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.