Good day, and thank you for standing by. Welcome to iQIYI Second 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 session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ms. Fan Liu, Head of Capital Market of iQIYI, to read the opening remarks and the safe harbor statement. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining iQIYI Second Quarter 2021 Earnings Conference Call. The company's results were released today and are available on the company's investor relations website at ir.iqiyi.com. On the call today are Mr. Yu Gong, our Founder, Director, and CEO, Mr. Xiaodong Wang, our CFO, Mr. Xiaohui Wang, our CCO, Chief Content Officer, and Mr. Wenfeng Liu, our CTO, Chief Technology Officer. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Xiaodong, who will go through the financials and the guidance. After their prepared remarks, Xiaohui and Wenfeng will join Mr. Gong and Xiaodong in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements except as required under applicable law. With that, I will now turn the call over to Mr. Gong. Please go ahead.
Hello, everyone. For the second quarter, we maintained favorable momentum from the first quarter, with total revenue approaching the high end of our previous guidance. Our operating loss narrowed for the fifth consecutive quarter on a year-over-year basis due to our effective cost and expense control. During the quarter, we continued to lead the market in multiple operating metrics. According to the third-party data, we ranked at the top of the long video industry in terms of mobile MAUs, mobile DAUs, and the total user time spent. First, let's start with our membership business. As of June 30, our total number of subscribers reached 106.2 million. This represented 0.9 million net add sequentially, despite the heightened uncertainty of content launch during the second quarter. Our membership growth was mainly due to three factors.
One, our premium content, especially dramas, performed well, which helped to drive the number of subscribers to increase. For example, dramas launched in June, including "My Dear Guardian," "Ai Shang Ke Dong Ding," "The Rebel," "Fan Yi Zhe," were well-received by audiences. In addition, films such as "Detective Chinatown 3" and "The Brook Soon: The Darkness," "Xiao Fei Jue Zhan," also did well. Second, we saw strong membership growth on TV devices as we approach summer vacation. Three, we further depended on overseas expansion. Driven by our premium content and efficient operation, we continuously improved the conversion of our subscribers. The number of our overseas subscribers by the end of the quarter exceeded 1 million. Apart from bringing our domestic producer content to the overseas users, we also made "Brook Soon" in the local original content.
For example, we launched our first original career drama series, "My Roommate Is a Gumiho," in May, which was remarkably successful. In addition, "The Swindling Scepter" was launched for the first time in overseas market, "Bian Jian Ju Chang," keeping pace with the domestic success of "Scepter," scaling mode and improving the retention of specific user cohorts with a sequence of genre-specific content. The slight sequential decline of membership services revenue was mainly due to the volatility of subscriber number during the quarter, which was mainly attributable to, One, lack of blockbuster to continue the popularity from Q1, which causes the volatility of subscriber number, particularly in the first half of Q2. Two. Delayed launch of premium content to the end of Q2. Despite the volatility of our membership-services business, our ARPU grew nicely.
Average monthly ARPU saw a high single-digit growth year-over-year during the quarter, mainly due to the price adjustment we launched in November last year. With more premium and diversified content portfolio to be launched in the second half of the year, we remain confident in our lead on the long-term subscribers and the ARPU growth. We also expanded new market space for paid online videos. During the quarter, we launched our Cloud Cinema brand. The brand includes three major categories, theatrical movies launched under our PVOD mode, as-we-hit online movies, and our original movies. The revenue sharing ratio of PVOD movies to content partners increased to 42%, which is higher than the theatrical release. By doing this, we hope to explore a new area for growth and establish a new online distribution ecosystem for movies. Moving over to our advertising business.
Our total advertising revenue increased by 15% year-over-year, but it declined slightly quarter-over-quarter. The year-over-year growth was mainly attributable to the key driver for food and beverage advertising, partially offset by a decline in revenue due to our content delay. We expect both brand and performance ads to increase in the third quarter due to our ad inventory increase during the summer vacation. Brand ads recorded significant growth year-over-year during the quarter, mainly due to an improvement in ARPU. Our major dramas during the quarter, such as 'A Love for Dilemma,' 'Xiao She De,' 'The Rebel,' 'My Dear Guardian,' and 'The Sweet Arm Shelter' performed well in terms of popularity and word-of-mouth and video views, which helped to drive our client ARPU to the peak level over the past few years.
Performance ads regained year-over-year growth during the quarter, mainly driven by the contribution of key industries such as internet movies, e-commerce platforms, and internet service apps. We also enhanced our monetization capabilities with our products and technology, which helped to significantly improve our effective CPM. Meanwhile, new resources from connected TVs and apps aligned both performed well. Moving over to content. Although we experienced certain challenges in content scheduling during the second quarter, we maintained our leading position in terms of the total number and the video views of top content across categories, from dramas and variety shows to animations and children's content. According to third-party data, video views of our drama and variety shows accounted for nearly 40% and over 30%, respectively, of the overall market share. Our animation content, including children's cartoons, have had over 40% market share.
During the quarter, we launched a series of classic titles. The content perfectly caters to user demand and further accelerates the development and innovation of our IP. To give you some examples, one, for dramas, we launched the exclusive title, 'The Rebel,' which was a hit among a wide range of users. The drama topped a number of ranking lists since its launch, and was well-rated, 8.3 on average by over 220,000 accounts on Douban, a widely used user rating platform. Other exclusive dramas such as 'A Love for Dilemma,' 'My Dear Guardian,' 'My Treasure,' and others were received on our platform. In addition, 'A Love for Dilemma' also aired on CCTV-8 and Dragon TV, which helped to attract a lot of TV audience back to the iQIYI platform. Following the success of the 'Mist Theater,' we continue to broaden our content offering via theater mode.
We are working to meet the diversified needs of users through this new mode, enhancing their user experience while attracting the fans in the niche segment. In May, we launched the SWEET ON Theater-themed moonlight and 'The Day of Becoming You' successfully gained popularity and word of mouth. For variety shows, we continue to innovate new original content across various genres. Original titles such as 'The Detectives' Adventures,' 'Mr. Housework 3,' and 'WORKING MOM' were especially hot shows during the quarter. Three, for animation. Our self-produced animation, 'Immortal Demon Disciples' maintained its popularity throughout the quarter. Other title launches include 'No Time But To Be Three Earths' and our self-produced cartoon, 'The Tales of Wonder Keepers.' For online movies in April, we exclusively released 'Great Yu Xue Wu Ming Chun,' which up to now its box office is about to break RMB 30 million and was well-received by audience.
For original films, 'Piercing the Darkness,' which was produced by iQIYI Pictures, was released in theaters during the quarter. The cumulative box office has surpassed RMB 400 million so far. It has received great reviews and commercial returns. At the same time, another two movies produced by iQIYI Pictures started shooting in the second quarter, and another 4 are in post-production and expected to be released soon. In addition, iQIYI original films have 14 films under development. For the second half of the year, we have a better pipeline than either the first half of the year or the second half last year in terms of numbers of titles, quality, and genres. Meanwhile, we will continue to push to launch all scheduled content on time.
For the second half, key dramas include traditional dramas with regular numbers of episodes, such as 'Eight Truths,' 'The Ideal City,' and 'Feng Qi Luoyang,' as well as vertical theater brands such as 'Who Is the Murderer,' 'Gold Panning,' and 'The Pavilion' in mid-summer. For variety shows, we are focusing on developing innovative new content across a number of themes, such as the already-launched 'GAME OF SHARK' and new-generation hip-hop projects, upgraded version of 'The Rap of China,' as well as 'What's Your Name' and 'BORN TO DANCE.' For animation and children's content, we are expanding our content library. We are also exploring the area of in-house production.
On sports content, after successfully broadcasting the UEFA Euro 2020, we will present full competitions of Premier League for the next 4 seasons, 2022 FIFA World Cup qualification games in Asia, as well as La Liga and other top sports events. Moving over to technology. Advanced technology is the cornerstone of our business. Among other things, it allows us to continuously develop innovative content, enhance the user experience, and improve our operating efficiency. During the quarter, we were pleased to see that iQIYI Lite, that targets users in lower-tier cities, has rapid pickup. The peak DAU exceeded 1.3 million, and the average user time spent exceeded the same metrics on our iQIYI mobile app. The number is as at the end of last quarter.
In terms of demographics, users on iQIYI Lite consist mainly of older and young people, groups that tend to have more spare time, mainly in low-tier cities. In June, the average DAU overlap between iQIYI Lite and our main app is around 7%. In addition, we continually work hard to improve the technology of our recommendation engine so that users are effectively matched with the most appropriate content from our vast library. We believe nearly 30% of our DAUs were driven by our content library during the second quarter. Recently, we also made progress in industrialization of video production by utilizing our intelligent production toolset. For example, we currently launched the production business intelligent system, PBIS, internally. PBIS is a professional data system for our content production team. As a BI, business intelligence product, designed and developed centering content producers.
PBIS offers producers one-stop data inquiry, acquisition, analysis, and evaluation to support their decision-making. On the first day of our launch, thousands of our producers tried out the system. In the future, PBIS will be widely promoted internally and then cover all our in-house studios within a year, promoting the industrialization of video production within iQIYI, as well as in our partner ecosystem. In general, we are still in early stage of industrialization of video production. The supply of high-quality content, especially of key vertical content, needs to be uplifted. Our core content strategy is to focus on high-quality content across selected verticals, while providing more premium mass-market hits so that we can optimize subscribers' penetration and conversion. We admit that there is still gap between us and our global peers.
In the future, leveraging our deep understanding of users, our highly innovative in-house production teams, as well as our advanced technologies for industrialization production, we believe we are well-positioned to address content challenge, narrow the gap with our global peers, and capture the future market opportunities. With that, I'll turn it over to Xiaodong to talk about our financials.
Good evening, everyone. Let me reveal our key financial highlights for the second quarter. Our total revenue reached RMB 7.6 billion. Membership business continued to be our largest business pillar, accounting for 62% of our total revenues. Our advertising business continued to rebound with a 15% increase on a year-over-year basis. Our other revenues achieved a 20% growth on a year-over-year basis, as we continue to diversify our monetization channels. Our cost of revenues was flat compared with the same period last year, among which content cost would also remain stable. Our operating loss margin on GAAP basis narrowed down to 15% from 17% in the same period last year, and our net loss narrowed for the fifth consecutive quarter on a year-over-year basis, driven by our disciplined investment strategy. As of June 30, 2021, the company had cash equivalents, restricted cash, and short-term investments of RMB 12.3 billion.
For detailed financial data, please refer to our press release on our website. For the third quarter of 2021, we expect the total revenue to be between RMB 7.62 billion and RMB 8.05 billion, a 6%-12% increase year-over-year. This forecast reflects iQIYI's current and preliminary view, subject to change. I will now open the floor for Q&A. Thank you.
Please ask your questions in Chinese first, and then translate your questions into English. Participants are requested to be strict to one question at each time. Your first question comes from Ella Ji from China Renaissance. Please ask your question.
Thank you. Thank you for taking my question. My first question is if management could elaborate on the latest regulatory environment, especially in the overall directions regarding the content. Thank you.
Sure. Thank you. I will answer this question. Regarding regulation
[Non English-Content]
OK, hello Ella. It contains 4 major parts. Firstly, because we are video platform, the content censorship is the main area we look at. Actually, the basic principle for content censorship hasn't been changed over the past several years. For this year, because the July 1st key event, there is a tightened censorship environment in the 2nd quarter. After that, it will actually return to the normalized regulation pace. The second area is for actually we see the tightened regulation for the overall internet industry, not only for us. This area mainly focus on the two parts. One is the anti-monopoly regulation. For us, the video industry, particularly for the long form video industry, is actually a fully competitive industry. We actually foresee limited impact from the anti-monopoly regulation. The second part is on the data security.
We observe that the government has implemented more tightened and specific guidelines for this part. Internally, we already enhanced our management and also the technology part to formulate and implement more specific approach on this area. The last one for the education industry, because this is an area people ask frequently. Education is not our main business area we are looking at, but just because of the tightened regulation on this area, we foresee that the students or the kids might have more time to spend on other things apart from studying. The entertainment is one of the key areas that they might spend more time on.
Thank you.
Thank you.
[Non English-Content]
I just wonder if that could also affect the long-form video content in both the drama as well as the variety shows. Thank you.
[Non English-Content]
Hello, this is Xiaodong. I think probably you mentioned that like recently released a regulation regarding the enhanced censorship on the short form videos. I think Dr. Gong just said for long form videos, we have always been through this kind of process. I think if anything will have like indirect or direct impact on our business, should be positive, because those short form videos, they haven't go through all this kind of process before. Now I think kind of we are on the same track right now. We have more experience on how to handle this and let's say already go through all these kind of things for the past decade. Thank you.
OK, thank you. Thank you for addressing my question. If I may, I have a second one regarding the Lite version. [Foreign language] Could management elaborate on the recent progresses of iQIYI Lite? Because we see that iQIYI Lite app had a quite impressive user growth in the recent months. Thank you.
[Non English-Content]
OK. Ella, I will introduce iQIYI Lite app briefly, and then I will turn over to our CTO Wenfeng to elaborate.
We have developed iQIYI Lite app for around half a year. Behind this project, we are actually trying to target the non-major users we are targeting right now. Our core users right now are actually the users aging between 25-35 years old users, and we cover some young generation and the older people, but that is not enough. Over the past one or two years, recently, we observed that more and more new users may actually not haven't formulate a habit to use iQIYI app. We try to develop a new product that can target these kind of new users and incentivize these kind of new users to use our product and watch our content. Up to now, the app satisfy our expectation. I will turn over to our CTO Wenfeng to elaborate more.
[Non English-Content]
OK. iQIYI Lite APP is a personalized product targeting the lower tier city users.
Since the launch, we observed a very solid user growth. As of the end of Q2, the weekly DAU has surpassed 1 million milestone. The user overlap between iQIYI Lite app and iQIYI main app is extremely low. As we just mentioned, the CEO prepared remarks, it's only 7% and this ratio continues to go down. We observed that the users for our iQIYI Lite app prefer to consume more content library rather than new content. In terms of the user time spent, performed also very well. We try to acquire the new users through advertising on the channels with relatively high penetration into lower-tier cities, and also through the user sharing approach. Also we try to improve the user retention through the personalized recommendation and also the easy and convenient interaction, and also improving the adaptation capability to the low-functional smartphones.
Right now, the user retention for our iQIYI Lite app is also very good.
[Non English-Content]
Our CEO have something to add. This kind of initiatives, I mean iQIYI Lite app is also consistent with our idea that we believe there would be a consumption upgrade in terms of the content for the Chinese users. Basically, we expect those kind of users, they previously don't watch the TV dramas or the films and this kind of entertainment content. When they have a chance to access to the high quality entertainment content, they will spend more time on this kind of entertainment content. From our initial data set, it seems that our thesis got demonstrated through this kind of user retention rate and also the user growth.
Thank you.
Thank you.
Thank you. Your next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.
[Non English-Content]
Thank you.
[Non English-Content] I think if you are talking about like one or two quarters content cost, it could be caused by the delay of certain content.
If you look at the past few quarters numbers, you see the collective optimize of content costs, which actually is more driven by the efficiency improvement on the content investment. We see the price stabilized since year 2018. Given the fact we have more original content launched in the past few quarters. Basically we have more control on the quality and the efficiency of the content investment. Of course, I don't think conservative is the right word here, because given the fact we are going to expand the category of our content investment, including original movies and overseas content, that's why we see the potential slightly increase on the dollar amount of content cost. The percentage of revenue, definitely I think you will continue to see the optimized trend in the next few quarters. Thank you.
As a reminder, please restrict to one question at each time. Your next question comes from Alicia Yap from Citigroup. Please go ahead.
[Non English-Content]
Will the current model between the membership subscriptions and the advertising model remain in place? Any breakthroughs in terms of content productions or monetization model, especially I think management talking about the industrializations in the video productions, how would that actually transform future monetization model for the video industry? Thank you.
[Non English-Content]
Okay. Alicia, I actually have a very positive view for this industry personally. My positive view is built on these two parts. One is that in terms of the penetration, we still have a very low penetration in terms of the paying users, so our paying ratio is also low. In China, there is only a small percentage of people that are willing to pay for professional and high-end entertainment content. We expect that more and more people will actually join this kind of target users with the trend of the consumption upgrade of the content we just mentioned before. In terms of the monetization, right now our core users are the people aged between 20 to 40. We don't have sufficient content for the people aging higher than 40 years old. Also for the younger generation, we also don't have sufficiently good content for them.
Right now, we are trying to amplify our content supply and to satisfy this kind of user's need. Based on that, we expect the penetration ratio and also the paying ratio will continue to improve. In terms of the monetization model, in China, for most of the Internet verticals, when the new users join the platform, they often turn off our free users, so they will consume the advertising.
As they more and more enjoy our content, they will start to pay for our content, and there will be no advertising for them. These kind of users will convert into the high-output users through our membership package and also the paid vault methods.
[Non English-Content]
As you have observed, we went through some kind of volatility or the uncertainty in terms of the content launch. I think that the more fundamental reason behind that is that we haven't been able to offer sufficient content supply and more diversified content supply. As we mentioned in the shareholder letter in the last quarter, we believe the industrialization of video content production is the key to solve this issue. The key thing is that we try to enhance the certainty or improve the forecast accuracy for the full cycle of the content production so that we can lower risk and lower the cost accordingly. From the first quarter, we have enhanced our investment in this kind of industrialization of video content production. As we have mentioned previously, in this quarter we start to roll out the Production Business Intelligence System, PBIS.
This kind of a tool can enable our producers to forecast the traffic and the monetization, the revenue for the project. Yeah, thank you.
Thank you. Your last question comes from Piyush Mubayi from Goldman Sachs. Please go ahead. Please ask your question.
Thank you for taking my question. When I look at your content cost as an indication of how you are industrializing content production, your content spend was about, at its peak, 84% of revenue, and it's come down gradually, and it's looking like it is about 67% of revenue. With the industrialization, where does that content spend come down to, and how long do you think it'll come down to that trough level that you think it can get to? That's my first question. Related to that, if I may, you've moved into iQIYI Sports in a major way with the EPL, and the price point, it looks like it's RMB 19 or RMB 20 per month, on a headline basis based on the price I've seen. What has been the initial indication of demand for EPL on your platform? Thank you.
This is Xiaodong. I will comment on the first question. I think the industrialization of the content production is mainly to increase the supply and the quality of the content. Definitely, the percentage of revenue it will continue to contribute is positive, in fact, because of the, let's say, better monetizability of this content. I think in the past few years, the main driver of the content is more like the slight increase of the hit ratio and the quality of the content, and the more diversified content strategies like the Mist Theater and so on. I think within the next three to five years, definitely you will see a significant improvement on the efficiency of the content production given the progress we expect to achieve for the industrialization of the content production.
For the sports, I'm not quite follow your question regarding the CPM, because sports is not like we charge the user directly for the nominal price you saw on the website. Actually, it's more like the revenue share between iQIYI and our JV, who actually run a sports business. It has very little impact on the ARPU of the membership business or the revenue of iQIYI because they only have, I think, a very low percentage of the total memberships or subscription business. Thank you.
This concludes the question and answer session. I will now pass the line to the management for closing remarks. Please.
Thank you everyone to joining our call today. Please feel free, if you have any question, please feel free to reach us. Let's speak next quarter. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.