iQIYI Inc
NASDAQ:IQ
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iQIYI Inc
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Thank you for standing by, and welcome to the iQIYI's Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Ms. Chang Yu, IR Director of the company. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining iQIYI's Third Quarter 2024 Earnings Conference Call. The company's results were released earlier today and are available on the company's Investor Relations website at ir.ic.com. On the call today are Mr. Yu Gong, our Founder, Director and CEO; Mr. Jun Wang, our CFO, Mr. Xiaohui Wang, CCO, Chief Content Officer; Mr. Youqiao Duan, Senior Vice President of our Membership business; Mr. Xianghua Yang, Senior Vice President of Movies and Overseas Systems and Mr. [indiscernible], Senior Vice President of Brand Advertising business.
Mr. Gong will give a brief overview of the company's business operations and highlights, followed by Jun, who will go through the financials. After the prepared remarks, the management team will participate in the Q&A session. Before we proceed, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.
Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements, except of the required under applicable law. I will now pass on to Mr. Gong. Please go ahead.
Hello, everyone, and thank you for joining us today through our 14-year company history, our ability to reinvent [indiscernible] innovative, have been our [indiscernible] against a competitor, and this strategy has remained unchanged for navigating [indiscernible] of challenges, and at this moment, we have identified three key trends: First, consumers become more prudent because of macro [indiscernible]; secondly consumers are facing more entertainment options, including [indiscernible], which is growing rapidly. As always, we hold strong belief that premium long-form videos remain part of the most [indiscernible] and if we place work or entertainment their unique ability to improve while often provide most manner unmatched by any other form of entertainment as well as in evolving industry and under market dynamics, which should for active reach out to the new opportunities and to ensure a long-term healthy and tenor growth.
That's why we have been making a series of strategic upgrades, key initiatives improved. First, we have optimized the production of dramas by requiring a drain pain last structure and that character development will help to better match the organic will [indiscernible] this will to improve the popularity and bring better returns. Second, we have been upgraded and we will continue to upgrade our APPs to improve mini and the short summer as part of our content offering the main app will maintain its focus on long-form video content and subscription-based model. Completement by three mini and short dramas and advertising model in contrast, the upgraded IT lag app will focus on three mini and an advertising model, complemented by long-form videos and the subscription model.
So we will increase investments in the acquisition and the distribution of mini and [indiscernible] dramas. We have optimized our membership products and associated system by in a authorized pathwork showing and introducing attractively price family account auction, the goal as we enhance member conversions and expand the scale of membership. Beyond these initiatives, we would apply AI more widely across our ecosystem expand our present in our [ seas ] market and its core possibility in IP, the relative and offline experience. We believe these efforts will impact our revenue and profitability over the long term.
Now, let's move on to the details of our core business segments, starting with mini and short dramas. We are adapting our company's strategy and the business model to align with evolving market trends and the consumer preferences by introducing mini and short dramas into [indiscernible]. It seems from long-form video unit formats, [indiscernible] and the audience reach mini and short termers as a great complement for our existing lineup of traditional loan format, dramas, movies, and variety shows. Many dramas, feature ensure lasting 1 to 5 minutes in vertical formats under shop summers and spent 5 to 20 minutes in horizontal format.
This transfer format offers a quicker story telling cater well to users seeking quick entertainment risks and have gained considerable popularity among audiences from a business model perspective in the future, mini drama will be available to all members as no actual cost. Nonmembers will drive the free towards milligrams or choose to pay prevail to as those exclusive to members. Short Dramas were mineral the approach taken with our rock for content. They are free for members. Well, number while nonmembers will have access to upgrade free-to-watch second window this still offering caters to deliver via demand or demand while supporting the growth of our subscriber base and expanding our monetization opportunities.
Moving on to long-form videos, which are from mentor for our content ecosystem. Starting with the [indiscernible] category, we regained the #1 position in will ship market share during the quarter. according to in-licensed data. This was driven by the launch of multiple titles that gather high claim from users. [indiscernible] score of 10,000. Not only [indiscernible] third season is already in production with IP has been expanding as influence from online to off-line domains. Showcasing of success in IP development, also the new release for the young ones, [indiscernible] received the highest IT popularity index score among drama with less than 20 episodes, [indiscernible] were all released [indiscernible]. Well, we are around of programs [indiscernible]. We record that certain areas where we all improve. For example, the limited supply of key female-oriented carton dramas in the third quarter impacted [indiscernible] members.
To this end, we aim to enhance the steady supply in this [indiscernible], while also better align company general with optimal broadcasting window going forward. So shows on innovative new title, [indiscernible] will enforce our strong in [indiscernible] according to enlighten data dominated the viewship charts for 10 consecutive weeks and largely outperformed other shows in the same genre and also achieved the second highest peak popularity ever recorded for IT inclusive variety shows. What was more impressive is that the shop has not only propelled [indiscernible] capable improving the industry and capturing the attention of audiences.
For movies, we have maintained our leading position in view shape for 11 consecutive quarters or coming to enlighten data. The performance was underscored by the article relates like to a and the normal bank guide, which ran the first and the second, respectively, on our popularity index racking for admissions of production capabilities for Chinese animations continue to improve as evidence by an increasing share of revenue generated from our original handles along with the ongoing release of the high [indiscernible] How Dear You. We also launched the Legend of Sky Law, [indiscernible] and A Moment But Whatever [indiscernible] receiving positive feedback.
Leveraging the exceptional quality of our premium content, we have earned broad recognition from reputable Chinese industry awards and the 34th flying virus award, we can we talk the list among online video platforms with 11 owners. They also secure owners at the [indiscernible] China TV Golden Eagle Award [indiscernible]. Turning to our content in India. Turning to our content pipeline. We remain committed to providing our users with top-notch long-form video. This was highlighted during the ITI Conference. Our flagship marketing event will we disclosed an exacting lineup of over 300 titles that [indiscernible] premier in the year 2024 and 2025.
Focusing dramas, [ funds of fortune], [ someone really ] was released and will be followed by the much anticipated female-oriented drama, loan in winter move in great by UFS. In reality under the strangers, audiences can look forward to. We are criminals or changing under the skin season 2 or the flat business to HR, the wind go by for Roger. Beyond dramas, our movie offering includes the already released hit upstream [indiscernible] additional new online films and IT auto films are on the horizon in terms of variety shows, we are introducing flash-like [indiscernible] and the Looming Journey, [indiscernible] for animations, the Q4 pipeline features major pedals like [indiscernible], [ Dragon Balls ], the original material at IP, with [indiscernible] membership services membership revenues in the third quarter was RMB 4.4 billion down year-over-year.
There are three areas that improve the membership revenue performance. First, I approved a mentioned, although we launched the good quality titles in the corner, they are through for an improvement in the supply of premium female-oriented and Asian costume dramas, which are especially per to members driven by her titles. Second, unmet the current micro healing users on the titles have grown more cautious in spending and our broader selection of entertainment auction is also seeking to capture their budget and attention the high base effect from last year, continued to play a part in our current figures innovative value-added services continue to gain traction among users, mostly we launched express package for 13 games in the quarter. leading to more than 40% sequential growth in cash purchase, reaching its telephone high.
Additionally, we further enhance member benefits to encourage upgrades to high tier plans and boost member engagement. This includes more than 20 offline events such as fund meetings, early screening, early screening events and family funds. As always, our primary goal for membership services is mainline revenue performance to fulfill this goal and to proactively adapt to the current consumer segments, we are making modifications to our membership offering, key initiatives in group. First, we are come back and authorized membership our [indiscernible] to enhance our common security [indiscernible]. On the [indiscernible] we introduced the family content auction as a [indiscernible] our account sharing through this program, [ Monterey ] renewing Golden VIP members have the option to add a separate family accounts for just RMB 8 per month.
Each account, both [indiscernible] family and on will maintain separate user profiles and ensure and interact and personalized on experience. Secondly, the have supported basic membership plan, which was pre-well exclusive to IT life has not been expensive to major IT products. This insurance performance is in line with our expectation. Last but not least, content serves as one of the key drivers of our membership business, integrating mini and shop dramas with on top quality long-form video handles introduce new net mix satiates to deliver build prefer. Moving on to the advertising business. advertising revenue during the short corner was RMB 1.3 billion year-over-year. Performance has remained the highlights during the quarter. Again steady growth annually, driven by the solid performance in e-commerce, Internet and mini driver sectors.
The growth was also fueled by our advancements in AI applications with the CPM for AI app, improving by over 20% compared to traditional apps. [indiscernible] revenue decline annually due to a weak advertiser segments and unmet the macro having is facing, we proactively reduce the investments in shows in response to the macro hiring to win for natural back, which led to a major decrease in brand ad revenue network company-related as remained popular among brand advertisers titles such as the team of standpoint the more [indiscernible] attracted the largest shelf of ad budgets on our platform. Going forward, we will focus of expressing our advertiser base, especially among local brands and capturing a greater shell of barges from top-tier clients.
Moving on to technology and products. We are making solid progress in driving technology innovations to improve user experience organization or operational efficiency. For example, we have made upgrades to our products across all devices. We reach include interactive and bullish capabilities, improve the audio quality better redouble and refined recommendation features. We have also made further profile in advising the [indiscernible] of the entertainment business as our watch production topology has not reached the mass production date IT is one of the first streaming platform in China with the ability to hand the until watchful production process for drivers, including production, cost evaluation, technical design and suction. This capability allows us to manage multiple projects lately.
In addition, the drama [indiscernible] is the first in China to apply the latest version of [indiscernible] into water production. We have also upgraded the IT virtual production video with amnio indicators making the highest tender spoke in China and international. These tax upgrades is expected towards effectively enhance our mass production capability moving for all. Our recent omen showcase utilization of AI to improve business efficiency, AI plays a central role in on operations, especially in content translation and a doubling for our overseas business. Our AI-driven approach has enabled efficiency efficient and highly accurate multilingual translation at the multi-tone sorting. Drama particularly reducing the time additive to release Chinese content overseas and cutting down on translation costs. Moreover, we have developed an AI system capable of rapidly generating plant tax for our content library.
This innovative tool have shortened what used to be a month long [ manual task ] into a matter of days. In fact, we have produced plus tax for over 12,000 movies, achieving an impressive after rate of over 92% the cutting process has seen similar improvement with AI lease land analyzing and margin actors to the right roles, which largely builds up producer decision-making work wrong, and for our business performance in region outside of midline China. We recorded solid performance in our overseas business in the third quarter with both total revenue and membership revenue and the membership service revenue and annual and sequential net growth, notably membership revenue from Hong Kong, U.K. Brazil and Australia grew over 40% annually.
The average daily number of subscribing members overseas also increased annually and sequentially. with Brazil, Mexico, Hong Kong and Thailand seeing annual growth exceeding 45%. The influence of C-Dramas continue to strengthen overseas. In the third quarter, total views of last web-banking cycle or the viewership ranking of multiple markets including the U.S., Australia, Japan and South Korea. Additionally, with access at expanded the improved expanded the info of original production and strange tales of content and the business for beyond mainland China. [indiscernible] made international build with a primal in Singapore at the end of July.
[indiscernible] overseas premium on screening for premium drivers. For local one, we launched a number of drivers that received a positive feedback among the related and overscored the highest daily revenue among all Thailand, all-time drivers released our platform in 2024 that show also ranked trust on Google and Thailand, which we outperformed other shows in the same time same time slot. As we head into the first quarter, we will continue to expand our local and for additional monetization opportunities. This includes depending the ongoing package cooperation with telecom providers in [indiscernible] under Hong Kong.
In addition, we aim to amplify the inform of our content and increase membership benefits on diversifying off-line events on November 1 we host our first II conference outside of Mainland China, as we proceed soon the remaining bonds of we have that to launch far appreciation events and promotion for members. Additionally, we are excited about the forthcoming international rollout of more high-quality content, notably our talent show down line-wise was introduced on October 26 and have already received a positive reaction from our audience.
In summary, looking ahead, we remain committed to driving innovation and advancements across our business, catering to the dynamic entertainment needs of targeted initiatives such as launching mini and shop drivers while operating in rerent experiences and for strengthening of commercial abilities. These efforts are supported by our deep knowledge of both content and users coupled with our vast industry resources. In parallel, we will deepen our adoption of AI technology once over the expansion and fully elaborate the potential of our IP. This strategic efforts and at driving our company towards greater the ability and success. Now let me pass it to Jun Wang [indiscernible].
Thank you, Mr. Gong, and hello, everyone. Let me walk you through the key numbers. In the third quarter, the total revenue were RMB 7.2 billion, down 10% annually. The membership services revenue reached RMB 4.4 billion, down 13% annually for 3 reasons as previously discussed by Mr. Gong. For online advertising, revenue decreased by 20% year-over-year to RMB 1.3 billion. This was primarily due to the decrease in brand added business, partially offset by the growth in performance and business. [indiscernible] distribution revenue reached RMB 814 million and grew 52% annually and other revenues decreased by 8% annually to RMB 729 million.
Moving on to cost and expenses. The content cost was RMB 4 billion down 5% annually, primarily due to lighter movie offering in the quarter. The total operating expenses were RMB 1.4 billion, down 5% annually primarily driven by the more disciplined management of the marketing spending. Turning to profits and cash flows. The non-GAAP operating income was RMB 369 million and its corresponding margin was 5%. The operating cash flow totaled RMB 243 million positive for 10 consecutive quarters. At the end of the third quarter, we had cash, cash equivalents, short-term investments and the long-term restricted cash included in the prepayment and other assets, a total of RMB 4.7 billion. For the details of financial data, please refer to our press release on our IR website.
Now I will open the floor for Q&A.
[Operator Instructions]. Your first question comes from Xueqing Zhang with CICC.
[Interpreted]. My question is about mini and short drama. As Gong mentioned in the prepared remarks, the company has enhanced the integration of mini and short dramas. Could management elaborate a little more on this? And what's our strategy for mini and short drama.
[Foreign Language].
[Interpreted] The CEO, Mr. Gong is answering this question, starting from the end of September this year, we added mini drama and shorter drama into our counting ecosystem. And these two type of content are very much differentiated from a traditional long-form video content. So they are a very good complement to our content offerings.
[Foreign Language].
[Interpreted] Especially for this year, the three mini drama model has been rising significantly. And then the user scale is a pretty useable scale and has been growing. So now it's a good time to enter.
[Foreign Language].
[Interpreted] Okay. So for mini dramas, we classify them as they are 1 to 5 minutes long in vertical format and for short drama, 5 to 20 minutes in horizontal format. And for now, we're focusing on the mini drama center.
[Foreign Language].
[Interpreted] In the past 2 years, we've participated in a mini drama, participating in the performance model.
[Foreign Language].
[Interpreted] And we have been actually innovated in this media drama sector by innovating different models and formats. For users, it used to be participating or watching the content by free or Paper B, and we now introduce the subscription model to this business model. And for here subscribers, they can watch a vast majority of the mini drama for free and then pretty soon in the future, they will watch everything for [indiscernible].
[Foreign Language].
[Interpreted] For the [ film ] business model, there are 3 advertising model and then or they can do paper B. And we actually introduced a subscription model to the business model, and we believe this will be positive and constructive for the membership retention and also to get new users.
[Foreign Language].
In terms of content strategy, we will develop mini dramas through various methods, including the licensed copyrights whole right and profit sharing.
[Foreign Language].
[Interpreted] Going forward, we'll focus on the premium head content of mini dramas. And then eventually, we will develop a unique style that generated by IT below.
[Foreign Language].
[Interpreted] And we hope in the future that for ICE in from in terms of the content production quality and also the balance provide to users, it will be a further improvement.
Your next question comes from Lei Zhang with Bank of America.
[Interpreted]. Can you share with us the capacity add in investing short drama and any impact to our content cost in the future.
[Foreign Language].
[Interpreted] The CEO, Mr. Gong is answering this question. So in terms of our advantage in Minima First of all, we have advantage in product and technology. For mini drama materially a material amount of the traffic is happening on the mobile side. So on the mobile side, we have two major applications, the iQIYI Up and also iQIYI Lite. So for these 2 apps, we have very mature technology and infrastructure and also a good user base and actually a good size and actually a good portion of the users are subscribers. So basically, based on that, when we add new content dramas to this and then combined with a good upgrade to the application, it will be a good adaption to the current strategy.
[Foreign Language].
[Interpreted] For the first upgraded version of the iQIYI app actually have been released already -- we're doing the AB test right now. So most of the users winning downloaded or upgraded the application, you will see the changes.
[Foreign Language]
[Interpreted] For iQIYI app, it will continue to focus along from video content. From a business model perspective, it will be majority focused on the subscription model. And for iQIYI Lite application. It will focus on many dramas and so from mainly driven by the advertising.
[Foreign Language].
[Interpreted] The vast majority of the company providers for many dramas are iQIYI's existing partners. So cooperation in these new habits further expanded and our deep our partnership. So allowing to rapidly scale up in these areas and then relatively low cost.
[Foreign Language].
[Interpreted] So basically, the operational rules or principles in terms of managing these 2 type of content, the long-form video content versus mini. I mean from a relatively similar or don't have a major changes. So it will be pretty fast for our teams to pick up and then after its.
[Foreign Language].
[Interpreted] In terms of the funding for the content for mini dramas, first of all, we'll lower the investment in terms of the low ROI long-form video content. And then secondly, then we will scientifically and also rationally increasing the budget for mini.
Your next question comes from Maggie Lee with CLSA.
[Interpreted] Good evening. Thank you for this opportunity to ask questions. My question is membership. In October, we announced the launch of family account option. [indiscernible] share more insights into the strategic consideration around this initiative, especially given the current macro environment and consumer trends, what's our expectation this strategy over near term and longer term how the initial feedback we received from consumers and users so far since the introduction.
Thank you, Maggie, and we will invite Mr. Duan, who's in charge of this business segment to answer this question.
[Foreign Language].
[Interpreted] iQIYI's family accounted as high cost effective shared membership service plan we introduced to enhance the user experience for dollar members. The better serves users independent and diverse viewing needs and user scenario.
[Foreign Language].
[Interpreted]. The family account and the primary and are actually stand-alone membership accounts with individual passwords and also playback history. So this not only effectively improves the user experience, but also protect the account security.
[Foreign Language].
[Interpreted] And as you know that the video consumption needs of the elderly and the young demographics are steadily increasing, and the family accounted is actually designed to effectively address their challenges in account management and access in content.
[Foreign Language].
[Interpreted] The membership account is an innovative attempt in the membership product model, which have a positive impact on improving membership conversion and revenue. So going forward in the future, we'll continue to come back case sharing and offer users more cost-effective courses and aim for the long-term healthy development of the membership business.
[Foreign Language].
[Interpreted] The family account that was actually officially launched on November 12, and we will observe the performance for some time before sharing the user feedback and data outcomes with everyone.
Your next question comes from Zei Zhao with Guangfa.
[Interpreted]. I will translate myself as Dr. Gong has mentioned the long-form video fundamentals to IT's content ecosystem. My question is about your strategy for production of dramas, could you share with us about the lens, seeing an innovative direction of your future drama series sent you.
Thank you, and we will invite Mr. Xiaohui, our Chief Content Officer, to take this question.
[Foreign Language].
[Interpreted] We believe, although there have been some cyclical fluctuations in the industry. We believe that the recovery of the market confidence and user demand [indiscernible] long-form videos will still be one of the strongest demand among users in the mid to long term. We believe it will remain at the core of IT content ecosystem as well. So going forward, where will enhance the sustainability of a diverse high-quality content supply through powerful performance measures are continuing to achieve a win-win situation for both constant holidays and commercial revenue.
[Foreign Language].
[Interpreted] Based on the insights into societal sentiment and also the changes in user views and purchases, we believe we will comprehensively upgrade the production and operational mechanisms. For dramas, films, animations and variety shows. We will improve the production and content launch efficiency, focused resources on creating high-quality works and strengthen the commercial aspect of the content.
[Foreign Language].
[Interpreted] For content lending, we will structurally optimize the process by improving the coordination of the number of new dramas, episodes and genres and will reasonably reduce the number of key main drama releases each year. We will strictly curate project selections to prioritize excellence and concentrate resource allocations on premium content with high commercial value. So from inception, all projects will involve commercial appeal, mass market revenue and contemporary relevance.
[Foreign Language].
[Interpreted] For content evaluation, we will establish stricter assessment standards that focus more on revenue capability and innovation ability within the framework of the content-related cost ratio.
[Foreign Language]
[Interpreted] For content creation, we will optimize scripts and film interest to align with users' evolving viewing purposes. And simultaneously, we will aim to deepen our understanding of social trends and create work that are resonating more day with contemporary social emotion and [indiscernible].
[Foreign Language].
[Interpreted] For constant production will strengthen project management and policy control both we monitor project profits and work with partners to reduce cost and improve production efficiency.
[Foreign Language].
[Interpreted] And from a team building perspective, we are committed to the continuous improvement in our in-house studio mechanisms, our studios, which are structured around the producers focus on consistently attracting high-quality talent from the market. We aim to cultivate healthy internal competition by establishing mechanisms that reward innovation and promote distinct in states. The strategy ensures ongoing evolution through a process natural selection were only an excellent spread. And that concludes the answer to this.
There are no further questions at this time. I'll now hand back to management for closing remarks.
Thank you, everyone, for participating in the call today. If you have further questions, do not hesitate to contact us. Thank you again.
That does conclude our conference for today. Thank you for participating. You may now disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]