iQIYI, Inc. (NASDAQ:IQ) Q3 2024 Earnings Conference Call November 21, 2024 6:30 AM ET

Company Participants

Chang You - Investor Relations Director
Yu Gong - Founder, Chief Executive Officer and Director
Jun Wang - Chief Financial Officer
Youqiao Duan - Senior Vice President, Membership Business
Xiaohui Wang - Chief Content Officer

Conference Call Participants

Xueqing Zhang - CICC
Lei Zhang - Bank of America
Maggie Ye - CLSA

Operator

Thank you for standing by and welcome to the iQIYI Third Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a 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.

Chang You

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's third quarter 2024 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. Jun Wang, our CFO; Mr. Xiaohui Wang, CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business; Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Business; and Mr. Gang Wu, 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 US 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.

I will now pass on to Mr. Gong. Please go ahead.

Yu Gong

Hello, everyone, and thank you for joining us today. Throughout our 14-year company history, our ability to reinvent ourselves and innovate has been our core advantage against competitors, and these strategies have remained unchanged for navigating all kinds of challenges. At this moment, we have identified two key trends.

First, consumers become more prudent because of the macro headwind. Secondly, consumers now are facing more entertainment options, including the free mini and short dramas, which is growing rapidly.

As always, we hold strong belief that premium long-form videos remain one of the most fundamental and irreplaceable forms of entertainment. Their unique ability to influence a wide audience and provide emotional value is unmatched by any other form of entertainment.

Meanwhile, facing evolving industry and market dynamics, we should proactively reach out to these new opportunities to ensure our long-term, healthy and sustainable growth. That's why we have been making a series of strategic upgrades.

Key initiatives include, first, we have optimized the production of dramas, by refining storytelling, pacing, plot structure, and character development so as to better match the audience's viewing preference. This will further improve the popularity and bring better returns.

Second, we have been upgrading and will continue to upgrade our APPs to include mini and short dramas as part of our content offerings. The main iQIYI App will maintain its focus on long-form video content and subscription-based model, complemented by free mini and short dramas and advertising model.

In contrast, the upgraded iQIYI Lite App will focus on free mini and short dramas and the advertising model, complemented by long-form videos and subscription model.

Third, we will increase investment in the acquisition and distribution of mini and short dramas. Fourth, we have optimized our membership product and services system by combating unauthorized password sharing and introducing an attractively priced family account option. The goal is to enhance member conversions and expand the scale of our membership.

And beyond these initiatives, we would apply AI more widely across our ecosystem, expand our presence in overseas markets, and explore possibilities in IP derivatives and offline experiences. We believe these efforts will enhance our revenue and profitability over the long-term.

Now, let's move on to the details of our core business segment. Starting with mini and short dramas. We are adapting our content strategy and business model to align with evolving market trends and consumer preferences by introducing mini and short dramas into our offerings.

Distinct from long-form videos in format, storytelling style, and audience reach, mini and short dramas serve as a great complement for our existing lineup of traditional long-format dramas, movies, and variety shows.

Mini dramas feature episodes lasting one to five minutes in vertical format and short dramas span five to twenty minutes in horizontal format. These shorter formats offer a quicker storytelling pace cater well to users seeking quick entertainment breaks and have gained considerable popularity among audiences.

From a business model perspective, in the future, mini dramas will be available to all members at no extra cost. Non-members will enjoy the free-to-watch mini dramas or choose to pay-per-view to access those exclusive to members.

Short dramas will mirror the approach taken with our long-form content, they are free for members, while non-members will have access to upgrade free-to-watch second window. This dual offering caters to deliver viewer demands, while supporting the growth of our subscriber base and expanding our monetization opportunities.

Moving on to long-form videos, which are fundamental to our content ecosystem. Starting with the core drama category, we regained the number one position in viewership market share during the quarter, according to Enlightent Data. This was driven by the launch of multiple titles that gathered high acclaim from users.

Notably, the second season of Strange Tales of Tang Dynasty [Foreign Language] became the 14th drama to break the iQIYI popularity index score of 10,000. Not only the series third season is already in production, this IP has been expanding its influence from online to offline domains showcasing our success in IP development.

Also the new release For the Young Ones [Foreign Language] received the highest iQIYI popularity index score among dramas with less than 20 episodes. Other titles such as Interlaced Scenes [Foreign Language], Born to be the One [Foreign Language] and Wind Direction [Foreign Language] were all released to widespread praise.

While we are proud of our performance in crime and reality drama genres, we recognize certain areas where we could improve. For example, the limited supply of key female-oriented costume dramas in the third quarter impacted kids title-driven members. To this end, we aim to enhance the steady supply in this genre, while also better aligning content genres with optimal broadcasting windows going forward.

For variety shows, our innovative new title, The King of Stand-Up Comedy [Foreign Language] reinforced our strong presence in the comedy genre. According to Enlightent data, it dominated the viewership charts for ten consecutive weeks and largely outperformed other shows in the same genre.

It also achieved the second-highest peak popularity ever recorded for iQIYI exclusive variety shows. What's more impressive is that the show has not only propelled some stand-up comedians to widespread fame, but also played a key role in boosting the industry and capturing the attention of audiences.

For movies, we have maintained our leading position in viewership for 11th consecutive quarters according to Enlightent data. The performance was underscored by the theatrical releases like Successor [Foreign Language] and No More Bets [Foreign Language] which ranked first and second, respectively, on our popularity index rankings.

For animations, our production capabilities for Chinese animations continued to improve as evidenced by an increasing share of revenue generated from our original titles. Along with the ongoing release of the highly popular How Dare You? [Foreign Language] we also launched The Legend of Sky Lord [Foreign Language] and A Moment But Forever [Foreign Language] receiving positive feedback.

Leveraging the exceptional quality of our premium content, we have earned broad recognition from reputable Chinese industry awards. At the 34th Flying Apsaras Awards [Foreign Language] we topped the list among online video platforms with eleven honors and we also secured seven honors at the 32nd China TV Golden Eagle Awards [Foreign Language]

Turning to our content [Foreign Language] turning to our content pipeline, we remain committed to providing our users with top-notch long-form videos. This was highlighted during the iQIYI iJOY Conference, our flagship marketing event, where we disclosed an exciting lineup of over 300 titles that are set to premiere in the years 2024 and 2025.

For costume dramas Fangs of Fortune [Foreign Language] was released and will be followed by the much anticipated female-oriented dramas Love Song in Winter [Foreign Language] and Moon Embracer [Foreign Language].

In reality and suspense genres, audiences can look forward to We Are Criminal Police [Foreign Language], Under the Skin Season 2 [Foreign Language], The Fearless Season 2 [Foreign Language], and Let Wind Go By [Foreign Language].

Beyond dramas, our movie offerings include the already-released hits Upstream [Foreign Language], Go for Broke [Foreign Language], and Tiger Wolf Rabbit [Foreign Language], with upcoming titles such as The Volunteers: The Battle of Life and Death [Foreign Language]. Additionally new online films and iQIYI original films are on the horizon.

In terms of variety shows, we are introducing fresh IPs like My Zone [Foreign Language] and The Blooming Journey [Foreign Language]. For animations, the Q4 pipeline features major titles like the exclusive Dragon Ball DAIMA [Foreign Language] and our original martial arts IP Wind Driver in Tang Dynasty [Foreign Language].

Move on to membership services. Membership revenues in the third quarter was RMB4.4 billion, down year-over-year. There are three areas that influenced the membership revenue performance.

First, as I previously mentioned, although we launched good quality titles in the quarter, there's room for improvement in the supply of premium female-oriented and ancient costume dramas, which are especially appealing to members driven by hit titles.

Second, amid the current macro headwinds, users drawn to hit titles have grown more cautious in spending, and a broader selection of entertainment options is also seeking to capture their budget and attention. Lastly, the high base effect from last year continued to play a part in our current figures.

Our innovative value-added services continued to gain traction among users. Notably, we launched Express Package for 13 dramas in the quarter, leading to more than 40% sequential growth in cash purchase, reaching a historical high.

Additionally, we further enhanced member benefits to encourage upgrades to high-tier plans and boost member engagement. This included more than 20 offline events such as fan meetings, early screening events and family fun days.

As always, our primary goal for membership services is to maximize revenue performance. To fulfill this goal and to proactively adapt to the current consumer sentiments, we are making modifications to our membership offering.

Key initiatives include, first, we are combating unauthorized membership account password sharing to enhance account security. Meanwhile, on November 12, we introduced the family account option as a better solution for account sharing.

Through this program, monthly auto-renewing Golden VIP members have the option to add a separate family account for just RMB8 per month. Each account, both the primary and the family add-on will maintain separate user profiles and ensure an uninterrupted and personalized viewing experience.

Secondly, the ad-supported basic membership plan, which was previously exclusive to iQIYI Lite, has now been expanded to major iQIYI products. This initial performance is in-line with our expectations. Last but not least, content serves as one of the key drivers of our membership business. Integrating mini and short dramas with our top-quality long-form video titles introduces a unique mix that caters to diverse viewer preferences.

Moving on to the advertising business. Advertising revenue during the third quarter was RMB1.3 billion, down year-over-year. Performance ads remained the highlight during the quarter, gained steady growth annually, driven by the solid performance in e-commerce, internet, and mini dramas sectors. The growth was also fueled by our advancements in AI applications, with CPM for AI-powered ads improving by over 20% compared to traditional ads.

For brand ads, revenue declined annually due to weak advertiser sentiment amid the macro headwinds. Especially, we proactively reduced investment in variety shows in response to the macro headwind to avoid financial setbacks, which led to a major decrease in brand ad revenue.

Nevertheless, content-related ads remained popular among brand advertisers. Titles such as The King of Stand-up Comedy, The Moon is Shining and Strange Tales of Tang Dynasty Season 2 attracted the largest share of ad budgets on our platform. Going forward, we will focus on expanding our advertiser base especially among local brands and capturing a greater share of budgets from top-tier clients.

Moving on to Technology and Products. We are making solid progress in driving technology innovations to improve user experience and operational efficiency. For example, we made upgrades to our products across all devices, which included enhanced interactive bullet chat capabilities, improved audio quality, better video sharing and download options and refined recommendation features.

We have also made further progress in advancing the industrialization of the entertainment business as our virtual production technology has now reached the mass production stage. iQIYI is one of the first streaming platforms in China with the ability to handle the entire virtual production process for dramas, including production, cost evaluation, technical design, and supervision.

This capability allows us to manage multiple projects simultaneously. In addition, the drama Shadow Love [Foreign Language] is the first in China to apply the latest version of Unreal Engine into Virtual Production. We have also upgraded the iQIYI Virtual Production Studio, with technical indicators meeting the highest standards both in China and internationally. This tech upgrade is expected to effectively enhance our mass production capabilities moving forward.

Our recent advancements showcase the broad utilization of AI to improve business efficiency. AI plays a central role in advancing our operations, especially in content translation and dubbing for our overseas business.

Our AI-driven approach has enabled efficient and highly accurate multilingual translation and multi-tone dubbing services, dramatically reducing the time it takes to release Chinese content overseas and cutting down on translation costs. Moreover, we have developed an AI system capable of rapidly generating plot tags for our content library.

This innovative tool has shortened what used to be a months-long manual task into a matter of days. In fact, we have produced plot tags for over 12,000 movies, achieving an impressive accuracy rate of over 92%. The casting process has seen similar improvements with AI swiftly analyzing and matching actors to the right roles, which largely speeds up producers' decision-making workflows.

Finally, for our business performance in regions outside of Mainland China. We recorded solid performances in our overseas business in the third quarter, with both total revenue and membership services revenue gained annual and sequential growth.

Notably, membership revenue from Hong Kong, UK, Brazil, and Australia grew over 40% annually. The average daily number of subscribing members overseas also increased annually and sequentially, with Brazil, Mexico, Hong Kong, and Thailand seeing annual growth exceeding 45%.

The influence of C-dramas continues to strengthen overseas. In the third quarter, total views of Love's Rebellion [Foreign Language] topped the viewership rankings across multiple markets, including the US, Australia, Japan, and South Korea.

Additionally, we successfully expanded the influence of our original production Strange Tales of Tang Dynasty Season 2 beyond Mainland China. The series made international debut with a premiere in Singapore at the end of July marked the first ever overseas premier screening for our premium C-dramas.

For local content, we launched a number of dramas that received positive feedback. Among these The Lady and Her Lovers recorded the highest daily revenue among all Thai dramas released on our platform in 2024. The show also ranked first on Google in Thailand, greatly outperformed other shows in the same time slot.

As we head into the fourth quarter, we will continue to expand our local partnerships and explore additional monetization opportunities. This includes deepening the bundled package cooperation with telecoms providers in Thailand, Malaysia, Singapore, and Hong Kong.

In addition, we aim to amplify the influence of our content and enrich membership benefits through diversified offline events.

On November 1st, we hosted our first iJOY Conference outside of Mainland China. As we proceed through the remaining months of Q4, we are set to launch a series of appreciation events and promotions for our members.

Additionally, we're excited about the forthcoming international rollout of more high-quality content. Notably, our talent show Starlight Boys was introduced on October 26 and has already received a positive reception from our audience.

In Summary, looking ahead, we remain committed to driving innovation and advancements across our business catering to the dynamic entertainment needs. Our targeted initiatives, such as launching mini and short dramas will bring enriched entertainment experiences and further strengthen our commercial capabilities. These efforts are supported by our deep knowledge of both content and users, coupled with our vast industry resources.

In parallel, we will deepen our adoption of AI technology, advance our overseas expansion, and fully leverage the potential of our IPs. These strategic efforts are aimed at driving our company towards greater sustainability and success.

Now let me pass it on to Jun to go through our financial performance.

Jun Wang

Thank you, Mr. Gong, and hello, everyone. Let me walk you through the key numbers.

In third quarter, the total revenues were RMB7.2 billion, down 10% annually. The membership services revenue reached RMB4.4 billion, down 13% annually for three reasons as previously discussed by Mr. Gong.

For online advertising, revenue decreased by 20% year-over-year to RMB1.3 billion. This was primarily due to the decrease in brand ad business, partially offset by the growth in performance ad business. Content distribution revenue reached RMB814 million and grew 52% annually and other revenues decreased by 8% annually to RMB729 million.

Moving on to costs and expenses. The content cost was RMB4 billion, down 5% annually, primarily due to lighter movie offering in the quarter. The total operating expenses were RMB1.4 billion down 5% annually primarily driven by the more disciplined management of the marketing spending.

Turning to profits and cash flows. The non-GAAP operating income was RMB369 million and its corresponding margin was 5%. The operating cash flow totaled RMB243 million, positive for ten consecutive quarters. At the end of third quarter, we had cash, cash equivalents, short-term investments and long-term restricted cash included in the prepayments and other assets of total RMB4.7 billion.

For the detailed financial data, please refer to our press release on our IR website. Now, I will now open the floor for Q&A

Question-and-Answer Session

Operator

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

Xueqing Zhang

[Foreign Language] Thanks management for taking my question. My question is about mini and short dramas. As Gong mentioned in the prepared remarks, the company has enhanced the integration of mini and short dramas. Can management elaborate a little more on it and what's our strategy for mini and short dramas? Thank you.

Yu Gong

[Foreign Language] The CEO, Mr. Gong, is answering this question. Starting from the end of September this year, we added mini dramas and short dramas into our content ecosystem. And these two type of content are very much differentiated from a traditional long-form video content. So they are very good complement to our content offerings.

[Foreign Language] Especially for this year, the three mini dramas model have been rising significantly and then the user scale is at a pretty sizeable scale and it has been growing. So now is a good time to enter.

[Foreign Language] Okay. So for mini dramas, we classify them as they are one to five minutes long in vertical format and then for short dramas, there are 5 to 20 minutes long in horizontal format. And for now, we're focusing on the mini drama segment.

[Foreign Language] In the past two years, we participated in a mini dramas by participating in performance app model.

[Foreign Language] And we have been actually innovative in this mini drama sector by innovating different models and formats. For users, it used to be participating or watching the content by free or pay per view. And we now introduced the subscription model to this business model. And for our current subscribers, they can watch vast majority of the mini dramas for free and then pretty soon in the future, they will watch everything for -- mini dramas for free.

[Foreign Language] For the current business model, there are three advertising model and then or they can do pay per view. And we actually introduced a subscription model to the business model and we believe this will be positive and constructive for the membership retention and also to get new users.

[Foreign Language] In terms of content strategy, we will develop the mini dramas through various methods, including the licensed copyright of full rights buyout and profit sharing.

[Foreign Language] Going forward, we'll focus on the premium high content of the mini dramas and then eventually we will develop a unique style that's generated by iQIYI belongs to iQIYI.

[Foreign Language] And we hope in the future that for iQIYI's mini dramas in terms of the content production quality and also the value provided to users, it will be a further improvement from the current level.

[Foreign Language] Thank you.

Operator

Your next question comes from Lei Zhang with Bank of America. Please go ahead.

Lei Zhang

[Foreign Language] Thanks management for taking my question. I want to follow up on the short drama side. Can you share with us the competitive edge in investing short drama and any impact to our content cost in the future? Thank you.

Yu Gong

[Foreign Language] The CEO, Mr. Gong, is answering this question. So in terms of our advantage in mini dramas, first of all, we have advantage in products and technology. For mini dramas, currently -- materially -- a material amount of the traffic is happening on the mobile side. So on the mobile side, we have two major applications, the iQIYI App and also iQIYI Lite. So for these two apps, we have very mature technology and infrastructure and also a good user base. And actually a good site and actually a good portion of the users are subscribers. So basically, based on that, when we add a new content genres to this and then combine it with a good upgrade to the application, it will be a good adaption to the current strategy.

[Foreign Language] For the first upgraded version of the iQIYI app actually have been released already. We're doing the API test right now. So most of the users when you download the or upgraded the application, you will see the changes.

[Foreign Language] For iQIYI App, it will continue to focus on the long-form video content. From the business model perspective, it will be majority focused on the subscription model. And for iQIYI Lite application, it will focus on mini dramas and for dramas mainly driven by the advertising model.

[Foreign Language] The vast majority of the content providers for mini dramas are iQIYI's existing partners. So cooperation in these new categories are further expanded and our deepened -- our partnership scope allowing us to rapidly scale up in these areas and then at a relatively little cost.

[Foreign Language] So basically the operational rules or the principles in terms of managing these two type of content, the long-form video content versus mini dramas are relatively similar or don't have a major changes. So it will be pretty fast for our teams to pick up and then master in this.

[Foreign Language] In terms of the funding for the content for mini dramas, there are only two aspects. First of all, we'll lower the investment in terms of the low ROI in long-form video content. And then secondly then we will scientifically and also rationally increasing the budget for mini-series.

[Foreign Language] And that's it. Thank you.

Operator

Your next question comes from Maggie Ye with CLSA. Please go ahead.

Maggie Ye

[Foreign Language] Good evening. Thank you for this opportunity to ask questions. My question [Technical Difficulty] membership. In October, we announced the launch of family account option, wondering if management can share more insights into the strategic consideration around this initiative, especially given the current macro environment and consumer trend? What's our expectation on this strategy over near-term and longer term? How is the initial feedback we received from consumers and users so far since the introduction? Thank you.

Chang You

Thank you, Maggie. And we will invite Mr. Duan, who's in charge of this business segment to answer this question.

Youqiao Duan

[Foreign Language] iQIYI's family account is a high-cost effective. Shared membership service plan we introduced to enhance the user experience for family members. It better serve users' independent and diverse viewing needs and user scenario.

[Foreign Language] So the family account and the primary account are actually standalone membership accounts with individual passwords and also playback history. So this not only effectively improves the user experience but also protects the account security.

[Foreign Language] And as you know that the video consumption needs of the elderly and the young demographics are steadily increasing and the family account is actually designed to effectively address their challenges in account management and accessing strong content.

[Foreign Language] The membership account is an innovative attempt in the membership product model which has positive impact on improving membership conversion and revenue. So going forward in the future, we'll continue to combat password sharing and offer users more cost effective choices and aim for the long-term healthy development of the membership business.

[Foreign Language] The family account was actually officially launched on November 12, and we will observe the performance for some time before sharing the user feedback and data outcomes with everyone. Thank you.

Operator

Your next question comes from Zihui Zhao with Guangfa. Please go ahead.

Unidentified Analyst

[Foreign Language] I will translate myself. Dr. Gong has mentioned, the long-form video are fundamentals to iQIYI's content ecosystem. My question is about your strategy for production of dramas. Could you share with us about the length seeing an innovative direction of your future drama series? Thank you.

Chang You

Thank you. And we'll invite Mr. Xiaohui, our Chief Content Officer to take this question.

Xiaohui Wang

[Foreign Language] We believe although there have been some cyclical fluctuations in the industry, we believe that the recovery of the market confidence and user demand long-form videos will still be one of the strongest demand among users in the mid to long-term. We believe it will remain at the core of iQIYI's content ecosystem as well. So going forward, we will enhance the sustainability of a diverse high quality content supply through powerful reform measures. Continue to achieve a win-win situation for both content quality and commercial revenue.

[Foreign Language] Based on the insights into societal sentiment and also the changes in user viewing practices, we believe we will comprehensively upgrade the production and operational mechanisms for dramas, films, animation and variety shows. We will improve the production and content launch efficiency, focus resources on creating high-quality works and strengthen the commercial aspect of the content.

[Foreign Language] For content planning, we will structurally optimize the process by improving the coordination of the number of new dramas, episodes and genres and will reasonably reduce the number of key new drama releases each year. We will strictly curate project selection to prioritize excellence and concentrate resource allocations on premium content with high commercial value. So from inception all projects will embody commercial appeal, mass market resonance and contemporary relevance.

[Foreign Language] For content evaluation, we will establish stricter assessment standards that focus more on revenue capability and innovation ability within the framework of the content related cost ratio.

[Foreign Language] For content creation, we will optimize scripts and filming techniques to align with users' evolving viewing preferences and simultaneously, we will aim to deepen our understanding of social trends and create works that resonate more profoundly with contemporary societal emotions and takes.

[Foreign Language] For content production, we'll strengthen project management and quality control, thoughtfully monitor project progress and work with partners to reduce cost and improve production efficiency.

[Foreign Language] And from a team building perspective, we are committed to the continuous improvement in our in-house studio mechanism. Our studios which are structured around the producers, focus on consistently attracting high quality talent from the market. We aim to cultivate healthy internal competition by establishing mechanisms that reward innovation and promote distinct content styles. This strategy ensures ongoing evolution through a process of natural selection where only the excellence drives. And that concludes the answer to this question.

Operator

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

Chang You

Thank you, everyone, for participating in the call today. If you have further questions, do not hesitate to contact us. Thank you again. Bye, bye.

Yu Gong

Thank you.

Operator

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