iQIYI, Inc. Q1 FY2024 Earnings Call

Thank you for standing by, and welcome to the iQIYI First Quarter 2024 Earnings Conference Call. 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 iQIYI's First 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.iqiyi.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO; Mr. Xiangjun 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. San Ha Yang, Senior Vice President of Moelis and Overseas Business; and Mr. Fan Liu, 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 include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements, 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 kicked 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 a record high with income of RMB 1.1 billion and a margin at 14%. The expanding margin is a natural result of high-quality growth. For our Membership Services business, the monthly ARPU growth reached an all-time high, which is the sixth consecutive quarter of sequential growth. We are satisfied with the program and continue to believe that ARPU remains one of the key drivers for unleashing the long-term value of Membership Services. In our Advertising Services, revenue has achieved double-digit annual growth and is at a historical high in Q1. We anticipate the momentum to continue as it directly benefits from the growing adoption of generative AI, which is expected to yield greater returns on investment for advertisers. Content distribution revenue hit a historical high of 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 dominance in content. Data from Enlighten 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 general category, we have held the #1 position for viewership share for 9 straight quarters. Aside from our domestic achievements, we are also excited by the amplified reach and influence of our content and brand in overseas markets. 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 privileges 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 the revenue results ultimately reflect all the collective components contributing to that performance. With that, 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 ARPU. We will provide updates on key milestones related to subscriber growth and ARPU 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 base effects created last year with the release of our mega hit, 'The Knockout.' The surge in travel and offline entertainment during the very first Chinese New Year holiday of this year post-COVID also partially diluted online activities. Currently, among the various factors contributing to the revenue performance, we are intently focusing on enhancing the ARPU and extending the lifespan of each membership, which serves 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 ARPU strategy, which reflects 6 consecutive quarters of sequential growth. This 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 for our members. Given that our membership fees are affordable and the effective ARPU remains modest, we have the opportunity to further refine our pricing strategy, emphasizing the exceptional value of our premium content and services. We have been working on improving ARPU by introducing exciting services that add substantial value. Take the Express Package, for example: cash purchase for the drama. Lonely Warrior has reached a new high. The Express Package not only brought in more revenue but also increased the popularity of the title. In fact, just one day after we launched this package, the drama hit its peak on iQIYI's 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 while making efforts to attract and engage users. We also intend to adapt our membership offering to suit diverse user preferences and bolster our 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. Maintaining market leadership in key content genres has reinforced our reputation as a diversified and high-quality premium content powerhouse. For 9 consecutive quarters, our drama viewership shares have topped the industry. The quarter's newly released titles highlighted the extensive range and depth of our offering. We achieved meaningful advancements in realistic genres, distinguishing ourselves from competitors through quality dramas infused with varied creative elements. This strategy has successfully broadened our content creation expertise. Original programming remains the cornerstone of our content strategy. iQIYI Originals accounted for over 70% of our key new dramas launched in the first quarter, covering diversified themes. In particular, War of Faith emerged as the first drama of this year and 13th in history to surpass iQIYI's popularity index score of 10,000, setting it apart from other war-themed shows. War of Faith features a historical period with financial intrigue, suspense, and other creative elements. This demonstrates our commitment to innovation as we continue to push genre boundaries and introduce unique storytelling perspectives. The well-received drama, Always on the Move, which was released during the Chinese New Year holiday, recorded a viewership share of over 27% at its peak according to Enlighten. It also set a new record for drama viewership on CCTV-8, with its popularity index score of 9,959, just shy of the 10,000 landmark. After establishing our industry leadership in the suspense genre with Light On Theater, we have continued to thrive in the comedy genre, introducing 3 new titles under the Laugh On Theater brand this quarter. This includes Our Parallel Universes and The Great Nobody, both of which are drama spin-offs of our hit variety show. Additionally, the newly released A Soldier's Story has broken iQIYI's records for the highest popularity index score, highest revenue, and best ROI for Laugh On Theater production. During the quarter, we also released a collection of diverse high-quality dramas, such as Burning Flames, Born to Run, and Detective Chinatown 2. For the quarter, our movie viewership outperformed competitors, as reported by Enlighten. We released 24 major films across various genres, including top-grossing theatrical releases on our movie channel. Meanwhile, 32 movies debuted on the Cloud Cinema channel to positive audience reception. We also observed encouraging early responses to our new action series and various film brand releases. For variety shows, we made solid progress in both new releases and established IPs. Become a Farmer 2 leveraged the strong buzz of the first season, achieving a notable boost in popularity and revenue, and spurring a resurgence in viewership for the first season. In addition, HAHAHAHAHA 4 had a powerful season, with high levels of interaction among guests, and its popularity index surpassed 8,400 at its peak. For animations, we improved our offerings and received positive responses from users. Our original works, The Great Ruler and Against the Gods achieved the best performance for domestic animations on our platform. Our upcoming dramas feature standout titles such as Fox Spirit Matchmaker, Follow Your Heart, and As Husband as Wife. The recent releases, including In the Name of the Brother and others, have bolstered our reputation for delivering high-quality, diverse content with great audience appeal. Notably, City of the City became the highest-rated show during prime time on CCTV-1 this year. In particular, To the Wonder exemplifies our success in blending artistic merit with commercial success. This series, adapted from literary prose and infused with light comedy elements, supports our pioneering standards and offers a cinematic experience that sets a new industry benchmark. Additionally, this series is the first to utilize our in-house developed cloud-based on-set production management system, enabling instant collaboration on daily shooting footage, remotely boosting production efficiency. To the Wonder has achieved profitability while garnering domestic and international acclaim. It topped the ratings on Douban this year, became the first 8-episode mini-series to air during CCTV-1’s prime-time slot, and was the first Chinese drama to be selected for the prestigious Long Form Competition at CANNESERIES. The Light On Theater is set to introduce 6 titles in 2022, with notable ones such as the already released Tell No One and the upcoming Lost in the Shadows and Interlaced Scenes. In addition, we're broadening our genre-focused theater model with 2 new brands: Microcosm Theater, which focuses on premium mini-series exploring the nuances of everyday life, with To the Wonder being its first title. The Masterpiece Theater, on the other hand, offers adaptations of esteemed literary works. We believe the theater mode will further enhance content performance and commercial value. Our Q2 movie offerings include socially relevant titles like Pegasus and The Pig, The Snake, and The Pigeon. Cloud Cinema will showcase YOLO, a hit from The Chinese New Year release window, along with renowned director Zhang Yimou's Article 20 and the action-packed Suspect. Additionally, we are eager for the May 17 Theater release of Hovering Blade, based on Keigo Higashino’s esteemed novel. With our variety shows, we have seen a strong return on our established IPs, including The Detectives’ Adventures Season 4 and The Rap of China 2024. We are also exploring new IPs in the reality shows genre with I Play Basketball in Hengdian and Wonderland. Our original production capabilities for animations continue to improve. We expect the number of Kids’ animation titles we launch next quarter to increase. In addition to sequels from existing series, we will launch new IPs such as Fantastic Around. We also pressed forward with sequels of new animation IPs like Phoenix Guardians: The Golden Court Crisis and I'm The Blade Master in the martial arts and fantasy genres. We recognize that the core strength of the long-form video industry lies in consistently delivering high-quality content that strikes a balance between creative value and economic success. Our edge in this industry is secured by combining elite talent and industry resources, rigorous content evaluation and management, sophisticated business intelligence, and innovative technology. As we progress through 2024, our approach will focus on crafting top-tier, diverse content that leverages our leadership in the drama category, while exploring advancements in other genres. We will also refine our release strategy to align with the evolving tastes 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 are the 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 our advertising platform, allowing advertisers to promptly create advertising materials on their own. These tools effectively reduce production costs while improving ad quality and boosting ROI. For gaming and the short drama advertisers, ads created with generative AI tools have seen an increase in ROI by over 40-50%. With the role of generative AI rapidly expanding, we are leveraging its broader potential to transform the advertising landscape. On the brand ad business side, our premium content continues to attract brand advertisers, with over half of the revenue stemming from content-targeted ads. A great example of this trend is the drama Always on the Move, which achieved exceptional ad sales performance. Additionally, the variety show Become a Farmer, which debuted in 2023, has seen a notable 80% increase in revenue this year. By industry, the food and beverage sector stood out with solid increases in ad spending, both annually and sequentially. The medical services and communications sectors also registered substantial growth in ad revenue exceeding 20% on both an annual and sequential basis. Looking ahead, we expect to see a resurgence in brand ad spending in the second quarter as our traditional high season for the brand ad business, and we have a strong lineup of variety 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 our Technology and 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 resonating the revolutionary impacts that generative AI technology is having on the evolving entertainment ecosystem. Other than the performance as discussed earlier, we also see substantial benefits from integrating generative AI into the process of production and operations. While we are still at the initial stage of fully unleashing the potential of generative AI, it has meaningfully enhanced the industrialization of content production, contributing to content quality improvements and cost savings. For example, we utilized our in-house developed data-driven platform, the iQIYI Content Production Management System, to meaningfully improve the hit ratio while enhancing content production and operational efficiency. Our latest upgrades have expanded its scope from dramas to include variety shows, animation, and movies, and it is continuously refined to improve production and management capabilities. In addition, we have incorporated our broader range of AI tools into the system, streamlining everything from content selection to promotion. Our new AI features can not only summarize novels and scripts but also assist in crafting story outlines and character profiles, increasing producers' reading efficiency by several times. Additionally, our system skilfully handles voice restoration for actors in post-production, a feature that has been implemented in major projects. Beyond production, our marketing and distribution efforts have been upgraded as well. We are now better equipped to produce compelling promotional materials, under our smart video search function that offers more accurate content recommendations by effectively responding to plot-oriented searches and conversational commands. On the user product front, we take great pride in our continuous commitment to improving the user experience. The introduction of Kids Mode on our Smart TV app, designed to collect content suitable for children, has resulted in increased parental trust and user engagement time. Last but not least, in terms of our 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 U.K. We continue to amplify the reach and influence of our content and brand in overseas markets. iQIYI Originals continued to gain traction among overseas audiences; the overall viewership of Sword and Fairy 4 ranked first in all regions and categories on our overseas platform, topping popularity charts in Thailand, Vietnam, and Indonesia. The second season of our Malaysian original Rampas Cintaku 2 continued its success over the first season, boosting both traffic and membership revenue growth on our Malaysian site. Leveraging our premium content, we develop 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 iQIYI C-drama slot on selected local TV stations in Thailand. Looking ahead, we aim to provide a steady slate of premium C-pop content to keep overseas markets engaged and accelerate the production of original premium content for local audiences. Meanwhile, we will persist in our efforts to promote C-pop and local content through partnerships with Southeast Asian TV stations, as we have established our brand presence in key markets. We are also committed to exploring a variety of IP monetization opportunities. 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 assessing the power of generative AI, which could potentially transform the entertainment landscape. With this in mind, we are committed to leveraging pioneering technologies to further enhance our ability to continuously provide high-quality content and extend our lead in the industry. Now let me pass on to Jun Wang for our financial performance.

Thanks, Mr. Gong, and hello, everyone. We delivered strong Q1 results with a record high operating profit and corresponding margins, including cash flow and a healthier balance sheet. We believe we can utilize more tools to enhance shareholder value over time. Now let me walk you through the key numbers. In Q1, the total revenues were RMB 7.9 billion. Membership services revenue reached RMB 4.8 billion, remained stable sequentially, and decreased 13% annually. The annual decrease, as previously explained, was primarily due to the high base effect from the same period last year. For online advertising, revenue grew by 6% annually to RMB 1.5 billion. The increase was primarily driven by the growth of performance revenue, which achieved double-digit annual growth and hit a historical high in Q1, even compared with a high base from last year. Content distribution revenue also hit an all-time high of RMB 928 million, growing 27% annually. Moving on to costs and expenses, content cost was RMB 4 billion, down 5% annually, driven by our improvement in content strategy and operating efficiency. Total operating expenses were RMB 1.4 billion, down 12% annually, primarily due to our discipline in marketing spending and the reversal of allowance for credit losses. Turning to profit and cash flow, our non-GAAP operating income was RMB 1.1 billion, and its corresponding margin is 14%, reaching a historical high. Furthermore, the operating cash flow totaled RMB 938 million, remaining positive for 8 consecutive quarters, reflecting the continuous improvement of our balance sheet. At the end of Q1, we had cash, cash equivalents, short-term investments, and long-term restricted cash included in prepayments and other assets of RMB 7.3 billion in total. Moving forward, we remain committed to creating long-term value for our stakeholders. We aim to continue generating sustainable profit and cash flow and to further strengthen our balance sheet. For detailed financial data, please refer to our press release on our IR website. With that, I will now open the floor for Q&A.

Your first question comes from Xueqing Zhang from CICC.

Congratulations on the strong results. My question is about the membership business. The company did not disclose the subscriber numbers this quarter. What is the reason for that? And how should we think about the outlook for the membership business in the longer term?

Congratulations on the strong results. My question is about the membership business. The company did not disclose the subscriber numbers this quarter. What's the reason for that? And how should we think about the outlook for the membership business in the longer term?

The CEO, Mr. Gong, explained that we did not disclose the subscriber numbers and ARPU because these metrics only partially reflect the progress of our entire business. Providing too much detail on these numbers could disrupt the development of our overall business. For more details, we will have Mr. Duan, who oversees the membership business, provide further explanation.

The CEO, Mr. Gong, just explained why we didn't disclose the subscriber numbers and ARPU, because these figures only partially reflect the progress of our entire business. Providing too much detail on these numbers could potentially disrupt the development of our overall operations. For more details, we'll invite Mr. Duan, who oversees the membership business, to elaborate further.

After serious consideration, we decided to no longer disclose the subscriber and ARPU data starting this quarter. At the same time, we believe many of you have already noted that there are overseas streaming platforms that will soon stop disclosing this data as well.

After serious consideration, we decided to no longer disclose the subscriber and ARPU data starting this quarter. At the same time, we believe many of you have already noted that there are overseas streaming platforms that will soon cease the disclosure of these data as well.

Our reasoning is partly similar, due to the varying rights and pricing linked to different membership products and tiers. Each user provides a unique economic value, and simply tracking the number of subscribers at a given time or over a duration is inadequate and lacks objectivity in reflecting business and financial progress. Since early 2022, we have consistently highlighted that the primary objective of our membership business is to maximize long-term membership revenue. In the current stage of our membership business development, the metrics for assessing growth and health extend beyond subscriber count performance. Consequently, the three key drivers of revenue growth—ARPU, membership lifetime, and subscriber scale—will ultimately be evident in revenue performance. Overall, we believe that focusing on membership revenue as the main indicator is the most effective way to help investors understand business progress.

In the current stage of development of our membership business, the indicators for evaluating growth and health go beyond just subscriber count. The three drivers of revenue growth, which are average revenue per user, membership lifetime, and subscriber scale, will ultimately be reflected in revenue performance. Therefore, we believe that using membership revenue as the core indicator is the best way to help investors understand the progress of the business.

In terms of content performance, besides revenue, there are other external real-time indicators that can assist investors in understanding our business performance, such as iQIYI's popularity index and third-party data.

In terms of content performance, aside from revenue, there are other external real-time indicators that can help investors understand our business performance, for example, including iQIYI's popularity index and third-party data.

We remain confident in the long-term growth prospects of our membership business. In the future, we will continue to drive the healthy long-term growth of our membership business by improving content quality and diversity, optimizing membership products and services, and better reaching user groups that are not fully served, such as the elderly and youth.

We remain confident in the long-term growth prospects of our membership business. In the future, we will continue to drive the long-term healthy growth of our membership business through measures such as improving content quality and diversity, optimizing membership products and services, and better penetrating user groups that are not fully served, for example, the elderly and youth.

And last but not least, I wanted to remind everyone that for each company, the way we track subscriber numbers or the disclosure measures are a little bit different also.

Your next question comes from Maggie Ye from CLSA.

I will translate myself. My question is about our recently released iQIYI Original premium mini-series To the Wonder, which currently has a high rating of 8.8 on Douban, and I am a big fan of it. I have noticed that this series showcases exceptional artistic qualities and differs significantly from traditional commercial productions. I'm curious about what the investment returns look like for similar projects, and if this suggests a new direction for iQIYI's future content strategy.

Thank you, Maggie. We'll invite our CCO, Chief Content Officer, Mr. Xiaohui Wang to answer this question.

I want to know what the investment return looks like for projects like this drama series, which has an impressive 8.8 score and showcases exceptional artistic qualities, differentiating it from traditional commercial productions. Does this signify a new direction for iQIYI's content strategy?

To the Wonder has been a very successful project. We believe it transcends simple categorization as a drama or commercial drama; it also signifies a new direction in our innovation, affirming our commitment to both content quality and commercial success. This year, we achieved the highest rating on Douban for domestic drama series, with a score of 8.8, and it marked the first time a Chinese language series represented us internationally at CANNESERIES, setting an excellent foundation for iQIYI's new macrocosm theaters.

We believe it cannot be simply categorized as a drama or commercial drama; instead, it also signifies a new direction in our innovation, highlighting our commitment to both content quality and commercial success. This year, we achieved the highest rating on Douban for domestic drama series, with a score of 8.8, and it marked the first time a Chinese language series was represented internationally at CANNESERIES, setting a strong foundation for iQIYI's new macrocosm theaters.

In terms of content and innovation, we adapted the storyline from a little-known literary prose and enhanced it with lighter elements. This brings new energy and rhythm to the drama while maintaining strong quality.

In terms of content and innovation, we adapted the storyline from a little-known literary prose and spiced it up with light elements. This brings new energy and rhythm to the drama while maintaining a strong quality.

More impressively, from a commercial perspective, this drama achieved profitability through diverse revenue streams, demonstrating that high-quality content generates both significant social influence and considerable commercial potential.

We adapted the storyline from a little-known literary prose and included light elements to bring new energy and rhythm to the drama while maintaining strong quality. More impressively, from a commercial perspective, this drama achieved profitability through diverse revenue streams, proving that high-quality content yields both strong social influence and substantial commercial potential.

Coming back to our content strategy, we will continue to balance content quality with commercial value, consistently producing high-quality, diverse, and commercially valuable content. We aim to solidify our core competitive advantage in the drama sector while seeking more breakthroughs in other content areas.

Coming back to our content strategy, we will continue to balance content quality with commercial value, consistently producing high-quality, diverse, and commercially valuable content. We aim to solidify our core competitive advantage in the drama sector while seeking more breakthroughs in other content areas.

Regarding our drama strategy, we will continue to strengthen our position in the realistic genre and enhance our collection of high-quality ancient costume dramas. We are dedicated to producing diverse, high-quality content that seeks to gain broad recognition from our audience.

We aim to solidify our core competitive advantage in the drama sector while seeking more breakthroughs in other content areas. Regarding our drama strategy, we will continue to consolidate our advantages in the realistic genre and strengthen our reserve of high-quality ancient costume dramas. We are committed to cultivating high-quality, diverse content with the aim of gaining the broadest possible recognition from our audience.

Our CEO, Mr. Gong, just mentioned that in terms of content strategies, managing costs is very important, and specifically, To the Wonder had effective cost control, which is why its commercial performance was strong.

Your next question comes from Thomas Chong from Jefferies.

My question is about online advertising. Can management comment on the advertising outlook in 2024, particularly regarding performance-based advertising? Additionally, can management discuss how AI benefits our advertising business?

Thank you, Thomas. We will invite our CTO to answer this question related to performance advertising.

My question is about online advertising. Can management comment on the advertising outlook in 2024, particularly regarding performance-based advertising? On the other hand, can management comment on how AI benefits our advertising business? Thank you, Thomas. We will invite our CTO to answer this question related to performance advertising.

Performance advertising has seen significant growth in the first quarter. Ad revenue hit a record high, making up more than 40% of total advertising revenue. We anticipate continued strong annual revenue growth in Q2 and throughout the year. We've also discovered that generative AI has effectively boosted the growth of our performance advertising business; its impact on performance ads is more substantial compared to brand advertising and holds great potential for future revenue growth. This is evident in various ad results. Wenfeng highlighted three key aspects. Firstly, regarding the efficiency of ad material production, advertisers can leverage AI to independently and automatically generate a large variety of image and video ad materials, which enhances production efficiency and reduces costs for them.

In the context of our business, the impact of generative AI on performance ads is more significant than on brand advertising and continues to hold great potential for future ad revenue growth. This is evident in various ad results. Wenfeng highlighted three key aspects. Firstly, regarding ad material production efficiency, advertisers can utilize AI to autonomously and automatically create a diverse array of image and video ad materials, which enhances production efficiency and reduces costs for advertisers.

Second, regarding the quality of material production, generative AI assists industries in creating high-quality materials that align with high-quality video content on our platform, making ads feel more integrated and resulting in improved campaign performance. Third, by utilizing upgraded model architecture and evolving ad placement strategies, we can optimize ad performance to make ad placement more precise and personalized, helping advertisers achieve better results while improving the monetization efficiency of user traffic.

Generative AI assists industries in producing high-quality materials that align with top-notch video content on our platform, leading to more natural advertisements and improved campaign performance. Additionally, by utilizing enhanced model architecture and developing new ad placement strategies, we can fine-tune ad performance, making placements more accurate and personalized, which helps advertisers attain better results while increasing the monetization efficiency of user traffic.

Moving forward, we will continue to utilize generative AI capabilities to assist advertisers in tracking high-quality users, achieving optimal delivery synergy, and enhancing valuable exposure to improve advertising effectiveness. In terms of industry performance for the second quarter, we are optimistic about the growth of sectors such as e-commerce, online services, gaming, and fast-growing areas like dramas, which we believe will provide additional opportunities for performance advertising.

Moving forward, we will continue to leverage generative AI capabilities to help advertisers track high-quality users, achieve top delivery synergy, and reinforce valuable exposure to enhance advertising effectiveness. Looking at the performance by industries for Q2, we are optimistic about the development of sectors including e-commerce, online services, the gaming industry, and fast-growing sectors such as dramas, which we believe will bring more opportunities for performance ads.

For Q2, this is the peak season for brand advertising. With the increased supply of variety shows in the quarter, we expect to see a recovery in brand advertising both sequentially and year-over-year. For the outlook of this full year, we remain cautiously optimistic about the brand advertising business. From the industry's perspective, we are confident about sectors such as food and beverage, medical services, and telecommunications. Overall, we believe that future growth in brand advertising will depend on the development of domestic brand advertisers. The rapid increase in Smart TV penetration rates is expected to create more opportunities in the brand advertising space, enabling advertisers to engage more effectively with valuable home scenarios. Currently, we have leading user coverage on large screens.

Your next question comes from Lincoln Kong from Goldman Sachs.

My question is straightforward; I want to ask about our future strategy, especially what areas management is focusing on for this year and the long term.

My question is straightforward; I want to ask about our future strategy, especially what areas management is focusing on for this year and the long-term.

Our CEO, Mr. Gong, is answering this question. In the short term, we will continue to improve our business operational efficiency to enhance team capabilities, including strengthening business fundamentals, and also from a financial perspective to improve profits and cash flows. From a mid- to long-term perspective, our primary focus is to consistently enhance the quality, diversity, and supply stability of our premium content.

Our CEO, Mr. Gong, is answering this question. In the short term, we will continue to improve our business operational efficiency to enhance team capabilities, including strengthening business fundamentals, and also from a financial perspective to improve profits and cash flows. From a mid- to long-term perspective, the very first focus is to consistently enhance the quality and diversity, and supply stability of our premium content.

Secondly, for generative AI, we will apply it more broadly and deeply within our operations to boost efficiency. Our third focus is to employ all strategies to combat piracy. The fourth aim is to enhance the quality of our domestic market operations. When it comes to our international business, we will invest with caution and appropriateness in those markets. Looking ahead for growth, aside from our relatively mature businesses, we will leverage generative AI and virtual reality; these innovative technologies will help us explore new business opportunities, including franchise models both online and offline. We also intend to better serve specific demographics, such as the elderly and children, by tailoring product design and content production to meet their needs, enhancing their viewing experiences, and accommodating niche content preferences. For instance, we will improve accessibility to content for the elderly and strive to offer more safe and reliable viewing options for children's content.

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

Thank you, everyone, for joining the call today. If you have any questions, feel free to reach out to the IR team. Thank you.

Thank you. Bye-bye.

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