iQIYI, Inc.

Thank you for standing by and welcome to the ITE fourth quarter and fiscal year 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, Investor Relations Director. Please go ahead

Thank you, operator. Hello, everyone, and thank you for joining ITE's fourth quarter and fiscal year 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. On the call today are Mr. Yifeng, our founder, director, and CEO, Mr. Jun Wang, our CFO, Mr. Xiaohui Wang, our CCO, Chief Content Officer, Mr. Wenfeng Liu, our CTO, Chief Technology Officer, Mr. Yuqiao Duan, Senior Vice President of our Membership Business, and Mr. Xianghua Yang, Senior Vice President of Moody and Overseas Business, and Mr. Zhang Wu, Senior Vice President of Ben Advertising Business. Mr. Gong will give a brief overview of today's company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, Xiaohui, Wenfeng, Yuqiao, Xianghua, and Gong will join Mr. Gong and Jun in the Q&A session. Before we proceed, please note that this discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements are substrate to risks and uncertainties that may cause accurate results to differ materially from a correct quotation. Potential risks and uncertainties include, but now limited to, those outlined in the public filing with the FDA. 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. We left out the macro year of Turnaround with outstanding performance in 4Q22. Our market share reached historical highs. sold well for membership venues, operating profits, and free cash flow to be a perfect pick. In Q4, we launched six blockmaster commerce with subscribing members time spent growing by over 40% annually and 30% sequentially, which is unprecedented as a result. we continue to gain market share. Our leadership in terms of effective bid-to-bills in the general category remained unchallenged according to enlightened data. Strong content performance brought the highest quarterly membership revenues in our history at 15% annually and 13% sequentially in Q4. Our average daily number of total subscribing members was 111.6 million, representing a sequential net addition of more than 10 million. The number of subscribing members as of the end of December was 119.7 million, representing net addition of over $13 million compared with the end of September. In the meantime, the advertising business continued to recover with a sequential growth rate of 25%. Now move on to profit. We had a record-setting quarter of RMB 979, meaning non-GAAP operating profit, up 87% compared with last quarter. The non-GAAP operating margin continued to expand for the fifth consecutive quarter and reached 13% in Q4, a showcase of operating leverage embedded in our business model. In Q4, free cash flow reached over RMB 840 million, grew by 4.7 times compared with Q3. We have been generating positive free cash flow for two consecutive quarters. The outstanding Q4 performance is not a surprise. True performance may just be the start if we look ahead for one or two years. The driving force behind our current and future success is our ability to produce and deliver highly competitive popular original content, which is our unique core competence. ITE Original now is a synonym to the Master C Show. ITE's brand presentation has been elevated from ITE is capable of creating blockbusters to ITE is a blockbuster powerhouse. footnote to our statement. Right after the closing of 4Q22, we launched the original drama, The Knockout. It has become another mega hit, broke records across every key market. The fastest-to-break IT popularity index of 10,000, highest peak popularity index, highest daily user time span, largest daily audience, and highest membership revenue. The knockout also generated tremendous social buzz and has become a true nationwide phenomenon. The success of the show demonstrates that the production and operation of our original content had entered into a virtual cycle. Flywheel effects have been released. The stable premium content supply drives user growth, improves cost efficiency, and profitability, which supports the company to create more premium content. Therefore, we firmly believe that success is replicable and we could exceed our past performance in the future. Why do we believe that Our production capability is unique and cannot be easily copied because creating blockbusters has no shortcuts. To get where we are today, we invested numerous resources, including time, capital, talent, and technology. We initiated our original content strategy back in 2014 and made a substantial breakthrough in 2022 after almost a decade of persistent efforts. In the most recent two years, our investment in original content almost reached the R&D funding billing With time and money, we have established in-house studios that bring together the industry's most creative talent. We have also gradually established a complex, data-driven, and highly efficient decision-making system that can capture every critical moment in the entire lifecycle of content production. As a result, we witnessed the gradual wrap-up of high-quality original drummers. Among the key drummers we had launched each year, the proportion of original productions increased from 20% in 2018 to over 50% in 2022. For 2022, the original content accounted for over 60% of blockbuster drummers and also contributed over 60% of the revenue during the new release window in Q4. The total subscribing members times five on original content doubled year over year. Hence, we conclude that we enjoy the structural advantages that are very difficult to others to imitate. The entry barrier is extremely high. In the past 12 months, we have completed three rounds of capital leasing with a precise total around US dollar 1.3 billion to remove that overhaul. We truly appreciate the generous support of our investors who are as confident as we are in the future of IT. With a healthier balance sheet and a cash generating business, the management will be able to focus entirely on accelerating the company's growth, creating more value for our investors. Looking ahead to 2023, we will start a brand new journey We have upgraded our 2023 annual goal to achieving high-quality growth. Under this strategy, our goal is to achieve growth in revenue and operating profit. To realize high-quality growth, we will continue to invest in our core business while remaining cautious while assessing material new business opportunities. We will continue to invest in top premium content to maintain a high-quality yet diversified content pipeline and to invest in high ROI marketing and members' benefits. Also, we will keep a close eye on industry opportunities powered by technical advancement such as artificial intelligence-generated content, NIGC, and other innovative technologies. We will explore AIGC application and scenarios in the long-form video industry together with our strategic partner, Baidu, in the areas such as improving content, production efficiency, content distribution, and promotion. We believe the AIGC A strategy will help IT to unlock even more potential, further improve our overall business efficiency, and generate greater value. Now, let's go through the detailed performance of our business segments, starting with membership services. Membership services revenue was RMB 4.7 billion, the highest in our corporate history. representing an increase of 15% annually and 13% sequentially, as we had a very strong powder of blockbuster content. We utilized the opportunity to attract and grow our subscriber base with a marginal increase in R. Our subscriber base has strong growth in Q4, The average daily user of total subscribing number was 111.6 million, a net addition of 10.6 million compared with Q3. The total number of subscribing number was 192.7 million as of the end of December, a net addition of 13.5 million compared with the end of September. Very importantly, we are glad to see the improvement in membership structure with a proportion of annual subscribers increasing significantly in Q4 compared to the same period last year. We believe the higher subscription rate for annual packages will help to improve sickness and long-term monetization. In Q4, our monthly arm was RMB 14.17, up 2% sequentially. We further increased our membership pricing in December, which will drive our increase in the future. Our membership business, we are committed to grow revenue. In the long term, we believe our arm will have plenty of room to grow when we continue to upgrade content quality and bring more value to our users. In the short term, we strategically choose to optimize the growth of subscriber base and the membership duration so that more people can enjoy our content. and the relationship between the platform and the user becomes more enduring. A good example is that as the monthly arm of the annual package is lower than the monthly package, when we enroll more annual subscribers, our average arm might be impacted in the short term. However, we value the relationship with subscribers And we believe the long-term trust we built with subscribers will bring more strategic value. In Q4, we continue to expand our inclusive membership benefits package, including inclusive IP-based souvenirs and limited-time discounted offers, inclusive events. Moving on to content. In Q4, we continue to lead the market with dominant market shares. According to enlightened data, we remain number one in terms of effective video views for both overall dramas and the exclusive dramas categories, reaching quarterly new highs in the past two years. For variety shows, We are also number one in terms of effective video views with launch of popular original programs, including SuperSketch for Two, Xi Da Da, Monroe Player, Yuan Da Mao Xie, and FOC 2022. 2022 was the harvest year for our drummers. we had most number of blockbusters that were seen and even released across the year. First, we launched five dramas with a popularity index of over 10,000 in a single year. Well, four of them are originals. Not only we brought our content quality to the next level. We've significantly improved our financial performance and generated profitability and large scale. Second, our content releases cover diverse themes, including modern themes, A Lifelong Journey, Lin Shijian, Ordinary Greatness, Jingkai Rongyu, and Wild Blue. from ,, the Asian custom ,, love between the fairy and the devil, ,, and new life begins. The suspenseful, strange tales of Tang Dynasty, and the fantasy and the youth inspiration, the heart of genie, Third, the timing of all releases was evenly throughout the year. The five blockbusters with popularity index of 10,000 were released at the beginning of the year during summer vacation and during winter. Other high-quality dramas were released at regular intervals during the year. Users can turn to IT and watch the most current case shows at any time. We also maintain the best war of mind in the industry. Among the top 10 highest rated Chinese drummers on douban.com in 2022, seven were IT-inclusive drummers and four were original production. Our original title, Ordinary Christmas and Wild Bloom, went first and third with positive list. As we move on to 2023, we will maintain our strong momentum and plan to launch a number of highly anticipated dramas. Original production and the knockout were launched in Q1 and highly acclaimed by users. The knockout became another market to nationwide phenomenon. Just to name a new highlight first, It has the highest popularity index score, and it's the eighth drama that broke the popularity index of 10,000. Second, generated huge social buzz and high word of mouth. Its peak score was 9.1. Only various selected Chinese dramas have such high scores. Third, the drama was broadcasted on the international TV network, including CCTVs and BRTVs, all of which have outstanding viewership. Just on the CCTV network alone, the knockout has been watched by over 300 million audiences so far. During 2023, a variety of key drummers will be launched, such as the Asian customer epics, The Demon Hunter's Romance, Wu Youku, Story of Kunming Palace, Ning An Ru Meng, Instinct, Changfeng Du, The Force, The Spirit, Matchmaker, Fuyao Xiaohongyang, multi-themed dramas such as Miles to Go, Rensheng Luyao, Take us Home, Longcheng, and We Are Criminal, please, and et cetera. For original variety shows, we will continue to launch multi-session shows and introduce new programs. We will focus on building franchise values and enhancing synergy between dramas and variety shows. Please also anticipate to see a slate of well-crafted original movies, children's content, and animations. As our testing business recovers sequentially in Q4, total annual revenue were RMB 1.6 billion in Q4, up 25% sequentially and down 7% annually. which was significantly narrowed from the 25% annual decline in Q3, exceeding our expectations at the beginning of the quarter. In particular, for Q4, Grand S returned to double-digit sequential growth, and the year-over-year decline continues to narrow. Better than our expectations, the sequential growth was Benefit's plan. First, his dramas and variety shows attract ad buyers. Second, the domestic reopening boosted advertisers' confidence and increased ad demand. Third, growth in sectors such as the internet services, communications, and healthcare. Heading into 2023, we believe reopening will support economic recovery. We are positive about brand S for the full year 2023 and expect to see healthy growth compared with 2022. For performance S, we achieved a strong revenue growth both sequentially and annually, driven by an algorithm of optimization and tailored operational initiatives for advertising from e-commerce, internet services, and online gaming sectors. We believe that IT's core user growth is highly attractive for advertisers, And with our appealing content and advanced technology, we will be able to effectively help advertisers to increase their brand influence. In the future, we will adopt multiple strategies to improve our ad business. We will focus on growing our revenue scale and offer tailored campaigns. on large screens. Meanwhile, we will continue to develop the ad-supported basic subscription package on ITLite, which is similar to Netflix's low-price ad-supported initiative. We believe the solid growth In ITLite, the subscription package will drive the ad inventory on our platform and lead to ad revenue growth. Moving on to technology and the product. Technical innovation is one of our core values. Our continuing plan promotes video industrialization and improves efficiency in company production and distribution through innovative technologies. We've started to explore AIGC-related opportunities since mid-2022 and have seen poor mixing results. We believe our rich video entertainment resources combined with cutting-edge technologies will empower IT to further improve efficiency in content production, distribution, and other areas. On February 15, we announced the strategy of cooperation with Baidu, and both companies will jointly explore the AIGC application scenario soon Baidu's . We anticipate that company distribution and promotion are one of the earliest areas to be implemented. And this cooperation will further accelerate our program in AIGC-related areas. We look forward to implement more applications as we are stressing our technology advancement in the future. Moving on to new business. First, IT light in Q4. ITLite reached a break-even for the first time and recorded solid revenue growth both annually and sequentially. We continued to develop a monetization model of ITLite. And the new ad supported basic subscription package was well received by users. Moving on to overseas business. In Q4, overseas membership revenue increased 30% year-over-year, and the growth rate in America and Canada exceeded 70%. Original content, especially original dramas, performed quite well. Original Chinese dramas, New Life Begins, achieved top rankings in Thailand, Philippines, Indonesia, and South Korea. Only three days after its launch, we are also delighted that our original dramas released in Q4 attract advertising budgets. In 2022, we successfully completed an iconic turnaround with substantial improvement in financial performance, business operations, and market share. Meanwhile, our unique content production methodology helped us to produce a continual stream of blockbusters, increasing our core barriers. Our industry-leading original content production ability and the super operational capability are our core competitive strengths and the key to our success. rapid growth in the long term. As we move through 2023, we are committed to delivering high-quality growth. We firmly believe our best days are yet to come. We will further release the flywheel effects of our business and bring higher value to our users, partners, and stakeholders. Now, let me pass on to June to go through all financial performance. Thanks, Mr. Gong, and hello, everyone. Q4 was a record-setting quarter for our membership revenue, operating profits, operating cash flow, and free cash flow. The operating margin continues to expand, driven by operating leverage. In addition, we raised around $1.3 billion over the past 12 months to remove the debt overhead. With operational and financial performances in great condition and significant capital structure enhancement, the management will be able to focus on delivering high-quality growth in the long run. Now, I would also like to give this opportunity to review the overall performance for the year 2022 for IGE. First, we delivered what we promised earlier in the year. We set a goal of reaching non-GAAP operating break even for the full year of 2022 and ended up with non-GAAP operating profit of RMB 2.2 billion, far exceeding our expectation. Then we shifted our operational focus from cost down in Q1 and Q2 to scale up in Q3 and Q4. and roll out our common growth strategy in the middle of the year, which resulted in a very healthy expansion of market share, membership services revenue, and profits in the second half. The momentum continues beyond December 31st, 2022. And in addition, we also promise to protect the interests of all stakeholders and fix the immense challenge of debt overhead despite the extremely volatile market, and we made that as well. Secondly, we humbly asked our investors to look beyond IT's specific achievement and revalue the long-form video industry as a whole. IT continued to outperform to deliver alpha But our eye for the entire industry was quickly recovering for the entire 2022 as well to deliver beta, driven by the structural change on the supply side. Less quantity, more quality. More concentrated supply of platform-originated content leads to higher field ratio and more efficient cost control. On the demand side, as Mr. Gong mentioned, Long-form media remains the fundamental entertainment means for the mass market. Over time, the higher quality content naturally leads to the higher willingness to pay, hence the higher arm, and we are in a virtuous cycle and will see a more promising future. Thirdly, we would like to thank everyone who supported us in a very dramatic 2022, including our users, employees, content partners, our shareholders, and supportive bondholders and creditors. Our commitment in achieving healthy business growth remains unchanged, and we are more confident than ever in our ability to generate value for our stakeholders in the long run. For detailed financial data for Q4 and fiscal year 2022, please refer to our press release on our IR website. Now we will open the floor for Q&A.