Earnings Call Transcript - IQ Q4 2023

Operator, Operator

Good day and welcome to the iQIYI Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. I would now like to turn the conference over to Ms. Chang Yu, IR Director. Ms. Yu, the floor is yours.

Chang Yu, IR Director

Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Fourth Quarter and Fiscal Year 2023 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. Wenfeng Liu, our CTO, Chief Technology 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 section. 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.

Tim Gong, CEO

Hello, everyone. Thank you for joining us today. After an iconic turnaround in 2022, we continued our success in 2023, delivering the best-performing year in the Company's history by focusing on high-quality growth. Both total revenue and non-GAAP operating profit in 2023 increased double-digit year-over-year and reached historical highs despite macro headwinds. More importantly, our growth in profits substantially surpassed that of revenues. This demonstrated the resilience of our businesses and our operational excellence. Let’s take a closer look at the key metrics in 2023: total revenues reached RMB31.9 billion, up 10% annually. Non-GAAP operating profit reached over RMB3.6 billion, up 68% annually; and non-GAAP net profit exceeded RMB2.8 billion, up 121% annually. We generated a sizable total free cash flow of RMB3.3 billion in 2023, which improved our liquidity position, allowing us to make investments to drive future growth. All four above-mentioned key metrics hit record-setting highs. It became very clear that the Company was following the right course, offering sustainable value growth for our stakeholders. Our exceptional financial results mirror our solid leadership in China’s long-form video industry. Our capacity for consumer engagement, viewership market share, creative content production and technological innovation is second to none. Indeed, in consumer surveys, iQIYI stood out as the signature brand for providing 'top-tier content.' This was supported by viewership market data as well. According to Enlightent, we were ranked #1 in drama viewership share for three consecutive years. Notably in 2023, we broadcasted seven out of the top ten most viewed new dramas in the market. In addition to the drama category, we also dominated the online movie streaming segment with a total viewership share of 47%. Our market share leadership is deeply rooted in our unique capacity to produce original, premium content. In 2023, iQIYI Originals accounted for over 65% of our key dramas released, an annual record in our history. The original production capability not only guaranteed us a steady, exclusive supply of premium content, it also optimized our cost efficiency, measured by an operational metric known as the 'content-related cost ratio.' For the drama category in 2023, this ratio improved by 12 percentage points compared to 2022. The notable increase in efficiency translated directly into an increase in our profits. That is why our original capability is often recognized as the most important defensive barrier protecting our business. Meanwhile, we are also the leader driving technology innovation in the long-form video industry, industrializing the content production process, and upgrading users’ entertainment experiences. For example, we developed 'iQIYI Content Production Management System,' a highly efficient data-driven system that recorded every crucial aspect of the entire content production process. This system, together with Generative AI, would meaningfully improve the hit ratio while enhancing the production and operation efficiency. One more example of our technology leadership is 'eXave MAX,' a standard we pioneered to deliver ultimate cinematic experiences on certified TV devices, covering more than 19,000 episodes of content across 157 TV models. Being a leader means constantly having our eyes on what's ahead, not the past, and thinking more about long-term strategies rather than short-term gains. As the management team, what really matters to us is the potential returns our entire content portfolio could yield in the next several years and whether we can find systematic approaches to improve that ROI either by technological advancement or by upgrading our content creation and management process. This perspective is a sharp departure from the public's conventional way of measuring our success by the number of hit titles in a specific quarter. But we firmly believe that this perspective best upholds our long-term leadership in the industry. Likewise, when we notice quarterly fluctuations in our subscriber numbers, it motivates us to boost the quality of our content and better our services, to further engage underserved demographics like seniors and youth, improving long-term retention and ARM. We firmly believe that by addressing these fundamental long-term challenges, we would be able to grow our value to users, partners, and investors sustainably. Looking forward to 2024, we remain committed to our long-term vision and will continue to focus on high-quality growth. Our key priorities include strengthening our current market position in core content categories such as dramas and movies, improving our competencies in additional vertical genres such as kids' cartoons and animations to enhance our capabilities in incremental areas, integrating cutting-edge technologies to increase efficiency in content production and operational execution, enriching the user experience, and last but not least, exploring new markets and business opportunities. Now let me walk you through the details of our core business segments, starting with membership services. Our goal for the membership services business is to drive long-term and sustainable membership revenue growth, and our focus extends beyond merely the quarterly net additions. Membership revenue is driven by three components, namely, ARM, subscriber lifetime, and the subscriber base. ARM and subscriber lifetime are our current key focuses in driving the long-term economic value of membership services. In 2023, our membership services revenue exceeded RMB20 billion, up 15% compared to 2022, driven by increases in both ARM and the subscriber base. For Q4, membership services revenue reached RMB4.8 billion, up slightly year-over-year. ARM maintained sequential growth for five consecutive quarters, hitting a record high of RMB15.98 in Q4, up 13% annually and 3% sequentially. We believe our ARM has ample room to grow in the future. First, the monthly membership fee for the industry is still very affordable compared with other discretionary spending, such as movie tickets, coffee, and a Happy Meal in quick-service restaurants. With more premium content and higher perceived value, users' willingness to pay would increase, allowing us to strategically scale back on discounts. Additionally, our innovative value-added services, including Express Package, offline events, and merchandise benefits, show promising potential. In Q4, we launched Express Package for six drama series and saw a nearly 50% sequential increase in the number of participants. Members redeeming points for access increased by 40% sequentially, and cash purchases by members increased by 250% sequentially. Furthermore, our premium membership options are designed to entice users to higher tiers, tapping into greater monetization potential. For example, in Q4, events like the Story of Kunning Palace, fan meetings, and the 2023 iQIYI Scream Night provided opportunities for loyal, long-term members, particularly those on the S-Diamond plan, to win event tickets through exclusive draws. This has led to a shift with members upgrading from the standard Gold plan to the higher-end Platinum and S-Diamond plans which, although more expensive, offer enhanced privileges. The average daily subscribers for Q4 was 100.3 million, with the quarter-end number higher than the daily average for the quarter. Our content continued to captivate subscribers, and the subscriber mix has improved compared to the same period last year, with a substantial increase in the proportion of annual plans. With a strong content slate for 2024, we are confident that the number of dramas breaking the 10,000 popularity index score will surpass that of 2023. Premium content is expected to fuel our revenue growth. For 2024, we are taking several steps to strengthen our membership services business. First, we will offer more differentiated products tailored to different user cohorts and provide a value-for-money member experience. Second, we will optimize content scheduling, marketing, and operations to attract new members while increasing member retention. Third, we will keep improving the loyalty program to incentivize users to choose long-term, premium, and auto-renewing plans. Such initiatives will further boost member stickiness and increase lifetime value. Moving on to content. Our consistent market leadership in core content genres has solidified our reputation as 'a diversified and high-quality premium content powerhouse.' Original programming remains the cornerstone of our content strategy and a key revenue driver. We have made remarkable advancements in the quality of our original productions. In 2023, original content contributed 80% of the total revenue from key new dramas during the new-release period. And that's not all. For seven straight quarters, over half of our revenue for new key dramas has come from original titles. Additionally, our content efficiency has largely improved. Our 'content-related cost ratio' for dramas has improved for the third consecutive year, decreasing by 12 percentage points since last year. That's a clear mark of progress in enhancing our cost structure and ultimately, our bottom line. This is underpinned by our sophisticated content production and operation mechanism, which maximizes the efficiency of our content investments while sparking the creation of innovative new titles. Our 'iQIYI Content Production Management System' lies at the heart of this process, empowering our teams to deliver top-tier programming with remarkable efficiency with effective resource allocation and program management at every step. In addition, we give our creative talent ample flexibility to truly push the envelope with their innovative ideas. The blend of robust content management and creative liberty allows us to consistently deliver high-quality content so efficiently; it's the secret sauce to our content strategy. Accordingly, we have seen a consistent flow of premium content, and the hit ratio for our entire content portfolio has improved. For example, in 2023, there were more titles with popularity index scores of 9,000 and above, up 71% compared to 2021, reflecting a steady improvement in content quality. Additionally, over 70% of our key drama releases in 2023 met or surpassed our expectations. Moving on to detailed content performance in Q4 2023. For dramas, Story of Kunning Palace was a great success as our first fully in-house produced original to reach a popularity index score of 10,000, leading the industry viewership during its run. Another drama that also reached a popularity index of 10,000 was A Journey to Love, which set the record for the best opening-day viewership in 2023. During the quarter, the new season of Mist Theater returned. The success of Lonely Warrior consolidated our leadership in the suspense genre, reaching a peak popularity index of more than 9,800, a record high for Mist Theater and the 24-episode short drama category. Other premium titles in Q4 included The Fearless, Romance of the Farm, and Tiger Crane, showcasing the diverse range of our drama portfolio. For movies, we maintained a leading viewership share in Q4 as per Enlightent. Our movie channel featured 20 major releases, many topping the box office charts. Additionally, we are happy to see the recovery of the offline movie market, and four of iQIYI's original theatrical films garnered box office revenues of over RMB100 million in 2023. Our original strategy extends across all content genres. In animation, we significantly scaled up original content in 2023, doubling the number of original titles launched and posting a 90% increase in revenue contribution compared to 2022. For kids' cartoons, we now have 11 original IPs, eight of which were multi-season. Notably, Princess Doremi Season 3 was named the Best 3D Animated Program at the 28th Asian Television Awards, which is one of the largest entertainment, content, and broadcast awards in the Asia Pacific, demonstrating our expanded influence in overseas markets. Next, let's take a look at our content pipeline in 2024. For dramas, our goal is to deliver diversified and high-quality content on a continuous basis. We are increasing investments in premium programs while keeping the total number of titles relatively stable. Our content slate includes ancient costume dramas such as the highly anticipated Fox Spirit Matchmaker series, Burning Flames, Follow Your Heart, Moon Embracer, the second season of Strange Tale of Tang Dynasty, and others. In addition, Mist Theater will debut new titles in 2024 with Tell No One, Breaking the Shadows, and Lost in the Shadows. In the reality genre, the premiere of Always On the Move, known for its top-notch production and strong audience appeal as its peak popularity score reached as high as 9,959, is another example showcasing our strong content capability. Viewers can also look forward to the upcoming City of the City, Ball Lightning, adapted from the famous science fiction novel written by Liu Cixin, as well as In the Name of the Brother. For movies, we expect several iQIYI originals to hit theaters in 2024. Our lineup includes the action comedy Rob & Roll, which premiered in January and garnered a total box office of RMB236 million. Also, we anticipate releasing the eagerly awaited crime suspense Samayou Yaiba, adapted from the renowned novel written by Keigo Higashino. For our online movie segment Cloud Cinema, we have introduced 'Action Master,' our new brand that brings together a diverse lineup of action movies for our viewers. We have debuted three titles so far and earned high praise from audiences. Additionally, we look forward to the upcoming release of The Wild Blade of Strangers, the latest addition to our 'Action Master' catalog. For variety shows, in addition to new seasons of established IPs like The Detectives' Adventures 2024 and The Rap of China 2024, we will continue to develop new programs spanning different themes, such as Player One In Wonderland, Youth Choir, and others. For kids' cartoons and animation, we are actively expanding our production capacity. We will introduce brand new IPs and new seasons of classic IPs of original kids' cartoons. And for Animation, we are planning to release around 20 seasons of original animations, with enhanced quality and thematic diversity. To sum up our 2024 content strategy, we aim to reinforce our drama leadership and achieve breakthroughs in other genres. Our focus will remain on premium titles, increasing their supply, quality, and monetization. We'll also optimize our content scouting to cater to our diverse user base and their varied preferences. Moving on to the advertising business. In 2023, we recorded an annual increase of 17% in our advertising revenue. Both brand and performance ads booked healthy growth over the previous year. In Q4, advertising revenue increased by 6% annually to RMB1.65 billion, beating our expectations thanks to our growing content influence among brand advertisers. Revenue from content-targeted ads accounted for over 50%, as advertisers flocked to top dramas and shows like Story of Kunning Palace, A Journey to Love, and We Never Stop. Broken down by sectors, the annual growth in Q4 came mainly from the recovery of brands in industries including food and beverage, communications, and healthcare. Performance ads continued to show annual growth, despite the high baseline set in Q4 last year. We expanded our customer base to attract new advertising budgets, such as new e-commerce platforms and short-form dramas. Our solid performance also capitalized on our technology upgrade, as we made effective use of generative AI to improve ad creation and ROI. Looking ahead to 2024, we remain cautiously optimistic about the ad market, and we are closely monitoring the dynamics of the macroeconomy and advertisers' sentiment. With that said, our performance in 2023 once again proved that we remain the go-to platform for advertisers, thanks to our unmatched content quality, extensive user profile, and strong sales ability. For brand ads in 2024, we will retain key clients in food and beverage, cosmetics and toiletries, and communications while striving for breakthroughs in healthcare, entertainment, and other promising sectors. We expect that domestic brands will experience a faster recovery compared with their international peers. Furthermore, we are positioned to tap into more opportunities as we observed a higher demand for ads visible to subscribers and on key dramas. For performance ads, our strategy is to strengthen our offerings for key clients in established areas like internet services, e-commerce, and gaming. Meanwhile, we're set to boost revenues in new growth areas, such as live-streaming e-commerce and short-form dramas. Technological innovation is a priority. We need to provide cutting-edge ad solutions to maintain our competitive edge. Moving on to technology and products. Our commitment is centered around fostering technological innovation to push the industrialization of content production, improve the user experience, and boost operating efficiency. We have integrated the latest technology into our top original productions. For example, our major original drama, The Story of Mystics, leveraged virtual production to achieve remarkable results, capturing over 3,000 minutes of footage. This pioneering technology marks a paradigm shift in filmmaking, enabling immersive, efficient, and creatively boundless storytelling for the future. Another example is that for many iQIYI original productions, on-set footage could be immediately uploaded to our proprietary cloud, enabling remote production oversight and content quality checks, as well as swift real-time editing to expedite the post-production phase. This boosts our efficiency in both production and program management. We are leveraging technologies to refine our products and enhance user experience as well. Our deployment of AI to filter out poor-quality comments and spoilers creates a better community environment and boosts user engagement. In addition, we are broadening the reach of our technology to allow more audiences to indulge in the ultimate viewing experience through our pioneering eXave MAX. In terms of Generative AI, we are advancing every stage of content creation, from planning and development to promotion, enhancing both efficiency and creativity. These efforts not only improve content production and operation efficiency but also unleash creative potential. Over the past year, we used AI for mass-producing quality marketing materials, which outperformed manual designs in click-through rates and viewership. Additionally, AI’s capability to comprehend video content at a minute level enables detailed plot summaries for each playlist, now available for over 3,000 dramas. Finally, regarding our business performance in regions outside of Mainland China, we achieved our first full-year operating profit in 2023. Additionally, we continued to expand the influence of C-pop, with C-dramas contributing more than 50% of revenue. In Q4, membership revenue and ad revenue both recorded double-digit annual growth, driven by the growing popularity of premium content among users and advertisers. Membership revenue increased by over 80% in Japan, Hong Kong, and the UK, and over 50% in Mexico and South Korea. Ad revenue grew 20% annually and 49% sequentially. Our C-dramas have continued to captivate international audiences. Story of Kunning Palace led rankings in many markets, setting record high metrics for Chinese content on our overseas platform. Meanwhile, A Journey to Love also dominated many charts in Southeast Asia, North America, and Australia during the broadcasting period. We are also exploring ways to bring overseas local content to the domestic Chinese market. In January this year, we debuted our original Malaysian drama Rampas Cintaku in China, marking a solid step in further amplifying the synergies between domestic and overseas content. Our pursuit of collaborative opportunities remains strong. We have introduced bundled plans through partnerships with telecommunications providers in Thailand and Hong Kong. We also worked with tourism authorities in Thailand, Singapore, and Hong Kong to craft specialized commercial content and advertisements. Looking into 2024, we have prepared an exciting slate of C-pop for key markets while ramping up original production of premium content for local users. Notably, we are set to debut an international version of the iQIYI original music show Youth with You. Meanwhile, we will continue our efforts to promote C-dramas and local content in partnership with Southeast Asian TV stations. Alongside increasing our brand influence in key markets, we also aim to explore diverse IP monetization opportunities. In summary, the year 2023 marked a milestone for iQIYI. It's exciting to see that the transformation we started back in 2022 paid off. We celebrated record-high revenue, profits, and cash flow. In 2024, we aim to sustain this high-quality growth trajectory and further grow our revenue and profits. We are confident that our efficient content production and robust operations will drive further success. We will also continue to integrate advanced technologies to increase productivity and support our strategy of long-term sustainable growth. We are enthusiastic about collaborating with our stakeholders for a prosperous 2024. Now, let me pass on to Jun to go through our financial performance.

Jun Wang, CFO

Thanks, Mr. Gong, and hello everyone. We maintained our strong momentum in 2023. The impressive financial results once again demonstrated the resilience and scalability of our business model. With increased profits and enhanced liquidity, we have an even greater capacity to sustain long-term value creation for our stakeholders. Now, let me walk you through the key numbers: In 2023, total revenues increased by 10% from 2022 and reached RMB31.9 billion. The revenue growth was driven by membership and online advertising services, as both recorded double-digit annual growth. Membership services revenue hit RMB20.3 billion, up 15% annually. The growth was driven by the increase in Average Revenue per Membership, i.e., ARM, and a rise in average daily subscribers. Online advertising revenue grew by 17% annually and reached RMB6.2 billion. The rise was primarily fueled by the growth in performance-based ads, and to a lesser extent, brand ads. Notably, performance-based ad revenue actually reached historic highs in 2023. Turning to our topline performance in Q4, total revenues increased 1% annually to RMB7.7 billion. Membership services revenue was RMB4.8 billion, up 1% annually. Our ARM strategy proved highly successful, achieving sequential growth for five consecutive quarters. Online advertising services revenue was RMB1.65 billion, up 6% annually, and exceeded our expectations. The growth was largely driven by the growing attractiveness of our premium content among advertisers. Now, moving to the costs and expenses. For 2023, content cost was RMB16.2 billion, down 2% annually. Total operating expenses was RMB5.8 billion, up 8% annually. For Q4, the content cost was RMB3.7 billion, down 5% annually, mainly due to our improvement in content strategy and operating efficiency and fewer number of major variety shows launched in the quarter as well. The total operating expenses was RMB1.4 billion, down 1% annually. Turning to profits and cash flows. For 2023, we successfully delivered what we promised for profit growth earlier in the year. Our non-GAAP operating income surged to over RMB3.6 billion, up 68% annually. For Q4 alone, the non-GAAP operating income was RMB928 million, positive for eight consecutive quarters. Furthermore, our free cash flow in 2023 totaled RMB3.3 billion, achieving its first full-year positive, with Q4 contributing RMB614 million. Strong cash flow improved the healthiness of the balance sheet, leading to value creation from deleveraging and derisking. As of the end of Q4, we had cash, cash equivalents, restricted cash, short-term investments, and long-term restricted cash included in prepayments and other assets totaling RMB6.2 billion. In terms of the future use of the cash, the Company has a total of USD396 million of convertible bonds puttable on August 1, 2024. After meeting this potential repayment obligation, the management would be able to actively explore various shareholder value enhancement initiatives, such as the commonly used share buybacks, on top of our investment for future business growth. The implementation of the plan is contingent upon the financial condition of the company and market condition at that specific point in time and is subject to our board discussion and approval. To conclude, echoing Mr. Gong’s earlier remarks, we are now with substantially strengthened fundamentals, remain deeply committed to creating enduring value for all stakeholders and to continue leading industry evolution. As we just celebrated the Chinese New Year, I would like to take this moment to extend our sincere thanks to our investors and analysts for your consistent support throughout our path. For detailed financial data, please refer to our press release on our IR website. Now, we will open the floor for Q&A.

Operator, Operator

And the first question will come from Xueqing Zhang of CICC.

Xueqing Zhang, Analyst

Given that other players have strong pipelines this year, what's your strategy on KPI for 2024 and will the indicators be more constant? In the long term, is there anything that can become a new driver?

Tim Gong, CEO

Our CEO Gong Yu is answering this question. So our target for 2024 is to maintain high-quality growth. With that, revenue and profits will both grow and profit will outpace the growth of revenue. And this target was set in 2023 Q4 and that hasn't changed. It comes in different aspects of our strategies. The first is related to content. First, we are recruiting top-notch talent and producing very high-quality content. That's the first one. And then the second is using a very effective evaluation and decision-making process and also management process to systematically increase the hit rate of our entire content offerings. And third is to utilize our content management program to improve the efficiency of our content production and operations. In addition to what I just mentioned, we're also focusing on new business areas. Hopefully, that will become our second growth curve in the future, including, but not limited to, overseas business and IP derivatives, both online and offline. We will also utilize generative AI to really improve our operating efficiency and content capability. In terms of financial aspects, I will invite our CFO Wang Jun to add on.

Jun Wang, CFO

Sure. I will answer the question in English and thanks, Xueqing Zhang, for the question. I think that when we are looking at our financial numbers for 2024, we always focus on two key words, which are growing and health. The pursuit of high-quality growth has been repetitively mentioned during our comments and is itself evidenced. Due to the time constraint, we will not get into details on this call, but we'll be happy to share insights on future occasions. But in this call, we'd also like to highlight that in 2024, what you will observe is further improvement of the financial health net, as we have a very solid growth in our operating cash flow, which deleverages our balance sheet and offers two critical benefits. First, in my view, I think it gives us a clear road map to decrease the average cost of capital. The steady stable cash inflows actually give us the ability not only to pay down existing debt but also to tap into the low-cost capital pool, such as long-term loans or investment-grade credit products, which would otherwise not be available. Such low-cost capital could be gradually used to replace the previous high-cost debt and mathematically translate into a possible decrease of the total discount rate for the long-term model. Therefore, if our shareholders can agree with such arguments, starting from 2024 and going forward, you should probably increasingly take reference to our net income instead of operating profit to check the progress because our net income won't be able to capture and reflect the value creation from the derisking and deleveraging. Moreover, as we previously discussed, it offers us more tools to enhance shareholder returns. This is the second critical benefit. I won't explain further in this call.

Operator, Operator

The next question we have comes from Lincoln Kong of Goldman Sachs.

Lincoln Kong, Analyst

Congrats on the solid 2023 result. So my question is about AIGC. How would the management view the latest generative AI technology, especially its implications for the movie or drama industry as well as for yourselves? And what's the company's spending in terms of the investment and strategy in this front?

Tim Gong, CEO

We are very bullish on the opportunities that the development of generative AI technology brings to the long-form video industry and believe that actively applying the technology can significantly enhance creative efficiency and elevate the levels of creation and decision-making. It can also play a very important role in the planning, development, production, and promotion of content. Additionally, the rapid advancement of generative AI technology enables artists to use this technology to create higher-quality works with greater efficiency. This is particularly true for the creation and production of animated content powered by generative AI, which has the potential to break through the long-standing capacity barriers and drive changes in the industry landscape based on creative levels.

Wenfeng Liu, CTO

We have been keeping a close eye on the latest developments in the generative AI industry and actively establishing cooperation with market-leading companies in China and abroad. We are implementing the latest generative AI technologies in the content production process, especially by combining iQIYI's extensive long-form video data with large language models for training and fine-tuning. Our aim is to develop generative AI-powered vertical applications tailored for long-form video scenarios. Going forward, we will step up our investment in R&D and application of generative AI technology. We plan to use this technology to develop and comprehensively upgrade our in-house intelligent production system and thereby empower the creation of iQIYI's professional video content. Thank you.

Operator, Operator

Next, we have Lei Zhang of Bank of America Securities.

Lei Zhang, Analyst

We noticed that major players are more focused on top content last year. Can you share with us your view on content and communication? And how should we stay competitive in terms of content in 2024?

Xiaohui Wang, CCO

The competitive market dynamic is an ever-present reality, where the competition we think lies in the substantial sustainability of high-quality content as well as achieving a balanced and win-win situation in terms of content quality and also commercial returns. Additionally, capital is not the only sole barrier to competition. iQIYI's ability to maintain a market-leading position in the industry is actually underpinned by the accumulation of talent, control of industry resources, effective content review, and management mechanisms supported by our business intelligence system, which we believe are all indispensable. Our content creation strategy actually focuses on three areas. First is to produce content with high public recognition and market returns. Second is to create innovative high-quality content. And third is to continuously focus on content efficiency regarding the number of key premium titles and social insights. In terms of the foreign drama category, there has been a clear improvement in the value of our content inventory, as key premium content is critical to maintaining a high competitive edge in the market. We maintain a market-leading level of inventory reserve for premium titles. For the 2024 lineup of our iQIYI originals and exclusive licenses, we expect that premium key titles will account for over 50%. Thank you.

Operator, Operator

This will conclude today's question-and-answer session. I would now like to turn the conference call back over to management for any closing remarks.

Chang Yu, IR Director

Thank you, everyone, for supporting us and joining the call today. If you have further questions, feel free to contact our team. Thank you.

Tim Gong, CEO

Thank you. Bye.

Operator, Operator

And we thank you for your time also today. The conference call has now concluded. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines. Take care.