Thank you for standing by, and welcome to the iQIYI Second Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Chang You, IR Director of the company. Please go ahead..

Thank you, Operator. Hello, everyone, and thank you for joining iQIYI’s second 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.

Xiaohui Wang, our CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our Membership business and Mr. Xianghua Yang, Senior Vice President of movies and overseas 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..

Red Moon Pact, we integrated virtual characters and scenes into ad materials, substantially enhancing ad outcome. This new ad format was welcomed by advertisers and opened up ample possibilities. For content marketing, we have employed AI multimodal models to analyze plot information and generate key marketing points to improve marketing efficiency.

Finally, for our business performance in regions outside of Mainland China, over the second quarter, we sustained solid performance in our overseas business, with both total revenues and membership revenues continuing to grow annually and sequentially.

The influence from C-dramas and iQIYI’s original content continues to strengthen, evidenced by the 30% annual increase in membership revenue from top C-dramas during the quarter. Our localization attempt has also started to bear fruit.

The accumulated number of views of our original Thai dramas My Stand-in ranked first in a number of markets, including the U.S., Canada, and U.K. We have also made solid progress in animation.

How Dare You has attained remarkable viewership and revenue on our overseas site, reached a historical high among all iQIYI original Chinese animations, and even outperformed top Japanese animations in several countries. Leveraging our premium content, we have expanded local partnerships to boost global penetration and monetization.

Our efforts include deepening collaboration with telecom operators in overseas markets to enrich bundle products and strengthen promotion activities. For example, we have partnered with Etisalat, one of the largest telecom companies in the Middle Eastern and North African markets, to stream iQIYI’s content on their OTT platform StarzON.

This partnership will further enhance the influence of C-drama beyond Asian markets. In the future, we will continue to enhance the influence of the iQIYI brand overseas with premium C-pop content in key markets, accelerate production of local content, and explore diversified IP monetization opportunities.

In summary, looking ahead, we are dedicated to pursuing our long-term growth with a sustainable approach. We will roll out more diversified premium content, apply innovative technologies more extensively, and continue to enhance our team’s creativity and execution capabilities.

With that, we believe the flywheel effect of iQIYI’s content ecosystem will drive our long-term growths. Now, let me pass on to Jun to go through our financial performance..

Thanks Mr. Gong, and hello everyone. Let me walk you through the key numbers. In the second quarter, the total revenues were RMB7.4 billion, down 5% annually. The membership services revenue reached RMB4.5 billion, down 9% annually, primarily due to fluctuations in the content slate performance as previously discussed.

For online advertising, revenues decreased by 2% year-over-year to RMB1.5 billion. This was primarily due to the decrease in brand ad businesses, which again is due to the decrease of the variety shows we had during the quarter. That was partially offset by the healthy growth of the performance ad businesses.

Content distribution revenue reached RMB698 million and grew 2% annually. Other revenues increased by 16% annually to RMB784 million, partially driven by the increase of revenue derived from talent agency services and third-party cooperation. Moving on to costs and expenses. Content cost was RMB4.1 billion, down 2% annually.

Total operating expenses were RMB1.4 billion, flat annually. This was in line with our disciplined marketing spending strategy. Turning to profits and cash flow, the non-GAAP operating income was RMB501 million and its corresponding margin was 7%. The operating cash flow totalled RMB411 million and remained positive for nine consecutive quarters.

As of the end of the second quarter, we had cash, cash equivalents, short-term investments and long-term restricted cash included in prepayments and other assets, totalling RMB8.6 billion.

We have prudently managed our financial resources, striving to improve the overall health of our business and to optimize the financial leverage of our balance sheet. In August, we have completed the repurchase right offer for our convertible notes in 2026.

An aggregate principal amount of US$395 million was validly surrendered and repurchased, and only $157,000 aggregate principal amounts of the notes remained outstanding. For detailed financial data, please refer to our press release on our IR website. I will now open the floor for Q&A..

Thank you. [Operator Instructions] Your first question comes from Xueqing Zhang with CICC..

[Foreign Language] Thanks management, for taking my question. My question is about the competition landscape. We noticed that other platforms had some blockbusters this year, and our market share, which has been leading in recent years, has also fluctuated.

How does management view the current competition landscape for long videos, and what are your strategies? Thank you..

[Foreign Language] We will invite our CCO, Xiaohui, to answer this question..

[Foreign Language].

The intense competition within the industry has always been present. And this competition actually helps us to improve the overall quality and the richness the industry’s content, enhancing the competitiveness of the long-form video sector compared to other forms of entertainment, such as we often mentioned short-form video.

At the same time, it also motivates us to continually improve content quality in the future. We’ve always emphasized that the ultimate goal in the long-form video competition is to sustain a high-quality, diverse content supply and achieve a win-win situation between the content quality and the commercial benefit..

[Foreign Language].

Looking at our long-term market share performance, iQIYI has actually maintained a leading position in the core categories of drama and film for a long period of time.

Although we experienced some fluctuation in our drama market share in Q2, but after a thorough review and a targeted optimization, we’ve overcome the short term difficulties and returned to the number one position in drama category market share..

[Foreign Language].

In balancing the content quality and commercial returns, iQIYI’s performance continues to lead. The drama series To the Wonder and The Strange Tales of Tang Dynasty Season 2 are great examples, and we believe this advantage will further enhance in the future..

[Foreign Language].

Going forward, we will remain dedicated to creating high-quality content tailored for mainstream and female audiences. Enhancing our social insights and innovation, optimizing content scheduling strategies and strengthening the management in every facet of our in-house studios.

And we believe these initiatives are all aimed at improving the stability of our high-quality, diverse content supply..

[Foreign Language].

Our current drama reserve accommodates the viewing demand of the mainstream audience. We have a relatively ample reserve specifically for the core genres of ancient costume dramas aimed at female audiences as well as for the mystery suspense and the reality themed dramas..

[Foreign Language].

We will also continue to strengthen our capabilities for IP serialization development. For example, The Strange Tales of Tang Dynasty Season 2, which launched in Q2, is a successful case of serialized content development. And the third season will soon be introduced.

In the future, the well-loved series such as The Fearless and Under the Skin also launched their second seasons. And The Ingenious One Season 2 is also in preparation. Thank you..

Your next question comes from Lincoln Kong with Goldman Sachs..

[Foreign Language] Thank you, Management, for taking my questions. My question is about the membership business. How should we think about the prospects of membership growth in the future, especially for our subscribers, as well as the ARPU growth? Thank you..

We’ll invite our Senior VP of Membership Business, Youqiao Duan, to answer this question..

[Foreign Language].

From a perspective of membership structure, our cornerstone members represent a stable base of our subscribers and have remained steady. Fluctuations actually mainly come from the members who are attracted by new and popular content.

As the summer season arrives, our content offerings have positively influenced the return of these hit driven users and retention of long-standing members..

[Foreign Language].

In Q2, our ARM, which is the average revenue per member, maintained a solid year-over-year growth. The current level of ARM provides us with flexibilities in terms of operational tactics. In the near future, our focus will be on expanding the scale of our membership, but the ultimate goal remains to maximize membership revenue..

[Foreign Language].

In the future, we also plan to implement more proactive measures to optimize account sharing and combat piracy, thereby supporting the long-term healthy growth of our membership business. We’ll share specific plans with every one as the progress is made. Thank you..

Your next question comes from Maggie Ye with CLSA..

[Foreign Language].

Good evening, and thanks for the chance to ask questions. Regarding our overseas business, we’ve seen very decent revenue growth in past quarters by high-quality local production in addition to distribution of our premium Mandarin content.

As iQIYI international celebrates its 5-year anniversary, can management share your latest thoughts on business strategy and plan for our overseas business? Thank you..

[Foreign Language].

We’ll invite our senior VP, Xianghua Yang, who is responsible for the overseas business, to answer this question..

[Foreign Language].

We started expanding into the overseas market in 2019 and have achieved initial success. In 2023, our overseas operations actually reached full-year operating breakeven. Our goal for 2024 is to boost revenue growth while continuing to increase profit.

And for Q2 this year, the total revenues for overseas and also membership revenue both maintained healthy year-over-year and also quarter-over-quarter growth..

[Foreign Language].

In terms of content, we have discovered an optimal content mix suitable for our overseas markets, and we aim to further increase content offerings through different measures. For example, the popularity for Chinese language content overseas has significantly increased, becoming a major source of our top content for our overseas platform.

In fact, over the past three years, over half of the 20 most popular shows on iQIYI overseas were Chinese dramas, most of which were iQIYI originals. This demonstrates the influence of Chinese language content and the strength of our original offerings.

And in the future, we’ll continue to use Chinese dramas as the foundation of our overseas content offerings and actively explore opportunities to increase production of local original content.

And also, from the technology perspective, we will utilize AI technology to empower the different aspects of the long-form video industry, enhancing the production efficiency of iQIYI’s localized original content overseas..

[Foreign Language].

Regarding our local partnerships, we have already established deep connection and cooperation with local telecom operators in certain regions. And going forward, we aim to expand our partnerships to telecom operators in additional countries and to increase our collaboration with local partners.

And we believe these will enhance our brand awareness and content influence overseas.

And for our long-term objectives is to make iQIYI’s overseas platform the home of beloved Asian content, expanding the influence of Chinese language content while also increasing the coverage of local content, and continue to explore diversified IP monetization models..

[Foreign Language].

And our CFO, Wang Jun, just added to this. And he mentioned that in 2023, our overseas business actually reached full year operating breakeven. This is based on the fact that -- from a management accounting perspective..

This is based on the BU management account..

Correct, correct. And this is a very healthy trend that has developed over the past year. Thank you..

Your next question comes from Thomas Chong with Jefferies..

[Foreign Language] Hi, good evening. Thanks, management, for taking my question. As iQIYI has a lot of good IP, can management share your strategy of unlocking the IP potential in different areas rather than membership and advertising? Thank you..

[Foreign Language].

Our CEO is answering this question. He mentioned that content IP is the core asset of our company. Promoting the monetization of content IP in various forms, including off-line business, is an important and sustained effort that is key to enhancing our long-term value and competitiveness.

We actually describe this IP-based business model with a metaphor called eating a fish in multiple ways, which actually emphasize our ability to transform each piece of our content IP into numerous prospects, for revenue, thereby, we believe this will maximize its value across different markets and platforms..

[Foreign Language].

With many years of focus producing original content, actually, the value of our company’s IP assets has grown significantly. For instance, two years ago, in Q2 2022, our original dramas accounted for over half of our quarterly new release key dramas. And this proportion now has stabilized at around 70%.

And also our high-quality, original dramas have not only found success during their initial broadcasting period, but also have demonstrated a sustainable long tail effect, which maintained popularity over an extended period of time..

[Foreign Language].

We actually hope that the off-line experience business will become our second growth curve in the future. And we also noted the shift in consumer behaviour change in domestic offline commerce and cultural tourism sectors, where the premium content IP actually plays an increasingly important role in creating engaging experiences.

For example, our vast library of high-quality video content IPs actually serve as our core strength in this area.

For example, we leveraged the IP from the recent hit drama title called The Strange Tales of Tang Dynasty beyond its online presence, successfully introducing an immersive VR experience in cities like Beijing and Xi’an, these are key cities in China.

In addition, we’ve developed new derivative products such as card games designed to appeal to the taste of a younger demographic, further extending the IP’s reach and impact..

[Foreign Language].

And for the operational model, actually, we actually favoured a light asset approach which has a promising prospect for incremental revenue under limited cost..

[Foreign Language].

Actually based on our experiences this approach has actually been validated in terms of off-line experiences. And this model is now being able to be replicated and scaling..

[Foreign Language].

In addition to what I just mentioned, the VR theater experiences that I mentioned earlier, we’re also exploring further initiatives centered around our IP. For example, our Qixiaobei which is the IP merchandise stores, now also QiBubble Park, which is a theme park designed for children.

And these initiatives are actually developing in collaboration with our partners similar to what I just mentioned, the light-asset approach. And the aim is to provide users with a very comprehensive and engaged entertainment experience. Thank you..

There are no further questions at this time. I’ll now hand back to management for closing remarks..

Thank you, everyone, for participating in the call. And if you have further questions, please don’t hesitate to contact us. Thank you..

Thank you. Bye-bye..

That does conclude our conference for today. Thank you for participating. You may now disconnect..