IQ - Intrinsic Value and Financial Analysis - iQIYI, Inc.

Operator

Thank you for standing by, and welcome to the iQIYI First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead. .

Chang Yu IR Director

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's First Quarter 2024 Earnings Conference Call. The company's results were released earlier today and 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. Jun Wang, our CFO; Mr.

Xiangjun Wang, our CCO, Chief Content Officer; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business; Mr. San Ha Yang, Senior Vice President of Moelis and Overseas Business; and Mr. Fan Liu, Senior Vice President of Brand Advertising Business. .

Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, the management team will participate 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 are 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. .

I will now pass the floor to Mr. Gong. Please go ahead. .

Tim Yu

Hello, everyone. Thank you for joining us today. We kicked off the year with a strong first quarter as we continue to execute our high-quality growth strategy and achieved multiple historical highs, in key financials and operational results.

The non-GAAP operating income and its corresponding margin both reached a record high with income and RMB 1.1 billion and margin at 14%. .

The expanding margin is a natural result of high-quality growth.

For our Membership Services business, the monthly ARM growth to an all-time high, which is the sixth consecutive quarter of sequential growth, we are satisfied with the program and continue to believe that ARM remains one of the key drivers for unleashing the long-term value of Membership Services. .

In our Advertising Services, revenue from the performance has achieved double-digit annual growth and is historical high in Q1. We anticipate the momentum to continue as, it directly benefited from the growing adoption of generative AI, which is expected to yield greater returns on investment for advertisers. .

Content distribution revenue hit historical high as well reached RMB 928 million and grew 27% annually. This clear illustrates that our growing content production capabilities are creating more high-quality content that is recognized by television stations and other buyers. .

While we delivered impressive financial performance in the quarter, we maintained dominance in content. Data from Enlightent shows that our total viewership across major content categories, such as dramas and movies maintained the top spot in the market in Q1.

Notably, in the crucial drama general category, we have held the #1 position for viewership share for 9 straight quarters. Aside from our domestic achievements, we are also excited by the amplified reach and the influence of our content and the brand in the overseas markets. .

Now let's dive deeper into the performance of core business segments. Starting with Membership Services, we are committed to offering our users superior content, the finest user experience and enhanced number of privileges and benefits, which we believe will fuel the sustainable long-term growth of our Membership Services revenue.

Our focus extends beyond merely the quarterly subscriber numbers, as the revenue result ultimately reflect all the collective component contributing to that performance. With that, we believe the way we share the development of our membership business should be aligned as well.

Starting in Q1 of this year, we will stop reporting the quarterly average subscriber numbers and ARM. We will provide updates on key milestones related to subscriber growth and ARM as they are achieved. .

In the first quarter, we delivered membership revenue of RMB 4.8 billion, flat sequentially and down 13% from a year earlier. The year-over-year fluctuation was primarily due to the high base effects created last year with the relief of our mega hit, "The Knockout".

The surge in travel and offline entertainment during the very first Chinese New Year holiday of this year post-COVID also partially diluted the online activities..

Currently, among the various factors contributing to the revenue performance, we are intently focusing on enhancing the ARM and extending the lifespan of each membership, which serves as our principal areas of focus. We remain highly confident in the long-term growth potential of our membership business.

Our confidence is supported by the success of our ARM strategy, which reflects 6 consecutive quarters of sequential growth. This strong performance is driven by our ongoing efforts to improve operations, enrich product offerings, and enhance membership benefits, all of which have bolstered the value proposition of our members.

Given that our membership fees are affordable and the effective ARM remains modest, we have the opportunity to further refine our pricing strategy emphasizing the exceptional value of our premium content and services..

We have been working on improving ARM by introducing exciting services that add substantial value. Take the Express Package for example

cash purchase for the drama. Lonely Warrior [Foreign Language] reached a new high. The Express Package, not only brought in more revenue, but it also increased the popularity of the title. In fact, just one day after we launched this package, the drama hit its peak on iQIYI popularity index score.

We are making good progress in bringing additional value to our members while concurrently driving revenue and popularity. .

In summary, our strategy for our membership business involves consistently delivering premium content and streaming -- streamlining operations and making efforts to attract and engage users.

We also intend to adapt our membership offering to suit diverse user preference and bolster our loyalty program to motivate commitment to long-term premium subscriptions. Such initiatives are designed to foster loyalty and enhance customer lifetime value..

Moving on to Content. Maintaining market leadership in key content genres has reinforced our reputation as a diversified and high-quality premium content powerhouse. For 9 consecutive quarters, our drama viewership shares have topped to the industry. The quarter's newly released title highlighted the extensive range and depth of our offering.

We achieved meaningful advancements in the realistic genres, distinguishing ourselves from competitors through quality dramas infused with varied creative elements. This strategy has successfully broadened our content creation expertise..

Original programming remains the cornerstone of our content strategy. iQIYI Originals accounted for over 70% of our key new dramas launched in the first quarter, covering diversified themes..

In particular, War of Faith [Foreign Language] emerged as the first drama in this year and 13th in history to surpass iQIYI popularity index score of 10,000. Setting it apart from other war-themed shows. War of Faith, historical period of setting with financial intrigue, suspense and other creative elements.

This demonstrates our commitment to innovation as we continue to push genre boundary and introduce unique storytelling perspective. .

The well-received drama, Always on the Move [Foreign Language], which was released during the Chinese New Year holiday, recorded viewership share of over 27% at its peaked according to Enlightent. It also set a new record for drama viewership on CCTV-8 and its iQIYI popularity index score was 9,959, just shy of 10,000 landmark. .

After establishing our industrial leadership in the suspense genre with Light On Theater, we have continued to thrive in the comedy genre introducing 3 new titles under the Laugh On Theater brand this quarter.

This includes Our Parallel Universes [Foreign Language] and The Great Nobody [Foreign Language], both of which are drama spin-offs of our hit variety show.

Additionally, the new released, A Soldier's Story [Foreign Language] has broken iQIYI records for the highest popularity index score, highest revenue and the best ROI for Laugh On Theater production. .

During the quarter, we also released a collection of diverse high-quality dramas, such as Burning Flames [Foreign Language], Born to Run [Foreign Language], Detective Chinatown 2 [Foreign Language]. For the quarter, our movie viewership outperformed competitors as reported by Enlightent.

We released 24 major films across genres like crime, suspense and action including top-grossing theatrical releases on our movie channel. Meanwhile, 32 movies debuted on Cloud Cinema channel to positive audience reception.

We also observed encouraging early responses to our new action Action Master Season [Foreign Language] and Art Films Cinema [Foreign Language] brand releases. .

For variety shows, we made solid progress in both new releases and established IPs. Become a Farmer 2 [Foreign Language], leveraged the strong buzz of the first season, it achieved not only a notable boost in popularity and revenue, but also spurred a resurgence in viewership for the first season. In addition, HAHAHAHAHA 4 had a powerful season.

With a high level of interaction among guests, its popularity index surpassed 8,400 at its peak..

For animations, we got better at what we do and users responded well. Our original works, The Great Ruler [Foreign Language] and Against the Gods [Foreign Language] achieved the best performance for Domestic animations on our platform..

Our upcoming dramas feature standout titles such as Fox Spirit Matchmaker [Foreign Language], Follow Your Heart [Foreign Language] and As Husband as Wife [Foreign Language].

And our slate of recent releases, including In the Name of the Brother [Foreign Language] and others, have bolstered our reputation For delivering high-quality, diverse content with great audience appeal. Notably, City of the City became the highest-rated show during prime time on CCTV-1 this year.

In particular To the Wonder [Foreign Language] exemplifies our success in blending artistic merit with commercial success. The series, adapted from literary prose and spiced up with light comedy elements supports our pioneering eXave standard and offers a cinematic experience that sets a new industry.

Benchmark. .

Additionally, this series is the first to utilize our in-house developed cloud-based on-set production management system, enabling instant collaboration on daily shooting footage, remotely and largely boosting production efficiency. To the Wonder has achieved profitability while garnered domestic and international acclaim.

It topped the ratings on Douban this year, became the first 8-episode mini-series to air during CCTV-1’s prime-time slot, and was the first Chinese drama to be selected for the prestigious Long Form Competition at CANNESERIES..

The Light On Theater is set to introduce 6 titles in 2022, with notable ones such as the already released Tell No One [Foreign Language] and the upcoming Lost in the Shadows [Foreign Language] and Interlaced Scenes [Foreign Language]. In addition, we're broadening our genre focused theater Mode with 2 new brands

Microcosm Theater [Foreign Language] which focuses on premium mini-series that explore the nuances of everyday life, with To the Wonder being its first title. The Masterpiece Theater [Foreign Language] on the other hand, offers adaptations of esteemed literary works.

We believe the theater mode will further enhance content performance and commercial value..

Our Q2 movie offer -- offerings include socially relevant titles like Pegasus [Foreign Language] and The Pig, The Snake, and The Pigeon [Foreign Language].

Cloud Cinema will showcase YOLO [Foreign Language] a hit from The Chinese New Year release window, along with renowned director Zhang Yimou's Article 20 [Foreign Language] and the action-packed Suspect [Foreign Language].

Additionally, we are eager for the May 17 Theater release of Hovering Blade [Foreign Language] based on Keigo Higashino’s esteemed novel. .

With our variety shows, we have seen a strong return on our established IPs including The Detectives’ Adventures Season 4 and The Rap of China 2024. We Are also exploring new IPs in the reality shows genre with I Play Basketball in Hengdian and Wonderland [Foreign Language]..

Our original production capabilities for animations continue to improve. We expect the number of Kids’ animation titles we release next quarter to increase. In addition to sequels from existing series We will launch new IPs such as Fantastic Around [Foreign Language]. We also pressed forward with sequels of new animation IPs like Phoenix Guardians

The Golden Court Crisis [Foreign Language] and I'm The Blade Master [Foreign Language] in the martial arts and fantasy genres. .

We recognize that the core strength of the long-form video industry lies on consistently delivering High-quality content that strikes a balance between creative value and economic success.

Our edge in this industry is secured by combining elite talent and industry resources, rigorous content evaluation and management, sophisticated business intelligence, and innovative technology. .

As we progress through 2024, our approach will focus on crafting top-tier, diverse content that leverages our leadership in the drama category, while exploring advancements in other genres. We will also refine our release strategy to align with the evolving tastes of our audience..

Moving on to the Advertising Business. In the first quarter, ad revenue reached RMB 1.5 billion, up 6% annually, which was driven mainly by the growth of performance ads. Performance ads are the highlight of the quarter, the record high revenue was propelled by the growing adoption of generative AI which in turn improves ROI for advertisers.

In fact, we have successfully integrated generative AI tools into our IT advertising platform allowing advertisers to promptly create advertising materials on their own. These tools can be effectively reducing production costs while improving ad quality and boosting ROI.

For gaming and the short drama advertisers, ads created with generative AI tools have seen an increase in ROI by over 40% -- 50%. With the role of generative AI rapidly expanding, we are leveraging its broader potential to transform the world of advertising. .

On brand ad business side, our premium content continues to attract brand advertisers, with over half of the revenue stemming from content-targeted ads. A great example to this trend is the drama Always on the Move [Foreign Language], which achieved exceptional ad sales performance.

Additionally, the variety show Become a Farmer [Foreign Language], which debuted in 2023 has seen a notable 80% increase in revenue this year. .

By industries, the food and beverage sector stood out with solid increases in ad spending both annually and sequentially. The medical services and the communications sectors also registered substantial growth in ad revenue exceeding 20% on both annual and sequential business. .

Looking ahead, we set to see our resurgence in brand ad spending as second quarter as our traditional high season for brand ad business, and we have a strong lineup of variety shows, although we remain cautiously optimistic regarding the brand advertisement market for this year.

We anticipate domestic brands to show faster recovery than their international peers. .

Moving on to our Technology and Products, our dedication to advancing technology innovation remains steadfast as it plays a crucial role in driving the industrialization of content production, improving user experience and boosting operational efficiency. We look forward to the abundant opportunities that AI presents across our business.

We have been resonating the revolutionary impacts that the rest of AI technology is having on the evolving entertainment ecosystem. Other than the performance as discussed earlier, we also see the substantial benefits from integrating generative AI into the process of production and operations.

While, we are still at the initial stage of fully unleashing the potential of generative AI, it has meaningfully enhanced the industrialization of content production, contributing to the content quality improvements and cost saving. .

For example, we utilized our in-house developed data-driven platform, the iQIYI Content Production Management System, to meaningfully improve the hit ratio while enhancing content production and operational efficiency.

Our latest upgrades have expanded its scope from dramas to include variety shows, animation and movies and it is continuously refined to improve production and management capabilities. .

In addition, we have incorporated our broader range of AI tools into the system, streamlining everything from content selection to promotion.

Our new AI features not only can summarize novels and scripts but they also -- but they can also assist in crafting story outlines and character profiles, increasing producers' reading efficiency by several times. Additionally, our system skillfully handles voice restoration for actors in post-production, which has been implemented in major projects.

Beyond production, our marketing and the distribution efforts have been upgraded as well. We are now better equipped to produce compelling promotional materials, under our smart video search function offers more accurate content recommendations by effectively responding to plot-oriented searches and the conversational commands. .

On the user product front, we take great pride in our continuous commitment to improving the user experience, the introduction of Kids Mode on our Smart TV app, designed to collect content suitable for children has resulted in increased parental trust and the user engagement time. .

Last but not least, for our business performance in regions outside of Mainland China. We achieved solid annual revenue growth in the first quarter. Membership revenue grew both annually and sequentially with nearly 80% annual increase in markets such as Hong Kong and the U.K.

We continue to amplify the reach and influence of our content and the brand in the overseas markets. .

iQIYI Originals continued to gain traction among overseas audience, the overall viewership of Sword and Fairy 4 [Foreign Language] ranked first in all regions and categories on our overseas platform, topped popularity charts in Thailand, Vietnam, and Indonesia.

The second season of our Malaysian original Rampas Cintaku 2 continued its success over the first season boosted both traffic and membership revenue growth on our Malaysian site..

Leveraging our premium content, we develop local partnerships to boost global penetration and monetization. We have strengthened ties with telecom companies and tourism authorities in Hong Kong and Thailand and launched iQIYI C-drama slot on selected local TV station in Thailand..

Looking ahead, we aim to provide a steady slate of premium C-pop content to keep overseas market and accelerate the production of original premium content for local audiences.

Meanwhile, we will persist in our efforts to promote C-pop and local content through partnership with Southeast Asian TV stations as we have our brand presence in key markets, we are also committed to exploring a variety of IP monetization opportunities. .

In summary, the strong performance in the first quarter demonstrated the successful execution of our high-quality growth strategy. We recently celebrated our 14th anniversary.

As we step boldly into the future, we are seeing more exciting opportunities ahead, especially when we assess the power of generative AI, which could potentially transform the entire landscape of entertainment.

With this in mind, we are committed to leveraging the pioneering technologies to further enhance our ability to continuously provide high-quality content and extend our lead in the industry. .

Now let me pass on to Jun Wang for our financial performance. .

Jun Wang Chief Financial Officer

Thanks, Mr. Gong, and hello, everyone. We delivered a strong Q1 results with a record high operating profit and corresponding margins include cash flow and a healthier balance sheet. We believe we can utilize more tools to enhance shareholder value over time. .

Now let me walk you through the key numbers. In Q1, the total revenues were RMB 7.9 billion. Membership services revenue reached RMB 4.8 billion, remained stable sequentially and decreased 13% annually. The annual decrease as previously explained, was primarily due to the high base effect from the same period last year.

For online advertising, revenue grew by 6% annually to RMB 1.5 billion. The increase was primarily driven by the growth of performance and revenue, which achieved double-digit annual growth and hit the historical high in Q1, even compared with a high base from the last year.

Content distribution revenue also hit all-time high reached RMB 928 million and grew 27% annually. .

Moving on to cost and expenses. Content cost was RMB 4 billion, down 5% annually driven by our improvement in content strategy and operating efficiency. Total operating expenses was RMB 1.4 billion, down 12% annually primarily due to our discipline in the marketing spending and the reversal of allowance for credit losses. .

Turning to profit and cash flow. Our non-GAAP operating income was RMB 1.1 billion and its corresponding margin is 14%, reaching historical high. Furthermore, the operating cash flow totaled RMB 938 million, remaining positive for 8 consecutive quarters, reflecting the continuous improvement of our balance sheet. .

At the end of Q1, we had cash, cash equivalents, short-term investments and long-term restricted cash included in the prepayments and other assets of RMB 7.3 billion in total. .

Moving forward, we remain committed to creating long-term value for our stakeholders. We aim to continue to generate sustainable profit and cash flow and to further strengthen our balance sheet. .

For detailed financial data, please refer to our press release on our IR website. .

With that, I will now open the floor for Q&A. .

Operator

[Operator Instructions] Your first question comes from Xueqing Zhang in from CICC. .

Xueqing Zhang

[Foreign Language] Congratulations on the strong results. My question is about the membership business. The company did not disclose the subscriber numbers this quarter.

What's the reason for that? And how should we think about the outlook for the membership business in the longer-term?.

Tim Yu

[Foreign Language].

Chang Yu IR Director

[Interpreted] The CEO, Mr. Gong just explained why we didn't disclose the sub numbers and ARM because this only partially indicates the progress of our entire business. So disposing the numbers too much in detail, probably would disturb some of the development of our overall business. So for the details, we'll invite Mr.

Duan in charge of the membership business to explain further. .