iQIYI, Inc.

Thank you for standing by and welcome to the ITE third 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 third quarter 2024 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. Li Gong, our founder, director, and CEO, Mr. Jun Wang, our CFO, Mr. Xiaohui Wang, CCO, Chief Content Officer, Mr. Youqiao Duan, Senior Vice President of our membership business, Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Business, and Mr. Zhang 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 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 are not limited to those outlined in our public filings with the FTC. 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, and thank you for joining us today. Through our 14-year company history, our ability to reinvent ourselves and innovate has been a call around it against the competitor and this strategy has remained unchanged for navigating all kinds of challenges. At this moment, we have identified two key trends. First, consumers become more prudent because of micro-having. Consumers now are facing more entertainment options, including the free mini and short dramas, which is growing rapidly. As always, we hold strong belief that streaming long-form videos remain one of the most fundamental and irreplaceable forms of entertainment. Their unique ability to include a wide audience and provide emotional value is unmatched by any other form of entertainment. Meanwhile, facing evolving industry and market dynamics, We should proactively reach out to these new opportunities and to ensure a long-term healthy and sustainable growth. That's why we have been making a series of strategic upgrades. Key initiatives include, first, we have optimized the production of drummers by requiring story telling, pacing, plot structure, and character development so as to better match the audiences' view preference preference. This will further improve popularity and bring better returns. Second, we have been upgrading and will continue to upgrade our to include mini and soft drummers as part of our content offerings. The main ITE app will maintain its focus on long-form video content and subscription-based models, complemented by free mini and soft drummers and advertising models. In contrast, the upgraded ITE Lite app will focus on free mini and short dramas and advertising models, complemented by long-form videos and subscription models. Third, we will increase investment in the acquisition and distribution of mini and short dramas. Fourth, we have optimized our membership products and services system by combining and authorized password sharing and introducing an attractively priced family account option. The goal is to enhance member conversions and expand the scale of membership. Beyond these initiatives, we would apply AI more widely across our ecosystem, expand our present in overseas markets and explore possibilities in IPC derivatives and offline experience. We believe these efforts will enhance our revenue and profitability over the long term. Now, let's move on to the details of our core business segments. Starting with mini and short dramas, We are adapting our company's strategy and business model to align with evolving market trends and consumer preferences by introducing mini and shop drummers into our offerings. It seems from long-form video informatics, storytelling style, and audience reach, mini and shop drummers serve as a great complement for our existing line up of traditional long format dramas, movies, and variety shows. Many dramas feature episodes lasting 1 to 5 minutes in vertical formats, and short dramas span 5 to 20 minutes in horizontal formats. This short format offers a quicker storytelling pace cater well to users seeking quick entertainment breaks and have gained considerable popularity among audiences. From a business model perspective in the future, mini-dramas will be available to all members at no extra cost. Non-members will enjoy the free-to-watch mini-dramas all choose to pay per view to access those exclusive to members. Short-termers will mirror the approach taken with our long-form content. They are free for members, while non-members will have access to a free-to-watch second window. This new offering caters to deliver viewer demand, while supporting the growth of our subscriber base and expanding our monetization opportunities. Moving on to long-form videos, which are fundamental to our content ecosystem. Starting with the core genre category, we regained the number one position in real-ship market share during the quarter, according to enlightened data. This was driven by the launch of multiple titles that gathered higher acclaim from users. Notably, the second season of Strange Tales of Tang Dynasty, Tang Chao Gui Shu, has become the forking streamer to break the IT popularity index. not only the third season is already in production this IP has been expanding its influence from online to offline domains showcasing our success in IP development also the new release for the young ones received the highest iQIYI popularity index score among drummers with less than 20 episodes. Other titles, such as Interlaced Sin , Born to be the One , and Ring's Erection , were all released to widespread praise. Well, we are proud of the performance in crime and reality drama genres. We recognize certain areas where we could improve. For example, the limited supply of key female-oriented costume dramas in the so-called impacted case-title-driven members. To this end, we aim to enhance the study supply in this genre. will also better align content genres with optimal broadcasting window going forward. For variety shows, our innovative new title, The King of the Stand-up Comedy, Xi Juzhuang Deng Touqi, will enforce our strong first presence in the comedy genre according to In lightened data, it dominated the viewership charts for 10 consecutive weeks and largely outperformed other shows in the same genre. It also achieved the second-highest peak popularity ever recorded for IT-inclusive variety shows. What's more impressive is that the show has not only propelled some stand-up comedians to widespread fame, but also played a key role in boosting the industry and capturing the attention of audiences. For movies, we have maintained our leading position in viewership for 11 consecutive quarters, according to enlightened data. The performance was underscored by the There are article releases like Nexessor, Strava, and the normal best, Fuzhu Yizhi, which ranked first and second, respectively, on our popularity index rankings. So animations of production capabilities for Chinese animations continue to improve as evidence by an increasing shell of revenue generated from all original titles. Along with the ongoing release of the highly popular How Dare You? We also launched The Legend of Skylogged and A Moment But Forever, Nian Wushuang receiving positive feedback. Leveraging the exceptional quality of our premium content, we have earned broad recognition from reputable Chinese industry awards. At the 34th Flying Aceros Awards, we topped the list among online video platforms with 11 owners. We also secured 7 honors at the 32nd China TV Golden Eagle Award. Turning to our content pipeline, we remained committed to providing our users with top-notch long-form video. This was highlighted during the ITI Drive Conference, our flagship marketing event, where we disclosed an exciting line-up of over 300 titles that are set to premiere in the year 2024 and 2025. For casting dramas, Founts of Fortune, Simon Wheelie was released and will be followed by the much anticipated female-oriented drama, Love Song in Winter, Dong Zhi, Moon, Embrace, Bai Yue Fan Xing. In reality and the stress errors, audiences can look forward to We Are Criminal Police, Wo Shi Xing Jiu, Under the Skin Season 2, Ye Sui Tu Jian Er, The Firelight Season 2, Wu Suo Wei Ju Er, Let Wind Go By, Feng Zhong Ge Huo Yan. Youngstrammers, our movie offering includes the already released hits Upstream, 逆行人生, Go For A Walk, 重生, and Tiger, Wolf, Rabbit, 御火之路 with upcoming titles such as The Volunteer, The Battle of Life and Death, 志愿军 Additionally, new online films and IT original films are on the horizon. In terms of variety shows, we are introducing fresh IPs like My Zone and The Blooming Journey . For animations, the Q4 pipeline features major titles like the exclusive Dragon Ball Diamond, Longzhu Damo, and the original material art IP with driver in Tang Dynasty, Datang Chengfengzhu. Moving on to membership services, membership revenues in the third quarter was RMB 4.4 billion done year over year. There are three areas that include the membership revenue performance. First, as I previously mentioned, although we launched good quality titles in the quarter, there is room for improvement in the supply of premium female-oriented and Asian costume dramas, which are especially appealing to members driven by his titles. Amid the current micro-havings, users drawn to his titles have grown more cautious in spending, and a broader selection of entertainment options is also seeking to capture their budget and attention. Lastly, the high base effect from last year continues to play a part in our current figures Our innovative value-added services continued to gain traction among users. Notably, we launched an express package for 13 drummers in the quarter, leading to more than 40% sequential growth in cash purchases, reaching a historical high. Additionally, we further enhanced member benefits to encourage upgrades to high-tier plans and boost member engagement. This includes more than 20 offline events, such as fund meetings, early screening events, and family fundings. As always, our primary goal for membership services is to maximize revenue performance fulfill this goal and to proactively adapt to the current consumer sentiments. We are making modifications to our membership offering. Key initiatives include, first we are combating unauthorized membership accounts password sharing to enhance account security. Meanwhile, On November 12, we introduced the Family Account Auction as a better solution for account sharing. Through this program, monthly out-renewing GoldenVIP members have the option to add a separate family account for just RMB 8 per month. Each account, both primary and family, will maintain separate user profiles and interact and personalize their own experience. Secondly, the ad-supported basic membership plan, which was previously exclusive to IT-lite, has now been expanded to major IT projects. This niche performance is in line with our expectation. Last but not least, Continent serves as one of the key drivers of our membership business, integrating many and strong drummers with our top-quality, long-form media titles introduce a unique mix that caters to deliver real preference. Moving on to the advertising business, Heightening revenue during the short quarter was RMB 1.3 billion down year-over-year. Performance has remained the highlight during the quarter. Again, steady growth annually driven by the solid performance in e-commerce, Internet, and mini-drama sectors. The growth was also fueled by advancements in AI applications with CPM for AI-powered ads improving by over 20% compared to traditional ads. World brand ads revenue declined annually due to weak advertiser segments and unmet the micro-highways essentially will proactively reduce the investments in variety shows in response to the micro-highways to avoid financial setbacks, which led to a major decrease in brand ad revenue. Nevertheless, company-related ads remained popular among brand advertisers Titles such as The King of Stand-Up Comedy, The Moon is Shining, and The Strange Tale of Tom Dynasty Season 2 attracted the largest share of ad budgets on our platform. Going forward, we will focus on expanding our advertiser base, especially among local brands, and capturing a greater share of budgets from top tier clients. Moving on to technology and the products, we are making solid progress in driving technology innovations to improve user experience and operational efficiency. For example, we've made upgrades to our products across all devices with which include enhanced interactive bullet chat capabilities, improved audio quality, better video sharing and download options, and refined recommendation features. We have also made further progress in advancing the industrialization of the entertainment business as our virtual production technology has now reached the mass production stage. IT is one of the first streaming platforms in China with the ability to handle the entire virtual production process for drummers, including production cost, evaluation, technical design and circulation. This capability allows us to manage multiple projects simultaneously. In addition, the drama Shadow Love is the first in China to apply the latest version of Unreal Engine into virtual production We have also upgraded the IT virtual production studio with technical indicators meeting the highest standards both in China and internationally. This type of upgrades is expected to be effective in terms of mass production capability moving forward. Our recent advancements showcase the broad utilization of AI to improve business efficiency. AI plays a central role in advancing our operations, especially in content translation and traveling for our overseas business. Our AI-driven approach has enabled efficiency efficient and highly accurate multilingual translation and multi-tongue dubbing service. Drama particularly reducing the time it takes to release Chinese content overseas and cutting down on translation costs. Moreover, we have developed an AI system capable of rapidly generating plot text for our content library. This innovative tool has shortened what used to be a month-long manual task into a matter of days. In fact, we have produced plot text for over 10,000 movies, achieving an impressive accuracy rate of over 92%. The cutting process has seen similar improvement with AI swiftly analyzing and matching actors to the right roles, which largely builds up producers' decision-making workflow. Finally, for our business performance in regions outside of mainland China. We recorded solid performance in our overseas business in the third quarter with both total revenue and membership service revenue gained annual and sequential growth. Notably, membership revenue from Hong Kong, UK, Brazil, and Australia over 40% annually. The average daily number of subscribing members overseas also increases annually and sequentially, with Brazil, Mexico, Hong Kong, and Thailand seeing annual growth exceeding 45%. The influence of C-Dramas continues to strengthen overseas. In the so-called total views of Last, with Biden, Tsai Ing-wen topped the Billship ranking across multiple markets, including the US, Australia, Japan, and South Korea. Additionally, this successfully expanded the influence of original production and strange tales of pandemic season 2 beyond mainland China. The series made an international debut with a premiere in Singapore at the end of July, marked the first ever overseas premiere screening for premium C-dramas. For local content, we launched a number of dramas that received positive feedback, among them The Lady and Her Lovers. recorded the highest daily revenue among all Thai drivers released on our platform in 2024. The show also ranked first on Google in Thailand, which outperformed other shows in the same time slot. As we head into the first quarter, we will continue to expand on local partnerships and explore additional monetization opportunities. This includes deepening the bundled package cooperation with telecom providers in Thailand, Malaysia, Singapore, and Hong Kong. In addition, we aim to amplify the influence of our content and increase membership benefits diversifying offline events. On November 1st, we host our first iDRI conference outside of mainland China as we proceed soon. The remaining months of Q4, we are set to launch a series of appreciation events and promotion for members. Additionally, we are excited about the forthcoming international rollout of more high-quality content. Notably, our talent show Starlight Boys was introduced on October 26th and has already received a positive reception from our audience. In summary, looking ahead, we remain committed to driving innovation and advancements across our business catering to the dynamic entertainment needs. Our targeted initiatives such as launching mini and short dramas while bringing rich entertainment experiences and further advancing our commercial capabilities. These efforts are supported by our deep knowledge of both content and users. coupled with our vast industry resources. In parallel, we will deepen our adoption of AI technology, advance our overseas expansion, and fully leverage the potential of our IP. These strategic efforts are aimed at driving our company towards greater sustainability and success. Now, let me pass it on to Jun, who will go through our financial performance.

Thanks, Mr. Gong. And hello, everyone. Let me walk you through the key numbers. In the third quarter, the total revenue for RMB $7.2 billion down 10% annually. The membership services revenue reached RMB 4.4 billion, down 13% annually for three reasons, as previously discussed by Mr. Gong. For online advertising, revenue decreased by 20% year-over-year to RMB 1.3 billion. This was primarily due to the decrease in brand ad business, partially offset by the growth in performance ad business. Government distribution revenue reached RMB $814 million and grew 52% annually, and other revenues decreased by 8% annually to RMB $729 million. Moving on to costs and expenses, the content cost was RMB $4 billion, down 5% annually, primarily due to lighter movie offerings in the quarters. The total operating expenses were RMB $1.4 billion, down 5% annually, primarily driven by the more disciplined management of the marketing spending. Turning to profits and cash flows, the non-GAAP operating income was RMB $369 million, and its corresponding margin was 5%. The operating cash flow totaled RMB 243 million positive for 10 consecutive quarters. At the end of the third quarter, we had cash, cash equivalents, short-term investments, and long-term restricted cash included in the prepayments and other assets, a total of RMB 4.7 billion. For the detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q&A.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Please ask questions in Chinese first and then translate your questions into English. Please also limit yourself to one question at a time. If you wish to ask further questions, please rejoin the queue. Your first question comes from Su King Zhang with CICC. Please go ahead.

那想请教一下公司部局委短期的考虑,然后这方面的策略是什么? 谢谢。 Thanks, management, for taking my question. My question is about mini and short dramas. As Gomba mentioned in the prepared remarks, the company has enhanced the integration of mini and short dramas. Can management elaborate a little more on it? And what's our strategy for mini and short dramas? Thank you.

The CEO of Mr. Gong is answering this question. Starting from the end of September this year, we added

meaning dramas and short dramas into our content ecosystem. And these two types of content are very much differentiated from traditional long form video content. So they are very good complement to our content offerings.

Especially for this year, the free mini-dramas model has been rising significantly, and then the user scale is at a pretty sizable scale and has been growing, so now is a good time to enter. So for mini dramas, we classify them. They are one to five minutes long in vertical format. And then for short dramas, they are five to 20 minutes long.

in horizontal format. For now, we're focusing on the mini-drama center.

In the past two years, we've participated in a mini-drama by participating in the performance app model. um um

And we have been actually innovated in this media drama sector by innovating different models and formats. For users, it used to be participating or watching the content by free or pay-per-view. And we now introduce the subscription model to this business model. And for current subscribers, they can watch that majority of the mini-dramas for free, and then pretty soon in the future, they will watch everything for mini-dramas for free. For the current business model, there are three advertising models, or they can do pay-per-view. And we actually introduced a subscription model to the business model, and we believe this will be positive and constructive for the membership retention and also to get new users.

In terms of content strategy, we'll develop the mini dramas through various methods, including the license copyright, full rights buyout, and profit sharing. Going forward, we'll focus on the premium head content of the mini dramas, and then eventually we will develop a unique style that's generated by ITE, belongs to ITE. And we hope in the future that for ITE, in terms of the production quality and also the value provided to users, it will be a further improvement from the current level. Thank you.

Your next question comes from Li Zhang with Bank of America. Please go ahead.

Hi, good evening. Thank you for accepting my question. My question is mainly to continue to follow up on the layout of the short-term. Can you share with us, as a leader of long-term products, what competitive advantages do we have in the short-term? And if we invest in the short-term, will it have any impact on our future content cost? Thank you. I will translate it myself. Thank you for taking my question. I want to follow up on the shock drama side. Can you share with us the capacity edge in investing in shock drama and any impact to our content costs in the future? Thank you.

Uh, uh, uh, uh,

The CEO, Mr. Boon, is answering this question. So in terms of our adventures in mini dramas, first of all, we have advantage in product and technology. For mini dramas, currently a material amount of the traffic is happening on the mobile side. So on the mobile side, we have two major applications, the IT app and also IT light. So for these two apps, we have very mature technology and infrastructure and also a good user base. And actually, a good size and actually a good portion of the users are subscribers. So basically, based on that, when we add a new content to this and then combine it with a good upgrade to the application, it will be a good adaption to the current strategy. For the first upgraded version of the IT app actually has been released already. We're doing the AP test right now, so most of the users, when you download it or upgrade the application, you will see the changes.

For IT app, it will continue to focus on long-term video content. From the business model perspective, it will be majority focused on the subscription model. And for IT lite,

application, it will focus on mini dramas and short dramas, mainly driven by the advertising model.

Secondly, in terms of content acquisition, the vast majority of short-term content providers in the market are IT partners. So expanding the cooperation with them is relatively fast and cost-effective.

The vast majority of the content providers for mini-dramas are IDE's existing partners, so core operations in these new categories have further expanded and are deep in our partnership scope, allowing us to rapidly scale up in these areas and then at a relatively low cost. 为了智能运营,这基本的工作和长视频差别不大。

So basically the operational rules or principles in terms of managing these two type of content

the long-form video content versus mini-forms are relatively similar or don't have a major changes. So it will be pretty fast for our teams to pick up and then master in this.

And then in terms of the budget, the cost of micro-forms, in terms of the budget, there are two sources. The first source will reduce the cost of the long-form content of some B projects. The second is

In terms of the funding for the content for mini dramas, it comes from two aspects. First of all, we'll lower the investment in terms of the low ROI of long-form video content. And then secondly, then we will scientifically and also rationally increase the budget for mini series. And that's it. Thank you.

Your next question comes from Maggie Yee with CLSA. Please go ahead.

Thank you. 我们预期这个战略在短期跟长期会有什么样的效果? 那清醒卡推出以来,目前消费者的反馈是什么样的? 谢谢。 再翻译一下。 Good evening. Thank you for this opportunity to ask questions. My question is for the membership. In October, we announced the launch of Family Account Option, wondering if management can share more information. insights into the strategic consideration around this initiative, especially given the current microenvironment and consumer trends. What's our expectation on this strategy over near-term and longer-term? How's the initial feedback we received from consumers and users so far since the introduction? Thank you.

Thank you, Maggie. And what we invite Mr. Stone, who's in charge of this in this segment to answer this question.

ITE's family account is a high cost effective shared membership service plan we introduced

to enhance the user experience for family members. It better serves users' independent and diverse viewing needs and user scenarios.

The family account and the primary account

are actually stand-alone membership accounts with individual passwords and also playback history. So this not only effectively improves the user experience but also protects the account security.

In addition, as we all know, the number of users is constantly growing in terms of the demand for the video. So, QinQinCard can solve the usage and threshold of their official accounts very well.

And as you know, that the video consumption needs of the elderly and the young demographics are steadily increasing. And the family account is actually designed to effectively address their challenges in account management and accessing internal content.

Qingqing Card is a innovation for our member product model. It will have a positive impact on the transformation and income of members. At the same time, we will continue to increase the share of this password.

The membership account is an innovative attempt in the membership product model, which has a positive impact on improving membership conversion and revenue. So going forward in the future, we'll continue to combat password sharing, offer users more cost-effective choices, and aim for the long-term healthy development of the membership business.

The family account was actually officially launched on November 12th, and we will observe the performance for some time before sharing the user feedback and data outcomes with everyone. Thank you.

Your next question comes from Zizao with Guangfa. Please go ahead.

I will translate myself. As Dr. Gong has mentioned, your long-form video are fundamental to IT's content ecosystem. My question is about your strategy for production of dramas. Could you share with us about the lens, theme, and innovative direction of your future drama series? Thank you.

Thank you. And we'll invite Mr. Xiaohui, our Chief Content Officer, to take this question.

Okay. Now I'll answer this question. Our judgment is that although the industry has undergone a period of fluctuation, but with the recovery of market confidence and user demand, long-term video content will still be one of the strongest needs of users in the long term. It is still the core of iQIYI's content ecosystem. We will continue to improve the continuity of high-quality and diversified content supply through strong and powerful reform measures, and continue to implement the double-edged strategy of content quality and commercial profit.

We believe although there have been some cyclical fluctuations in the industry, we believe that the recovery of the market confidence and user demand, long-form videos will still be one of the strongest demands among users in the mid to long term. We believe it will remain at the core of IT's content ecosystem as well. So going forward, we will enhance the sustainability of a diverse, high-quality, constant supply through powerful reform measures continue to achieve a win-win situation for both content quality and commercial revenue. Based on the insights into societal sentiment and also the changes in user-viewing practices, we believe we will comprehensively upgrade the production and operational mechanisms for dramas, films, animations, and variety shows. We will improve the production and content launch efficiency, focus resources on creating high-quality works, and strengthen the commercial aspect of the content.

In terms of content planning, For content planning, we will structurally optimize the process.

by improving the coordination of the number of new dramas, episodes, and genres, and will reasonably reduce the number of key new drama releases each year. We will strictly curate project selections to prioritize excellence and concentrate resource allocations on premium content with high commercial value. So from inception, all projects will embody commercial appeal, mass market resonance, and contemporary relevance. For content evaluation, we will establish stricter assessment standards that focus more on revenue capability and innovation ability within the framework of the content-related cost ratios.

For content creation, we will optimize scripts and filming techniques to align with users' evolving viewing preferences. And simultaneously, we will aim to deepen our understanding of social trends and create works that resonate more profoundly with contemporary societal emotions and takes.

For content production, we'll strengthen project management and quality control, closely monitor project progress, and work with partners to reduce cost and improve production efficiency.

And from a team-building perspective, we are committed to the continuous improvement in our in-house studio mechanisms.

which are structured around the producers, focus on consistently attracting high-quality talent from the market. We aim to cultivate healthy internal competition by establishing mechanisms that reward innovation and promote distinct content styles. The strategy ensures ongoing evolution through a process of natural selection where only the excellence thrives. And that concludes today.

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

Thank you, everyone, for participating in the call today. If you have further questions, do not hesitate to contact us. Thank you again. Bye-bye. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.