iQIYI, Inc.

Thank you for standing by and welcome to the iQIYI second quarter 2023 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. Cheng Yu, IR Director of the company. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining ITE's second quarter 2023 earnings conference call. The company's results were released earlier today and are available on the company's investor relations website at ir.ite.com. On the call today are Mr. Yu Gong, our founder, director, and CEO, Mr. Jun Wang, our CFO, Mr. Xiaohui Wang, our CCO, chief content officer, Mr. Wenfeng Liu, our CTO, chief technology officer, Mr. Youqiao Duan, senior vice president of our membership business, and Mr. Gang Wu, senior vice president of brand advertising business. Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun. will go through the financials. After the prepared remarks, the management team will participate in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include or are 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. I will now pass on the floor to Mr. Gong. Please go ahead.

Hello, everyone. Thank you for joining us today. Our focus of the conference remains firmly on generating high-quality growth. Our original content strategy continued to deliver top-notch titles, which in turn brought the strongest second quarter performance in our history in terms of key metrics such as total revenues, profits, free cash flow, and average daily subscribers during the quarter. Also, we maintain our industry-leading position across various key aspects. The exceptional quarterly results clearly demonstrate the resilience and immense long-term growth potential of our business. Now, let me walk you through the key developments in the second quarter. Firstly, we maintain our industry-leading position in drama market share for six consecutive quarters. According to Enlightened, our original dramas continue to play a major role in terms of content supply and revenue contributions. Notably, testing Changfeng Du broke iQiyi's popularity index with record by exceeding the 10,000 score in the shortest time. In addition, titles such as 13 Years of Dust, Chenfengshi Fanzai, and the ingenious one Yunxiang Zhuan generated highly positive word-of-mouth reviews, reinforcing our brand image as a diversified and high-quality premium content powerhouse. Second, from a financial In perspective, we have the best second-counter revenue performance in our history at 17% year-over-year. We recorded double-digit annual revenue growth across all key business lines. Membership services revenue grew 15% annually, and advertising revenue grew 25% annually. Meanwhile, non-GAAP operating income hit RMB 786 million, or by 129% annually, marking the sixth consecutive quarter of profitability. Furthermore, ability to generate cash further stressing with free cash flow reaching RMB 72 million, positive for our consecutive quarters. Our performance in the second quarter represents another solid step in our pursuit of high-quality growth. As we previously mentioned, IT and the Intel industry have been completely transformed Rationalized competition, we have seen improving return on investment for the Intel streaming industry. And as an industry leader, IT largely impacts the original company's ability to financial performance. That's a new market standard that drives the overall industry advancement. In light of this, We aim to enhance the long-term health of our content production and operations so that we can consistently perform the industry. Now, let's dive deeper into the performance of our core business segment, starting with membership services. During the call time, both membership value and the number of subscribers hit all-time high for a second quarter. Membership revenue exceeded RMB 4.9 billion, up 15% year-over-year. Look at the key drivers behind. Monthly arm for the quarter reached RMB 14.82, increasing both annually and sequentially. This was driven by our refined operating strategy. For example, we optimized our pricing strategy, which effectively narrowed the gap between listing and actual rates. Average daily number of total subscribers in Q2 reached 111.2 million, up 13% year-over-year. primarily driven by a stable supply of content that continues to attract and retain members. Subscriber base declined on sequential basis, primarily due to, one, the impact of seasonality, and two, the high base effect after the release of the low cost. and the natural attrition of members. We are encouraged by the continuous optimization of membership structure. The absolute number and proportion of annual subscribers both had meaningful growth year over year. I would like to The goal of our membership business is to maximize user experience, which in return threatens our membership service revenue. Going forward, we are more focused on the overall economy, not just the pure subscriber growth. adjust and carefully balance the number of subscribers based on multiple factors, including content supply, user demand, and market conditions. More importantly, we strive to enhance the overall health and revenue growth the sustainability of our membership business. Providing exceptional user experience is key to do so. We established a loyalty program that includes diversified privileges and benefits. The long-term loan members can enjoy more favorable pricing and privilege reinforcing users' perception that early enrollment and long-term subscription offer greater benefits. Just recently, we rolled out the eSPRESS package program, which grants early access to the finale of our heat drama. We think that in this event, over 6 million subscribers have used their membership points to access the present package. Our first express package event received very positive feedback among members. As membership points are linked to the duration and the continuous subscription, Members with longer subscription materials are entitled to higher reward points and also accumulate points at a faster speed. We expect this initiative will further strengthen subscriber loyalty and drive member retention rate. Moving on to content. We continue to execute our original content strategy and reinforce our brand image as a diversified and high-quality premium content powerhouse. In the first half of 2023, we have already released two dramas that broke the 10,000 popularity index score, as I mentioned earlier. we maintained the top position in the drama market share for six quarters in a row. Original content remained the primary driver for our content supply and revenue among all major dramas released during the second quarter. Original content accounted for 67% within their share of revenue contribution remaining high. We kick off our summer 2023 lineup with the release of Destined Chengfengdu, which was the fastest drama in our history to break 10,000 popularity index scores. This was a nice show that brought such scores in our history, and the second title that did so this year. In addition, 13 Years of Dust, under our Missed Theatre brand, and the Beauty of Resilience, Falun also received critical acclaim for their appealing stories. And at the same time, our original variety shows made their strong return and their popularity remains as strong as ever. Our market share for total variety shows was the highest in the industry according to Enlightened. Even more impressive was the market share for all inclusive variety shows, which doubled sequentially. The highly anticipated shows launched in Q2 include or flagship, the detective adventure season three, The Draft of China, 2023. Ha ha ha ha ha, season three will happen. And innovative new shows such as Become a Farmer. This season of The Draft of China was a true hit and scored the highest popularity index score for variety shows. Moreover, we completed a holistic commercialization of the show, which expanded its cultural influence into other articles, including concerts, artist agencies, and merchandise. Thumbs from the show were also released on leading streaming music platforms such as Tencent Music and NetEase Cloud Music, driving record high music revenue for this IP. The third reason of the detective adventure suite generated the highest popularity index score of any reason. Additionally, become a farmer. wrapped up in the second quarter gained critical acclaim with a nomination for the Best Variety Show at the well-known 28th Shanghai TV Festival Mongolia Awards. We are also excited to see original content is widely recognized across TV stations in China. In Q2, we distributed 30 dramas to broad TV networks, including CCTV and the provincial channels with whom we have built a long-term partnership. So this partnership, we are able to expand our content reach and grow its influence among different demographics. Now heading into the second half of the year, we have a wide range of exciting and diversified premium content in the pipeline. Summer 2023 in IOPS has been bolstered by highly anticipated Asian custom drummers, including the Lauter's Casebook, which was the latest and the 10th drummer that bogged the 10,000 popularity index. Level 70 times Qi Shi Ji Xiang also was launched and the Demon Hunter's Romance Wu Du will follow moreover we are broadening our presence in the crime drama genre with popular titles such as The Lost Eleven's Flaw and Imperfect Victim both of which generated significant user traction and exceeded a popularity index of 9,000. Our offerings will be further enriched by the Bright Eyes in the Dark, Ha Tong Huo, Huang Chong Zou. For this summer season, we have been founded high-quality new releases in both online drama series and offline theatrical movies. As media companies stealthily compete for users' attention, our top-notch content offerings have allowed us to maintain our leading position in the drama category. This once again proves our strength in the content business. Four variety shows of pipeline in the second half will consist of both sequels, two classic and innovative new IPs. Season 3 of the Big 5, with Xia Tian, makes a strong comeback. Another key program includes less DBQs, each root harbor, post-work talent, and, as you wish, Yi Bai Lang Yue Di, which integrates crossovers from our feature films. Our pipeline also includes other numerous exciting releases, including films such as Fight Against the Evil 2, and Come Back, Yuan Hao Ruishan's Children's Cartoon, such as New Seasons, A Princess for a Me, Sui, and A Girl's Call, Sui, as well as original animations, including The Great Ruler, Da Zhuzai, War Arrow, The Red Planet, Fenghuo Zhanji, and The Land of Miracles, Shen Lan, Qi Yue, Wu Shuangzhu. Moving on to advertising business, we are delighted to see accelerated recovery. A total ad revenue recovered to RMB 1.5 billion, up 25% annually and 7% sequentially. Both brand ads and performance ads recorded annual and sequential growth in Q2. Performance ad revenue doubled year over year and reached a historical high, and its growth accelerated on a sequential basis. This solid performance was driven by a combination of factors. One, the current higher share of ad budgets during the June 18th shopping festival. Two, targeted and efficient operations brought higher budgets from key sectors such as internet services. e-commerce, and games. Optimizing algorithm for better ad performance and monetization efficiency 4. Applying generative AI to enhance ad creation and ROI Brand ad revenue also grows annually and sequentially, benefiting from several factors One, Q2 in the high season for food and beverage sectors. Two, increased ad budgets during the June 18th shopping festival compared with last year. Three, more robust pipeline of variety shows contributing to an expanded ad inventory. And four, and a low base effect when compared to the same period last year. We also observed increasing demand for ads related to key dramas, with the improving quality of IT originals, the number of advertisers signing annual contracts, and the contract rate. both increased meaningfully as compared to the same period last year. His drummers attracted over 40 brand advertisers, generated highest ad revenue among all drummers launched this year. Heading into the second half, we remain cautiously optimistic about the outlook of overall advertising market. Well, we noticed a steady rebound in consumption segment. We do aware that the microeconomic recovery will have a lagging effect on the brand advertising business. That's that. We still hold a positive view of the long-term growth of the brand advertising market in China. We expect certain cyclical sectors, including food and beverage, as well as those that benefit from reopening policies. and recovering at a relatively faster pace. Moving on to technology and products, technical innovation is one of our core values. We keep improving content production and operation efficiency by driving technology innovation such as generative AI. We have been applying generated AI in content production, marketing, user interaction, and receive encouraging initial results. For example, through large-language model scripts can directly be processed to extract key information effectively accelerating the assessment process and improving budgeting and resource management. Our internal data shows that the accuracy rate of scene and character breakdowns aimed by generative AI has exceeded 90% so far. Besides, generative AI can quickly assess intricate authority plots to enhance the user experience by improving search results, recommendations, and playback interactive experience. Moreover, the generative AI has also been helping us in creating advertising ideas and boosting monetization performance. To give you an example, performance ads using generative AI to produce home-had content increased ROI by 20 percentage points. Next, I'd like to give you some updates on our growth and early-stage business. I'll start with IT Light, which continues to generate high-quality and healthy growth. This is being driven by our and improving monetization capabilities. Impressively, ITLAB has already been profitable at the operating level for three consecutive quarters. Total revenue reached historical high in Q2 of 35% year-over-year, with membership revenue increased by 87% annually. primarily driven by the ad-supported basic membership package. Next, let's talk about business performance in regions outside of mainland China. Our premium content continues to grow in popularity, and we saw solid membership revenue growth. In particular, Hong Kong, the US, and Canada had an annual growth of more than 50%. The cultural influence of high-quality original Chinese drama is growing rapidly. Drama generated by original productions increased by 160% year over year. An original Chinese drama, oh no, here comes trouble. became the top revenue title in Taiwan. Ancient custom dramas, acting, and the beauty of religious beliefs topped the broadcasting list in various markets, including Southeast Asia, East Asia, and North America. With plenty of premium titles in pipeline for the third quarter, we will continue to fortify our competitive edge for developing premium Chinese video content. We will also continue to develop a closed loop in terms of content marketing and promotion, user growth, and subscriber acquisition, promoting Chinese content to a wider range of audiences. in the overseas market. In summary, we are pleased with this solid progress in our pursuit of high-quality growth. Looking forward to the second half of this year, we will keep focusing on the long-term sustainability and health of businesses, strengthening our competitive position in the long run. Our robust premium content pipeline will continue to create the flywheel effect, reinforcing the online improvement of our business fundamentals. On top of exceptional results, we will also closely monitor the right alternatives and make selective strategic investment to fulfill the next wave of growth. We appreciate all your support and look forward to building great value together. Now, let me pass to Jun to go through our financial performance.

Thanks, Mr. Gong. And hello, everyone. As Mr. Gong mentioned earlier, we recorded our best-ever second quarter results across multiple key financial metrics, such as total revenues and core membership services revenue, while the profits and the free cash flow remained robust. In addition, our balance sheet healthiness was further improved. Now, let me walk you through key numbers. Total revenues increased by 17% annually to RMB $7.8 billion, setting an all-time high for second quarter performance. We secured double-digit annual revenue growth across all business segments. Membership services revenue continued to serve as the most powerful growth engine, with revenue exceeding RMB $4.9 billion, up 15% annually. Online advertising spanned up its growth as revenues reached $1.5 billion with an accelerated annual growth rate of 25%, which was fueled by the growth in both brand and performance ads, with performance ads being the key driver and to a lesser extent from brand advertisement. The company distribution revenue and other revenues rose by 15% and 16%, respectively, on an annual basis as well. Moving on to cost and expenses, our cost of revenues increased by 10% annually, among which counting costs increased by 7% annually. This was primarily driven by an increase in number of original dramas and variety shows launched during the quarter. Total operating expenses grew by 11% annually, largely due to the increase in SG&A expenses. We devoted more resources in marketing as we believe this could amplify our common influence, increase subscriber attraction, and enhance the strong momentum generated by our original content offerings. Turning to profits and cash flows. Non-GAAP operating income reached RMB $786 million, up 129% annually, positive for six consecutive quarters. Free cash flow reached RMB $872 million, positive for four consecutive quarters. During the quarter, as part of our liability management initiatives, we repurchased a total principal amount of USD $133.6 million, above all convertible senior notes due 2026. In addition, the total interest-bearing debt decreased significantly quarter-by-quarter. As of the annual second quarter, the company has cash, cash equivalents, restricted cash, short-term reinvestment, and long-term restricted cash included in the prepayments and other assets, a totaling of RMB 6.1 billion. To conclude, the second quarter results once again demonstrated that we are making solid progress in delivering high-quality growth, and we are well positioned to generate greater value for our stakeholders in the long run. For detailed financial data for the second quarter, please refer to our press release on our IR website. Now we will open the floor for Q&A.

Thank you. If you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. Please ask your question in Chinese first, then repeat in English. We ask that questions are limited to one per person. Please rejoin the queue to ask any follow-up questions. Your first question comes from Xuquan Zhang of CICC. Please go ahead.

Good evening, Mr. Wang. Thank you for answering my question. I would like to ask about the member business. 有看到过去两个季度,我们的ARM只保持了稳健的增长, 那想请教一下对于ARM的长期目标是怎么样的, 然后如何展望今年下半年以及更长期的会员业务的发展趋势? Good evening, management. Thanks for taking my question. My question relates to the membership benefits. The arm has maintained stable growth in the past two quarters. So what's the longer-term target for arm? Also, how should we think about the outlook for the membership service in the second half of this year and the longer term? Thank you.

Thank you. We will invite Mr. Duan, who is responsible for the network service business, to answer the question.

Hello, everyone. Let me answer this question. Our membership business has different focus points and development strategies at different stages of development. In the initial stage of membership business model and the rapid development stage, the primary goal is to pursue the greatest number of members, which is to develop the membership size. When the membership size is developed to a large enough size, for example, in 2019, our membership size exceeded 100 million in the first place. According to the market situation at that time and our own strategic adjustment, the focus is not only on the number of members, but the goal is to turn into membership income.

Okay, our membership business development has different focuses and strategies at different stages. In the initial establishment and rapid growth phase, the primary goal was to maximize the number of subscribers, which was focusing on growing the sub-base. When the sub-base reached a significant size, for example, when our sub-base was first in the market that exceeded 100 million in 2019, our objective shifted to membership revenue based on the market condition and our own strategy adjustment. So, no longer purely just focus on the sub-number.

The decision of the membership income, membership size, life cycle, and ARM, our goal is not only to obtain the current income, but also to achieve long-term and sustainable membership income. Our membership revenue is determined by the sub-base, subscriber lifetime, and arm.

Our goal is not only to focus on the current quarter revenue, but to achieve long-term and substantial growth in membership revenue, taking a more long-term perspective in business planning and improving the overall health of our membership business.

We will continue to stick to this strategy in the future. First, we will continue to guide users to make long-term subscriptions and increase the user ratio of long-term cards. We have already seen the size and ratio of annual cards continue to be improved. We hope that this trend can continue to be maintained in the future. Second, we will continue to promote member loyalty construction, especially to improve the value perception of long-term members. Currently, we have launched a series of measures.

In the future, we'll continue to adhere to the strategy we mentioned earlier. So first, we will continue to encourage subscribers to subscribe for a long period, increasing the proportion of long-term subscribers. We have already seen continuous annual growth in the scale and also the percentage of annual subscribers, and we hope this trend will continue. Secondly, we will continue to systematically promote membership loyalty Particularly by enhancing the value perception of long-term subscribers, we have already implemented a series of measures, for example.

First, we provided discounted price and privileges for long-term subscribers.

reinforcing members' understanding that the earlier and longer you subscribe, the better.

The second point is that through the membership system, we can increase the flow rate of members through long-term subscription benefits, so that the platform can get long-term benefits from a longer member life cycle. For example, the recent Lianhua Tower bonus gift is a good long-term case of membership-based applications. The eight-day bonus gift event attracted more than 6 million members,

We introduced a membership loyalty program that contains membership points system, which favors long-term loyal subscribers. We believe this will improve user retention rates and enable the platform to generate mid- to long-term revenue from extended subscribing life cycles. For example, we wrote out the recent The Lotus Casebook Extras package program, which was a meaningful application upgrade of our membership points. During the 8-day event, over 6 million subscribers have used their membership points to access the Express package.

Overall, with the increase in the value of members, we believe that the loyalty and flow rate of IT members will naturally increase, and thus promote long-term member ARM and member income growth. Thank you.

Overall, we believe with the improvement in membership value perception, we believe that the membership loyalty and retention will naturally increase, driving the long-term growth in ARM and also membership revenue.

Thank you.

Our next question will come from Li Zhang of Bank of America Securities. Please go ahead.

Hi, 管理层,你们好,谢谢接受我的提问。 我的问题主要是关于内容方面的, 就是有看到今年暑期档的话, 客家都上了不错的内容,然后表现也还可以。 所以想看一下公司怎么看我们今年暑期的这些变化, 还有爱奇艺我们怎么样可以保持在内容方面的一个竞争优势, 还有就是今年线下的娱乐的情况复苏的比较强劲, 尤其是电影。 Thank you for taking my question. We have seen that a key long-form video player launched several content this summer with good performance. So I want to see how should we look at this change, changing environment, and how should IT keep the competitive advantage in content perspective? At the same time, we have noticed that offline entertainment actually saw strong recovery, especially movie. Do we see any impacts or benefits to our business? Thank you.

Thank you, Lei. We will invite our CCO, Mr. Xiaohui Wang, to answer this question.

Hello, everyone. I'm Wang Xiaohui. Let me answer this question. Indeed, this year, the quality content of the summer industry is still very sufficient.

For this summer, we've seen the industry have a very supply of high-quality content.

whether it's online dramas or offline theatrical movies. All of these are actually competing for users' attention. We are also pleased to see the flourishing of the long-form video industry. We believe with the improved content quality, the industry vitality has been activated, and we believe the market prosperity is beneficial for everyone.

In this context, IT still uses high-quality original content Under this backdrop, we have maintained our leading position in online drama, driven by our high-quality original content.

We have been leading the industry for six consecutive quarters in terms of the overall drama market share and also the exclusive market share. Once again, we have withstood the test in Q2, which demonstrated our advantage and sustainability in the content business. As everyone knows, the content industry is a long-term business, and the key to long-term success lies in the ability to continuously produce and supply high-quality content. In the core drama category, due to the nature of longer production cycles for dramas, Our competitive advantage in this area is difficult to surpass in the short term.

Additionally, core market players are establishing differentiated advantages.

focusing on original content and exclusive content. As such, the content differentiation has been greatly improved, and the competition environment has been more benign and rational. We believe that our ventures in the content business are foreseeable and sustainable, supported by four strong pillars, a mature and continuously improving content production mechanism, strong operating capabilities, leading technology capabilities, and our top industry talent.

In the future, we will continue to adhere to the innovation strategy, the product strategy, and the diversification strategy, and will continue to persist in the development of innovation

In the future, we will continue to be firmly adhered to innovations, streaming content, diversification, and continuously seeking new breakthroughs through innovations and research. Also, while ensuring the quality of projects

we will carefully plan our production to ensure a long-term and sustainable supply of diverse premium content. Regarding the recovery of offline entertainment, on one hand, we will continue to focus on our strength, concentrating on the production and operation of our content online. On the other hand, the recovery of offline theatrical movies will benefit online video platforms. The second window, movies, will recover and increase.

Thank you.

Our next question today will come from Alicia Yap of Citigroup. Please go ahead.

Hello, thank you. So good evening, management. Thanks for taking my questions. Wonder if management could share with us what's your view on the overall brand advertising market outlook for the second half this year? Have you observed any major shift of budget sentiment from advertisers? And will IAT modify any of your advertising strategy? Thank you.

Thank you, Alicia. We'll invite our Senior VP of Brand App Business, Wu Gang, to answer the question.

Hello, everyone. I'm Wu Gang.

Let me answer this question. The company's brand advertising business is constantly recovering.

Q2已经直接反弹,同环比都有所增长。 IT's overall advertising business has been in a continuous recovery phase with brand advertising rebounded in Q2, growing both year-on-year and also quarter-on-quarter.

or a cautious and optimistic attitude.

After the economy recovery takes time to reflect in the brand advertising market, we hold a cautiously optimistic attitude towards the brand advertising market for the second half of this year.

iQIYI is one of the strongest platforms in the Chinese Internet industry with the highest quality of users, payment capacity, and payment wishes.

所以我们是广告主提升品牌影响力不可或缺的一个选择。 Because we think ITE is one of the platforms in the Chinese Internet industry that has the highest user quality as well as strong consumption power and a user's willingness to pay. So we are an indispensable choice for advertisers in enhancing their brand influence.

We have been seeing increasing recognition from advertisers for our content and also innovative products.

the contrafining amount of content marketing advertisement has been driven by top-notch dramas and variety shows. And there has been a strong preference and acceptance from advertisers for our innovative ad products.

In the current global environment, different brand advertisers from different industries have a strategic vision and long-term judgment on the market. They have a specific investment strategy

Under the current macro environment, brand advertisers from different sectors are formulating corresponding advertising strategies based on their strategic vision and also the long-term market view, among which certain brand advertisers with forward-looking strategic vision may increase their app spending

seizing marketing opportunities by occupying the market.

Looking at the specific sectors, we are optimistic for the food and beverage industry, cosmetic and personal care industry, as well as the transportation industry, which also includes the new energy vehicles.

Thank you.

Our next question today will come from Lincoln Kong of Goldman Sachs. Please go ahead.

Hello, thank you for accepting my question. My question is more about the sales ad. Of course, we also see that there is a continuous recovery in the first half of the year. Could you please share with us how we look at the sales ad in the second half of the year? So thank you, management, for taking my question. So my question is about performance and pricing here. We've seen a continued recovery of our performance as in the first half. How do we think about the second half outlook for this set of business? Thank you.

Thank you, Lincoln. We'll invite RCTO Wenfeng to answer this question.

Thank you. I'm Liu Wenfeng. Let me answer this question. The performance ad revenue has maintained its annual growth for five consecutive quarters, with the growth rate

with actually the growth rate continuously accelerating. And its contribution in total ad revenue has continued to increase, reaching a historical high in Q2. It is expected that the performance app sector will continue to experience strong growth in second half of this year, benefiting from our improved market capability, attracting more advertising budget from key industries, such as internet services, e-commerce, and gaming. Also, we believe with the algorithm optimization and the support of generative AI, performance and results will bring the app performance and also monetization efficiency to improve.

We believe that the idea of creating an effective advertising team will be more important in the future in terms of cost and investment. to achieve high-efficiency transformation and investment return. So based on this judgment, we will continue to enhance our work in advertising innovation, content individualization, and interaction. For example, through new technologies such as AI, we can reduce the cost of advertising material production, improve the efficiency of advertising, and adapt to the constantly changing market and customer needs. In the future, we think the performance ad advertiser will pay more attention to cost effectiveness and also the advertising performance, striving to achieve efficient conversions

and also to maximize returns on investment. Going forward, we will continue to strengthen app creativity, content personalization, and interactivity. We will also leverage new technologies like generative AI to lower app production costs and also enhance ad delivery efficiency, adapting to the ever-changing market and user demand. From the app sector's perspective, For the second half of this year, we think we have a positive outlook on different sectors. For example, the traditional e-commerce platform, live streaming e-commerce, culture and entertainment, travel and tourism, and also the lifestyle food industry.

Thank you.

Our next question will come from Maggie Yee of CLSA. Please go ahead.

Good evening, thank you for the opportunity to ask me a question. I noticed that we have received very good operating cash flow and free cash flow in this quarter, and we have also repaid more than $1 billion in cash. Could you please share with us your thoughts on debt management in the next few quarters and your plans for future funding use? Thank you. Thank you, management, for taking my question. Noted that the company has generated very strong operating cash flow and free cash flow this quarter and has also repurchased convertible notes. Please, could you share with us more about your thoughts on the company's debt level management and plans for financial resources in the coming quarters? Thank you.

Thank you, Maggie. We will invite Mr. Jim Arciapo to answer this question.

Sure. Thanks, Maggie, for the question. I think for the interest of time, I'll just answer the question in English directly. So I think this is a question that we constantly receive, an inquiry that we constantly receive from the investor community as well. And our answer is very straightforward. First and foremost, we are in a process of continuously improving our capital structure. we are still trying every effort to make our balance sheet more healthy, healthier, and more robust. And this is what we do. And secondly, I think within our framework of doing that, there are two things that really matter. The first and the most important thing is actually to continuously generate sizable free cash flow. Just remember, generating sizable cash flow means naturally leverage, regardless of whether we will conduct the debt buyback or not. And this is really key, and this is what we have been very proud to see our progress in the past couple of quarters. And the second thing is to develop a serious and comprehensive set of choices to see what we can do to benefit our shareholders best. And this set of choices will include, for example, the debt-back-back, but it will also include and explore the opportunity to invest for safe returns. And as we all know, the external environment has been extremely dynamic with a rising interest rate and actually provide return opportunities for the company with a free cash flow. So with that being said, I think our overall principle remains the same. We explore every opportunity to create value for our stakeholders, including our shareholders and our supporting debt holders. but without compromising the safety of our business, for sure. That's it.

Thank you.

This will conclude our question and answer session. At this time, I'd like to hand back to management for closing remarks.

Thank you, everyone, for participating in the call today, and please do not hesitate to ask us if you have any further questions. Thank you, and we will see you next quarter. Thank you.

Bye-bye.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.