iQIYI, Inc.

Thank you for standing by and welcome to the IKEE first quarter 2024 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining ITE's first quarter 2024 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. 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, Mr. Xiang Haoyang, Senior Vice President of Mulis and Overseas 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, 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 Security 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 not are limited to, those outlined in our public filings with the SEC. ITE does not undertake any obligations 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. We kick off the year with a strong first quarter as we continue to execute our high-quality growth strategy. and achieved multiple historical highs in key financials and operational results. The non-GAAP operating income and its corresponding margin both reached record highs with income and RNB 1.1 billing and margin at 14%. The expanding margin is a natural result of high-quality growth. For our membership services business, the monthly ARM grows to an all-time high, reaching the sixth consecutive quarter of sequential growth. We are satisfied with the progress and continue to believe that ARM remains one of the key drivers for unleashing the long-term long-term value of membership services. In our advertising services, revenue from the performance has achieved a double-digit annual growth and a historical high in Q1. We anticipated the momentum to continue as it directly benefited from the growing adoption of generative AI, which has expanded geo-systems greater returns on investment for advertisers. Content distribution revenue hit historical high as well, reached RMB 928 million and grew 27% annually. This clearly illustrates that our growing content production capabilities are creating more high-quality content that is recognized by television stations and other buyers. While we delivered impressive financial performance in the quarter, we maintained all dominance in content. The data from Enlightened shows that our total viewership across major content categories such as dramas and movies maintained the top spot in the market in Q1. Notably, in the crucial drama category, we have held the number one position for a wheel-shaped shell for nine street corners. Aside from all domestic achievements, we are also excited by the amplify the reach and the influence of our content and brand in the overseas market. Now, let's dive deeper into the performance of core business segments. Starting with membership services, we are committed to offering our users superior content, the finest user experience, and enhanced member privilege and benefits, which we believe will fuel the sustainable long-term growth of our membership services revenue. Our focus extends beyond merely the quarterly subscriber numbers. As a revenue result, ultimately, we flex all the collective components contributing to that performance. With that said, we believe the way we share the development of our membership business should be aligned as well. Starting in Q1 of this year, we will stop reporting the quarterly average subscriber numbers and arms. We will provide updates on key milestones related to subscriber growth and arms as they are achieved. In the first quarter, we delivered membership revenue of RMB 4.8 billion flat, sequentially, and down 13% from a year earlier. The year-over-year fluctuation was primarily due to the high-based effects created last year with the release of Omega Heat, the knockout. The surge in travel and offline entertainment during the very first Chinese New Year holiday of this year post-COVID also partially dilutes the online activities. Currently, among the various factors contributing to the revenue performance, we are intently focusing on enhancing the arm and extending the lifespan of each membership. which serve as our principal areas of focus. We remain highly confident in the long-term growth potential of our membership business. Our confidence is supported by the success of our ARM strategy, which reflects six consecutive quarters of sequential growth. The strong performance is driven by our ongoing efforts to improve operations, enrich product offerings, and enhance membership benefits, all of which have bolstered the value proposition of all members. Given that our membership fees are affordable and the effective arm remains modest, we have the opportunity to further refine our pricing strategy emphasizing the exceptional value of our premium company and the services. We have been working on improving ARM by introducing exciting services that add substantial value. I take the Express package for example. Cash purchase for the drama. A lonely warrior reached a new high. The Express package not only brought in more revenue, but it also increased the popularity of the title. In fact, just one day after we launched this package, the drama hit its peak on the IT popularity index score. We are making good progress in bringing additional value to our members while concurrently driving revenue and popularity. In summary, our strategy for our membership business involves consistently delivering premium content and streamlining operations and making efforts to attract and engage users. We also intend to adapt our membership offering to suit that worth user preference and bolster loyalty program to motivate commitment to long-term premium subscriptions. Such initiatives are designed to foster loyalty and enhance customer lifetime value. Moving on to content, maintain market leadership in key content genres has reinforced all the reputation as a diversified and high-quality premium content powerhouse. For nine consecutive quarters, our drama wheel-shaped shelves have topped the industry. The quarter's newly released title highlighted the extensive range and depth of our offering. We achieved meaningful advancements in the realistic genre. distinguishing ourselves from competitors from quality drummers infused with varied creative elements. This strategy has successfully broadened our content creation expertise. Original programming remains the cornerstone of our content strategy. IT originals accounted for over 70% of our key new drummers launched in the first quarter. covering diversified themes. In particular, Warm of Faith, Cui Feng Zhuo emerged as the first genre this year and the 13th in history to surpass an ITA popularity index score of 10,000. Setting it apart from other warm-seed shows, Warm of Faith a historical parallel setting with financial intrigue, suspense, and other creative elements. Demonstrates our commitment to innovation as we continue to push general boundary and introduce unique storytelling perspectives. The well-received drama, Always on the Move, by Lai Wei Wang. which was released during the Chinese New Year holiday, recorded a wheel-shaped shell of over 27% at its peak, according to Enlightened. It also set a new record for driver wheel shape on CCTV8, and its IT popularity index was 9,959, just a shy of 10,000 landmarks. After establishing our industry leadership in suspense genre with LATAM Theatre, we have continued to thrive in the comedy genre, introducing three new titles under the LATAM Theatre brand this quarter. This includes our parallel universes, Shao Yi He Wang, and the great nobody, Da Wang Bi Huang Zhang. both of which are drama spin-off or a spin-off of our hit variety show. Additionally, the newly released Soldier's Story has broken IT records for the highest popularity index score, highest revenue, and the best ROI for laugh-on-the-shelter production. During the quarter, we also released a collection of that war's high-quality dramas, such as Burning Flames, Lie Yan, Born to Run, Detective Chinatown 2, For the quarter, our movie viewership outperformed competitors, as reported by Enlightened. We released 24 major films across genres like crime, suspense and action, including top-grossing theatrical releases on our movie channel. Meanwhile, 32 movies debuted on our Cloud Cinema channel to positive audience reception. We also observed encouraging early responses for our new action master season, 動作高手記, art, film, cinema, Wenyi Yuanxian brand releases. For variety shows, we made solid progress in both new releases and established IPs. Become a farmer, Zhong Jiba, to leverage the strong thoughts of the first season and achieved not only a notable boost in popularity and revenue, but also spurred a resurgence in we will shape for the first season. In addition, five hub, four have a powerful season, Wuhan, with a high level of interaction among guests. It's underwriting index surpass 8,408 peak. For admission, we got better at what we do and users responded well. Our original works, The Great Ruler, Da Zhu Zai, and Against the Ghost, Ni Tian Xie Shen, achieved the best performance for domestic animation on our platform. Our upcoming dramas feature some of our titles, such as Folks, Spirit, Matchmaker, Hu Yao Xiao Feng Yang, Follow Your Heart, Yan Xin Ji, and As Husband, As Wife, Xiao Fu Qi, An out of late of recent releases, including In the Name of Brother, Harbin 944, and others, have bolstered our reputation for delivering high-quality, diverse content with great audience appeal. Notably, CTAO's CTAO becomes the highest-rated show during project time on CCTV1 this year. In particular, To the Wonder, for the other time, exemplified our success in blending artistic marriage with commercial success. The third, adapted from literary prose and sparse art with light comedy, with live comedy elements, supports Pioneer's EXIF standard, and offers a cinematic experience that sets a new industry benchmark. Additionally, this service is the first to utilize our in-house developed cloud-based on-site production management system, enabling instant collaboration on daily shooting footage, remotely and largely boosting production efficiency. To the vendor has achieved a profitability well-gathered domestic and international acclaim. AdTops' ratings on Dover this year become the first eight episodes miniseries to air during CCTV1's prime time flight. and was the first Chinese drama to be selected for the prestigious long-form competition at Cannes Cereals. The Lighthouse Theater is set to introduce six titles in 2022, with notable ones, such as the already-released Tell No One , and the upcoming Lost in the Shadow and Interlaced Scenes. In addition, we are broadening our general focused theater mode with two new brands, Microcosm Theater, which focuses on premium mini cereals that is for the nuance of everyday life with to the wonder being its first title the masterpiece shelter on the other hand offering adaption of esteemed literary works, we believe the theater mode will further enhance content performance and commercial value. Our Q2 movie offerings include social relevance titles like Pegasus, and The Peak, the Snake, and the Pigeon. Cloud Cinemas will showcase YOLO, He is from the Chinese New Year release window, along with renowned director Zhang Yimou, Article 20, and the action package suspect Chaoyi Shentai. Additionally, we are eager for the May 17th shelter release of Harvey Blake, based on Keigo Higashino's I used to know Dongyue Guiwu. With our variety show, we have seen a strong return on our established IP, including The Detective Adventure Season 4 and The Drive of China 2024. We are also exploring new IPs in the reality show genre, with I Play Basketball in Hengdian and Wonderland, Shuiyuan Zhihou Huidao Xian Shi. Our original production capabilities for animation continue to improve. We expect the number of kids' animation titles we release next quarter to increase, in addition to sequels from existing scenarios. We will launch new apps such as Fantastic Around, Xiaotiao Bangbangbang. We also pressed forward with the sequels of new animation IPs like Phoenix Gardens, The Golden Calf Crisis, Jing Wei Zhi Feng Qi Jing Yun, and I'm the Blade Master Wu Wei Daozong in the material arts and the fantasy genres. We recognize that the call stress of the long-form video industry lies on consistently delivering high-quality content that strikes a balance between creative value and economic success. Our edge in this industry is secured by combined elite talent and industry resources. Rigorous content evaluation and management sophisticated business intelligence and innovation technology. As we progress through 2024, our approach will focus on crafting top-tier, diverse content that leverage our leadership in general categories while exploring advancement in the genres. We will also refine our release strategy to align with involving the taste of our audience. Moving on to the advertising business. In the first quarter, ad revenue reached RMB 1.5 billion, up 6% annually, which was driven mainly by the growth of performance ads. Performance ads As a highlight of the quarter, the record high revenue was propelled by the growing adoption of generative AI, which in turn improves ROI for advertisers. In fact, we have successfully integrated generative AI tools into IT's Advertising platform allows advertisers to remotely create advertising materials on their own. These tools have been effectively reducing production costs while improving ad quality and boosting ROI. For gaming and short drama advertisers, ads created with generative AI tools have seen an increasing increase in ROI by over 50%. With the role of generative AI rapidly expanding, we are leveraging its broader potential to transform the world of advertising. On-brand ad business site. our premium content continues to attract brand advertisers with over half of the revenue stemming from content targeted ads. A great example to this trend is the genre Always on the Move, Nana Beiba, which achieved exceptional ad sales performance. Additionally, the variety show Become a Farmer, Zhong Biba, Debut in 2023 has seen a notable 80% increase in revenue this year. By industries, the food and beverage sector stood out with solid increases in spending both annually and sequentially. The medical services and communication sectors also adjusted substantial growth in ad revenue. exceeding 20% on both annual and sequential business. Looking ahead, we expect to see a resurgence in brand ad spending as second quarter is a traditional high season for brand ad business, and we have a strong line-up of market shows, although we remain cautiously optimistic regarding the brand advertisement market for this year. We anticipate domestic brands to show faster recovery than their international peers. Moving on to technology products, our dedication to advancing technology innovation remains steadfast as it plays a crucial role in driving the industrialization of content production, improving user experience, and boosting operational efficiency. We look forward to the abundant opportunities that AI presents across our business. We have been witnessing the revolutionary impact that the rest of AI technology is having on the involving entertainment ecosystem. Other than the performance as discussed earlier, we also see the substantial benefits from integrating generative AI into the process of content production and operations. We are still at the initial stage of fully and lifting the potential of general HFAI. It has meaningfully enhanced the industrialization of content production, contributing to the content quality improvements and cost savings. For example, we utilized Our in-house developed data-driven platform, the IT content production management system, to meaningfully improve the hit ratio while enhancing content production and operation efficiency. Our latest upgrades have expanded its scope from dramas to include variety shows, animations, and movies. and it is continuously refined to improve production and management capabilities. In addition, we have incorporated a broader range of AI tools into the system, streamlining everything from content selection to promotion. Our new AI features not only can summarize novel scripts, but they can also assist in crafting story outlines and character profiles, increasing producers' reading efficiency by several grams. Additionally, our system skillfully handles voice restoration for actors in poster production, which has been implemented in major projects beyond production of marketing and distribution efforts have been upgraded as well. We are now better equipped to produce compelling promotional materials and our smart video search function offers more accurate content recommendations by effectively responding to cloud-oriented search and conversational commons. The user products dropped with great pride in our continuous commitment to improving the user experience. The introduction of Kids mode on a smart TV app designed to create content suitable for children has resulted in increased parental trust and user engagement time. Last but not least, for business performance in regions outside of mainland China, We achieved solid annual revenue growth in the first quarter. Membership revenue grew both annually and sequentially with nearly 80% annual increase in markets such as Hong Kong and the UK. We continue to amplify the reach and the influence of our content and the brand in the overseas markets. ITO Originals continues to gain attraction to gain traction among overseas audience. The overall viewership of SWOT and VELT4 ranked first in all regions and categories on our overseas platform, top to popularity charts in Thailand, Vietnam, and Indonesia. The second season of our Malaysian original OnePass Sing Taku 2 continued its success over the first season, boosted both traffic and membership revenue growth on our Malaysian site. Leveraging our premium content, we developed local partnerships to boost global penetration and monetization, we have strengthened ties with telecom companies and tourism authorities in Hong Kong and Thailand, and launched an ITC drama slot on selected local TV stations in Thailand. Looking ahead, we aim to provide a steady slate of premium CPOP content to keep overseas market and accelerate the production of original premium content for local audiences. Meanwhile, we will persist in our efforts to promote CPOP and local content through partnership with Southeast Asian TV stations as we have our brand presence in key markets We are also committed to exploring a variety of IP monetization alternatives. In summary, the strong performance in the first quarter demonstrated the successful execution of our high-quality growth strategy. We recently celebrated our 14th anniversary As we step boldly into the future, we are seeing more exciting opportunities ahead, especially when we assess the power of generative AI, which could potentially transform the entire landscape of entertainment. With this in mind, we are committed to leveraging the pioneering technologies to further enhance our ability to continuously provide high-quality content and extend our lead in the industry. Now, let me pass the microphone for Gosung of Financial Performance.