-up question on Dr. Gong's comment about original content. So just wondering, in the upcoming years' spending, how much of the budget is for the original content? And then the second question is about the so-called large screen strategy.

Wondering if there is any update on the user metrics from smart TV? And then finally, we noticed that there was an acquisition of a chocolate brand like 2 months ago.

So wondering any rationale behind it?.

[Foreign language] Okay. So I will turn over to Xiaodong for the question of the content cost. I will answer the Connect TV question first. For Connect TV, if we throw out the seasonal volatility, our user time spend and also user traffic on the Connect TV, it's still stably increasing.

In terms of the user time spend, the Connect TV has already surpassing the mobile side. When I say mobile side, it includes both cell phone and the tablet. Right now, we don't have a very authorized third-party data, but I believe that in terms of the DAU and MAU, on the connect TV, it's still smaller than mobile side.

But in terms of the every daily time spent, on the TV side is higher than the mobile side. And we believe this kind of a trend to continue. And in the long run, the TV side, in terms of the user time spend, it might contribute 60% to 70% of our total user time spend.

And I need to add one point that the Connect TV has -- will be -- has more ample potential in terms of the membership and also PVOD monetization just because of the Connect TV has a much better user experience. And it's easier for users in terms of the willingness for paying for the users, it's much higher.

In terms of the chocolate company, you have mentioned previously, is called Meiri Heiqiao. It's not a merger or it's not a consolidation business investment. It's just a minority equity investment. And since our investment, it's -- the total valuation of Meiri Heiqiao has doubled, more than doubled..

This is Xiaodong. I think if we talk about original content as the total content cost, it's is around like 30%. But if you look at across different categories, it varies. For drama categories, it come for over 40%. For variety shows, it is higher over, I think, sometimes over 90%.

So we are not going to increase-the penetration in these 2 categories in the next few quarters. But I think the focus will be the quality, we are going to improve the quality of our original content in these 2 categories.

And in the coming year, I think we will try to understand how we are going to expand our original content strategy to other categories, including movies and animations. As we said before, we are going to do some small experiments in these 2 categories.

So overall, I think you will still see some increase of the original content, the total content cost next year. But I think ideal or stable level of the original content as we disclosed before, will be around like 40% to 60%, if you look at the mix between original content versus license copy rights..

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

My first question will be -- my first question will be about the new VIP program for iQIYI Lite, you should please share with us the differences from the original VIP programs? And how should it help you penetrate into low tier cities? And secondly, would you please share with us the impact of the new regulation on the reality shows after the event of Youth with You 3? Or would it impact your advertising revenue from reality shows in the future?.

[Foreign language] We apologize that -- we are sorry that we haven't been able to broadcast the last episode of Youth with You. And as we have already observed that the Beijing Municipal Bureau of Radio and television has issued a new guidance that we cannot vote through the purchasing goods or our buying membership plans.

So this means that the voting in the future would be only for free. And in terms of the impact in terms of our advertising revenues, we are still evaluating internally. So iQIYI Lite app, as you know, it's mainly catered to lower-tier city users. It's much more simplified in terms of the user interface versus our main app.

In terms of the membership plan on iQIYI Lite app, for these kind of members may need to watch certain advertising format. But in terms of the membership pricing, it's much lower than our main app memberships. Just because for this kind of subscribers, their willingness to paying for the content is not that high.

And so we want to leverage some certain kind of operation tactics to penetrate that..

I will now pass the call back to management for closing remarks..

So thank you for joining our call. We look forward to talking with you guys in the next quarter. Thank you. Thank you. Bye-bye..

This concludes today's conference call. Thank you for participating. You may now disconnect..