iQIYI, Inc.

Thank you for standing by and welcome to the ITE third 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 Chao Yu, investor relations director of ITE. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining ITE's third 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, Mr. Yu Qiao Duan, Senior Vice President of our Membership Business, and Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Business. Mr. Gong will give a brief overview of companies' business operations and highlights, followed by Jun, who 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 and are 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 to Mr. Gong. Please go ahead.

Hello, everyone. Thank you for joining us today. Our focus... Our focus... Our focus of... Our focus of the quarter remained firmly on generating high-quality growth, achieving strong results in both revenues and profits. Our total revenues grew 7% year-on-year, while profit performance was far more remarkable. Growth, profit, and non-gap operating profit had annual growth of 23% and 71% respectively. The impressive financial results demonstrate the strength of our robust operating leverage, anchored by our exceptional content, which serves as our core competitive advantage. ITE is a signature brand for top-tier content, According to enlightened data, we have been leading the industry in drama wheelchair for seven consecutive quarters. Our original dramas remained as a key driver for content supply and revenue contribution. Meanwhile, a diverse of high-quality titles premiered were highly acclaimed by users. Notably, the law firm's casebook, Yuanhua Law, was the 10th drama in our history to break the 10,000 popularity index. During the quarter, membership services revenue grew by 19% annually, mainly driven by a 12% annual increase in hours. Two key factors contributed. to the revenue growth firstly in part by the high appeal of our inclusive content. We have reduced the discounts provided for membership purchases while direct and the channel sales. Our content is compelling enough to drive purchasing decisions in its own. Secondly, we have upgraded our member benefits and authorities, resulting in increased viral perception among our members and a boosted membership retention rate. The enhanced member benefits encompass a wide range of upgrades, for example, optimizing the viewing experience from mobile devices to large-screen TVs. members can now enjoy content in selling 4K, 8K, and even indulge in proprietary exotic masks to enjoy filter quality, audio, visual, The audio experience is equally enhanced, with a shift from ordinary stereo sound to the immersive and captivating private career, industry-leading high-Q humeral sound. And our members' quirks don't stop there. We go beyond the online realm. extending our offering to exciting offline experiences, such as inclusive concerts. These upgrades have transformed entertainment, providing users a diversified, personalized, and immersive entertainment experience. We are very pleased to see users' appreciation for our content and services translate into our goals. Alongside membership services, advertising revenue was our second growth driving during the quarter. Our premium content and enhanced marketing capability drove up advertising revenue by 34% annually and 12% sequentially. Both brand ads and performance ads booked annually and sequentially growth. Entering into Q4, we are cautiously monitoring the microenvironment impact on the advertising market. We will upgrade our marketing capabilities to weather potential challenges as we continue to seek out new growth opportunities in the future. Now, let's dive deeper into the performance of our core business segments, starting with membership services. In the third quarter, membership services revenue exceeded RMB 5 billion for the second time in our history, representing a strong annual increase of 19%, driven primarily by arm worlds. We would like to reiterate that the primary goal for membership services is to drive long-term sustainable revenue growth. Membership revenue is driven by three components, namely subscriber lifetime and subscriber base. Subscriber lifetime are all current key focus in driving the long-term economic value of membership services. In the third quarter, Arm reached RMB 1.54% annually and 5% sequentially. The average daily subscriber increased by 6%. percent annually to 107.5 million. The current arm level in our views is still very affordable compared with the price of other consumer products. We will continue to drive sustainable arm growth over the long term backed by several factors. As we just mentioned, membership purchase decisions are increasingly being made based on content and member benefits rather than discounts. Very importantly, our ability in consistently delivering high-quality premium content will be further improved. Second, our member experience offers comparing value for the many. We will continue enhancing our offering with new value-added services that increase members' value perception and willingness to pay, such as express package, concerts, and merchandise offers. Finally, we see significant potential to further upgrade existing Gold members to Platinum and Star Diamond membership tiers, which command a higher price yet offer more privileges. Our member privileges and benefits have proven highly attractive and we expect their appearance to remain strong. For example, the express packages is one of the content privileges we have developed for members, which enables subscribers to redeem their member points to unlock early access to finally episodes of hit drama series. This model was applied to two heat drivers in the third quarter, attracting over 10 million participating members, demonstrating the significant value perception attached to this benefit, in line with our strategy to foster deeper connections between our loyal members and our premium content through IP-derived work tips. Cloud concerts are another important component of membership offerings. We held the mysterious Lotus Casebook theme concert, which created immersive excitement Lastly, we have developed a dedicated e-commerce platform for merchandise related to our IPs. Members can use their member points to pay for these goods in full or in part. As discussed repeatedly, Our primary focus is on enhancing member loyalty, retention, and lifetime value through our membership privileges and benefits. Our loyalty program is closely tied to the duration of membership and we strive to improve the service experiment. and value perception, especially for our long-term members. For instance, users who opt to auto-renewal, choose long-term plans, or become premium members are granted elevated benefits, including faster accumulation of member points. that can be redeemed for content-related perks and merchandise. As a result, we observed meaningful year-over-year growth in both the quantity and proportion of annual plan subscription in the third quarter. Moving on to content. Content is our core competitive advantage. IT original drummers continue to be the main driver in terms of content supply and revenue contribution, accounting for over 60% of the key drummers launched in the third quarter. For this year's summer season, our drummer lineup covered diverse genres, such as Asian custom, loyalty, and suspense. The Asian custom detective drama, The Lotterer's Kids Book, became the Duck House hit of the summer. It was our tenth drama to break our 10,000 popularity index score, and the drama's theme concert we held generated over 230 trending search topics and attracted over 320 million likes. We are happy to see the significant long-lasting impact with this series as it continues to dominate the enlightened list even after its series finale. Other hit dramas, such as Asian custom suspense series, My Journey to You, Yun Zhi Yu, In Imperfect Victim, a serial focused on social issues and a criminal suspense serial, The Lost Eleventh Law, Xiao Shi Le Shi Yi Cong, were all well received by audiences and reflected the quality and depth of our drama lineup. For variety shows, to all classic IPs, such as the third season of the Big Bang, and housework talent Jiawu You Dengsheng made strong comebacks. The Big Bang 3 achieved outstanding performance in both advertising and membership revenue. We also launched that world's Innovative new IPs, including our very first variety show and drama crossover, As You Wish, Love You Seven Times, Cultural variety show, Glory is Back Beijing, and a cruising show, Let's Barbecue, which attracted a wide variety of users. On a separate note, we are also making good progress in realizing the commercial potential of our premium IPs. Notably, sales of the Lotus Casebook merchandise exceeded RMB 18 million. We have also introduced merchandise based on our original children's IPs' spending the full range of children's products, including daily life, learning, food, and offline entertainment. Heading into Q4 and next year, we are committed to deliver diversified and high-quality content on a continuous basis. We have a highly anticipated slate of drummers, aside from the already-launched titles such as Romance of the Pianzhongji, Story of Kunming Palace, Nian Runmo, and The Fearless Season 1. We also propelled a stellar drama pipeline to be released. This includes major Asian customer titles, A Journey to Love , and the Chinese Paladin 4 , as well as modern-day theme dramas like Detective China, Chinatown Season 2 , Like a Flowing River Season , and The Lonely Warrior . For a variety show, our pipeline covers a wide range of themes, including our first original physical competition show, the show we never stop, and our hit show, Become a Farmer, where I introduce its first spin-off show, Hi! Young Farmers. We also have an exciting line-up of children's cartoons and animations. For the original children's cartoon, we are going to debut the second half of DELL Squad Season 3, and a brand new title, Mega Miao, Miao Long Zhan Shi. for original animation, The Great Ruler, Da Zhu Zan, and Against the Gods, Ni Tian Xian Shen, are still trending. While new apps such as sci-fi series, The Beast Game, Shen Yuan You Xi, and comics adaption, The Magic Grocery, are set for release. Moving on to advertising business, we are delighted to see accelerated recovery during the third quarter. Total advertising revenue reached RMB 1.7 billion, up 34% annually and 12% sequentially. Revenue from Brand S recorded double-digit growth, both annually and sequentially, driven by several factors. Notably, our premium or general content, such as Big Bang Season 3 and Love You Seven Times, attracted stronger advertising demand. Advertising budgets allocated towards variety shows and dramas increased by 67% and 28% year-on-year, respectively. Breaking it down by sector, we saw increased ad budget from food and beverage, while sectors like internet services, transportation, and healthcare also recovered. Revenue from performance ads recorded strong annual revenue growth of over 70%, mainly due to two factors. First, targeted and efficient operations gain a higher budget share from sectors such as Internet, services, e-commerce, and games. Second, the effective use of generative AI-enhanced ad creation and ROI Looking ahead to Q4, we are cautiously monitoring the overall advertising market. We acknowledge that the consumption segment takes time to fully bounce back, creating a lagging effect on brand advertising business. Nevertheless, based on our unparalleled content quality and extensive user profile, we are the go-to platform for advertisers seeking optimal advertising opportunities. For performance ads, we are optimistic on sectors such as Internet services, e-commerce, and shop drummers. and we will continue to fine-tune our algorithms and leverage generative AI to enhance ad creation and maximize efficiency. Moving on to technology and products, our commitment is centered around fostering technology innovation to empower the entertainment ecosystem. creating value for our users and content creators. Firstly, we harness the power of technology to elevate the entertainment experience for our users. And secondly, we empower our content creators by equipping them with the latest tools and resources to improve the quality and efficiency of their creation. Our focus on leveraging AI to enhance the user experience has yielded significant progress. Notably, we have pioneered the use of generative AI in three key search categories, character search, plot search, and actor search. By applying advanced accountants We are now capable of automatically generating video clips and drama highlights. This cutting-edge technology has been implemented across hundreds of core dramas on our platform, greatly improving search accuracy. accuracy and user engagement. Users directed to a drama through AI platforms spend an average of 40% more time viewing the content. One more exciting user experience optimization is the introduction of Karaoke mode in Big Bang 3. This innovative and interactive feature seamlessly integrates some lyrics into the on-screen display during band performance sessions, allowing viewers to sing along and creating a more immersive experience. With meaningful viewers, engagement and the time span increased by users activating this feature in terms of content production and operation we are promoting the application of generative ai in various user cases during the rapid technology development of the video industry now the role of generative ai is involving from a male-embedded to a co-pilot made in every phase of workflow. By leveraging this transformative technology, we empower creators in every aspect of their work, from planning and development to production and the promotion of content. This approach not only enhance efficiency but also unlock new potentials. We are seeing great initial results. For example, we use generative AI producing low-cost, high-quality posters and videos to showcase our content. We have applied this technology in promoting our key programs such as testing Chengfengdu, the Big Bang season 3, etc. In addition, we are expanding the reach and influence of us by using generative AI. Finally, for our business performance in regions outside of mainland China, our premium content continues to win acclaim from overseas users and draws steady growth in overseas membership revenue. In the third quarter, membership revenue in Japan, Korea, the US, and Hong Kong all increased by over 50% annually. The solid performance was driven by the rising influence of our high-quality CPOP powered by a number of popular the total viewing time for C drummers on our overseas platform increased by 23% annually and 33% sequentially in the quarter. My journey to you, Yun Zhiyu, achieved the highest revenue on our overseas platform during its broadcasting period. Meanwhile, the Lauter's Casebooks Popularity in extended beyond mainland China at the top of all overseas platforms in both total video view and viewing time in the third quarter and remarked number one in total video views in Southeast Asia, East Asia and the North American market. For the first quarter, we will continue to drive high quality growth in addition to enhancing platform cooperation and channel expansion. We are dedicated to bolster our content pipeline to capitalize on the strong momentum of Chinese drama we are introducing. localized drivers in Thailand, Malaysia, and Taiwan to further expand our influence. In summary, we have accomplished strong results in the third quarter, with emphasis on delivering high-quality growth. As we look ahead, our dedication to enhancing user experience, competitive edge in original content, maximizing member value and harnessing the power of advanced AI technology remains steadfast. Going into next year, we will cautiously increase investment in both our core and innovative business establish a solid foundation for sustainable long-term growth. Now, let me pass to Wang Jun to go through our financial performance.

Thanks, Mr. Gong. And hello, everyone. We have delivered strong Q3 results, as you can see. The growth of ARM drives the growth of the membership services revenue, profits, and the free cash flow. And our operating leverage led to margin expansion on year-over-year basis. This demonstrates the defensibility and scalability of our business model. Now, let me walk you through the key numbers. The total revenue increased by 7% annually to RMB 8 billion, driven by growth in both membership services revenue and online advertising services revenue. The membership services revenue exceeded RMB 5 billion, up 19% annually, primarily driven by the increase in ARM. Online advertising revenues reached RMB 1.7 billion, with annual growth rate of 34%. This was fueled by the growth in both brand and performance ads, with performance ads showing stronger growth momentum. Now, moving to the cost. Our quality costs and expenses remain relatively stable year-on-year. Total cost of revenue was RMB 5.8 billion, up 2 percent annually. Common cost as a component of cost of revenues was RMB 4.2 billion, down 3 percent annually. Total operating expenses were RMB 1.4 billion, down 2 percent annually. Turning to profits and cash flow, the non-GAAP operating income reached RMB 895 million, up 71 percent annually, positive for seven consecutive quarters. The free cash flow reached RMB 826 million and has been positive for five consecutive quarters, representing our enhanced cash-generating capabilities. At the end of Q3, The company has cash, cash equivalents, restricted cash, short-term investments, and long-term restricted cash, including the prepayments and other assets, the total of RMB 7.2 billion. To conclude, our Q3 results reflected the strong execution of our strategy and the steady progress in driving high-quality growth. We are dedicated to delivering long-term value to all of our stakeholders. For detailed financials, please refer to our prior 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. If you are on a speakerphone, please pick up the handset to ask your question. If you wish to ask your question in Chinese, please then repeat your question in English for the benefit of everyone on the call. Please limit yourself to one question. If you have further questions, you may re-enter the question queue. Your first question comes from Xu Ping Zhang of CICC. Please go ahead.

Thank you, Manager Chen, for accepting my question. Congratulations on your performance in another quarter. My question is about the membership of ARM. We saw that ARM achieved steady growth in this quarter. I would like to ask Manager Chen, what is the outlook of the fourth quarter and next year's ARM? Thanks management for taking my question and congratulations on another strong quarter. My question is about Arm. The Arm has recorded solid growth this quarter. So what's your outlook for Arm in the first quarter and next year? Also, could you give us more care on how to improve the perceived value and loyalty of membership? Thank you.

Thank you. Duan Youqiao will answer this question.

Yes. Hello, everyone. Duan Youqiao will answer this question. Please go ahead.

Hello, everyone. Let me answer this question. Q3 AMO is more than 15 yuan in our budget. Yeah, for Q3, the ARM exceeded 15 RMBs within our expectations.

And then this is because our progress in content quality and also membership privilege for the long-term perspective, the result of that has been promising. And more users have been willing to pay at a reasonable price for premium content and also quality services.

We expect that ARM will continue to grow in Q4 this year, and we expect that ARM will have more room for improvement in the long term. We expect that ARM will continue to grow in Q4 this year, and we expect that ARM will have more room for improvement in the long term.

We expect that ARM will continue to grow in Q4 this year, and we expect that ARM will have more room for improvement in the long term.

and we continue to stabilize the ability to provide high-quality and diversified content.

Content quality remains the primary determinant for members' purchase decision, and the ability to consistently provide high-quality and diversified content is strengthening continuously.

Second, compared to domestic daily consumer goods and foreign products, Currently, the actual price of our members is relatively low.

Second, in comparison to other domestic daily consumer goods and similar products abroad, our current prices are relatively low.

Third, with the constant growth of the demand for large-screen screens, more and more golden members will upgrade to higher-end white gold and star members.

Third, with the growing demand for watching content on large TV screens, an increasing number of gold members are upgrading to platinum and diamond membership levels.

And fourth,

The introduction of more member privileges and benefits such as loyalty points, express package, club performances, member-exclusive e-commerce items, and also IP merchandise will continuously enhance the attractiveness and the long-term value for members.

The above four aspects give us full confidence in the ongoing health growth of ARM in the future.

All of the above four items I just mentioned give us confidence that Arm will continue to have healthy growth in the future.

In addition, because our pricing is low, Arm's growth from an absolute value point of view has an impact on the user's perception, but not much. The most important thing for the user to pay is how good the content is and how good the experience is. Recently, with the rise of high-quality content, further due to our relatively low pricing base the absolute impact of arm growth on user perception is relatively small

What users care about the most is still the quality of content and the user experience. We have seen rapid increase in member conversions with the launch of recent premium content. This indicates that our strategy of leveraging quality content and user experience to enhance arm and long-term member value is correct and has gained user recognition, leading to sustainable growth in membership revenue. We will continue to pursue this direction. Thank you.

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

Thank you for accepting my question. I would like to ask about the situation of next year. At this time, if we look forward to next year, what should we think about our overall business plan, look forward to and focus on the direction of development? So thank you, Benjamin, for taking my question. So my question is, at this time juncture of the year, when we think about next year, how is our overall business plan, strategy, outlook, and the focus area for next year? Thank you.

Thank you. Let me answer this question. According to our own judgment on next year's macroeconomic economy and our own conditions, For next year, for 2024, based on the current macro environment and also our current performance so far, our goal for next year is still aiming for high-quality growth.

high-quality growth, meaning the revenue and profit will both grow, and profit will go at a faster pace.

There are two aspects that will significantly increase revenue. The first aspect is in terms of content. Because content is the main driving force of our membership business and advertising business, next year we will, based on the growth of the market, significantly increase content We will cautiously and appropriately increase investment in core business to promote

Long-term growth, specifically, we will reasonably allocate more investment in top premium content to enhance our core membership business performance in arm, member, lifetime, and sub-base, and also will drive the performance in advertising business.

运力方面是加大投入在声称是AI的应用方面。 There are two aspects to the生存式AI application. One is 2B. The focus is on the level of intelligent production, promotion, and publicization of film and television. On the other hand, it is mainly used in the innovation of consumer service. We strive to use the large-scale model of生存式AI to create new business. This new business can become the future of IT. Okay.

And thirdly, we will continue to explore the implementation of innovative technologies centered around innovative AI. So there are two sides that's going to benefit from this. On the B2B side, we will increase investment in intelligent production to improve the industrialization and efficiency of the video industry. And on the B2C side, we'll explore new services and even new business models to cater to the consumer needs. And hopefully this will become the second or third growth, new growth pillars going forward in the long term.

In addition, IT's two innovative businesses, one is a overseas business, and the other is a fast-growing one, if we have profit, we will be able to gain more income next year.

And for the other two, innovative and new, growing business, such as overseas business and ITE Light, if we can maintain profitability of these two businesses, we will hopefully grow the revenue performance for these segments next year.

Thank you.

Thank you.

The next question comes from Daniel Chen of JP Morgan. Please go ahead.

谢谢管理层。 我想问一个问题是关于content cost内容这边。 想问一下我们未来的一个内容投资的一个策略, 还有就是我们投入的一个规划。 谢谢。 Thanks, management, for giving me the opportunity to ask questions. My question is on the content cost and also content strategy. Could management please elaborate on what's our content strategy going forward and also the content span outlook? Thank you.

Oh, yeah. Our chief content officer, Mr. Xiaohui, will answer this question. Please go ahead.

Thank you. Next, I will answer this question. In general, the goal of our overall content strategy in the future is to stabilize and continue to output high-quality and diversified content to continue to stabilize the core of the drama track, while also seeking more breakthroughs in other content categories.

Our goal in the future remains to consistently deliver high-quality and diverse content, solidifying our core advantage in the drama genre while seeking breakthroughs in other content categories.

In terms of drama, next year, we will maintain a stable overall number of players, and we will focus on the investment ratio of the top projects, which we often refer to as S- and A-level projects. We will continue to produce and supply high-quality content. At the same time, next year's K01, we will launch a new season of American theater, as well as some heavy S-level works to strengthen our competitive advantage, and create an opening for next year. From this year to the present, there have been four episodes of hot drama. We expect that next year will be further improved than this year.

in terms of the drama category. While maintaining a stable overall number of releases, we will focus on increasing investment in top-tier projects, which we normally call the S and A-plus ratings. Continuing to produce and supply high-quality content is our number one goal. In Q1 of next year, we will launch a new season of Miss Theater and a highly-anticipated S-grade production, strengthening our competitive advantage and making a strong kickoff for the year. Based on the ITE's popularity index score, we have already seen four dramas this year that have exceeded a significant milestone of 10,000 score for this year, and we anticipate the performance for next year will be better than this year.

In terms of variety, while maintaining the basic stability of content costs, we will increase the number of programs and also upgrade our production team. In addition to the programs that have already been verified by the market, we have many innovative projects that will meet with everyone from this year's KU4. For example, the upcoming self-produced variety of physical energy competition is indispensable. This is a variety that we have a high score in. It will be released at the end of November.

Regarding variety shows, while keeping content costs relatively stable, we will increase the number of programs and upgrade our production team. In addition to the already market-proven multi-season variety shows, Several innovative projects will be gradually introduced starting from Q4 this year, such as our original physical competition show, We Never Stop, which will be launched at the end of November, and we have internally high expectations for that. In terms of business models, we will explore monetization models beyond advertising, membership, and IP derivatives, as well as explore more IP development opportunities throughout its lifecycle. For movies, we will increase investment in films made for online distribution and top-tier content feature films while further optimizing the operating models for online films, theoretical releases, and our ITE cloud cinemas.

For traditional content, we will appropriately increase investment, strengthen the influence of our multi-season IPs,

and increase commercially-oriented original content, as well as expand PUGC content. Our primary objective will be increasing the revenue growth potential and expanding IP licensing and exploring additional revenue potential, such as toy licensing, and etc.

In terms of animation, we have seen that Q3 has been the best quarter since Q3. We are very confident that we will continue to invest in our own content next year.

As for animation, Q3 was the best quarter we've had for original animation. We are confident in further increasing investment in original content next year and expect a moderate increase in the number of original titles. Thank you.

The next question comes from Thomas Chong of Jefferies. Please go ahead.

Our senior vice president will answer this question. Thank you.

Our overseas business started in 2019 and encountered the outbreak of COVID, which led us to adjust and slow down our progress over these three years.

However, through these three years of exploration, we have also achieved fruitful results. Firstly, we have validated our business model. Although our overseas business is still small in scale, in 2023, we forecast to achieve revenue growth and profitability. We have experimented in different markets and identified methods for growth and profitability that can be gradually replicated in other markets. 其次,我们验证了爱奇艺自治民众在海外的影响力。

And secondly, we have validated the influence of IT's original content overseas, establishing our core competitiveness.

Our goal is to establish our overseas platform as the home of beloved Asian content, and ITE's original Chinese dramas are our most evident advantage. Over the past years, Chinese dramas have witnessed significant viewership growth in certain markets, and we have seen the potential of CPOP.

Finally, we have also started to gradually establish our own ecosystem of cooperation in some key countries, including cooperation partners with local regulators and content partners. Lastly, we began to build a comprehensive ecosystem in key countries, including cooperation with local regulatory agencies, content partners, and channel partners.

Through these collaborations, we have already launched exceptional local drama content. We can bring outstanding content and culture from all over the world to IT users in China and also around the world through our global network. These advancements have inspired us largely.

On the basis of these three achievements, we hope to strengthen the cooperation of our individual partners by replacing content with our technical platform. On the one hand, we promote cultural exchanges. On the other hand,

Building on these three achievements, we aim to strengthen collaboration with partners around the world using content as a medium and leveraging technology platforms to facilitate cultural exchange and also explore new commercial opportunities. We will continuously empower and add value to everyone in our ecosystem. Thank you. Thank you.

The next question comes from Maggie Yee of CLSA. Please go ahead.

感谢管理层提问的机会。 想和管理层进一步了解一下爱奇艺在生成式AI相关应用方面的进展。 Thank you, management, for taking my question. My question is about advancement we made in the application of generated AI technologies at IT. And I'm particularly interested in understanding the results we have already achieved in terms of improvement in business efficiency as well as cost structure. and also want to learn more about management's perspective on the long-term impact of these technologies. Thank you.

Sure. Thank you, Maggie. And then we will have Wenfeng, our CTO, to answer this question.

We believe that even AI will have a major impact on the film industry in the next three to five years, including production methods, cost structure, and personnel structure. These have brought huge changes. We believe the generative AI will have significant impact on the entire video industry in the next three to five years.

bringing significant changes in production methods, cost structure, and personnel structure. So currently, ITE has already started implementing generative AI in core areas, such as content planning, development, production, and promotion. We have achieved a certain level of productivity in four major application scenarios, namely text, image, sound, and videos. And this has helped creators to improve quality, optimize efficiency, and reduce cost.

For example, in content planning,

we have used generative AI to compress the time required for sorting extensive evaluation feedback from project assessment process from several hours to a few minutes. In the development phase, the use of generative AI has assisted reducing the time required for manual reading from three to four days to about one hour. The accuracy of scene and character breakdown in script have also exceeded 90%.

In the prediction phase, producers have effectively saved on design and production costs by using generative AI tools to generate character sketches and concept posters.

In the promotion phase, high-quality posters and dynamic videos generated by generated AI have been applied in on-platform operations and off-platform advertising for key projects, such as Destin and the Big Band 3.

In addition to the hidden content system, we also use the creative tool of IIGC to help advertisers produce advertising materials in the afternoon advertising. There are some industries where the advertising amount is increased by 200% compared to the previous use.

In addition to content production, we also utilize AI-generated creative tools for effective app material production for performance ads. Some industries have seen a 200% increase in app spending compared to before the use of AI. While other campaigns using AI-generated materials have also experienced a 60% higher rate of investment compared to non-AI materials. In the future, we will continue to explore more business scenarios and application opportunities, fully leveraging the capabilities of generative AI to create even greater value. Thank you.

There are no further questions at this time. I'll now hand back to management for closing remarks.

Thank you everyone for participating in today's call and please do not hesitate to contact us if you have further information or questions. Thank you. Bye-bye. We'll see you next quarter.

Thank you.

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