iQIYI, Inc. Q4 FY2024 Earnings Call

Thank you for being here, and welcome to iQIYI's Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. I will now hand the conference over to Ms. Chang You, the IR Director of the company. Please proceed.

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Fourth Quarter and Fiscal Year 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. Xiaohui Wang, our CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our Membership Business; and Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Business. Mr. Gong will give a brief overview of 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 US 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, and 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 it on to Mr. Gong. Please go ahead.

Hello everyone, and thank you for joining us today. Since late November, we've seen a notable recovery in our business performance across various metrics, including an increase in subscribing members and user engagement, as well as a stronger position in the total drama share market based on recent data. This was propelled by the strong return of our top-notch content. In just three months, two of our hit dramas, 'We Are Criminal Police' and 'DRIFTING AWAY', surpassed 10,000 in the IT popularity index, reinforcing IT's dominance in the suspense genre. We've also improved our selection of premium female-oriented content, with 'Moon [indiscernible]' exceeding 9,500 and 'Winter Dong Zhi Yi' exceeding 9,000 in the IT popularity index. Along with the rebound of our premium long-form video content, we've made strides in the mini-drama sector, expanding our portfolio to over 10,000 titles. We've also revamped our products to enhance user experiences, and upgraded our advertising placement system to better capitalize on the rising traffic of mini-dramas. All these initiatives have spurred rapid growth in our user base, and we are eager to see what the future will bring. Alongside operational enhancements, we are buoyed by the positive recovery in consumer sentiment towards quality videos, highlighted by the high theatrical movie box office performance during the Chinese New Year. This strengthens our confidence in the long-form video content quality, and we have a positive outlook for the long-form video industry moving into next year. As we look to 2025, we aim to increase membership revenue by improving the quality and diversity of our content. Additionally, we plan to boost advertising revenue by expanding our app inventory, which will be positively influenced by the growth in the mini-drama segment. Together, these two initiatives will act as key growth drivers for our revenue. Now, regarding our long-form videos, we've maintained our leadership in the core drama category, achieving the highest total viewership market share in Q4 and for the full year 2024 according to recent data. This success is supported by the outstanding performance of our critically acclaimed titles across different genres. In Q4, we continued to dominate the suspense genre without challenge. Our terminal placements became the 15th drama to surpass a score of 10,000 on the iQIYI popularity index and achieved the highest score on our platform in 2024. Additionally, new releases like [Foreign Language] brand and another [Foreign Language] have been well-received by viewers. Our exciting slate of offerings extends beyond Q4, especially with our flagship [Foreign Language] brand, which exceeded a popularity index score of 10,000 merely six days post-release, making it the first drama with fewer episodes to reach such heights. In Q4, within premium female-targeted content, we successfully stabilized our content release schedule and attracted audiences with [Foreign Language]. A highlight of this is the Asian custom drama 'Fangs of Fortune', which effectively drew in new members. Additionally, the modern drama 'Love Song in Winter' received praise for its unique combination of suspense and romance, reaching an impressive iQIYI popularity index score of over 9,000. Moving forward, we are dedicated to refining our production lineup and release strategy for both Asian customs dramas and modern tales that resonate with female viewers. Shifting to movies, in Q4, we retained our leading viewership position for self-produced partners based on recent data. The highlight was our original production 'Frozen Wind', which was the top-performing comedy movie on our platform this quarter. Other significant releases such as 'Upstream', [indiscernible], 'The Battle of Life and Death', and [Foreign Language] also achieved top rankings on the iQIYI Popularity test during Q4. For animations in Q4, our capabilities in producing Chinese animations continued to develop. 'The Legend of Sky Log' and [indiscernible] remain audience favorites. We’ve also expanded our offerings with new exclusive IPs such as 'Urban Miracle' [Foreign Language]. For Japanese animations, we exclusively launched 'Dragon Ball Daima' and [Foreign Language] on our platform, garnering positive responses. As we approach 2025, our focus is on enhancing the production and management of our long-form videos. Our primary goal is to deliver exceptional content, improving its commercial viability while streamlining the production and distribution processes for better efficiency. For dramas, our attention will be directed towards ensuring the stability of our pipeline and enhancing the share of our premium content. We aim to reinforce our leadership in realistic and suspense-driven themes while further developing premium content tailored for female audiences, which is showing strong growth. Titles like 'Drifting Away' have performed well, and we will be releasing new titles from 'Light on Shelter', including 'Breaking the Shadow', [Foreign Language], 'Justifiable Defense', [Foreign Language], 'A Life for a Life', [Foreign Language], and 'Low IQ Crime feature Zhang' [Indiscernible]. Our lineup also includes highly anticipated female-oriented dramas such as 'Moon, Embracer', [Foreign Language], and 'The [Indiscernible] at Season 2', [Foreign Language], and 'The Love of the Divine Tree', [Foreign Language], all of which have gained strong traction among female viewers, with more engaging releases on the way. For our variety shows, our strategy focuses on maximizing visibility. We are dedicated to enhancing the commercial value of our classic IPs while also exploring innovative new formats. Our strong multi-season IP lineup includes 'Become a Farmer', [Foreign Language], 'The Hawk Season 5', 'The Rap of China 2025', and 'The King of Stand-up Comedy 2' [Foreign Language]. Additionally, we are unveiling several new IPs such as 'The Blooming Journey' [Foreign Language], in Asia [Foreign Language] and 'The Greatest Showman' [Foreign Language]. Notably, 'The Blooming Journey' was released in January and quickly achieved a peak IP popularity index score of about 8,000, topping the rankings. For the comedy [Foreign Language], leveraging the success of 'The King of Stand-up Comedy', we launched a spin-off show, 'HAPPY OFF WORK', during the Chinese New Year holiday, further enhancing the IP's stature. In terms of movies, premium content remains our primary focus, particularly original theatrical releases that can drive significant box office revenue. In 2025, we expect our original movie 'Winter to Summer' [Foreign Language] to perform well. Audiences can also enjoy theatrical hits on our move channel, including [Foreign Language] 'Burning Stars', [Foreign Language], 'Hot Pot Artist', [Foreign Language], and 'The Antarctic Octopus with Broken Arm', [Foreign Language]. We also plan to enhance our production capacity for online films. In the animation sector, we plan to broaden our array of timeless varieties and allocate resources towards high-quality Chinese animation. Our aim is to improve both the quality and financial returns of our original creations. Key panels to be launched include 'Super Cube' [Foreign Language], 'Over the Divine Realms', [Foreign Language], 'The Fitted Magical Princess', [Foreign Language], as well as sequels to much-loved children's animations including [Foreign Language] and 'The Princess Doremi Season 4' [Foreign Language]. Regarding mini-dramas, we achieved significant milestones within just three months. Firstly, we successfully revamped our apps. The mini-drama section in the iQIYI main app now focuses mainly on a subscription model, while the iQIYI lite app accommodates all three components, supported by an advertising model. Secondly, we have completed the establishment of back-end systems, especially for content recommendations and advertising capabilities. This enhancement not only improves the viewing experience but also unlocks new monetization avenues. Our mini-drama portfolio has rapidly expanded to over 10,000 titles, capturing 95% of the leading mini-drama content providers in the market. This extensive and varied content portfolio has set the stage for our next developmental phase. Our recent program has likely increased our user base and viewing time for mini-dramas in the fourth quarter, with positive trends expected to persist. Notably, in December, our platform recorded its first mini-drama generating more than RMB 1 million in revenue. As we advance into the next phase, our goals include refining our products and service offerings with proven line recommendations, fine-tuning our advertising system to attract a broader audience of new advertisers, expanding our content catalogue with fresh and classic titles, and nurturing an iQIYI original mini-drama ecosystem to continuously provide high-quality content. Turning to membership services, membership revenue in the first quarter was RMB 4.1 billion, reflecting a decline both year-over-year and sequentially, mainly due to a lighter content lineup in the first two months of the quarter. However, beginning in late November, we witnessed a strong recovery in our content offerings, which has significantly revived our membership business. Specifically, we improved our long-form video content and introduced better mini-dramas for members, aimed at increasing retention and attracting new subscribers. Furthermore, we maintained a tighter supply of premium content and intensified our promotional activities so subscribers can look forward to new releases, thereby enhancing their loyalty to our platform. In addition to content improvement, we restructured our membership offering into two main categories: one for individuals and one for families. Both categories include basic service tiers as well as vendor service tiers, with the family category also featuring a premium service level offering additional privileges. This plan provides unlimited access to express packages for early access to premium content finales, allows logging in on up to eight supported devices, and includes opportunities to attend significant offline events. This restructuring offers multiple benefits to our membership business. It simplifies the membership plan structure for clearer positioning, captures a broader audience from budget-conscious individuals to those seeking premium perks, and effectively deals with unauthorized hardware sharing. In the first quarter, we introduced the actual member feature to address account sharing concerns. Moreover, our basic plan has seen consistent growth in subscriptions, particularly among users in lower-tier cities and younger demographics throughout the quarter. To further enhance the value we provide, we have utilized more joint membership options, which have resonated well with our members. Looking forward to 2025, our strategy revolves around creating a membership business that is better aligned with mass audiences. We also plan to refine member offerings, streamline operations, and improve distribution channels. Additionally, we aim to elevate the iQIYI member brand and associated service standards to ultimately enhance the experience value for our members. For our advertising business, revenue for the quarter reached RMB 1.4 billion, reflecting a 7% sequential increase and a reduced rate of annual decline compared to the previous period. Brand advertising revenue experienced double-digit sequential growth, primarily driven by similar growth from our premium dramas. In 2025, we plan to evolve our brand advertising business by diversifying our revenue sources and exploring new advertising opportunities. We aim to improve client service to retain existing advertisers and attract new ones from sectors such as food and beverage, cosmetics, toiletries, and telecommunications. We will also monitor emerging sectors like healthcare, home furnishings, and tourism. Furthermore, we aspire to increase our share of top-tier clients and investigate potential collaborations within mini-dramas and advertisers’ customized programs. Performance ads have seen annual and sequential growth, largely due to improvements in operations from major e-commerce companies and our strong service to clients in the Internet services sector. Notably, during our shopping festival, e-commerce revenue contribution grew over 40% year-over-year, and revenue from Internet services rose over 30% year-over-year during the quarter. To maintain this momentum, we are enhancing our technical and platform capabilities to secure a larger budget share from top-tier clients in sectors like e-commerce, Internet services, and video gaming. We continue to leverage AI for video production and expand our client base to improve monetization efficiencies. We are also optimistic about the additional advertising inventory that mini-dramas could bring in 2025. In technology and products, we are continuing to innovate in the video industry, improving our operational efficiencies. Our intelligent production management system has become essential for production teams managing various on-site tasks, providing advanced tools and management capabilities. In the first quarter, we enhanced the system to incorporate highly efficient production supply management features. Regarding virtual production, we have embraced technologies that push boundaries in content creation. We are proud that our projects, 'Fangs of Fortune' and 'My Journey to You', have won multiple prestigious industry awards for their outstanding use of virtual production techniques. In addition, we have made significant progress with our digital asset collection. We have built an extensive digital asset library from hundreds of dramas, reality shows, movies, and animations over the year, recognized as one of the top collections in China. We are now using these assets in new video products and are expanding into offline experiences. Looking ahead, we are aiming for broader applications in content creation, IP value-added services, and immersive virtual reality experiences. Moreover, we have been expanding the role of AI across content production and operations. AI has notably enhanced our project assessment process, providing valuable insights for around 5,000 screenplays and novels. Additionally, AI has assisted in character design and selection during project approvals based on character descriptions from scripts, streamlining the creative journey. Lastly, concerning our performance outside of Mainland China, we maintained robust results in the fourth quarter, with both total revenues and membership revenue growing year-over-year and sequentially. Membership revenue from regions such as Hong Kong, the U.K., Thailand, and Australia increased by over 30% year-over-year. The average daily number of subscribing members also saw year-over-year growth, with Hong Kong and Thailand experiencing more than 40% and 50% increases respectively. The appeal of our original content continues to rise; 'Songs of Fortune' emerged as the top-performing Chinese drama on our overseas platform in 2024, with its dubbed version leading viewership rankings in Thailand. Additionally, our debut original overseas variety show, 'Starlight', extended its success beyond our platform, attaining top ranks in local Google searches for variety shows across various Southeast Asian nations. Furthermore, Thai dramas are becoming a central content upgrade on our international platform, ranking just behind Chinese dramas. Encouraged by this trend, we plan to ramp up investments in original Thai productions. We've also been working on improving our international brand recognition at key events. Last quarter, we hosted our inaugural iQI Conference Overseas, which set a new standard as the most comprehensive and well-attended press conference ever organized by our Chinese video platform in Thailand, attracting exceptional artist participation. As we move into 2025, our main international goals focus on revenue expansion. We intend to enhance our free drama offerings and improve the monetization capabilities of localized content. Having established a presence in Asia, especially Southeast Asia, we plan to extend our footprint into the Middle East, Latin America, and Brazil. Our strategy includes bolstering partnerships with telecom operators, seeking innovative collaborations, and launching marketing initiatives to enhance our brand and content influence. In conclusion, we wrapped up the year by implementing a series of transformations and innovations that have effectively advanced our business, setting a strong foundation for 2025. We are confident that our robust recovery of premium long-form videos, alongside continual innovation in mini-dramas, will be pivotal in achieving our objectives for 2025.

Thank you, Mr. Gong, and hello, everyone. As Mr. Gong mentioned earlier, driven by the premium content, we have experienced a significant rebound in main operating performance in comparison to November 2024. Now let's take a look at Q4 key numbers. In Q4, the total revenues were RMB 6.6 billion, down 14% annually. Membership services revenue reached RMB 4.1 billion, down 15% annually, primarily due to a lighter content slate. However, as Mr. Gong just mentioned, premium content had a strong rebound from late November 2024 to now. For online advertising, revenue decreased by 13% year-over-year to RMB 1.4 billion. This was primarily due to the decrease in brand advertisement business, partially offset by growth in performance ad business. Content distribution revenue reached RMB 406.6 million, down 20% annually, primarily due to lower revenue from the distribution of theatrical movies invested by iQIYI and a decrease in barter transactions, partially offset by increased revenue from cash transactions. Other revenues decreased by 10% annually to RMB 670.2 million. Moving on to costs and expenses, content costs were RMB 3.4 billion, down 9% annually, primarily driven by our improvement in the content strategy as well as a lighter content slate in the quarter. Total operating expenses were RMB 1.3 billion, down 5% annually, primarily due to disciplined marketing spending. Turning to profits and cash flows, non-GAAP operating income was RMB 405.9 million with a corresponding margin of 6%. Net cash provided by operating activities totaled RMB 519 million, a positive result for 11 consecutive quarters. As of the end of Q4, we had cash, cash equivalents, and short-term investments and long-term restricted cash included in prepayments and other assets around RMB 4.5 billion. For detailed financial data, please refer to our press release on our IR website. Now I will open the floor for Q&A.

Thank you. Your first question comes from Xueqing Zhang with CICC. Please go ahead.

Thank you to management for addressing my question. We've observed that iQIYI has released numerous drama series since the start of this year. As we look forward to 2025, could you share insights about your content pipeline and the expected quality of these titles? How many of them are likely to become blockbusters? Thank you.

Thank you, Xueqing. We will invite our Chief Content Officer, Mr. Xiaohui Wang, to answer this question. Go ahead.

We had a good start to 2025 with the new season of 'Ride on Theater' drama 'Testing Away' launched in January, reaching an iQIYI popularity index of over 10,000 in just six days. This is a milestone for us as it is the first drama of the year to exceed 10,000 in popularity and also marks our first limited-episode 'Ride on Theater' drama to achieve this milestone. Our main goal for 2025 is to improve both the quality and share of our premium long-form video content, while also ensuring stability and strong starts to the year. In key areas like the drama genre, the number of premium top-tier dramas planned for release this year has significantly increased compared to last year. We will focus on creating a tighter narrative pace that aligns with current social sentiment and user engagement. For suspense and drama, as well as female-oriented content, which are our main programming pillars, we will maintain our leading advantage in the sustained crime genre. This year, 'Light on Theater' has multiple works planned, including additional releases such as 'Breaking the Shadows', 'Justifiable Defense', 'A Life for a Life', 'Low IQ Crime', 'Dead End', and 'Beneath the Undertow'. We will continue to lead in the sustained crime genre and maintain our strong position in suspense, drama, and female-oriented content. This year, 'Light on Theater' has several projects planned alongside the already launched 'Drifting Away', including upcoming releases like 'Breaking the Shadows', 'Justifiable Defense', 'A Life for a Life', 'Low IQ Crime', 'Dead End', and 'Beneath the Undertow'.

In terms of female-oriented content and the market season, we will further strengthen our offering and continuous programming with launch titles such as 'The Best Thing', 'Love in Pavilion', 'Fox Spirit Matchmaker: Sword and Beloved', 'A Dream Within a Dream', 'Build', and 'Strange Tales of Tang Dynasty Season 3'.

In terms of female-oriented content and the market season, we will further strengthen our offering and continuous programming with launch titles such as 'The Best Thing', 'Love in Pavilion', 'Fox Spirit Matchmaker: Sword and Beloved', 'A Dream Within a Dream', 'Build', and 'Strange Tales of Tang Dynasty Season 3'.

Additionally, we will continue to invest in realistic genres. The pipeline includes 'What a Wonderful', 'How Things Born', 'Eight Thousand Miles of Cloud and Moon', 'Tao Jin', and 'Lonely Old Town'.

Additionally, we will continue to maintain our investment in the realm of realistic genres. The pipeline includes 'What a Wonderful', 'How Things Born', 'Eight Thousand Miles of Cloud and Moon', 'Tao Jin', and 'Lonely Old Town'.

Thank you.

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

Thank you, management, for addressing my question. I would like to know more about the updates on your short mini-drama projects. Additionally, do we have any strategic plans for mini-drama in 2025?

Our CEO is addressing this question and would like to clarify what we mean by mini-dramas, which we've discussed in the opening remarks. Mini-dramas are defined as content that lasts one to three minutes in a vertical format, and it's the primary focus for us. Horizontal mini-dramas are similar to long-form video content where we have an advantage, but they are distinct. We began investing in the mini-drama business about a quarter ago for two reasons. First, users are increasingly drawn to fast-paced content with shorter attention spans and prefer to consume content in smaller time increments. Second, from a market perspective, we believe the mini-drama market for 2024 will exceed the Chinese box office, although estimates vary. For 2025, we expect a rebound after the holiday season and still anticipate that the mini-drama market will surpass the Chinese box office that year. Our mini-drama business has successfully completed several first-phase objectives, achieving notable results in user product transformation, content portfolio development, and establishing a robust development system. Currently, our mini-drama content library boasts over 10,000 titles, making it comparable to leading platforms in the industry. We attribute our rapid improvement to two main factors. First, we have an experienced IT, technology, product, and operations team, each with over a decade of experience. Although mini-dramas are new, we leveraged our long-form video expertise. The second factor is our strong industry connections with content providers, many of whom we have previously collaborated with. These elements have facilitated our swift progress. For our main app, we continue to prioritize long-form digital content and a subscription revenue model. We have quickly upgraded iQIYI Lite to focus on mini-dramas supported by advertising. In terms of user engagement, mini-drama viewing time now closely rivals that of animations and cartoons. In iQIYI Lite, mini-drama viewing is the second-largest genre, following long-form video content. I will now outline key focus areas for the next stage. We intend to introduce leading mini-drama titles for ITE and build an original mini-drama ecosystem for ITE. For the Chinese New Year, we have launched several titles. Our upcoming tasks include increasing mini-drama advertising inventory and enhancing monetization capabilities by exploring additional advertising budgets and new formats within the app space. Lastly, we plan to invest more in user growth to attract more viewers to iQIYI for mini-dramas. Thank you.

Your next question comes from Lincoln Kong with Goldman Sachs. Please go ahead.

Thank you to the management for addressing my questions. I would like to ask about the membership business and how recent content performances, such as the impact of Semi-Card or Star Diamond member extra content, are affecting this area, along with the strategy for the full year 2025. Thank you.

Thank you, Lincoln. I will invite Mr. Youqiao Duan, the Senior Vice President of Membership Business, who will take this question. Go ahead.

Since late November 2024, our ongoing programming of premium drama titles has transitioned our membership business to a pivotal moment, leading to a notable surge in new subscribers. We launched several key initiatives for 2024, reclassifying our membership options into two main categories: one for individuals and one for families. The individual plans consist of two options without extensive access, while the family plans offer three options with comprehensive access. Membership rights and benefits are segmented into three tiers: basic, standard, and premium. This revamped membership structure allows users to choose between cost-effective options or premium benefits based on their needs. Additionally, we intensified our efforts against password sharing and introduced an authorized account service that allows for sharing, which has effectively broadened our member base and enhanced retention. We also focused on enhancing member benefits, particularly for S Diamond members, who now enjoy limited early access to Express Packages, granting them early access to final episodes of premium content, thereby boosting the perceived value of our premium membership. Following the introduction of these new benefits, we have seen a significant increase in S Diamond memberships, with many new members drawn by the advantages of the Express Package, leading to increased engagement from existing S Diamond members on our platform. Looking ahead to 2025, our priorities include continuously improving the stability and continuity of our top-tier premium content programming, boosting pre-release promotions for upcoming content to strengthen user loyalty towards iQIYI. We also aim to create a mass-market membership service to drive sales and revenue growth while attracting new members and enhancing retention and user engagement. Furthermore, we will continue to refine our membership products and operations, including improvements to our pricing strategies and benefits to optimize the user experience, as well as develop a membership model specifically designed for mini-dramas. Lastly, we will focus on enhancing the quality of our membership services and the iQIYI brand, improving the perception of membership benefits and privileges, and raising our overall net promoter score among iQIYI members. Thank you.

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

We have recently observed positive performance in international markets regarding both membership revenue and the number of subscribing members. Can you provide an update on the core strategy for our international business in 2025? Thank you.

Thank you, Maggie. We'll invite Mr. Xianghua Yang, the Senior Vice President of our Overseas Business to take those questions. Go ahead.

The overall strategy for our business outside of Mainland China in 2025 is to pursue rapid revenue growth while maintaining profitability. In the past few years, we have focused on several markets, including Southeast Asia, Hong Kong, Macau, and North America, and have achieved satisfactory development. For 2025, we have set different strategies for different markets. For the markets we entered since the early days, such as Thailand, Malaysia, and North America, our goal is to achieve both profit and revenue growth. For the new markets such as Indonesia and South Korea, the focus is on revenue growth for 2025. At the same time, we're preparing for the long-term growth of our business. We expect to break into new markets in 2025, such as the Middle East, the Spanish-speaking Latin American region, and Brazil. In terms of local content, after years of effort, we have developed some experience and will continue to invest in markets such as Thailand and Malaysia, supporting user growth in the future. For content promotion, advertising placement, and cooperation with telecom carriers, these are our core methods to enhance content value. In 2025, we will increase our investment in these areas across more markets. Thus, to summarize our overseas business strategies, we anticipate strong membership growth and revenue at a relatively high speed continuing through 2025, especially given the momentum starting in December 2024 with the release of high-quality content. Thank you.

That concludes our question-and-answer session. I'll now hand back to management for closing remarks.

Thank you, everyone, for participating in the call today. If you have any questions, don't hesitate to contact us. Thank you, and see you next quarter.

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