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spk18: 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.
spk28: 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.
spk37: 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.
spk51: Thanks, Mr. Cohn. And hello, everyone. This is Jun.
spk37: To start the financial structure, I would like to highlight four key items that we have delivered. First, it's the profit growth. Second, it's the operating cash flow break-even. Third, it's the $500 million fund raising. And fourth, it's the optimistic growth outlook. based on our calm growth strategy, as Mr. Ghosn just mentioned. Now, with these four items in mind, I would like to move into the details.
spk51: In the second quarter, we booked RMB 6.7 billion revenues and RMB 344 million non-GAAP operating profits, and at the same time, achieved quarterly operating cash flow break-even.
spk37: As Mr. Ghosn mentioned, This is a remarkable result as we fight against the gravity of macro downturns throughout the quarter.
spk51: For the revenue line, the membership service revenue was on the 4.3 billion of 7% year-over-year, mainly driven by ARM for average revenue per membership.
spk37: The solid performance of membership revenues was partially offset by the weaker non-membership services revenues due to challenging macro environment. Now move to the cost of expenses.
spk51: The second quarter cost of revenues was RMB 5.2 billion, representing a cost saving of RMB 1.6 billion, down 24% annually and 12% sequentially.
spk37: The common cost, a significant component of cost of revenues, decreased 24% year-over-year when we delayed several top shares in the third quarter. The net result is that our gross profit margin reached 21% in the second quarter, and it consistently expanded in the past quarters, namely from 7% to 12% to 18%, then to the 21% in the latest quarter. So it's actually ongoing in ROI of our company's businesses. Meanwhile, we kept our spending discipline and stabilized the total operating expenses in the second quarter. As a result, the extended gross margin and disciplined expenses control combined contributed to our non-cap profit extension. For the second quarter, non-cap offering profit was RMB $644 million, which is 5% for the whole quarter.
spk51: At the end of the second quarter, the company had cash, cash equivalent, with 3% cash in the short-term investment of RMB 4.9 billion, compared with RMB 5.2 billion in the previous quarter.
spk37: We managed our operating cash flow well, achieving operating cash flow rate even for the first time in the second quarter. Today, we also entered into an agreement with PAG, the leading investment firm in Asia Pacific, to raise $500 million through convertible bond issuance. We would like to thank our new investors' trust, and we are confident about our future performances on the common growth strategy, aiming to achieve both revenue and profit growth and business wealthiness at the same time.
spk51: And we will continue to pay the value to all the stakeholders.
spk37: In summary, again, to recap four deliverables that we have presented to the investors.
spk51: The first is the profit growth. The second is also the cash flow breakeven. The third is the downfall of raising. And the fourth one is the opposite optimistic growth outlook based on the cash flow strategy. For the details of financial information, please refer to our press release on our IR website. Now we will open the floor for Q&A.
spk18: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Please ask your question in Chinese first and then translate your question into English. We ask that you please limit yourself to one question at a time, after which you may then rejoin the queue. Today's first question comes from Alicia Yap with Citigroup. Please go ahead.
spk27: Hello, thank you. Thanks, management. Good evening. My question is related to the membership business. Can management elaborate a little bit more the trend that we are seeing for the second quarter in terms of the membership performance? And how is membership subscription and the revenue trending in the third quarter? And also, can management share your thoughts on how you view the membership business longer term and what are your future strategies? Thank you.
spk41: Hello, I'm Gong Yue. Let me answer this question.
spk37: There are two parts. The first part is about the situation of the second and third-stage Hui Lan industry. The second-stage Hui Lan's income growth is in line with our expectations. Especially in the second-stage, the market is increasing. However, the number of Hui Lan customers, the average number of Hui Lan customers in the second-stage has several reasons. First of all, the second wave of COVID-19 is a dead end, especially this year. Second, the second wave of COVID-19 is very serious, causing very few people to go online. The second window of the second window of the second window of the second window of the second window of the second window of the second window of the second window of the second window of the second window of the second window of the second window of the second window of the second Okay, let me answer the question into two parts. First, I would like to explain the trend of membership business from Q2 to Q3. First of all, for Q2, overall, the revenue performance met our expectations.
spk28: The arm for our membership continues to grow in the past quarters. However, there are some relatively fluctuations in the absolute subscriber numbers, which is below our expectations. There are a few reasons that contributed to that outcount. First, typically Q2 is the low season for the year. Second, Q2, because of the pandemic resurgence, There are a limited of theoretical movies that were released online, which triggered a lower number of movies that we can broadcast on platforms. And third, to some extent, there are some relatively constant delays of offerings on the platform, also contributed to the resurgence of COVID in China. And entering into Q3, we're seeing a significant improvement in the membership business, also because Q3 is traditionally the summer peak season. So starting from August, we've seen a lot of the major titles released online, including the Heart of Genius, the very blockbuster of How I Met You, which is a love between fairy and devil, So, currently, overall, we are optimistic of the Q3 revenue performance for the sub-business as well as the absolute subscribers base for Q3.
spk37: um um in a short period of time is a positive effect. However, this positive effect means that the number of patients will increase in about two to three months, and the side effects will be even greater. Therefore, in two and a half years, the number of patients will be abnormal, stable, abnormal, unstable, and unstable. There are many reasons, including the lack of content, the lack of stability, and the impact of the epidemic. It also includes the decline in the consumption of consumers. It's been affected for a long time. Consumption hospitals have naturally declined. In the past two and a half years, this kind of negative impact has been greater. But from now on, the negative impact of Omicron is getting smaller and smaller, and the economy is beginning to recover. Sure. In the past two and a half, almost three years, the members of the business experienced abnormal performance
spk28: because of the COVID situation in China. For short-term speaking, there were some positive impacts. For example, we have seen sub-based increases because of the COVID, but if that situation probably would last a shorter period of time, from two to three months, overall speaking, I think the COVID situation is more on the negative side of our membership business. That triggered to the abnormal, pretty volatile and unhealthy development of the business. From the operational side, for the content operating, we have seen that has also negatively impacted our content offerings. Then, in the last two or three years, the approval process of our content business has also had some impact as well. And also the consumer spending motivation were also impacted due to the COVID situation in China and negatively impacted by the macro environment. So overall speaking, I will summarize the past two or three years as more on the negative side rather than the positive side for our membership business. But currently, because of the whole pandemic situation is gradually improving and we've seen the negative impact is gradually decreasing over the recent period, especially since summer we've seen a significant pickup. in the consumption of the consumer spending, and the sentiment is positive on that side. So overall speaking, next to long-term of our membership business, we are still very optimistic of our membership business.
spk37: As mentioned earlier, we are planning to start from the second half of March to the future. In the gradual decline of this negative factor, or even the development of the direction of return to the good direction, there will be two changes. The first change is the number of members. We think it will increase. At least for us, it is like this. The second is that our recent six seasons have been growing at a straight line. This trend may be
spk28: Earlier, I touched on the negative impact of this because of the pandemic situation in the past couple of years. Starting in Q3, especially the second half of Q3, and to the future, we are seeing a gradual decrease of the negative impact because of COVID, and we're seeing a pickup in the overall business for our membership business. There are two points. First, we anticipate the sub-phase will continue to grow in the future. And secondly, for our arm, that continues to grow in the past six quarters. and we anticipate this positive trend will continue in the future as well. Thank you.
spk59: Thank you.
spk18: And our next question today comes from Thomas Chong at Jefferies. Please go ahead.
spk31: Thanks management for taking my questions. Just now in the prepared remarks, we have talked about a calm growth. Why is that our profit growth will be faster than the revenue growth? Thank you.
spk37: Okay, let me answer this question. I'm Gong Yu. As for the stable growth, it's like this. It's a strategy set up at the end of last year. This year's strategy is to open a flow, control costs, and increase income as much as possible. In order to achieve this goal, we took a lot of measures. And the measures we took were very strong. After two seasons of testing, we knew where the bottom line was. And then we found that some of the regular things have been found to have regular rules. So in this case, we are at a point where we expect to have a relatively high efficiency. to increase some investment. We believe that this kind of investment has a very high return, which means that the growth of profit will be higher than the growth of income. Of course, in the case of increasing investment, for example, I will explain two points clearly. For example, in the first half of the year, in terms of content and user growth, the ratio of user growth in these two aspects is very high. But we also found that the return on investment and return will be very high. That is to say, in the first half of the year, the trend came out of the bottom line. If we continue to increase, our income will definitely increase significantly. And this effect is high. Before, in the past, it was completely different to rely on high investment to increase income and not to pay attention to profit.
spk28: For the comfort strategy, let me explain a little how we arrived to this strategy. Towards the end of last year, we built out a strategy that will increase our efficiency and optimize costs. We built out the different measures and plans to execute this strategy. After the past two quarters, we successfully kind of figured out What's the minimum that we can do to achieve this result? And we also figure out the pattern that will guide us or enable us to achieve better efficiency and improvement in the future. For example, we now can know after we have increasing investment in some of the content that will generate high ROI, then that will positively lead to the higher margin growth for profit because we think a lot of the investment that we can gain from the past experiences, we know the content with higher ROI that we can invest in that will product the same result or even better results from the user front. So that's why we think overall speaking going forward, the profit will grow faster than revenue. And also we think given under the reasonable amount of increasing investment, that will expedite the process even further. And looking back through the first half of this year, we actually controlled some of our investment in content and that we also see some fluctuations in the user growth that negatively impacted due to such reason. But going forward, we know if we increase the investment for these two areas, we will gain higher returns in the future. which means we will gain higher efficiency for any of the investments we put in going forward.
spk30: Thank you. Thank you. Thank you.
spk18: Thank you. And our next question today comes from Shuqing Zhang with CICC. Please go ahead.
spk27: And I will translate myself. And thanks management for taking my question. And congratulations on another strong quarter. Today we have announced the $500 million U.S. dollar private placement of Comfortful Notes, or PAG. So could the management share more details about this? And in terms of financing activities, what's the plan for the future? Thank you.
spk51: Hi, thanks, Jiaqing. This is Jun. So for the sake of saving time, probably I will just respond. As you just mentioned, this afternoon actually the company has announced to enter into an agreement with PAG for 500 million convertible issuance. And as you know, PAG is a leading investment firm in Asia Pacific with approximately, I think, 50 billion AUM. and would accumulate investment over $70 billion. And they are very active, very seasoned investors with unique know-how in the digital media space with strong historical track record. So this is the general background. I think this financing illustrates PAG's recognition on companies' improved fundamentals. And we do have improved competitiveness. We have margin expansion. We have improved financial healthiness. And with all being said, I think most importantly, both sides have conviction that IG's media business has had great future, I think, growth potential. And this is one of the most important things. Then another consensus I would say that between two parties is the IG's value has been heavily underestimated. And one of the catalysts for value recovery probably is to find a way to solve the current debt overhand as the market pick up. And this $500 million financing is a joint cooperation, I think, the first step on companies' liability management, although it's not enough to solve all the problems. And we're all clear that $500 million is only a step stone and we still have a journey to go to solve problems and during this process we do need collaboration and efforts from all the partners including the company including employees including the company stakeholders and most holders as well and it's still with the completion I would say with the signing of this 500 million financing, we are still not in the position to sit back and relax. We are still going to work hard on that. And of course, we are very confident that if we can solve these technical issues with all collaborations from all parties, if we can recover the company's value, all the value unlocked can help the investors whoever has the company can help these investors to gain, I would say, satisfying rewards and returns going forward.
spk37: So this is all that I will share regarding our private placement as well as some of the future thinkings.
spk51: Thank you.
spk18: Thank you. And our next question today comes from Lincoln Kong with Goldman Sachs. Please go ahead.
spk24: So the question is about the cooperation with Douyin. Since we have signed an agreement on the copyright of video contents, So how should we think about the future potential collaboration formats and how would this help in terms of user acquisition, copyright distribution, and other potential commercial efforts to our financials?
spk37: After several months of communication and negotiation, we finally reached a consensus. Both sides were very sincere and realistic in the whole process. They were very realistic in their communication and negotiation goals and attitudes. Of course, the various details and difficulties in the middle of the process were not one by one. The process must be This has made a lot of money. To put it simply, IT's contribution is to promote the content of IT with relevant rights to the creators of the Tiktok ecosystem, to create the content on the Tiktok platform, the valuable content. For IT, we have obtained two things. The first is to maintain IT. Of course, it is also through short-term content, short-term and long-term. This is the main way to maintain IT users and members. The second is that IT will receive some cash income from ZTE. Then, through this thing of getting traffic, it is a multi-faceted cooperation that can achieve this goal, including cooperation in terms of content operation. OK.
spk28: Let me explain or elaborate a little bit more on the Douyin collaboration. We went through the negotiation process in the past month and both parties were very concerned and we wanted to create a win-win situation for this ecosystem as well as for the video space. I probably won't go too much into the details of the process, but there are a few aspects I wanted to share with you guys first. Within this collaboration, IT is authorized to use some of the content that has the license right to distribute using for creation of short-term videos. But within that framework, we have a specific arrangement for R-Trunk, which means the recreation for the short-form videos. The premise is that we won't hurt the long-form video viewing experience for this collaboration, which also means that we can use this collaboration for many of our very high-quality premium content to reach a broader audience, which also means utilize the short-form video to broaden the traffic to ITE platforms for the long-form video. And this is one aspect. Another aspect is we're getting the financial returns for this collaboration. The results you will see starting from the third quarter of this year, it had positive impact for revenue as well as profit and as well as cash flow had positive impact because of this collaboration. And thirdly, we also will collaborate in other operational fronts. For example, products, technology, and daily operations, of the platform. Because we just signed this agreement in Q3 in July, we are getting things worked out and we will load out products and also content starting from, I would say, toward the end of Q3. So you will anticipate more products and content related to this cooperation starting from that period.
spk37: I would like to add that from the long-term perspective, the value of this cooperation agreement, on both sides, the first side is the value of the industry. iQIYI and Douyin are the leading players in the long-term video industry. The cooperation between the two parties actually established the rules of the cooperation between the two industries. The goal of this rule is to achieve mutual win-win. In the future, the two industries will be able to develop in a long-term and positive way in the relevant areas. Then, the entire platform system, including media platforms, users, and partners, all have the most stable economic function. The second point is that the creators have provided a particularly good copyright resolution solution to promote the legalization and regularization of privacy content and intellectual property rights, and to make privacy content creators and production companies more professional um um Okay, let me share some of the mid- to long-term views of this collaboration. First, I will share from the industry perspective.
spk28: First of all, because IT and Doin are both the leading players in the market, one is for short-form and one is for long-form. So under this collaboration, very importantly, we're setting rules for this industry and creating win-win collaboration for both platforms. So basically, this demonstrates the very positive and sustainable development of of this video business in the long term, which is very beneficial for both platforms and also for the users as well as for this ecosystem. And second, for creators and industries, we are creating a very, I would say, advanced or better IP solutions which will push the IP production as well as the legal enforcement of our premium long form content. And also, it will to some extent, I will say that copyright infringement situation in some of the short form videos. And also very importantly, for the creator's perspective, I will say they have more time now to be concentrated and more dedicated to bring more creative talent and release their creative talent to bring more positive and high-quality content to our users. And this will also be very beneficial for the IT license holders as well. Above were the positive impacts for the video industry. And I will share some of the views for ITE specific. First of all, I will say This collaboration demonstrated the very premium content of IT recognized by the industry as well as our users. Also, it demonstrates the monetization potentials of our high-quality premium content in the future. Second, through this collaboration, it will help IT's high premium content to reach a broader group of users in creating bigger impact of our content that will also draw increasing number of users as well as members to the platform. Thank you. Thank you.
spk18: And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Miss Yu for closing remarks.
spk28: Thanks, everyone, for joining the call. Please contact us if you have any further questions. See you next quarter. Thank you.
spk36: Bye-bye.
spk18: Thank you. This concludes today's conference. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. You are the only participant.
spk26: You are the only participant.
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spk18: Thank you for standing by, 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, Investment Relations Director. Please go. Ms. Yu, please proceed.
spk28: 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 Ahyang, 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.
spk37: Hello, everyone. 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. we generated non-debt operating profit for two consecutive quarters and achieved sequential growth in Q2. C, 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 were 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 of opportunities with long investment cycles and high cash investment. 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 half. 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 quarter was premium content as we continue to diversify the high-quality content that caters to the various amounts of different user cohorts. ordinary prisoners can tell stories about the daily life of prisoners in heartwarming 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 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 lunch. In addition, we are devoted to strengthening membership benefits in addition to as a specific video viewing experience. 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, our Member Benefits success over 60 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 loyalty, 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 Crest 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 animation, including children animation, 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, 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, Princess, that's already in season two, made a solid revenue contribution to our membership business. For original content, one of our key slightly 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 The Detectives' Excitement, 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 a differentiated user demand. A lot of users The first journal under the lock-on filter 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 given its interactive features. The speed-on filter returned in June with five new titles satisfying the view preference of young generation audience during summer vacation. Over the years, we have definitely being solid improvement in the quality of our premium content offerings. For example, IT's popularity index is an influential measure that indicates the popularity of our content. And any campus with over 10,000 popularity index scores 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 score, and two of them were launched this year, namely Drama, Lifelong Journey, New Zealand, tailored to a relatively more mature audience group, The other one is our recently launched original drama, Love Between Celery and Dead Sibyl, coming to you from Sweet Home Theater, catering to young generations. This drama is the first original drama that brought such landmark scope, demonstrating the exceptional The quality of our original content is highly recognized by our users. We are now even more confident with our original content production abilities and our feature pipelines, especially for the original genre categories. We look forward to bring a diverse selection of high-quality titles to our users. For the second quarter of 2021 and 2022, and especially for the summer season, our content pipeline for learners is focused on capturing young generation audience while maintaining training content for mainstream audience. This includes the harvest of juniors from Taiji Bazaar, new life on Season 2, Shifu Huo, Season on Delta 2022, and etc. A new season of the new Delta will return in the first quarter. For variety shows, we will sterilize, establish IPs that are continuing to innovate the new gyrus. For the second half of the year, a greater number of variety shows were launched compared to the first half of the year, including our original super sketch show, Season 2, 年易度行大赛 Park. It's a hard work, Season 2, 独家旅人, 男人, and Folk. For animation and cubing content, we will continue execute multi-phases and diversify IP monetization strategies. Not only many of our popular titles will release their new visits. During our summer season, we also launched the animation version of Love Between Starry and Evil, which was adapted from the single novel as a blockbuster genre. The high popularity of the drama has also brought stronger revenue presence of the animation. Apart from that, we have seen clear pickup in overall consumer demand during the summer season. We hope fashion and momentum will continue and the summer demand will return to the The consumer demand will return to the pre-pandemic level soon. Moving on to advertising, the macro and pandemic resurgence in top tier cities, including Shanghai and Beijing, put pressure on the overall ad business, partially on brand ads. All the players in the market say a similar challenge. However, we simply engaged in pushing forward our SaaS sales process. After this, we began to assume a normal cost of business operations, starting mid-June, and managed to grow our SaaS revenue over initials by 53% sequential lag despite such challenging environments. Performance as an annual increased by 10% annually during the call times. This was mainly benefited from the accurate identification of user groups and the customized app solution 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 company's creative team and the product R&D team leads to the production of brand new opens in the active episodes for drama The Law of Losers. Such innovative and creative stories are currently shown as significant events of user engagement. The average time spent for the interactive episodes increased 20% as compared to conversational episodes. Moving on to new business and the products, 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 , and . These titles are held on the search list and 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 time-use base and market position capabilities to ensure stable growth and market position in key markets. My key lines for rapid annual growth in both membership and ad revenue. The average EAU for the second quarter was over 5 million, and the user engagement rate increased both annually and sequentially. ITLight focuses on low-care cities to differentiate from the user base of our main apps. The overlap between ITLight and us, our main app remains at a very low level in the second quarter, with the AU overlap less than 4% in June. With a distinct 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 monetization potential in the future. As you know, we announced a company lesson on cooperation with Douyin in July, in which with our lesson, select content to Douyin that enables distribution and recreation of IT's existing content. It demonstrates both platforms are working collectively to create win-win for both platforms and users. and the second rules. And the second rules for the industry, more importantly, the coordination showcases the value recombination of all essential contents of polyvalent as well as the strength and longevity of our premium long-form media content. The enrichment 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. We value our cooperation from both products and the common supply. starting in Q3. Overall, results in the second quarter were certainly engaging, encouraging. In the face of special challenges from the macro environment, we've significantly improved the natural results over two consecutive quarters. or industry-leading position. This was a result of our strong professionalism and team co-housing and evaluation, as well as our strategy focusing on cost optimization and efficiency improvement. In the future, under our upgraded common growth strategy, 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 our users. Now move to
spk51: Thanks, Mr. Cohn. And hello, everyone. This is Jun.
spk37: To start the financial structure, I would like to highlight four key items that we have delivered. First, it's the profit growth. Second, it's the operating cash flow break-even. Third, it's the $500 million fund raising. And fourth, it's the optimistic growth outlook. based on our calm growth strategy, as Mr. Ghosn just mentioned. Now, with these four items in mind, I would like to move into the details.
spk51: In the second quarter, we booked RMB 6.7 billion revenues and RMB 344 million non-debt operating profits, and at the same time, achieved quality operating cash flow breaking even.
spk37: As Mr. Ghosn mentioned, This is a remarkable result as we fight against the gravity of macro downturns throughout the quarter. For the revenue line, the membership service revenue was on default on $3 billion of 7% year-over-year, mainly driven by ARM for average revenue per membership. The solid performance of membership revenues was partially offset by the weaker non-membership services revenues due to challenging macro environment. Now move to the cost of expenses. The second quarter cost of revenues was RMB 5.2 billion, representing a cost saving of RMB 1.6 billion, down 24% annually and 12% sequentially. The common cost, a significant component of cost of revenues, decreased 24% year-over-year when we delayed several top shares in the third quarter. The net result is that our gross profit margin reached 21% in the second quarter, and it consistently expanded in the past quarters, namely from 7% to 12% to 18%, then to the 21% in the latest quarter. So it's actually ongoing in ROI of our company's businesses. Meanwhile, we kept our spending discipline and stabilized the total operating expenses in the second quarter. As a result, the extended gross margin and disciplined expenses control combined contributed to a non-cap profit extension. For the second quarter, non-cap offering profit was RMB $644 million, which is 5% for the quarter. And at the end of the second quarter, the company had cash, cash equivalent, with 3% cash in the short-term investment, of RMB $4.9 billion, compared with RMB $5.2 billion in the previous quarter. We managed our operating cash flow well, achieving operating cash flow great even for the first time in the second quarter. Today, we also entered into an agreement with PAG, the leading investment firm in Asia Pacific, to raise $500 million through convertible bond insurance. We would like to thank our new investors' trust, And we are confident about our future performances on the common growth strategy, aiming to achieve both revenue and profit growth and business wealthiness at the same time. And we will continue to pay the value to all the stakeholders. In summary, again, to recap four deliverables that we have presented to the investors.
spk51: The first is the profit growth. The second is also the cash flow breakeven. The third is the downfall of the raising. And the fourth one is the opposite optimistic growth outlook based on the come-forth strategy. For the details of financial information, please refer to our press release on our IR website. Now we will open the floor for Q&A.
spk18: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Please ask your question in Chinese first and then translate your question into English. We ask that you please limit yourself to one question at a time, after which you may then rejoin the queue. Today's first question comes from Alicia Yap with Citigroup. Please go ahead.
spk27: Hello, thank you. Thanks management, good evening. My question is related to the membership business. Can management elaborate a little bit more the trend that we are seeing for the second quarter in terms of the membership performance? And how is membership subscription and the revenue trending in the third quarter? And also, can management share your thoughts on how you view the membership business longer term and what are your future strategies? Thank you.
spk41: Hello, I am Gong Yue.
spk37: I will answer this question in two parts. The first part is about the situation of the second and third quarter of Huian. In the second quarter, the revenue growth of Huian is in line with our expectation. Especially in the second quarter, the value of ARMS is increasing. But the number of members, the average number of Huian in the second quarter, is more than what we expected. There are several reasons. First of all, the second wave of COVID-19 is a dead end, especially this year. Second, the second wave of COVID-19 is very serious. It leads to very little online streaming. The second wave of COVID-19 is online streaming. It leads to very little online streaming. Third, there is not much, but there is still a lot of online streaming due to the pandemic. Okay, let me answer the question in two parts. First, I would like to explain the trend of membership business from Q2 to Q3. First of all, for Q2, overall, the revenue performance met our expectations.
spk28: The arm for our membership continues to grow in the past quarters. However, there are some relatively fluctuations in the absolute subscriber numbers, which is below our expectations. There are a few reasons that contributed to that outcount. First, typically Q2 is the low season for the year. Second, Q2, because of the pandemic resurgence, There are a limited of theoretical movies that were released online, which triggered a lower number of movies that we can broadcast on platforms. And third, to some extent, there are some relatively constant delays of offerings on the platform, also contributed to the resurgence of COVID in China. And entering into Q3, we're seeing a significant improvement in the membership business, also because Q3 is traditionally the summer peak season. So starting from August, we've seen a lot of the major titles released online, including the Heart of Genius, the very blockbuster of online Q, which is a lot between fairy and devil, So currently, overall, we are optimistic of the Q3 revenue performance for the business as well as the absolute subscribers base for Q3.
spk37: Okay, so this is what we've seen in the past. From the beginning of 2021, the pandemic has been going on for almost three years, two and a half years. It's been going on for an abnormal period of time. Every year, there's a big pandemic. In 2020, it was a big one. This year, it was a big one. Last year, it was a bit better. In the short term, this kind of epidemic has a positive effect on the health care industry. However, this positive effect means that the number of people in the health care industry will probably continue for another two or three months, and the side effects will be even greater. Therefore, in the two and a half years, the health care industry is in a state of abnormal stability, abnormal stability, abnormal health development. There are many reasons, including the lack of content, the lack of stability, and the impact of the epidemic, or the impact of the effect of the epidemic. And then it also includes the decline in the consumer's consumer desire, because some people in the Hongwan economy Sure. In the past two and a half, almost three years, the members of business experienced abnormal performance
spk28: because of the COVID situation in China. For short-term speaking, there were some positive impacts. For example, we have seen sub-based increases because of the COVID, but if that situation probably would last a shorter period of time, from two to three months, overall speaking, I think the COVID situation is more on the negative side of our membership business. That triggered to the abnormal, pretty volatile and unhealthy development of the business. From the operational side, for the content operating, we have seen that has also negatively impacted our content offerings. Then in the last two or three years, the approval process of our content business also had some impact as well. And also the consumer spending motivation were also impacted due to the COVID situation in China and negatively impacted by the macro environment. So overall speaking, I will summarize the past two or three years as more on the negative side rather than the positive side for our membership business. But currently, because of the whole pandemic situation, it's gradually improving. And we've seen the negative impact is gradually decreasing over the recent period. Especially since summer, we've seen a significant pickup. in the consumption of the consumer spending, and the sentiment is positive on that side. So overall speaking, next to long-term of our membership business, we are still very optimistic of our membership business.
spk37: What they mentioned is that we are planning to start from the second half of March to the future. In the gradual decline of this kind of negative factor, or even the development of the direction of return and beginning to think well, there will be two changes. The first change is that the number of members we think will increase. At least for us, it is like this. The second is that our recent six seasons have been growing at this rate. This trend may be
spk28: Earlier, I touched on the negative impact of this because of the pandemic situation in the past couple of years. Starting in Q3, especially the second half of Q3 and into the future, we are seeing a gradual decrease of the negative impact because of COVID. And we're seeing a pickup in the overall business for our membership business. There are two points. First, we anticipate the sub-phase will continue to grow in the future. And secondly, for our arm, that continues to grow in the past six quarters. and we anticipate this positive trend will continue in the future as well. Thank you.
spk59: Thank you.
spk18: And our next question today comes from Thomas Chong at Jefferies. Please go ahead.
spk31: Thanks management for taking my questions. Just now in the prepared remarks, we have talked about a calm growth. Why is that our profit growth will be faster than the revenue growth? Thank you.
spk37: Okay, let me answer this question. I'm Gong Yu. As for the stable growth, it's like this. It's a strategy set up at the end of last year. This year's strategy is to reduce flow, control costs, and increase income as much as possible. In order to achieve this goal, we took a lot of measures. And the measures we took were very strong. After two seasons of testing, we knew where the bottom line was. um um To increase some investment This kind of investment We believe that the return is very high That is, it will cause profit growth Will be higher than the growth of this income Of course, in the case of increasing investment For example, I said two points to make it clear For example, in the first half of the year We are in terms of content and user growth These two aspects The ratio of reduction is very high But we also found that the return on investment and return will be very high. That is to say, in the first half of the year, the trend came out of the bottom line. If we increase the trend, the income will definitely increase significantly. And this effect is high. Before, in the past, it was completely different to rely on high investment to increase income and not to pay attention to the profit.
spk28: For the comfort strategy, let me explain a little how we arrived to this strategy. Towards the end of last year, we built out a strategy that will increase our efficiency and optimize costs. We built out the different measures and plans to execute this strategy. After the past two quarters, we successfully kind of figured out What's the minimum that we can do to achieve this result? And we also figure out the pattern that will guide us or enable us to achieve better efficiency and improvement in the future. For example, we now can know after we have increasing investment in some of the content that will generate high ROI, then that will positively lead to the higher margin growth for profit because we think a lot of the investment that we can gain from the past experiences, we know the content with higher ROI that we can invest in that will product the same result or even better results from the user front. So that's why we think overall speaking going forward, the profit will grow faster than revenue. And also we think given under the reasonable amount of increasing investment, that will expedite the process even further. And looking back through the first half of this year, we actually controlled some of our investment in content and that we also see some fluctuations in the user growth that negatively impacted due to such reason. But going forward, we know if we increase the investment for these two areas, we will gain higher returns in the future. which means we will gain higher efficiency for any of the investments we put in going forward.
spk30: Thank you. Thank you. Thank you.
spk18: Thank you. And our next question today comes from Shuqing Zhang with CICC. Please go ahead.
spk27: And I will translate myself. And thanks management for taking my question. And congratulations on another strong quarter. Today, we have announced the $500 million U.S. dollar private placement of Comfortful Notes, the PAG. So, could the management share more details about this? And in terms of financing activities, what's the plan for the future? Thank you.
spk51: Hi, thanks, Jiaqing. This is Jun. So, for the sake of saving time, probably I will just respond. As you just mentioned, this afternoon actually the company has announced to enter into an agreement with PAG for 500 million convertible issuance. And as you know, PAG is a leading investment firm in Asia Pacific with approximately, I think, 50 billion AUM. and would accumulate investment over $70 billion. And they are very active, very seasoned investors with unique know-how in the digital media space with strong historical track record. So this is the general background. I think this financing illustrates PAG's recommendation on companies' improved fundamentals. And we do have improved competitiveness. We have margin expansion. We have improved financial healthiness. And with all being said, I think most importantly, both sides have conviction that IG's media business has great future growth potential, and this is one of the most important things. Then another consensus I would say that between two parties is the IG's value has been heavily underestimated, and one of the catalysts for value recovery probably is to find a way to solve the current debt overhand as the market pick up. And this 500 million financing is a joint cooperation, I think, the first step on companies' liability management, although it's not enough to solve all the problems. And we're all clear that 500 million is only a step stone, and we still have a journey to go to solve some problems. And during this process, we do need collaboration and efforts from all the partners, including the companies, including our employees, including the company stakeholders, and most holders as well. And with the completion I would say with the signing of this 500 million financing, we are still not in the position to sit back and relax. We are still going to work hard on that. And of course, we are very confident that if we can solve these technical issues with all collaborations from all parties, if we can recover the company's value, all the value unlocked can help the investors whoever has the company can help these investors to gain, I would say, a satisfying reward in return going forward.
spk37: So this is all that I will share regarding the power of private placement as well as some of the future thinkings.
spk51: Thank you.
spk18: Thank you. And our next question today comes from Lincoln Kong with Goldman Sachs. Please go ahead.
spk24: So the question is about the cooperation with Douyin. Since we have signed an agreement on copyright video contents, So how should we think about the future potential collaboration formats and how would they help us in terms of user acquisition, copyright distribution, and other potential commercial efforts to our financials?
spk37: Okay, thank you. I will answer your question. After several months of communication and negotiation, we finally reached a consensus. Both sides were very sincere and realistic during the whole process. They had the same goal and attitude to do this kind of communication and negotiation. Of course, the various details and difficulties in the middle This process must have been a lot of work. Simply put, IT's contribution is to promote the content of IT with relevant rights to the creators of the TikTok ecosystem, to create the content on the TikTok platform, the valuable content. For IT, There are two ways to do this. The first is to keep IT. Of course, it is also through short-term content, short-term long-term. The main way is to keep IT users and members. The second is to get some cash income from ZTE. Then, through this thing of getting traffic, many aspects of this cooperation can be achieved, including cooperation in the field of content management, as well as some cooperation in the field of technical products to achieve these goals. Because this agreement was just added not long ago, Okay. Let me explain or elaborate a little bit more on the collaboration.
spk28: went through the negotiation process in the past month and both parties were very concerned and we wanted to create a win-win situation for this ecosystem as well as for the video space. I probably won't go too much into the details of the process, but there are a few aspects I wanted to share with you guys first. Within this collaboration, IT is authorized to authorized to use some of the content that has the license right to distribute, using for creation of short-term videos. But within that framework, we had a specific arrangement for art, which means the recreation for the short-term videos. The premise is that we won't hurt the long-form video viewing experience for this collaboration, which also means that we can use this collaboration for many of our very high-quality premium content to reach a broader audience, which also means utilize the short-form video to draw some of the traffic to ITE platforms for the long-form video. This is one aspect. Another aspect is we're getting the financial returns for this collaboration. The results you will see starting from the third quarter of this year, it had positive impact for revenue as well as profit and as well as cash flow had positive impact because of this collaboration. And thirdly, we also will collaborate in other operational front, for example, you know, technology and the daily operations of the platform. Because we just signed this agreement in Q3 in July, we are getting things worked out and we will load out products and also content starting from, I will say this, towards the end of Q3. So you will anticipate more products and content related to this cooperation starting from that period.
spk37: I would like to add that from the long-term view of the value of this cooperation agreement, the first aspect is the value to the industry Both ITE and ITE are leading players in the long-term video industry. The cooperation between the two parties has actually established the rules of cooperation between the two industries. The goal of this rule is to achieve mutual win-win. In the future, the two industries will be able to develop long-term in the relevant areas, and have a stable economic function for the entire system, including media platforms, users, and partners. The second point is that the creators have provided a particularly good copyright resolution solution to promote the legalization and regularization of privacy content and intellectual property rights. It has been expressed that the behavior of copyright infringement on the privacy content of this kind of long video allows the creators of this privacy content production company to is a little less because of the lawsuit brought this kind of energy consumption and worries and then for that IT is to say that our kind of content long-term value is more recognized by the industry and users in the future, this kind of long-term value has more space for this kind of materialization. This is one point, and then the second point is that the OK. Let me share some of the mid- to long-term views of this collaboration. First, I will share from the industry perspective.
spk28: First of all, because IT and Dolin are both the leading players in the market, one is for short-form and one is for long-form. So under this collaboration, very importantly, we're setting rules for this industry and creating win-win collaboration for both platforms. So basically, this demonstrates the very positive and sustainable development of this video business in the long term, which is very beneficial for both platforms and also for the users as well as for this ecosystem. And second, for creators and industries, we are creating a very, I would say, event or better IP solutions which will push the IP production as well as the legal enforcement of our premium long form content. And also, it will to some extent, I will say that copyright infringement situation in some of the short form videos. And also very importantly, for the creator's perspective, I will say they have more time now to be concentrated and more dedicated to bring more creative talent and release their creative talent to bring more positive and high quality content to our users. And this will also be very beneficial for the IT license holders as well. Above were the positive impacts for the video industry. And I will share some of the views for ITE specific. First of all, I will say This collaboration demonstrated the very premium content of IT are recognized by the industry as well as our users. Also, it demonstrates the monetization potentials of our high-quality premium content in the future. Second, through this collaboration, it will help IT high premium content to reach a broader group of users in creating bigger impact of our content that will also draw increasing number of users as well as members to the platform. Thank you. Thank you.
spk18: And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Miss Yu for closing remarks.
spk28: Thank you, everyone, for joining the call. Please contact us if you have any further questions. See you next quarter. Thank you.
spk36: Bye-bye.
spk18: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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