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iQIYI, inc (IQ) Q3 2021 Earnings Call Transcript

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iQIYI, inc (NASDAQ: IQ)
Q3 2021 Earnings Call
Nov 17, 2021, 6:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the iQIYI Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Chang Qiu [Phonetic], IR Director of Company. Please go ahead.

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Chang Qiu -- Investor Relations, Director of Company

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's third 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; Mr. Wenfeng Liu, our CTO, Chief Technology Officer; and Mr. Xianghua Yang, Senior Vice President of our membership business. 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 guidance. After their prepared remarks, Xiaohui, Wenfeng, and Xianghua 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 not limited to those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statement except as required under applicable law.

With that I will now turn the call over to Mr. Gong. Please go ahead.

Yu Gong -- Founder, Chief Executive Officer and Director

Hello everyone. Thank you for joining us today. In the third quarter, we have faced a lot of volatility as we navigated somewhat particular challenging operating environment. We experienced uncertainty in terms of content gathering, which resulted in softer than expected top line performance. Despite the short-term volatility, we are delighted to see encouraging sign across multiple operating metrics. Our leading market position remains intact as we continue to get number of awards in various user metrics according to third-party data. We formerly believe there are a couple of eternal truth when it comes to entertainment.

The first is that audiences constantly demand high quality entertainment content such as movies and drama. And the second is that creators have infinity potential to develop excellent material. With this market dynamics in mind, we think we have a tremendous space for growth and development. During the quarter, we continued to enhance the production capabilities of our original content, explore new drivers to diversify into and expand our user base by refining of products and the overall user interest. Meanwhile, we have been driving the industrialized pressure of video production to improve the efficiency of our operations. We believe all of these developments will enable us to navigate through the short-term challenge and we are on the right path to achieve long-term success.

Now, let's go through the performance of our business segments in the third quarter. Let's start the memberships. During the quarter, our membership services revenue grew both annually and sequentially. Our core strategy is to cater to the demands of specific user segments with diversifying content and continuously improve membership -- improve member benefit that enhance the member interest and brand new member signups and the user retention. At the same time, we are focused on reaching at and improving the long-term monetization of our membership business by developing innovative new business models, adjusting our price points, eliminating ineffective discounts and pushing to other operation measure tips.

However, as I mentioned earlier, the uncertainty of our content gathering across [Indecipherable] in terms of subscriber numbers. In the future, we will continue to enhance our library of content across different drivers and strengths. Our ability to withstand risks relating to content gathering. In the third quarter, membership services revenue grew by 8% year-over-year, mainly due to the effect of hit dramas such as One and Only, [Foreign Speech] and Forever and Ever [Foreign Speech], which were launched in the third quarter as well as the continued interest in dramas launched at the end of the second quarter such as My Dear Guardian [Foreign Speech].

As of September 30, the total number of subscribers was 103.6 million. The sequential [Indecipherable] was mainly due to delays in the release of some highly anticipated content. The major content that made delays in content was less diversified in terms of genres. Despite the soft performance, we are happy to see that subscriber growth on TV devices and from overseas maintained all the momentum. If you look at higher conversion of users on TV devices and the continued expansion of our overseas user base, we're the significant drivers of future subscriber growth.

On the other hand, our apps recorded both annual and sequential rate growth. As the annual growth rate of 10% was mainly due to the success brought by adjustment that was [Indecipherable] last November. With past of our membership business, we will continue to improve going forward driven by our content and our multiple operating initiatives. The member experience is one of the most important factor that we focus on. On October 4th, we proactively canceled the paid advanced build model to get ahead of peers.

This will further help improve the member interest and thus support the subscriber growth and retention and lay a solid foundation for the long-term monetization of our platform. In the Asia, we continued to enhance member benefits on our platform, where our operation with top industry partners. In terms of new services and the new business model, one of our key focuses is to promote the development of cloud cinema, primarily across free content categories. So, our article films gets rebuilt with PVOD model. Premium films only gets rebuilt on online platform and iQIYI original films.

Since 2020, our article release of future films have been hit significantly by the COVID-19 pandemic. The cloud cinema model will reduce the life of online video platform until there are article films. Also, it enables users to watch new films soon after they are offline release at a price that is cheaper than our traditional movie ticket, which further maximize the monetization potential of each film. During the [Indecipherable] and they're all cloud cinema model. These films fall in different genres: namely comedy, action and suspense, which help to satisfy the demands of different user content. [Indecipherable] was launched in October and it received a positive user feedback since its launch.

In terms of overseas expansion, we were able to significantly expand our user base with DAUs increasing sequentially in a number of Southeastern Asian countries. Downloads of the iQIYI app remain on top of last half of various regions and was number one in Thailand, Malaysia and [Indecipherable] domestic blockbuster drama continue the growth of our overseas revenue. We also recently kicked off the development of six oversees out and out dramas including four Korean and two Philippine are in demand.

In Asia, we continue to expand our cooperation with local partners, including multiple media platform and operators in Malaysia, Thailand, and Singapore. We also launched our ad system beside annual cooperation framework agreements with numerous advertisers and successfully expanded our local sponsorship for our [Indecipherable]. Moving onto advertising. During the quarter, our advertising revenue had been soft, mainly due to a drop in brand ad revenues. The decline was mainly due to the delay of key content including dramas and variety shows. We continue to work on developing innovative new variety shows, which we are doing to diversify our content and de-risk audience from content [Indecipherable].

We are still refining and fine tuning some of this production and it's going to take some time to bring over and what has simulated third parties with this new genre. The softness of our brand advertising business was also due to the overall challenging macroeconomic environment in China. Revenue from performance ads increased the standard both year-over-year and sequentially during the quarter. Our iQIYI Light apps was the main driver behind this. As opposed to our main apps, iQIYI Light mainly focuses on low-tier cities. There is low overlap with our main app, which mainly focus on brand apps.

IQIYI Light is excited to be a great complement that drives new growth of our advertising business. The year-over-year growth of performance ads also benefits from improvement in our monetization capabilities driven by our technology and the true contribution from key sectors including internet service and e-commerce. Thus, the crucial growth was also partially driven by the growth in our ads eventually during the summer vacation.

Looking forward to the fourth quarter, we have observed some slowdown in terms of overall macroeconomy, which might negatively impact our advertising business. Nonetheless, we are proactively adapting ourselves to the environment to minimize our potential if possible. Moving over to content, we have at present increased uncertainty in terms of content scheduling and pretty long content approval process since our last earnings call. Although, we prepared a rich plays of content during the quarter, some of the top dramas and variety shows in our pipeline is currently launch delays going forward to offset these types of risks. We are looking to further expand and increase the diversity of our content portfolio across new and different categories and deepen user awareness of our diversified content offerings, all in effort to de-risk our business from content gathering issues in the future.

In the Asia, we actively responded to the guidelines issues by the various government authorities to promote the health of entertainment and online media industries. We believe these actions will further result long impeding problems in the industry, which showed how to further optimize content cost, eliminate the chaos in content production and promotion. And as we deal, we should know industry combination. Overall, this change should be beneficial for supporting the healthy development of the industry over the long term.

I would also like to highlight out content strategy. Efficiency in content production and operation has always been our primary targets that we strive for and we are now putting even more focus on it. We are proactively taking initiatives to improve the efficiency of our operations and reduce ineffective investments in content by cutting projects that are added to generate low ROI. The online video industry has rapidly developed over the past decade and now we have gotten to a point where our content is key and the efficiency is key. We're happy to see the continued result of our progress to optimize content cost driven by our enhanced production capability, displaying the content expanding and improve operations.

Our important metric we use to track the efficiency of our content expanding is content related cost ratio. Simply speaking, this metric is calculated by dividing the total cost related to our title pilot revenue generated. Based on this experiment, we can see the operating efficiency of our overall content in 2021, have improved substantially from last year. We continue -- we will continue to use this metric as an effective tool in managing the efficiency of our investments in content and operations.

For example, One and Only and Forever and Ever were our two dramas launched in this quarter. These two titles were both adapted from the Finn Novel, which created synergy in terms of IP and they are quite innovative in terms of both content creation and forecasting models. Also these two titles are good examples that demonstrate all increased efficiency and in content operation as measured by the content related cost ratio. The performance of One and Only was 13 percentage points improved than last year's drama [Foreign Speech] which features the leading actress [Indecipherable].

We will also like to share some highlights on the performance of our vertical content sales and model strategy. We have always been the industry pioneer in terms of content innovation and operation. Our sales model strategy is definitely one of our successful attempts. This model helps us to build a recognition among audiences and advertisers in different genres and which is beneficial for attracting new user and driving up user retention and offer us better ROI as it brings synergies among different titles within the same content of genres and it provides more flexibility in working with advertisers.

For example, we observed that the recent broadcast of the [Indecipherable] recent daily video view of and user time spend for the parties increased by more than two times since the new season of the [Indecipherable] was launched. Looking forward to the fourth quarter, overall, we predict that certainly we'll remain in the market. We will continue to execute diversified content and strategy with the addition to the new season of [Indecipherable] launched in the first quarter. Other key titles include the [Indecipherable] and animated content such as Deer Squad 2 [Indecipherable] premiered in mid October. The show was highly acclaimed by audiences and validated our market leadership in variety shows.

Moving onto technology. Advanced technology is the foundation of our business and we are constantly developing new technology to improve the user interest, increase user penetration, develop innovative new content formats and enhance content production and the efficiency of our operation. At the same time, technical innovation is key to the industrialization of video production in the industry and as well be greatly beneficial for improving the probability of success, increasing ROI, simplifying the production management process, reducing production costs and increasing the viewing experience.

We continued to make progress in terms of user penetration. The user scale of iQIYI Light grew rapidly. Peak DAUs increased by nearly 2 times sequentially and the user retention and the monetization has also improved in terms of user profile as I mentioned earlier. iQIYI Light is mainly focused on low-tier cities. So the growth we have seen with this app speaks to all of the facts in penetrating into these regions. In terms of content production and efficiency improvements, we continue to apply AI technology to effectively reduce production costs during the quarter. For example, operating costs can be effectively reduced with our proprietary intelligent translation tools. We have fully replaced manual translation with ultimate AI translation for B level dramas in Malaysia.

Going forward, once we fully adopt this technology for our overseas business, it will save us hundreds of millions of RMB in translation costs in the future. In terms of industrialization of video, we have launched and applied multiple technology and products to our content production, which reduced the production cost, increased efficiency and improved the user interest. Taking our proprietary multi-view capture assist as an example [Indecipherable] full production process from camera deployment, video shooting to post production make content production more efficient.

Other intelligent tools that include our script to provide management product, which can be used in the mid stage production process. The product has been applying the tool [Indecipherable], including some of the [Indecipherable] works in production. Also a management tool for the post production editing process has been used by number of post production companies in the third quarter, improving transcoding efficiency by 3.7 times.

In summary, we are actively adapting ourselves to the current environment. We continue to be a pioneer when it comes to content innovation and operation. Meanwhile, we are seeing our promising growth trajectory for our new initiative such as iQIYI Light and overseas business. Our original content is [Indecipherable] model content is highly recommended by users and advertisers. We will continue to take the lead in growing out our technologies and the tools for intelligent production and driving the industrialization for the long-term video production process, which should help to further optimize our operating efficiency. We have evolved along with the industry in the online video market over the past decade. The inferences we have accumulated and our expertise are in line with where the industry is heading. We value the current unsteadiness as our prudent learning opportunity. We continue to believe that what it does not feel us make us stronger.

With that, I'll turn it over to Xiaodong to talk about our financials.

Xiaodong Wang -- Chief Financial Officer

Good morning and good evening, everyone. Let me review our key financial highlights for the third quarter. Our total revenue reached RMB7.6 billion. Membership service business continue to be our largest business pillar with revenue increased 8% year-over-year and accounted for 57% of our total revenue. Online advertising revenue decreased 10% year-over-year, primarily due to less premium content launched during the quarter and the challenging macroeconomic environment in China. Our content distribution revenue achieved a 60% growth on a year-over-year basis and we -- as we distributed more content titles to other platforms during the quarter, our cost of revenues increased 10% from the same period last year, among which content cost increased 13% from the same period in 2020.

The increase in content cost were mainly due to the more investment in original content during the quarter. Our operating loss margin on GAAP basis was 18%, remain largely flat compared to the same period last year, driven by our disciplined investment strategy. As of September 30, 2021 our company had a cash, cash equivalents, restricted cash and the short-term investment of RMB 11 billion. For detailed financial data, please refer to our press release on our IR website.

For the first quarter of 2021, iQIYI expected total net revenue to be between RMB 7.08 and RMB 7.53 billion expanding a 5% decrease to 1% increase year-over-year. This forecast reflects iQIYI's current preliminary view, which may be subject to change. I will now open the floor for Q&A. Thank you.

Chang Qiu -- Investor Relations, Director of Company

Operator. Please open the floor to questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Ella Ji from China Renaissance. Please go ahead.

Ella Ji -- China Renaissance -- Analyst

Thank you. [Foreign Speech] First question is relating to the recent improvement plans you had with a local province government. Just wonder how is that going to affect our future business? Second question is relating to the future membership growth potential. Just wonder regarding the future membership, is it going to be mainly from lower tier cities or still from the major tier cities from the reactivate of the older members? And third question is, just wonder what is the -- could management share anything new or exciting or promising relating to the variety shows going forward? Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

[Foreign Speech] I will translate Mr. Gong's feedback. So for the first one, in terms of your question regarding the Consumer Council. So this just kind of applies to the full industry players. So our feedback comes from the two aspects. One is the product design. So we have been -- the first one comes from the product design and the second one comes from the flow of the product. So the first one for product design, we've been also communicating with the Consumer Council, also collecting feedback from our customer service department. So, our goal is to increase the user experience, trying to lower the accidental clicks of any necessary steps. So, overall, the user experience will be increased and improved and from the business model perspective, we've been also communicating with Consumer Council in terms of also the user agreement to make sure all the messages are communicated clearly with users. So that's the first question regarding the Consumer Council related question.

And the second one is our penetration into the different tiers of cities. So for now, for our penetration in different regions, for the high tier city, the first and second-tier cities, the penetration is high and for the lower tier cities penetration is relatively low for this point and our iQIYI Light app is the main app that targets this user demographics. So for iQIYI Light right now we offer a lot of the free content, so the users consumes the free content and then they actually will see the advertisement for that. So right now on the advertising side for iQIYI Light, performance app has a high percentage of revenue contribution. So I think going forward, iQIYI Light needs one or two years for improvement and for growth and we will keep working on this application and for our main iQIYI app that's still going to be our main target for elevating our operations, optimize user experience, optimize products and optimize the product features.

[Foreign Speech] So, the 3rd question, I'll switch over to Xiaohui, our CCO, to answer your question.

Xiaohui Wang -- Chief Content Officer

[Foreign Speech] Okay. Xiaohui responded to the the talent show question. So because of the same culture that's been existing in this entertainment sector for a long time. So it does have some impact on the variety shows segment. So for now, the Koreans based or Korean style talent show that's prohibited in the video space. But, however, there is still a lot of ample room for growth in terms of variety shows, example from -- we can focus on the areas that come for genre that's like comedy, emotional and also some talent show, but that's not relatively to the Korean style and we also launched our new comedy variety show called [Foreign Speech] the Super Sketch Show, which is the new content genre that we innovated originally.

So based on its first feedback since its launch, we have seen promising user feedback and viewership from this show. So our variety show performance is back to number one position in the market. So going forward, especially in the fourth quarter, we'll still launch innovate innovative variety show content genre, for example, like we mentioned in the opening remarks. [Foreign Speech] that's also an innovative variety shows that will be introduced to the users. Thank you.

Ella Ji -- China Renaissance -- Analyst

Thank you very much.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of Alicia Yap from Citigroup. Please go ahead.

Alicia Yap -- Citi -- Analyst

Hi, thank you. [Foreign Speech] Thanks for taking my questions. So my questions is related to the overall longer-term outlook for the long-form video industry. Would there be any change of the strategies for your self-developed -- like self development content, overall the content genre and even for some other type of the length of the drama series, the type of the genre that you plan to produce. In addition, can long-form video monetization model rate out beyond the current membership subscriptions and advertising? If so, what could be the new model? Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

[Foreign Speech] So, for right now. I think the biggest problem in the -- for the online video space is the supply shortage contributed from various reasons. The first one is of course the biggest when the COVID-19. So for example, the number of movies launched since COVID-19 is only, less than half -- 50% of 2019 level and for traditional satellite TV series, the quantity is only one-third of the past. And for the new format of internet series, the web series, there's going to -- we experienced major delays because of the stronger censorship. And even though the content was launched, but the quality was got -- taken a discount or there is some less promising feedback from the quality. So frankly speaking, these are the reasons that contributed to the supply shortage for the video content. And also if you are taking the short-form video reason that also contributed to this because it's also taking the user time spent and this is one of the biggest, I guess, factor that contributes to user behaviors.

And for your questions about monetization models. I think we have been working on taking the full process of the entire IP chain. So for example, if we have a good IP, whether it is from the script level, whether it's from the story level, we wanted to take this through the whole entire process of the IP lifecycle. We can develop this into TV series, movies, games, also franchise products, etc. So I think going forward if you're looking at the long-term perspective of this industry, a healthy model will be the advertising revenue plus the subscription revenue plus the PVOD model, altogether is better than the -- our investment level. So that will be our end goal and we think it's the sustainable model going forward in the long-term prospect of the online video industry.

[Foreign Speech] Okay. So I think if you look at the overall grand picture of the online or actually the entertainment space, movie started 126 years ago or about 100 years ago and we believe the consumer demand -- the user demand for premium -- high quality premium content is internal and also the creative talents for this area continues. So all of these, it just needs time to grow the space. So I think for online video space, we believe -- we strongly believe there is ample room for growth in the future, is just now that we are proactively adapting ourselves to the new environment to embrace all the changes in the environment, but we think we are the -- very experienced team with expertise in this industry that will enable us to face all the challenges and be a successful player in the industry. Thank you.

Operator

Thank you. Next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

[Foreign Speech] Thanks management for taking my questions. I have a question regarding overseas competition. We have just a talk about using technology and achieve our efficiencies for the translation process. I just wanted to get some understanding how we think about the competitive landscape in different market and will we step up the investment in overseas going forward? Thank you.

Xianghua Yang -- Senior Vice President

[Foreign Speech] So, our Senior Vice President, Xianghua entitled to membership service will answer this question. So for our goal for overseas business -- our primary goal is to export our original content to various regions around the world. So, the first situation will counter, of course, if the translation situation. So -- and also different regions have different cultures, different backgrounds. So our growth initially was to find countries with similar culture background. So, for example, the countries in the southeast Asia region and also for North America because there are a lot of the trainees in that area. So we also introduced some of the content in that region as well.

[Foreign Speech] Okay. So, of course, going forward, we'll continue to bring more premium content to the overseas business and based on our internal data, we know that a lot of our series are very welcomed by the young audiences in the overseas area region.

Thomas Chong -- Jefferies -- Analyst

Thank you.

Xianghua Yang -- Senior Vice President

Thank you.

Operator

Thank you. Due to time constraint that was the last question and I would like to hand the call back to management for any closing remarks.

Yu Gong -- Founder, Chief Executive Officer and Director

[Foreign Speech] Okay. I will summarize our short-term goals and also the long-term goals for our company. So as you guys know that in our opening remarks, we mentioned, we are facing a lot of challenges in the short term related to the government regulatory environment. However, we've been proactively adapting ourselves to this new environment of situation. So, we expect for the next one or two quarters, we think the regulatory environment will becomes the new norm and would be stable and our main goal going forward first is to reduce our loss and we will further optimize our content cost based on our industrialized initiatives for video industrialization and also we were to execute strongly according to our strategy and we will eliminate or drop the content that doesn't fall in line with the policy and so at the same time, we will also to explore new monetization opportunities. So that's our overall strategy for the short term and also mid to long-term. Thank you.

Chang Qiu -- Investor Relations, Director of Company

So thank you everyone for joining us. Feel free to reach out to us if you have any questions and we'll talk next quarter. Thank you.

Yu Gong -- Founder, Chief Executive Officer and Director

Thank you. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Chang Qiu -- Investor Relations, Director of Company

Yu Gong -- Founder, Chief Executive Officer and Director

Xiaodong Wang -- Chief Financial Officer

Xiaohui Wang -- Chief Content Officer

Xianghua Yang -- Senior Vice President

Ella Ji -- China Renaissance -- Analyst

Alicia Yap -- Citi -- Analyst

Thomas Chong -- Jefferies -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.


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