iQIYI, Inc.

Good day and thank you for standing by. Welcome to the ITE First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Fan Liu, Investor Relations Director of ITE. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining ITE's first quarter 2021 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. Xiaodong Wang, our CFO, Mr. Xiaohui Wang, our CCO, chief content officer, and Mr. Xianghua Yang, senior vice president of our membership business. On behalf of Mr. Gong, I will give a brief summary of the shareholder letter we sent out earlier today, followed by Xiaodong, who will go through the financials and guidance. After our prepared remarks, Xiaohui 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 US 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. ITE does not undertake any obligation to update any forward-looking statements, except as required under applicable law. With that, I will kick-start the call with a brief summary of our shareholder letter. As you may have noticed, we have sent out a shareholder letter earlier today. This is the first time since our IPO for Mr. Gong to communicate with our shareholders with this format. In this letter, Mr. Gong shares some of his thoughts on the online video industry, its competitive landscape, and our content strategy. to start with the industry dynamics and our competitive advantage. From the perspective of users' mindset, video content can be defined as delicious, entertainment, and interest-based video, of which ITE mainly focused on the latter two. Our ITE app focuses on entertainment videos, and our Suike app on interest-based videos. The entertainment video market has extremely high entry barriers, including the economics of scale, the overall understanding of the industry, and its talent, as well as the industry's capital-intensive nature. Empowered by our technology and the database, our knowledge on the industry, and our affiliation with the key content talent, IT has established a solid leadership For interest-based videos, we will continue to invest in Suike and expect that it will contribute to our core entertainment business. Next, about our approach to current challenges. Though we are currently facing some challenges in our membership business, we still firmly believe that this business has huge potential. Two supporting data. First, as of the end of the first quarter 2021, the number of accumulative paid accounts has exceeded 490 million. And two, in first quarter 2021, the monthly average number of subscribing members who have membership benefits for any given day has reached nearly 160 million. For the volatility of membership business, we believe lack of high quality content is the primary reason. We believe the solution lies in the increase of our in-house production capacity and the industrialization of video production. To establish enough and highly productive in-house studios is an important prerequisite for the improvement of our content quality. We have now established over 50 in-house studios within two years. Most of these internal studios are focusing on original dramas and variety shows, and a few are concentrating on movies and animations. As the capacity of our in-house studios is still far from enough, we will continue to expand our in-house production capacity and diversify the genres of our in-house studios. Through these in-house studios, we can amass outstanding talents in the content production industry and up-term more premium IT and production. The industrialization of video production includes the restructuring of industrial rules and intelligent production techniques. Thanks to the development of new technologies, our intelligent production system and tools are gradually improving. This enables us to enhance the controllability of production schedules, content quality, and financial risks. and further reduce costs and improving efficiencies. Now, I would like to turn over to Xiaodong for first quarter updates.

Hello, everyone. We hit the peak of the year with a solid quarter. Our revenue increased both structurally and year-over-year in the first quarter, which is above our previous guidance. Besides, in recent quarters, when revenue has been relatively stable, our content costs have been effectively controlled and adopted. have continued to narrow or continue to lead the market by launching a consistent stream of premium content. According to Quest Mobile, our MAU, DAU, and monthly time spent all ranked first in the industry in the first quarter of 2021. For our membership benefits, as of March 31, 2021, we had 105.3 million subscribers with 3.6 million net addition during the quarter. Membership surveys revenue increased by 12% to R&D 4.3 billion. Subscriber growth was driven by several factors. First, our top content, in particular premium dramas, performed very well. For instance, our top drama, My Heroical Husband, was a blockbuster during the spring festival. Second, users spent more time on long-form media during the major holidays, such as the spring festival. driving up the overall traffic on our platform. Third, we introduced various innovative marketing initiatives during the holiday season. In addition to overall membership growth, our sequential growth in membership service revenue was also due to two factors, including, first, an increased willingness to pay among users. Second, powerful growth driven by the headline pricing adjustment in November 2020, which is well accepted among users in the industry. Meanwhile, We strive to expand our total addressable market through launching a new VIP plan for IT light and expanding our footprint overseas. Though we still expect short-term volatility in our subscriber numbers, we remain confident in the mid- and long-term development of our membership business. This is based on our dedication to premium content as well as ongoing improvements to our original content ecosystem and in-house production capabilities. Moving on to advertising business, during the quarter, the overall advertising market continued to recover. Our online advertising service revenue increased by 25% year-over-year. Even though the first quarter is a traditional slow season for our advertising business, we were able to achieve business crucial in the year-over-year growth. Like the trend in the first quarter of 2020, growth was mainly attributed to strong content marketing revenue, Our content marketing revenue recorded decent growth, driven by major variety shows and dramas. The content marketing revenue accounted for around 64% of our brand advertising revenue in the first quarter, which was a peak for the last few quarters. This again validates advertisers' recognition of our premium content. Next for content. We continue to lead the industry in terms of total number of top titles and viewership across the category, including drama, bird shows, animation, charging, and other content. For dramas, our exclusive costume drama, My Heroical Husband, became an instant hit after its launch. Its innovation in themes and style provided by the whole new way of creating good costume drama, which will have an impact on our future productions. In original movies, our original movie, Underwater Crash, has been screened in theaters, reached a box office of over R&B 300 million, and has received high ratings from various press platforms. For the second quarter, key dramas in our pipeline, including A Love for a Dilemma, Court Lady, Court of History, The Rebirth, The Lies Secret, and others, Love for a Dilemma, and Court Lady was aired in April, and we received by our users. We keep promoting short drama theaters with a brand-featuring romantic content scheduled to launch May 20th this year. We will also launch new content in Mr. Theater later this year. In animation, new content to be aired including No Choice But to Betray the Earth, The Tale of Wonder Keepers, and the light animation Immortal Father of the Son-in-Law 3, as well as others. Despite some expected uncertainties in our content schedule in the coming months, we believe that the impact will be mitigated by our diversified content pipeline, especially self-produced dramas. With over 10 years of IHE's growth, we strongly believe that long-form video is irreplaceable as an entertainment format. In the meantime, Through continuous technology innovations that empower content production, we will have the capability to increase our hit ratio, generate greater commercial value, and expand the imagination for the next generation of entertainment. As well, we look forward to bringing more good news to all shareholders. Now let me reveal our key financial highlights for the first quarter. For the first quarter, total revenue reached RMB 8 billion. Membership business continues to be our largest business pillar, accounting for 54% of our total revenue. Our advertising business recorded a notable rebound of 25% increase on a year-over-year basis. Both content distribution business and other business achieved a solid growth on a year-over-year basis. Our cost of revenue decreased 10% year-over-year, mainly due to the 9% year-over-year decline of content cost. The decrease was primarily due to the decline of licensed content cost. Our operating losses margin on GAAP basis continue to narrow by 16% year-over-year to 13% for the first consecutive quarter. As of March 31st, 2021, the company had cash, cash equivalents with strict cash in the short-term investments of RMB 13.3 billion. For detailed financial data, please refer to our website. For the second quarter of 2021, we expect the total revenue to be between RMB 7.21 billion and RMB 7.65 billion, a 3% increase year-over-year. This forecast reflects RIT's current preliminary view of subject to change. I will now open the floor for Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To redraw your question, press the pound or hash key. Chinese-speaking participants are requested to ask your question in Chinese first and then translate your question into English. Participants are restricted to one question at each time. Be standby while we compile the Q&A roster. Your first question comes from Thomas Chong from Jefferies. Please ask your question.

Thanks management for taking my questions. My question is about the regulatory environment in China. How should we think about the regulations regarding the long-form video? And on the other hand, how we should think about our short-form video strategy, I mean the mid-form video strategies for Celica and any KPI that can be shared that would be great. Thank you.

The first question is about policy supervision. In the past two years, the level of policy supervision has become relatively stable. But because of the regular management, the management will be strengthened before the major holidays. This is a regular way of management. So before July 1, Okay. Over the past two years, as you may have observed, that the regulation intensity is almost stable.

You can observe that before some kind of a season, for example, the upcoming July 1st day, there will be an intensified or enhanced regulation or policy guideline management. It will directly impact our content pipeline in the short term and cause some uncertainties.

We do not have a very accurate and refined KPI for the moment. In the past, we have spent more than a year thinking, trying, and developing to determine the moment to focus on the interest video. This model has been confirmed. The relevant interest video community uh uh Okay, for Suike APP,

right now don't have very quantitative KPI. Over the past one year, we have been able to find it because value proposition, which is based on the interest-based video community. All the things including the user interaction system is doing the progress of the upgrading And in terms of the content community ecosystem, it's still far from satisfactory. We still need to work hard on this. Until it has been quite satisfactory before the year end, we won't have a very big promotion. In terms of the user data, it won't grow very rapidly in the near term. we will still have a very elaborate evaluation internally. Thank you.

Your next question comes from Piyush Mubai from Goldman Sachs. Please ask your question.

Thank you for taking my question. My first question concerns the content cost spending, which looks solid in this quarter in terms of control. I wondered if you could talk through the expectation for the rest of the year and whether these levels can continue to improve on as we look forward for the rest of the year. That's the first. The second is, as we look at ARPU at this stage, following the competitions joining you with raising pricing or raising effective ARPUs, What is the outlook for where this number could go through for the rest of the year as you roll that higher price through? And where do you expect this to go? And the third is you've spoken in the past about your move into the international markets. Could you just give us a brief feel for the scale that you are likely to be able to attain and where you are at this stage? Thank you.

This is Xiaoduo. I will answer the first question about the content cost and then I will let Xianghua comment on the ARPU trend and over-savingness. For the content cost, I believe the total content cost we spent this year will continue to be optimized in the next few quarters, which means the percentage of revenue, I would say definitely you will continue to see the trend of decreasing of the content cost But as we discussed before, I think we are thinking about, in the short term, we are thinking about expanding to original content to different categories, including movies and animations, which could have some short-term volatility of the total content cost. For a longer period, the hit ratio improved. I think as we discussed before, the total spending on content cost, even from like the absolute dollar amount perspective, I believe will continue to be optimized in the next few years. Thank you.

We are very welcome. Our companies in the same industry have also increased their prices. For more information on this aspect, as well as information on overseas business, we have Yang Xianghua, We are actually very welcome our peers to follow our suit.

For the detailed information, I will turn over to Xianghua for the detailed information.

Sorry, I'm Xianghua. Regarding the second question, the growth of ARP, Okay, so as you know, we actually adjusted our pricing last November.

For this quarter, in terms of our pool growth, on a sequential basis and also on a year-on-year basis, it's around 10%. And we expect this trend will continue. Our international business is still in a very early stage, and it's definitely doing a very rapid growth stage. In terms of the future direction for the business, I think ASEAN region will be a major location we are looking at.

I would like to add to the overseas business strategy. Our overseas business investment now is a relatively conservative way of increasing investment. This is the strategy. The main reason is that we do not have enough of our own self-knowledge. Because in the past nearly ten years, our main self-knowledge content has been focused on variety shows and dramas. Although there has been a huge improvement five years ago, there is still a certain distance from our ideal. The distance between our overseas business and our self-made goals is far more than that. The variety of variety shows is very strong. The variety shows made in mainland China will be very small in the overseas market. There are two major categories. One is animation and the other is film. We have just started uh, uh, uh, uh, uh, uh,

Our current strategy for our international business is still very disciplined. We cautiously look at opportunities. The major concern here is that we don't have enough in-house or regional content. particularly in TV dramas and also variety shows. The capacity is far from enough. It's more the case for overseas expansion because in terms of the content, it has actually very strong characteristics for the regions. It's also more the case that in terms of the production capacity for the films and animations, is also far from enough in terms of the capacity and the diversity. So we will continue to increase expanded capacity for our in-house production, particularly when, in terms of the acquisition content, the marginal cost for the acquisition content is still too high. So the major approach is still in-house production capacity.

I would like to add more information to the topic of self-discipline. Because the previous press conference was more about the last quarter and the next quarter. There is no chance to talk about longer-term planning and ideas. So this time, in the form of a shareholder letter, we talked about our long-term thinking. Maybe because time is too tight, many investors and analysts haven't had time to look at it. I want to add one point that overlap

Since the IPO, our earnings core is mainly focused on this quarter and the next quarter. It's quite short term. We haven't been able to have a chance to talk about our long-term strategy or the thematic view. So this time is the first time since our IPO to use a shareholder letter to communicate with our shareholders. I understand that most of our analysts haven't been able to get some time to really read the shareholders' letters. I want to stress that the major challenge here is actually not that short-form video or other entertainment format to grab our time spent. Our biggest challenge for us is still the content itself on our platform.

The lack of content is mainly reflected in the copyright content. The copyrighted TV series, because the TV series industry is facing the TV Taiwan market, the series quickly shrank, so its head content was compressed, and it quickly became smaller. Then the original movies, including Chinese movies and Hollywood movies, because of the impact of the epidemic, and because of the pandemic, the rules of Hollywood movies are changing, resulting in the number of movies being broadcast online after the movie theaters are closed in mainland China. As a result, the number of movies being broadcast online is decreasing.

In terms of the licensed content, on the TV drama categories, as you may know, the content for satellite TV content has been roughly shrank. This has caused the same issue for the content we can get on our platform. On the films category, because of the COVID-19 pandemic outbreak and also because of the change of the broadcasting rules of how Hollywood films, we also have a scarcity in terms of the film content supply in our platform.

Because of the shrinking of TV drama content for satellite TVs, we need to focus on our in-house production capacity to more mass audience in this market.

just because they need more content from our category.

So, on the one hand, we will continue to increase the number of workstations and investment in the studio. On the other hand, we will continue to increase the number of workstations and investment in the studio. More importantly, we will increase the number of workstations and investment in the studio.

So as a result, we need to enhance the investment in terms of the numbers of the in-house studios we have. And in addition, we need to increase our budget on the investment on the films and also animation categories. 我提供一些现有的一些数据,大概的。

From a member's point of view, about 60% of people watch dramas. From the perspective of the number of people watching, the first is the number of dramas, the second is the number of movies. The number of movies is a little less than the number of dramas. And then other anime and variety shows are obviously less than dramas and movies.

We want to share some data with you guys. In terms of the membership time spent, 60% of the time spent on the drama, TV dramas. In terms of the video viewership or the user traffic, the first category is drama, second is film. For animation and a variety of shows, it's much less than the former two.

On the one hand, we want to increase the number of in-house users and increase the budget. On the other hand, China's content manufacturing industry lacks the level of industrialization. The level of industrialization is low. This is a bottleneck. So we hope that in addition to making new adjustments to the industry rules, we will rely more on technology, that is, the smart manufacturing, to solve the problem.

In addition to increase the numbers of in-house studios, we also need to improve the industrialization magnitude of the video production. The solution is mainly to take advantage of the technology. This includes three parts. First, we need to increase the forecast correctiveness of the financials and also user traffic via certain business intelligence techniques. Second, we need to take advantage of the AI or other technologies to systemize the video production system in terms of reducing the cost and improving efficiency. And the third, we need to take advantage of the intelligence tools to reduce the cost and also improve the efficiency, ROI.

In the past few years, we have developed some of the functions of the smart manufacturing system, but we have not been able to design, plan, and develop them systematically and completely. This is a key task for the next one to three years.

Over the past several years, we have already developed certain functions or certain tools in terms of the industrialization of video production. We haven't been able to systemize this work. We want to improve this over the next one or three years.

To sum up, the internal studio and smart production support our future self-knowledge content

So put that in a word, our increased numbers of the in-house studios is the most important supporting pillar for us.

Thank you.

Your next question comes from Zhu Jing Liu from UBS. Please go ahead.

Thank you for accepting my question. I mainly want to know two questions. One is that we have seen the growth of membership since last year. What can we do to reduce this fluctuation? The second question is related to what you just said. In the second half of the year, we have seen more original content online. Can we see an obvious improvement in content quality in the short term? Thank you, management, for taking my question. I have two questions. We have seen greater fluctuation of subscriber growth since last year. How can we mitigate such volatility? And secondly, we are supposed to see more original content launch in second half. Can we expect a prominent improvement of content quality in short term? Thank you.

The primary reason behind the volatility of our members, subscribing members, is that lack of the content on our platform. We have observed clearly that if we have good content, we will have the incoming users falling into our platform. If we don't have the good content, the users will leave rapidly. So this is a very clear phenomenon. So the key solution here is that improve the content quality, which will be a main thing in the second half.

IT, ADP,新上线了一个新的功能,最新版。在这个手屏的下面有一个新的栏目, It's called the upcoming release of the new issue. It will list all the content that we have confirmed has been released recently. This is the full list. It includes the details of the month and date of the release. It also includes the content that has been released in the past few months. But it also includes the content that has not been confirmed yet. For example, I see on my phone that

I recommend that you look at our APP. We have the new feature here, which is calling the upcoming new content, which includes the content which have already specified launching date and also including some more content with the uncertain launching date. If you look at our feature right now, you will find that we have 78 new titles which will be launched in the coming quarters.

Thank you.

Thank you.

Your next question comes from Eddie Leong from Bank of America Merrill Lynch. Please ask your question.

Good evening, management team. I would like to ask three questions. The first is a supplementary question about the investment of the content of the project. I would like to ask you about the budget for the content. How much is included in the original content? Especially in terms of the theater, what is the proportion? The second question is, I remember about two or three years ago, 我記得你們也講過一個大屏幕的一個 strategy 那個時候也跟我們講過 update 了一些比如說智能電視這方面的一些用戶的一些數據 所以想問一問有沒有一個 update 就是現在比如說我們所謂大屏的一些智能電視 那個用戶的一個數量大概是什麼樣的一個規模 然後他們是一個平穩的狀態 還是在增長 還是怎麼樣的一個狀態 The last question is, I remember two months ago, I think I saw you guys bought a chocolate company. So I want to ask you guys, what is the reason behind it? What is the idea behind it? Just a few quick questions. The first one is a follow-up question on Dr. Gong's comment about original content. So just wondering, in the upcoming year's spending, how much of the budget is for the original content? And then the second question is about the so-called large-screen strategy. Wondering if there is any update on the user metrics from Smart TV. And then finally, we noticed that there was an acquisition of a chocolate brand like two months ago. So we're wondering any rationale behind it. Thank you.

Wow. Okay. So I will turn over to Xiaodong for the question of the content cost.

I will answer the Connect TV question first. For Connect TV, if we rule out the seasonal volatility, our user time spans and also user traffic on the Connect TV is still steadily increasing. In terms of the user time spans, the Connect TV has already surpassed the mobile side. When I say mobile side, it includes both cell phones and tablets. Right now, we don't have a very authorized third-party data, but I believe that in terms of the DAU and MAU, on the Connect TV, it's still smaller than mobile side. But in terms of the daily time spent on the TV side, TV side is higher than the mobile side. And we believe this kind of a trend continues. And in a long run, the TV side, in terms of the user timestamp, it might contribute 60% to 70% of our total user timestamp.

I would like to add one more thing. For Da Ping, the three-day live broadcast method and the pay-per-view business model have more potential for development. And I need to add one point that the Connect TV has more ample potential in terms of the membership.

and also pivot monetization, just because of the connectivity has a much better user experience, and it's easier for users, although in terms of the willingness for paying for the users, it's much higher. 刚才提到的巧克力公司叫做每日黑巧,不是收购,是少数股权投资。

In terms of the transport company you have mentioned previously, it's called Meiji Heiqiao.

It's not a merger or it's not a consolidation-based investment. It's just a minority equity investment. And since our investment, the total valuation of Niger Hatel has doubled, more than doubled. Thank you.

This is Xiaodong. I think if you talk about the total common cost, it's around like 30%. But if you look at... across different categories varies. For drama categories, it comes for over 40%. For virtual, it is higher, I think sometimes over 90%. So we are not going to increase the concentration in these two categories in the next few quarters, but I think the focus will be the quality. We are going to improve the quality of the original content in these two categories. In the coming year, I think we will try to understand how we are going to expand our original content strategy to other categories, including movies and animations. As we said before, we are going to do some small experiments in these two categories. Overall, I think you will still see some increase of the original content as a total content cost for next year, but I think an ideal or stable level of the original content as we disclosed before would be around 40 to 60 if you look at the penetration mix between original content versus licensed copyright. Thank you.

Your last question comes from Alex here from Credit Suisse. Please ask your question.

Thank you, Guanlin, for accepting my question. I have two questions. First, I would like to ask about what you just mentioned about the new member launched by iQIYI Lite. What is the difference between it and the original member's project? How will it help the users who infiltrate DCM? Is it in terms of price? It's cheaper or the features are different. The second question is, after Youth With You came out with a new program about variety shows, it was banned to use money to vote. I don't know if this will affect the advertising revenue of variety shows in the future. Thank you, Benjamin, for taking my questions. My first question will be about the new VIP program for IT light. Would you please share with us the differences from the original VIP programs and how should it help you penetrate into low-tier cities? And secondly, would you please share with us the impact of the new regulation on the reality shows after the event of use with U3. Would it impact your advertising revenue from reality shows in the future? Thank you.

Let me answer the second question first. The first question is from Yang Xianghua. Regarding the Youth With You variety show, we are very sorry that the final episode of the competition has not been broadcast. The Beijing Broadcasting Bureau and then issued a new clear announcement that the program can no longer vote for the contestant through the purchase of products and members. This is a very clear and clear requirement. Therefore, if the future program can only vote for free, We apologize that we are sorry that we haven't been able to broadcast the last episode of Youth With You.

And as you have already observed that the Beijing Municipal Bureau of Radio and Television has issued a new guidance that we cannot vote through the purchasing goods or the buying membership plans. So this means that the voting in the future would be only for free. And in terms of the impact in terms of our advertising revenue, we have to evaluate internally.

Yang Xiaohua. Okay, next question. I'm Yang Xiaohua. I'll answer it. Okay.

So for IT like APP, as you know, it's mainly catered to lower tier city users. It's much more simplified in terms of the user interface versus our main app. In terms of the membership plan on IT like APP, For these kind of members, they need to watch certain advertising formats. But in terms of the membership pricing, it's much lower than our main app membership. Just because for these kind of squabbers, their willingness to pay for the content is not that high. So we want to leverage some certain kind of operation tactics to punish them. Thank you.

I will now pass the call back to management for closing remarks.

Thank you for joining our call. We look forward to talking with you guys in the next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Only two things are forever, love and Liberty Mutual customizing your car insurance so you only pay for what you need.