iQIYI, Inc.

Good day and welcome to the eQIY fourth quarter and fiscal year 2023 earnings conference call. All participants are in a listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I will now like to turn the conference over to Ms. Chen Yu, IR Director. Ms. Yu, the floor is yours, ma'am.

Thank you, operator. Hello, everyone, and thank you for joining ITE's fourth quarter and fiscal year 2023 earnings conference call. The company's results were released earlier today and 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. Xiao Gui 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. Xiang Haiyang, senior vice president of movies and overseas business. Mr. Gong will give a brief overview of the company's business operation and highlights. followed by June, 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 but are not limited to those outlined in our public filings with the FDC. ICE does not undertake any obligation to update any forward-looking statement except as required under applicable law. I will now pass the floor to Mr. Gong. Please go ahead.

Hello, everyone. Thank you for joining us today. After an iconic turnaround in 2022, We continued our success in 2023, delivering the best performing year in the company's history by focusing on high-quality growth. Both total revenues and the non-GAAP operating profits in 2023 increased several digits year-over-year and reached its powerful high despite macro-heaviness. More importantly, of growth in profit substantially surpassed that of values. This demonstrated the resilience of our business and our operational excellence. Let's take a closer look at the key metrics in 2023. Total revenue reached RMB 31.9 billion. of 10% annually. Non-GAAP operating profit reached over RMB 3.6 billion of 58% annually. And the non-GAAP net profit exceeded RMB 2.8 billion of 121% annually. We generated a sizable total free cash flow of RMB 3.3 billion in 2023, which improved our liquidity position, allowing us to make investments to drive future growth. All four above mentioned key metrics hit record, saving time. It becomes very clear that the company was following the right course, offering a sustainable value growth for all stakeholders. Our exceptional financial results mirror our solid leadership in China's long-form video industry. Our capacity for consumer engagement will shape Microsoft's creative content production and technology innovation is second to none. Indeed, in the consumer space, IT has stood out as a signature brand for providing top tier content. This was supported by viewership market data as well. According to Enlightened, we were ranked number one in drama viewership shelves for three consecutive years. Notably, in 2023, we broadcasted out of the 10 most viewed new drummers in the market. In addition to drummer categories, we also dominated the online movie streaming segment with a total viewership share of 47%. Our market share leadership is deeply rooted in our unique capacity to produce original premium content. In 2023, ITE Originals accounted for over 65% of our key drummers' releases. As an annual record in our history, the original production capability not only guarantees as a steady, inclusive supply of premium content. It also optimized our cost efficiency measured by an operational metric known as the content-related cost ratio. For drama category in 2023, this ratio improved 12 percentage points compared to 2022. The notable increase in efficiency translated directly into an increase in our profits. This is why our original capability is often recognized as the most important defensive barrier protecting our business. Meanwhile, we are also the leader driving technology innovation in long-term video industry. industrializing the content production process and upgrading users' entertainment experience. For example, we developed IT content production management system, a highly efficient data-driven system that recorded every crucial aspect of the Intel content production process. This system, together with generative AI, will meaningfully improve the health ratio while enhancing the production and operation efficiency. One more example of our technology leadership is Max, a vendor we pioneered to deliver the ultimate cinematic-like experiences on certified TV devices, covering more than 19,000 episodes of content across 157 TV models. Being a leader means constantly having our eyes on what's ahead, not the past, and thinking more about long-term strategies rather than short-term gains. As a management team, What really matters to us is to the potential returns of until content portfolio called year in the next several years and whether we can find a systematic approach to improve the ROI either by technological advancement or by upgrading our content creation and management process. Perspective is a sharp departure from the public conventional way of marrying our success by the number of key titles in a specific quarter. But we firmly believe that this perspective best upholds our long-term leadership in the industry. Likewise, when we notice, possibly, a fluctuation in our subscriber members. It motivates us to boost the quality of our content and better our services to further engage underserved demographics like senior and the young so as to improve long-term retention and arm. They firmly believe that by addressing this fundamental long-term challenges we will be able to grow our value-to-user partners and investors in a sustainable manner. Looking forward to 2024, we remain committed to our long-term vision and continue to focus on high-quality growth. Our key priorities include stressing our current market position in core content categories such as dramas and movies, improving our competencies in additional vertical gyros such as kid cartoons and animations to enhance our capabilities in incremental areas, integrating cutting-edge technologies to increase efficiency in content production and operational in reaching the user experience, and the last but not least, exploring new markets and business opportunities. Now let me walk you through the details of our core business segment, starting with membership services. Our goal for the membership services business is to drive long-term sustainable membership revenue growth, and our focus extends beyond more than the portfolio net addition. Membership revenue is driven by three components, namely subscriber lifetime and subscriber death. Subscriber lifetime are our currently key focus in driving the long-term economy. value of membership services. In 2023, our membership services value exceeded RMB 20 billion, up 15% compared to 2022, driven by increase in both arm and subscriber base for Q4. Membership services value reached RMB 4.8 billion, up slightly year-over-year. Arm maintained sequential growth for five consecutive quarters and hit record high of RMB 15.98 in Q4, up 13% annually and 3% sequentially. We believe our arm has ample room to grow in the future. The monthly membership fee for the industry is still very affordable compared with other affordable discretionary spending, such as movie tickets, coffee, and a happy meal in quick service restaurants. With more premium content and a higher perceived value, users' willingness to pay will increase, allowing us to strategies to scale back on this cost. Additionally, our innovative value-added services, including Express Package, offline events, and merchandise benefits show promising potential. In Q4, we launched Express Package for six grammar scenarios, and the four are nearly 50% sequentially increase in the number of participants. Members redeem points for access increased by 40% sequentially and cash purchase by members increased by 250% sequentially. Furthermore, our premium membership options are designed to entice users to hire peers, tapping into greater monetization potential. For example, in Q4, events like the story of Kuning Palace, Nyanguma Sun Meeting, and the 2023 IT Screen Nights provided opportunities for long-term members, and particularly those on the estimate plan. to win event tickets through inclusive draws. This has led to a shift with members upgrading from the standard gold plan to the higher-end planning and assignments plan, which, although more extensive, offer enhanced privileges. The average daily subscribers for Q4 was 100.3, meaning with the quarter end number higher than the daily average for the quarter. Our content continues to captivate subscribers. The subscriber mix has improved compared to the same period last year, with substantial increase in the proportion of annual plans. With strong content sales, As late for 2024, we are confident that the number of dramas breaking the 10,000 popularity index will surpass that of 2023. Premium content will naturally have to fuel our revenue growth. For 2024, we are taking a number of steps to start stressing our membership's serious business. First, we will offer more differentiated products tailored to different user cohorts and provide value for many member users. Second, to optimize continuous gathering, marketing, and operations to attract new members while increasing member retention. Third, improving the loyalty program to incentive-wise users to choose long-term premium and auto-renewing plans. Such innovative will further boost member thickness and increase lifetime value. Moving on to content. Our consistent market leadership in core content garrison has solidified our reputation as a diversified and high-quality premium content powerhouse. Original programming remains the cornerstone of our content strategy and a key revenue driver. We have made a remarkable advancement in the quality of our original production. In 2023, original content contributed 80% of the total revenue from key new drivers during the new release period. And that's not all. For seven three-quarters Over half of the revenue for new key drummers has come from original titles. Additionally, our content efficiency has largely improved. Our content-related cost usual for drummers has improved for the third consecutive year, decreasing by 12 percentage points since last year. That's a clear mark of progress enhancing our cost of structure and ultimately our bottom line. This is underpinned by our sophisticated content production and operation mechanism, which maximize the efficiency of our content investments while sparking the creation of innovative new titles Our IT content production management system lies at the heart of the program, empowering our teams to deliver top-tier programming with remarkable efficiency and with effective results allocation and program management at every step. In addition, we give our creative talents enough flexibility to grow to really push the envelope with their innovative ideas. The blend of robust content management and creative laboratory allows us to consistently deliver high-quality content so efficiently. It's a sacred source for our content strategy. We have seen a consistent flow of premium content until content portfolio improved. For example, in 2023, there were more titles with popularity index score of 9,000 and about 71% compared to 2021, reflecting a steady improvement in content quality. Additionally, over 70% of all key drama releases in 2023 match both types of expectations. Moving on to detailed content performance in Q4 2023, for dramas, Zarya of Kunming Palace, Nian Lu Mo, was a great success as offers a fully in-house produced original to reach a popularity index of 10,000 leading the industry wheelchairs journey in Israel. Another drama that also reached a popularity index of 10,000 was A Journey to Love, Nian Guanshan, which set the record for the best opening day wheelchairs in 2023. During the quarter, the new season of Mr. Shelter rechanged the success of Lonely Warrior. Some of it consolidated leadership in the suspense genres, reaching a peak popularity index of more than 9,800, a record high for the Mr. Shelter and the 24-episode short drama category. Other preeminent titles in Q4 included the phallus, Wu Hewei Jun, Romance of the Fang, Tian Geng Ji, and the Tiger Queen, Hu He Yaoshi Lu, showcasing the diverse range of all drama portfolio. For movies, we maintained a leading leadership shell in Q4 as per in Titan, Enlightened, Our movie channel features 20 major releases, mainly talking about box office charts. Additionally, we are happy to see the recovery of the offline movie markets, and four of IT's original theoretical films garnered box office revenue of over RMB 100 million in 2023. Our original strategy extends across all content genres. In animation, we largely scaled up original content in 2023, doubling the number of original titles launched and posting a 90% increase in revenue contribution compared to 2022. For kids cartoons, we now have 11 original IPs, eight of which were multi-season, notably Princess Doremi Season 3 was named the Best 3D Animated Program at the 28th Asian Television Awards, which is one of the largest entertainment content and broadcast awards in the Asia Pacific. demonstrating our expanded influence in overseas market. Next, let's take a look at our content pipeline in 2024. For drummers, our goal is to deliver diversified and high-quality content on continuous basis. We are increasing investments in premium programs while keeping the total number of titles relatively stable. Our content slate includes ancient custom dramas such as the highly anticipated folk spirit matchmaker Buyao Xiaohongyang's boring slave Ye Yan's Zhi Wugongji, Full of Your Heart's Yan Xingji's Meng in the second season of Strange Tale of Tang Dynasty and others. In addition, Mr. Seltzer will debut new titles in 2024 with Breaking the Shadows and Lost in the Shadows In the reality gyrus, the premium of always-on-the-move metadata known as top-notch production and a strong audience appear as its peak popularity score reached as high as 9,959, another example showing casing of strong content capability. Viewers. I can also look forward to the upcoming City of the City for Latin, adapted from the famous science fiction novel written by Liu Zixin as well as in the name of the brother. For movies, we expect several IT originals to hit the theaters in 2024. Our line-up includes the action comedy, Rob and Rob in Shijiaan, which premiered in January and garnered a total box office of RMB 236 million. Also, we anticipated to release the eagerly awaited trial-success summer UOE adapted from the renowned novel written by Keiko Hagashino for our online movie segment, Cloud Cinema. We have introduced Action Master, our new brand that brings together the work line up of action movies for our viewers. We have debuted three titles so far earned high praise from audiences. Additionally, we look forward to the upcoming release of the wide blade of Stranger, Mobu Guangzhou, the latest addition to our Action Master catalog. The variety shows, in addition to new seasons of established IPs like The Detective's Adventure 2024, one time under the draft of China 2024. We will continue to develop new programs, finding different themes such as Player One in Wonderland, Young Square, and others. For kids cartoon and animation, we are actively expanding our production capacity. We will introduce brand new IPs and new seasons of classic IPs of original kids cartoon. And for animation, we are planning to release around 20 seasons of original animation with enhanced quality and To sum up our 2024 content strategy, we aim to reinforce our drama leadership and achieve breakthroughs in other genres. Our focus will remain on premium titles, increasing their supply, quality, and monetization. We will also optimize our content scheduling to cater to our needs. diverse user base and their varied preferences. Moving on to the advertising business, in 2023, we recorded an annual increase of 17% in our advertising revenue, both brand and performance as folks' health growth over the previous year. In Q4, advertising revenue increased by 6% annually to RMB £1.65 billion, beating expectations thanks to outgoing content influence among brand advertisers. Revenue from content-targeted ads accounted for over 50% as advertisers Vlogs to top dramas and shows like The Story of Kunming Palace, A Journey to Love, and We Never Stop. Broken down by factors, the annual growth in Q4 came mainly from the recovery of brands in industry, including food and beverage, communications, and health care. Performance apps continued to show annual growth despite the high baseline set in Q4 last year. We expanded our customer base to attract new advertising budgets such as new e-commerce platforms and platform programmers. Our solid performance also capitalized on our technology upgrades as we made effective use of generative AI to improve ad creation and ROI. Looking ahead to 2024, we remain culturally optimistic about the ad market, and we are closely monitoring the dynamics of microeconomics and advertisers segments. Our performance in 2023 once again proves that we remained as a go-to platform for advertisers thanks to our unmatched content quality, extensive user profile, and strong sales ability. For BrandS in 2024, we will retain key clients in food and beverage, cosmetics, and the communications we are striving for in healthcare, entertainment, and other sectors. We expect that domestic brands will experience a faster recovery compared with their international peers. Furthermore, we are positioned to tap into more alternatives as we observed a high demand for ads visible to subscribers and non-key drummers. For performance ads, our strategy is to stress our offering for key clients in established areas like internet services, e-commerce, and gaming. Meanwhile, we are set to boost revenue in new growth areas such as live streaming, e-commerce, and short-form dramas. Technology innovation is our priority. We need to provide a cutting-edge solution to maintain our privilege at a competitive edge. Moving on to technology and the products, our commitment is centered around factoring technology innovation to push the industrialization of content production, improve the user experience, and boost operating efficiency. We have integrated the latest technology into our top original production. For example, our major original drama, The Story of Mystics, I'm really glad virtual production to achieve remarkable results. Capturing over 3,000 minutes of footage, this pioneering technology marks a paradigm shift in filmmaking, enabling immersive, efficient, and creative storytelling for the future. Another example For many IT original productions, unsigned footage could be immediately uploaded to a proprietary cloud, enabling remote production, oversight, and content quality checks, as well as swift real-time editing to expedite the post-production phase. our efficiency in both production and program management. We are leveraging technologies to refine our products and enhance user experience as well. Our deployment of AI to filter out poor quality comments and spoilers. creates a better community environment and boosts user engagement. In addition, they are broadening the reach of technology to allow more audiences to engage, indulge in the ultimate real-time experience through our Pioneer X8 Max. In terms of generative AI, we are advancing every stage of content creation from planning, development to promotion, enhancing both efficiency and creativity. These efforts not only improve content production and operation efficiency, but also unleash creative potentials Over the past year, we used AI for mass-producing quality marketing materials which outperform the manual design in collecting soon rates and viewership. Additionally, AI's capability to comprehend video content at minute level enables detailed plot summaries for each playlist. now available for over 3,000 drivers. Finally, for our business performance in regions outside of mainland China, we achieved our first full year operating profit in 2023. Additionally, we continue to expand the influence of CPAP with three drivers contributing more than 50% of revenue. In Q4, membership revenue and ad revenue both recorded double-digit annual growth driven by the growing popularity of premium content among users and advertisers. Membership revenue increased by over 80% in Japan, Hong Kong, and the UK, and over 50% in Mexico and South Korea. Ad revenue rose 30% annually and 49% sequentially. Our three drummers have continued to captivate international audiences. The story of coming talents leads rankings in many markets, affecting records high metrics for Chinese content on our overseas platform. Meanwhile, A Journey to Love also dominated many charts in Southeast Asia, North America, and Australia during the broadcasting period. We are also exploring ways to bring overseas local contents to the domestic Chinese market. In January this year, we developed our original Malaysia drama, One Pass Sing Taku, for those in China. making a solid step in further amplifying the synergy between domestic and overseas content. Our pursuit of collaborative opportunities remains strong. We have introduced bundled plans through partnerships with telecommunications providers in Thailand and Hong Kong. We also worked with tourism authorities in Thailand, Singapore, and Hong Kong who craft specialized commercial content and advertisements. Looking into 2024, we have prepared an exciting slate of feedback to key markets. We are wrapping up original production of premium content for local users. Mostly, we are set to build international version of the IT original music show, Youngs of You. Meanwhile, we will continue our efforts to promote C-Dramas and the local content in partnership with Southeast Asia TV station. Alongside increasing our brand influence in key markets, we also aim to explore that work IP monetization opportunities. In summary, the year 2023 marked a milestone for IT. It's exciting to see that the transformation we start back in 2022 really paid off. We celebrated the record high revenue profits and the cash flow. In 2024, we aim to sustain the high-quality growth trajectory and further grow our revenue and profits. We are confident that our efficient constant production and robust operations will drive further success. We also continue to integrate advanced technologies to increase productivity and support our strategy of long-term sustainable growth. We are enthusiastic about collaborating with our stakeholders for Prosperous 2024. Now, let me pass on to Jun to go through our financial performance. and hello everyone. We maintained our strong momentum in 2003. The impractical financial results, once again, demonstrated the resilience and scalability of our business model. With increased profits and enhanced liquidity, we have an even greater capacity to sustain a long-term value creation of our stakeholders. Now, let me walk you through the key numbers. In 2023, total revenues increased by 10% from 2022 and reached RMB $31.9 billion. The revenue growth was driven by membership and online advertising services as both recorded double-digit annual growth. Membership services revenue hit RMB $23.3 billion, up 50% annually. The growth was driven by the increase in average revenue per membership, i.e. arm, and a rise in average daily subscribers. Online advertising revenue grew by 17% annually and the reach on the 6.2 billion. The rise was primarily fueled by the growth in performance-based ads and to a lesser extent, the brand ads. Notably, performance-based ads revenue actually reached historical highs in 2023. Turning to our offline performance in Q4, total revenues increased 1% annually to RMB $7.7 billion. Membership services revenue was RMB $4.8 billion, up 1% annually. Our ARM strategy proved highly successful, achieved sequential growth for five consecutive quarters Online advertising services revenue was RMB 1.65 billion of 6% annually and exceeded our expectations. The growth was largely driven by the growing attractiveness of our premium content among advertisers. Now moving to the cost and expenses. For 2023, common cost was RMB 16.2 billion down 2% annually. Total operating expenses was RMB 5.8 billion, up 8% annually. For Q4, the accounting cost was RMB 3.7 billion, down 5% annually, mainly driven by our improvement in accounting strategy and operating efficiency. And the fueling number of major variety shows launched in the quarter as well. The total operating expenses was RMB 1.4 billion, down 1% annually. Turning to profits and cash flows, for 2023, we successfully delivered what we promised for profit growth earlier in the year. Our non-GAAP operating income surged to over RMB $3.6 billion, up 68% annually. For Q4 alone, the non-GAAP operating income with RMB 928 million positive for eight consecutive quarters. Furthermore, our free cash flow in 2023 totaled RMB 3.3 billion, achieving its first full-year positive with Q4 contributing RMB 614 million. Strong cash flow improved the healthiness of the balance sheet and leading to value creation from deleveraging and de-risking. As of the end of Q4, we had cash, cash equivalent, restricted cash, short-term reinvestment, and long-term restricted cash, including prepayments and other assets, totaling of RMB 6.2 billion. In terms of the future use of the cash, the company has a total of U.S. dollars $396 million on convertible bonds on August 1, 2024. After meeting this potential repayment obligation, the management will be able to actively explore various shareholder value enhancement initiatives, such as the Common User Share Buyback, on top of our investment for future business growth. The implementation of such plan is contingent upon the financial condition of the company, the market condition at that particular point of time, and is subject to all the discussion and approval. To conclude, echoing what Mr. Ghosn earlier remarked, we have now substantially strengthened the fundamentals, remain deeply committed to creating enduring value for all stakeholders, and to continue leading in its evolution. As we just celebrated the Chinese New Year, I would like to take this moment to extend our sincere thanks to our investors and analysts for your consistent support throughout our past. For details on financial data, please refer to our press release on our IR website. Now we will open the floor for Q&A.