iQIYI, Inc.

Thank you for standing by and welcome to the ITE third quarter 2022 earnings conference call. All participants are in a 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 hand the conference over to Ms. Chang Yu, director of the company. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining ITE's third quarter 2022 earnings conference call. The company's results were released today and are available on the company's investor relations website at ir.ite.com. For the call today, our CEO, Mr. Yu Gong, will give a brief overview of the company's business operations and highlights, followed by our CFO, Mr. Jun Wang, who will go through the financials. After the prepared remarks, the senior management team will join Mr. Gong and Jun in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Report Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, and now limited to, those outlined in our public filing with the SEC. ITE does not undertake any obligation to update any forward-looking statement, except as required under applicable law. With that, I will now turn the call over to Mr. Gong. Please go ahead.

Hello, everyone. I'm very pleased to take this opportunity to report on our program. on the third quarter and show our views on the business. Through efforts in the first three quarters this year, ITE has completed an iconic turnaround with business performance far exceeding the targets we set at the beginning of this year. There are two parts to this iconic turnaround. We have been growing the non-GAAP operating profit for four consecutive quarters starting from Q4 last year. And for the first three quarters this year, we achieved nearly RMB 1.2 billion in non-GAAP operating profit, a sharp reversal from the operating loss of RMB 2.5 billion over the same period last year. This non-GAAP operating profit in Q3 alone exceeded RMB 500 million. Meanwhile, we generated positive operating cash flow for two consecutive quarters. Second, our market leadership remains unchallenged, and our market share in September actually hits historical high on the content side. According to enlightened data, we remain number one in terms of effective video views for our inclusive dramas, more than our competitors in the second and the third place combined. As for the mobile user metrics side, we were also number one across call metrics, including user base, user engagement, and the user signature. Our subscriber base has grown from 95.6 million on June 30th to 106.2 million on September 30th, representing a net addition exceeding 10 million. How did we naturally improve financial performance without gaining market share? The key is our long-term commitment to original content. We are glad to see that the original content has become a main contributor to our content supply. Among the dramas we launched in Q3, 65% were original content, a historic high. Meanwhile, the hit ratio of our original content improved significantly. As many of you know, IT's popularity index is an influential indicator of content popularity. Of the six blockbuster dramas with popularity in jazz, of over 10,000 in our history, we launched four this year and two in Q3. Both are original titles. Hundreds of millions of users binge on our original content blockbusters, which drive us drive up user base and market share, and then translate into the huge improvement in our financial results from loss to major profitability in a single year. Behind this title is our unique approach to content production and operation, which is our core competitive edge. As such, our iconic turn around is very difficult for others to replicate since it is based on our years of expertise and extensive library of original content. With original content as the key to our success, we will continue to execute our calm growth strategy. This means seeking value growth prompts while ensuring overall operating efficiency, enhancing content investment, and marketing spending in an appropriate manner. With this strategy, we will continue to provide users with appealing content and superior services and further drive the healthy development of business. Now let's go through the detailed performance of our business segments, starting with membership services. Membership services have always been our most important business segment. We are determined to roll out strategies and allocate resources to support the continuous growth of our membership business. The average daily number of total subscribers in Q3 was 101 million, a net gain of 2.7 million compared with Q2. September was strong in particular. The number of subscribers at the end of September surpassed 106 million. grew by over 10 million compared to June 30th, and over 2.6 million compared to last September. We are happy to see that. Even after summer vacation ended, subscribers continued to grow in September for the first time in the past four years. And the average daily subscribers of this September also reached is highest level compared to all the past subscribers. Based on our latest subscriber numbers, the strong momentum continues. Such success was mainly driven by premium content, indicating that users still have strong appetite in paying for excellent storytelling. Of course, competitive edge lies around the ability of constantly supplying high-quality content, discover and produce exceptional original content. Meanwhile, we strategically emphasize on bringing more privileges to members across wider content categories, which leads to improved monetization ability of our subscriber base. One important point to note is that original content has become a major contributor to our membership revenue. In Q3, the top three revenue contributors were all original content, namely Love Between Fairy and the Devil , Chasing the Undercurrent , and the Heart of Genius . Our multi-season variety show the Rep of China 2022 also adapted earlier access for subscribers and ranked among the top five revenue contributors for the quarter. On a separate note, membership services revenue was slightly below our expectation in the third quarter. This was mainly driven by three factors. First, the temporary decline in consumer sentiment in May, June, and July due to pandemic resurgence. Second, the delay of certain key dramas. And third, the significant reduction of marketing spending as part of our business stress test. Starting from the second half of August, we successfully reversed the trend with a series of premium content releases, including Love Between Fairy and the Devil, Chasing the Undercurrent, and A Thousand Year for You, Xing Jun. Also, the reasonable increase in marketing spending and the recovery in consumer sentiment also contributed positively to strong growth in subscriber numbers. As a result, this September marked as the strongest September in our history. This means the strong performance of our membership business was not fully reflected in our Q3 results. In Q3, our monthly arm continued to grow annually, but had more deep sequential. We offered promotional discounts. during summer season to encourage more users to experience our service at a relatively low price point. We believe the value created by these subscribers will be reflected in the future. Moving on to content strategy and the performance. In the past three quarters, we achieved significant results improving both quality and efficiency. Even though we launched fewer titles than last year, we are able to generate more premium works. The performance of our dramas was outstanding in Q3, especially for original dramas. As we had big improvement in areas such as content supply, revenue contribution, success rate and word of mouth. One of the best way to understand this success of content is to understand our commitment to the original content strategy that we set long ago. So our performance during the quarter was not accident and it's replicable. Our investments in original content over the past year have been productive and bearing fruit. I'd like to show some data. Among major dramas launched in Q3, original dramas accounted for 65%, the highest in our history. Meanwhile, the success rate for original content have also increased. Two dramas broke the popularity index of 10,000 in Q3, with two more dramas breaking 9,000 score. All four were original content. This in original content was driven by the unique and effective content methodology we established, which we have soon processed with content creation and production to post-op broadcasting powered by a strong team of professionals and supported by a mature and high efficient operating mechanism. First, we focused on improving the content creation and the production qualities of our in-house studios. We also have sophisticated supporting teams with highly experienced professionals across different factions backing the studios through the entire process. Second, we have established a mature and highly efficient mechanism right through the whole process, enabling high-efficient decision-making, strict quality control and optimal content scheduling. The key to this mechanism is a profound understanding of the content industry as a whole, based on over a decade of experiences in the industry. This forms a high barrier that it has to pursue in the short term. The pursuit in original content have improved the overall quality and influence of our content, gave us absolute advantage as the industry leader. In terms of market share in September, effective views of our dramas ranked number one, with the greatest lead in our history. Effective views of our inclusive drama took an absolute lead, more than the sum of the competitors in the second and the third positions, according to Invitant. In terms of popularity, we launched the ITE Popularity Index back in 2018, and since then, only six titles received a score above 10,000, and 22 titles received a score above In other words, titles with a popularity index of over 10,000 are considered potential front track titles, and over 9,000 are household blockbusters. Among the top six popular drummers, four were released this year, and two in Q3. For the first nine months, a total of seven drummers broke 9,000. Our content has also received great word of mouth. Users actively discuss, rate, and recommend our content on social platforms. On a third-party platform, dobar.com, nine of our dramas launched in Q3 received a rating of over seven, the best quality performance in our history. The performance was driven by our carefully refined content scaling based on our content reserve and user demand. For the two drama breaking in a popular index of 10,000 in Q3, Love Between Fire and the Devil tapped into the demand of young generation audience during the summer vacation as creative storytelling set. set age apart from other titles on the same general. Chasing the undercurrent, although the storyline is oriented to our relatively mature users, but well liked by a wide range of age groups and with high view completion rate. In addition to drama, we maintained or output of premium content in other categories. For variety shows, the effective views of multi-season shows, The Drop of China 2022 was leading the online variety show market in Q3. The second season of the Super Sketch Show has tracked the largest advertising budget among the variety shows we launched this year. In addition, our original animations recorded solid growth in both the number of titles launched and revenue. During the quarter, our IP franchise format also achieved a great performance. We launched both the original drama and animation based on the same IP. The love between fairy and the devil and also great synergies. Membership revenue of this original animation stand at number two on the animation channel during the until summer vacation, just behind the Japanese animation One Piece. Entering into Q4, we will maintain the strong momentum of Q3 by launching a number of highly anticipated dramas, including New Life Bing, Qingjing Ri Chang, Wild Bloom, Feng Chui Ban Xia, featuring top leading actress Zhao Liying, and A Chained Love, featured Wang Hedi, Fu Tu Yuan. The leading actor from our blockbuster drama Love Between Fire and the Devil this summer. We continue to explore new content themes that cater to diversify the user demand, such as recently launched a drama series selection targeting female audience. Place also anticipated a good selection of variety shows, children's animation, and movie slates for release. Moving on to advertising. Similar to our peers, we found against micro-headings and increased advertising revenue by 4% sequentially. For brand advertising, the revenue recovered sequentially and the year-over-year decline narrowed compared with last quarter, reflecting the attraction of hit drama and variety shows in the peak summer location season. We saw sequential recovering in the number of brand ad clients in Q3, as well as recovering of ad demand. for international brand advertisers. For performance ads, we saw revenue increases both annually and sequentially. Heading into Q4 and the next year, we face the same challenges as our peers. As Q4 is a traditional off-season for advertising, and micro-recovery takes time to be reflected in advertising budgets. Currently, we expect continuously, sequentially recovering in advertising business for Q4. For next year, if microeconomy recovers with absence of a pandemic resurgence, we shall anticipate to see year-over-year recovery also. Technical innovation has always been part of our core values. We are committed to bring the best entertainment experience to every user. At the same time, we hope to promote the industrialization of long-form videos to drive the robust development of the Chinese video industry. This ambition is reflected in our daily work as our engineering team focuses on every product detail. A recent example of our approach to product improvement was the optimization of the bullet chat quality and distribution algorithm, which improved the user interaction and Average daily number of users that activated the bulleted chat feature increased year-over-year in Q3, and the daily average number of bulleted chat interaction increased by 50% year-over-year. We also continue to utilize in-house developed tools to improve content production efficiency The IT video production management system acts as an efficient tool to help production teams. By the end of Q3, the system has been applied to five IT original drummers. In addition to improving efficiency and production quality, the system also saves costs and effectively controls budgets. For our overseas business in Q3, we saw healthy growth in membership revenue, both annually and sequentially, reflecting the popularity of our premium content and improved operating capability. Premium content launched during the quarter had a solid result, both in terms of monetization and world of mark. Here's Chinese dramas. Domestic main app also performed very well overseas, further exceeding the IP value on a large scale. Top drama under our sweet-on-shelter brand, including the love between fairy and devil, and a thousand years for you, have sunk performance. Premium content also drove improvements in monetization. For example, Advertisers recognized the value of our shelter mode and we attract partners such as Zada and Realme as title sponsors for suite-on-shelter in Thailand. In the first three quarters of 2022, we again demonstrated the powerful execution abilities, and a strong unity of everyone within IT. For three consecutive quarters, we outperformed continuously improving fundamentals, demonstrating our value to everyone. We achieved growth in market share while significantly improving our financial performance. As content is our core competency, we are confident that we will be able to deliver blockbusters on a continuing basis as we have worked out replicable methodologies for both original content production and operation. These methodologies lay a solid foundation for healthy growth. We believe that we have achieved an iconic turnaround in the context of an extremely challenging microenvironment this year. And we will continue to deliver values both to users who love our content and the stakeholders who are as confident as we are in the prospect of long-form video. I will hand over to Wang Jun for financial details.