Earnings Call Transcript - IQ Q2 2024

Operator, Operator

Thank you for joining us for the iQIYI Second Quarter 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 turn the conference over to Ms. Chang You, IR Director of the company. Please proceed.

Chang You, IR Director

Thank you, Operator. Hello, everyone, and thank you for joining iQIYI’s second 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. 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 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.

Yu Gong, CEO

Hello everyone. Thank you for joining us today. In the second quarter, we saw intense competition for top content. While we aired a series of diversified premium content, certain titles did not meet our high expectations, putting pressure on our financial results. After a great deal of hard work, we have overcome the short-term fluctuation in our content slate performance. As a matter of fact, we view the vibrant competition within the long-form video sector as constructive, which has enhanced its appeal over other entertainment formats and also provided us a valuable opportunity to review and refine our tactics. It helps us gain a better understanding of user preference and improve our business for future growth. We firmly believe that ultimately, the success in the long-form video business depends on the stable supply of premium content and the ability to achieve balance in both content quality and commercial benefits. With this in mind, our goal is to further improve the overall success rate of our content portfolio and, more importantly, the stability of content performance. In fact, as the summer season unfolds, our premium content has gained strong momentum. The release of acclaimed titles such as Interlaced Scenes, The Strange Tales of Tang Dynasty Season 2, and How Dare You has boosted our key operating metrics and brought us back to the leading spot in terms of market share in the key drama category in July, according to Enlightent data. Notably, the second season of Strange Tales of Tang Dynasty becomes the 14th drama to break our popularity index score of 10,000. For iQIYI, in addition to delivering high-quality content, providing a great user experience stands as another cornerstone of our business. As we remain committed to enhancing member benefits, we are also refining our content distribution algorithm to bring free users a superior viewer experience while balancing commercial performance. Looking ahead, we are investing in multiple areas to drive the company’s long-term sustainable growth. Firstly, we are extensively applying AI to improve content creation, operational efficiency, and user experience. Secondly, we will further enhance our domestic business while expanding our footprint in broader overseas markets. Thirdly, we are using our iQIYI content influence and its IP portfolio to explore revenue opportunities beyond membership and advertisement such as IP derivatives and offline experiences. These initiatives align perfectly with our core value, which centers on maximizing our IP value through technical innovation and content creativity, setting the stage for an exciting future. Now, let’s move on to the performance of our core business segments, starting with Membership services. Our primary goal for Membership services remains on driving sustainable long-term revenue growth through top-notch content and superior user experience. In the second quarter, membership revenue was down 9% annually, primarily due to fluctuations in our content slate performance, causing the attrition of hit-title driven members and the high base effect from last year’s mega The Knockout. ARM grew steadily year-over-year. This was partially fueled by our disciplined pricing strategy as we scaled back on the overall promotions and discounts. Our enhanced member benefits also played a major role, effectively encouraging members to sign up for higher-tier plans. Furthermore, our innovative value-added services drove users' willingness to pay. Notably, we launched the Express Package for ten dramas in the second quarter and garnered the highest number of cash purchases. Following the success in the drama category, we plan to expand Express Package to other content categories such as variety shows and animations. We remain confident in the long-term outlook of our membership business, which is supported by several key factors. Firstly, we have successfully built a solid foundation of loyal, sticky members. Secondly, content remains a primary driver of our membership growth, and we are in the middle of introducing more diversified premium content to engage broader user cohorts. Furthermore, we are committed to enhancing our operational strategy to improve member acquisition and retention. Initiatives include one, reaching broader demographic groups by expanding our sales channel and utilizing viral social marketing. Two, improving conversion rates by launching marketing initiatives directly tied to popular content of the season such as IP-based member packages, Express Package and Courtesy Experience Program. Three, providing value-for-money services for long-term and high-tier plan subscribers such as exclusive offline events. In the second quarter, we organized 17 offline events and received positive member feedback. Building on the strong user reception from last year, our annual offline flagship event, the 2024 iQIYI Scream Night Three, is set for its comeback on December 7 this year in Macau. The perceived value of our members was even further amplified by our very first July 17 iQIYI Member Festival. Through this event, we offered appealing membership discounts and hosted a seven-hour live broadcast to promote over 130 titles in our content pipeline. More than 40 celebrities participated in the live streaming event and generated over 30 million views. In the future, July 17th iQIYI Membership Festival is set to be an annual event exclusive to our members. It is an event to discover attractive deals and enjoy exciting activities. This festival will not only underscore the substantial value we provide to our members, but will also serve as a key opportunity to boost our brand influence. Moving on to content, we have overcome the short-term fluctuation in the content slate performance in Q2 and learned a lot from this short-term setback. Through the in-depth analysis of our projects, we have gained valuable insights that are set to guide our content creation and operations in the future. Firstly, with respect to content creation, we will craft more and higher-quality content that meets the appetite of mainstream audiences. In particular, we plan to broaden our portfolio with offerings that especially appeal to our female audience to maintain our edge in the constantly evolving field of content creation. We aim to further enhance our ability to tap into popular social trends, thereby producing content that establishes a deeper connection with our audiences. We will embrace a more innovative stance in our casting and script selection process, aiming to transcend the limits of traditional storytelling. Secondly, regarding content scheduling, we will closely monitor our user trends and adopt a dynamic scheduling strategy that is guided by user engagement and retention. This approach ensures that our content rollout is optimally timed to align with our audiences’ preferences and viewing habits. Thirdly, in terms of managing our in-house studios, we are committed to enhancing the efficiency and effectiveness of our operations at each key stage of the creative process. Our aim is to cultivate a more proactive culture among our talent, ensure they have ample freedom to fully unleash their artistic skills, and foster an environment where creativity can thrive. Moving on to the detailed content performance in the second quarter. For dramas, our leadership in the reality and suspense genres remains unchallenged. Our original drama, To the Wonder, perfectly demonstrated our success in blending artistic merits and commercial benefits, garnering exceptional performance across all metrics. What’s more impressive is the show’s remarkable long-tail effect, with its influence extending well beyond the online domain, as it boosts tourism to its filming location in Xinjiang to effectively extend the vitality of the IP we worked with creative teams to host an open-field concert in Xinjiang in July, which was widely acclaimed by users, sponsors, and the local culture and tourism bureaus. In addition, we further solidified our position as the go-to platform for the suspense genre by launching dramas, Tell No One, and Lost in the Shadows under our Light On Theatre brand. With movies, we continued to outperform our peers according to Enlightent’s viewership share data. In the second quarter, we launched a total of 15 key titles in our movie channel, including multiple box office hits, such as Article 20 and Pegasus 2. In our Cloud Cinema, we launched 21 titles, covering the latest and most popular theatrical releases, such as the box office top-grossing YOLO. For original movies, we released various genres, such as disaster comedy, A Promising Future, and suspense crime, Suspect. For variety shows, our two flagship shows returned with the new season, namely The Detective Adventure Season 4 and The Rap of China 2024, both of which continued to be well-recognized by advertisers. The Rap of China 2024 also generated considerable membership revenues. For animation, we continued to invest in original Chinese animations and began to see encouraging initial results with enhanced in-house production capabilities. How Dare You serves as a perfect example, as it hit multiple records for iQIYI original animation. It is our first original animation to break our popularity index of 5,000. Its revenue and new user acquisition also reached new highs. As we enter the summer vacation season, which is a critical broadcasting window for online video platforms, we are excited that our premium content has helped us regain market leadership. We roll out premium content in both ancient and modern genres to appeal to a wide audience with a particular focus on young viewers who have more free time to enjoy our offering during their holiday. So far, Strange Tales of the Tang Dynasty Season 2 and A Lonely Hero’s Journey have all been well-received by audiences. Additionally, in the suspense genre, the drama Interlaced Scenes and For the Young Ones have both showcased strong user engagement. Notably, Strange Tales of the Tang Dynasty returns for a second season showcasing remarkable quality that has led it to break iQIYI’s popularity index of 10,000. The acclaimed series has demonstrated a pronounced long-tail effect. The second season substantially amplifies the user time spent and membership revenue generated by the first season, increasing them by about sixfold and tenfold, respectively. This drama also serves as an excellent example of our serialized approach to IP development. Encouraged by the success of the first two seasons, production for the third season is set to begin shortly. Additionally, the IP starts to generate diverse revenue streams as its influence now expands into offline domains, including entertainment, tourism, and consumer goods. In a strategic move to capitalize on this success, we have launched IP-based VR theaters in key cities such as Beijing, Shenzhen, and Xi’an. This initiative aims to broaden the impact and presence of our original content, extending beyond traditional screens. Beyond drama, our creativity is expanding into new categories. Tenday, a brand-new original iQIYI variety show IP, has garnered user praise for its innovative format and recorded a peak iQIYI popularity index score of over 7,000. Additionally, the King of Stand-up Comedy marks iQIYI’s first exploration into stand-up comedy. The show has received encouraging initial feedback, standing out among the comedy variety offerings this summer. Moving on to our content pipeline. For dramas, we expect the stability of premium content supplies to be meaningfully enhanced. Meanwhile, we are fast-tracking the production of ancient costume idol dramas and modern idol dramas, both targeting female audiences. Some of the much-anticipated works in this genre include Go East, A Moment But Forever, Love Song in Winter, Snowy Night Timeless Love, Fangs of Fortune, Moon Embracer, and Love of the Divine Tree. In the realistic and suspense category, audiences can anticipate a diversified content offering, including Born to be the One, Northward, The Fearless season 2, and Justifiable Defense. For movies, we will release more diversified theatrical hits on our platform. Additionally, self-produced iQIYI original films are expected to be released in theaters, including Skin and A Frozen Rage. For our variety show line up, we plan to release a greater number of titles in the second half of the year compared to the first. Building on the momentum of Tenday and The King of Stand-up Comedy, we are preparing to launch more innovative shows, including The Moon is Shining, which is set to release later this month. Moving on to animation, we expect to see a surge in titles during the second half of the year, with increased diversification in genre. We plan to launch 8 to 14 additional seasons of key original works compared to the first half. Alongside How Dare You, we have also launched the fantastical The Legend of Sky Lord and A Moment But Forever, which shares its IP with an upcoming drama series of the same name. The action-packed anime Super Qube: Extraordinary Chapter is also set to release soon. On a separate note, iQIYI has become one of the key content sources for traditional TV media, covering outlets such as CCTV, satellite TV, and regional TV stations, thanks to our enhanced offering of original content. In just the first half of 2024 alone, we have distributed about 50 drama series, reinforcing the long-tail effect of premium content. The value of our IP has been even further unleashed by exploring diversified monetization streams, for example, franchising revenue from the dramas Fox Spirit Matchmaker: Red Moon Pact reaching a new high for iQIYI original dramas. We have also worked with established toy brands for IP licensing, joint product customization, and marketing. Moving on to the advertising business. In the second quarter, total ad revenue was RMB1.5 billion, down 2% year-over-year. Performance ads remained as a highlight of the quarter, growing at a healthy rate year-over-year. Key sectors such as e-commerce and Internet services demonstrated solid performance, with e-commerce revenue from the June 18 shopping festival growing 80% annually, and revenue from Internet services growing 30% annually. The solid result in performance ads is also a clear reflection of our technical advancement. Through upgraded ad placement mechanisms and reinforced smart bidding algorithms, we have further enhanced the monetization efficiency of traffic and the ROI for our clients. Additionally, our AI tools now cover broader industries, enabling more efficient ad production and driving AI-powered ad revenue up by 150% sequentially. For brand ads, revenue was down annually, mainly due to fewer variety shows launched. Despite that, our premier content continued to attract brand advertisers, with 59% of the revenue stemming from content-targeted ads. In particular, our major dramas achieved notable double-digit annual growth in revenue. The performance of the June 18 shopping festival was also in line with our expectations. Moving on to technology and products, we remain committed to advancing technology innovation as it’s crucial in improving content production, user experience, and operational efficiency. For example, our virtual production technology used to be limited to fantasy genres. This quarter marked an exciting breakthrough as we successfully extended its application into a new territory, deploying it within reality-themed drama for the first time. We have also made meaningful progress with our in-house pre-visualization technology. This tool allows for the rapid design and visualization of scenes and shots before actual filming begins. We have applied this across multiple flagship projects and it has led to a large increase in production efficiency. Our in-house developed platform continues to demonstrate its power. Our in-house iQIYI content management system has been in operation for over two years. This sophisticated data-driven system provides substantial support to the management team and producers in project management, effectively elevating content quality and the success rate. Now this management system has covered all our projects in drama, movie and animation. Another high-efficiency system is our intelligent protection management system, which is widely used by production crews for diverse onsite tasks, equipping them with frontline production tools and production management capabilities. In the second quarter alone, 21 dramas adopted the system to date. This system has been used in 67 iQIYI dramas and gained widespread recognition for its effectiveness. In addition, we have expanded the use of AI across various aspects, covering project assessment, creativity, marketing, and distribution. This broadened application has meaningfully enhanced content production and operational efficiency. For example, AI has supported revenue forecasting and decision-making during the initial phase of project development. AI also drives our advertising innovation. For “Fox Spirit Matchmaker: Red Moon Pact,” we integrated virtual characters and scenes into ad materials, substantially enhancing ad outcomes. This new ad format was welcomed by advertisers and opened up ample possibilities. For content marketing, we have employed AI multimodal models to analyze plot information and generate key marketing points to improve marketing efficiency. Finally, for our business performance in regions outside of Mainland China, over the second quarter, we sustained solid performance in our overseas business, with both total revenues and membership revenues continuing to grow annually and sequentially. The influence from C-dramas and iQIYI’s original content continues to strengthen, evidenced by the 30% annual increase in membership revenue from top C-dramas during the quarter. Our localization attempts have also started to bear fruit. The accumulated number of views of our original Thai dramas My Stand-in ranked first in a number of markets, including the U.S., Canada, and U.K. We have also made solid progress in animation. How Dare You has attained remarkable viewership and revenue on our overseas site, reaching a historical high among all iQIYI original Chinese animations, and even outperforming top Japanese animations in several countries. Leveraging our premium content, we have expanded local partnerships to boost global penetration and monetization. Our efforts include deepening collaboration with telecom operators in overseas markets to enrich bundle products and strengthen promotion activities. For example, we have partnered with Etisalat, one of the largest telecom companies in the Middle Eastern and North African markets, to stream iQIYI’s content on their OTT platform StarzON. This partnership will further enhance the influence of C-drama beyond Asian markets. In the future, we will continue to enhance the influence of the iQIYI brand overseas with premium C-pop content in key markets, accelerate production of local content, and explore diversified IP monetization opportunities. In summary, looking ahead, we are dedicated to pursuing our long-term growth with a sustainable approach. We will roll out more diversified premium content, apply innovative technologies more extensively, and continue to enhance our team’s creativity and execution capabilities. With that, we believe the flywheel effect of iQIYI’s content ecosystem will drive our long-term growth. Now, let me pass on to Jun to go through our financial performance.

Jun Wang, CFO

Thanks Mr. Gong, and hello everyone. Let me walk you through the key numbers. In the second quarter, the total revenues were RMB7.4 billion, down 5% annually. The membership services revenue reached RMB4.5 billion, down 9% annually, primarily due to fluctuations in the content slate performance as previously discussed. For online advertising, revenues decreased by 2% year-over-year to RMB1.5 billion. This was primarily due to the decrease in brand ad businesses, which again is due to the decrease of the variety shows we had during the quarter. That was partially offset by the healthy growth of the performance ad businesses. Content distribution revenue reached RMB698 million and grew 2% annually. Other revenues increased by 16% annually to RMB784 million, partially driven by the increase of revenue derived from talent agency services and third-party cooperation. Moving on to costs and expenses. Content cost was RMB4.1 billion, down 2% annually. Total operating expenses were RMB1.4 billion, flat annually. This was in line with our disciplined marketing spending strategy. Turning to profits and cash flow, the non-GAAP operating income was RMB501 million and its corresponding margin was 7%. The operating cash flow totaled RMB411 million and remained positive for nine consecutive quarters. As of the end of the second quarter, we had cash, cash equivalents, short-term investments and long-term restricted cash included in prepayments and other assets, totaling RMB8.6 billion. We have prudently managed our financial resources, striving to improve the overall health of our business and to optimize the financial leverage of our balance sheet. In August, we completed the repurchase right offer for our convertible notes in 2026. An aggregate principal amount of US$395 million was validly surrendered and repurchased, and only $157,000 aggregate principal amounts of the notes remained outstanding. For detailed financial data, please refer to our press release on our IR website. I will now open the floor for Q&A.

Operator, Operator

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

Xueqing Zhang, Analyst

Thank you, management, for taking my question. My question is about the competition landscape. We have seen that other platforms had some successful releases this year, and our market share, which has been strong in recent years, has also seen some changes. How does management assess the current competition landscape for long videos, and what strategies are in place? Thank you.

Chang You, IR Director

We will invite our CCO, Xiaohui, to answer this question.

Xiaohui Wang, CCO

Thank you for taking my question. My question is about the competition landscape. We noticed that other platforms had some blockbusters this year, and our market share, which has been leading in recent years, has also fluctuated. How does management view the current competition landscape for long videos, and what are your strategies? Thank you. We will invite our CCO, Xiaohui, to answer this question.

Chang You, IR Director

The intense competition within the industry has always been present. And this competition actually helps us to improve the overall quality and richness of the industry’s content, enhancing the competitiveness of the long-form video sector compared to other forms of entertainment, such as we often mentioned, short-form video. At the same time, it also motivates us to continually improve content quality in the future. We’ve always emphasized that the ultimate goal in the long-form video competition is to sustain a high-quality, diverse content supply and achieve a win-win situation between content quality and commercial benefits.

Xiaohui Wang, CCO

The industry’s content quality and diversity enhance the long-form video sector's competitiveness against other entertainment formats, particularly short-form video. This also drives us to consistently improve content quality going forward. Our focus has always been on maintaining a high-quality, diverse content supply in the long-form video competition while ensuring a mutually beneficial outcome between content quality and commercial success.

Chang You, IR Director

Looking at our long-term market share performance, iQIYI has actually maintained a leading position in the core categories of drama and film for a long period. Although we experienced some fluctuation in our drama market share in Q2, after a thorough review and a targeted optimization, we’ve overcome the short-term difficulties and returned to the number one position in drama category market share.

Xiaohui Wang, CCO

iQIYI has consistently held a leading position in the key areas of drama and film over an extended period. Despite some fluctuations in our drama market share in the second quarter, we conducted a detailed review and made targeted optimizations, allowing us to overcome short-term challenges and regain our top position in the drama category market share.

Chang You, IR Director

In balancing content quality and commercial returns, iQIYI’s performance continues to lead. The drama series To the Wonder and The Strange Tales of Tang Dynasty Season 2 are great examples, and we believe this advantage will further enhance in the future.

Xiaohui Wang, CCO

Chang You, IR Director

Going forward, we will remain dedicated to creating high-quality content tailored for mainstream and female audiences. Enhancing our social insights and innovation, optimizing content scheduling strategies, and strengthening management in every facet of our in-house studios. We believe these initiatives are all aimed at improving the stability of our high-quality, diverse content supply.

Xiaohui Wang, CCO

Chang You, IR Director

Our current drama reserve accommodates the viewing demand of the mainstream audience. We have a relatively ample reserve specifically for the core genres of ancient costume dramas aimed at female audiences as well as for the mystery suspense and reality-themed dramas.

Xiaohui Wang, CCO

Chang You, IR Director

We will also continue to strengthen our capabilities for IP serialization development. For example, The Strange Tales of Tang Dynasty Season 2, which launched in Q2, is a successful case of serialized content development. The third season will soon be introduced. In the future, well-loved series such as The Fearless and Under the Skin will also launch their second seasons. The Ingenious One Season 2 is also in preparation. Thank you.

Operator, Operator

Your next question comes from Lincoln Kong with Goldman Sachs.

Lincoln Kong, Analyst

Thank you, Management, for taking my questions. My question is about the membership business. What are the prospects for membership growth in the future, particularly regarding our subscribers and ARPU growth? Thank you.

Chang You, IR Director

We’ll invite our Senior VP of Membership Business, Youqiao Duan, to answer this question.

Youqiao Duan, SVP of Membership Business

Thank you, Management, for taking my questions. My question is about the membership business. How should we think about the prospects of membership growth in the future, especially for our subscribers, as well as the ARPU growth? Thank you.

Chang You, IR Director

From a perspective of membership structure, our cornerstone members represent a stable base of our subscribers and have remained steady. Fluctuations actually mainly come from the members who are attracted by new and popular content. As the summer season arrives, our content offerings have positively influenced the return of these hit-driven users and retention of long-standing members.

Youqiao Duan, SVP of Membership Business

To answer this question, from a perspective of membership structure, our cornerstone members represent a stable base of our subscribers and have remained steady. Fluctuations actually mainly come from the members who are attracted by new and popular content. As the summer season arrives, our content offerings have positively influenced the return of these hit-driven users and the retention of long-standing members.

Chang You, IR Director

In Q2, our ARM, which is the average revenue per member, maintained solid year-over-year growth. The current level of ARM provides us with flexibilities in terms of operational tactics. In the near future, our focus will be on expanding the scale of our membership, but the ultimate goal remains to maximize membership revenue.

Youqiao Duan, SVP of Membership Business

In Q2, our average revenue per member continued to show strong year-over-year growth. The current level of average revenue per member gives us flexibility in our operational strategies. Moving forward, we will prioritize expanding our membership base, while our ultimate aim remains to optimize membership revenue.

Chang You, IR Director

In the future, we also plan to implement more proactive measures to optimize account sharing and combat piracy, thereby supporting the long-term healthy growth of our membership business. We’ll share specific plans with everyone as the progress is made. Thank you.

Operator, Operator

Your next question comes from Maggie Ye with CLSA.

Maggie Ye, Analyst

Good evening, and thank you for the opportunity to ask questions. In regard to our international business, we have experienced strong revenue growth in recent quarters due to high-quality local production and the distribution of our premium Mandarin content. As iQIYI international marks its 5-year anniversary, could management provide your current thoughts on the business strategy and plans for our international operations? Thank you.

Yu Gong, CEO

Good evening, and thanks for the chance to ask questions. Regarding our overseas business, we’ve seen very decent revenue growth in past quarters due to high-quality local production in addition to the distribution of our premium Mandarin content. As iQIYI international celebrates its 5-year anniversary, can management share your latest thoughts on business strategy and plans for our overseas business? Thank you.

Chang You, IR Director

We’ll invite our senior VP, Xianghua Yang, who is responsible for the overseas business, to answer this question.

Xianghua Yang, SVP of Overseas Business

As iQIYI international celebrates its 5-year anniversary, can management share your latest thoughts on business strategy and plan for our overseas business? Thank you. We’ll invite our senior VP, Xianghua Yang, who is responsible for the overseas business, to answer this question.

Chang You, IR Director

We started expanding into the overseas market in 2019 and have achieved initial success. In 2023, our overseas operations actually reached full-year operating breakeven. Our goal for 2024 is to boost revenue growth while continuing to increase profit. In Q2 this year, the total revenues for overseas and membership revenue both maintained healthy year-over-year and quarter-over-quarter growth.

Xianghua Yang, SVP of Overseas Business

Chang You, IR Director

In terms of content, we have discovered an optimal content mix suitable for our overseas markets, and we aim to further increase content offerings through different measures. For example, the popularity of Chinese language content overseas has significantly increased, becoming a major source of our top content for our overseas platform. In fact, over the past three years, over half of the 20 most popular shows on iQIYI overseas were Chinese dramas, most of which were iQIYI originals. This demonstrates the influence of Chinese language content and the strength of our original offerings. In the future, we’ll continue to use Chinese dramas as the foundation of our overseas content offerings and actively explore opportunities to increase production of local original content. From the technology perspective, we will utilize AI technology to empower different aspects of the long-form video industry, enhancing the production efficiency of iQIYI’s localized original content overseas.

Xianghua Yang, SVP of Overseas Business

This demonstrates the influence of Chinese language content and the strength of our original offerings. In the future, we’ll continue to use Chinese dramas as the foundation of our overseas content offerings and actively explore opportunities to increase production of local original content. From a technology perspective, we will utilize AI technology to empower different aspects of the long-form video industry, enhancing the production efficiency of iQIYI’s localized original content overseas.

Chang You, IR Director

Regarding our local partnerships, we have already established deep connections and cooperation with local telecom operators in certain regions. Going forward, we aim to expand our partnerships to telecom operators in additional countries and to increase our collaboration with local partners. We believe these will enhance our brand awareness and content influence overseas. Our long-term objectives are to make iQIYI’s overseas platform the home of beloved Asian content, expanding the influence of Chinese language content while also increasing the coverage of local content and continue to explore diversified IP monetization models.

Jun Wang, CFO

Going forward, we aim to expand our partnerships to telecom operators in additional countries and to increase our collaboration with local partners. We believe these will enhance our brand awareness and content influence overseas. Our long-term objectives are to make iQIYI’s overseas platform the home of beloved Asian content, expanding the influence of Chinese language content while also increasing the coverage of local content and continue to explore diversified IP monetization models.

Chang You, IR Director

Our CFO, Wang Jun, mentioned that in 2023, our overseas business achieved full year operating breakeven from a management accounting perspective.

Jun Wang, CFO

This is based on the BU management account.

Chang You, IR Director

Correct, correct. And this is a very healthy trend that has developed over the past year. Thank you.

Operator, Operator

Your next question comes from Thomas Chong with Jefferies.

Thomas Chong, Analyst

Hi, good evening. Thank you, management, for taking my question. Given that iQIYI has a lot of valuable IP, could management share the strategy for leveraging this IP potential in areas beyond just membership and advertising? Thank you.

Yu Gong, CEO

Hi, good evening. Thanks, management, for taking my question. As iQIYI has a lot of good IP, can management share your strategy of unlocking the IP potential in different areas rather than membership and advertising? Thank you.

Chang You, IR Director

Our CEO is answering this question. He mentioned that content IP is the core asset of our company. Promoting the monetization of content IP in various forms, including offline business, is an important and sustained effort that is key to enhancing our long-term value and competitiveness. We actually describe this IP-based business model with a metaphor called eating a fish in multiple ways, which actually emphasizes our ability to transform each piece of our content IP into numerous prospects for revenue. Thereby, we believe this will maximize its value across different markets and platforms.

Yu Gong, CEO

Promoting the monetization of content intellectual property in various forms, including offline business, is an important and ongoing effort that is essential to enhancing our long-term value and competitiveness. We refer to this IP-based business model with a metaphor about consuming fish in multiple ways, which highlights our capability to convert each piece of our content intellectual property into various revenue opportunities. As a result, we believe this will optimize its value across different markets and platforms.

Chang You, IR Director

With many years of focus on producing original content, the value of our company’s IP assets has grown significantly. For instance, two years ago, in Q2 2022, our original dramas accounted for over half of our quarterly new release key dramas. This proportion now has stabilized at around 70%. Our high-quality, original dramas have not only found success during their initial broadcasting period but also have demonstrated a sustainable long-tail effect, which maintained popularity over an extended period.

Yu Gong, CEO

After years of focus on producing original content, the value of our company’s intellectual property assets has increased significantly. For example, two years ago, in Q2 2022, our original dramas made up over half of our quarterly new release key dramas. This percentage has now stabilized at around 70%. Our high-quality, original dramas have not only succeeded during their initial broadcast period but have also shown a sustainable long-tail effect, maintaining their popularity over a longer time frame.

Chang You, IR Director

We hope that the offline experience business will become our second growth curve in the future. We also noted the shift in consumer behaviour change in domestic offline commerce and cultural tourism sectors, where the premium content IP plays an increasingly important role in creating engaging experiences. For example, our vast library of high-quality video content IPs actually serves as our core strength in this area. For instance, we leveraged the IP from the recent hit drama title called The Strange Tales of Tang Dynasty beyond its online presence, successfully introducing an immersive VR experience in cities like Beijing and Xi’an. These are key cities in China. In addition, we’ve developed new derivative products such as card games designed to appeal to the taste of a younger demographic, further extending the IP’s reach and impact.

Yu Gong, CEO

Our video content IP serves as our core strength in this area. For instance, we leveraged the IP from the recent hit drama titled The Strange Tales of Tang Dynasty beyond its online presence, successfully introducing an immersive VR experience in cities like Beijing and Xi’an. These are key cities in China. In addition, we’ve developed new derivative products such as card games designed to appeal to the taste of a younger demographic, further extending the IP’s reach and impact.

Chang You, IR Director

For the operational model, we favour a light asset approach, which has a promising prospect for incremental revenue under limited costs. Based on our experiences, this approach has actually been validated in terms of offline experiences. This model is now being able to be replicated and scaled.

Yu Gong, CEO

We have developed new derivative products such as card games designed to appeal to a younger demographic, further extending the IP’s reach and impact. For the operational model, we favor a light asset approach, which has a promising prospect for incremental revenue under limited costs. Based on our experiences, this approach has actually been validated in terms of offline experiences. This model is now being able to be replicated and scaled.

Chang You, IR Director

In addition to what I just mentioned, the VR theater experiences that I mentioned earlier, we’re also exploring further initiatives centered around our IP. For example, our Qixiaobei, which is the IP merchandise store, now also QiBubble Park, which is a theme park designed for children. These initiatives are developing in collaboration with our partners, similar to what I just mentioned, the light-asset approach. The aim is to provide users with a very comprehensive and engaging entertainment experience. Thank you.

Operator, Operator

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

Chang You, IR Director

Thank you, everyone, for participating in the call. If you have further questions, please don’t hesitate to contact us. Thank you.

Yu Gong, CEO

Thank you. Bye-bye.

Operator, Operator

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