iQIYI, Inc. (NASDAQ:IQ) Q3 2024 Earnings Call Transcript

iQIYI, Inc. (NASDAQ:IQ) Q3 2024 Earnings Call Transcript November 21, 2024

Operator: Thank you for standing by and welcome to the ITE 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. I would now like to hand the conference over to Ms. Cheng Yu, IR Director of the Company. Please go ahead.

Cheng Yu: Thank you, Operator. Hello, everyone, and thank you for joining our 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.ite.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. Xianghua Yang, Senior Vice President of our Membership Business; and Mr. Dan Hu, 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 U.S. 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. ITE does not undertake any obligation to update any forward-looking statement, except as required under applicable law. I will now pass on to Mr. Gong. Go ahead.

Yu Gong: Hello, everyone. Over our fourteen-year company history, our ability to reinvent ourselves and innovate has been our core strength against competitors. This strategy is crucial for navigating forecasted challenges. At this moment, we have identified two key trends. First, consumers are becoming more cautious due to macro headwinds. Second, consumers now face more entertainment options, including free mini and short genres, which are growing rapidly. At ITE, we hold a strong belief that premium long-form videos remain one of the most important forms of entertainment. They have a unique ability to evoke emotional connections unlike any other form of entertainment. As the industry evolves and market dynamics shift, we are actively reaching out to new opportunities to ensure long-term healthy and sustainable growth.

That is why we have been making a series of key initiatives. First, we have optimized the production of our content by improving storylines, pacing, plot structure, and character development to better match audience preferences. This will further improve our market share and bring better returns. Second, we have been operating and will continue to operate our apps to include mini and short dramas as part of our content offering. The main app will focus on long-form video content and a subscription-based model, complemented by free mini and short dramas and an advertising model. In contrast, our upgraded ITE Lite app will focus on free mini and short dramas and an advertising model, complemented by long-form videos and a subscription model. We will increase investments in the acquisition and distribution of mini and short dramas.

Q&A Session

Xiaohui Wang: We have optimized our membership products and services system by combating unauthorized password sharing and introducing attractively priced family account options. The goal is to enhance member conversion and expand the scale of membership. Beyond these initiatives, we will apply AI more widely across our ecosystem to expand our presence in overseas markets and explore possibilities in IP development and offline experiences. We believe these strategies will positively impact our revenue and profitability over the long term. Now let’s move on to the details of our content strategy. 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 offering, we aim to complement our long-form video content with a storytelling style that appeals to a broader audience. Mini dramas feature episodes lasting one to five minutes in vertical formats, while short dramas span five to twenty minutes in horizontal formats. This format offers a quick and engaging experience for users seeking brief entertainment breaks and has 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 free mini dramas but can choose to pay per view to access those exclusive to members. Short dramas will mirror the approach taken with our long-form content, being free for members while non-members will have access to an ad-supported free-to-watch second window.

This strategy caters to diverse viewing preferences while supporting the growth of our subscriber base and expanding our monetization opportunities.

Yu Gong: Moving on to long-form videos, which are fundamental to our content ecosystem, starting with the core genre category. We regained the number one position in viewership market share during the quarter, according to Enlighten data. This was driven by the launch of multiple titles that garnered high acclaim from users. Notably, the second season of “The Strange Tales of Tang Dynasty” became the fourteenth drama to break the IP popularity index score of ten thousand. The series’ third season is already in production. This IP has been expanding its influence from online to offline domains, showcasing the vast potential of Internet IP development. Also, the new release “The Young Warriors” received the highest ITE popularity index score among dramas with less than twenty episodes.

Our panel shows, including “Want to Be the One,” “Franco,” and “Green Evacuations,” performed well. We are proud of our performance in the inquiry and reality drama genres. We recall that certain areas faced challenges, such as the limited supply of key female-oriented costume dramas. In response, we are focusing on better aligning our content genres with optimal forecasting windows going forward. Variety shows, including new titles like “The King of Stand-Up Comedy,” reinforced our strong presence in the comedy genre. According to Enlighten data, it dominated the viewership charts for ten consecutive weeks and outperformed other shows in the same genre. It also achieved the second-highest peak popularity ever recorded for ITE-exclusive variety shows.

What’s more impressive is that the show has not only propelled some 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 eleven consecutive quarters, according to Enlighten data. The performance was driven by titles like “The Legend of Sky Lord Shenmu” and “A Moment But Forever,” which received 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, we topped the list among online video platforms with eleven honors. We also secured seven honors at the 32nd China TV Golden Eagle Awards.

Xiaohui Wang: Turning to our content pipeline, we remain committed to providing our users with top-notch long-form video content. This was highlighted during the ITE2I conference, our flagship marketing event, where we disclosed an exciting lineup of over three hundred titles set to premiere in 2024 and 2025. Broadcasting dramas like “Fates of Fortune” and “Among the Ridges” were released and will be followed by the much-anticipated female-oriented drama “Love from Adventure.” In reality and variety shows, audiences can look forward to “We Are Criminal,” “Please Huachangjiang,” “Under the Skin Season 2,” “320R,” “The File Lab Season 2,” and “Let’s Wind Go By.” Our movie offerings include “The Almighty,” released this October, and upcoming titles such as “The Volunteer,” “The Battle of Life and Death,” and “New Online Films.” In terms of variety shows, we are introducing flagship IPs like “My Zoom” and “The Income.” For animations, the Q4 pipeline features major titles like “The Exclusive Tracking Form” and “The Original Material IP We Driver in Tang Dynasty.” Membership revenues in the third quarter were RMB 4.4 billion.

There are three areas that improved membership revenue performance. First, although we have launched good quality titles, there is room for improvement in the supply of premium female-oriented and Asian costume dramas, which are especially appealing to members. Second, amid the economic uncertainty, users have grown more cautious in buying and are exploring a broader selection of entertainment options to capture their budget and attention. Lastly, the high base effect from last year continues to play a part in our current figures. Innovative value-added services continue to gain traction among users. We launched the express package for thirteen dramas in the quarter, leading to more than forty percent sequential growth in cash purchases, reaching a historic high.

Additionally, we further enhanced member benefits to encourage upgrades to higher-tier plans and boost member engagement. This includes more than twenty offline events, such as fan meetings, early screenings, and family plan days. As always, our primary goal for membership services is to maximize revenue performance. To fulfill this goal and proactively adapt to current consumer trends, we are making modifications to our membership offering. Key initiatives include combating unauthorized membership account password sharing to enhance account security. On November 10th, we introduced the family account option as a better solution for account sharing. This profile allows renewing Golden Bay IP members to add a separate family account for just RMB 8 per month.

A usual account, both primary and family, can have up to ten separate user profiles and ensure an uninterrupted personalized experience. Additionally, the basic membership plan, which was previously exclusive to ITE Lite, has now been expanded to majorize our product. This initiative’s performance is in line with our expectations. Last but not least, content search is one of the key drivers of our membership business. Integrating mini and short dramas with our top-quality long-form video content introduces a unique mix that caters to diverse viewing preferences.

Yu Gong: Moving on to the advertising business, performance was down year-over-year. However, we have made highlights during the quarter, again achieving steady growth annually driven by solid performance in e-commerce, Internet, and many other sectors. Growth was also fueled by our advancements in AI applications, with the CPM of AI-powered ads improving by over twenty percent compared to traditional ads. Brand ads declined annually due to weak advertiser sentiment amid macro headwinds. In response, we proactively reduced investments in variety shows to avoid financial imbalances, which led to a major decrease in brand ad revenue. Nonetheless, company-related shows remained popular among brand advertisers, with titles such as “The King of Stand-Up Comedy,” “The Mo Is Shiny,” and “The Strange Tales of Tang Dynasty Season 2” attracting the largest share of ad partners on our platform.

Going forward, we will focus on expanding ad offerings, especially among local brands, and capturing greater shares of ad 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 have made upgrades to our products across the board, including enhanced interactive bullet comments, improved audio quality, better video streaming, and refined recommendation features. We have also made further progress in the industrialization of the entertainment business, as our virtual production technology has now reached the mass production stage. ITE is one of the first with the ability to handle the entire virtual production process for dramas, including production cost evaluation, concept design, and supervision.

This capability allows us to manage multiple projects simultaneously. “Shadow Now,” a drama, is the first in China to apply the latest version of Unreal Engine into virtual production. We have also upgraded the ITE virtual production studio, with technical indicators meeting the highest standards both in China and internationally. This upgrade is expected to effectively enhance our mass production capability moving forward. Our recent announcements showcased our utilization of AI to improve business efficiency. AI plays a central role in advancing our operations, especially in content translation and dubbing for overseas business. Our AI-driven approach has enabled efficient and highly accurate multilingual translation and subtitling, reducing the time needed to release Chinese content overseas and cutting down on translation costs.

Moreover, we have developed an AI system for rapidly generating plot tags for our content library. This innovative tool has transformed what used to be a month-long manual task into a matter of days. In fact, we have produced plot tags for over twelve thousand movies, achieving an impressive accuracy rate of over ninety-two percent. The casting process has seen similar improvements with AI, efficiently analyzing and matching actors to the right roles, which largely streamlines producers’ decision-making workflow. For our business performance in regions outside of Mainland China, we recorded solid performance in our overseas business in the third quarter, with both total revenue and membership service revenue gaining annual and sequential growth.

Membership revenue from Hong Kong, the UK, Brazil, and Australia grew over forty percent annually. The average daily number of subscribing members overseas also increased annually and sequentially, with Brazil, Mexico, Hong Kong, and Thailand seeing annual growth. The influence of our dramas continues to strengthen overseas. In the third quarter, total views of “Hello?” ranked at the top of the viewership rankings across multiple markets, including the US, Australia, Japan, and South Korea. Additionally, this flagship expanded its influence with the international debut of “The Strange Tales of Tang Dynasty” and “Fantasy Stories” beyond Mainland China. The series made its international debut with a premiere in Singapore at the end of July, marking the first of our overseas premium screenings for our premium dramas.

For local content, we launched a number of dramas that received positive feedback. Among these, “The Lady and Her Lover” recorded the highest daily revenue among all Thai dramas released on our platform in 2024. The show also ranked first on Google and WeTV, outperforming other shows in the same time slot. As we head into the first quarter, we will continue to expand our local content and explore additional monetization opportunities. This includes deepening partnerships with telecom providers in Thailand, Malaysia, Singapore, and Hong Kong. In addition, we aim to amplify the influence of our content and increase membership benefits through offline events. On November 1st, we hosted our first ITE conference outside of Mainland China in Singapore.

As we proceed into the remaining months of Q4, we are about to launch a series of appreciation events and promotions for members. Additionally, we are excited about the forthcoming international rollout of more high-quality content. Our talent show “Starlight Wise” was introduced on October 26th and has already received a positive reaction from our audience. In summary, looking ahead, we remain committed to driving innovation and advancement across all business segments, catering to the dynamic entertainment needs of our audience. Through targeted initiatives like launching mini and short dramas, we are bringing enriched entertainment experiences and enhancing 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 leverage our adoption of AI technology to advance our operations and fully leverage the potential of our IP. This strategic effort is aimed at driving our company toward greater profitability and effectiveness. Now, let me pass it on to Jun, who will go through our financial performance.

Jun Wang: Thanks, Mr. Gong, and hello, everyone. Let me walk you through the key numbers. In the third quarter, total revenue was RMB 7.2 billion, down ten percent annually. Membership service revenue reached RMB 4.4 billion, down thirteen percent annually for three reasons, as previously discussed by Mr. Gong. For online advertising, revenue decreased by twenty percent year-over-year to RMB 1.3 billion. This was primarily due to the decrease in brand ad business, partially offset by the growth in performance ad business. Channel distribution revenue reached RMB 814 million and grew fifty-two percent annually, while other revenues decreased by eight percent annually to RMB 729 million. Moving on to costs and expenses, the content cost was RMB 4 billion, down five percent annually, primarily due to lighter movie offerings in the quarter.

Total operating expenses were RMB 1.4 billion, down five percent annually, primarily driven by more disciplined management of marketing spendings. Turning to profit and cash flows, the non-GAAP operating income was RMB 369 million, and its corresponding margin was five percent. Net operating cash flow totaled RMB 243 million, marking ten consecutive quarters of positive cash flow. At the end of the third quarter, we had cash, cash equivalents, short-term investments, and long-term restricted cash included in prepayments and other assets totaling RMB 4.7 billion. For detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q&A.

Operator: Thank you. If you wish to ask a question, please press star one on your telephone. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Please ask questions in Chinese first and then translate your question into English. Please also limit yourself to one question at a time. If you wish to ask further questions, please rejoin the queue.

Suking Zang: Your first question comes from Suking Zang with CICC. Please go ahead.

Suking Zang: Thanks, management, for taking my question. My question is about mini and short dramas. As Mr. Gong mentioned in the prepared remarks, the company has enhanced integration of mini and short dramas. Could management elaborate a little more on it? And what’s our strategy for mini and short dramas? Thank you.

Yu Gong: Starting from the end of September this year, we added mini dramas and short dramas into our content ecosystem. These two types of content are very much differentiated from traditional long-form video content, so they are a very good complement to our content offerings. Especially for this year, the free mini dramas model has been growing significantly, and the user scale is pretty flexible and has room to grow. So it is a good time to enter. For mini dramas, they are one to five minutes long in a vertical format, and for short dramas, they are five to twenty minutes long in a horizontal format. For now, we are focusing on mini dramas. In the past two years, we participated in mini drama survival and performance, and we have been innovating in this mini drama sector by introducing different models and formats.

For users, it used to be participating or watching the content for free or pay-per-view, and we now introduced the subscription model to this business model. For current subscribers, they can watch the vast majority of the mini dramas for free, and pretty soon in the future, they will watch everything in mini dramas for free. For the business model, there are three advertising models, and they can do pay-per-view. We actually introduced a subscription model to the business model, and we believe this will be positive and constructive for membership retention and also to attract new users. In terms of content strategy, we will develop mini dramas through various methods, including licensed copyright, full-price buyout, and profit sharing. Going forward, we will focus on premium head content of mini dramas, and eventually, we will develop our unique style of content generated by ITE that belongs to ITE.

We hope in the future that for ITE’s mini dramas, in terms of content production quality and also the value provided to users, there will be a further improvement on the current landscape. Thank you.

Li Zang: Your next question comes from Li Zang with Bank of America. Please go ahead.

Li Zang: Thanks, management, for taking my question. I want to follow up on the short drama segment. Can you share with us the competitive edge in investing in short dramas and any impact on our content cost in the future?

Yu Gong: In terms of our advantages in mini dramas, first of all, we have an advantage in product and technology. A significant amount of traffic happens on the mobile side. On the mobile side, we have two major applications, the ITE app and ITE Lite. For these two apps, we have very mature technology and infrastructure and a good user base. A good portion of the users are subscribers. Based on that, when we add new content, such as dramas, and combine it with a good upgrade to the application, it will be a good addition to the current strategy. The first upgraded version of the ITE app has been released already, and we are doing A/B testing right now. Most users, when they download or upgrade the application, will see the changes.

The ITE app will continue to focus on long-term video content. From a business model perspective, it will be primarily focused on the subscription model. For the ITE Lite application, it will focus on mini dramas and short dramas, mainly driven by the advertising model. The vast majority of the content providers for mini dramas are existing partners. Collaborations in these new areas further expand our different entrepreneurship, allowing us to scale up in these areas at a relatively low cost. The operational rules or principles in terms of managing these two types of content, long-form video content versus mini content, are relatively similar. There are no major changes, so it will be pretty fast for our teams to pick up and master this. In terms of funding for the content, for mini dramas, it comes from two aspects.

First, we will lower the investment in terms of low ROI long-form video content. Secondly, we will scientifically and rationally prepare the budget for mini dramas. Thank you.

Maggie: Your next question comes from Maggie with Morgan Stanley. Please go ahead.

Maggie: Good evening. Thank you for this opportunity to ask questions. My question is about membership. In October, we announced the launch of a family account option. I am wondering if management can share more insight into the strategic consideration around this initiative, especially given the current macro environment and consumer trends. What is our expectation for this strategy over the near term and longer term, and how has the initial feedback been from consumers and users so far since the introduction? Thank you.

Xianghua Yang: Thank you, Maggie. We will invite Mr. Yang, who is in charge of this segment, to answer this question. ITE’s family account is a high-cost-effective shared membership service plan we introduced to enhance the user experience for family members. It better serves users’ independent and diverse viewing needs and user scenarios. The family account and the primary account are actually standalone membership accounts with individual passwords and playback history. This not only effectively improves the user experience but also protects the account security. As you know, video consumption needs among the elderly and young demographics are steadily increasing. The family account is designed to effectively address their challenges in account management and accessing trial products.

The membership account is an innovative attempt in the membership product model, which has positive impacts on improving membership conversion and revenue. Going forward, we will continue to combat password sharing and offer users more cost-effective choices, aiming for the long-term healthy development of the membership business. The family account was officially launched on November 12th, and we will observe the performance for some time before sharing the user feedback and data outcomes with everyone.

Zee Zhao: Your next question comes from Zee Zhao with Wainfa. Please go ahead.

Zee Zhao: I will translate myself. As Mr. Gong has mentioned, long-form video is fundamental to ITE’s content ecosystem. My question is about your strategy for the production of dramas. Could you share with us about the licensing and innovative direction of your future drama series? Thank you.

Xiaohui Wang: Thank you. We will invite our Chief Content Officer to take this question. We do think, although there have been some cyclical fluctuations in the industry, we believe that the recovery of market confidence and user demand for long-form storytelling will still be one of the strongest demands among users in the mid to long term. We believe it will remain as the core of ITE’s content ecosystem as well. Going forward, we will enhance the sustainability of our high-quality content supply through powerful reform measures, continuing to achieve a win-win situation for both content quality and commercial revenue. Based on insights into societal sentiment and changes in user viewing preferences, we will comprehensively upgrade the production and operational mechanisms for films, animations, and variety shows.

We will improve production and content launch efficiency, focus resources on creating high-quality works, and strengthen the commercial aspect of the content. 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. We will strictly curate project selection to prioritize excellence and concentrate resource allocations on premium content with high commercial value. From inception, all projects will embody commercial appeal, mass market resonance, and contemporary relevance. For content evaluation, we will establish stricter assessment standards that focus more on revenue capability and innovation ability within the framework of the company-related cost ratio.

For content creation, we will optimize our approach to align with users’ evolving viewing preferences. Simultaneously, we will aim to deepen our understanding of social trends and create works that resonate with contemporary societal emotions and tastes. For content production, we will strengthen project management and closely monitor project profitability, working with partners to reduce costs and improve production efficiency. From a team-building perspective, we are committed to the continuous improvement of our in-house studio mechanisms. Our studios are structured around producers, focusing 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 patterns and styles.

This strategy ensures ongoing evolution through a process of natural selection for only the best talent. That concludes the answer to this question.

Operator: There are no further questions at this time. I will now hand back to management for closing remarks.

Yu Gong: Thank you, everyone, for participating in the call today. If you have further questions, do not hesitate to contact us. Thank you again. Goodbye.