iQIYI, Inc.

And welcome to the ITE Second Quarter 2022 Earnings Conference Call. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to turn the conference over to Ms. Chang Yu, Investor Relations Director. Please go ahead. Ms. Yu, please proceed.

Thank you, operator. Hello, everyone, and thank you for joining ITE's second quarter 2022 earnings conference call. The company's results were released today and 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. Xiaoyu Wang, our CCO, Chief Content Officer, Mr. Wenfeng Liu, our CTO, Chief Technology Officer, and Ms. Vivian Wang, our CMO, Chief Marketing Officer, Mr. Yu Chaozhuang, Senior Vice President of our Membership Business, and Mr. Sun Ayang, our Senior Vice President of Movies and Overseas Business. Mr. Feng 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, will join Mr. Gong and Jun in this Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe proper provisions of the U.S. Security 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 some certain uses include, and now limited to, those outlined in our public filing with the IPC. ITE does not undertake any obligation to update any forward-looking statement except as required under applicable law. With that, I'll now turn the call over to Mr. Boone. Please go ahead.

Hello, everyone. I'm very pleased to take this opportunity to report on our program in the second quarter, but more importantly, share our views on the future. In the second quarter, the company made brief terms once again, as well as As we all know, the weak microeconomics and the COVID resurgence in Q2 have a great impact on business of most of media companies. Despite an extremely challenging environment, we still made achievements in the following three aspects. One, our membership business continues to grow year over year. Two, we generated non-debt operating profit for two consecutive quarters and achieved sequential growth in Q2. Three, our cash flow improved significantly and we achieved a positive operating cash flow for the very first time. These were the results of strong execution of the strategy that centers around cost optimization and efficiency improvement. Such strong results also fully demonstrated the resilience of our business. For two consecutive corners, we reached our operational targets where drastically improve our financial healthness, enabling us to fit the ever-changing market environment with ease. Our solid performance in the second quarter demonstrated that IT has completed its self-transformation and successfully sold out of the storm. It also gives us the confidence to upgrade our strategy starting from the so-called third quarter this year, a strategy which will fuel our business growth and improve our financial health at the same time. We would like to call it the Calm Growth, which has the following features. to pursue growth, but not at the expense of significant cash growth. We will stay cautious about the growth opportunities with young investment cycles and high-cash investments. Rather, we will actively invest more resources in IT core business and projects with higher degree of certainty and higher ROI to pursue growth for both profit and revenue. But profit should grow faster than revenue. Capitalizing revenue growth opportunities will not result in higher operating expenses. We will maintain the current lean organization organizational structure, embrace challenges with passion, and improve operational efficiency. The value we provide to users and customers will grow ever faster than the profit. We will produce and stream more and better premium content. We will create greater value for our users and customers. and all financial returns should follow. The common growth strategy can better motivate us and align the interests of our users, customers, and stakeholders. We hope that the common growth strategy can help us further improve the health net of our business and drive our profit and revenue growth in the future. Now let's go through the performance of each business segment in the second quarter of this year. Starting with membership services. Membership business is the most important business segment for us. We are determined to roll out strategies and allocate resources to support and guarantee the continuous business growth The second quarter membership revenue were RMB 4.3 billion at 7% year-over-year. The average daily number of total subscribing members for the second quarter was 98.3 million and monthly income was RMB 4.3 billion. 14.53% at 8% year-over-year, and has maintained a healthy annual growth rate at or above 8% for six consecutive quarters. The positive outcome was contributed to our newly launched membership package targeting TB devices consistently. and diversified premium content offerings under the implementation of our refined operating strategy that increased the value of presentation by our members. First, we actively drove acquisition of new members on TV devices targeting the growing demand on TV users. the Platinum Membership Plan in May and processing benefits on TV sites. As stress in member experience and the value on TV, the monthly active members on TV devices increased by around 15% annually in the second quarter. Secondly, we continue to refine Our operating strategy is on building and paying references to increase member retention, revenue member growth, and win-back churn users. Another driver during the conference was premium content as we continue to diversify the high-quality content that caters to the varied amounts of different user cohorts. For example, ordinary prisoners can tell stories about the daily life of prisoners in hard work and humorous ways. The drama harvests positive public reaction as well as revenue performance. It tops the global list for domestic dramas in the first half of 2022 with a score of 8.6. We are generating the highest membership value on our platform during its broadcasting. In terms of exclusive content, we adopted an early access view model for members. We launched our original multi-season exclusive variety show the Lab of China 2022 in late June. Members were given the privilege of early access and the show successfully attracted over 1.3 million members on the first day of launch. In addition, we are devoted to strengthening membership benefits in addition to For example, we launched marketing campaigns, such as Member Benefits Day and Super Brand Day, who provide members with various benefits and deals across a wide variety of brands. In the second corner, Member Benefits, we are also over 16 million times. Looking ahead, we will continue to launch high-quality premium content, optimize sales channels, listing, and offset options, effectively leverage various content promotion channels that our partners use to expand the reach of our premium content. Meanwhile, we will continue to improve our operational initiatives to increase number, value, user variety, and brand awareness, and last but not least, continue to improve the experiments and the monetization capabilities on the live screen. Moving on to content, we insist on providing users with high-quality streaming content that caters to differentiated view remarks. As improving operating efficiency and advertising content quality become industry-wide keywords, we took the initiative to adjust our content pipeline so that heavy premium content makes up the majority of new releases. During the second quarter, we maintained our leadership position across key operating measures. On new air traffic struts, according to Quest Mobile, Mobile is the number one in the industry. Meanwhile, our content related measures, according to Enlarged data will maintain the highest market share for the drama category in terms of effective visual views despite the number of new releases will announce the highest in the market. Our market share for animations, including children animations, also ranked first in the industry. Meanwhile, thanks to our long-term commitment to premium content, our high-quality content library continues to show positive long-term effects as a real market share of our library content, also ranked number one in the industry. I'm pleased to see strong user engagement, well-focused supply of high-quality content, while improving content-related cost ratios for key content categories. The ROI performance for drama, variety show, animation, and the children's content channel all improved both annually and sequentially. During the second quarter, we continued to launch premium original content across key genres. A range of original dramas included ordinary Britney, My Sassy Princess, Zhu Qinghao, and The Five Good Years. The box office for our original movie Man on the Edge was over 160 meetings, and we are And it was one of the main contributors to the massive movie box office in the second quarter. For children's content, the sequel to our original animation, Dream Quest, that's already in season two, made a solid revenue contribution to our membership business. For original content, one of our key strategy focused on taking a multi-season approach for our distinguished IT group to drive long-term value. Building on the success from previous seasons, we sourced from user attraction footage with 10 titles. During the second quarter, four popular original variety shows released their latest seasons. including The Drop of China 2022, The Detectives' Adventure Season 2, and etc. Among which, our original music show, The Drop of China 2022, maintained its high popularity from previous seasons and a good number of songs. from the show, top to the top, on various music platforms. The second season of the Detective Adventures also represented number one on multiple third-party data platforms. Vertical content, a self-made model, continues to meet differentiated user demands. A lot of users Pushkinian, the first genre, and the lock-on shelter introduced an innovative interactive viewing feature that provides an immersive experience from increased audience participation. A so far score started at 7.1 and went up to 7.6 The split-arm delta returned in June with five new titles satisfying the view preference of young generation audience during summer vacation. Over the years, we have definitely seen solid improvement in the quality of our premium content offerings. For example, IT is a popular Popularity index is an influential measure that indicates the popularity of our content. And any titles with over 10,000 popularity index calls are clear blockbusters. Such measure is highly recognized by the industry and the users. Among our content offerings, there have only been four titles that broke the 10,000 popularity index call. And the two of them were launched this year. Namely, Drama, Lifelong Journey, is yet tailored to a relatively more mature audience growth. The other one is originally launched, Original Drama, launched between February and December. coming here from . This drama is the first original drama that . Demonstrating the exceptional quality of our original content is highly recognized by our users. even more confident with our original content production abilities and our feature pipelines, especially for the original drama categories. They look for words to bring diverse selection of high-quality titles to our users. For the second quarter of 2020 and especially for the summer season, our content pipeline for dramas is focused on capturing young generation audience while maintaining training content for mainstream audience. This includes the harvest of juniors, 20 new life on season two, 2022, and et cetera. of mid-theater will return in the first quarter. For variety shows, we will sterilize the established IPs while continuing to innovate the new gyrus. For the second half of the year, a greater number of variety shows will launch on Paribas. For animation and children's content, we will continue to execute multi-phased and diversified IP monetization strategies. Not only many of our popular titles will be released there. During our summer season, we also launched the animation version of Love Between Diary and the Devil, which was adapted from the same novel as the blockbuster drama. The high popularity of the drama has also brought stronger revenue for the animation. We have seen clear pickup in the overall consumer demand during the summer season. We hope that the momentum will continue and the consumer demand will return to the pre-pandemic level soon. Moving on to advertising, the macro-softening and pandemic in top tier cities, including Shanghai and Beijing, put pressure on the overall ad business, partially on brand ads. All the players in the markets faced a similar challenge. However, we simply engaged in pushing for one of our ad sales programs. After the cities began to resume at normal cost of business operations starting mid-June, and managed to grow our ad manual of original verificals by 53% sequentially despite such challenging environment. Performance ad manual increased by 10% annually during the quarter. This was mainly benefited from Accuracy and identification of user groups and customized app solutions for key accounts. Technical innovation is among our core values. Technical innovation makes it possible to bring wonderful view experiences to our users. For example, cooperation between our content creators and product R&DP leads to the production of brand new open interactive episodes for drama The Law of Losers. Such innovative and creative stories are currently shown as significant elements of user engagement. The average time spent for the interactive episodes increased 20% as compared to conversional episodes. Moving on to our new business and the products, both the overseas and IT-provided business maintain some momentum, continue to increase our long-term value, grow and enrich our ecosystem. The overseas membership level recorded significant annual growth, benefiting from a large increase in paid subscribers. During the quarter, we launched a few titles, including Inputs to the Serious and the Southern Territories Agency. These titles are held on the Twitter's top search list, attract a large number of viewers and advertisers, especially in Thailand and Malaysia. For the second half of the year, we will work to expand the paid user base and monetization capabilities to ensure stable growth and market position in key markets. My key lines for rapid annual growth in both membership and revenue and ad revenue. Average EAU for the second quarter was over 5 million, and the user engagement rate increased both annually and sequentially. ITLite focuses on low-care cities to differentiate from the user base of our main apps. The overlap between ITLite and us, our main app remains at a very a very low level in the second quarter, with the AU overlap less than 4% in June. With a distinctive user group, consumption behavior, and a granular model, IT-Lite serves as a great complement to the main app and is expected to reach greater manipulation potential in the future. As you know, we announced a content lesson on cooperation with Douyin in July, in which with our lesson, select content to Douyin that enables distribution and re-creation of IT's existing content. It demonstrates both platforms are working collectively to create win-win for both clients and users. And the second group. And the second group for the industry, more importantly, the coordination showcases the value recombination of all essential nodes, accounting for the value as well as the strength and of our premium long-form media content, the arrangement will unlock new opportunities that will help us penetrate into large user bases, enrich the under-reviewed ecosystem, broaden manipulation opportunities, and increase the value of our IPs. These are all co-operations from both products and the company's design, starting in Q3. Overall, results in the second quarter were certainly engaging, encouraging. In the face of special challenges from the macro environment, we significantly improved the natural results. Over two consecutive months, we are maintaining our industry-leading position. This was a result of our strong professionalism and team cohesion and exacting vision, as well as our strategy focusing on cost optimization and efficiency improvement. In the future, under our abbreviated common goals, growth strategies. We aim to generate sustainable growth of non-GAAP operating projects. We are committed in providing more premium content to our users, satisfying growing spiritual and cultural demands, driving content value, and creating long-term value for the users.