Earnings Call: Q1 2021

May 18, 2021

Earnings release

Good day and thank you for standing by. Welcome to the iQIYI First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Fan Liu, Investor Relations Director of ICE. Please go ahead. Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Q1 2021 earnings conference call. The company's results were released earlier today and are available on the company's Investor Relations website atir.qiyi.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO Mr. Xiaodong Wang, our CFO Mr. Xiaohui Wang, our CTO, Chief Content Officer and Mr. Shao Hua 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, We will go through the financials and guidance. After our prepared remarks, Xiaohui and Jianghua will join Mr. Gong and Xiaodong in the Q and 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 In this letter, Mr. Gong shares 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 advantage, From the perspective of users' mindset, video content can be defined as delicious, Entertainment and interest based video, of which iQIYI mainly focused on the latter two. Our iQIYI app focuses on entertainment videos and our Sike app on interest based videos. The entertainment video market has extremely high entry barriers, including the economics 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 the database, Our knowledge on the industry and our affiliation with the key content talents, iQIYI has established a solid leadership. For interest based videos, we will continue to invest in Feiqe 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. 2 supporting data. 1st, As of the end of Q1 2021, the number of accumulative paid accounts has exceeded 490,000,000 And 2, in Q1 2021, the monthly average number of subscriber members We have membership benefits for any given day has reached nearly RMB160 1,000,000. 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 announce outstanding talent in the content production industry and upturn more premium IPs Production. The industrialization of video production includes the restructuring of industrial rules And the intelligent production techniques. Thanks to the development of new technologies, our intelligent production system and the 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 Q1 update. Hello, everyone. We hit the peak of the year with a solid quarter. Our revenue increased both hugely and the year over year in the Q1, which is above our previous guidance. Besides, in recent quarters, While revenue has been relatively stable, our content costs have been effectively controlled and the 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 the monthly time spent all ranked 1st During the Q1 of 2021, for our membership business, as of March 31, 2021, we had 105,300,000 subscribers with 3,600,000 net additions during the quarter. Membership service revenue increased by 12 Xuexi was a broadcaster during the spring festival. 2nd, users spend more time on long form media during the major holidays, such as the spring festival, Driving up the overall traffic on our platform, 3rd, we introduced various innovative marketing initiatives During the holiday season, in addition to overall membership growth, our sequential growth in membership service revenue was also due to 2 factors, including: 1st, We increased the willingness to pay among users. 2nd, ARPU growth driven by the headline pricing adjustment in November 2020, which is well accepted among users in the industry. Meanwhile, we strive to expand Our total addressable markets were launching a new VIP plan for iQIYI Lite and expanding our footprint overseas. Though we still expect short term volatility in our subscriber number, 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 service revenue increased by 25% year over year. Even though the Q1 is a traditional For our advertising business, we were able to achieve business crucial and year over year growth. Like the trend in the Q1 of 2020, growth was mainly attributed to strong content and marketing revenue. Our content and marketing revenue recorded decent growth, driven by major variety shows and dramas. The content and marketing revenue account for around 64% of our brand advertising revenue in the Q1, which was a peak for the last few quarters, This again validates advertisers' recognition of our premium content. Next for content, We continue to lead the industry in terms of total number of top titles and viewership across the category, including drama, For the shows, animation, and other content, for dramas, our exclusive customer drama, My Heroical Husband, become an instant hit after its launch. It's innovative the innovation in themes and the star provided by the whole new way of creating good customer drama, which will have an impact on our future productions. In original movies, our original movie On the World Crash has been screened in theaters, which are box office of over RMB300 1,000,000 and has received high ratings from various platforms. For the Q2, key dramas in Our pipeline including A Love for Dilemma, Court's Law History, Reva's Life's Secret and others, Love for Dilemma and the Corn Lady was aired in April and well received by our users. We keep promoting Short drama theaters France with a brand featuring romantic content scheduled to launch May 20 this year. We will also launch new content In Mr. Theater later this year, in animation, new content to be aired including No Choice But to Betray the Earth, The Tale of Wonder Keepers Under light admission, Immortal Father, the son-in-law, Zui, as well as others, despite some uncertainties in our content schedule in the coming months. We believe that the impact will be Medicated by our diversified content pipeline, especially self produced dramas, with over 10 years of IG's growth, we strongly We believe that the long form video is irreplaceable as an entertainment format. In the meantime, Through continuous technology innovation 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 Q1. For the Q1, total revenue reached RMB8 1,000,000,000. Membership business continued to be our largest business pillar, accounting for 54% of our total revenue. Our advertising business recorded notable rebound of 25% increase on a year over year basis. Both content distribution business and other business achieved a solid growth on a year over year basis. Our cost of revenue decreased year over year, mainly due to the 9% year over year decline of content costs. The decrease was primarily due to the decline of licensed content costs. Our operating losses margin on a GAAP basis continued to narrow by 16% year over year to 13% for the 4th Executive quarter. As of March 31, 2021, the company had cash, cash equivalents, For detailed financial data, please refer to our press release on our IR website. For the Q2 of 2021, we expect the total revenue to be between RMB7.21 billion RMB7.65 billion, a 3% decrease year over year. This forecast reflects IQ's current preliminary view subject to change. I will now open the floor for Q and Chinese speaking participants are requested to ask your question in Chinese first and then translate your question into English. Your first question comes from Thomas Chong from Jefferies. Please ask your question. Thanks management for taking my questions. 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 strategy is And any KPI that can be shared, that would be great. Thank you. Okay. Over the past 2 years, as you may have observed, that the regulation intensity It's almost stable. You can observe that before some kind of a season, for example, in the upcoming July First day, there will be an 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. Okay. For Sui Ke app, we right now don't have a very quantitative KPI. Over the past 1 year, we have been able to find a Because value proposition, which is based on the interest based video community. All the things, including the user Interaction system is doing 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 sad, Bakri, before the year end, we won't have the very big promotion. In terms of the user data, It won't be very roughly in the near term. We will still have a very Your next question comes from Piyush Mubayi from Goldman Sachs. Please ask your question. Thank you for taking my question. 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 can be continued to improve on as we look forward for the rest of the year. That's the first. The second is, as we look at ARPU at this stage, following The competition is joining you with raising pricing or raising effective ARPUs. What is the outlook for where this number could go through for the rest 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. Thank you. This is Xiaodong. I will answer the first question about the content cost and then I will let Xiaohua Comment on ARPU trend and overseas business. For the content cost, I believe the total content cost we spent this year We'll continue to be optimized in the next few quarters, which means that the percentage of your revenue, I will Definitely, you will continue to see the trend of decreasing of the content cost. But as we discussed before, I We are thinking about like the in short term, we are thinking about like expand to 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, the hit ratio improved. I think as we discussed before, the total spending on content cost From like the absolute dollar amount perspective, I believe we'll continue to be optimized in the next few years. Thank you. We actually very welcome our peers to follow our suite. For the detailed information, I will turn over to Xiaohua for the detailed information. 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's definitely During a very rapid growth stage, in terms of the future direction for the business, I think ASEAN region will be Major location we are looking at. 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 the case for overseas expansion because in terms of the content, It has actually very strong characteristics for the regions. It's also more the case that in terms of the Production capacity for the films and animations is also far from enough in terms of the capacity and the diversity. So we will continue to increase expanded capacity for our in house production, Particularly when 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 in house production capacity. I want to add one point that Since 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 medical view. So this time is our is the first time since our IPO 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 read the shareholder letter. I want to stress that the major challenge here is actually not that short form video or other entertainment format Grabbing our time spent, our biggest challenge for us is still the content itself on our platform. In terms of the licensed content, on the TV drama categories, as you may know, the content for satellite TV Content has been roughly shrinked. This has caused the same issue for the content we can get on our platform. On the fuels category, because of the COVID-nineteen pandemic outbreak And also because of the change of the broadcasting rules of Hollywood films, We also have a scarcity in terms of the film content supply in our platform. Because of the shrinking TV drama content for satellite TV, we needed to focus Our in house production capacity to a more mass audience in this market just because they need more content from our category. So as a result, we all need to enhance the investments in terms of the numbers of in house studios we have. And in addition, we need to increase our budget on the investments on the films and auto 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 dramas. In terms of the video viewership On the user traffic, the first category is drama, second is film. And for animation and variety In addition to increase the numbers of in We also needed to improve the industrialization magnitude of the video production. The solution is managed to take advantage of the technology. This includes 3 parts. 1st, We need to increase the forecast corrects of the financials and also user traffic about certain business intelligence techniques. 2nd, we need to take advantage of the AI or other technologies And third, we need to take advantage of the intelligence tools to reduce the cost and also improve the efficiency, ROI. 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 Let's start over the next 1 or 3 years. So put it in a word, Our increased numbers of the in house studios is the most important supporting pillar for us. Your next question comes from Zuzing Liu from UBS. Please go ahead. Thank you, management, for taking my question. I have two questions. We have In greater fluctuation of subscriber growth since last year, how can we mitigate such volatility? And secondly, we are supposed to The more original contents launched in second half, can we expect a prominent improvement of content quality in short term? Thank you. The primary reason behind the volatility of our members subscribing members is that back of 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 So this is a very clear phenomenon. So the key solution here is that improve the content quality, which will be announcing in the second half. I recommend that you look at our APP. We have a new feature here, which is calling the upcoming new content, which included 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. Thank you. Thank you. Your next question comes from Eddie Leung from Bank of America Merrill Lynch. Please ask your question. Just a few quick questions. The first one is a follow-up question on Doctor. Gong's comment about original content. So just wondering, in the upcoming year's spending, how much of the budget is for the original content? Then the second question is about the so called large screen strategy. Wondering if there is Any update on the user metrics from smart TVs? And then finally, We noticed that there was an acquisition of a chocolate brand like 2 months ago. So, we're wondering Any rationale behind it? Thank you. I will answer the Connected TV question first. For Connected TV, if we rule out the seasonal volatility, our user Time spent and also user traffic on the Connect TV is still steadily increasing. In terms of the user time spent, The CNECT TV has already surpassing the mobile side. When I say mobile side, it includes both cell phone and 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 And to continue, and in the long run, the TV side in terms of the user time spent, it might contribute 60% to 70% of our total user time spent. 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 pvault monetization just because of The Connect TV has a much better user experience and it's easier for users, although in terms of the willingness for In terms of the top line company, you have mentioned previously, it's called Meir Heitiao. 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 major Heitau has doubled, more than doubled. Thank you. This is Xiaodong. I think it's for the order content. The total content cost is around like 30%. But if you look at across different categories, it varies. For drama categories, it's come for over 40%. Well, for sure, it is higher than over, I think, some time over 90%. So we are not going to increase the confusion in these two categories in the next few quarters. But I think the focus will be the quality. We are going to improve the quality of this The quality of the original content in these two categories. 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 So overall, I think you will still see some increase of the original content as a total content cost for next year. But I think an idea or stable level of storage container that we disclosed before Would be around like say $40,000,000 to $60,000,000 if you look at the penetration mix between order content versus license copyright. Your last question comes from Alex Xie from Credit Suisse. Please ask your question. My first question will be thank you, management, for taking my questions. My first question will be about the new VIP program for iQIYI Lite, Would you 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 Video 3, And did it impact your advertising revenue from reality shows in the future? Thank you. We apologize that we are sorry that We haven't been able to broadcast the last episode of news with you. And as you have already observed The Beijing Municipal Bureau of Radio and Television has issued a new guidance that we cannot vote through the purchasing goods or the or buying membership plans. So, this means that the voting in the future It would be only for 3. And in terms of the impact, in terms of our advertising revenues, we are still Okay. So for IT like APP, as you know, it's mainly catered to lower tier city users. It's much more simplified in terms The user interface versus our main app, in terms of the membership plan on IT like app, For this kind of members, they need to watch certain advertising formats. But in terms of the membership pricing, it's much lower than our main app memberships, just because for this kind of However, their willingness to paying for the content is not that high. So we want to leverage Some certain kind of operation tactics to manage them. Thank you. Thank you. I will now pass the call back to management for closing remarks. Okay. So thank you for joining our call. We look forward to talk 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.