Earnings Call: Q2 2021

Aug 12, 2021

Earnings release

Good day and thank you for standing by. Welcome to ICE 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 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 ICE, to read the opening remarks and the safe harbor statement. Please go ahead. The company's results were released today and are available on the company's Investor Relations website at ir.siye.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO Mr. Xiaozhong Wang, our CFO Mr. Xiaobei Wang, our CCO, Trip's Account Officer and Mr. Wenfeng Liu, our CTO, Trip's Technology Officer. Mr. Huo 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, Xiaogui and Wenfeng 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 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 With that, I will now turn the call over to Mr. Bo. Please go ahead. Hello, everyone. For the Q2, We maintained favorable momentum from the Q1 with total revenue approaching the high end of our previous Dennis, our operating loss narrowed for the 5 consecutive quarters 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 3rd party data, we ranked At the top of the long mid form 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 Certainly, our total number of subscribers reached 106,200,000. This represented 900,000 net adds sequentially despite the heightened Our membership growth was mainly due to 3 factors: 1, our premium content, especially dramas, performed well, which helped to drive the number of subscribers Well received by audience. In addition, films such as Defective Chinatown 3 We continuously improved the conversion of our subscribers. The number of our overseas subscribers at the end of quarter exceeded 1,000,000. Apart from bringing our domestic producer content To the overseas users, we also made book soon in the local original content. For example, We launched our 1st original Karel drama series, My Roommate at Gong Min Ho in May, which was remarkable by fans. In addition, the Speed On Shelter was launched for the first time in Overseas Market, Yanxuan Zhuchang, keeping pace with the domestic success of Delta Scaling mode and improving the retention of specific user cohorts with a Sequences of gyro first week content. The slightly sequential decline of membership services revenue was mainly due to the volatility of subscriber number during the quarter, which was mainly to continue the popularity from Q1, which caused the volatility of subscriber number, particularly in the first half of Q2 to delay the launch of streaming content to the end of Q2. Despite the volatility of our membership services business, our ARPU grew nicely. Average monthly So 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 We launched since the second half of the year. We remain confident in our mid and long term subscribers and our growth. Furthermore, we also expanded new marketplace for paid online videos. During the quarter, we launched our Cloud Cinema brand. The brand includes 3 major categories, and our original movies. The revenue sharing visual of PE World Movies to content partners increased to 42%, which is higher than the article 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 a 15% year over year, but declined slightly quarter over quarter. The year over year growth was mainly attributable to the We expect both brand and the performance as we increase in the Q3 due to our Ad inventory increased during the summer vacation. Brand apps recorded significant Growth year over year during the quarter, mainly due to an improvement in our major dramas My Dial Garden and the hit on sales performed well in terms of popularity, Word-of-mouth and video views, which helps to drive our clients up to the peak level over the past Few years. Performance sales regained year over year growth during the quarter, mainly driven by the contribution of key industries such as Internet Movie, e commerce platform and the Internet service app. 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 AMS Alliance both performed well. Moving over to content. Although we experienced certain challenges in content Scheduling during the Q2, 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 the children's content. According to third party data, video views of our dramas and variety shows accounted For nearly 40% and over 30% respectively of the overall market viewership, Our animation content, including children's cartoon, has had over 40% market share. During the quarter, we launched a series of classic titles. The content perfectly caters to user demand and further sterilizes the development and innovation for top IPU. To give you some examples, 1, for dramas, we launched the inclusive title, The label, which was a hit among a wide range of users. The drama topped a number of writing lists since its launch and were rated 8.3 on average by over 220,000 accounts such as the Alarm 4 Dilemma, My Girl Garden, My Traitor and others will receive the online platform. In addition, And last for Dilemma also aired on CCTV 8 and the Dragon TV, We continue to broaden our company offering with shelter mode. We are working to meet a diversified mix of users Through this new mode, enhancing their user experience while attracting the fans in the niche segment, In May, we launched the Sweet Home Theater in which Moon Light, 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 and Walking Mana, so Shanghai MAMA were especially hot shows during the quarter. So for animation, maintained as popularity throughout the quarter. Other title launches include of Banger Capers, Xingue Shohoduo. For online movies, in April, we We closely released the rate, Yuxue, which up to now, its box office is about to break RMB30 $30,000,000 and well received by audit for our original film, which For this room, the darkness, which was produced by IGE Pictures was released in theaters during the quarter. The cumulative box office has surpassed RMB400 1,000,000 so far. Are in post production and is expected to be released soon. In addition, IKEA Original Films has 14 films under development. For the second half of the year, we have a better pipeline than either the first Meanwhile, we will continue to push to launch our scheduled content on time. For the second half, K dramas include traditional dramas with regular numbers of episodes such as F2, Wang Par Busui, For variety shows, we are focusing on developing innovative new content across a number of scenes, such as the already launched Game of Shark, Tiyi Tuber Shark and the new generation For animation and children's content, we are expanding our content library. We are also employing the area of in house production. A couple of exciting titles include the already released self produced 3 d animation in multiple of the Golden Age, Yes, Alicia, on sports content. After successfully broadcasting the Euro 2020, we will present All competitions of premium league for the next 4 seasons. 2022 We filed World Cup qualification games in Asia as well as like Weka and other top spot events. Moving over to technology. Advanced technology is the cornerstone of our business. Among other things, it allows us to continuously develop in low tier cities has ramped pickup. The peak DAU exceeded 1,300,000 And the average user time spent exceeded the same metric on our IQ mobile app. The number is at the end of last quarter. In terms of demographics, users on IQ Lite consists mainly of elder and young people, groups that tend to have more spare time, mainly in low tier cities. In June, is around 7%. In addition, we constantly We most appreciate the content from our website library. We believe nearly 30% of all DAUs were driven by our content library during the Q2. Recently, we also made progress in industrialization of video production by utilizing our intelligent production tools. For example, we currently launched the production business Intelligent Systems, TBRF internally. TBRF is a professional A data system for our content production team as a BI, business intelligence product, design and Development Center in Content Producers. PBIS offers producers 1 stop, On the first day of our launch, thousands of our producers trying to try out the system. In the future, TBS will widely promote it internally and cover all 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 amplified. 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 the convention. We admit that there is still a lag 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 future market opportunities. With that, I will turn it over to Xiaodong to talk about our financials. Good evening, everyone. Let me review our key financial highlights for the Q2. Our total revenue reached RMB7.6 billion. Membership business continues to be our largest business pillar, accounting for 52% of our total revenues. Our advertising business continues to rebound with a 15% Our other revenues achieved 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 a GAAP basis narrowed up to 16% from 17% in the same period last year, and our net loss narrowed for the 5th consecutive quarters on a year over year basis, Driven by our disciplined investment strategy, as of June 30, 2021, the company had cash, cash Please refer to our press release on our IR website. For the Q3 of 2021, we expect total revenue to be between RMB This forecast reflects Iqiyi's current and preliminary view subject to change. I will now open the floor for Q and A. Thank you. Your first question comes from Ella Ji from China Renaissance. Please ask your question. Thank you. Thank you for taking my questions. So my So my first question is So management could elaborate on the latest regulatory environment, especially in the overall direction regarding their content. Thank you. Okay. Hello, Ella. So it contains 4 major parts. So firstly, because we are a video platform, So the content censorship is the main area we'll look at. So actually, the basic principle for content That's a trip hasn't been changed over the past several years. So for this year, because The key event, the July 1 key event, there is a tightened censorship environment in the second quarter. After that, it will actually return to the normalized regulation pace. And the second area is for actually we see the tightened regulation for the overall Internet industries, not only for us. So this area mainly focus on the 2 parts. 1 is the anti monopoly Regulation. But for us, the video industry, particularly for the long form video industry, is actually Fully competitive industry. So we actually foresee limited impact from the anti monoclonal Regulation. And the 2 second part is on the data security. So we observed 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 and implement take the more specific approach on this area. And last one for the education industry, because this is an area people ask frequently. Education is not our main area business area we are looking at. But just because of the tightened Regulation on this area, we foresee that the students on the piece have might have more time to And on other things, apart from the study, so the entertainment is one of the key area that they might spend more time on. Thank you. So just a quick follow-up regarding your content, Because we have seen some regulatory directions regarding the short video industry that They are promoting more positive kind of positive content. So 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. Hello. This is Xiaodong. I think Probably, you mentioned that like recently released the regulation regarding the enhanced censorship on the Short form videos. I think as Doctor. Gong just said, for long form videos, we have always been through kind of a process. So I think if anything, we 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 We have more experience on how to handle this and we have let's say already go through all these kind of things for past decade. Thank you. Okay. Okay. Thank you. Thank you. Yes. Thank you for addressing my question. So if I may, I have a second one regarding the lite version. So could management elaborate on the recent progress APP briefly, Yanan. I will turn over to our CTO, Wen Hong to elaborate. So we have developed Iqiyi, like app for around half a year. So behind this product, we are actually trying to target The non major users we are targeting right now. So our For users right now, actually the users aging between 25 to 35 years old users, And we covered some young generation and other people, but that is not enough. So over the past 1 or 2 years recently, we observed that more and more new users The about new products that can target this kind of new users and Incentivize this kind of new users to use our product and watch our content. Right now, Up to now, the app satisfies our expectations. So I will turn over to our CEO, Wenfeng, to elaborate It's extremely low. So as we just mentioned in the CEO's prepared remarks, It's only 7% and this ratio continues to go down. And we observed that the users For our IT Live app prefers to consume more content globally rather than new content. And in terms of the user time spent performed also very well. And we try to Acquired the new users through streaming advertising on the channel with relatively High penetration into lower tier cities and also through the user sharing approach. And also we try to improve the user retention Through the personalized recommendation and also the easy and convenient interaction and also including And the adoption capability to the low functional smartphones. So right now, the user retention for our IT So our CEO, Anne, has something to add. So this kind of initiative, I mean, iQIYI like ATPs, also with our idea that we believe there would be a consumption upgrade in terms of the content for the Chinese users. So basically, we expect those kind of users. They previously, they don't watch The TV dramas, all the films and this kind of entertainment content, when they have a chance to access to And high quality entertainment content, they will be spending more time on this kind of entertainment content. So 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. So my question is about current costs. We have seen a pretty good cost control in the past While the company has always been pretty conservative in our guidance in our current calls going forward, So wondering, when we look at the cost control in content, for example, in the past 1 or 2 How much was due to the delay of some of the hot content? And how much was coming from the benefits of Noah Production and Licensing Costs? Thank you. This is Xiaodong. I think if you're talking about like 1 or 2 quarters' content cost, it could be caused by the delay of certain content. But if you look at the past few quarters' numbers, you see The objective optimize of content cost, which actually is more driven by the efficiency improvement on the content investment. We see the price stabilize since year 2018. And given the facts, We have more original content launched in the past few quarters. So basically, we have more control on the quality and The efficiency of the content investment. But 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 the overseas content. That's why we see the potential slightly increase on the dollar amount of the cost and cost, But the percentage of revenue definitely I think you will continue to see the optimized trend in the next few quarters. Thank you. Your next question comes from Alicia Yap from Citigroup. Please go ahead. My question is, can management give us the longer term prospect of the long form video industry in China? Will the current model between the membership subscriptions and the advertising model remain in place? Any breakthroughs in terms of Content production for monetization model, especially I think management talking about the industrializations in the video productions. So how would that actually transform future monetization model for the video industry? Thank you. Okay. So Alicia, my I actually have a very positive view for this industry Personally, my positive view is still down these two parts. One is that in terms of the penetration, we still We have a very still have a very low penetration in terms of our paying users. So our pay ratio, paying ratio is also low. So in China, there is only a small percentage of people They are willing to pay for professional and high end entertainment content. And we expect that more and more people will actually join this kind of targeting users when With the trend of the consumption upgrade of the content we just mentioned before. And in terms of the monetization, Our right now, our core users are the people aged between 20 to 40. And but we Don't have sufficient content for the people aging higher than 40 years old. And also for the younger generation, we also don't have sufficiently good content for them. So right now, we are trying to amplify our content The penetration ratio and also the pain ratio will continue to improve. And in terms of the monetization model, In China, for most of the Internet verticals, when the new users joined the platform. They oftentimes are free users, so they will consume the advertising With their with the more and more enjoying our content, they will start to pay for our content And there will be no advertising for them, but this kind of users will turn into will convert into the high ARPU users through our membership package and also the pVault message. As you have observed, we went through some kind of volatility or the uncertainty in terms of the content launch. I think the more fundamental reason behind that is that we haven't been able to offer Sufficient content supply and more diversified content supply. So as we mentioned in the shareholder letter in the past 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 forecast enhance the Certainty will improve the forecast accuracy for the full cycle of the content production We have enhanced our investment in this kind of industrialization of video content production. As we have mentioned previously, in this quarter, we started to rollout the Production Business Intelligence System, PBIS, this kind of a tool can enable our producers to forecast the user traffic and the monetization, the revenue for the project. Yes. Thank you. Thank you. Your last question comes from Hirsch Mubayi from Goldman Sachs. Please ask your question. Thank you for taking my question. When I look at your content cost as an indication of how you're 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 will come down to that truck level that you think it can get to? That's my first question. And related to that, if I may, you've got you've moved into IQ Esports in the major way with the EPL And a price point that 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 your first question. I think the industrialization of the content production is mainly To increase the supply and the quality of the content, definitely, as a percentage of revenue, it will continue to contribute is 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 more diversified content strategies like the Mr. Theaters and so on. But I think within the next 3 to 5 years, definitely, you will see significant improvement on the efficiency of the content production given the Progress we expect to achieve for the industrialization of the content production. And for the sports, I'm not quite following your question regarding the CTM 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 IG and our JV who actually run the sports business. So it has very little Impact on the ARPU of the membership business or the revenue of IQ because they only have I think a very, very low percentage of the total membership 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, for joining our call today. So please feel free if you have any questions, please feel free to reach us. And so let's speak next quarter. Thank you. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.