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.